Turkcell Iletisim Hizmetleri A S Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. I am Galilea, Chorus Call Operator. Welcome and thank you for joining the Turkcell's Conference Call and Live Webcast to present and discuss the Turkcell Second Quarter 2021 Financial Results Conference Call. At this time, I would like to turn the conference over to Mr. Ali Serdar Yagci, Investor Relations and Corporate Finance Director. Mr. Yagci, you may now proceed.

Thank you, Galilea. Good morning and good afternoon, everyone. Welcome to Turkcell's second quarter 2021 results call. Today's speakers are our CEO, Mr. Murat Erkan; and our CFO, Mr. Osman Yilmaz. We have a brief presentation and afterward, we will be doing Q&A. Before we start, I would like to kindly remind you to review the last page of our presentation, for our Safe Harbor statement. Now, I hand over to Mr. Erkan.

Thank you, Ali Serdar. Good morning and good afternoon. Thank you for joining us today. Before we dive into the results, I would like to extend my condolences to every country, including our own beloved Turkey that is fighting wildfire disasters and flood recently. The world is dealing with one of the most severe heatwaves, which underlines the importance of addressing climate change and refocusing sustainable strategy. In the second quarter of the year, we accelerated our outstanding performance, delivering robust operational and financial results. We recorded a 23.5% revenue growth, and EBITDA reached TRY3.5 billion. Net income was TRY1.1 billion on a 31% year-on-year growth. Despite the prevailing pandemic conditions, this performance was enabled by a customer-centric strategy, a diversified business model, and a digital ecosystem with high-value offers. All this was possible due to remarkable subscriber base growth of 617,000 and double-digit ARPU growth in mobile and fiber residential segments. Additionally, our strategy of prioritizing our digital channel has helped us during the second quarter, whereby their share in our sales reached 18%. To note, we distributed the first and second installment of the 2020 dividend in April and on July 13, and the last installment is planned to be distributed in October. Our outstanding result and our expectations for the second half have led us to update the full-year guidance. Next slide. Let's take a look at our operational performance in the second quarter. In the mobile business, with our continued focus on the postpaid segment, the base grew by 501,000, and the postpaid share reached 66% of the total, on a 3-point rise year-over-year. Going forward, we aim to keep our postpaid focus and further increase the postpaid share. Despite the lockdowns in May, affecting acquisition and churn numbers, after the easing of the pandemic measures in June, we gained some momentum in net additions through increased mobility. Initially, our customer-centric approach and AI-based analytical capabilities were instrumental in retention. As such, our mobile churn rate was 1.7%, the lowest level of the past three years. Blended mobile ARPU rose to TRY52 on a 14% increase, thanks to a larger postpaid subscriber share, price adjustment, upselling to higher tariffs, and higher data usage. Our mobile ARPU level is 12% and 22% higher than the competition. Enabling a rational pricing environment in the market, we expect double-digit ARPU growth for the remaining quarters of the year. In the fixed broadband segment, strong demand has continued under prevailing mobility limitations. We made 40,000 fiber subscriber additions with our high-speed fiber internet offers. Our focus on fiber customers will continue. We are pleased to register a further 40,000 net addition to our IPTV subscribers, having reached the homes of 961,000 customers. We now offer this service to 62 out of every 100 households amongst our residential fiber customers. Our residential ARPU rose to TRY77, an 11% growth, mainly due to our upsell efforts, demand for higher speeds, and price adjustments. As the challenged operator in the fixed broadband market, our ARPU level is 21% above the incumbent. Next slide. Next, an update on the data usage and 4.5G subscription trends. Average mobile data usage rose 15% year-on-year to 13.4 gigabytes per user. Recall that last year for this quarter, mobile data growth was the record highest in the previous eight years. The lockdown period in the quarter also affected growth. This quarter's data growth is reflected in mobile ARPU growth, which indicates that we are monetizing the usage trends. Out of 33 million customers signing up for 4.5G services, around 70% have 4.5G compatible smartphones, still indicating significant growth potential. Overall smartphone penetration is at 84%, with 92% of these being 4.5G compatible. Next slide. We received the last Turkcell digital ecosystem, which reunites all digital enterprise services under a digital ecosystem roof. An individual who uses any of our digital services will be served as a Turkcell customer, regardless of the operator they use. We aim to serve all customers within our digital ecosystem, with the unique Turkcell customer experience and technology. The satisfaction point accepted by all of our customers is our well-invested, high-quality network and strong infrastructure. This quarter, our AI-based retention strategy led us to reach the right customer, at the right time, with the right product. An extensive distribution channel of almost 6,000 points nationwide in our digital channels, that are tailored to customer needs, are instrumental in customer decision-making. As we invest further in the relationship with our customers, we are happy to see their appreciation. Customers have continued to recommend Turkcell to a significantly higher degree than the competition, as confirmed by our Net Promoter Score. Next slide. Now, our strategic focus areas. Let's start with our digital services. The stand-alone revenue from digital services and solutions continued its strong growth at 32% year-on-year, reaching TRY404 million. The paid user base reached 3.4 million, up 0.8 million from last year. BiP, our messaging platform, reached 82 million downloads and has 26 million active users, with more than a quarter of active users being abroad. Since we have added the ability to move chats and groups from other platforms, 2 million chats have been imported to BiP today. It has also been a good quarter for our TV business. The churn level for the mobile TV product is half that of last year, as TV+ has the best user experience, price, and content creation. In the big screen strategy, we are now in almost every Smart TV produced over the past four years. And for those that we have not integrated, we offer TV+ Ready devices. We are glad to have reached a remarkable milestone for our personal cloud application Lifebox, as the stand-alone paid user base has exceeded 1 million. Consistent improvement in user experience, new features, and collaboration have increased the app's user base. As communicated last quarter, we have launched the B2B business model of our digital services, with evident market demand. As the demand for remote working and education continues, we are ready to serve cooperation with our local services, and aim to be a part of their digitalization process. Next slide. Next, our digital business services. Revenues from digital business services rose 22% year-on-year to TRY618 million. We signed 678 new contracts, with a total contract value of nearly TRY170 million. TRY917 million system integration project backlogs is promising for the periods ahead. By rendering our latest data center operational this quarter in total, we further sustained our leadership in data center and cloud business. Recently, we have launched a new interface for our cloud services, which enables our customers to make their own configurations. We have introduced our customers to a variety of new services. On the cybersecurity vertical, we have focused on fraud prevention for financial institutions and strengthened firewall services. Turkcell RPA was developed for the automation of robotic processes. On the IoT vertical, we launched Smart Utility Management solutions. These services will continue to assist corporates in their end-to-end digital transformation journey. Next slide. Third is our Techfin focus. Techfin services revenue for the quarter rose to TRY240 million on a 24% year-on-year growth. The contraction trend in finance sales revenue has eased off this quarter and year-on-year revenues are flat, due to the balanced loan portfolio and higher interest rates. Paycell showed another remarkable quarter, topping 5.5 million active users. The company has seen a 78% year-on-year growth on the back of traction in mobile payment solutions, especially for its Buy Now Pay Later products. Mobile payment transaction volume was nearly double to TRY418 million, whereas Paycell Card transaction volume grew three-fold year-on-year. Financell is the market leader in the metro loan segment with a 20% share. It differentiates with a robust credit scoring system that produces instant results with a much higher approval rate than the banks. Aiming to serve all Turkish customers, Financell started to provide financing solutions to Turkcell's fast-growing corporate segment, almost reaching 4,000 clients today. With this strategy, we aim to keep our focus on our products and services while providing the financing from a specialized company. This will improve risk management and balance sheet receivables with more transparency. Next slide. Now, a few words on the performance of our digital channel. Digital channels play an integral part in providing our services 24/7, even in extreme situations like complete lockdowns. Digitalization of our customers is among our top priorities. From the digital operator application, the customer can top up Turkish lira, purchase data packages, or smart devices from our extensive portfolio, while even a non-Turkcell user can apply for a subscription. As such, there were 23 million active digital operator users, which we refer to as digital users. Even though we have currently witnessed limited acquisition through digital platforms, the numbers have doubled year-on-year. Notably, data plan purchase and Turkish lira top-up transaction volume over this platform were even higher for the quarter at 1.9 times. Overall, with a 6.5 percentage point increase, the share of Turkcell Turkey's consumer sales generated on these digital channels has reached 18% in the second quarter. Next slide. Let's take a look at our performance in our international business. Turkcell international revenues have reached 10% of consolidated revenue, growing 45% year-on-year. On the back of a flourishing Ukrainian business and the positive impact of currency movements, excluding the currency impact, the segment has an organic growth of 24%. Lifecell Ukraine revenue grew by 26% in local terms. This was driven mainly by subscriber base growth, higher data consumption, and corresponding solid ARPU growth of 17%. Mobile subscribers reached 8.4 million on an 11% year-on-year growth. Next slide. Now, for an update on our e-mobility initiative. Turkey's automobile project TOGG has received one of the world’s most prestigious Design Awards, the iF Design Award for its fully electric SUV model. As production facility construction continues at full speed, the first SUV model vehicle is planned to roll out in the last quarter of 2022. In July, as a milestone, the company assembled the first buggy entirely made of domestically produced parts. As the company presents opportunities in e-mobility, a field we are also exploring, it has the potential to be the next strategic focus area for Turkcell. In line with this, in June, we announced increasing our stake in TOGG from 19% to 23%. Considering the existing and potential synergies with TOGG, we believe that this investment has the potential to be valued effectively for Turkcell Group in the medium term. Next slide. I would like to touch upon our actions on the ESG front in the second quarter. Our subsidiary, Turkcell Energy, recently acquired a wind power plant located in Izmit, with an 18-megawatt capacity. Furthermore, we installed solar panels as a solar data center. These investments are aimed at fulfilling our commitment for energy procurements exclusively from renewable sources by 2030. As a socially responsible company, we established Turkcell Sustainable Governance Principles. These principles underline our commitment to ethical behavior, human and children's rights, and fostering sensitivity in our relations with our employees, customers, and vendors, shortly within the Turkcell ecosystem. This year, we designed an AI-based fresh graduate recruitment process focused solely on the talent of the applicant. To note, this year we welcomed more women graduates than men. Lastly, we are in solidarity with disaster victims and heroes who are fighting the wildfires in Southern Turkey. We have donated saplings, provided free data and Voice packages, set up mobile base stations, and built veterinary hospitals with a local NGO in the region. Nature conservancy is not only a disaster-related action in Turkcell, as we have donated thousands of saplings to various organizations to date. Next slide. I would like to end my presentation by sharing our new guidance for the full year of 2021. Taking into consideration our healthy first-half performance and our expectation for the remainder of the year, we revised our guidance upwards. Accordingly, we raised our revenue growth target to around 18%, still aiming for real revenue growth in high integration with the environment. We revised our EBITDA expectation to around TRY14.3 billion. We expect to register an operational CapEx over sales ratio of between 21% to 22%. The strong nationwide demand for fiber has led us to increase our home-based plans to 600,000 for the full year. Our CapEx expectation is also affected by the demand arising from strong operational performance in the Ukrainian business and FX fluctuations. I will now leave the floor for our CFO, Osman.

Thank you, Murat. Now, let's take a closer look at our financials. Our performance in the second quarter was outstanding and resulted in a TRY8.5 billion top line on an accelerated 23.5% growth year-on-year. Despite the strict COVID-19 restrictions, we were able to generate 9% quarter-on-quarter growth. For the first half of the year, top line growth exceeded 20%. Our EBITDA reached TRY3.5 billion on a 22.7% increase, with a 40.5% margin. Our CapEx to sales ratio rose to 24.5% in Q2 due to advanced capital spending in line with our plan. We registered a net income on a 30% rise in Q2. As we disclosed last week, pursuant to Tax Law number 7326, we have restructured our tax assessment for the years 2017 and 2018. Another article of the same law allows us to revalue a part of our fixed-asset investments based upon domestic PPI. The impact of the latter has more than compensated for the former. Next slide. Now some details on revenue development. In the second quarter, Group revenues rose 23.5% year-on-year, corresponding to an incremental TRY1.6 billion. Of this increase, TRY1 billion drives from Turkcell Turkey. This was the result of the strong ARPU and net performance, mainly in the postpaid base. Turkcell international revenues rose 45% year-on-year, thanks to strong Lifecell operational performance and the positive impact of currency movements. Our Techfin segment contributed TRY47 million to the top line, fully driven by Paycell revenues. Other segments grew by 42.1%, contributing TRY285 million in this quarter on the back of higher equipment sales supported by digital channels. Next slide. Group EBITDA rose 22.7% year-on-year to TRY3.5 billion, driven mainly by strong top line growth. The EBITDA margin slightly decreased to 40% in Q2. The factors affecting the change in EBITDA margin are a gross margin decline of minus 0.9 percentage points triggered mainly by increasing equipment sales, an OpEx increase of minus 0.3 percentage points, mainly due to marketing expenses that had been suspended during the COVID-19 lockdown periods, and a decrease in doubtful receivables of plus 0.9 percentage points, thanks to better collection performance. Rising 49% year-on-year, Turkcell international EBITDA made a higher contribution at the group level. Strong operational performance and cost measures in our international subsidiaries, coupled with the FX impact, were instrumental in this performance. Next slide. Now, I would like to talk about our balance sheet and leverage details. As at the end of Q2, our cash position decreased to TRY12.4 billion from TRY13.5 billion, mainly due to an TRY860 million dividend payment and TRY1.6 billion debt repayment. In Q2, currency movements led to a TRY763 million increase in total debt and a TRY265 million rise in our cash position. As a result, our net debt position slightly increased to TRY11.6 billion from TRY11.4 billion with a 0.9 times leverage ratio. Excluding the financing business, this was at 0.8 times, hence at the same level as the previous quarter. Around the $1.3 billion accrual cash position covers our debt service until 2025. Next slide. Now, I will go into the management of foreign currency risk. We continue to hold the bulk of our cash in hard currency as a natural hedging tool. With hedging instruments in place, the share of FX base declined from 83% to 51% as of Q2. We are in a long net FX position of $146 million at the end of the second quarter. Going forward, we continue to target a neutral to long FX position. Next slide. Let's take a closer look at our fintech companies' performance and firstly our financing business, Financell. The contraction trend in Financell's revenue has eased off this quarter and revenues are flat year-on-year, due to a balanced loan portfolio and higher interest rate revenues. EBITDA rose by 15% to TRY87 million with a margin of 65%. The improvement in collection performance and the sale of doubtful receivables led to the rise in EBITDA margin. All-in-all, the cost of risk has reached 0.2% level, thanks also to the sale of doubtful receivables in Q2. Net income increased 44% year-on-year to TRY68 million, driven mainly by a TRY50 million dividend payment from Paycell, strong operational performance, and lower FX loss after hedging. Next slide. Our payment services company, Paycell, continued its momentum with a 78% yearly revenue growth. The demand for digital payments has been rising rapidly as payment habits change. Paycell is well-positioned to meet this demand with its diverse range of services and solutions. In fact, Paycell's three-month active users reached 5.5 million. Mobile payment transaction volume nearly doubled in this quarter to TRY418 million. In addition to rising demand, the increased usage of Buy Now Pay Later products is instrumental in this growth performance. In Q2, Paycell Card transaction volume quadrupled to TRY300 million year-on-year. We position the Paycell app as a super app that meets the financial and payment service needs of its users. In addition to our services, we act as a financial marketplace providing digital content and e-commerce products. In Q2, we had collaborations with game platforms to sell game tokens through the Paycell app. There are numerous items of legislation in the pipeline. Digital ID recognition, fintech regulation, a joint care initiative, digital banking, and open banking regulations will support the various verticals of Paycell for future growth. Paycell, supporting the overall strength of Turkcell Group, is set to sustain its strong momentum over the coming quarters. This concludes my presentation. We can now open the line for questions. Thank you very much for listening.

The first question is from the line of Cabejsek Ondrej with UBS. Please go ahead.

Hello. Congratulations on a strong quarter. And thank you for the question. A couple from me, please. First of all, on the upgraded guidance, can you maybe break down – because the top line guidance, I guess, is ahead of the EBITDA guidance, and also CapEx is up, so, two questions here. In terms of the top line upgrade, can you give us an idea of what that is primarily driven by, because it would seem in the context of the EBITDA that it is kind of the non-core businesses that are growing faster than perhaps expected? And then in terms of CapEx, if you could break down the impact between FX? You mentioned additional fiber investments and anything else? And then second question from me, please. You've had another huge quarter in terms of mobile net additions, at the same time your main competitor, I guess, highlighted that the composition in the market stabilized quite a bit during the second quarter, and that it’s looking pretty good. Can you just talk about where these numbers are coming from? And how you, as the market leader, see the competitive situation in mobile, please? Thank you very much.

Okay. First of all, thank you very much. Regarding guidance revision, I think we achieved quite robust performance in the first half despite the challenge of the pandemic environment. I mean, when we look at Turkcell Turkey, we have significant growth, especially in strong SaaS subscriber and ARPU performance. We achieved net subscriber additions of 1.3 million in the first half of the year, which means this subscriber base will help us to increase our revenue level in the second half of the year. And also on the international side, we see strong organic growth in our Ukraine operation, together with the positive impact of currency movement supporting top line growth. So, this is also another confident situation for us in the second half. On the EBITDA guidance revision, it mainly depends on revenue increase. And regarding CapEx breakdown, because I also mentioned in the slides, in the presentation, we would like to invest more in fiber since there is demand from the customer side. So, we increased the number of home pass target from 500,000 to 600,000. So, which will drive the CapEx increase. Also, as I mentioned, Ukraine is a promising market. We are gaining market share, we're increasing our top line growth. So, we would like to invest in Ukraine more because we invest we get more as well. So, this is the main reason for the CapEx. And obviously, since we have more customers, the customer needs more data, so we are going to invest more in this area. Regarding the second question, for the net addition, first of all, our strategy is based on providing a rich value proposition to our customers through differentiated products and services. We have a diversified business model. We offer high-quality telco services, a wide range of digital services, as well as digital payment solutions. And as clearly stated from our customers, our infrastructure also enables us to provide all the services with maximum quality, and this helps us to increase our customer base. Also, AI capabilities are important. We can go further with a micro-segmented approach, which enables us to make the right offer to the right customers at the right time. So, in terms of where these customers are coming from, mainly postpaid. Out of 617,000 customers, sorry, postpaid customers, and out of this postpaid customer, 40% switched from prepaid and 60% of them activated new lines. Thank you.

Thank you. May I have a very short follow-up on the CapEx question please? You mentioned strong demand in fiber and that is consistent with what your competition is saying. Should we read this may be that the higher target than just 0.5 million homes per year would be not just the 2021 target, may be going forward as well that you would accelerate the plan for the medium-term as well?

Exactly, because we don't want to stop after investing 600,000 home passes. So, we see that the demand will continue, especially when we also have 5G coming. When the 5G comes, we need more fiber. So, when we invest in home passes or anything, it will help other businesses as well. So, definitely we'll continue to invest in fiber.

I must say, I meant more than 0.5 million because your previous guidance was kind of 0.5 million per year over the next couple of years. Would it now be say 0.6 million per year over the next couple of years?

We hope for more than that. To be honest, we hope for more than that. Because when you start investment, it will take time to accelerate the machine. When the machine gets speed, you can easily increase the speed of having home passes or acquiring customers, actually. So, I think – I hope for more than that.

The next question is from the line of Degtyarev Vyacheslav with Goldman Sachs. Please go ahead.

Yeah. Thank you very much for the presentation. A couple of questions. Firstly on the 5G, what would be your thoughts over the time you can build for the financial implications of the spectrum auction? And would you envisage the significant investments into the network after or around the spectrum allocation? And the second question would be on the electric vehicle projects. Can you outline certain potential for the further upcoming capital commitments into this project, and also the timing, the magnitude of the monetization, as well as the synergies you see with Turkcell? Thank you.

Okay. Vyacheslav, thank you very much. For the 5G, as you may recall a couple of months ago, the Deputy Minister of Transport and Infrastructure unofficially announced that new spectrum auction related to 5G could be held in 2022, with the commercial launch in 2023. So, this gave us some guidance. Since then, we haven't heard any official announcement from the government with respect to the 5G timeline. Meanwhile, we continue our preparation for the 5G and we are ready to get 5G spectrum and license. And also, as a recent development, we are working very hard on the preparation of 5G. In June, we launched commercial 5G roaming services, so that Turkcell subscribers can now use 5G services in 29 countries. Overall, we don't have any official timeline for 5G. However, we already have a strong 4.5G network, which we believe is the transition to 5G. Our extensive tests with different partners on different use cases will also help us to offer a quality 5G service going forward. Regarding CapEx side of the 5G, as I said, we don't have a clear schedule for the 5G auction. Obviously, when you wait longer, your CapEx demand decreases, because the cost of equipment by nature of the technology decreases. So, we'll see what’s going to happen, but obviously, the announcement is there. It’s not an official announcement, but it's an announcement. Regarding the electric vehicle project, our capital commitment to this project is around EUR115 million. So far, we have invested around EUR25 million already. Going forward, we will continue to release this capital during the project phases, depending on where we need it, when we need it. It really depends on the project plan and the progress of the EV company.

Thank you. Can you maybe elaborate on the synergies you see with Turkcell?

Regarding synergy, e-mobility is everywhere. So, when we joined this partnership, the TOGG partnership, everyone was thinking that why a telco operator is joining this EV consortium. But everybody right now, since e-mobility is a trend, the connectivity, entertainment, and driverless cars are very important, which needs high speed, low latency, and strong customer engagement. So, that's the main reason that we have synergies. Turkcell and TOGG can have collaborations, including smart-living solutions in smart cities, smart charging, data-based business model, suppliers and partners with complementary competencies, and so on. There are integrated digital services and payment solutions. Payment is very important for charging solutions and infrastructure; IoT is there. So, there are many, many things that may come during the roadmap, but we'll see how we can help on this side. But I think clearly, Turkcell has a vision to finalize this synergy.

The next question is from the line of Mandaci Ece with UNLU Securities. Please go ahead.

Hi. Thank you very much for the presentation. I have a couple of questions. The first one is on your hedging and FX costs. Compared to the last two years' average, we are seeing a higher level of FX loss – net FX loss when we also include the fair value adjustments. So, the currency and fixed rates were also volatile in the previous quarter. So, what else has changed specifically for this quarter? Is this TRY518 million FX loss, is there any one-offs in that or is this the new base now? Should we consider such a number as quarterly FX losses going forward? And secondly, I want to also ask about your deferred income you have generated for this quarter due to the accounting change. Is this also one-off or will we see such effects in the coming quarters? And thirdly, two days ago there was the emerging market news that you were in talks or started the process for the sale of a minority stake in Paycell. Could you also provide your prospects regarding the potential asset sale, and when this could be official or when we should expect such news? So, thank you very much.

Ece, thank you very much. Let me ask – let me give the floor to our CFO, Osman, to answer all three questions, and then maybe I can comment at the end of his response.

Thank you very much. Hedging and FX costs increased significantly compared to last year, especially compared to the average of the last three quarters. We can associate this increase with rising hedging costs. You know, short-term swap rates almost more than doubled compared to last year, and this is creating a negative impact on our FX revenues. On the other hand, we needed to generate Turkish lira for our working capital needs, as well as for dividend payments. Since we hold the majority of our cash in hard currency, we need to generate Turkish lira through short-term FX swaps, and the costs of these short-term FX swaps are also classified under hedging costs. And one-third of the FX loss that you see in this quarter is associated with this short-term Turkish lira need. Fair value adjustments, hedging cost increases, and Turkish lira generation needs account for the high FX hedging costs this quarter. We expect a gradual decrease in hedging costs and FX loss over the next quarter unless we see another sharp increase in the dollar TRY parity. For the second question that you are asking, it is associated with the recent tax legislation that I tried to explain during the presentation. We made use of the right introduced by recent changes in the law, which allows us to revalue some of our fixed assets and inventories. As per the law, the respective assets, these are typically network assets, especially mobile networks, fixed networks, and data center investments. These assets can be revalued with PPI, Producer Prices Index, until the year-end. And we need to pay 2% over the value of these assets in order to be able to revalue those. This high increase inflates the value of our fixed assets and translates into higher amortization and depreciation costs in the following years, which creates deferred tax income on our balance sheet. By the way, it’s a cash impact because we will be able to pay less tax due to increasing amortization. So, it translates into a deferred tax visit on our balance sheet and makes a positive impact on our net income. On the third question, I assume that you're referring to the news that appeared on the merger markets yesterday. It's no surprise. We have been expressing our interest in a potential stake sale, not only at Paycell but also in other subsidiaries, including Superonline. We continue to work on the different alternatives, but I can say that so far we haven't been given any mandates by our shareholders to finalize this process. We are still exploring alternatives, and if something material happens, we will share it with you through the disclosure platforms.

Thank you.

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

You mentioned about one-off and you had some recently announced tax investigation numbers, I guess, you recorded in the second quarter. Could you just give us some clarification on that? Thank you.

I'm sorry. Mr. Demirtas, can you please repeat your question? Because we could not hear you in the beginning. Thank you.

Okay. My question is about the effective tax rate. I see that you recorded tax income. Maybe during the presentation, you mentioned about the details; I don't know if I missed it, but that's my first question. And the second question is about the one-off; you mentioned again during the presentation, but I didn't clearly hear. If you could just sort of elaborate on that. And what's the latest tax investigation results impact that was seen in the second quarter? Did you record that in the second quarter? Thank you.

Thank you very much. First of all, regarding the effective tax rate, it was 2% and 3% without one-offs. And regarding the second question, as we have announced last week, our company was imposed a tax assessment in relation to the tax investigation that was conducted with respect to the special communication tax for 2017. I would expect the special communication tax, value-added tax, and corporate tax for 2018. We also shared that we will benefit from restructuring provisions for this tax assessment and will pay TRY258 million at the end of September. This led to an increase in other expenses.

Okay. It was recorded under other expenses. Thank you.

The next question is a follow-up question from Cabejsek Ondrej with UBS. Please go ahead.

Thank you. I have one follow-up in terms of costs as well. You mentioned a year ago, I believe, that part of the – and I think it was half of the selling and marketing expense decline that you saw because of the lockdowns and moving to digital would be sustainable. Now, I know there's been another lockdown in Turkey, but on an annualized basis, that ratio of selling and marketing expenses was more or less flat year-over-year. And you mentioned in your presentation the ongoing share of digital sales. Can you maybe update us in terms of where you think the sustainability of the – I mean there is a 1.5 percentage points year-over-year decline in terms of selling and marketing expenses as a percentage of revenues last year, what part of that is or would be sustainable today versus what you said about a year ago? Thank you.

Thank you very much, Ondrej. First of all, the deterioration in selling and marketing expenses has been mainly driven by the increase in marketing expenses, not just – not the selling side. We started a new communication campaign on the Turkcell Ecosystem, positioning comprising both telco and digital services. We will continue investing in this campaign during the years as well. So, this is one of the reasons. But regarding selling expenses, they either flat or decreased due to the lockdown that happened in May as well. Regarding is there any other question?

Maybe just if there is an update in terms of how sustainable the levels of 2Q are going forward? Because, I mean, we may have expected a bit of a rebound in terms of selling and marketing compared to last year, as you flagged that's only part of the decrease from a year ago was sustainable. But there was virtually no change in terms of the proportion to relevance. So, is there another assessment today versus what you said a year ago when you said roughly half only of the savings were sustainable, would you say it's more today?

Yeah. First of all, during the first half, we see that especially sales expenses declined. But during the second half, we would like to see a little bit of bounce back on selling because we will continue to invest in our sales channel. But as you know, we would like to invest more and more in digital sales channels. This is our focus area. If we can continue to increase digital channels spending and the digital channels expenses, this will help us with more savings. But obviously, it's not going to be the same as the first half. We expect a little bit more on the OpEx increase during the second half.

The next question is from Demirak Kayahan with Ak Investment. Please go ahead.

Hi, thank you very much for the presentation and opportunity to ask questions. I mean, as a follow-up on the CapEx side, based on the upper end of your guidance you're roughly looking for higher CapEx compared to the previous quarter. So, what I'm trying to understand is what percentage of that is related to the additional 100,000 home taxes? And also very roughly, what is the incremental revenue contribution you are looking from this 600,000 home pass? Or in other words, what is the, I mean, expected payback period for this investment? Thank you.

Okay. Thank you very much. For the first question regarding CapEx increase, almost one-third of them comes from the FX increase, one-third of them comes from fiber investment, and one-third of them comes from business growth, including Ukraine and mobile subscriber base increase as well. Regarding payback, the payback period usually is long-term ROI. But we see that during the pandemic, we see that fiber investment return cycle is decreasing. So, we'd like to benefit on this side, but obviously, mainly eight years, nine years is the payback period that is acceptable for private investment. Because economically, the fiber lifetime is almost 25 years, so eight years is okay.

The next question is from the follow-up question from Mr. Cabejsek Ondrej with UBS. Please go ahead.

So, one more follow-up from me, please. In terms of Superbox, I noticed that the trend of net additions has been going down quite a bit from the peak of about a year ago. And you don't even talk about the product in your presentation anymore. Is that because you think the market for this product is, kind of saturated by now? Or are you actively trying to replace it specifically with fiber? Or any update on how you see that going forward? Thank you.

Thank you. Actually, your response was quite okay. Since its launch, Superbox has shown substantial growth in the subscriber base, providing a need for fixed wireless access backed by quality network. Our success with Superbox has also shown that our company is ready for the 5G transition period in Q1 2021. Superbox subscribers reached 626,000 on the back of increased demand and brand awareness, as well as rising household broadband demand in the pandemic environment. From now on, we will be more concentrated on monetizing our Superbox subscriber subscriptions, with a focus on network efficiency, usage optimization, and price adjustment. So, we recently did some price adjustment. We would like to monetize more Superbox products with a more efficient network infrastructure. So, those are the two reasons. And Superbox is not a cheap product. It's a high-quality product with high demand. So, we would like to focus on the OpEx side as well, the cost – network cost side as well. So, it's in balance; we are increasing Superbox ARPU to an acceptable level. And Superbox is not a competition for fiber. I mean, it's a product that specifically addresses the needs of customers in a high-speed, high-quality, and mobility environment.

Mr. Cabejsek, are you finished with your question?

Yes. I was on mute. Thank you very much.

Thank you. 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.

I would like to thank all the contributors, all the listeners. Thank you very much. Good afternoon, good evening, good morning to everyone. Thank you.

Well, thank you. This is the end of our call. Thank you everyone for taking the time to join us today. We hope to meet you in the upcoming quarters. Goodbye.