Turkcell Iletisim Hizmetleri A S Q3 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining Turkcell's Conference Call and Live Webcast to present and discuss Turkcell's Third Quarter 2024 Financial Results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. At this time, I would like to turn the conference over to Ms. Ozlem Yardim, Investor Relations and Corporate Finance Director. Ms. Yardim, you may now proceed.

Thank you, Constantino. Hello, everyone, and welcome to Turkcell's Third Quarter 2024 Earnings Call. Today, our CEO, Ali Taha Koc; and CFO, Kamil Kalyon will be delivering a brief presentation covering operational and financial results which will be followed by a Q&A session. Before we begin, I would like to kindly remind you to review our safe harbor statements available at the end of our presentation. Now, I'm handing the meeting over to Mr. Ali Taha.

Thank you, Ozlem. Good afternoon, everyone, and thank you for joining us today. This quarter marks my first full year at Turkcell. I am honored to be a part of this journey while hitting some major milestones along the way. In September, we completed the divestment of our Ukraine assets, creating value for our shareholders. We also opened our very first solar energy field, a significant step forward in our sustainability efforts. Recently, I was elected to the Board of GSMA. This is not only a personal honor but also an opportunity to represent Turkcell globally and help shape the future of our industry. I remain committed to growing our businesses and leading Türkiye's digital transformation with critical innovations and industry firsts that will position us for long-term success. After a quarterly pause, we are back on a growth path in the third quarter. Our top line increased by 7%, reaching TRY 40.2 billion. This growth was primarily driven by Turkcell Türkiye's strong ARPU growth performance and solid subscriber additions, supported by our Techfin segment. With a clear focus on profitability, our EBITDA rose 10% to TRY 17.8 billion, delivering a robust EBITDA margin of 44.2%. Our approach to acquiring high-value postpaid and fiber customers resulted in 322,000 net additions. We reported a net income of TRY 14.3 billion which includes TRY 3 billion profit from operations, along with proceeds from the sale of our Ukraine assets. Next slide please. Let's take a look at our operational performance. On the mobile front, we have faced aggressive pricing in the market since May. We made a 25% price adjustment in July to support a more rational market environment. Despite this, extended competitive campaigns have driven up MNP activity across the market, with market volume rising 47% quarter-over-quarter. We have also responded to some of our competitors' pricing campaigns resulting in net additions. Focusing on value-generating customers, we remain committed to the postpaid segment, adding 515,000 new postpaid subscribers in the third quarter. Over the past year, our postpaid base grew by 1.9 million, pushing the postpaid customer share to 74%, a 4-point increase year-on-year. On the other hand, the prepaid customer base declined by 266,000, primarily due to the broader adoption of alternative data solutions which negatively impacted tourist demand. Thanks to steady price adjustments and upsell efforts, along with slowing CPI, mobile ARPU increased by 6.9% year-on-year. We expect to see real growth in Q4. However, due to market aggressiveness and lifecycle closures, we saw a churn rate of 2.2%. Next page please. The fixed broadband market remained rational in Q3, which gave us room to make a price adjustment in August. Following the incumbent action, we focused on fiber subscribers, and thanks to strong demand for our high-speed end-to-end fiber service, we had 47,000 net additions. With our strategic approach, we now have 82% of our residential fiber customers on 12-month contracts, which has helped in terms of ARPU growth during this inflationary period. Residential fiber ARPU grew 15% year-on-year, with our price adjustments. We saw a slight increase in churn, mainly due to price increases and the shift to 12-month contracts. Meanwhile, our take-up rate rose by 2.2 points year-on-year, as we focus on adding fiber subscribers over expanding home pass coverage. Another key trend is the rise in demand for high-speed packages. The share of packages of 100 megabits and above in our total residential fiber portfolio increased by 10 percentage points year-on-year. To introduce more of our customers to spur online fiber quality, we offer a complementary 1,000 megabit per second upgrade for a month, which is highly appreciated. Next page, please. Let's consider our strategic focus areas, starting with Digital Services & Solutions. In line with our goal of right positioning, we have retained our focus on profitability and ensuring that our digital service portfolio supports ARPU growth. As a result, our stand-alone paid users reached 5 million in the third quarter. Revenue from standalone digital services and solutions grew by 4% year-on-year, primarily driven by our pricing actions. This quarter marked a new milestone for us, as our IPTV users rose 7% year-on-year, making us the second largest player in the IPTV market. Moving on to our next focus area, Digital Business Services generated TRY 2.9 billion of revenue this quarter. Recurring service revenues rose 18% year-on-year. Macroeconomic headwinds continued to pressure demand in hardware sales, resulting in a contraction from the same period of last year. In our high potential area of data centers and cloud, we maintained a strong growth rate of 43%, underlining both market demand and our pricing strength as the market leader. Next slide please. The last strategic focus area I want to talk about is Techfin. In the third quarter, Paycell revenues grew by 20%, primarily driven by increased commissions and transaction volumes from Paycell Card and POS Solutions. We saw a 24% rise in the transaction volume for Pay Later, thanks to more people using it in app stores due to eligibility for QR payments and an increase in active users. The transaction size in POS Solutions nearly doubled, thanks to better market penetration and integration with leading e-commerce platforms. Meanwhile, Paycell EBITDA increased by 9.2% year-on-year. When it comes to meeting our customers' technological needs, finance sales revenues rose by a solid 38%. This was due to a larger loan portfolio and higher average interest rates. The higher loan interest of our loan portfolio began to compensate for higher funding costs, rising the net interest margin to 4.1%. Despite the challenging macroeconomic conditions, our cost of risk is reasonable at 2.8%. Next slide please. I want to add my part by sharing our guidance for 2024. Let me outline our plan: in May, we penciled in inflation peaking midyear and then, however, monthly inflation since June has exceeded expectations, driving higher annual inflation in the second half. Following the medium-term program update in August, we raised our year-end CPI forecast. In light of this, we are adjusting our revenue growth guidance for 2024 to around 7%, solely due to the increased CPI outlook. Our unadjusted financials remain on track. In fact, as inflation aligned with initial expectations, we will have achieved low double-digit growth. And for our EBITDA margin and CapEx intensity, we are maintaining our guidance. Now I will hand over to our CFO, Mr. Kamil Kalyon for the financials of this quarter.

Thank you very much, Ali Taha. Now, let's move on to our financial results. The third quarter was quite successful for us, with 7% top line growth, a healthy strong EBITDA margin of above 44%, and net income of TRY 14.3 billion. We have clear proof that we are managing our business well. Our consolidated revenues exceeded TRY 40 billion, driven by 7% year-on-year growth in the Turkcell Türkiye segment, thanks to price adjustments, a larger postpaid base, and effective upselling. The Techfin segment contributed TRY 0.5 billion to the top line, backed by impressive performances of Financell and Paycell, which grew 38% and 20%, respectively. The other segment impacted the top line negatively due to reduced demand in consumer electronics. Next slide please. Now let's look at our EBITDA performance. In the third quarter of 2024, EBITDA grew by 10.4% year-on-year to reach TRY 17.8 billion, driven by strong revenue growth and well-managed direct costs. Our EBITDA margin expanded by 1.4 percentage points year-on-year. To invest in our human capital, we made two wage adjustments this year in the second and third quarters. This reduced the margin by 2.1 percentage points, along with added pressure from rising funding costs. On the other hand, lower growth in the cost of goods sold due to decreasing demand for consumer electronics and the ongoing decline in MTR have positively contributed to the margin. Next slide please. Let's take a closer look at our CapEx management. For the third quarter of 2024, our CapEx to sales ratio is 18.1%. Operational CapEx amount remained fairly in line with the second quarter. However, with a boost in top line, we observed a typical seasonal slowdown. Half of our budget has been allocated to core communications covering both mobile and fixed services for this quarter. We expect acceleration in tower fiberization in the fourth quarter heading to our target of 41%. In September, we activated 6.4 megawatts capacity in our solar energy investments. The remaining capacity, which has already been installed, is currently awaiting legal approval. We anticipate that this will be reflected in our CapEx over the subsequent two quarters. Regarding data center investments, we are progressing with the finalization of two modules and remain aligned with our targets. Looking ahead, we expect CapEx intensity to rise next quarter consistent with the seasonality of our businesses. Next slide please. Now let's turn our attention to the balance sheet. Following the Ukraine asset sale, our cash position increased to TRY 82 billion. Additionally, the gross debt balance decreased to TRY 107 billion. As a result, our net debt position decreased to TRY 9 billion, which brings our net leverage ratio to 0.1 times. Our FX debt service for this year is around US$179 million, which we deem manageable. We have adequate cash to cover the redemption of the 10-year Eurobond in 2025. Hence, considering potential data center investments, 5G network preparation, and ongoing renewable energy investments, we have applied to the CMB to issue a new Eurobond up to TRY 1 billion, which will be partially sustainable. The majority of our cash remains denominated in hard currencies. Excluding FX swaps, 57% of our cash is in US dollars and 21% in Euros. Next slide please. Lastly, let's look into the management of foreign currency risk. At the end of Q3, we had approximately US$2 billion equivalent in FX financial liabilities on our balance sheet. With proceeds from the Ukraine asset sale, our FX-denominated financial assets increased to US$2.2 billion, already moving us into a long FX position. As part of our strategic FX management efforts at the beginning of the quarter, we decreased our net FX position to minimize hedging costs. Our derivative portfolio decreased to US$111 million. We closed the quarter with a net long FX position of US$228 million mainly due to proceeds from Lifecell sales. Going forward, we aim to stay within our target FX range of plus or minus US$200 million. And this concludes my presentation. We can now start the Q&A session.

Ladies and gentlemen, we will now begin the question-and-answer session. Please hold for our next question. The first question comes from an unidentified Analyst with Schroders. Please proceed.

Hello. Congrats on the results. Thanks for taking my question. First of all, about the divestment proceeds you mentioned at the beginning of the call. Could you please share more information on them? And then also, I think you briefly spoke about your 2025 CapEx outlook. If you could provide more details on that both in terms of the different projects you're looking at, as well as the expected or approximately expected CapEx to sales ratio? Lastly, you finished this quarter at a very low net leverage level. I was wondering what you consider to be the ideal net leverage and what do you expect for 2025? Thank you very much.

First of all, I just want to start with the divestment process change. We completed the sale of the process on September 9th. The final sales value will be determined based on closing adjustments to be made, as well as the level of net cash debt on financial statements to be prepared as of the closing date. Although we do not have a Board decision regarding the proceeds we will obtain from the sale of our assets in Ukraine, prospectively, we might have important investments. Some of them depend on regulatory authority decisions to come, such as the 5G tender and its rollout plan or any other big-scale business initiatives creating value for our shareholders in the upcoming periods. Although we are diligently exploring a range of competitive and rational alternatives, we have the redemption of our Eurobond in 2025. Regarding your second question about CapEx; as part of our CapEx planning this year, we will continue to focus more and more on our core businesses. Accordingly, we will follow our demand-driven CapEx approach. Moreover, we are expanding the white space capacity of our data centers by adding new modules to meet increasing demand in Türkiye and the region. Additionally, we have renewable energy investment plans on the energy side to meet our own electricity demand. In 2023, we initiated investments in solar plant installations to achieve a capacity of 300 megawatts within three years. The installation of the first phase of 54 megawatts has been completed. Out of this, 54 megawatts, 6.4 megawatts of the first phase has been activated in Q3 2024. We aim to cover 65% of Turkcell's total electricity consumption from our own green energy production by 2026. We're also waiting for a 5G tender as well. In 2025, we will be getting ready for the 5G live network. There is an expectation that an auction is going to happen in 2025. So we need to prepare our infrastructure for 5G by the time it is ready for live operation in 2026. This will be a CapEx intensive year. All in all, mobile and fixed CapEx will take more than half of the CapEx budget, with the remaining share taken mainly by data centers and renewable energy investments.

Regarding your net leverage question, as I mentioned in my presentation, with the help of proceeds from the sale of our Ukraine assets, our net leverage ratio is currently at a very low level. Our target is to keep our leverage below the industry average, and our long-term internal target is around 1.5 times.

Okay. Thank you. I come back into the queue. I’ll have more questions later, I guess.

The next question comes from the line of Bystrova Evgeniya with Barclays. Please go ahead.

Yes. Hello. Thank you very much for the presentation and congrats on the results. I have just one question regarding your potential bond issuance program. Given that you just received TRY 500 million proceeds and now you're planning to issue TRY 1 billion, I was trying to understand or maybe you could provide more color in terms of the timing of the issuance? Also, are you planning to issue the whole TRY 1 billion? Or will it be split in parts? You mentioned that you're planning a sustainable or green bond. Which one are you planning to issue?

Thank you very much for your question. First of all, I would like to mention that as Mr. Ali Taha said, we have some investment liabilities or investment figures in 2025, like 5G, data centers, and solar projects. In order to cover our operations, we will continue to make our CapEx investments. We also have a redemption of Eurobond in 2025. Therefore, our expectation or intention is to issue around $1 billion Eurobond, most probably split into 50% conventional and 50% sustainable loan. We are waiting for the approval of the CMB regarding this issuance; after we take the issuance approval, we expect it to be in the market in the first quarter of 2025.

Thank you. Thank you very much.

You're welcome.

The next question comes from the line of Demirtas Cemal with Ata Investment. Please go ahead.

Thank you for the presentation and congratulations for good results. My question is about the growth prospects. I know that you have been ambitious about growth potential in the long-term, but I would like to understand the plans related to data centers and clouds. We see some significant increases in the third quarter. How should we assume for the following years regarding the growth? What should be the portion of this business in your overall business? That's my question for maybe the next several years. Also, after the US elections, Trump won the elections. Regarding the projects and the China-US relations on all those technology issues, do you have any strategy in your mind regarding the projects for the future? Or does it have any impact on your plans related to global relations? Thank you.

Thank you very much. It's a great question. So you're right, we have ambitions for long-term growth. In order to keep Türkiye's data in Türkiye, we maintain our leading position in the data center market and aim to increase our investment focus in our data centers as well as our cloud businesses. Currently, the highest market share or market CapEx firms are investing more in the data center business. With AI, we expect that the need for data centers will increase exponentially. So AI is just starting, and we are expecting that as companies begin using AI, the demand for data centers will rise. The data center market is very active, and we anticipate that market growth will continue in the coming years due to increasing needs within both public and private sectors. As for cloud, every business will eventually migrate to the cloud, as it is the best way to move IT infrastructure without incurring large investments. The close proximity to cloud or data centers results in better performance. We currently have four significant data centers and have spent €330 million, positioning us to become the largest cloud vendor in the region. Regarding your second question on the presidential elections, we closely follow such changes. We remain watchful; however, currently, we do not see any impact on our businesses. Historically, our relationships remain stable despite changes in the presidency.

As a follow-up related to 5G, is it still early to talk about the timing? Or I don't know, maybe I'm missing some point. What might be the potential timing on that?

Actually, let me tell you that every couple of years, the technology always improves. So, to be honest, with the last upgrades we've seen in 4.5G, the latest technology release is termed 5G Advanced. We are not late or early for this. We aim to extract the best out of the best state-of-the-art technology in Türkiye, and our Ministry of Transportation announced that in 2025, there will be a frequency auction. Just like with 4.5G, specific frequencies will need to be auctioned, and every operator must purchase them. This auction is expected in 2025, and typically there is a timeframe of six to eight months afterward before we see the technology go live. Historically, we saw an auction in 2015 and were able to offer live 4.5G services by April 2016. So, we expect a similar timeframe for 5G; following the auction in 2025, we expect the rollout to occur around 2026.

Lastly, regarding 2025, what do you expect compared to 2024? You had difficult times when inflation increased significantly, and you adapted to market conditions. But now that we’re potentially in an inflationary environment, how do you see 2025 shaping up?

To be truthful, in 2025 we will be focusing more on R&D and further developing in the IoT domain. Right now, we have a motto saying that everyone works with Turkcell; by 2025, we want everything to work with Turkcell, especially within the IoT space. We expect significant subscriber increases and growth within this domain. Additionally, we will sustain our postpaid focus on the mobile side while maintaining our fiber focus on the fixed side. We will continue to take necessary pricing actions according to macroeconomic and competitive conditions. Accordingly, we expect real revenue growth in 2025 as well. We are currently working on refining the figures and will share more detailed expectations for 2025 within our year-end results announcement in the coming months.

Thank you, Ali Taha.

Thank you.

The next question is a follow-up from the line of Morris Still with Schroder. Please go ahead.

Thank you for taking this follow-up. There have been statements in the press that the contribution of Turkcell to telecom is currently not foreseen, but it was interesting to see Turkcell telecom being asked this question at all because I didn't have it on my radar. I thought that the market structure as it stands in Turkey doesn't require consolidation. Could you just address this elephant in the room? I would be interested to know more about your thoughts on this.

I think it is just a rumor. We never heard of that kind of connotations. I appreciate it's just a rumor.

All right. Cheers.

The next question comes from the line of Madhvendra Singh with HSBC. Please go ahead.

Yes. Hi. Thanks a lot for taking my questions. My first question is on your operational performance and pricing outlook. If you could disaggregate how much of the growth in the third quarter was due to price increases or pricing? Do you have further plans to increase prices? And how comfortable are you with your ability to continue with price hikes? The second question is on your data center strategy. If I may have missed it, could you remind me of your targets for megawatt capacity and by when you consider any M&A to reach that target? Or do you want to achieve that entirely organically? Lastly, could you talk about your overall M&A strategy? Is there any gap in your offering that you would want to fill with potential M&A? Thank you.

Thank you very much for the question. As you mentioned, we had a very successful quarter in Q3. In real terms, our revenues grew by 7% quarter-over-quarter; this is the main driver of our growth, with a real growth rate of 7% in Türkiye's recurring income. We have a very successful period, particularly driven by the expanding subscriber base in the postpaid segment and real ARPU growth. We achieved a growth of 11% year-on-year in the Consumer segment. This is particularly important from our perspective, especially as hardline revenues increased by 31% year-on-year. Therefore, it's a very successful period for the fintech side. These are the main drivers behind our Q3 results. Regarding price increases, as a leading operator in the mobile sector, we are operating in a hyperinflationary environment. We have made quarterly price adjustments since 2021. Looking at the history, except for Q1 2023 and Q2 2024, we have implemented several price hikes including the final price increase in July of around 25%. When looking at cumulative year-on-year price increases, this has amounted to around 90% for mobile services. We will take necessary actions based on macro and competitive conditions, as our competitors are exhibiting aggressive competition daily. For your second question, we currently have 33 megawatts of capacity in the data center. Previously, all data centers were measured with the white spaces but now, with all the processing power, it comes down to electrical consumption. We possess a capacity of 33 megawatts to support our four large data centers. The key difference with Turkcell data center business is that we design, construct, and operate our data centers at the highest standards. That’s why we enjoy such a fruitful market and attract multiple large companies as our customers. We are a market leader in this business. Over this year, we aim to increase this capacity by at least 30% more and we plan to grow organically. The high-quality data centers have subsequently attracted interest from cloud vendors, and we are closely negotiating with them. We're aiming for ambitious data center targets in the coming year and beyond.

And regarding your overall M&A strategy?

Currently, we have just exited from Ukraine, so we don't have any M&A strategy in any adjacent countries. We are not looking into expanding that business.

If your question relates to data centers, we are not contemplating any M&A actions. Our growth will be organic.

And within Turkey also, you're not looking to do any other M&A right?

In the short term, we do not have any M&A. However, that doesn't mean we are closing ourselves to opportunities. If we find suitable opportunities that could assist us with revenue growth or EBITDA contributions, we will consider them, but currently, there is nothing on our short-term plan.

Great. Thank you very much for taking my questions.

Thank you very much for your question.

The next question comes from a follow-up from Bystrova Evgeniya with Barclays. Please go ahead.

Yes. Thanks for the opportunity to ask a question again. I wanted to ask you about the potential sale of the stake of Türkiye Wealth Fund in Turkcell. Are there any developments or any talks going on regarding that? I appreciate that it might be sensitive, so any color would be very, very helpful. Thank you.

This is a question that needs to be answered by the Turkish Wealth Fund. They are our shareholders, and they have to decide and respond to your questions. So I think this is out of scope for this call.

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.

Thank you very much for listening to us. Hopefully, we will have another call at the end of Q4, and we look forward to speaking with you then. Thank you for your time.

Thank you for joining us. Bye.

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