Turkcell Iletisim Hizmetleri A.S.
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Good day and welcome to Third Quarter 2014 Results Announcements Conference Call. At this time, I would like to turn the conference over to Nihat Narin, Director of Investor Relations. Please go ahead.

[Nihat Narin:]

Thank you, Sarah. Good morning and good afternoon. 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, Süreyya Ciliv followed by presentation by CFO, Murat Erden. And then we will go into a Q&A session. Just before we start the presentation, I would like to go over the brief notice. Please remember that any statements about our future expectations are subject to uncertainties. Also all financial data are consolidated whereas, non-financial data are unconsolidated unless otherwise specified. Süreyya, please go ahead.

[Süreyya Ciliv:]

Good morning, and good afternoon and welcome to Turkcell’s 2014 third quarter results. With the quarter Turkcell group reached record high revenue in EBITDA. Revenues rose by 6% year-on-year, TRY3.2 billion. EBITDA arose by 3% while EBITDA margin was 33.2%. Overall the nine month performance was in line with our plans and we maintain our full year guidance. Net income in the first nine months was impacted by FX volatility in our countries of operation. We record that a total FX loss of TRY728 million which was mainly due to devaluation of Ukraine. Moving onto the next page. In the third quarter mobile and fiber broadband were the main growth drivers. We saw that a 1% drives in Turkcell Turkish voice revenues following negative growth rates in the first half due to the MTR cut impact. Mobile broadband accelerated its growth phase because 38% year-on-year rise through our actions to increase smartphone penetration and usage of data bundled offers. Meanwhile, the decline in SMS revenues was mainly due to all demand for SMS prior to global industry trends. It also reflected ICTA decision to decrease the maximum SMS price by 20% in January 2014. Mobile services have been one of Turkcell’s key focused areas and have increased 7% year-on-year. In the meantime, Turkcell’s performance sustained its strong growth momentum rising 38% year-on-year. On the other hand, the 6% decline in other subsidiaries revenue was mainly due to the local currency depreciation impact of Ukraine. Moving to Page 6, the Turkish mobile market has remained competitive year-to-date. In this environment, our strategy is to increase customer focus and to offer superior customer experience. As a result of this, and of the seasonality effect, our subscriber base rose by 97,000 for the quarter to 34.7 million. The increase in the subscriber base was driven by the postpaid segment, which expanded by 793,000 in the first nine months, mainly due to the pre-to-post switches. This led to a total improvement in our subscriber mix. Overall, our postpaid base now accounts for 43% of subscribers and 70% of revenues. Meanwhile, the strong rise in mobile data usage increased both postpaid and prepaid ARPU, despite the dilutive impact of switches. This led to 4.8% overall blended growth. Moving to Page 7, we welcome the success of the Turkcell T50, Turkish first domestic 4G smartphone. Following its launch in July, the T50 became the top selling smartphone in Turkey through its affordable price and quality. With contribution of the T50, the number of smartphones has reached 11.9 million welcoming 923,000 new users for the quarter. As a result, our smartphone penetration rose to 37%. We expect to reach 40% by year-end 2014. Through our smartphone focus, our contracted data bundled offers, mobile broadband revenues now constitute 21% of Turkcell Turkey’s total revenues on a 5% to deploying year-on-year rise. Moving onto Page 8. Our ultimate goal is to create value for our customers and success through our knowledge, innovation, technology, investments, hard work and teamwork. Parallel to this, recently launched our cutting edge TV platform Turkcell TV+, which took our Turkcell TV stores to the next level. Our ability to offer this product both on Turkcell’s superior 3G technology and Turkcell’s strong lines fiber network create a group synergy that will create value and differentiation for our mobile in fiber customers. Turkcell TV+ offers seamless multiple screen experience to offer rewinding and cloud recording anytime, anywhere. This platform also enables Turkcell Superonline to offer triple play services. Moving on to next page, Page 9. Turkcell Superonline was one of the key growth engines for the group recording 38% top-line and 51% EBITDA growth. Meanwhile, its EBITDA margin improved by 2.5 percentage points year-on-year to 27.8%, mainly driven by growing scale of the business. On the operational front, Turkcell Superonline reached a total of 1.1 million customers of which 686,000 were fiber users. We continued to increase in city coverage to around two million homes. In the third quarter, the residential segment grew by 55% on the back of continued strong subscriber growth and sharing the total reaching 40%. In the meantime, the corporate segment grew 32%. Moving to Page 10; our business remains solid in Ukraine, however, devaluation impacted our year-to-date financial performance. In the third quarter, revenues in local currency terms show a 16% top line growth, despite the 21% decline in TRY terms due to the currency depreciation. Meanwhile, the EBITDA margin improved by 0.8 percentage points to 31.6%. On the operational front, our active subscriber base continued to grow with 1.1 million net additions for the quarter. With regards the Crimea region, which accounts for 3.5% of Astelit’s revenues for the nine months. Our network experienced cutoffs of its fiber-optic channels due to circumstances beyond our control. Currently, Astelit has very limited coverage in the Crimea region and is working hard to restore the network and yet significant challenges remain. We continue to evaluate our alternatives in this region. Thank you and now I will hand over to Murat for the financial review.

[Murat Doğan Erden:]

Thank you. As highlighted in the third quarter, group revenues rose by 6% year-on-year to TRY3.2 billion with strong growth momentum in mobile and fiber broadband revenues. Subsidiaries revenue grew by 11% mainly due to Turkcell Superonline. Astelit’s contribution to the group declined due to the devaluation in the country, despite the country’s and the company’s 16% growth performance in local currency. The consolidated EBITDA in nominal terms rose 3% mainly on the top-line growth. The EBITDA margin is realized at 33.2% in this quarter. We’ve witnessed increased sales and marketing expenses due to intense competition in the Turkish mobile market. Higher interconnect and network cost of Turkcell Turkey and high operational expenses of certain subsidiaries. Now moving onto Page 12, group net income increased 8% year-on-year, mainly due to higher EBITDA, higher interest income, the positive impact of Turkish Lira depreciation against the dollars, and a one off positive impact of TRY24 million from the A-Tel share, sale possess in this quarter back in August. Meanwhile the increasing net income was partially nicked off by translation losses, due to devaluation in Ukraine and Belarus and a decrease in Fintur contribution, due to the write off of its operational assets. In this quarter Astelit recorded a translation loss of TRY125 million, BeST recorded TRY55 million. And Turkcell Iletisim recorded TRY33 million. On the other hand, Turkcell Turkey recorded a translation gain of TRY167 million, due to the both an increased share of cash held in hard currency and Turkish Lira depreciation. Moving onto the final page, our financial position remains strong with TRY5 billion of net cash on our balance sheet. A strong rise in EBITDA and higher interest income were the main reasons for the increase in our cash balance. Quarterly CapEx and increased trade receivables were the major cash flow items. Of the total CapEx of TRY555 million, TRY364 million was related to Turkcell Turkey TRY125 million to Turkcell and TRY66 million to other subsidiaries. Our consolidated debt is at TRY3.5 million level, the debt balance of our Ukrainian and Belorussian operations are TRY1.5 billion each. This brings our introductory presentation to an end. Thank you. Sarah?

[Operator:]

Thank you. (Operator Instructions) Okay. We will now take our first question from Dalibor Vavruska. Please go ahead. Your line is open.

[Dalibor Vavruska:]

Good afternoon, good evening. Just one question, I think the results looked generally good from your side and also from your competitor Avea that reported. Can you talk about some hope for market repair here? Also the follow-up question is it seems that you have lost some market share to Turk Telekom in mobile. Do you have some thresholds in terms of where you would like to see your market share like, like – where some sort of floor where you would like to start fighting again for market share? Or are you generally happy that some kind of market repair maybe happening even though you may continue losing market share let’s say in the next year or two? Thank you.

[Süreyya Ciliv:]

Murat, do you want to comment on the competitiveness of the market?

[Murat Doğan Erden:]

Let me make a few comments on the first question. We have seen some positive moments at the end of last quarter and at the beginning of this quarter in terms of some price increases in the irrational price levels that we were seeing. So these are good products. We think it’s still very early to talk about the overall market repair or the rationalization because even with these adjustments still it’s a very aggressive market and still the price levels are very competitive at low levels when compared with the last year let’s say. So we have some good signs, but it’s too early to say there is a market repair. About the second part of your question, the company looking at a lot of KPIs and market share is one of the KPIs, but it is not the most important KPI for us. We focused on, first of all, our focus on customers, keeping our customers, and delivering huge value and differentiation for our company to these customers. So our focus will continue for our customer, it has been in the past and delivering high quality services, innovative services both on mobile and fibers and the related areas is our team’s goal. Through our quality of our network, through the power of network, we have maintained our high market shares in Turkey. And we will continue to innovate to deliver a more value for our customers. So although our prices maybe more expensive sometimes. We hope that the customers will focus on the net value, the benefits they get minus the cost they pay. And we believe that customers act rationale in this way, but we also have to remember that starting March 2009, the regulators has introduced a price tariffs initially in 2009 it was for each tariff, so that the on-net revenue per minute was higher than the MTR and then this was changed in April 2012, campaigns were included. And then, in July 2013, SMS regulation came. And for the voice, the on-net revenue per minute, a new price floor was set, 1.7 times MTR. And unfortunately, in February 2014, regulatory body introduced new regulation for each tariff plus campaign. The on-net revenue for Turkcell per minute was to be higher than 1.7 times MTR. So these regulatory decisions have impacted the market a little bit and we will continue to innovate new mobile and fixed solutions services and we will continue to differentiate our network versus competition, so that we are the preferred choice.

[Dalibor Vavruska:]

Thank you very much.

[Operator:]

Thank you. We will now take our next question from Ivan Kim from VTB Capital. Please go ahead. Your line is open.

[Ivan Kim:]

Good evening. Two questions, please. First actually on the regulation, so basically given that’s your market share has now declined below 50%. Do you see any signs of regulatory being more rationale because indeed the latest moves have looked to be unwarranted and that’s besides the fact that the competition and the margin remains very, very tight. And then, secondly, on Astelit. The growth in local currency terms on the revenue side was very high, 16% almost. Can you please elaborate on the reasons for subscriber intake and the revenue growth? Thanks.

[Süreyya Ciliv:]

On the first question, we cannot comment on the regulatory body’s decision in the future. We have not been very successful in making some of these predictions in the past. We believe that technology world is fast changing and companies should be allowed more freedom to innovate and we should be able to control our consumer and user pricing. So I cannot comment on what the regulators will do in the future. We think this regulation should have been lifted long time ago. On the Astelit side, local currency growth was about 16% and this is higher than, as far as I can remember, versus our competition in Astelit. Although, our focus has not been market share, delivering higher value and increasing our customer base, but obviously Turkish lira because of devaluation is translated to a decrease in revenues. Murat, can you comment on the subscriber side.

[Murat Doğan Erden:]

Sure. Well, our subscribers’ number has increased in Ukraine, mostly driven by seasonality. And roaming, of course, have increased our revenues. But please note that seasonality effect right after the quarters get some normalization level, but we did of course benefit of 16% top line growth and of course maintain our margin quite flat.

[Ivan Kim:]

Can I just quickly follow-up on that because there was a slowdown, which was on the [stand up] (ph) on the second quarter, which seem to be driven by the economic and political turmoil slowed down to like 5% growth. And now the gulf shot back to quite high spell life in a while basically for us to it. Is that you’re taking customers because people would cut down on spending and consider us to reflect obviously the cheapest provider or there is anything else behind that?

[Murat Doğan Erden:]

Yeah, obviously, devaluation was about 62% and inflation is high. So I think all of the operators are behind inflation. So I think, in my opinion the market needs to catch up to the inflation and devaluation. So we think, we have to adjust our pricing accordingly and we hope that other operators think in a similar way, because obviously 3G is coming to that market and there needs to be a good return for the investments to come.

[Ivan Kim:]

Okay. Thank you.

[Operator:]

Thank you. We will now take our next question from Koray Pamir from Deutsche Bank. Please go ahead. Your line is open.

[Koray Pamir:]

Thank you very much for your presentation. Two quick questions, one regarding the networking capital position, should, I mean it has been understandably increasing regarding the smartphone sales. Moving on to 2015, should we expect a change in either direction regarding the networking capital expansion? And secondly, very brief on Superonline, the operational performance has been improving steadily. Should we expect EBITDA margin to stabilize under 30% or do you think it’s whether open ended going forward? Thank you.

[Murat Doğan Erden:]

This is Murat speaking. Regarding the first part of the question, the networking capital, usage of the company depends on two factors. One, the trend in the CapEx investment of the group. We are right now working on the next year’s plan. As you can understand this year was a heavy investment year for Turkcell Group, including Superonline and Turkcell. Right now we are investigating the trends or the need for the next year, including the possibilities for the 4G readiness of the whole network. Regarding the trade receivables on the smartphone penetration and the contractor sales; right now we reached the 37% smartphone penetration in our system. We anticipate that’s going to be reaching close to 40% and we’re going to keep the pace as much as possible and we are still working in the same momentum for the smartphone sales. So the trade receivables and use of working capital is going to continue for next year.

[Süreyya Ciliv:]

Koray just last part that you asked about Superonline, the 30 or plus margin for Superonline. Of course, we are not ready to give you a long-term guidance. However, of course, in midterm that is our target.

[Koray Pamir:]

Thank you.

[Süreyya Ciliv:]

Thank you.

[Operator:]

Thank you. We will now take our next question from Herve Drouet from HSBC. Please go ahead. Your line is open.

[Herve Drouet:]

Yes, good morning. Thank you very much for the presentation. My question is regarding in fact to Crimea, I have two questions. The first one is – this jump on the revenue in local currency, have you experienced any extraordinary growth potentially in area like Crimea where you have been relatively low exposure before on potentially I don’t know if – with some destruction of operation of the other operator. Do you see any impact this quarter that may also benefited in terms of the uptick in local currency growth. And the second question is regarding the 3G as well in Ukraine. I mean do you have any thoughts on how much the cost of the 3G license may come in Ukraine and depending on that costs do you think it can play a role in the different options you are looking at in being in Ukraine? Thank you.

[Murat Doğan Erden:]

Hi, this is Murat again. Regarding the first part of the question, in the Crimea region, you’re right that we were one of the only operators still running part of the operation in Crimea. But we have been facing lots of trouble to run the operation there and that operation has been significantly minimal and I believe we’re not anticipated that is going to viable for us to continue the operation there and it is interrupted much more frequently. So the benefit can be eroded in the next quarter regarding the jump in the local currency growth in the company. Regarding the second part of the question, I’m going to hand over to Mr. Ciliv.

[Süreyya Ciliv:]

I think the expectation for 3G license is being $200 million to $230 million plus I think there is also expectation that would cost another $40 million or $50 million to clean up these frequencies that are being used by the military today. So that is the preliminary estimates of these licenses again.

[Herve Drouet:]

And do you think – I mean, your view in Ukraine, is your view to stay in Ukraine operationally or do you look at different options depending on what the cost will be (indiscernible)?

[Süreyya Ciliv:]

Our long-term plan is to stay in Ukraine. We believe in Ukraine. And we think for many reasons it is a big market, close to Turkey where we have been and we have been more successful every year and we have a strong local team. And we think that through innovation in Turkcell we carry a lot of innovation to that market without experiencing 3G and fiber and mobile services. And the new Ukraine, at least the western part will be closer to West. So, yes, it’s a very challenging time, but you need to have a long-term view with these emerging markets and we have a long-term view. So we definitely see that our operations in Ukraine should have mobile broadband and fiber broadband and make mobile services that create value for consumers and also corporates.

[Herve Drouet:]

All right. Thank you very much for your answers.

[Operator:]

We will now take our next question. (Operator Instructions) Please go ahead, Ranjan Sharma from JPMorgan.

[Ranjan Sharma:]

Hi, good evening, and thank you for the call. Two questions if I may. Firstly, on the domestic business. Now that Superonline is getting scale, is there any plan to launch quarterly kind of services in Turkey? And secondly, on your Board and shareholders side, is there any update or indication when your Board might (indiscernible) and what can we have expectations from dividends going forward? Thank you.

[Süreyya Ciliv:]

On the Superonline side, we definitely have triple play and we have just last week announced Turkcell TV+ platform. IPTV platform, it’s runs not only on fibers, but also runs on all four screens

[Süreyya Ciliv:]

Sarah?

[Operator:]

Yes. We have no further questions in the queue.

[Süreyya Ciliv:]

Well, that’s very kind of you. Well, on behalf of the management team here, I would like to thank you and for all participation here. And if you have any follow-up question, please do call IR team and also our recording is available. Please visit Turkcell’s IR website. Have a good weekend. Thank you.

[Operator:]

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.