Earnings Call Transcript - TKC Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Turkcell Conference Call and live Webcast to present and discuss Turkcell's First Quarter 2021 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 Mr. Ali Serdar Yagci, Investor Relations and Corporate Finance Director. Mr. Yagci, you may now proceed.

Ali Serdar Yagci, Investor Relations and Corporate Finance Director

Thank you, Hailey. Hello, everyone. Welcome to Turkcell's first quarter 2021 results call. Today's speakers are our CEO, Mr. Murat Erkan; and our CFO, Mr. Osman Yilmaz. We have a brief presentation and afterwards we will be taking your questions. Before we start, I would like to kindly remind you to review the last page of this presentation for our Safe Harbor statement.

Murat Erkan, CEO

Thank you, Ali Serdar. Good morning and good afternoon. Thank you for joining us today. We had a strong start to the year, delivering robust financial results despite the prevailing challenges of the pandemic. This performance was possible due to our customer-centric strategy built on a diversified business model. This strategy has enabled the continuation of solid growth in total subscribers by 7,500, marking the highest level over the past three years. Our strong and fast network communities to seasonal and value offers have been instrumental in this success. Accordingly, we recorded 17.5% top-line growth, generating TRY7.8 billion in consolidated revenue. EBITDA reached TRY3.3 billion on 17.7% growth, with a 42.2% EBITDA margin. Net income was TRY1.1 billion on 26.6% year-on-year growth. Overall, these results have confirmed our confidence in achieving our full year guidance levels. Next slide, let's have a look at our operational performance in the first quarter. On the mobile front, we gained a net 410,000 postpaid and 190,000 prepaid subscribers. Our postpaid customer base reached 22.4 million, reflecting 66% of total on a 3-point rise year-over-year. Some momentum in net additions is a reflection of our commitment to strengthen our subscriber base. Our efforts to establish a customer-driven mentality throughout the company have played an important role in this performance. As such, our mobile churn rate was 1.8%, the lowest level of the past three years. In the fixed broadband segment, strong demand has continued under prevailing mobile limitations and remote working conditions. We recorded 50,000 fiber subscriber additions with our high-speed and unlimited fiber internet offers, designed to meet the need for speed at home office. In addition, there were 23,000 net additions to our fixed-wireless access service, Superbox, this quarter. Further, we are pleased to see robust demand for our TV services, with the addition of a net 49,000 IPTV customers. We now offer this service to 61 out of every 100 households among our residential fiber customers. Blended Mobile ARPU rose to TRY49.9 on an 8.7% rise. We felt the negative effect of the pandemic on the roaming revenue generation and are on the trend for additional data quota purchases. Despite this growth being driven by a larger postpaid subscriber base, higher data consumption and price adjustments, fiber residential ARPU growth was 8.8% to TRY74.3, mainly due to demand for high-speed, as well as our price adjustment. Reflecting the rising trend in inflation, we expect to record double-digit ARPU growth next quarter.

Osman Yilmaz, CFO

Thank you very much, Murat. Now let's take a closer look at our financials. This was a strong quarter for our company, with 17.5% growth generating TRY7.8 billion in revenues. While the pandemic still poses few challenges, our diversified business model coupled with strong operational performance in our core telecom business have been instrumental in this performance. Group EBITDA reached TRY3.3 billion on an 18% growth, indicating a 42.2% EBITDA margin. On the back of robust operational profitability and prudent FX risk management, we generated TRY1.1 billion in net income, representing a 27% yearly growth. Overall, we are on track with these results towards our full year targets. Next slide, before I dive into our revenue breakdown, I would like to briefly explain the changes in our reporting under IFRS from Q1 onwards. First and foremost, we now report the Techfin business as a new segment, reclassified from the segment called others. The Techfin business includes our consumer finance company, our payments services company and our Insurtech Company. By doing so, we aim to monitor the overall performance both as a whole and separately, as the segments have different dynamics from our core business. Secondly, the consumer operations of our subsidiary, which includes retail channel operations, smart device management, and consumer electronic sales through digital channels, have been reclassified in the other segment from Turkcell Turkey. The other segment also comprises the non-group call center operations and our energy business. This presentation will enable us to crystallize the performances of our core telecom operations and complimentary, relatively lower margin and growth businesses. I should highlight that these changes have no impact on our operating profit, bottom line or the cash flow statement. Next slide. Now some details on our revenue and EBITDA developments. This quarter, the increase in revenues by TRY1.2 billion, TRY700 million of it was from Turkcell Turkey. A larger subscriber base, rising data and digital services consumption and price adjustments were instrumental in Turkcell Turkey's performance.

Ece Mandaci, Analyst, Unlu Securities

Hi, thank you very much for the presentation. And congratulations on the strong results. I have three questions. One is on the prospects regarding revenue growth in the consumer segment going forward. Since the inflation trends have changed in Turkey, would it be fair to assume a higher ARPU growth generation in the quarters ahead? This is my first question. Secondly, could you please, if possible, give more information regarding the breakdown of digital service revenues? Is it fair to assume that now this application has a higher revenue share overall? And thirdly, last week, there were comments from the Chairman of ICTA regarding the 5G tender in 2022. Could you please also provide any comments about your view on the potential candidates going forward? Thank you very much.

Murat Erkan, CEO

Thank you, Ece. First of all, regarding the question about ARPU and higher ARPU in the upcoming quarters, we aim to improve our ARPU growth to double-digit level, and we expect inflation to decline towards the end of the year. We believe that the gap between our ARPU growth and inflation will be contracting. In a challenging macro environment with high inflation and rising unemployment, we will focus on balanced revenue growth through ARPU increase and customer additions. Moreover, as part of our diversified business model, we will also focus on strategic areas that will support our top-line growth. Especially, I would like to emphasize that the first quarter is not an apple-to-apple comparison in terms of roaming because last year there was roaming revenue after the pandemic; this year, there is no roaming revenue, which also impacts the ARPU growth level. Regarding the breakdown of digital service revenue, to be honest, the biggest share is from our TV business. So, we have TV, music, Lifebox, and BiP driving the revenue side, but the biggest share is in the TV segment. Regarding the 5G tender, we don't have an official roadmap announced by the regulation yet. A couple of days ago, the Deputy Minister of Transformation Infrastructure stated that they are planning to hold a tender in 2022, with commercial services to be launched in 2023. On our side, we have been preparing for 5G for the last couple of years. We have conducted tests through collaborations with network vendors and others. We are actively participating in international organizations to set the standards. We focus on different use cases of 5G and reach out to as many vertical sectors as possible while maintaining a local R&D focus. In this context, we are testing 5G heavily for real-time virtual reality cases, live TV broadcasting, and other tests. We believe that digitalization is vital for Turkey's sustainable economic growth. Moving forward, we will continue to provide tests and best-in-class technology for this purpose. However, it is still not clear on our side; 2023 seems to be the service timeline. I hope I answered all three questions.

Ivan Kim, Analyst, Xtellus Capital Partners

Hi, and good afternoon. Three questions for me too, please, quickly. Firstly, can you talk about the key NPS drivers for you? What are the reasons your scores are stronger than rivals and for the gap to increase, even though you keep increasing prices? Secondly, can you please talk about the fiber rollout plans? The plan for this year is clear, but longer-term, do you still aim to do sharing, or is your decision basically to do it yourself now? Finally, can you please talk about opportunities to monetize BiP? It looks fairly good scale now, so there are probably opportunities to get more revenue from there. Thank you.

Murat Erkan, CEO

Firstly, regarding drivers for NPS, there are three areas. One of them is our segmented customer-centric strategy. We focus on our customers based on young, premium, women, and other loyalty services. Customers appreciate our focus on this segment. Obviously, we invest a lot in our smart network. We have the widest, fastest, smartest network, which is appreciated by the customers. Additionally, our widest distribution network—that is, sales channel—helps us not just sell products, but also provide services and support our customers in utilizing technology. So, I believe all three factors have contributed to our NPS. Regarding fiber rollout plans in the longer-term, for this year we hope to achieve 500,000 home passes. Over the next three years, we would like to continue with 500,000 or even more than that in the following years. We see demand-driven approaches with regional focus in terms of capacity management. As long as there is demand, we will continue to invest in fiber. The 500,000 is our minimum target per year for the next three years. Regarding your third question, could you please repeat it?

Ivan Kim, Analyst, Xtellus Capital Partners

Sure. The third question was just the opportunity to monetize BiP, the messaging app. I believe there is not a ton of revenue coming from it right now. But now with the connections seen in the first quarter, maybe you can consider monetizing it more. Thank you.

Murat Erkan, CEO

Certainly. We have been investing in BiP in terms of monetization. Our approach is a bit different from OTT players and other messaging platforms because we utilize telco capabilities in our infrastructure. For BiP, with a different approach, we can monetize it through voice on-net and off-net utilization with services on top of it. We can also integrate it with Paycell capabilities for customer engagement. I believe we have several cases to monetize BiP, and we are also looking for opportunities with international operators to collaborate for market expansion, as we know how to leverage the telco approach. There are telcos around the world that can utilize BiP as their instant messaging platform with a white-label approach. We are also looking to attract sales to other operators and potential stakeholders as well.

Kayahan Demirak, Analyst, AK Investment

Hi, thank you very much for the presentation. I just had a follow-up on the ARPU growth. Maybe a few questions. On the postpaid ARPU, you had very strong net additions on the postpaid side for the past year, which supported the blended ARPU growth, but it seems like this impact is fading away. So what I'm trying to understand is how dilutive the new postpaid additions are in terms of price compared to your average postpaid ARPU. On a like-for-like basis, can you provide a rough number for the postpaid ARPU growth excluding the new additions? Also, do you see any transition to lower-priced packages among your subscribers? I am trying to understand the reason behind the relatively weak growth in postpaid ARPU. Lastly, this brings me to the inflationary pricing strategy. There is now a significant gap between headline inflation and ARPU growth—8% versus 17-18%. How much do you expect this divergence to close? Are you basing your price increases on year-end inflation prices? Do you have any targets on that side that you can share? Thank you.

Murat Erkan, CEO

Thank you very much. First of all, our postpaid ARPU is still impacted by roaming revenue due to travel restrictions. Some of our revenue sources, like add-on data packages and overuse charges, were also affected during the quarter. Additionally, we focus on switching prepaid customers to postpaid subscriptions, which has a positive impact on blended ARPU but negatively affects postpaid ARPU since these subscribers first choose entry-level postpaid packages. One of our strong points is our ability to grow and move customers to higher packages. The strong positive acquisition also impacted postpaid ARPU performance. Our like-for-like postpaid ARPU growth was 8.4% in the first quarter. As for the comparison of ARPU growth and inflation, we started the year by adjusting our prices. However, we cannot see the full impact of these adjustments immediately due to the contracted nature of our business. Furthermore, we have observed that people in Turkey are concerned about their purchasing power and job security, making material price adjustments more difficult in this environment. The current macro environment saw a quick rise in inflation, which was beyond our expectations. All in all, these factors widened the gap between our ARPU growth and inflation in the first quarter. However, we anticipate recovering this growth level in the coming quarters. I'm not sure we can meet that 17% level, but we aim to come as close as possible.

Kayahan Demirak, Analyst, AK Investment

Thank you, understood. Just one final quick question. About the asset monetization, you were hoping to see some development on the Superonline site this year; does that still stand?

Murat Erkan, CEO

Yes, it is not just Superonline, but Superonline is also one of the assets we would like to monetize. As we shared in our 2020 year-end conference call, we continuously evaluate assets in our business portfolio for strategic actions to maximize value for our shareholders. Among those assets, Superonline stands out as the best candidate for an IPO, given its size and growth potential. Currently, we are in the exploratory phase regarding a potential IPO. However, market conditions are critical for such a decision. We observe strong demand for IPOs in the Turkish market, with considerable interest from local retail investors. However, the sizes of these IPOs are relatively small compared to Superonline. For a sizable potential IPO like Superonline, the interest of international investors will be important. Therefore, foreign investor appetite in the market will be one of the criteria we consider.

Kayahan Demirak, Analyst, AK Investment

Okay, thank you, understood. Thank you very much for your time.

Murat Erkan, CEO

I would like to thank everyone who joined the conference call. I hope we will meet with healthy conditions in the upcoming quarters. Thank you very much. Good morning and good afternoon, again.

Ali Serdar Yagci, Investor Relations and Corporate Finance Director

So, ladies and gentlemen, thank you very much. This is the end of our call. Thank you all for taking the time to participate.

Operator, Operator

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