Turkcell Iletisim Hizmetleri AS (TKC) 2016 Q1 法說會逐字稿

Good day, and welcome to the first quarter 2016 results announcement conference call. At this time, I would like to turn the call over to Mr. Nihat Narin, Director of Investor Relations and Business Development. Please go ahead, sir.

Thank you, Marian. Thank you for your participation. I would like to say welcome to our call on behalf of the management team here. We will start today with the presentation by our CEO, Kaan Terzioglu; followed by presentation by CFO, Murat; and then we will go into the Q&A session.

Just before we start the presentation, I would like to remind you of our brief legal notice. In this presentation we will make statements that are forward-looking about our future targets and expectations. These are based on our current views and assumptions, which may, of course, change in the future. And our actual results may be different.

Mr. Terzioglu, please, the floor is yours. Thank you.

Thank you, Nihat. Good afternoon and good evening, everyone. And welcome to Turkcell's first quarter 2016 results call. Today we are in Cyprus, and I am joined by our executive team including Chief Financial Officer, Murat Erden; Chief Sales Officer, Murat Erkan; Chief Technology Officer, Ilker Kuruoz; Chief Legal and Regulation Officer, Serhat Demir; Chief Strategy Officer, Ilter Terzioglu; and Chief Customer Experience Officer, Dogus Kuran.

I am happy to say that we started the year strongly with record high-level revenues and EBITDA, both at Turkcell Turkey, and at the group level. Our group revenues rose 8.3% to TRY3.2 billion, and EBITDA by 8.1% year on year to TRY1 billion, while the EBITDA margin was sustained at 31.1%, despite the nonrecurring costs related to 4.5G launch.

Group net income, as per IFRS, rose notably to TRY563 million, quadrupling over the last year's figure, due to the elimination of foreign currency risks related to our subsidiaries in Ukraine, Belarus and Azerbaijan. This reflects the success of our debt restructuring efforts by focusing on balance sheet efficiency. Meanwhile, pro forma net income rose by 15.1% year on year to TRY544 million.

Now to the next page, solid performance of Turkcell group was primarily attributable to Turkcell Turkey. Its revenues rose 10%, and EBITDA climbed 10.6%. Pro forma net income was up 11.4% year on year. Turkcell Turkey's performance was mainly driven by continued solid growth in data and digital services in Turkey.

Meanwhile, our international subsidiary saw positive growth after several quarters of decline. Based on our first quarter performance in Turkcell Turkey and group, we remain on track with our plans. And therefore, we reiterate our full-year guidance.

As communicated before, in 2016 we expect 8% to 10% revenue growth, both for Turkey and the group. We also target an EBITDA margin of 31% to 33%, and operational CapEx-to-sales ratio of around 20%.

Moving on to the next page, I would like to share some highlights from our operations in Turkey. Turkcell Turkey, which accounts for 91% of group revenues, continued its double-digit growth momentum for three consecutive quarters, with an increased EBITDA margin of 31.3% in the first quarter of 2016. These figures clearly reflect the success of our value focused competition strategy and sustained inflationary pricing.

Our company performed strongly across all major business lines. 80% of Turkcell Turkey's revenues coming from the consumer segment, grew 10% year on year to TRY2.3 billion, on strong growth in data and digital services.

The corporate business, which generates 18% of Turkcell Turkey's revenues, posted 8.7% growth to TRY525 million, while wholesale revenues grew 13.9% year on year to TRY81 million.

Moving to the next page, now let's look at the performance of our key revenue drivers. The key growth drivers, data and digital services, in total posted 31.1% year-on-year growth, accounting for 42% of our business in Turkey, compared to 35% a year ago.

In details, mobile data revenues rose 25.8% on higher smartphone penetration of 55%, a larger number of data users, and a continued rise in data consumption. Meanwhile, fixed broadband revenues were up 28.4% with an increased number of customers and higher usage.

Services and solutions revenues ramped up by 57.2% to TRY226 million, mainly due to increased usage of Turkcell TV+, fizy, along with media and information services. Voice and SMS revenues saw single-digit decline, reflecting continued sector trends.

Moving to the next page, operationally we started to see the fruits of our focus on value generation. On the mobile side, our postpaid customer base rose by 1.2 million year on year, to 16.7 million. Postpaid customers now constitute 50% of total, further improving the subscriber (inaudible).

On the fixed side, our total customers reached 1.6 million, supported by a strong fiber network acquisition, dedicated salesforce, and customer care. In Fiber-to-the-Home, we strengthened our market-leader position, adding 159,000 new customers over the last 12 months, and more than doubling the additions of our closest competitor.

Moreover, Turkcell TV+ platform continued its solid user penetration growth, reaching 268,000 customers on 169,000 yearly additions. Including web and mobile, our total TV+ customers' base reached more than 700,000.

Smartphone penetration on our network reached 55%, rising 13 percentage points year on year, supporting higher data usage. Moreover, 52% of our smartphone base supports 4.5 technology, which will further boost data revenues.

Moving on to the next page, multi-play is a major component of our convergence strategy, which we have already started to monetize. Accordingly, we have achieved a healthy rise of greater service use per customer, both from mobile and fixed segments. We also see greater potential in cross-selling opportunities going forward.

On the mobile side, a sustainable increase in penetration of double- and triple-play offers supported an ARPU increase. In the first quarter, the double-play ratio was up 2 percentage points, quarter on quarter, to 47%, while the triple-play ratio rose 3 percentage points to 17%. In light of this, and along with higher postpaid share and data and services growth, mobile ARPU rose 8.8% year on year to TRY24.7.

On the fixed side, our multi-play ratio in total fiber residential customers, which includes internet and TV users, rose 4 percentage points quarter on quarter, to 30%. This, along with the inflationary pricing adjustments, resulted in a 6.8% year-on-year rise in fixed residential ARPU to TRY50.3.

Moving on to the next page, as we have highlighted in our previous calls, in 2016 and onwards, our customers will experience a more converged Turkcell. Indeed, we took concrete steps in the first four months of the year. We became the first and only company in the Turkish market to offer real converged experienced. We recently launched our converged offers that include mobile internet, voice, digital services and fixed internet.

In addition to a high mobile and fixed internet data allowance, we also provide an extra mobile internet quota for the service usage attached to the packages, encouraging higher penetration. Moreover, we are the only telecom operator to offer fully-integrated services to its customers, including single invoice, and single call center services. We believe these offers and future actions will further strengthen our market position, and help us achieve our target of becoming the leader of the Turkish telecommunications market.

Next page, in line with our game plan, we continue to leverage our wide range of digital services and solutions, such as BIP, our instant messaging platform; fizy, our videos and music streaming service; smart storage, and Goals on your Mobile, and TV+.

Digital services are a key component of our future positioning. And we have opened them to all access, and widened our global (inaudible) services portfolio. Our new-generation communication platform, BIP, continued its rapid rise, surpassing 7.5 million downloads today. Global downloads increased to 503,000 of the total, and 39% of BIP users are non-Turkcell customers.

In line with our all-access approach, we recently rebranded our leading music platform as fizy, with the new feature of music video streaming, which has reached 5.7 million downloads. The most widely used personal cloud service of Turkey, Smart Storage, geared up to 2.6 million downloads, while the best sports app in the sector, Goals on your Mobile, has been downloaded 2.2 million times.

The mobile Turkcell TV+ application will shortly be an all-access product as well. As of today, we have around 700,000 Turkcell TV customers, including mobile, web, and IPTV users.

Moving to the next page, the highlight of the sector at the beginning of the year was the national launch of 4.5G services on April 1, 2016. We acquired the largest spectrum with 47% of the available total at the tender. We started offering mobile internet speeds of 375 megabits at launch. With this spectrum, Turkcell will yet again be the first and only operator to offer over 1 gigabit speed on mobile devices through carrier aggregation technology.

As of April 1st, our 4.5G service is available in all provinces with a population coverage of over 70%, 970 provinces -- or 970 in total now have 4.5G coverage. Further, to offer our customers the best experience, we launched the sector's highest data packages up to 50 gigabytes data allowance. We have also widened our smart device portfolio. With affordable payment plans offered by our consumer finance company, smart devices such as the smart projector and Samsung Galaxy tablet TV will further boost the mobile TV experience.

Furthermore, we declared a list of 10 principles for our approach to our customers. And we are mobilizing all our [means] to reach high satisfaction levels. We are pleased with the initial demand for our 4.5G services. Shortly after the launch, in two minutes, we reached 1 million active users, and we have reached 42% 4.5G-enabled smartphones in our network, and 16% of our customers have already 4.5G compatible devices and SIM cards.

This far exceeds the one-year global averages of penetration. Moreover, more than 20% of data traffic is now on our 4.5G network.

Moving to the next page, Turkcell international revenues at 6% of the group total, were at TRY197 million, with an EBITDA margin of 27.2%. For this quarter, Turkcell international revenues saw positive year-on-year growth, despite negative currency trends compared to last year. Moreover, through actions to restructure our subsidiaries that eliminate foreign currency risk, we have continued to post a positive bottom line.

lifecell, the major component of our international business, grew 6.9% in local currency terms, due to migrations to higher ARPU tariffs, rising mobile broadband revenues driven by 3G-plus services, and (inaudible) price adjustments. The EBITDA margin rose 0.5 percentage points to 31.4% year on year.

In Belarus, in local currency terms, revenue rose 30.7% year on year, on the back of increasing active subscribers, higher voice and terminal revenues, with a 1.5 percentage point rise in the EBITDA margin.

Our operating in Northern Cyprus, comprising 16% of our international revenues, recorded a 3.2% year-on-year increase, due to mobile broadband growth. And the EBITDA margin was at 34.8%.

Now let me hand over to Murat for the financial review.

Thank you, Kaan. Good afternoon and good evening to all participants. I will now talk in more detail about our financial results.

In the first quarter, as Kaan highlighted, our business in Turkey is clearly the main revenue and EBITDA growth driver. Turkcell Turkey incremental contribution to our top line was TRY265 million, of which [79%] was from data, and the remaining from services and solutions.

Despite the continued devaluation in international operations, our top line grew by 7% and 31% in Ukraine and Belarus, respectively in local currencies. Consolidated EBITDA rose by 8.1%, exceeding TRY1 billion year on year.

This was mainly due to a (inaudible) increase in revenues, which was partially offset by rising direct cost of revenues and administrative expenses. The rise in direct cost of revenues was mainly network-related expenses.

Moving on to the next page, in the first quarter net income as per IFRS rose almost 4 times to TRY563 million, whereas the pro forma net income rose 16.1% to TRY544 million. Net income increased mainly due to higher EBITDA and lower translation losses due to a more efficient balance sheet, as well as to a lower tax expense related to Turkcell Turkey, resulting from less interest income, and a decrease in translation gain year on year. This was despite a lower contribution from Fintur and an increased interest expense on loans and license payables.

I will now talk about our balance sheet and cash flow items on the next page. As of the end of March, 2016, our net debt position was at TRY1.5 billion, and our consolidated debt at TRY4.0 billion. The decrease in the debt balance was mainly due to Turkcell Turkey's short-term loan payments.

During this quarter the major cash flow items include mainly capital expenditure of TRY738 million, of which TRY675 million was related to Turkcell Turkey, and regulatory fee payments of TRY491 million.

Moving on to the final page, in order to improve our balance sheet in 2015, we successfully implemented our action plans, and completed the debt restructuring of lifecell and BeST. This eliminated currency risk in our international subsidiaries which operate in more volatile markets.

In the first quarter of 2015, 86% of our debt portfolio was in foreign currency, namely dollars and euros. After the debt restructuring and [new debt] obtained by Turkcell Turkey, 81% of our total debt is in foreign currency. And as a result, we now manage all our FX debt through Turkcell Turkey. This allows us to benefit from two main advantages.

Firstly, a relatively lower volatility in Turkish market. And secondly, our convenient use of natural hedging options, such as inflationary pricing and cash conversion into hard currency in a more liquid Turkish market. At the end of the first quarter of 2016, the debt (inaudible) of lifecell was TRY393 million, denominated all in local currency in hryvnia, while the debt at almost TRY5 million of debt denominated again in Belarusian rubles.

Finally, in the first quarter of 2016, our net debt to EBITDA rose slightly to 0.4 times, which is expected to rise going forward, while maintaining our investment grade.

This brings our introductory presentation to the end. Let me thank all and hand over to Nihat for the Q&A session.

Thank you, Murat. At this point, we are ready to have a Q&A session. Marian, could you please initiate the Q&A session?

(Operator Instructions). Ranjan Sharma, JPMorgan Dubai.

Hi. Thank you for the presentation. Just a couple of questions from my side. Firstly, I have just seen the announcement of the decision to IPO the Global Tower company. Can you share further details on how many towers there are in this company, and what stake you're looking to list?

Secondly, if you can share what percentage of base stations are connected with fiber in Turkey. And the third question is on your depreciation and amortization expense, if you can share more details on how you're accounting for the amortization of the 4.5G license because your amortization doesn't seem to have increased much from the fourth quarter to the first quarter of this year. Thank you.

Thank you, Ranjan. First of all, on the tower IPO, we will not be able to share the details of the number of towers at this particular moment. But we have decided actually to start the process for the IPO. And we will keep you informed as we have more publicly available data for that purpose.

With regard to the fiber infrastructure, we are as of today, can have 95% of our transmission on our own network. We will not be able to provide exactly the number of fiber sites. But we are very comfortable in terms of providing the speed that we need to our nationwide network. Ilker, would you like to add anything?

Well, on these (inaudible), I think what's actually -- we have (inaudible) company is capable of handling all our back-haul traffic, more than 95%. And the base stations we have recently launched with the 4.5G has a high speed back-haul connectivity, either via a fiber infrastructure, or our high-speed radio link network.

Thank you, Ilker. And with regards to the depreciation expense, maybe Murat, you can provide the answer.

Yes. Thank you very much. Starting from December 2015, on a monthly basis we've been depreciating TRY8 million for the license. And starting from the first of April, when we had the launch, there's going to be an additional TRY26 million is going to come. And the total is going to be going forward, TRY34 million. Thank you.

Thank you.

Alper Ozdemir, Oyak Securities

Good evening. Could you please share your observations regarding the increase in data usage after 4G, and maybe its potential impact on your ARPUs going forward when campaigns are ended in a couple of months?

And my second question is on your subscriber losses. You've long been focusing on the postpaid segment. But you're losing market share. And your ARPU growth is not very strong for a while. Does that concern you? My question is that.

Thank you, Alper. With regards to the increase in data usage, we have seen actually a very healthy uplink in the data usage. We are now at 1.9 gigabytes per user, up from 1.7 level. Actually we have seen an overall 10% increase in the mobile data consumption. More than 22% almost of our total data has moved to LTE network, which is also very, very positive.

Maybe one anecdotal thing I can share is if I look to the average number of minutes that people watch TV on their mobile devices, has moved from 7 minutes to 16 minutes over a period of six months. And we have seen a strong increase of the services, which really encourages us, and actually shows that our customer is really enjoying the doubling the quotas for the next three months.

With regard to the subscriber base, we are very comfortable with the growth we see on our postpaid portfolio. Actually the ARPU level increases are a result of the switching from prepaid to postpaid that shows the average is lower. But if you look to our double-play and triple-play customer base, the changes we see are exactly in the right direction.

So we consider the higher value generating customer focus as the right thing to do for us.

Thank you.

Ivan Kim, VTB Capital.

Yes. Good afternoon. Two questions from my side, please. Firstly on the mobile voice revenue, their decline accelerated to 8% year on year in the first quarter. I was just wondering whether you can elaborate on the reasons behind that. Apparently we've been trying to increase prices for inflation, not for everybody, but for heavier users and less price-sensitive users. Does it work at all? Because in this mobile voice revenue trend, it's not that visible.

And the second question is on your residential-- fixed residential broadband business. There you see a mid-30% revenue growth for several quarters now. By now it's starting to be driven by ARPU, rather than subscriber growth. So I was just wondering how sustainable you think this trend is. And do you think you'll be able to sustain such high growth for much longer? Thank you.

Ivan, thank you very much. First of all, on the mobile voice revenue, let me correct the decline rate. It's not 8%, but 4.1%. This is actually in our -- second page? It was on the seventh page of our report as well. And this is actually better than our forecast.

As you know, the revenues is an allocation of the total packages. And we actually see the growth on the data side and the digital services side healthily compensating for this decline. And this is in line and better than actually our plans for 2016.

With regard to the inflationary pricing, we continue to raise our prices to the level that we are comfortable with the customer feedback.

On the residential fixed business, we see 30% revenue growth. The total home pass increase was seasonally lower on a winter period. So we are not also surprised to see these levels of growth. We believe that this is a sustainable level of growth for our fixed data revenues on the fixed side as well.

And I'm also particularly happy with the growth of double-play and triple-play customers in this total subscriber mix, which is the most healthy sign.

Okay. Thank you.

Vyacheslav Degtyarev, Goldman Sachs

Thank you very much for the presentation. Two questions from my side. Your first quarter EBITDA margin is at the bottom range of your annual guidance. So what makes you comfortable in your guidance for the full year? And so what are the improvements that you target to achieve over the course of the next nine months? So you mentioned one-off costs related to 4G launch. Can you estimate the amount of such cost?

And my second question is can you please provide any update with regards to the Fintur bid? Is there any formal deadline for TeliaSonera reply to you? Thank you.

Thank you, Vyacheslav. With regards to the EBITDA margin, actually Q1 we are -- we have done better than our plans. We were expecting higher promotions and marketing expense with regard to the 4.5G costs. And despite these one-off expenses and aggressive marketing campaigns including promotions, additional quota-doubling, and also advertising costs, we are comfortable with where we are. And we are reiterating our guidance for the year.

With regard to 4.5G costs, I think in our report we have already provided you the CapEx figure, TRY735 million, I believe.

And with regard to the marketing, we have (inaudible) again in line with our plans. We have increased almost additional marketing dollars by TRY35 million for the total quarter. And despite these one-offs, we are well in our plans.

The deadline for Telia Fintur deal, our discussions are continuing. We have provided a binding offer. And we will let you know when these discussions progress.

Thank you.

Atinc Ozkan, Credit Suisse.

Good evening, all. This is Atinc from Credit Suisse. If I may, I have two questions. I heard your previous reply on Global Tower, and I do perfectly understand you cannot disclose any numerical data. But could you just provide some color on the revenue mix of this asset? I mean how much of -- whether the majority of the revenues are external or internal. Just asking that because as far as I know, there is not power collocation regulation in Turkey. So I am just trying to figure out whether this is a material revenue generator or not.

And my second question is regarding your effective tax rate, which was significantly below versus what you reported in the full year of 2014 and 2015. I know you have been simplifying and streamlining your corporate structure, eliminating some subsidiaries. Was the lower tax charge driven by this, or anything else? Thank you.

Thank you, Atinc. For the Tower, this in line with our strategy of an asset-light model. So we are actually consolidating all our assets in different countries under the Global Tower structure. As you can guess, we will not be in a position to provide you numbers with regard to that. But the revenue generation potential will also be in a healthy balance in terms of the foreign currency revenue-generating assets of the mix.

With regard to the effective tax rate, we have actually applied a very efficient way of restructuring and looking to our balance sheet, making sure that none of the expenses incurring outside of the country eliminates our tax shelter benefit. So by doing this in the right way, consolidating all our cash-management practices also in Turkey, simplifying our operations in terms of number of companies, we have come to a point, I think we are slightly above 20% corporate tax rate, which is in Turkey. So we are comfortable with this. And we can foresee that this will be the future trend.

Much appreciated, thank you.

(Operator Instructions). Dalibor Vavruska, Citigroup.

Oh, hello. Good evening. I just wanted to ask about the 4.5G and how the launch went, and how you think that you are positioned relatively to competitors in this area. Also, sort of referring to the fiber and to the discussions that have been taking place about sharing fiber, I'm just wondering where we are and whether you can maybe talk about the scenarios that, if the fiber sharing goes ahead, what is the scenario when it doesn't? What sort of CapEx differences are we talking about in the next couple of years? Thank you.

Thank you, Dalibor. With regard to the 4.5G launch, I think the team did a fantastic job in terms of executing on the plans. As of the launch date, we have seen more than 70% of population coverage. We are in 81 of the 81 cities, 970 of the 970 provinces in Turkey.

With regard to the pick-up, I think we broke a world record in terms of getting to 1 million subscribers in a [minute or two]. And as of today, we are getting close to 4 million, which is actually a very, very strong figure. We almost have 15% of our customer base already enjoying from 4.5G. And as you know in the global averages, this takes almost more than a year for telcos to get to these levels.

So we are happy. We are seeing the benefits of getting 47% of the available spectrum. By carrier aggregation, we are seeing maximum speeds of almost up to 400 megabits per second. I think Istanbul and Ankara, Turkcell networks are currently the fastest metropolitan mobile networks in the world, based on the speed test averages that I am following. And when you come to Turkey, I'm sure you will enjoy having 60-70 megabits of connectivity while you are in the city.

With regard to the fiber sharing, our hypothesis and proposals have been embraced by the Ministry of Telecommunications and the regulatory bodies. So we are now working hand in hand exploring different options on this. There are two main issues. One, fiber-sharing, either through a joint infrastructure company or through the right sharing and pricing mechanisms for access to fiber.

But also the government has taken steps for eliminating the hurdles with regard to getting licenses in terms of construction licenses. And they are working on a new law which will allow us a much smoother operation in this area. So I am hopeful that as an industry and with hand in hand with the regulatory bodies, we will find a mutually acceptable solution.

Based on our calculations, a joint infrastructure could save almost $12 billion in order to achieve the desirable fiber infrastructure for the country.

Okay. Thank you.

(Operator Instructions). As there are no further questions in the queue at this time, that will conclude today's question-and-answer session.

I would now like to actually take another question from Michael Shen, Moon Capital.

Hello, a very good performance in the broadband sector. What are you seeing from the competition in this quarter and has your outlook changed regarding the wireline segment? And could you also share the homes passed for fiber as of Q1?

Sure. Maybe Ilker, you can help me with the home passed developments. As you know this was a winter period. So home pass growth is relatively low, because of seasonality.

Yes, Kaan. As you mentioned, actually Q1 has been in line with our yearly plans. And since there is this heavy winter conditions, the rollout of homes passed has been slower in the first quarter. But this is a usual seasonal traffic. All trends are in line and we will be concluding with the hundreds of thousands of homes passed related to our network until the end of 2016.

Last year I recall we had nearly 360,000 home passes. And I think we will be in line with our trends.

I think now we're at about 2.4 million.

Yes. We have --

The target for this year.

Yes. 2.475 million.

Thank you.

This will conclude the question-and-answer session. I would like now to hand the call back to Mr. Nihat Narin.

Thank you, Marian. On behalf of the management team here, I would like to thank you and all the participations to the call, and please do call the IR team if you have further questions. And also please be aware that our audio will be available. So feel free to call in upcoming days. Thank you very much, and have a good day. And have a good night. Thank you.

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.