Earnings Call Transcript - TKC Q1 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. I'm Vasilious, 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 2024 Financial Results. All participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. 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.

Ozlem Yardim, Investor Relations and Corporate Finance Director

Thank you, Vasilious. Hello, everyone. Welcome to Turkcell's first 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.

Ali Taha Koc, CEO

Thank you, Ozlem. Good afternoon, everyone, and thank you for joining us today. At Turkcell, we are celebrating our 30th anniversary with great pride, having pioneered numerous milestones from our first call to becoming Turkey's leading technology provider. In the first quarter of 2024, we are delighted to share our successful results. By taking timely actions, we have delivered double-digit real growth despite global central banks tightening policies and reaccelerating inflation in Turkey. Our top line grew 12% to TRY31 billion with a remarkable 23% increase in EBITDA. These results have been driven by rational price increases since 2021, which enabled mobile ARPU growth to reach 17% and fiber residential ARPU growth to reach 14%. Supported by lower energy and interconnection expenses, operating leverage expanded the EBITDA margin by 3.8 percentage points to 41.4%. Additionally, our commitment to focusing on value-generating post-paid and fiber customer acquisition resulted in 333,000 net additions in the first quarter of the year. Overall, our strong operational performance resulted in a remarkable net profit of TRY2.6 billion. Our strong first quarter performance enabled us to revise our 2024 revenue growth upwards, which I will elaborate on later. Next slide, please. Let's take a look at our operational performance in the first quarter. Unlike previous quarters, competition in the mobile market was relatively less aggressive in this quarter. On the mobile front, we sustained our focus on the postpaid segment, which contributes more value to our financials, resulting in a net increase of 472,000 subscribers. Over the past 12 months, our postpaid base has grown with 1.7 million additions. Our postpaid customer base exceeded 27.6 million, reflecting 72% of the total on a three-point rise year-over-year. Disconnections from previous year's tourist lines, rising new acquisition price levels, and demand for alternative data solutions were the main factors behind the prepaid net loss of 243,000 subscribers. Our customer-centric and innovative approach contributed to a low churn rate this quarter. The churn rate in the mobile segment was at 1.5%, marking the lowest rate in the past six years. Driven by sequential price adjustments, upsell efforts, and an increased share of post-paid subscribers in the portfolio, blended mobile ARPU rose by 95% year-on-year and continued to outpace CPI. The base effect from last year's earthquake contributed to the widening ARPU inflation gap in this quarter. Taking into account inflation adjustments, mobile ARPU recorded 17% yearly growth. Next slide, please, Ozlem. In the fixed broadband market, this year started with price adjustment in December, and the market has become more rational compared to the previous year. In the first quarter, we had 48,000 fiber customer additions to our portfolio, following focused investments in expanding our fiber footprint over past years. We are pleased to have added 41,000 IPTV subscribers, reaching the homes of 1.5 million customers. TV Plus is a premier solution for fiber subscriber retention, enabling us to implement effective price adjustments, thanks to its rich content. With the contributions of TV Plus, our pure fiber technology and a rational market, we achieved a fixed churn rate of 1.3%, marking the lowest level since 2007. Widening the gap with CPI, residential fiber ARPU growth continued to rise, achieving a 90% year-on-year growth on a historical basis. Our upsells forced to higher-speed packages and an increase in 12-month contract share within the customer portfolio were the main components of this outstanding performance. Similar to the mobile site, the base effect from last year's events contributed to the widening ARPU inflation gap in this quarter. Lastly, we will be prioritizing fiber subscriber net additions over increasing home passes this year. Therefore, it is reasonable to anticipate lower new compass figures compared to last year. Next slide. Let's discuss our strategic focus areas, starting with digital services and solutions. Standalone revenue from our digital services and solutions grew an impressive 32% year-on-year, primarily driven by a 29% revenue increase in digital OTT services, which has a 5.5 million paid user base. Among these offerings, our TV services and personal cloud service were particularly instrumental. TV Plus' success is remarkable as it has been the only platform consistently growing its market share since 2014. According to the ICTA report, the TV Plus market share increased to 17.6%, cementing its second position as of 2023 year-end. In the first quarter, digital business services generated TRY2.8 billion in revenue and secured more than 1,200 contracts. We remain committed to maintaining our leading position in the data center market. Combined with our cloud services, revenues from those grew by 48% to TRY470 million. Next slide. Paycell, our innovative payment service platform, registered a remarkable quarter, delivering 33% year-on-year growth. Rising interest rates and commission on post solutions as well as volume growth supported the top line. The 57% surge in Pay Later volume was positively affected by a 16% increase in the number of active users. Paycell EBITDA rose 47% year-on-year. The primary factor behind the rise in the margin is post-expense growth lagging behind its revenue increase. Financing customers' technological needs, finance sales revenues rose 53% on a surging loan portfolio, higher average interest rate, and the contribution of insurance business revenues. The higher cost of funding stemming from tight monetary policies secures finance sales profitability similar to the banking sector. This was reflected in the net interest margin, which narrowed by 2.4 percentage points this quarter. Since financial issues loans have relatively shorter maturities, we expect this pressure to decline in the second half of the year. Meanwhile, our cost of risk is at 1.7%, which is lower than the first quarter of 2023. Next slide. Lastly, our performance in international markets. Turkcell’s international revenues, which account for 3% of group revenues, rose 2.2% to TRY815 million. Best revenues rose 24% on a yearly basis in local currency terms, primarily driven by higher data, SMS, and service revenues. The 3.2 percentage point improvement in EBITDA margin was sustained by dedicated cost management. Next slide. I would like to end by sharing our revision for 2024 guidance. Given our first quarter performance, we revise our 2024 revenue growth guidance to low double-digit growth. For EBITDA margin and CapEx intensity, we maintain our guidance. I will now leave the floor to our CFO, Mr. Kamil Kalyon.

Kamil Kalyon, CFO

Thank you very much, Ali Taha. Now let's move on to our financial results. Our consolidated revenue increased by 11.8% on a yearly basis to TRY30.8 billion. The Turkcell Turkey segment was the biggest supporter of the Group topline growth with a 13% rise on a year-on-year basis. This was driven mainly by an expanding subscriber base, particularly on the postpaid side, and strong ARPU growth, thanks to sequential price adjustments with successful upselling efforts. In the first quarter of 2024, EBITDA rose 23% on a yearly basis to TRY12.8 billion, thanks to strong revenue growth. The EBITDA margin expanded 3.8 percentage points year-on-year. Despite the increase in personal expenses due to the annual wage rise and the increased funding cost of our financing operation, the Group EBITDA margin benefited from a decline in the cost of goods sold, energy expenses, and interconnection expenses as a percentage of revenue. After the electricity prices increase in 2023, which was relatively low compared to inflation and our corresponding price adjustments in line with the inflation, the proportion of energy expenses to our revenue decreased, thereby supporting the EBITDA margin. Additionally, the continued decline in MTR positively impacted our profitability. This trend is expected to persist throughout 2024. Now let's dive into the net income performance. Thanks to a robust operational performance, EBITDA has contributed TRY2.4 billion to net income. The net FX loss item has pressured net profit by TRY1.8 billion, due to higher foreign exchange rate changes, which is partially offset by mark-to-market financial derivatives. By the first quarter, the increased weight of non-monetary assets on the balance sheet, the dividend distribution, which decreased retained earnings, and higher inflation indexation resulted in a positive impact of TRY3.1 billion on net profit, marked under the monetary gain and loss item. Despite the positive impact of indexation between statutory reporting and IFRS, deferred tax decreased compared to the previous period. Lower corporate tax also supported the net profit. Let's take a closer look at our CapEx management. The CapEx to sales ratio for the first quarter of 2024 was 18.2% with accelerated revenue. As we plan to accelerate our data center and renewable energy investments in the upcoming quarters and given the seasonality of the second half, we expect to reach 23% CapEx intensity for 2024. In this quarter, we primarily focused our investments on mobile and fixed assets. Fixed-site investments are primarily driven by tower fiberization. We remain committed to achieving our fiberization target of 41% within this year. The share of data center investments within the total investments for this quarter appears small. Yet, we expect this proportion to increase over the coming quarters in line with our target of installing an additional 9.1 megawatt capacity. Thanks to the modular structure of our data centers, we simply add new modules as demand arises. Now let's turn our attention to the balance sheet. In Q1 2024, our cash position is at TRY49 billion. Note that a total of TRY5.2 billion wireless usage tax payments, the second installment of the earthquake donation, and employee bonuses had a negative effect on our cash position. Additionally, we have invested in euro bonds for effective cash management. Our gross debt was at TRY98 billion, and we ended this quarter with a net debt position of TRY33 billion. Due to the decreasing cash position, our net leverage slightly increased to 0.6 times. This year, our FX debt service is around $340 million, which we consider quite manageable given our strong cash position. We possess an adequate cash reserve to fulfill the 10-year euro bond redemption in 2025 and are exploring a range of funding alternatives for the reissues. The majority of our cash remains denominated in hard currencies, excluding FX swaps; 49% of our cash is in U.S. dollars and 24% in euros. Lastly, let's look into the management of foreign currency risk. In the first quarter of this year, our balance sheet had around $2 billion equivalent in FX financial liabilities. In addition to the $1.6 billion equivalent FX denominated financial assets, we have a $700 million effective hedging portfolio, the vast majority of which consists of futures, forwards, and NDFs. Since we believe the Turkish lira has entered a period of real appreciation and with hedging costs in the market having risen significantly over the past couple of years, we plan to reduce our derivative portfolio in the coming periods. As of this quarter, we have a net FX position of $158 million due to our plans to reduce our derivatives portfolio. It's fair to expect our net FX position to decrease in the coming periods while remaining within our neutral FX range of minus and plus $200 million. This concludes our presentation and we can now open the line for questions. Thank you.

Operator, Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. The first question comes from the line of Tiron Cesar with Bank of America. Please go ahead.

Tiron Cesar, Analyst

Yes, hi. Good evening. Thanks for the call and for the opportunity to ask questions. I have three questions, but they're all easy. The first one, if that's okay. The first one is on the guidance increase on the revenue. What surprised you the most in the past, let's say one or two months, so you had to hike this guidance? That would be the first question. The second question, I would like to understand what exchange rate are you assuming in your budget for the lira? And let's say, if the lira depreciates less than per your budget, could it be that you spent a little bit less CapEx, so maybe the CapEx intensity will be less than your guidance? And then the third question, going back to the datacenters, can you please explain your ambition in the field and how large do you think the capacity would be in the medium term? Thank you so much.

Ali Taha Koc, CEO

Hi, Cesar. Thank you very much for the question. We had a quarter with solid financial and operational performance, actually, which has exceeded our initial plans. Accordingly, our revenue growth guidance for 2024 increased to low double-digit growth, and there's no change in our EBITDA margin and CapEx adjusted guidance. However, given the macroeconomic dynamics, projecting inflation will be challenging, and the actual figures may vary according to the realized inflation and other factors such as the cyclicality of revenues. Additionally, the Minister of Treasury and Finance announced that the middle-term plan OVP is planned to be reviewed at the end of summer. Accordingly, we will be closely following the macroeconomic developments for possible further revision. But to be truthful, the first couple of months of this quarter have been better than our expectations, so that's the reason we revised our guidance. For the datacenter business, we already have four big high-tech datacenters, and we are planning to build more and are actually looking for a collaboration with big companies to bring the data, whatever it is with the data we have in Turkey, we want to keep it and we want to be a data hub for this region. So that's the reason we have huge ambitions about the datacenter business. Currently, we have four big datacenters, and we are adding more to them; in the future, you're going to see more coming from Turkcell.

Kamil Kalyon, CFO

For the second question, normally, our year-end U.S. dollars FX rate estimation is TRY37.5 and the average rate we are assuming is TRY34. We believe that we will be in line with our guidance for the full year on the CapEx side. However, in case of a spike in the FX rate, if it materializes within the year, we can postpone our discretionary CapEx in order to create a buffer. We are monitoring developments in the economic landscape, but most probably the FX rate will align with our estimations this year.

Tiron Cesar, Analyst

Thank you so much. That was very clear. Thank you.

Kamil Kalyon, CFO

You're welcome.

Operator, Operator

The next question comes from the line of an unidentified analyst with Barclays. Please go ahead.

Unidentified Analyst, Analyst

Hello, good evening. Can you hear me?

Ali Taha Koc, CEO

Yes, loud and clear.

Unidentified Analyst, Analyst

Good. Thank you very much for the presentation and congrats on the results. It's also great news about the upgraded guidance. I have two quick questions, so my first one, you mentioned that your cash position decreased because of investments in Eurobond. Could you please elaborate on that a little bit? And my second question is related to Ukraine. Obviously, we've seen some headlines in the news about potentially positive developments. But, my question would be, what will you do with the proceeds from this asset sale? Will you plan to pay additional dividends, or do you intend to use that for CapEx or maybe for your Eurobond repayment? That's it. Thank you.

Kamil Kalyon, CFO

Thank you very much. I will give the answer for the first one. The duration of the euro bond is five years. Turkish Sovereign and Bank, when we look at the yields in the Eurobonds, there's a high yield when we compare it with the deposit rates. Therefore, we prefer to invest in Eurobonds in order to benefit from the high yields. For the second question, maybe you can give.

Ali Taha Koc, CEO

As you may know, in April, the seizure of our Ukrainian assets was lifted. It's positive news. We are now waiting for the necessary permission from our anti-monopoly committee of Ukraine. So this is the last step for concluding this deal. Although we do not have a board decision regarding the proceeds we will obtain from the sale of our assets in Ukraine, we have important investment projections in the coming period, such as data centers, solar energy, and the 5.5G auctions. So we are looking for huge investment projections in the coming period.

Unidentified Analyst, Analyst

Got you. Thank you. So, do you still see the deal closing during this year?

Ali Taha Koc, CEO

Yes, definitely. Because there are two big roadblocks: one is just this seizure and another one is the anti-monopoly committee. Other than that, everything is clear. So hopefully, after this permission from the anti-monopoly committee of Ukraine is finalized, we are talking about a period of months; we're expecting that's going to be done this year.

Unidentified Analyst, Analyst

Okay. Thank you very much.

Kamil Kalyon, CFO

You're welcome.

Operator, Operator

The next question comes from the line of Ignebekçili Murat with HSBC. Please go ahead.