Earnings Call Transcript - TKC Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Gaily your Chorus Call operator. Welcome and thank you for joining Turkcell's conference call and live webcast to present and discuss Turkcell's First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode and the conference is being recorded. There will be a presentation, followed by a question-and-answer session. 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, Gaily. Hello everyone. Welcome to Turkcell's first quarter 2023 results call. Today our CEO, Mr. Murat Erkan, and Acting CFO, Mr. Kamil Kalyon will be delivering a brief presentation on operational and financial results. And afterwards, we will be doing Q&A. Before we start, I would like to kindly remind you to read our safe harbor statement, which is placed at the end of the presentation. Now I'm handing over to Mr. Erkan.

Murat Erkan, CEO

Thank you, Ali Yağcı. Good morning and good afternoon everyone. Thank you for joining us. We have been healing from the warmth of the recent earthquake, which happened to be one of the worst disasters in our history. We have taken certain actions to make sure people can seamlessly communicate in the region. Turkcell also remains committed to supporting the local community through projects that aim to increase employment, and we will also make our digital channel available for local producers and suppliers. Moving onto Q1 highlights. Our revenue growth continued to accelerate to 37% in Q1 2023 and reached a remarkable 61.5%. Thanks to the expanding subscriber base and increasing ARPU, despite the negative impact of the earthquake during half of the quarter. Excluding the earthquake impact, the growth would have been around 65%. Our strategic focus areas, mainly digital business services and technical segments, also supported top-line growth with strong performance. We are happy to see our mobile ARPU growth, which achieved 68%, exceeding the headline inflation as we reaped the benefits of the sequential price increases we began at the end of 2021. On the profitability side, our EBITDA reached TRY 6.8 billion with a 57% increase. And despite ongoing inflationary pressure, we achieved a margin of just over 39%, in line with our expectations, which accounts for the impact of the disaster on our OpEx. Excluding the earthquake impact, the margin would have been 41%. Last but not least, we recorded a solid net profit of TRY 2.8 million, mainly on the back of the strong operational performance as well as lower FX losses. Next slide. Let's take a closer look at our mobile operational performance. As part of our strategy, we have been focused on attracting premium subscribers, which led to a net addition of 342,000 postpaid subscribers in Q1, bringing the postpaid share to 69%. Prepaid net additions were impacted by lower new subscriber demand in the earthquake region and from competitive offers, as well as higher involuntary churn due to significant tourist arrivals in Q3 last year. While we observed the continued impact of year-end campaigns at the beginning of the year, the market rationalized after the earthquake and overall the MNP market contracted in Q1. To support the victims of the earthquake, all operators froze price actions. We also paused telesales to respect our national agreement. We resumed both mobile price adjustments and telesales by April. Despite the impact of the earthquake, blended mobile ARPU growth accelerated to 68% year-on-year, pacing to 54% average annual inflation within the quarter. Without the earthquake impact, we should note that the ARPU growth would have been around 75%. Our mobile churn rate of 1.7% is reasonably below 2%, despite a slight increase year-on-year due to higher prepaid churn. The monthly data usage of 4.5G users reached 17.4 gigabytes, driven by 88% smartphone penetration, up 1.5 points year-on-year. Next slide, please. As expected, the earthquake had a negative impact on our fixed broadband business. However, we saw significant demand for our services in March due to our location in the impacted area. Our focus on fiber subscribers continued resulting in a net addition of 38,000 fiber subscribers in Q1. Our IPTV platform also saw a net addition of 28,000 subscribers in the same period. After lengthy notable price adjustments in Q4 last year, and due to the earthquake, there were almost no significant price adjustments in the fixed broadband market. However, we introduced uncommitted offerings which were appreciated by customers. We also saw continued traction in high-speed packages, with 4% of new subscribers opting for 100 megabits or higher packages. Our annual residential fiber ARPU growth in Q1 slightly decreased to 31% compared to the previous quarter, mainly due to the actions we took for earthquake victims. Excluding this impact, the ARPU growth would have been 36%. The slight increase in fixed churn is also triggered by the disruptions in the earthquake regions. As we announced previously, our target is to reach 300,000 home passes this year, and we have already exceeded half of that in Q1. We then aim to increase return on investment. We will focus on increasing our take-up rate by addressing potential subscribers in the relevant home pass areas. Next slide. And now in the next two slides, I will be providing an update on our strategic focus areas. Let's start with Digital Services and Solutions. In Q1, standalone revenue from digital services and solutions grew by 65% year-on-year. This was enabled by digital OTT service revenue, rising 72% year-on-year. Our flagship digital OTT services, mainly cloud storage, TV, and music streaming platforms were the main pillars for growth on the back of price adjustments and paid user expansion. Collectively, the standalone paid user number grew 24% year-on-year, despite this decline due to the suspension of marketing campaigns after the earthquake. Our second focus area, digital business services addressing digital transformation in enterprises, posted strong growth of 104% year-on-year. The main drivers of growth were system integration projects and data center and cloud business. Exceeding 11% of total DBS revenue, data center and cloud services more than doubled the top line with strong demand from both local and international clients. In this quarter, we gained more than 1,100 new contracts. The backlog from system integration projects reached TRY 2.5 billion which will contribute to the top line over the upcoming quarters. Next slide, please. Our third focus area, techfin. In Q1, Paycell, Turkey's leading payment platform increased revenue by 79% year-on-year. Almost tripling transaction volume was enabled thanks to an ongoing shift towards digital payments. Pay Later, which is the leading product of Paycell, maintained its strong revenue trend and doubled its transaction volume, mainly supported by transactional payments in Apple and Android stores. POS solution transactions rose more than four times due to increased penetration of physical cost devices in the market and our exclusive role in joint electric vehicle projects. On the consumer financing side, finance sales revenue grew by 65% against rising interest rates and an expanding loan portfolio. Finance's loan portfolio expanded 7% year-on-year, mainly reflecting increased device prices in the market, as well as corporate segment initiatives. Due to diversification in the portfolio, as well as actions taken after the earthquake, the cost of risk increased to 2.7%. Next slide, please. Now, let's look at the performance of our international subsidiaries. Turkcell International revenue grew by 31% year-on-year in Q1. Excluding the currency impact, the organic growth was 20%. Lifestyle revenue rose 16% year-on-year in its local terms. EBITDA margin expanded by four percentage points compared to last year, reaching 60%, thanks to higher revenue growth and lower international interconnection expenses. Best revenue rose 15% year-on-year in its local currency. EBITDA margin expanded by a remarkable 15 percentage points compared to last year, thanks to the recently revised MTR rate, which led to lower interconnection expenses. Next slide. I would like to say a few words about Togg, our e-mobility initiative. Our investment in Turkey's electric vehicle initiative is a solid step towards realizing opportunities in the e-mobility ecosystem. In a promise to deliver Turkey's first smart mobility devices, as you may recall, the omni technology compass had become ready for mass production in October last year. In March, Togg began pricing its first smart mobility devices and received strong demand of nine times. Electric vehicle deliveries started in April. As Turkey's leading payment platform, Paycell provided the payment infrastructure for this process through Turkcell's owned app. Paycell managed to process around TRY 11 billion transactions smoothly and is the very first company in the world to achieve such a large transaction volume through a rollout in a short time. In the meantime, Turkcell has led the foundational development and production factor adjacent to its technology compass together with a battery giant. The facility is planned to be completed by 2024. Now, I would like to leave the floor to our acting CFO, Mr. Kamil Kalyon.

Kamil Kalyon, Acting CFO

Thank you, Murat. Now let's take a closer look at the financials. Group revenues grew by 62% year-on-year, corresponding to an incremental rise of TRY 6.6 billion. This quarter was another period where we saw the results of our dedicated price adjustments, resulting in robust ARPU growth. Turkcell rose 70% in this quarter, thanks to an expanding subscriber base and an ARPU growth that exceeds inflation. Our digital business services was another revenue driver with its steady performance. The revenue contribution of the International segment was limited to TRY 442 million in this quarter, reflecting the easing inflation in our international markets, as well as the slowdown in currency depreciation. This segment added TRY 253 million to the top line, supported by Paycell tripling transaction volume and the finance sales segment's higher loan portfolio and average interest rates. Improvement in other segments' contributions on a yearly basis was mainly due to a rise in sales from digital channels and higher equipment revenues. Next slide, please. Now some highlights on EBITDA development. Strong revenue growth has been the key driver of the 57% rise in EBITDA. In this quarter, EBITDA margin contracted by 1.1% year-on-year, as declining interconnection expenses as a percentage of revenues was partially compensated by the rise in personnel expenses. Please recall that we made a secondary rise to wages in July last year on top of the January rise following the minimum wage increase. Energy expenses had a limited impact on the EBITDA margin, as last year's energy price hikes were exceptionally high. Lastly, I would like to mention Turkcell International profitability. In this quarter, the EBITDA margin of the segment improved by 3.8% year-on-year. Likewise, the improving margin performance in Ukraine was joined by Best in Belarus, thanks to the recently announced MTR change in our favor. Next slide, please. Let's take a closer look at our CapEx management. As we begin the year, we are implementing a disciplined CapEx plan, bringing our last 12-month CapEx intensity ratio to 20.6%, in line with our guidance. Looking at the CapEx breakdown, mobile and fixed investments each account for one-third of the total CapEx. On the mobile CapEx side, our non-discretionary approach is still intact, as evidenced by a single-digit mobile CapEx intensity. Of note, we had to make around TRY 350 million in one-off CapEx due to the earthquake. On the fixed side, having realized 1.5 million fiber home passes in the past two years, we have decided to slow down given the compelling cost environment. Therefore, this year we will focus on monetizing these recent home passes. This quarter we added 160,000 new home passes to our portfolio. We are proceeding with expanding our white space capacity in our data centers. Thanks to the modular structure of our existing data centers, we are just adding new modules to meet increasing demand. Next slide, please. At the end of Q1, our gross debt position increased by 4.62 TRY 59 million due to new borrowings and the currency depreciation impact of TRY 1.4 billion. Our cash position increased by TRY 1.4 billion to just over TRY 27 billion in Q1. FX movements had a TRY 0.5 billion positive impact on the cash position. To note, TRY 1.4 billion wireless usage tax payment in Q1 negatively affected our cash position. As of the first quarter of the year, group net debt was around TRY 23 billion with a 0.9 times net leverage. Excluding the Techfin business, this was at 0.8 times, in line with the previous quarter. We are far below our long-term threshold of 1.5 times net debt to EBITDA. Notably, a 10% depreciation in our currency leads to a 0.1 times increase in our net leverage. The majority of our cash continues to remain in hard currencies. Excluding FX swaps, 57% of our cash is in US dollars and 15% in euros. This cash is sufficient to cover our debt service until 2025. The FX debt service is around US$280 million this year, which we believe is reasonably manageable given our strong cash position and committed long-term credit lines. Next slide, please. Lastly, I will go into the management of foreign currency risk in Q1. We have continued to keep the majority of our cash in FX and also utilize hedging instruments as part of our prudent financial risk management approach. Looking at the FX position composition, we had US$1.9 billion equivalent of FX debt on our balance sheet. On the asset side, we had US$1.4 billion equivalent of FX cash and a US$600 million derivative portfolio mainly comprised of proxy hedges with futures and forwards. Overall, we ended up with a short FX position of just US$21 million, which is within our neutral FX position definition of plus and minus US$200 million. We may, however, see a higher short FX position from time to time during the rest of the year due to evidence of liquidity, higher costs for hedging, and a result of a 2G license fee of around €140 million. This concludes our presentation and we can now open the line for questions. Thank you.

Operator, Operator

Ladies and gentlemen, we will begin the question-and-answer session. The first question is from the line of Kennedy-Good Jonathan with JPMorgan. Please go ahead.

Kennedy-Good Jonathan, Analyst

Good evening, and thank you for the opportunity to ask questions. Just a quick one on the potential price increases for the rest of the year. When should we expect further price increases on the mobile side? And given now that your mobile ARPU is growing well ahead of inflation, how should we expect price increases to evolve? And then secondly, there was a significant cash outflow in terms of working capital, I think driven by an increase in your trade receivable balance. Can you give us a sense of what drove that and whether that will reverse in the quarters to come? Thank you.

Murat Erkan, CEO

First of all, thank you very much, Jonathan. Let me take the first question regarding price increases. As you know, we are the leading operator in mobile, and our priority in a high inflation environment is to adjust our price in a timely manner. So, due to the earthquake in the first quarter, we had temporarily stopped price increases in February and March, but we continued with price adjustments in April. We aim to maintain our price-focused strategy throughout the year. So far, we have increased our price almost every quarter, and our aim is to keep this behavior. We have successfully implemented this strategy over the last two years. The accelerating ARPU growth and revenue growth clearly demonstrate this attitude. So, despite the negative impact of the earthquake on ARPU, mobile ARPU increased 68% annually, exceeding inflation of 54.3%. If we exclude the earthquake impact, the ARPU growth would be around 75%. This strategy clearly works well. Let me give the word to Kamil regarding the outlook of cash outflow.

Kamil Kalyon, Acting CFO

Thank you, Murat Erkan. As you know, every year we pay the frequency usage in the first quarter, and we will collect it from subscribers throughout the year. We paid TRY 1.4 billion for this in Q1 at the end of February. The first reason was this. The second reason was that there were some important factors that adversely affected our cash generation and working capital. One of these was bonuses we made to our employees for the previous years. The expansion of the finance sales loan portfolio is the second reason, and the third one is receivables from our growing EBS business, which are relatively longer-term. I may also add that due to the earthquake, we stopped collecting some payments from our subscribers for a 1.5-month period; therefore, this also temporarily increased our trade receivables.

Kennedy-Good Jonathan, Analyst

Thank you. That’s very helpful.

Operator, Operator

The next question is from the line of Mark Cho with Schroders. Please go ahead.

Unidentified Analyst, Analyst

Hello, can you hear me? Either way, okay. Thanks for taking my question. You mentioned the position of your credit lines. Can you remind me where they ended the quarter and where they are right now? And can you elaborate a little bit on your newly contracted liquidity?

Kamil Kalyon, Acting CFO

We have some committed lines. We have a significant amount of committed lines with AKANE, and on the CDB side, we do not have any problem regarding the position of our credit lines. We are also trying to add new credit lines to our portfolio this year, around €220 million. The CDB will end in March 2024, and the AKANE credit lines were around $30 million.

Unidentified Analyst, Analyst

Okay. Great. Thank you.

Operator, Operator

Our next question is from the line of Mandaci Ece with Unlu Securities. Please go ahead.

Mandaci Ece, Analyst

Hi. Thank you very much for the presentation. I just wanted to ask about your CapEx over sales guidance. I think you keep it around 22%, but the first quarter performance was much lower. Is it due to currency effects? I think that most of the CapEx was realized as of the first quarter one-off CapEx. So, going forward, could there be a possibility of a lower CapEx over sales for 2023? It would be very helpful if you could talk more in detail about your prospects there. Thank you.

Murat Erkan, CEO

Thank you.

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

Okay. Thanks for joining us. But I think we have one more question. Is that right?

Operator, Operator

Yes sir. The next question is from the line of Demirtas Cermal with Ata Invest. Please go ahead.

Demirtas Cermal, Analyst

Thank you for the presentation and congratulations for a very good result. My question is regarding the donation related to the earthquake. You earlier had announced TRY 2.5 billion; how should we elaborate on that, and when are we going to see the impact on your financials? And the other question is about the dividend side and General Assembly side. Could you give us some indication on those two issues? Thank you.

Murat Erkan, CEO

Thank you, Cermal. First of all, regarding the donation, our Board of Directors has decided to contribute up to TRY 3.5 billion to relevant earthquake relief organizations. First of all, we need to present the donation decision to our shareholders for a vote at the Annual General Meeting. Therefore, it will need to be voted on by the shareholders first. Once it is approved at the General Assembly, we will determine the timing and payment structure of the donation among other mechanics. Regarding the AGM and the dividend distribution, I would like to remind you that our dividend policy continues unchanged. As you know, the dividend proposal is first made by the Board of Directors and voted by the shareholders at the General Assembly. No proposal has been made by the Board of Directors for this year yet. As you may recall from last year, our Board of Directors' dividend proposal was announced together with the General Assembly announcement. Therefore, I don't want to speculate on the potential proposal of the Board of Directors regarding the dividends. Thank you.

Demirtas Cermal, Analyst

Thank you for the clear answer. Thank you.

Operator, Operator

Ladies and gentlemen, there are no further audio 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 for being with us in this Q1 results. We hope to see you in the next one. Thank you very much. Thank you, bye-bye.

Murat Erkan, CEO

Thank you very much. Bye.

Operator, Operator

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