Turkcell Iletisim Hizmetleri A.S. Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 8 speakers on the call.

Operator

Welcome and thank you for joining the Turkcell's conference call and live webcast to present and discuss the Turkcell Third Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a question and answer At this time, I would like to turn the conference over to Ms. Oskoum Jardim, Investor Relations and Corporate Finance Director. Ms.

Operator

Yarden, you may now proceed.

Speaker 1

Thank you, Gili. Hello, everyone. Welcome to Turkcell's Q1 2020 earnings call. I am Ozlem Yarden and recently appointed as the Head of IR and M and A Success. I have been with the company more than a decade and I'm excited to meet each of you in person in the near future.

Speaker 1

I'm always here to address your questions and feedback. Today, our CEO, Alita Hakoch and CFO, Kamil Kalyon, will be delivering a brief presentation covering Before we begin, I would like to kindly remind you to review our Safe Harbor statements available at the end of our presentation. Now I am handing the meeting over to Mr. Ayesha.

Speaker 2

Thank you, Islam. Hello, everyone. Thank you for joining us today. I'm honored to have been appointed as the CEO of Turkcell, which pioneered mobile telecommunication technology in Turkey and remains a flat carrier in the global capital markets. With a strong background in telecommunication, technology and innovation, I have contributed to numerous patents and international projects during my tenure at Intel Corporation.

Speaker 2

I have also held key positions overseeing the digital transformation of Turkey. With a wealth of experience in my new role, I am committed to advancing Turkcell's leading position in our nation's digital sovereignty. We will harness our advanced technological capabilities to foster innovation and create brighter digital future for all while taking TURXAL to the next level. As we are celebrating the centennial of the Republic, I am confident in Turkcell's leadership in technology and innovation will further carry our country to the 2nd century. Turkcell's performance in the Q3 proves the success of this company, which is leveraged by a robust business model, state of the art capabilities that enhance customer satisfaction and a team of highly skilled individuals.

Speaker 2

My initial evolution of the company has reaffirmed my perception of Turkcell. My primary mission is to bolster Turkcell's position in the telecommunication and technology market. To achieve this, I plan to place a greater emphasis on technological advancements and innovation. To unlock the full potential that lies within the Turkcell's capabilities, I aim to achieve sustainable growth and create value for Turkcell's shareholders. Let me dive into financials.

Speaker 2

We delivered a solid set of results in the Q3. Continuing to outpace inflation, Our revenue growth accelerated to 77%, driven by record ARPU growth and a significantly expanding subscriber base. Our EBITDA exceeded TRY11 1,000,000,000, marking an impressive 89% annual increase. This growth is driven mostly by robust top line performance and reduced energy prices despite increased personnel expenses. Our margin reached 43.5% on a yearly rise of 2.6 percentage points.

Speaker 2

We delivered a remarkable net profit of TRY 5,500,000,000. Thanks to in September. This result enabled us to increase our full year guidance further. Next slide please. Let's take a closer look at our mobile operational performance.

Speaker 2

We have concluded a dynamic quarter for the mobile market, leveraging strategic pricing actions amidst Competitive pressures are grasping summer seasonality. In the Q3, we made a price adjustment in August, Responding to the soaring inflation rates of July. While overall price levels across the market escalated, we also observed aggressive promotional campaigns that have Shifted the MMP market away from rationality. Our commitment to price adjustments remain intact As we have already adjusted prices by 20% for Q4 in October. Mobile ARPU sustained its climb, Thanks to sequential price adjustments aligned with inflationary pricing policy and bolstered by upsell efforts supported by analytical models.

Speaker 2

Accordingly, we recorded a 27% year on year growth. This quarter we gained a net of 392,000 postpaid and 193,000 prepaid subscribers. This remarkable result was driven by our strategy of focusing on prepaid subscribers and summer season, which had a positive impact on prepaid services. However, increased competition from alternative data solutions And rising acquisition prices impacted the prepaid net addition. The mobile churn rate ticked up to 2%, though remaining at a healthy level, Despite the aggressive pricing efforts of the competitors.

Speaker 2

Next slide please. In the fixed broadband segment, We had a net gain of 48,000 fiber subscribers, thanks to an expanded fiber footprint and increased demand during the back to school period. The year's only price action by the incumbent took place in July, which we follow. Thanks to our strategy focused on development contract options, The ratio of those in our fiber portfolio reached 59% in the 3rd quarter. With 88% Our new customers opting for a 12 month contract in September and the removal of 24 month contract options in this quarter, it is fair to expect A higher 12 month contract ratio in the fiber base in upcoming periods.

Speaker 2

Consequently, price actions will have a more immediate impact on ARPU. Fiber ARPU ramped up by 63% yearly driven by our price adjustments, upselling efforts to higher tariffs, Our focus on 12 month contract options and higher IPTV pricing. It is fair to expect real growth in fiber ARPU will be sustained for the remainder of the year. Introducing shorter contract relations and the price adjustment in the fixed segment has led to a slight increase in churn levels annually. We are pleased to register a further 31,000 net additions to our IPTV subscribers bringing our total customer base 1,400,000.

Speaker 2

We provided IPTV to 66% of our fiber subscriber base. Next slide please. Regarding our strategic focus areas, let's begin with Digital Services and Solutions. The standalone revenues From digital OTT services rose 103% year on year. We introduced new price adjustments across most of our digital service portfolio.

Speaker 2

The standalone paid user base reached 5,800,000 marking a R1 1,000,000 rise on the previous year. Our TV platform, TV Plus Expanded its customer base on both OTT and IPTV platforms, thanks to its rich content and the best pricing strategy. It has consistently increased its market share in the pay TV market since the Q2 of 2014 and most recently reached 17.2% despite ongoing price adjustment throughout the year. Lifebox, our cloud storage platform Has seen substantial growth reaching 2,100,000 subscribers rising 29% on a yearly basis. Our digital business services playing a pivotal role in supporting the digital transformation of enterprises recorded 76% year on year growth.

Speaker 2

We also witnessed strong performance in the promising verticals, particularly in the data center and cloud segment, which accounts for 16% of our for DBS Revenues and posted solid revenue growth of 152%. This quarter we had a record level of new contracts exceeding 1500 contracts. Next slide please. Our techwing companies once again delivered a strong performance supporting the group's top line in the quarter. Digital Financial Services Platform Paycell's revenue rose 112%.

Speaker 2

The flagship product Pay Later sustained its growth, robust growth with more than doubling transaction value. Paycell with the vision providing solutions across various verticals of the Turkish Fintech Ecosystem has been expanding its reach. Paycell customers can now execute Borsa Istanbul Stock Exchange transactions through the app via a TMB licensed brokerage hub. Furthermore, Paycell offers shopping limits to its customers through Financell in collaboration with Turkey's renowned pioneering e commerce platform. Finance sales revenues grew by 104%.

Speaker 2

The loan book has expanded to TRY 5,700,000 97% growth, thanks to loan portfolio diversification with new products such as green notes for solar energy investments offered to enterprise customers. Increasing funding rate has diluted the margins due to the shortage of long term funding liquidity. Complementing our Techfin strategy, our digital insurance company, Vio, started operations in July 2023 with loan production insurance. We will be sharing more information about Voya, which stands for with you, including KPIs and product development in the coming quarterly reviews. Next slide please.

Speaker 2

Now our international subsidiary. Turkcell international revenues comprising 11% of consolidated revenues Grew by 75% year on year in the Q3. The growth came mainly from the positive impact of currency movements and growth in all subsidiaries. Excluding the currency impact, the segment has grown 30% organically. Lifestyle revenues which account for 76% of this segment grew by 26% year on year in local currency terms.

Speaker 2

The rise in ARPU and expanding subscriber base underpinned the performance, While the impact of war during the same period of last year was the factor curbing the growth. BEST Recorded 18% organic revenue growth on a yearly basis and the EBITDA margins reached 46% marking a substantial 14 point improvement. Lower interconnection expenses were the main driver of this high profitability. In September, we introduced 4.5 gs services in the Turkish Republic of Northern Cyprus, establishing Ourselves as the pioneering provider in the country. Next slide please.

Speaker 2

According to GSMA reports, the telecommunication industry consumes 2% to 3% of global power consumption. As operators, energy usage grows daily with increasing data demand, so does our carbon footprint. Furthermore, Considering the global energy crisis we experienced last year, we may face even higher energy costs and scarcity. In response, Most telecommunication companies have adopted their business strategies and investment activities to address the growing energy challenge. At Turkcell, we are also actively taking the latest steps.

Speaker 2

We are implementing various projects for optimal and efficient energy usage. Furthermore, we utilize 100 percent renewable energy certificate certified sources and intensify focus on our renewable energy investment. As you may recall, Turkcell acquired a wind power plant in Turkey 2 years ago, which currently generates 8% of our energy usage. This acquisition marked a great leap towards achieving net 0 by 2,050. This year we initiated investment in solar power plant installations to achieve a capacity of 300 megawatts within 3 years.

Speaker 2

The first phase with an installed capacity of 54 megawatts We will be completed by the end of first half next year. We aim to cover 65% of Turkcell's total energy consumption from our own for Green Energy Production by 2026. This call shields us against energy price fluctuations and reinforce our commitment to sustainability. Next slide please. To conclude my presentation, Here, I am pleased to share our updated guidance for 2023.

Speaker 2

Building on our Our outstanding performance in the 1st 9 months of this year, we have decided to revise our guidance upwards to align with a more realistic expectation. Accordingly, we raised our revenue growth guidance to around 73%, generating real revenue growth. Our nominal EBITDA expectation is now set around 39,000,000,000 and we anticipated maintaining an operational CapEx over sales ratio of around 22%. I firmly believe that Turkcell has the scope to deliver a stronger performance over the coming years. We are confident in our ability to create value through advancements in artificial intelligence, innovations and cybersecurity by leveraging our state of the art infrastructure in next generation communication technology.

Speaker 2

Moreover, we aim to capitalize on evolving digital habits of our

Speaker 3

Thank you very much, Alta Abe. Now let's move on to our financial results. Our group's revenue delivered an incremental revenue of TRY 11,300,000,000, marking 77% year on year growth. The Turkcell Turkey segment was the main driver of this performance, Driven by an expanding subscriber base, strong ARPU growth, thanks to sequential price adjustments and successful upselling efforts. The contribution of the international segment was TRY 1,200,000,000.

Speaker 3

The main drivers of this rise were the positive impact of currency movements and our Ukrainian operations performance. Our Techne segment contributed TRY537,000,000 to the top line with Strong performances of Paycell and Financell which grew 112% and 104% respectively. Next slide please. Now let's look at our EBITDA performance. In the 3rd quarter, group EBITDA grew 88.9 percent to TRY11.3 billion due to solid top line performance.

Speaker 3

The NDA margin expanded by 2.6% on a yearly basis in this quarter. The increase in personnel expenses due to the wage rise That became effective at the start of the quarter was more than compensated by the decline in the cost of goods. Energy expenses sustained the positive impact on the margin this quarter as well. Please note that the Energy Market Regulatory Authority has announced A 20% price increase effective from October 1, which will have an adverse impact on our Q4 results. Declining NTR rates through 2024 year end will continue to impact profitability in the upcoming periods positively.

Speaker 3

Next slide please. Now the net income performance. Group net income surged by TRY 3,100,000,000 Reaching a remarkable TRY 5,500,000,000 on 129 percent year on year growth. Our robust operational performance boosted EBITDA contribution to TRY 5,300,000,000 resulted in the solid net income. The limited depreciation of the Turkish lira resulted in lower foreign exchange losses in Q3, particularly compared to the previous quarter.

Speaker 3

The NPM valuation of the derivative portfolio had a positive impact of TRY600 1,000,000 on the overall net FX loss of TRY670,000,000. The tax impact The earthquake donation and the change in the corporate tax rate on deferred tax assets led to a lower tax expense in this quarter. Next slide please. Let's take a closer look at our CapEx management. The CapEx to sales ratio was 14.6% for the 3rd quarter, which brings the past 12 months figure to 19.4%.

Speaker 3

Thanks to a front loaded investment in the mobile segment. We primarily concentrated on maintenance CapEx excluding the earthquake zone. Having met the fiber home test target in the first half, We focused more on monetization in the fixed segment. These improvements have resulted in the expansion of other segments in the total CapEx breakdown. FX movements were the primary reason for the increase in international CapEx rather than higher organic investment.

Speaker 3

We expect to see a higher CapEx intensity in the next quarter due to seasonality of the business and new investment areas like data centers and Renewable Energy. Next slide please. Now let's turn our attention to the balance sheet. At the end of Q3, our cash position increased by TRY 4,000,000,000 supported by FX movements of TRY 1,300,000,000 while cash generation totaled TRY 1,800,000,000. ARGO's debt increased to TRY83.5 billion mainly due to TRY2.9 billion currency depreciation and new borrowings of TRY2.4 billion.

Speaker 3

We ended the quarter with a net debt position of TRY28.1 billion. Thanks to robust EBITDA generation, our net leverage decreased to 0.8 times. Our leverage ratio is quite healthy and we are far ahead of our competitors. In addition to the strong cash position, we have committed clients of around €175,000,000 equivalent for the The majority of our cash continues to remain in hard currencies. Excluding FX swaps, 56% of our cash is in U.

Speaker 3

S. Dollars and 13% in euros. Next slide please. Lastly, let's look into the management of foreign currency risk in Q3. At the end of Q3, our balance sheet had around 1 point US9 billion dollars equivalent in FX Financial Liabilities.

Speaker 3

In addition to the US1.4 billion dollars equivalent FX denominated financial cash, we have a US700 $1,000,000 effective hedging portfolio, the vast majority of which consists of We ended up with a long FX position of 100 and for $45,000,000 which is within our neutral FX position definition. This concludes our presentation and we can now open the line for

Operator

Ladies and gentlemen, at this time, we will begin the question and answer session. One moment for the first question please. The first question is from the line of Mois Dhi with Reuters. Please go ahead.

Speaker 4

Hello and thank you for taking my question. Congratulations on the quarter. Can you please share some thoughts About what you're planning to do with your upcoming debt maturities, there's quite a war ahead like $2,000,000,000 between now and 2025. So it would be great to get some color on that. Thank you.

Speaker 3

Thank you very much for the question. We have around US1.4 billion dollars to record FX cash in hand as of the end of the third quarter. In addition, we have around RMB175 1,000,000 committed long term facilities as I mentioned in my presentation. And as of Q3, our cash is sufficient to service our debt until the end of 2024. Our fixed debt service for this year is around $150,000,000 which we deem as manageable.

Speaker 3

As you mentioned regarding Our 2025 Eurobond, Turkcell processes educate cash reserves to fulfill the bond redemption as evidenced from our financial statements. Nevertheless, we are diligently exploring a range of competitive and rational alternatives for the issuance of the 2025 Eurobond. These alternatives encompass potential solutions such as launching a fresh bond sukuk offering or securing a bank loan.

Operator

The next question is from the line of Demetaskema with Ata Invest. Please go ahead.

Speaker 5

Thank you for the presentation and congratulations for good results. My first question is about the fiber investment in Turkey. What's your the current share of your company in this area? What are your targets For the future, I'd like to elevate that. And the second question is about the inflation accounting set.

Speaker 5

What might be the impact of inflation accounting application on your financials starting by the following? If you know that you I announced the iovation adjusted figures as you are listed in U. S, but I would like to Understand how it will affect your tax payments or other factors or any impact on your financials? Thank you.

Speaker 2

Let me answer the first one and then I'm going to hand over to my CFO. As part of our CapEx planning this year, we focus more on our core businesses. Compared to the last year, mobile investments will take a bit more share given the disaster related damages. On the fiber front, each year we maintain a balanced CapEx strategy with a demand driven approach. We have decided to decrease HomePass Investment to 380,000 due to uncertainties that arise from the current macroeconomic situation and our new monetization strategy on the fiber side.

Speaker 2

In line with the increased demand, we have selected our investment and added a total of 1,500,000 new home passes in 2021 2022. Accordingly, we now swap down our investment on that side and have progressed on the monetization phase. However, if a need arises, we can also consider increasing our home path investment in line with our smart CapEx strategy. Additionally, we have remarkable energy investments plans on the energy side to meet our own electricity demand as well.

Speaker 3

Inflation Accounting As you know, we have revised our 2022 financials as per the IFRS rules and we will be Starting the 2023 financials this year regarding the IFRS side, since we are is the CapEx Or how can I say the asset size are a little bit higher? The inflation accounting would affect us a little bit Positively in the income side, most probably simultaneously the tech side might be affected over this issue, but we have Some tools regarding the tax side, especially for the deferred tax side and we would not have affected Very negatively about this issue from the tax perspective.

Speaker 5

Thank you. Thank you. You're welcome.

Operator

Ladies and gentlemen, we have more questions. The next question is from the line of Demirakahayan with AK Investment. Please go ahead.

Speaker 6

Hello. Thank you very much for the presentation and opportunity Last question. I mean, I have a question about maybe for the next year, would it be possible to give any indication About the expected CapEx intensity for the next year given your expansion plans in the fiber? And also could we assume that the company will be committed to the inflationary pricing delivering real growth like

Speaker 3

Thank you very much for the question. As we mentioned in our presentation, We had a lot of investments in the fiber side last 3 months period and we are at the stage of monetization of this fiber investments in this year. Most probably this strategy would continue for the next year, especially for 2024. We will make some investments where we need. Regarding the committed to inflationary pricing delivering growth, yes, This year, we have a lot of inflationary effects in our sector and in our economy.

Speaker 3

Therefore, this is a tradition for Turkcell team. We We are doing this inflationary pricing very well more than decades. Therefore, we will continue this inflationary pricing in 2024 also.

Operator

The next question is from the line of Nagi Nora with Ares Group Bank AG. Please go ahead.

Speaker 1

Hi, thank you for the presentation and taking my question. Can you please update us on 5 gs spectrum allocation in Turkey? What's

Speaker 2

Well, there is no official timeline for 5 gs announced by the regulator yet, but the Minister Telstra Transportation has announced that 2024 will be a planning for a year for the 5 gs technology. Accordingly, we will be continuing our preparations during 2024. 5 gs is a vital technology that will So take the situation of industries and contribute to the economic development of our country. However, we believe that there are some issues that need to be addressed first For a healthy launch such as the fiber connection of our base stations, 5G capable smartphone penetration and development of locally manufactured equipment. As of 26 July 2022, We've officially launched commercial 5 gs in Istanbul Airport with a special regulatory permission that is issued to all operators.

Speaker 2

Turkcell customers and international rumors with 5 gs supported phones and 5 gs subscriber subscription can use 5 gs in Istanbul Airport. We will position Istanbul Airport as a commercial 5 gs pilot cluster and use it as a base for us to use care creation and R and D on top of our test 5 gs sites. As to the license cost and rollout of CapEx, It is difficult to give you an estimate as there is no official tender announcement. Analyzing the 5 gs development in different countries, we see that the high license calls Lead to a slower 5 gs rollout and lower network quality. Additionally, the use cases especially of 5 gs, Particularly for the consumer segment are not yet clear.

Speaker 2

5G will offer value for the digitization of the industries initially. We believe that this will limit operators' ability to generate incremental revenues at first. Therefore, it is of utmost importance that licenses Are granted to operators with reasonable fees and conditions. We also believe that deployment should be gradual based on customer demand to prevent excessive cash outflows without any return potential.

Speaker 1

Thank you.

Speaker 2

Thank you.

Operator

The next question is from the line of Ignacio Bexhillimurath with HSBC. Please go ahead.

Speaker 7

Hello. Thank you for the opportunity. I would like to wish the top management success for their new I would like to ask you a more general question maybe about the strategy. What are the key parts of this We think these improvements at first glance. And when you look at 2024 and 2025, where are the key points where there is potential for improvement That will also reflect in the financial performance over

Speaker 5

the next couple of years.

Speaker 7

This is a more broader question maybe, but I just wanted to hear about your thoughts on this. Thank you.

Speaker 2

Thank you for the great question. I'm committed to advancing Turkcell's leading position in our nation's digital sovereignty, while Sustaining and bolstering the company's position in the telecommunication market. I am planning to Emphasize innovation and technological development to unlock the full potential that lies within the Turkcell, while creating of course value for our shareholders. There are several trends in the telecommunication industry if you look around that has the potential to significantly affect the future of our sector such as especially artificial intelligence, Cybersecurity and Digitalization. At Turkcell, we will direct our efforts towards these forms by utilizing our company's state of the art infrastructure and know how and human capital.

Speaker 3

Thank you.

Operator

Question is from the line of Demirtaske Malyi with Alta Invest. Please go ahead.

Speaker 5

Thank you. My question is again about strategic focus areas. As we see in your financials Around 15% of your revenue is coming from growth focused strategy. We have standalone digital, digital business and patient business. Do you have any target on that side?

Speaker 5

Because over the last several years, We see that around 50% of the consolidated revenues. Should we expect some jump in the future, Maybe over the next 3, 4 years. Do you have any just numerical targets on that? Thank you.

Speaker 3

Thank you very much for the question. As you know, our strategy or our focus areas We are in the leader in the telecommunication sector, but we have determined some growth areas for our group, Especially this DSS side and the finance side, FinTech side is significant instruments of this growth area. Therefore, especially in the PayFac side, we continue our growth more than 100% growth rate as you can see In our financials regarding the TECF Insight, most probably we will be continuing this performance in next year. We also have targeted our DSS services, especially we are trying to increase Our direct sales from the DSS side to the more efficient and more And I say extended subscriber base and we will continue to perform this performance in 2024.

Speaker 5

Thank you. Thank you for that.

Speaker 2

Welcome.

Operator

The next question is from the line of Demirakka Hayyan with AK Investment. Please go ahead. Hi, thank you again.

Speaker 6

I mean, as a follow-up on the strategic priorities since there's new management in place, Yes. The asset monetization was a topic for the 2 sales for over the next for the past few years. There has been a little progress on that front. The things I remember, the company was looking for a strategic partnership in the Fintech business on potential IPOs in the Our business and the fixed broadband business and the IPO process has been started, I think, like Previous years, but there hasn't been any progress on that front So what do you think about the asset monetization that is in current structure? And also maybe I May I add disposal orders, telling the international businesses also was a part of the agenda.

Speaker 6

I mean, what's

Speaker 2

Well, thank you. We are continuously relating our portfolio And we are open to strategic actions that has the potential to create value for our shareholders. Frankly speaking, our international operations can be the closest candidates for a potential divestment. While these operations contribute to our top line, they are not among our strategic priorities. If we see interest with good valuation, we might evaluate our options always.

Speaker 2

As you know, Sproline is a multi $1,000,000,000 worth asset. We currently do not think that the current market conditions are supportive for such a sizable IPO. Last December, our Board decided to start preparation to take Global Tower to public. There was a Board resolution. It had to be announced.

Speaker 2

The Board of Directors said the company will be listed when relevant conditions are favorable. As IPO preparation take time between 6 to 9 months, we decided to have the Board approval in advance and we are ready for a potential IPO in the following quarters.

Operator

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Turkcell management for any closing comments. Thank you.

Speaker 3

Thank you very much for joining this call. We hope to see you in next quarter. Thank you very much for sparing your valuable time.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant evening.

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Turkcell Iletisim Hizmetleri A.S. Q3 2023
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