Turkcell Iletisim Hizmetleri A.S. Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. I am Gaye, your Chorus Call operator. Welcome and thank you for joining the Turfel's conference call and live webcast to present and discuss the Turkcell First Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode and conference is being recorded. The presentation will be followed by a question and answer session.

Operator

At this time, I would like to turn the conference over to Mr. Alisair Dariaz, Investor Relations and Corporate Finance Director. Mr. Dariaz, you may now proceed.

Speaker 1

Thank you, Givin. Hello, everyone. Welcome to Turkcell's Q1 2023 results call. Today, our CEO, Mr. Muratakan and CFO, Mr.

Speaker 1

Cameron Caglon will be delivering a brief presentation on operational and financial results and afterwards we'll be doing Q and A. Before we start, I would like to kindly remind you to read our Safe Harbor statement, please wait at the end of the presentation. Now, I'll hand over to Mr. Eitan.

Speaker 2

Thank you, Selvar. Good morning and good afternoon everyone. Thank you for joining us. We have been hearing the wound of the recent earthquake which happened to be the most worst disaster of our history. We have taken certain actions to make sure people do seamlessly communicate in the region.

Speaker 2

Turkcell also remains committed to support the local community through projects that aim to increase employment And we will also make our digital channel available for local producer and suppliers. Moving to the Q1 highlights. Our revenue growth continued to accelerate from 37% of Q1 2022 and reached to a remarkable 61.5%. Thanks to the expanded subscriber base and increased ARPU despite the negative impact of the earthquake during the half of the quarter. Excluding the Urkain impact, the growth would have been around 65%.

Speaker 2

The strategic focus area, mainly digital business services And segment segments also support top line growth performance. The happy to see our mobile ARPU growth, We achieved 68%, exceeding the headline inflation as we reap the benefits of sequential price increase we began at the end of 2021. On the profitability side, our EBITDA reached TRY 6,800,000,000 with a 57% increase and despite the ongoing inflationary pressure, we achieved a margin of just over 39%, In line with our expectation, which accounts for the impact of the disaster on our OpEx. Excluding the earlier impact, The margin would have been 41 percent. Last but not least, we recorded a solid net profit of Turfos, mainly on the back of strong operational performance as well as lower FX losses.

Speaker 2

Next slide. Let's take a closer look at our mobile operational performance. As a part of our strategy, we have been focused Attracting premium subscriber, which led to a net additional 342,000 postpaid subscriber in Q1, bringing total share to 69%. Prepaid net additions were impacted by lower new subscriber demand in the Urkka region and full competitive offers as well as high involuntary churn due to significant tourist arrival in Q3 last year. While we observe the continued impact of year end campaigns in the beginning of the year, the market rationalized after the And overall the M and P market contracted in Q1.

Speaker 2

To support the victims of the earthquake, all operators We also passed Telesys to respect our national grid. We resume both mobile price adjustments and press release by April. Despite the impact of the earthquake, blended mobile ARPU growth accelerated to 68% year on year, Our pacing was 64% average annual inflation within the quarter. Without the organic impact, We shall note that the ARPU growth would have been around 75%. Our mobile turn rate 1.7% is reasonably below 2% despite a slight increase year on year due to the higher prepaid churn.

Speaker 2

The market data usage of 4.5 users have reached 17.4 gigabyte driven by 8% smartphone penetration, up 1.5 points year on year. Next slide please. As expected, the earthquake also had a negative impact on our fixed broadband business. However, we saw a significant demand for our services in March Due to location in the impacted area, our focus on fiber subscriber continued resulting in a net additional 28,000 fiber subscribers in Q1. Our IPTV platform also saw a net additional 28,000 subscribers in the same period.

Speaker 2

After the long awaited notable price adjustment in Q4 last year and due to the hurricane, There are almost no significant price adjustment in the fixed broadband market. However, we introduced uncommitted offering in January, which were appreciated by customers. We also saw continued traction in high speed packages with 1st 4 percent of new subscriber opting for 100 megabits or higher packages. Our annual residential fiber auto growth in Q1 slightly decreased to 31% compared to the previous quarter, mainly due to the action we've taken for earthquake victims. Excluding this impact, the ARPU growth would have been 36%.

Speaker 2

The slight increase in fixed churn is also triggered by the distraction in the North Cape regions. As we announced previously, our target is to reach 300,000 Home Pass this year and we have already exceeded half of that in Q1. With an aim to increase return on investment, we will focus on increasing our take rate by addressing potential subscribers in the relevant and past areas. Next slide. And now in the next two slides, I will be providing an update On our strategic focus areas, let's start with the digital services and solutions.

Speaker 2

In Q1, standalone revenue of digital services and solutions grew by 5% year on year. This was enabled by digital OTT service revenue rising 72% year on year. Our flash digital OTT services, mainly cloud storage, TV and music streaming platforms were the main pillars of the growth On the back of price adjustment and paid user expansion, collectively standalone paid user number grew 24% year on year, reaching 5,200,000 decided its decline outreach due to suspension of marketing companies after their kicks. Our second focus here, digital business services addressing digital transformational enterprises, The strong growth of 104% year on year. The main drivers of growth are system integration products, data center and cloud business.

Speaker 2

Exceeding 11% of total DBS revenue, data center and cloud services more than doubled their top line with strong demand from both local and international class. In this quarter, We gained more than 1100 new contracts. The backlog from system integrated projects reached Turkish lira2.5 million, which will contribute to the top line over the upcoming quarters. Next slide please. Our focus area is Tekken.

Speaker 2

In Q1, Paycell Turkey's leading payment platform increased revenue by 79% year on year. Almost tripling transaction volume was enabled, thanks to an ongoing shift into digital payments. Payless, which is the leading product of the Paycell, maintain its strong revenue trend and double its transaction volume, mainly supported by the transaction in payment in Apple and Android Stores. PR solution transaction in size rose more than 4 times. Given the increased penetration in the physical force devices in the market and our exclusive role in the joint electric vehicle projects top presales project.

Speaker 2

On the consumer financing side, Finance sales revenue grew by 65% on rising interest rate and expanding loan portfolio. Finance loan portfolio expanded 7% year on year, mainly reflecting the increased device prices in the market as well as corporate segment initiatives. Due to the diversification in portfolio as well as transaction taken after the earthquake, Cost of risk increased to 2.7%. Next slide please. Now let's look at the performance of our internal subsidiaries.

Speaker 2

Usher international revenue grew by 31% year on year in Q1. Excluding the currency impact, the organic growth was 20%. Life's revenue rose 16% year on year in its local currency. EBITDA margin expanded by 4% compared to the last year reaching 6%, thanks to higher revenue growth and lower international interconnection expenses. BEST revenue rose 15% year on year in its local currency.

Speaker 2

EBITDA margin expanded by a Remarkable 15 percentage points compared to last year. Thanks to the recently revised MTR rates, which Let's lower interconnection expenses. Next slide. I would like to say a few words about Tok, of our eMobility initiative. Our investment in Turkey's electrical vehicle initiative is a solid step towards Realizing opportunity in eMulti Ecosystem.

Speaker 2

In a promise to deliver Turkey's 1st smart mobility devices, As you may recall, Yandex Technology Campus had become ready for mass production in October last year. In March, Tok began presence of its 1st smart mobility devices and received a strong demand of 9 times. Electrical vehicle deliveries started in April. As Turkey's leading payment platform, Paycell provided the payment infrastructure for the process through Tok's own app. Paycell managed to process around TRY 11,000,000,000 transaction Smoothlyb and its very first company in the world to achieve such a large transaction volume through a Voalte app in a short time.

Speaker 2

In the meantime, Tok has laid the foundation of battery development and production factor adjacent to its technology company together with battery giant, Pharosys Energy. The facility is planned to be completed by 2024. Now, I would like to leave the floor to our acting CFO, Mr. Kamir Khanhoyan.

Speaker 3

Thank you, Murat. Now let's take a closer look into the financials. Group revenues grew by 62% year on year corresponding to an incremental rise of This quarter was another period where we saw the results of our dedicated price adjustment resulting in robust ARPU growth. IXA Turkey revenues rose 70% in this quarter, thanks to an expanding subscriber base and ARPU growth that exceeds inflation. Our Digital Business Services was another revenue driver with its doubling performance.

Speaker 3

The revenue contribution of international segment was limited to 442,000,000 in this quarter, Reflecting the easing in our international markets as well as the slowdown in currency depreciation, the segment added JPY 253,000,000 to the top line on the back of Paycell's tripling transition volume and Finances' Higher loan portfolio and average interest rates. Improvement of the other segments' contribution on a yearly basis is mainly Thanks to a rising sales from digital channels and higher equipment revenues. Next slide please. Now some highlights on EBITDA development. Strong revenue growth has been a key driver of the 57% rise in EBITDA.

Speaker 3

In this quarter, EBIT margin contracted by 1.1% year on year, declining interconnection expenses As a percentage of revenue partially compensated the rise in personnel expenses. Please recall that We had made secondary rise to wage in July last year on top of the January rise following the minimum wage increase. Energy expenses had a limited impact on the EBITDA margin as last year's energy price hikes were exceptionally high. First, I would like to mention about Turkcell International's profitability. In this quarter, EBITDA margin of the segment improved by 3.8% year on year.

Speaker 3

LifeSci's improving margin performance in Crane was joined by best in Belarus. Thanks to the recently announced NTR change in favor of us. Next slide please. Let's take a closer look at our CapEx management. At the beginning of the year, we are implementing a disciplined CapEx plan, which brings our loss to wealth market CapEx intensity ratio to 20.6 percent in line with our guidance.

Speaker 3

Looking at the CapEx breakdown, while I think we are speaking out for 1% of the CapEx. On the mobile side, our non discretionary approach is still intact as evidenced by a single digit mobile CapEx intensity. Of note, we had to make around TRY350,000,000 worth CapEx due to the earthquake. On the fixed side, having realized 1,500,000 fiber compasses in past 2 years, we have decided to slow down the given compelling cost environment. Therefore, this year we will focus on monetizing these recent home business.

Speaker 3

This quarter we added 160,000 new home visits to our portfolio. We are proceeding with expanding our white space capacity in our data centers. Thanks to the restructure of our existing data centers, we are adjusting the new modules to meet increasing demand. Next slide please. At the end of Q1, our gross debt position increased by TRY 4.6 to 59,000,000,000, newly net new borrowings and currency depreciation impact of TRY 1,400,000,000.

Speaker 3

Our cash position increased by TRY 1,400,000,000 to just over TRY 27,000,000,000 in Q1. FX movements had TRY 500,000,000 positive impact in the cash position. To note, TRY 1 point 4,000,000,000 wireless usage tax payment in Q1 negatively affected our cash position. In the Q1 of the year, Group net debt was around TRY 23,000,000,000 with a 0.9 times net leverage. Excluding the TETCEM business, This was at 0.8 times in line with the previous quarter.

Speaker 3

We are far below from our long term threshold of 1.5 times net debt to EBITDA. Of note, 10% appreciation in our currency reached to a 0.1 times increase in our net leverage. The majority of our cash continues to remain in high currencies. Excluding FX swaps, 57% of our cash is in U. S.

Speaker 3

Dollars and 15% in euros. This cash is sufficient to cover our debt service until 2025. The FX debt service is around $280,000,000 this year, which we believe is reasonably manageable given our strong cash position and committed long term credit lines. Next slide please. Lastly, I will go into the main offering Q and A in Q1.

Speaker 3

We have continued to keep majority of our cash in FX And also utilize hedging in Zimos as part of our prudent financial management approach. Looking at the FX position composition, we had US1.9 billion dollars equivalent of FX debt on our balance sheet. On asset side, we had US1.4 billion dollars equivalent FX cash and a $600,000,000 investor derivative portfolio mainly comprised of proxy hedge, namely futures and forwards. Overall, we ended up with a short FX position of just US21 $1,000,000 which is within our neutral FX position definition of plus and minus US200 $1,000,000 We may, however, see a higher short FX position from time to time during the rest of the year Due diligence of equity at higher costs for hedging as well as a result of 2 gs license fee of around €140,000,000 This concludes our presentation and we can now open the line for questions. Thank you.

Operator

Ladies and gentlemen, at this time, we will begin the question and answer session. The first question is from the line of Kennedy Goodshan with JPMorgan. Please go ahead.

Speaker 4

Good evening and thank you for the opportunity to ask questions. Just a quick one on the potential price increases for the rest When should we expect further price increases on the mobile side? And given now that your mobile ARPU is growing well ahead of inflation. How should we expect price increases to evolve? And then secondly, there was a significant Cash outflow in terms of working capital, I think driven by an increase in your trade receivable balance.

Speaker 4

Can you give us a sense of what drove that and whether that will reverse in the quarters to come? Thank you.

Speaker 2

First of all, thank you very much, Jonathan. Let me take first question regarding pricing risk. As you know, we are the leader of operating mobile and our priority in a high inflation environment is to adjust our price in a timely manner. So due to the hurricanes in the Q1, we temporarily stopped price increase in February March, but continue with the price adjustment in April. We aim to maintain our price focus strategy throughout the year.

Speaker 2

So far, we increased our price points every quarter and our aim is to keep And we have successfully implement this strategy last 2 years. And this the accelerating ARPU growth and revenue growth clearly showed this attitude. So despite the negative impact of earthquake on ARPU, mobile ARPU increased 6% to 8% annually. So we beat the inflation, which was 54.3%. So if we Get rid of the earthquake impact.

Speaker 2

The ARPU growth would be around 75%. So the strategy clearly works well. So So let me give the word to Kamil regarding the cash outflow.

Speaker 3

Thank you, Murphy. As we do every year, we paid the frequency usage fee in the Q1 and we will collect it from subscribers throughout the years. We paid TRY 1,400,000,000 for this in Q1 at the end of February. The first reason was that. The second one, there were some important factors that adversely affected our cash generation to our working capital.

Speaker 3

One of those bonus payments we made to our employees for the Previous years, expansion of finance sales loan portfolio is the 2nd reason and the third one receivables from our growing EDS business, which are relatively longer term is the 3rd reason. And I may add to this, due to earthquake, we stopped collecting some Payments from our subscribers for 1.5 month period. Therefore, it also increased our trade receivables for a

Operator

The next question is from the line of Morris Tull with Reuters. Please go ahead.

Speaker 5

Hello, can you hear me?

Speaker 6

Okay, thanks for taking my question. You mentioned the position of your credit lines. Can you remind them where they ended the quarter and where they are right now? And also, Can you elaborate a little bit on your newly contracted liquidity?

Speaker 3

We have a significant amount of committed lines in KA and CDB side. We do not have any problem about the position of our credit lines. Also we are trying to add new credit lines to our portfolio this year Around €220,000,000 CDB will end in March 2024 And Akaines credit line was around $30,000,000

Speaker 5

Okay, great. Thank you.

Operator

Our next question is from the line of Mabetsi Etsi with Unlu Securities. Please go ahead.

Speaker 7

Hi. Thank you very much for the presentation. I just wanted to ask about your CapEx over sales guidance. I think you keep it around 22%, but the first Q performance was much lower. Is it due to the currency effects?

Speaker 7

I I think that most of the CapEx was realized as of the Q1, one off CapEx. So Going forward, could there be a possibility of a lower CapEx over sales for 2023? It would be very helpful if you Talk more in detail about your prospects there. Thank you.

Speaker 2

Thank you, Ejiv. First of all, Historically and seasonality wise, Q1 is the lowest CapEx sales ratio quarter. Usually, Q4 is the highest one. So, if you look at the existing guidance, We would like to keep our guidance as 2% and 2% CapEx sales ratio because some of the EarthK CapEx Happened in Q1, but there are more to go coming quarters. So we would like to keep our CapEx sales

Operator

Ms. Madatze, are you finished with your questions?

Speaker 7

Yes, thank you.

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 1

Okay. Thanks for joining us. But I think we have one more question. Is that right?

Operator

Yes, sir. The next question is from the line of Demitarcie Malle with AlpenInvest. Please go ahead.

Speaker 8

Thank you for the presentation and congratulations for very good results. My question is regarding the donation Related to earthquake, you earlier had announced TRY 3,500,000,000. How should we elaborate that? When are we going to see the Impact on your financials and other questions about the dividend side and general asset side. Could you give us some Indication in those three issues.

Speaker 8

Thank you.

Speaker 2

Thank you, Cemal. First of all, regarding the donation, Our Board of Directors has decided to contribute up to TRY 3,500,000,000 to relevant ERK relief organizations. First of all, we need to present the donation decision to our shareholders both at the Annual General Meetings. Therefore, it will need to be voted by the shareholder first. Once it is approved at the General Assembly, we will determine the timing and payment structure of donation among other mechanics as well.

Speaker 2

So regarding the AGM And regarding the dividend distribution, I would like to remind you that our dividend policy continues unchanged. As you know, dividend proposal is first made by the Board of Directors and then voted by the shareholders at the General Assembly. No proposal has been made by the Board of Directors for this year yet. As you may recall from last year, our Board of Directors dividend proposal was announced together with the General Assembly announcement. Therefore, I don't want to speculate on the potential proposal of the Board of Directors regarding the dividends.

Speaker 2

Thank you.

Speaker 8

Thank you. Thank you for the clear answer. Thank you.

Operator

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

Speaker 1

Thank you very much for being with us in this Q1 results, we hope to see you in the next one. Thank you

Speaker 2

very much. Thank you. Bye bye.

Speaker 6

Thank you

Speaker 3

very much. Bye.

Operator

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

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Earnings Conference Call
Turkcell Iletisim Hizmetleri A.S. Q1 2023
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