Earnings Call Transcript - TKC Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining Turkcell's conference call and live webcast to present and discuss the Fourth Quarter and Full Year 2022 Financial Results Conference Call. At this time, I would like to turn the conference over to Mr. Ali Serdar Yağcı, Investor Relations and Corporate Finance Director. Mr. Yağcı, you may now proceed.

Ali Serdar Yağcı, Investor Relations and Corporate Finance Director

Thank you, Maria. Hello, everyone. Welcome to Turkcell's fourth quarter and full year 2022 results call. Today, our CEO, Mr. Murat Erkan; and acting CFO, Mr. Kamil Kalyon will deliver a brief presentation covering operational and financial results, and afterwards we will be doing Q&A. Before we start, I would like to remind you of our safe harbor statement at the end of the presentation. Now handing over to Mr. Erkan.

Murat Erkan, CEO

Thank you, Serdar. Good morning and good afternoon, everyone. Thank you for joining us. We are devastated by the earthquake that struck Southeastern Turkey on February 6th. We offer heartfelt condolences to the families of those who lost their lives in this catastrophic event. We trust in the solidity of the nation to overcome this massive tragedy. The past year presented many challenges and opportunities, not only for the Turkish economy but also for the globe. The war in Ukraine drove up food and energy prices. Also, elevated supply chain disruption further worsened pricing behavior across all markets. Easing inflation towards the year-end provides some relief to the markets, yet it will continue to impact this year's economic growth. In Turkey, inflation was a major concern during the year, despite cooling off by year-end. On the other hand, strong domestic demand and robust tourist inflow reaching pre-pandemic levels supported overall economic activity. As telcos, we saw continued mobile and fixed broadband demand, enabling us to make more frequent price adjustments to counter inflationary pressures. Our revenue growth continued to accelerate in Turkey, but mainly with the impact of Ukrainian operations. Group top-line growth in the fourth quarter was just over 57%, slightly above third quarter growth. This Q4 performance brought our 2022 revenue growth to 50%, enlarging the subscriber base by 2.3 million, and accelerating ARPU growth were the main drivers of this performance. Solid demand for digital business and techfin services also supported this growth. Despite the heavy inflationary pressure on the cost base, our EBITDA grew by 46% to TRY 22 billion, bringing the margin to 40.8%, implying just a 1% contraction year-on-year, thanks to disciplined cost management. At the bottom line level, we registered TRY 11 billion net income, of which TRY 4.6 billion comes as net deferred tax income from asset revaluation. Even without the tax income, our bottom line continued to be strong, thanks to our solid operational performance as well as proactive financial management. With strong EBITDA generation and successful working capital management, we generated TRY 1.7 billion of free cash flow in the year despite a challenging macro environment. To the next slide. I would like to compare our full year results with the most recent guidance. On the revenue growth front, we were dedicated to timely price adjustments to protect our top line and profitability. Our diversified business model, which includes growth in digital services and techfin, also continued to support this growth. Consequently, the accelerating top line growth from 37% in the first quarter to 57% in the fourth quarter brought our full year 2022 growth to 50%, clearly above the guidance. Pricing discipline, coupled with prudent OpEx management, allowed us to deliver TRY 22 billion EBITDA, exceeding our expectations. On the CapEx front, we managed to adhere to the plan and closed the year with around 20% CapEx to sales ratio. Next page. Let's take a look at our operational performance in mobile. During the year, the market grew on the back of increased population, tourist arrivals, and demand from the corporate segment. With valuable customer focus and switching to postpaid plans, we gained a net 1.9 million postpaid subscribers, marking the highest number in the past 13 years. As leaders in the mobile market, we implemented sequential price increases during the year to reflect inflation. The market was rational, as operators followed our increases. However, it is worth noting that some end-of-year aggressiveness in the market and a lack of competitive pricing actions were also observed. This triggered a slight increase in the mobile portability market, which had contracted in the previous fourth quarter. Blended mobile ARPU growth ramped up to 56% year-on-year. The main reasons behind the acceleration were five consecutive pricing adjustments since December last year, continued upsell performance, and a higher postpaid share reaching 68%. A slight increase in the mobile churn level compared to the same quarter of last year is mainly due to much higher tourism activity during the year, which brings in short-term mobile users. This churn level is in line with our expectations, and as prepared before, we are focused on timely price adjustments. Overall, in our flagship service, we continue to lead the market with higher ARPU growth levels, sustained pricing premium as high as 30% versus the competition, and most importantly, this was achieved while maintaining our leadership in net mobile subscriber addition. To the next slide. On the fixed business, this year, we reaped the financial expansion strategy in fiber outreach. With this effort, we gained a record net 234,000 fiber subscribers. Customer demand for high-speed packages was quite strong, with more than one-third of new subscribers opting for 100 megabits or higher packages. We made significant price adjustments to our fixed broadband services in November, following the long-awaited repricing of the incumbent. Coupled with this upsell to higher-speed packages and increased IPTV penetration, we supported ARPU growth of 3% in Q4. On the IPTV side, we are pleased to see continued interest in our TV+ services with 200,000 yearly net additions. Notably, our IPTV platform has consistently increased its share in the pay TV market over the past eight years. Given the accelerated expansion of our fiber footprint, our take-up rate decreased to 41%, yet remains well ahead of the competition. We believe that the past two years of fiber rollout provide us with a strong outreach. Accordingly, we set our annual home base target to 300,000 for 2023. Our aim will be to monetize our strong base while initiating new fiber home pass investments as needed. Next slide. Now a few words on our strategic focus areas. In the fourth quarter, the revenue of our digital OTT service rose 71% year-on-year, driven mainly by price adjustments in TV, cloud storage, and music streaming services, as well as a 28% overall growth in the standalone paid user base. With its rich content, our TV streaming platform continues to grow its paid subscriber base at a speed of almost 20% year-on-year. Our cloud storage platform, Lifebox, played a crucial role in increasing the paid user base, which reached 1.8 million paid subscribers, representing a solid rise of 38% year-on-year. We continue to monetize the digitalization trend in digital business services, where revenues increased by 87% year-on-year. The primary growth drivers were tailor-made end-to-end digital transformation projects, data center, and cloud business services. Doubling year-on-year, the backlog from the system integration project totaled TRY 2.8 billion, which is expected to contribute to the top line over the upcoming quarters. Third is our techfin focus. Our techfin business had yet another strong quarter with revenues up 77% year-on-year. Paycell, Turkey's leading payment platform, almost doubled its revenue year-on-year. The shift to digital payment continues, as evident in doubled transaction volumes generated by 7.7 million active users. The Pay Later business remained the key driver of the growth, with a user expansion of 20% year-on-year and a doubling of transaction volumes. POS solutions powerfully contributed to the top line, as POS device usage tripled in the market along with increased utilization of virtual payment solutions. With the focus on diversifying services across the fintech ecosystem, Paycell launched stock trading services on the New York Stock Exchange and NASDAQ. On the consumer financial side, Financell revenue rose 64% on a large loan portfolio, but still resulted in a 1% cost of risk. Next slide. Now let's take a look at our performance in the international markets. The revenue of Turkcell International segment grew by 41% year-on-year. Excluding the currency impact, organic growth was 13%. Despite the ongoing war in Ukraine, Lifecell remains the key driver of this performance, with revenue growing by 8% yearly in local currency terms, mainly due to increasing ARPU driven by price adjustments and growing data usage. Next slide. On February 6, two devastating earthquakes struck 11 cities in Southeastern Turkey, affecting around 14 million people. The earthquake caused massive destruction in five cities, destroying thousands of buildings. As Turkcell, our first and foremost reaction was to ensure continuity of communication services and to help protect our people and those affected in the region, which I will elaborate on in the next slide. Let me start with what the quake region means for us in terms of subscribers and infrastructure. We have around 6.5 million total subscribers in the region, representing 16% of our mobile subscriber base and 10% of each of our fixed broadband and IPTV subscriber bases. These subscribers roughly generate 10% of our overall revenues in consolidated terms. However, I must underline that not all of these subscribers have faced the same level of damage from the disaster. Next page. Now I would like to provide some information about the impact of the earthquakes on our business. We had 3,300 sites in the region. Initially, we lost around half of them mainly due to power outages. With more than 1,200 personnel deployed, we achieved more than a 90% active site rate within four days. In the aftermath of the disaster, we lost one tower and around 150 base stations. We have deployed mobile base stations to meet increased communication needs, as well as electric generators and batteries to sustain seamless operations. Around 13% of our exclusive stores are in the region. Of those, 68% are still operational. We continue to support our stores with containers we placed in the region, and digital channels are up and running for all types of services. We started to provide additional packages for subscribers, healthcare, and emergency teams in the region. With the announcement of a state of emergency, we have provided one month of free communication in the area. We also waived additional fees such as those for activation, cancellation, or late payment. Based on our initial impact assessment, we estimate the revenue impact to be around TRY 1.5 billion, with an OpEx impact of around TRY 400 million, and a CapEx impact of around TRY 900 million in 2023. Once again, these numbers reflect our early analysis using currently available information and are fully incorporated into our guidance. We are continuously working to determine the full scale of the disaster with updated data. Further revisions will be shared in the upcoming quarters. To the next slide. I would like to end my part by sharing our guidance for 2023. Taking into account our plans for the year as well as the initial assessment of the earthquake's impact, we set our revenue growth target to 55% to 57%, EBITDA guidance to around TRY 34 billion, and expect a CapEx intensity around 22%. I will now leave the floor to our acting CFO, Mr. Kamil Kalyon.

Kamil Kalyon, Acting CFO

Thank you, Murat. Nice to meet you all. Now, let's take a closer look at the financial performance. In Q4, our group revenues reached TRY 16 billion, rising 57% year-on-year, corresponding to an incremental TRY 5.9 billion. As we have underlined in the past, the gap between top-line growth and inflation will tighten if the downward trend in inflation continues. Of this increase, TRY 4.8 billion came from Turkcell Turkey, representing a 62% top-line growth. Growth came mainly from accelerated ARPU growth, thanks to dedicated price adjustments and strong subscriber net addition performance throughout the year. Turkcell International revenues rose 41%, contributing TRY 526 million in Q4. Excluding the FX impact, the organic growth was 13%. Lifecell Ukraine continued its positive performance in this quarter too. Undertaking side, the contribution was TRY 253 million, where the main contributor was Paycell as its growth performance almost doubled. Traction in pay rate and cost solutions and accelerating revenue contribution due to higher transaction volumes were the major verticals of this performance. The other segment contribution of TRY 340 million was driven mainly by the rise in sales for all digital channels. Next slide, please. Now some highlights on EBITDA development. In the fourth quarter, group EBITDA increased year-on-year by 58%, reaching TRY 6.7 billion, driven by strong top-line performance as well as pivotal cost management. Despite the increases in radio and employee expenses due to higher energy prices and two rate adjustments in 2022, our EBITDA margin improved by 30 basis points in Q4. This was thanks to lower growth of interconnection expenses and the cost of goods sold. It’s also worth mentioning that Turkcell International EBITDA margin improved by 2.1% on an annual basis. The main reason for this performance is a lower increase in interconnection costs that more than compensated for higher sales and marketing expenses. Next slide, please. Now some highlights on net income development in Q4. Our net income increased year-on-year mainly due to strong operational performance and the positive impact of deferred tax income relating to the revaluation of certain assets. The deferred tax income impact on the quarterly net income was TRY 4.1 billion. As you may recall, following the sharp appreciation of TRY, we reported higher net FX loss in the last quarter of 2021, as the thresholds of some of our hedges were exceeded. Compared with that, this quarter’s FX gain had a positive contribution on the bottom line. Next slide, please. Now more detail on our free cash flow generation. As mentioned before, we generated TRY 6.7 billion of EBITDA in the last quarter of 2022. Increased trade receivables, including financial services work, aligned with revenue and loan portfolio increases. Thus, we managed to keep the average collection period flat despite periodic economic challenges. Higher trade was due to seasonality as well as support from advanced payments realized in the past quarters, which led to a positive change in working capital. Also, due to higher CapEx in Q4 because of seasonality, the acquisition of tangible and intangible assets of TRY 5.7 billion in total negatively affected free cash flow generation. Overall, we managed to generate around TRY 1 billion free cash flow in Q4. Next slide, please. Let's take a closer look at our CapEx management. 2022 was the year we needed to be more disciplined and focused on our investment plans. We completed the year having successfully managed the CapEx in line with our plans. Given the prospect of continued demand, we focused on expanding our fiber rollout and delivering it to more homes. Accordingly, we added 887,000 new home passes to our portfolio, slightly above our target. Due to seasonality, our operational CapEx to sales ratio rose to 28% in Q4, bringing the full-year ratio to slightly above 20%, in line with the guidance. Of note, mobile CapEx intensity was below 10%. On the fiber side, CapEx intensity reached 49% for the year. We aim to monetize the investments made over the past two years and will slow down our fiber rollout this year. Lastly, we continued to add new modules to our anchored data centers, responding to the increasing demand. This explains the increase in other segments of the CapEx. Next slide, please. Now I would like to talk about our balance sheet and leverage details. At year-end, our cash position rose to TRY 26 billion, and the gross debt position climbed to TRY 54 billion. Currency movements led to increases in this figure of TRY 1.1 billion and TRY 2 billion, respectively. Accordingly, group net debt slightly increased to TRY 21 billion, of which with strong EBITDA generation, the leverage ratio decreased to 0.9 times. Excluding the finance business, the figure was at 0.8 times. The majority of our cash remains in hard currencies, excluding FX swaps; 51% of our cash is in US dollars, and 15% in euros. This cash is sufficient to cover our debt service until 2025. Next slide, please. Lastly, I will cover our management of foreign currency risk. At the end of Q4, we had around US$1.9 billion equivalent of FX debt. As initial hedging, we had US$1.3 billion equivalent of FX denominated cash. Additionally, we had around US$600 million derivative portfolio comprising cross-currency swaps and proxy hedges. Please recall that these figures include the ineffective portion of our participating cost-savings swaps as well. Throughout the year, we improved our net FX position to a more neutral level, ending the year with a net short FX position of just US$25 million. Going forward, we aim to keep our net FX position between plus and minus US$200 million. This concludes our presentation, and we can now open the line for questions. Thank you.

Operator, Operator

The first question is from the line of Mandaci Ece with Unlu Securities. Please go ahead.

Mandaci Ece, Analyst

Hi. Thanks so much for the presentation. I have a couple of questions. The first one is about your revenue. You have mentioned that the effect of the earthquake -- in the earthquake was included in your guidance. So with that effect, how should we think about the ARPU growth separately for mobile and fixed side and for subscriber additions? Because after a very high base, I mean, could you please elaborate more on your estimates? This is my first question. And secondly, I think you are keeping your EBITDA margin almost at a similar level in your guidance, or you're expecting a very small margin deterioration. So what's the APRU for that? Is it due to continued price adjustments in the market? That's my second question. And thirdly, I haven't seen your IFRS financials. Will you report them also tonight? Is there a major difference in the net income level? And finally, will there be an announcement about your dividends tonight? Thank you very much.

Murat Erkan, CEO

Okay. Thank you, Ece. First of all, we include the earthquake effect and impact in our guidance. So regarding ARPU growth for mobile and fixed, we will continue to adjust prices in line with inflation. Based on inflation, we expect ARPU growth to be a little bit higher than inflation. So in terms of net adds, it is not easy to comment on that. We'll see what we can do. However, our expectation is to continue increasing the number of subscribers as planned, aiming to add another million or so. So we're going to focus on increasing pricing and price adjustment during 2023 as well. Regarding the EBITDA side, the full-year EBITDA margin was 40.8% in 2022, just 1% below the last year. The main reason behind the contraction was increasing energy and personnel costs, but this was offset by improved cost of goods sold, as part of sales and interconnection costs. This year, we expect a relatively stable margin as implied by our revenue and EBITDA guidance; price increases will take place. Inflationary cost pressure will continue, but as always, our prudent OpEx management, coupled with strong top line, will help us maintain a similar margin level. Regarding IFRS, I think Kamil can take that question, and then I'll continue.

Kamil Kalyon, Acting CFO

Thank you, Ece. Our IFRS financials are in the process of preparation. Most probably, we will be declaring IFRS financial statements and disclosures on April, along with the 20-F report.

Murat Erkan, CEO

As for the dividend and our dividend policy, yes, I would like to remind you that our dividend distribution policy remains unchanged. As you know, a dividend proposal is initially made by the Board and voted by shareholders at the AGM. There hasn't been a proposal made by the Board yet for this year. If you recall from last year, our Board's proposal was released with the AGM announcement on the same day, so I wouldn't like to speculate on the Board's potential proposal.

Mandaci Ece, Analyst

Thank you very much. Could you please also share your inflation forecast? Thank you very much.

Murat Erkan, CEO

I'm not an economist, but our forecast will likely be around the 40% level.

Operator, Operator

The next question is from the line of Annenkov Evgeny with Bank of America. Please go ahead.

Annenkov Evgeny, Analyst

Hi. Good evening. Thank you so much for the presentation, and the opportunity to ask questions. I have two, please. Can you please provide some insight into potentially one-off items you might have this year? First of all, about the TRY 3.5 billion contribution to the Turkey One Heart campaign—is it included in EBITDA guidance partially? Do you expect to contribute everything in cash? Any insight on this would be helpful. Secondly, concerning the renewal of spectrum in 900 megahertz, do you have any potential pricing guidance you can provide? Thank you.

Murat Erkan, CEO

Thank you, Evgeny. First of all, our donation will be deducted from EBITDA, so it won't impact our EBITDA guidance. Regarding the renewal of the 900 megahertz spectrum, there is very limited time ahead of us for renewal. However, I know that the Ministry and Regulatory Authority are working on it, so I expect a potential price announcement soon. I don't want to speculate on the price, but I hope it will be lower than anticipated.

Annenkov Evgeny, Analyst

Thank you so much. However, these are two items that would impact your dividend recommendation as well, so please keep these cash outflows in mind.

Murat Erkan, CEO

Definitely. We are factoring these two matters into our considerations.

Operator, Operator

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.

Ali Serdar Yağcı, Investor Relations and Corporate Finance Director

Thank you very much. Hope to see you in the next quarter.

Murat Erkan, CEO

Thank you. Thank you all.

Kamil Kalyon, Acting CFO

Thank you very much.