Turkcell Iletisim Hizmetleri A.S. Q2 2023 Earnings Call Transcript

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August 17, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome and thank you for joining the Turkcell's conference call and live webcast to present and discuss the Turkcell's 2nd 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 session.

Operator

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

Speaker 1

Thank you, Konstantinos. Hi, everyone. Welcome to Turkcell's Q2 2023 results call. Today, our CEO, Mr. Muratakan and acting CFO, Mr.

Speaker 1

Kamir Karyon, will be delivering a brief presentation covering operational and financial results, which will be followed by a Q and A. Before we kick off, I would like to kindly remind you to review our safe harbor statement placed at the end of the presentation. Now I'm handing over to Mr. Eka.

Speaker 2

Thank you, Serdar. Hello, everyone. Thank you for joining us. We delivered outstanding results in the Q2. Our determined inflationary pricing strategy plays an instrumental role in delivering an ever accelerating performance.

Speaker 2

Up pacing the inflation, our revenue growth ramped up to 74% on a record ARPU growth and extending subscriber base. Strategic focus area also supports topline growth as always. On the profitability side, our EBITDA almost doubled, reaching TRY 9,500,000,000, driven mostly by strong top line growth and reduced energy prices in Q2. We achieved a remarkable 44% EBITDA margin. This strong operational performance coupled with dynamic and prudent risk management enabled a solid net profit of 3,200,000,000 Turkish rands on a 70% year on year rise.

Speaker 2

Considering these results, we further increased Our full year guidance. Next slide. Let's take a closer look at our mobile operational performance. Our focus on postpaid subscriber yielded a substantial gain of 404,000 subscriber in Q2. Topic of 70% postpaid share of the mobile base.

Speaker 2

Following the gloomy Q1, We resumed price adjustment in April. And as the competitors followed us, overall price level escalated in the market. However, temporary competitive offers were observed in the market, triggering an increase in M and P volume. Rising acquisition price position during the second half of the year is now expected

Speaker 3

to be in the range of $1,000,000,000

Speaker 2

Accordingly, we raised our prices in August. As anticipated, the ripple effect of preceding price adjustment and intact upsell efforts Propel a remarkable 84% acceleration in mobile ARPU. The ARPU versus CPI spread widened further Despite a slight increase due to the line closure deferral from Q1, our mobile churn rate stood at 1.9%. Next slide. In the fixed broadband, our focus persists on fiber.

Speaker 2

Accordingly, we gained 40,000 fiber subscriber in Q2. The IPTV platform, a supportive factor in subscriber retention, Grew with 35,000 net addition. We achieved 165,000 additional home pass during the quarter. We are delighted to exceed our annual target of 300,000 in the first half, benefiting from more favorable FX rates, In line with our fiber expansion, the take up ratio decreased just below 40%. However, It is fair to expect the rate to remain for the remainder of the years as we aim to monetize these investments.

Speaker 2

This quarter, residential fiber ARPU grew strongly by 49% yearly, surpassing quarterly average annual inflation after a long Thanks to price adjustments. Longer contract duration and the reluctance of incumbent operator to make price adjustments Have been affecting this segment adversely. To mitigate these factors, we have shifted our focus over the past years to offering 12 months contract or contract free tariffs, resulting in 53% of our Fibers customer Opting for this plan by June. Lastly, we are pleased to see continued interest in high speed plants. The weight of these packages in the total fiber portfolio has increased by 11 percentage points year on year.

Speaker 2

Next slide. On strategic focus areas, let's start with digital services and solutions. The standalone revenue of digital services and solutions grew by 8 7% year on year due to price adjustment and expansion of paid users. We have reached Significant milestone in our flagship services, OTT TV services has surpassed the 1,000,000 mark, While the Cloud Storage service exceeded 2,000,000 users, by surpassing 1,000,000 active users in Pakistan, BIP Further expanded its user base through the partnership with Jazz. Our standalone paid user base reached 5,500,000, rising 22% annually.

Speaker 2

On the other hand, TV plus is intensifying its collaboration with both local and international digital platforms and partnering with leading Global Studios. Moving on to our next focus area, digital business services, constitute 10% of Turkcell revenue, having registered 82% year on year growth. The main growth drivers were system integration projects, data center and cloud businesses, each doubling their revenues annually. Notably, the backlog from system integration projects has reached of Turkish lira. Next slide.

Speaker 2

Our 3rd focus area is Techfil. In the Q2, Paycell revenue rose 95% year on year. PayLater has more than doubled its volume and remain the key driver of Paycell revenues. This growth was supported by increased payment in mobile app stores and expanded user base and volume of ready to use limits. Paycell cards has also supported this remarkable performance, Thanks to increased money transfer and higher card fees.

Speaker 2

In May, the Nationwide joint QR project was launched, which enable our customer to make payment using Paycell app at any location with QR code. Turning to Financell into its revenue group by 87% With an expanding loan portfolio and rising interest rates, the loan book reached TKK4.7 billion on 88% growth. Next slide. Now international subsidies. The Turkcell International segment, which accounts for 10% of the group top line, grew by 48% year on year in Q2.

Speaker 2

Excluding the currency impact, the organic growth was 38%. Thanks to increasing data roaming revenue And also price adjustments, lifestyle revenue in Ukraine rose 36% year on year in its local currency, well above the inflation. The EBITDA margin improvement of 1.2 percentage point was mainly driven by lower interconnection and energy expenses as a percentage of revenue. BEST revenue rose 22% year on year in its local currency, Comfortably exceeding the inflation, the MTR rate revision at 2022 Year end and the Sytna OpEx result in a 20 points margin improvement.

Speaker 4

Next slide.

Speaker 2

I would like to end my presentation by sharing our updated guidance for 2023. Taking into consideration our outstanding first performance, we have revised our revenue growth target to around 71%. EBITDA guidance to around TRY 37,000,000,000 and maintain CapEx intensity at around 22%. I will now leave the floor to our CFO, Mr. Kamir Kalyan.

Speaker 5

Thank you very much, Burak. Now let's dive into our financial results. Our group revenues had an incremental rise of TRY 9,200,000,000, corresponding to 74% growth year on year. Turkcell 2K revenues were the main driver of the performance, thanks to expanding Cyber base and solid ARPU growth. Digital services were also supportive on the remarkable performance.

Speaker 5

Turkcell international revenue grew by 48%, lower than overall group due to lower inflation and limited currency depreciation. Techfin business grew by 93% year on year with an incremental rise of TRY 3 TRY 83,000,000 as evidenced by the traction in financial services companies, Paysalend Financial. Next slide, please. Now let's look at our EBITDA performance. Turkcell Group EBITDA reached TRY 9,500,000,000, reflecting on the solid revenue growth.

Speaker 5

In Q2, EBITDA margin expanded by 3.7%. Increasing employee expenses was Offset by decreasing interconnection expenses, cost of goods sold and energy costs as a percentage of the revenue. Of note, 15% reduction in the electricity prices, which was introduced for industrial consumers in April, supported the margin. Also, we shall inform you that following the minimum wage increase in July, we have also increased our rates by around 37%, which will be weighing on our financials starting from Q3. Next slide please.

Speaker 5

Let's take a closer look at our CapEx management. In Q2, we kept implementing our disciplined CapEx plan, which brings our last 12 month CapEx intensity ratio to 20.7%. Mobile and fixed investments in total accounts for more than 70% of the total CapEx. Mobile CapEx investments had a higher share in total CapEx compared to last year as we had to make around 420,000,000 one off CapEx due to earthquake. However, we managed to keep single digit intensity.

Speaker 5

On the fixed side, even though we slightly exceed our annual target, it was lower than previous years. As we have mentioned before, This year, we mostly focused on monetizing our fixed investments for the rest of the year. Next slide, please. Our cash position increased by TRY7.8 billion in 2nd quarter. FX movements had an impact of TRY 6,200,000,000 in the cash position.

Speaker 5

Our gross debt position grew by TRY 18 point TRY 7,000,000,000 in Q2. The increase in gross debt is mainly due to TRY 40,800,000,000 currency depreciation. We ended the quarter with a net debt position of TRY28,200,000,000. Thanks to the strong EBITDA generation, our net leverage Remains around 1x, and excluding financial, it is 0.8x. Remaining FX debt service is around US156 $1,000,000 this year, which is manageable given the cash position and committed credit lines.

Speaker 5

The majority of our cash continues to remain in hard currencies. Excluding FX swaps, 58% of our cash is in U. S. Dollars and 10% in euros. Next slide please.

Speaker 5

Lastly, I will go into the management of foreign currency risk in Q2. We have continued to keep majority of our cash in FX and also utilized hedging instruments as part of our prudent financial risk management approach. Looking at the FX position composition, we had US1.9 billion dollars equivalent of FX Financial Liabilities on our balance sheet. On the asset side, we had US1.4 billion dollars equivalent FX Financial Assets and US645 $1,000,000 derivative portfolio mainly comprised of proxy hedges, namely futures and forwards. Overall, we ended up with a long FX position, USD 8,000,000 to USD 4,000,000, which is within our neutral FX position definition.

Speaker 5

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 question and answer session. The first question is from the line of Mandakji Eze with Unlu Securities. Please go ahead.

Speaker 6

Hi, thank you very much for the presentation and congratulations on the strong results. I have a couple of questions On your guidance and potential ARPU growth going forward, the first is about the subscriber additions in the mobile side. We are seeing a slower increase compared to previous years or previous quarters. So is that Table performance will be sustainable for the second half. How would you think about or guide about the subscriber additions?

Speaker 6

The second question is about the mobile ARPU growth. We have seen a significant recovery. And was there any Price adjustment on the mobile was just 6 sites as of August. So should we think above 90% ARPU levels or more Normalized level given the high base of last year for the second half, particularly on mobile ARPU. And thirdly, I saw that you have upgraded your guidance for full year.

Speaker 6

On the EBITDA margin side, I'm seeing that You are a bit more cautious regarding the EBITDA margin performance for the second half. Is this due to Expectation of higher cost inflation because you're also making price adjustments. Could you please Provide some more color about these questions, please, please. Thank you very much.

Speaker 2

Thank you. Thank you, Ecem. First of all, regarding subscriber growth and subscriber growth target, In the mobile segment, we experienced net add of under 65,000 subscriber in the 2nd quarter. This is supported by the seasonality effect, which is lower than the normal trend. Essentially, 404,000 net addition postpaid was partially offset by the net loss in the prepaid segment.

Speaker 2

Rising new acquisition price level and alternative data solution for tourists particularly impacted the price sensitivity prepaid subscriber. However, we believe that these alternative solutions could pose security risks. On the fiber and IPTV side, Net subscriber ad continues as usual supported by NetAd. And also for this year, we expect A net add of around 1,000,000 subscriber as well. Regarding second question, mobile ARPU growth and And price increase, we did increase for the mobile during August, mobile and fixed, they are not in the same time, but We increased our price during August, and we will Closely followed the inflation.

Speaker 2

So we as everybody knows, our strategy is based on inflation pricing. So we're going to closely follow the inflation. And during the inflation increase, we're going to increase our price. For the EBITDA guidance, I think this is mainly that there are two reasons actually. One of them in the first half, the energy price decreased.

Speaker 2

So it has decreased 15%, I believe, in April. So for the next half, We put some expectation on the price increase for the energy price. The second thing is because of the inflation For the employee salary, we had to increase our employee salary in July 37%. So this is going to impact also second half EBITDA for the employee salary increase as well. So these are the things that makes us a little bit cautious.

Speaker 2

But obviously, we're going to follow-up closely To recover the EBITDA, it is it's going to be around 40% level anyway.

Speaker 6

Thank you.

Operator

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

Speaker 4

Thank you for the presentation. My question is about the financial expense side. When we look into details, we see significant increase in financial expenses. And As far as we know, we don't have very big long short FX position. We have some net debt position.

Speaker 4

And even if we come up with the FX changes from 1st quarter to 2nd And we multiplied by your net debt position. We come up with TRY 10,000,000,000 Financial expense. Could you give us more detail how should we approach to your financial expense side? Because Your EBITDA is strong. It's good and your guidance is revised up and the FX impact is possibly on that numbers also.

Speaker 4

So what's the how should we think when we try to reach the bottom line because EBITDA is strong, but Huge financial expense. So if you didn't hedge, what would be the result? I would like to understand The effect of all those hedges on your bottom line. So how does it save you? And how did it save you If you didn't hedge what would happen in 2nd quarters, if you have any just Colors on that?

Speaker 4

Thank you.

Speaker 5

Thank you very much, Cemal, for the question. As you know, following the sharp currency movements in the Q4 2020 1, strike levels of some of the call options that we hoped we had sold as part of our participating across currencies was exceeded. Consequently, in order to maintain the protectiveness of our hedging portfolio, we opted for short term Derivative instruments as the current market conditions have not been idle for the long term. We have a net long FX position in the amount of USD 8 $4,000,000 at the end of the second quarter, as you say, which is in line with our neutral position definition. The hedging costs of short term instruments have normalized after the elections, But we saw an increase in the FX rates, unfortunately.

Speaker 5

According to the majority of our FX gain has arisen from the increase in the FX rate, which offset the loss arising from the valuations of our short term derivative contracts due to the normalization of the TL interest rate curve. Despite this negative impact from the interest rate curve, our derivative portfolio printed a positive M2M valuation, which helped us to keep our FX loss limited. Going forward, the movement of swap curve will also have an impact on FX gainloss, however, we aim to stick around our FX neutral definition as we declared previously, plus and minus US200 $1,000,000 I should also note that we continue to evaluate market conditions. If we can find favorable conditions, We might consider restructuring our portfolio.

Speaker 4

So in the Q3, you're going to use the And if you assume that the currency will be more stable, should we Also assume your EBITDA will remain high and your financial expense will go down. Is it the model We can take.

Speaker 5

Yes, might be, but it depends on the economy management interest policy. If the interest is Especially for currently, the interest rates for Turkish lira loans are very high, as you know. It might be going higher in the next term. If the interest expenses increase like this way, maybe we can wait A kind of extra additional financial finance interest expenses.

Speaker 4

Okay. And as a follow-up question rather on to the operation side, we see the price are increasing. And when we look at Competitors there also, they're increasing the prices to just match the increase in cost. How do you see the Q3 outlook? You revised your guidance, but how do you see it from your side about the pricing and at least also the additions, Subscribe editions, what could be the trend for the Turk question?

Speaker 4

And one other question about the strategic perspective. Both Turkcellcom and Turkcell are like controlled by the wealth fund. And at At some point, there is 5 gs issue, there is a licensing of Turk Telekom. These are all on the possibly on the agenda. And as far as we know in the past before finding a solution to 5 gs issues or others, Licensing of TurkcellaCom would be also linked to that about the full regulatory system.

Speaker 4

At least from Turkcell's perspective, what should we expect in the regulatory environment for the next 1 year? Could we expect and already be the elections are completed. So what should be The issues going forward for telecom sector also for your side? Thank you.

Speaker 2

Thank you. First of all, regarding the price increase and the competition follow-up, so far, We increased as a market leader, we increased our price based on inflation. And it seems Our competition also following up us. On the fixed line side, it is really difficult to see or foresee what's going to happen. But we see some movement on the fixed side, which is good for us, so we can increase our prices.

Speaker 2

For the mobile side, I think as a leading operator In the mobile, our priority in a high inflation environment is to adjust our price in a timely manner. So we're going to Continue what we did so far and follow the inflation. The other question was regarding strategic perspective of Turkcell Control by Well, fun. So I think for the 5 gs, Everybody is expecting for next year the license not this year. So we'll see what's going to happen, but Belfmann has I believe 22 companies underneath.

Speaker 2

So for the licensing side, I mean, we are competing with Telecom. So Westfans is a strategic investor for both party. I don't see any issue on this side. For the as I said, for the 5 gs, we expect 2024 As a licensing or spectrum tender as well.

Speaker 4

Thank you, Amari.

Operator

The next question is from the line of Demira Kayahana with AK Investment. Please go ahead.

Speaker 3

Hi. Thank you very much for the presentation and opportunity to ask questions. I have A couple of them. The first one, I mean, did you cancel in any other price increases this year in formulating the Guidance or other way of asking this line, should we expect, I mean, another price increases given the Direction of your cost inflation that you might first question.

Speaker 2

Okay. For this question, I mean, we just increased our prices. We're going to follow the inflation, but my feeling is by the end of the year, One more price increase we can expect, but obviously, this price increase for the next year, not this year's Not this year numbers or revenues anything, but we I think we can expect In price increase for last quarter in Q4.

Speaker 3

Okay. Thank you, Alan. Would it be possible Any direction in terms of the expected CapEx intensity for the next year? I mean, would In North, should we expect something lower than this year or a bit higher given your Given the expansion plans, the maintenance?

Speaker 2

Yes. To be honest, it is very difficult See for next year CapEx guidance, but obviously, our aim is decreasing our CapEx Ratio, sales CapEx ratio, revenue ratio. So my expectation would be Little lower, but not too much on this side. But it's too early to say because we don't know the FX Because our CapEx 75% of our CapEx depends on foreign exchange. So it is really difficult to forecast for next year CapEx.

Speaker 2

And macro conditions also It's going to give us sometimes hard times, sometimes good times. So we'll see. But it is too early Say anything about 2024.

Speaker 3

Okay. Thank you. Understood. And the final question for the for international operations. I mean, the numbers in Ukraine looking quite strong given the difficult operating Environment has I mean decent growth in U.

Speaker 3

S. E terms, margins are going up. Should we expect this To continue going forward, how do you see the situation over there?

Speaker 2

Obviously, you are asking difficult question because Ukraine is under war. So based on existing behaviors, I mean, We will see successful operation over there. But this is sometimes it's really difficult to speak while ongoing war is happening over there. So we are happy about Ukraine lifestyle performance. Things getting easier, but it doesn't mean like before the war.

Speaker 2

As everybody knows that Ukraine had around 8,000,000 to maybe 10,000,000 People move out from Ukraine. So this makes are they going to come back or not? We will see. So it is really difficult to forecast for next year or coming years. But so far, we are good.

Speaker 2

If things stable, we're going to continue as good as today, but it is under war. It's difficult to comment on this one. Okay.

Speaker 3

Understood. Thanks for taking the time and congratulations on the for results.

Speaker 2

Thank

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 2

Thank you very much for joining us and have a good day. Have a good night, whatever it is. Thank

Speaker 3

Thank you. Bye bye.

Speaker 1

Thank you for joining us. We hope to see you in the next one.

Speaker 5

Thank you. Bye bye.

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. Q2 2023
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