Turkcell Iletisim Hizmetleri A S Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. I'm Mina, your Chorus Call operator. Welcome and thank you for joining the Turkcell's Conference Call and Live Webcast to present and discuss the Turkcell Third Quarter 2022 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 very much, Mina. Hello, everyone. Welcome to Turkcell's third quarter 2022 results call. Today speakers are; our CEO, Mr. Murat Erkan; and our CFO, Mr. Osman Yilmaz. We have a brief presentation and afterwards we will be taking your questions. Before we start, I would like to kindly remind you to review the last page of the presentation for our safe harbor statement. Now, I hand over to Mr. Erkan.

Thank you, Serdar. Good morning and good afternoon, everyone. Welcome to Turkcell's third quarter earnings call and thank you for joining us. We left behind another quarter where macroeconomic challenges continued to weigh on the economic activity around the world. While inflation remains a major concern, especially in Turkey, domestic demand was still strong as rising prices prop up consumer spending. We recorded 57% revenue growth in the third quarter, enabled by consecutive price adjustments and upsell performance coupled with a growing subscriber base. Strong rebound in roaming, ongoing momentum in digital business services and techfin, along with a positive contribution from international operations supported top-line growth. Amidst continuing inflationary pressures, EBITDA grew by 49% year-on-year, implying just short of a 41% margin. On the back of growing EBITDA and proactive FX management, we recorded a net income of TRY 2.4 billion, increasing by 68% year-on-year. Higher mobility and strong tourism activity enabled us to accelerate subscriber base growth with one million net additions. In the first nine months, we gained a total of 2.2 million net subscribers, further strengthening our leadership in the market. Lastly, this quarter, with a focused approach, the revenue share of digital channels in consumer sales achieved 23%, setting a record. In consideration of these results, we further increased our full-year guidance, which I will elaborate on in my last slide. Moving to the next slide. Let's take a look at our operational performance in mobile. In line with historical trends, this quarter was marked by increasing mobility coupled with a sharp rise in foreign visitors to Turkey, exceeding pre-pandemic levels. The market continued to grow on the back of tourist arrivals, as well as demand from the corporate segment. Accordingly, we recorded strong net additions of 420,000 in postpaid and 506,000 in prepaid subscribers. Blended mobile ARPU growth ramped up to 49% year-on-year, from 33% in the previous quarter. The main reasons behind the acceleration were consecutive price adjustments since December of last year, upsell performance, and higher data usage during the summer. On top of the price adjustments of the past three quarters, we made another increase in September, and tariffs have doubled for new subscribers compared to last year. Despite price adjustments, we continue to observe stable churn levels in the mobile segments, thanks to our energy capabilities, strong brand perception, network quality, and extensive distribution channels. Despite a very slight increase compared to the previous quarter, as expected due to increased mobility, our churn rate was identical to that of last year in this quarter. Confirmed by our Net Promoter Score, consumers continue to recommend our services to a significantly higher degree than the competition, underlining our premium position in the mobile segment. Moving to the next... In the fixed broadband segment, we gained net 68,000 fiber subscribers on the back of rising demand for high-speed connections in the back-to-school period. Our focus on price adjustments and upselling to higher speed packages has supported ARPU growth of 27%. ARPU growth in the fixed segment lags behind that of mobile for two reasons. First, contract terms are longer as per market dynamics, and the second, the incumbent operator was reluctant to make meaningful price adjustments until October. We have started to offer 12-month contracts to address the first concern and also increased the price following the incumbent's very recent actions. The fiber churn rate of 1.2% was not much affected by price increases and higher mobility in this quarter, thanks to our superior speed and customer service quality. Proceeding with our fiber rollout plan, we added 240,000 home passes in this quarter. Year-to-date, we have reached around 90% of our annual target, with over 700,000 additions. On the IPTV side, we are pleased to see continued interest in our 3+ service, with 45,000 net additions this quarter. Overall, IPTV penetration in our fiber subscriber base has exceeded 66%, rising three points year-on-year. Next slide. And now in the next two slides, we go through the developments of our strategic focus areas. Let's start with our digital services and solutions, where we gained 1.2 million paid users year-on-year, reaching almost five million. The revenue of digital OTT services, which include core OTT services, rose 66% year-on-year, mainly driven by cloud storage, TV, and music streaming. On the TV+ side, our paid subscriber base continued to grow. As we successfully delivered on our BiP, fizy, and TV+ service strategy, our OTT TV subscribers reached 932,000, up 25% year-on-year. Our cloud service platform Lifebox reached 1.7 million paid subscribers, with a solid rise of 47% year-on-year successfully addressing rising interest in cloud services as a result of the ongoing digitization of everyday lives. On the Digital Business Services side, where we serve corporates and enterprises, this quarter was marked by exceptional revenue growth of 107%. Tailor-made and Digital Transformation projects were instrumental in this growth. Additionally, by more than doubling tier revenues in data center, cloud, and business application services, further supported this growth. The backlog from the system integration project totaled TRY1.5 billion, which is set to contribute to the top line over the upcoming quarters. We continue to acquire new value-added business, for instance, by establishing Turkey's Electric Vehicle Togg IT Infrastructure with High Processing Power. Next slide. Third, is our Techfin focus. Our Techfin business had a strong quarter with revenues up 77% year-on-year. As Turkey's leading payment platform, Paycell was the main driver of this growth, increasing its revenues by 105% year-on-year. The ongoing shift to digital payments was evident, tripling total transaction volume and the 21% rise in active users, hitting over seven million. Among the revenue lines, the leading product, Pay Later, sustained its strong revenue trend as mobile payments doubled year-on-year. Another strong platform vertical is Paycell Card, where the transaction volume rose fourfold. Lastly, revenue contribution from the POS solution also continued as we ramped up our Android POS devices in this market. Furthermore, Paycell Europe was launched in the third quarter to serve users on that continent. The company will initially provide Money Transfer services, targeting mainly the Turkish population for money flow from and to Europe. Further to that, we are planning to launch digital wallet, debit card, and investment product solutions. On the Consumer Financing side, Financell's revenue rose 57%, on a larger loan portfolio achieving TRY2.9 million. Despite a growing loan book under unfavorable macro conditions, the cost of risk remains at a healthy level of 1.3%. Next slide. Now, let's take a look at our performance in the International Market. Turkcell's International segment revenue grew by 79% year-on-year, mainly thanks to currency movement and to some extent Lifecell's growth. Despite the ongoing war in Ukraine, Lifecell's revenue grew by 10% yearly in local currency terms, mainly from the increase in ARPU. Lower interconnection costs and sustained marketing expenses more than compensated for the rising analysis pressures. Lifecell's EBITDA margin improved by around three percentage points to 60% in the third quarter. In Belarus, BeST revenue rose 9%, thanks to mainly the price increase and upsell performance. The contraction in handset sales continued to positively impact the EBITDA margin. Next slide. As communicated before, we are proud and excited to be a part of Turkey's Electric Vehicle Project Togg, which unveiled the Gaming Technology Conference last week on the occasion of Turkish Republic Day. The first domestic car is expected to hit the road in March of next year, and we will be the first electric SUV produced in Continental Europe by a non-traditional manufacturer. The facility will have a production capacity of 175,000 units per year and aims to produce a total of one million vehicles of five different models by 2030. At Turkcell, we are not only glad to contribute to Turkey's dream of innovation but also work towards leveraging our position in e-mobility services. By leveraging our capabilities in Digital Services, we integrated fizy as a native music application of the car. Moreover, we recently announced that we are working to integrate Paycell's payment system and Digital Financial Solutions into Togg's Mobility Solution. Thanks to e-wallet card storage and payment infrastructure provided by Paycell, top users will be able to create their own Togg wallet and make payments at charging stations without having to exit the vehicle. Next slide. I would like to end my presentation by sharing our updated guidance for the full year of 2022. Taking into consideration our nine months performance, we once again revised our guidance upwards. Accordingly, we raised our revenue growth target to 47% to 48% and EBITDA guidance to around TRY21 billion. On the CapEx side, we changed our guidance to around 20%. Thanks to our controlled CapEx management. Please note that these expectations do not account for the implications of like the adoption of inflationary accounting in the future. I will now leave the floor to our CFO, Osman.

Thank you, Murat. Please now let's take a closer look at our financial performance. In the third quarter, our group revenues grew by 57% year-on-year, corresponding to an incremental rise of TRY5.3 billion. Turkcell Turkey recorded a revenue growth of 57% in this quarter; thanks to an expanding subscriber base, gradually increasing ARPU growth as a result of dedicated price adjustments throughout the year, and strong momentum of Digital Business services. Doubling year-on-year strong performance of wholesale and roaming revenues was another driver of the top line growth. Turkcell International revenues, comprising 11% of the Q3 top line, contributed TRY700 million, mainly due to the positive impact of currency movements and better-than-expected performance of Lifecell Ukraine. Our Techfin segment made a TRY218 million contribution. Paycell revenues which account for 49% of the segment rose by 105% year-on-year. This performance was due mainly to traction in the Pay Later product as well as our POS solution that has been on an upward trend since its launch. Additionally, Financell's revenue was up 57% year-on-year, thanks to a greater loan portfolio and average interest rates, as well as the rising contribution of insurance business revenues. Improvement of the other segments' contribution on a yearly basis was mainly due to a rise in sales from digital channels and higher equipment revenues. Next slide. Now some highlights on EBITDA development. EBITDA rose by 49% year-on-year to TRY6 billion and margin decreased by 2.2 points year-on-year to 40.9%. Two main factors behind this contraction were wage hikes and higher energy prices. On the personnel expenses side, we reflected the rise in minimum wage to our wage ancillary budget in July, which was the second increase of the year. Our energy expenses more than tripled year-on-year as of Q3, stemming from globally increasing electricity prices and higher utilization in data centers. On the other hand, lower growth of cost of goods sold and interconnection costs as a percentage of revenue limited the margin contraction. The Turkcell International segment recorded a 52% EBITDA margin in this quarter. As a percentage of revenues, lower S&M expenses and improvement in the international cost of Ukraine operations more than compensated for the higher radio expenses. Lastly, group S&M expenses only recorded a limited increase of 0.1 points as a percentage of revenues, while we managed to add one million subscribers to our portfolio just in this quarter. Next slide. Now, more detail on our free cash flow generation. In line with our expectation, we generated TRY2 billion free cash flow in this quarter. This cash flow generation was mainly on the back of strong EBITDA generation of TRY6 billion. Our working capital improved around TRY80 million, mainly resulting from a positive impact from trade receivables, thanks to better collection performance and higher trade payables due to seasonality, as well as the support from advance payments realized in the previous quarter. To note, the increase in receivables from financial services was mainly due to Financell's expanding loan portfolio. Next slide. Let's take a close look at our CapEx management. We continue to focus on fixed segment investments in order to introduce our pure fiber technology to new customers given the sustained demand. In Q3, around half of operational CapEx was accounted for by the fixed segment. Accordingly, we recorded 711,000 home passes in the first nine months of the year. Having advanced the quality of our mobile network in the past years, we are now able to focus more on expanding our fiber footprint. In Q3, our operational CapEx to sales ratio was at 17%, which brings the 12-month figure to 18.9%. We expect a higher CapEx in Q4 given the seasonality. On the fiber front, while CapEx intensity continues to increase, it will normalize as we ramp up the monetization of new home passes. All in all, we are progressing in line with our plan. Next slide. Now, a few words on our balance sheet. As of Q3, our total cash position increased from TRY22 billion to TRY24 billion. Of this increase, TRY1.9 billion stemmed from currency movements. Recall that there was a cash outflow of TRY1.3 billion as dividends in July. Our gross debt position increased to TRY52 billion from TRY48 billion. Currency movements led to around TRY2.9 billion increase in total debt. As a result, our leverage has improved this quarter to one-time, thanks to strong EBITDA growth and higher financial assets. Excluding the finance business, the figure was 0.9 times. The bulk of our cash remains in hard currencies. Excluding FX loss, 55% of our cash is in US dollars and 17% in euros. This cash is sufficient to cover our debt service until 2025. Next slide. Lastly, I will go into the management of our FX currencies. At the end of Q3, we had around $1.9 billion equivalent of FX debt and around $1.2 billion equivalent of FX-denominated cash as a net FX position. Additionally, we had around $700 million derivative portfolio comprised mainly of proxy hedges which shield us independent of currency fluctuations. Overall, we have a limited short net FX position of $19 million. Going forward, we continue to target a neutral FX position. This concludes our presentation. And we can now open the line for questions. Thank you very much.

The first question comes from the line of [indiscernible]. Please go ahead.

Hello, thank you for taking my question. Congrats on the very strong results. Can you hear me?

Yes.

Great. Okay. So, you have presumably spoken about ending the year nearly 1.5 times net leverage. Now, net leverage actually went down to 1.2 times from 1.0 times in Q2 2022. So I was wondering what do you now think we should expect for net leverage at year-end 2022?

I guess this is the only question. Actually, we completed this quarter as we said with a leverage of one time. Our target is to keep the leverage at these levels given that we don't have any big CapEx cycle in the near future like 5G. We continue to focus on our fiber investments and invest less in our mobile network since we had already made a bulk of investments in the past five years. So, excluding the currency impacts, we aim to keep our leverage target around one time going forward.

That's excellent news for us, I guess. Your EBITDA is obviously growing stronger than expected which has to do with deleveraging. But I was wondering if, given the high cash position you've accumulated, like bonds are trading below par, if you are looking into accelerating the bond debt reduction?

Could you repeat the question? Second question, we couldn't get the question.

Sure. I was wondering if you're planning to accelerate the bond debt reduction given the very high cash position you have accumulated while bonds are trading below par?

Yes, it is one alternative for us to use our cash to buy back bonds which are trading very cheaply in the current credit conditions both locally and globally. But unfortunately, the liquidity in the secondary market is very thin. So, we are not able to buy back as we wish. Therefore, we use our cash in relatively more liquid instruments at the moment. But bond buybacks are an important item on our treasury's agenda, so we look for opportunities to increase our bonds.

Great. And the last question is related to private penetration. Your uptake rate is very high at 41%. And you obviously mentioned that among new homes passed even 50%. So, I was wondering if you can provide an outlook on the topic here where do you see penetration rates trending going forward? Do you have any home pass targets for this year and next year? And then you also mentioned that the government is paying for some of your fiber CapEx. So, I was wondering if you can expand a bit on how the dynamic works. For example, what the proportion is between fiber CapEx that you pay for yourself compared to that of the government? And if it reverses you or if it pays a direct play?

Okay. Thinking further, I didn't get your point about government restriction on the CapEx side, because we don't have any constraint from the government regarding the fiber CapEx. For the fiber side, we aim to reach around 800,000 fiber home passes. We already reached around the 700,000-710,000 level. So, it seems that we're going to reach our targets. And for the take-up rate part, our take-up rate is quite strong. Obviously, while we are adding new home passes, we can see some slight decrease in the take-up. But we're going to recover as soon as we penetrate the market. We penetrated the new home passes that we get. So we don't see any issue on the take-up rate side. We're going to see that it's going to continue to have a slight increase on the take-up rate side.

The question on the government was not about restrictions. But I think you once mentioned that the government is paying for some of your CapEx. So that subsidies or reimbursement or something like that. And I was wondering how this dynamic works?

No, no. Actually, this is not related to fiber. The government doesn't give any incentive or any payment for the fiber CapEx side. But we have a universal fund, which is used on the mobile side for areas that have very limited customer lives. But this is related to mobile, not the fiber side. We don't get any incentives or any CapEx support from the government or anywhere else. I wish we had.

Okay, great. Thank you very much. Those were all my questions, and congrats again on the great quarter.

The next question comes from the line of Kennedy-Good Jonathan with JPMorgan. Please go ahead.

Good evening, and thanks for the opportunity to ask questions. Just one from my side. You mentioned there were no real plans for 5G. I just wanted to -- if you could refresh us on whether there are any renewals of licenses coming up or spectrum auctions that we should be aware of in the near to medium-term? And thoughts on 5G rollout eventually, please?

Okay. First of all, let's focus on the 5G side. Obviously, there is no official timeline for 5G announced by the regulatory body. 5G is a vital technology that we can facilitate the digitalization of industries and contribute to the economic development of the country. However, we believe there are some issues that need to be addressed first, such as the fiber connection of base stations, 5G capable smartphone penetration, and development of locally manufactured equipment. As of 29 of July, we officially launched commercial 5G in Istanbul Airport with special regulatory permission issued to all operators. Turkcell customers and international roamers can get 5G support as part of it. We will position this airport as a commercial 5G pilot cluster. We would like to use it as a base to create an R&D and test facility side of the equipment. As for the license cost and rollout CapEx, it is difficult to provide any estimates to be honest, and we will see the timeline. There has been no official tender announcement yet. On the 2G renewal side, we are discussing with the regulator in terms of renewing 2G, at least for the end of our 3G and 5G -- sorry, LTE spectrum license end, which is 2029. As soon as we reach a conclusion, we will go and announce this position. So, but it is not going to be a significant item for us. It should be another six-year extension of the 2G license. Obviously, 2G is coming to an end.

Great. Thank you. That’s very helpful.

The next question comes from the line of Nagy Nora with Erste Group. Please go ahead.

Hi, and thank you for the presentation and for the possibility to ask questions. Two from my side, please. Today, we've seen the release of the inflation in Turkey, which topped 85%. And I was wondering if this could mean further price increases to come, even this year, so in December maybe? And then, the second question is about any more information if you have in Turkey about another minimum wage increase, and if yes, by how much? Thank you.

Okay. Let me start from the second part of the question. Obviously, having such a high inflation environment, we will see some increase in the minimum wage salary. But our expectation is starting from next year, as a usual timeline. I don't have the figures, because it really depends on the government policy and the discussion with all shareholders. But you can assume that we will see some increase in the minimum wage salary in Turkey. Regarding inflation pricing, as the leading operator, our priority in the high inflation environment is to adjust our prices in a more frequent and timely manner. So our approach has given competitors the opportunity to adjust their prices as well, because we are the leading operator. We started adjusting our prices in the mobile segment in December of last year and we have made further increases in March, June, and September. We saw that these price adjustments were followed by the competition to an extent. Despite the effective pricing on the mobile side, competitive dynamics lead to more limited price increases in the fixed segment. In spite of the continued demand for fixed broadband services, the incumbent operator was reluctant to make meaningful price adjustments until October, which was evident in the limited revenue growth and significant EBITDA margin contraction. Accordingly, we had fewer price increases in the fixed segment. In October, the incumbent operator made a meaningful price revision, which was also followed by us on November 1. Furthermore, telecommunications is a necessity service for our customer, unlike discretionary items. Demand for our services has limited price elasticity. Additionally, the price of other spending items is also rising, which makes consumers less sensitive to price adjustments as well. Therefore, it's fair to state that we do have the ability to reflect higher inflation in our prices. Our accelerated ARPU growth over the last quarter also confirms this.

Thank you.

The next question comes from Demirak Kayahan with AK Investment. Please go ahead.

Hi. Thank you very much for the opportunity to ask my question. Also, congratulations on the strong results. I have a few things on my mind. The first thing I understand that the prices for the new mobile tariffs almost doubled in September with the cumulative price increases. For the existing tariffs, I mean, for the renewables, where do you see the price growth as of September?

I mean, obviously, it reflects in our ARPU numbers, and I think we see that at 60% to 70% level.

Okay, thank you. And I was hoping to get more insights on the next year. Maybe could you give us some direction regarding the expected blended ARPU growth for next year, given the pricing actions you take so far?

Obviously, we had increased prices four times during this year. So it really depends on the inflation journey in Turkey for next year. But we have one rule that we're going to follow for inflationary pricing. If we see inflation decreasing, we're going to react based on that. If we see inflation increasing, we're going to react based on that. So, I cannot comment on the inflation process right now, but whatever happens, we're going to follow this.

Okay, thank you. And as for next year's results in terms of expected CapEx intensity, do you think that the churns around 20% as of sales are sustainable since you don't expect any further investments in that front in the near term?

To be honest, we would like to expect similar CapEx intensity for next year. Obviously, for the CapEx side, there are dependencies that we cannot control, which include currency and other market variables. But to be honest, we would like to stick to our CapEx intensity side for next year as well.

Okay, understood. Thank you. And the final question was about -- it's about the dividend payment. You were usually paying around a 50% payout ratio, but you reduced it to 25% this year, given the difficult operating environment and the rising cost of debt. So the leverage seems now quite comfortable. What should we expect on that front at least in terms of your dividends?

Yes. Based on normal conditions, we will return to our usual procedure, which is a 50% distribution of the net income. So, as long as we don't see any different conditions, either macro or micro, we will continue to stick to our policy, because our approach is quite clear, and we intend to maintain this policy.

Okay. That was very helpful.

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.

First of all, thank you very much for joining our third quarter results call. I would also like to apologize for the interruption of the communication. But anyway, thank you very much for joining us, and good afternoon and good evening to everyone.

This concludes our call. Thank you very much all for joining. Hope to see you in the next one.