Turkcell Iletisim Hizmetleri A S Q1 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. I'm Vasilios, your Chorus call operator. Welcome and thank you for joining the Turkcell's Conference Call and Live Webcast to present and discuss the Turkcell’s First Quarter 2025 Financial Results. All participants will be in a listen-only mode and the conference has been recorded. The presentation will be followed by a question-and-answer session. At this time, I would like to turn the conference over to Mrs. Ozlem Yardim, Investor Relations and Corporate Finance Director. Mrs. Yardim, you may now proceed.

Thank you, Vasilios. Hello, everyone. Welcome to Turkcell's 2025 first quarter earnings call. Today, our CEO, Ali Taha Koc, and CFO, Kamil Kalyon, will be delivering a brief presentation covering operations 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 very much, Ozlem. Good afternoon, everyone. And thank you for being with us today. Before I start my presentation, I would like to take a moment to celebrate a milestone that makes 2025 meaningful for us. This year marks the 25th anniversary of Turkcell's IPO, where we proudly remain the first and only dual-listed company. Looking back on these 25 years, we are proud and grateful to have grown alongside with you, our valued shareholders, creating lasting value together. Moving on to highlights of the first quarter, our top-line reached TRY48 billion, delivering an outstanding double-digit year-on-year growth of 12.7%. On the profitability side, we delivered an EBITDA of TRY21 billion, up 19% year-on-year. This resulted in a robust margin of 43.7%, marking the highest first quarter margin in the last decade. Last but not least, we concluded the quarter with a solid net profit of TRY3.1 billion, another compelling indicator of our strong financial performance. We gained 153,000 postpaid and 30,000 fiber customers in the first quarter, which is clear evidence of the success of our value-focused strategy. This quarter, our strategic areas also delivered impressive results. Techfin segment revenues surged by 31%, while data center and cloud revenues grew by an outstanding 48%, reflecting the strong momentum in both areas. Next page, please. Now let's take a closer look at our operational performance. On the mobile side, our focus on value generation continued to deliver strong results. We added 153,000 postpaid subscribers quarter-on-quarter and 1.6 million year-on-year. As a result, our postpaid share reached an all-time high of 76%, up from 72% a year ago. Given the ongoing competitive landscape, our mobile churn rate remained low at 1.7%. We delivered double-digit ARPU growth of 15.9% this quarter, driven by our rational pricing strategy, effective upselling, an expanded post-paid base, and a slowdown in CPI. All contributed to a widening gap between ARPU growth and inflation. Next page, please. Now moving on to the fixed broadband segment. In the first quarter, we added 30,000 net fiber customers, expanding our end-to-end fiber reach. We now cover over 6 million homes with fiber-to-the-home technology, FTTH. Residential fiber ARPU grew by 17.7% year-on-year, supported by an increase in 12-month contract share to 86% and strong performance in upselling customers to higher speed packages. By quarter end, the share of Turkcell fiber customers on 100 MB plus packages rose 15 points, exceeding 46%. The slight raise in churn is mainly due to the transition to 12-month contracts. Thanks to our targeted initiatives, we successfully raised our take-up ratio to 43%. Next please. A quick update on our strategic areas, starting with Digital Business Services. This quarter, Digital Business Services achieved a revenue of TRY4 billion, driven by a 23% year-on-year increase in recurring service revenues. Notably, our system integration project backlog reached TRY4.9 billion, underscoring strong demand and continued customer confidence in our service offerings. Revenues in our high potential data center and cloud segment surged by 48% this quarter. We are forming the strategic importance of this business in our portfolio. To meet growing demand, we plan to add two new modules, expanding our capacity by 8.4 megawatts by year-end. The total data center investments now stand at EUR528 million. Next please. Now the Techfin segment, which plays a key role in our growth strategy. Paycell, our secure mobile payment platform recorded an impressive 47.8% year-on-year growth, with pay later driving revenue, followed by post revenues. We focus on profitability and Paycell EBITDA rose to 24.2%. Financell revenue grew 8.2% supported by loan portfolio expansion through dedicated campaigns and personalized pricing. Net interest margin improved to 4.7% due to lower funding costs. Despite macro challenges, our cost of risk remained at 3.3%. As a final note, I would like to highlight that we firmly stand by our 2025 guidance while closely monitoring global and local economic dynamics. I will now hand over to our CFO, Mr. Kamil Kalyon.

Thank you very much, Ali Taha. Let's take a deeper dive into our financial performance. Before we start the financial overview, I want to explain our new segmentation structure that takes effect this quarter. We made two changes. After successfully selling our premium assets, revenues from international subsidiaries now make up a smaller portion of our overall financials. As a result, we have moved the international segment under the other segment. Additionally, the consumer business of Turkcell Satış is now included under Turkcell Türkiye alongside its enterprise sales. These changes reflect our internal management strategy for evaluating the overall performance of Turkcell Satış. These adjustments do not affect our operating profit, profit for the year, or cash flow statements. Next slide, please. Group revenues grew by 13%, adding TRY5 billion this quarter. The main contributor is Turkcell Türkiye, which accounted for TRY4.5 billion. Turkcell Türkiye saw a 12% revenue growth, driven by postpaid subscriber growth, an increase in ARPU supported by rational pricing, effective upsell efforts, and contributions from data center and cloud revenues. This performance attests to our ongoing growth momentum. We have consistently posted real ARPU growth for nine consecutive quarters. Our Techfin segment generated TRY667 million, primarily due to Paycell's strong performance. Focused on profitability and tight cost controls, we achieved an EBITDA margin of 43.7%, reinforcing our leadership in the Turkish telecom market. This margin improved because of reductions in the cost of goods sold, energy expenses, funding costs, and interconnection expenses relative to revenue. Next slide, please. Now let's discuss CapEx management. In the first quarter of 2025, our CapEx to sales ratio is at 20.2%. Our investments have been mainly directed toward strategic areas. By investing early, we are positioning ourselves to unlock value from our assets and shape Turkey’s future digital landscape. About a quarter of our budget is allocated for data center investments, which keeps us on track to add two new modules to the Corlu and Ankara data centers by year-end. We have also continued to enhance our core telecommunications infrastructure, with nearly 60% of the CapEx budget devoted to mobile and fiber infrastructure to maintain service quality. In Renewable Energy, we reached 28 megawatts of active solar capacity in Q1. We have a total installed capacity of 79 megawatts, with the rest to be activated once permissions are secured. Once we achieve 70% of our 300-megawatt target, we will cover around 20% of our annual energy costs, a key step toward cost efficiency and sustainability. We are effectively executing our CapEx management strategy. Next slide, please. Now let's highlight our strong balance sheet. In the first quarter, our total cash position rose to TRY108 billion from TRY76 billion, which adequately supports our service obligations for the upcoming three years. Following our successful January Eurobond issues, our gross debt increased from TRY115 billion to TRY151 billion. With the 5G tender approaching, we secured its financing through these issues at favorable rates. This was timely, as global interest rates rose soon after due to macroeconomic tensions. By the end of Q1, the group's net debt rose to TRY17 billion with a leverage ratio of 0.2 times. The TRY3 billion wireless usage fee paid in the first quarter, along with cash outflow from ongoing investments, slightly increased our leverage. Considering the 5G tender results and capital expenditures throughout the year, we expect our leverage to remain below 1 times this year, which we believe is a healthy level. Next slide, please. Finally, let's address our management of foreign currency risk. The majority of our cash is held in hard currencies, with 87% in hard currency, naturally hedging 86% of our hard currency debt. This quarter, we increased our local capital market issuances, which not only supports portfolio diversification but also allows for more effective financing cost management. By the end of Q1, we had accumulated $3.4 billion in FX debt and $3.5 billion to $3.1 billion in FX denominated financial assets. Additionally, we have a derivative portfolio valued at $388 million. We are in a short net FX position of $76 million. This quarter, we proactively managed our FX risk and balanced our net financial income and expenses, keeping our FX position within a plus or minus $200 million range. This disciplined approach effectively mitigated the impact of currency fluctuations on our balance sheet, strengthening our financial resilience. This concludes our presentation, and we are now open to your questions. Thank you.

Ladies and gentlemen, we will now start the question-and-answer session. The first question comes from Singh Madhvendra with HSBC. Please proceed.

Hi. Thank you for taking my question. My first question is about your revenue performance. I noticed a 12.7% growth for the group and wanted to know how your recent price increases, around 15% in Q1, affect this. Can you explain how the price increase is distributed? Are there any usage impacts that make your revenue growth in real terms less than 15%? I'm curious about the discrepancy between the price hikes and the new growth. Additionally, a competitor reported about 17% to 18% growth this quarter. Is there any increased competitive pressure in the market? My second question is regarding any updates on your 5G process. Do you have any insights on the cost structure? Thank you.

Thank you for your question. In the first quarter, we recorded a 13% revenue growth, which is strong compared to a 12% increase in the same period last year. Our performance over the years shows that, apart from a few quarters, we have consistently achieved higher revenue growth, leading to a larger revenue base. This success stems from the diverse and high-quality services we provide to our customers. We are effectively focused on upselling and have seen strong results in that area. Additionally, our subscriber base continues to grow. All of these factors contribute to our successful revenue performance. We aim to regularly share our growth updates with investors in the near future. Regarding the mobile market, we noticed increased competition starting in May 2024, which has continued into the end of the year. We haven't seen any normalization in 2025 either, but as we've indicated before, we are not solely focused on subscriber growth. We want to ensure that our revenue growth is not hindered as average revenue per user increases. As the market leader, we are closely monitoring market developments and implementing our aggressive campaigns when necessary rather than continuously throughout the year.

And for the second question, let me tell you that there is no official timeline announced by the regulatory yet regarding the commercial launch of 5G. However, recent statements suggest that the spectrum auction is expected to take place within this year. With 5G service anticipated to go live in 2026. While detailed information on spectrum pricing and licensing condition is still pending, we expect a balanced regulatory approach that supports both innovation as well as sustainable investments. As Turkcell, we are committed to building our 5G infrastructure by leveraging local and national technologies wherever possible. We continue to support the development of the domestic technology ecosystem through our ongoing R&D collaboration and partnerships. We are already providing live 5G coverage at The Grand National Assembly of Turkey for major football stadiums and Istanbul Airport, delivering speeds exceeding 1 gigabit per second to our customers. This deployment showcased our readiness as well as leadership in advanced connectivity and technology. Our robust 4.5G infrastructure along with our fiber backbone and virtualized core network position us well for efficient 5G rollout. So we are expecting the official timeline from the government and regulatory bodies.

Thank you.

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

Hi, hello, good evening. Thank you very much for the presentation and congrats on results. I have just one question. It seems that in the first quarter, you beat your guidance in terms of revenue growth also for EBITDA margins. So I was just wondering how you're seeing the rest of the year play out? Do you plan to maybe update your guidance accordingly? And also, if you could please remind us what was the CPI assumption for your guidance for this year? Thank you.

Thank you for the question. As you noted, we had a strong beginning to the year, and the results from the first quarter align well with our guidance. However, it’s a bit early to discuss any revisions to our guidance due to various significant macroeconomic conditions both domestically and internationally. We are monitoring these developments closely and are currently maintaining our original guidance. If a revision becomes necessary in the future, we will consider it, but for now, we are holding to the guidance we provided at the start of the year. Regarding our CPI expectations, we initially estimated a 30.5% CPI rate for the year-end, but we have recently updated our estimation to 35%.

That's year-end or average?

Year-end. While that is our budget side, the expectation of the Turkish Central Bank expectations around 24% to 27% CPI by taking into consideration, we set our expectations at 30%, but current developments have led us to revise it to 35% CPI for year-end.

Yeah, thank you very much.

The next question comes from the line of Mandaci Ece with Unlu Securities. Please go ahead.

Hi. Thank you very much for the presentation. Could you provide some more insight on your subscriber numbers? I understand that there was some more competition, and you focus mainly on increasing your postpaid subscribers on the mobile side. Will this strategy continue during the year? And can we see better quarterly subscriber additions going forward on a combined basis? And secondly, we also start to see a big jump in your fiber numbers, the lines you are leasing from other operators. So what could be the potential growth in that area, which also can contribute to your own fiber customer or subscriber base? Thank you.

Thank you very much for those questions. In this quarter, our postpaid net additions decreased compared to Q1 2024, totaling 153,000. The main reason for this decline appears to be the decrease in network, mainly due to ongoing aggressive campaigns by competitors. On the prepaid segment, we registered a net loss due to reduced usage from tourists, the widespread adoption of electronic SIM, eSIM technology and the growing competitiveness of discounted postpaid offers. Although minimum wage increase into Q1 2025, the absence of a minimum wage hike in the second half of 2024 combined with ongoing economic challenges also put pressure on prepaid subscribers' consumption power. However, the net subscriber loss was lower compared to the same quarter last year, supported by a decline in interest line closures. Our fixed subscriber base reached 3.3 million as of Q1 2025, with 25,000 net additions in the quarter. As a result of our dedicated investments, we recorded a net 30,000 Turkcell fiber subscriber additions. However, we experienced some customer loss on the resale segment due to price adjustments in line with our focus on profitability. In addition, the increase in our churn driven by factors such as a rise in contract expiration following our policy shift from 24 months to 12 months' commitment also negatively impacted our fixed subscribers' net addition. In line with our ARPU subscribers' balanced growth strategy, we didn't conduct some of the customer retention campaigns in Q1 2025 that we had made in Q1 2024. For the competitors' fiber optic cables, actually, we need to make it clear that this is not infrastructure sharing. Infrastructure sharing occurs in agreements where the owner of the telecom network facilities allows another operator to access and use those facilities based on a commercial agreement between both parties. We haven't signed such an agreement with a competitor. This is purely a reselling operation, similar to what we do with DSL and Turkcell cable. We continue our focus and investment in fiber, focusing on our Turkcell fiber. However, in areas where we don't have our own fiber infrastructure, we plan to sell competitors' fiber instead of competitors' DSL.

Thank you very much. Could you also please comment on the potential growth in your subscriber base in the quarters ahead? If you can provide some more detail on that going forward?

We are aligned with our planning, and then we are expecting better performance in the following quarters. Especially, we already had a huge investment in the fiber domain, extending our agreement with BOTAS. As you may know, there was a tender about it and then our backbone is well established with BOTAS. Starting from 15 years back, we had this agreement with BOTAS in 81 different cities we can reach with the BOTAS natural gas companies' pipes. So in the next dating, those pipes have our own fiber infrastructure and consist of our main backbone. So with this infrastructure that we extended this deal for the next 15 years, we are going to invest more and more in the fiber domain. And we believe in the fiber connectivity, especially for 5G and better service to our customers.

The next question is a follow-up from Madhvendra Singh with HSBC. Please go ahead.

Thank you for taking my question again. I would like to ask about your data center capital expenditure plan. Based on general expectations, can I assume that you intend to spend around TRY6 billion to TRY7 billion on data centers this year? Additionally, what is your overall ambition for data centers, and how significant is this CapEx in achieving those objectives? It seems that in dollar terms, it may not be a substantial amount.

Yes. To ensure that Turkey's data remains within the country, we continue to lead the data center market, and we are committed to increasing our investment in both data centers as well as cloud services. The data center market is currently very dynamic; we anticipate that hyperscaler cloud providers will invest in Turkey, which will significantly expand the market. Additionally, we expect even faster growth driven by the AI transformation, which will provide an additional boost to already existing growth. In regards to a global perspective, the current installed capacity of 55 gigawatts is expected to quadruple to 220 gigawatts by 2030. So there are big ambition plans all around the world about the data centers. There is no market study done by an independent research company for the data center businesses in Turkey. But according to the latest International Data Corporation's forecast for 2024, the cloud businesses, Infrastructure as a Service, Platform-as-a-Service, Software as a Service in Turkey total a market size of around $1.7 billion, which is expected to continue growing. Large corporate companies in finance, especially health care and the banking sector are significant potential customers for our data center business, as well as cloud services due to the Turkish regulations that require that data to be stored within the country's borders. On the other hand, Turkey has a fast-growing startup ecosystem, as you may know, that attracts investments, particularly showing significant development in the gaming and fintech sectors. This will require a huge data center business. Therefore, our country is very attractive, especially for hyperscalers. We are planning to make this the regional center for data, and we are going to make Turkcell and Turkey the regional data center hub of this region.

And in the first quarter, it seems the data center investment seems a little bit high. Yes, you're right, 24% of CapEx is seen a spot for the data center side. But for year-end estimation, it will be reduced to 13%, and we still spent a significant amount of money for the renovation and modernization of fiber and the mobile infrastructure.

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

Thank you for the presentation. My question is about the income statement, the effective tax side. You see an increase in deferred tax expense, is it specific to this quarter? Or are we going to see the trend for the rest of the year? Thank you.

Thank you for the question, Cemal. Yes, there are different applications, particularly due to inflationary accounting. The inflation accounting practices differ locally and under IFRS, and these discrepancies significantly impact our deferred tax liability and revenue. This quarter, we are experiencing a higher deferred tax expense in our financial income statement. We will monitor this in the upcoming quarters. I don't anticipate a major tax impact in the near term, but it will depend on these differences, which we unfortunately cannot predict.

Okay. Thank you. And one other question is about the TOGG side, which is reported under the equity method. We see a loss in this quarter and last year also there was both. In case of the capital increase, will you just be in that case, in case of any capital increase needed in the TOGG project?

Thank you, Cemal. Let me answer this question. Well, the financing of this investment is planned to be made by equity, borrowings by the company, a very significant incentive package and cash flows of the company shareholders' commitment is restricted with EUR500 million capital, which corresponded to EUR115 million for Turkcell, as the main share of one of the shareholders. As of the end of 2024, we made all capital contributions of EUR114.5 million. If needed, we can evaluate a capital increase with our Board of Directors, considering the prevailing conditions. Every industry goes through business cycles and the automobile sector has been in a down cycle for some time, primarily due to the impact of macroeconomic conditions on consumer's consumption power. TOGG, being a young company founded in 2018, may also require some time before it can deliver sustainable net profits. We see our investment in TOGG not just as an investment in automotive but as a broader move in the e-mobility ecosystem. Cars are becoming smarter. A new mobile ecosystem is emerging around vehicles, and all the connectivity is there, in-car infotainment has evolved significantly, and connectivity has become one of the key topics in the automotive industry, especially with the rise of autonomous vehicles. Therefore, this investment presents several opportunities for Turkcell, including the integration of smart living solutions into the e-mobility or mobility ecosystem and offering end-to-end mobile services. In this context, I can say that we have integrated Paycell, for example, innovative payment solutions, to TOGG. And our digital music platform, fizy, and our TV+ app, so you can watch TV in any TOGG right now. Given the industry trends and the alignment with Turkcell capabilities, we believe that this EV initiative has the potential to create value for our group, for Turkey, for all of us, both through the performance of TOGG itself and synergies we can unlock together.

Thank you. I have one last question regarding the recent fluctuations in currency as we close out the quarter. We understand your net FX position, but could you elaborate on how you plan to manage these volatilities going forward and assess your resilience? Additionally, regarding Turkcell's profitability and growth prospects, where do we currently stand? It seems we are performing slightly better than expected, but I recall that when you first joined Turkcell, there was a vision to potentially double the company. I would like to hear your thoughts on our current direction and status. Thank you.

Thank you very much, Cemal. As you know, we have a very strong balance sheet, and we are doing our homework regarding balance sheet management very well. We are trying to keep our discipline, especially not focusing solely on revenue growth. But as you know, we are managing cost optimization and cost management issues very well. Due to this fact, we have very good EBITDA margins compared to our competitors. Therefore, we are not only focused on the growth side. Below EBITDA level, we have a very strong balance sheet, as you know, and we are doing our whole work successfully. We have an FX short position of TRY76 million, as you mentioned in Q1. This is very important from our perspective, and we are using the limited hedging portfolios or hedging instruments very properly right now. Therefore, we do not see high or significant FX losses, for example, due to our strong position, and we will maintain it until the end of 2025. As you know, we had a very successful reissuance of Eurobond, and I can easily say that it's a very successful reissuance. If we did not realize this reissuance in January, for example, our interest rates would be around 7.45% and 7.65% for the 7-year maturity for the Eurobond side. For example, if we did not realize this issuance, today, we would be talking about significantly higher interest rates. This signals the successful management of our balance sheet. Therefore, we are prepared for the volatility of the FX side. Yes, we have FX denominated debt in our balance sheet, but we are hedging some of it, and we are keeping around 80% of our cash in FX denominated assets. Therefore, these deviations will not affect us very significantly. We will likely continue to see strong performance at the EBITDA level and net income level; most probably in 2025, we will maintain this performance until the end of the year. We will wait and see the 5G tender, which is very important from our perspective, but we have enough money and cash on hand, and we will wait to see the developments in the macroeconomic environment and the Turkish economic environment developments in our sector.

And besides – but we are just securing and just improving our infrastructure of both fiber and mobile. Besides that, a strategic move, we are investing heavily in the data center business. As you may know, the data center business globally is going to become a $1 trillion business in the near future, especially with cloud businesses. We are currently laying the groundwork for this future of Turkcell. So we believe in the data center business, we believe in the cloud business. So we expect that with all this infrastructure we’re going to see higher growth rates, and we’re going to have bigger growth in the near future.

Thank you.

Thank you very much. See you next quarter. Bye.

Thank you for joining us.

Have a very good weekend. Thank you very much.

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