Earnings Call Transcript - TKC Q2 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome and thank you for joining the Turkcell's Conference Call and Live Webcast to present and discuss Turkcell's Second Quarter 2023 Financial Results Conference Call. 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 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, Konstantinos. Hi, everyone. Welcome to Turkcell's second quarter 2023 results call. Today our CEO, Mr. Murat Erkan; and Acting CFO, Mr. Kamil Kalyon, will be delivering a brief presentation covering operational and financial results which will be followed by a Q&A. Before we kick off, I would like to kindly remind you to read our safe harbor statement placed at the end of the presentation. Now I'm handing over to Mr. Erkan.

Murat Erkan, CEO

Thank you, Serdar. Hello, everyone. Thank you for joining us. We delivered outstanding results in the second quarter. Our determined inflationary pricing strategy plays an instrumental role in delivering an ever-accelerating performance. Outpacing inflation, our revenue growth ramped up to 74% on a record ARPU growth and expanding subscriber base. Strategic focus areas also supported top-line growth as always. On the profitability side, our EBITDA almost doubled, reaching TRY 9.5 billion, driven mostly by strong top-line growth and reduced energy prices in Q2. We achieved a remarkable 44% EBITDA margin. This strong operational performance coupled with dynamic and prudent risk management enabled a solid net profit of TRY 3.2 billion on a 70% year-on-year rise. Considering this result, we further increased our full year guidance. Next slide. Let's take a closer look at our mobile operational performance. Our focus on postpaid subscribers yielded a substantial gain of 404,000 subscribers in Q2, capping a 70% postpaid share of the mobile base. Following the gloomy Q1, we resumed price adjustment in April. And as the competitors followed us, overall price levels escalated in the market. However, temporary competitive offers were observed in the market, triggering an increase in MNP volume. Rising acquisition price levels and alternative data solutions for tourists impacted prepaid subscribers. The inflation figure for July indicates a surge in inflation during the second half of the year. Yet we are committed to price adjustments. Accordingly, we raised our prices in August. As anticipated, the ripple effect of preceding price adjustments and intact upsell efforts propelled a remarkable 84% acceleration in mobile ARPU. The ARPU versus CPI spread widened further. Despite a slight increase due to line closure deferral from Q1, our mobile churn rate stood at 1.9%. Next slide. In the fixed broadband, our focus persists on fiber. Accordingly, we gained 40,000 fiber subscribers in Q2. The IPTV platform, a supportive factor in subscriber retention, grew with 35,000 net additions. We achieved 165,000 additional homepasses during the second quarter. We are delighted to exceed our annual target of 300,000 in the first half, benefiting from more favorable FX rates. In line with our fiber expansion, the take-up ratio decreased just below 40%. However, it is fair to expect the rate to increase for the remainder of the year as we aim to monetize this investment. This quarter, residential fiber ARPU grew strongly by 49%, surpassing quarterly average annual inflation after a long break, thanks to price adjustments. Longer contract durations and the reluctance of the incumbent operator to make price adjustments have been affecting this segment adversely. To mitigate this factor, we have shifted our focus over the past year to offering 12-month contracts or contract-free tariffs, resulting in 53% of our fiber customers opting for this plan by June. Lastly, we are pleased to see continued interest in high-speed plans. The weight of these packages in the total fiber portfolio has increased by 11 percentage points year-on-year. Next slide. On strategic focus areas, let's start with digital services and solutions. The standalone revenue of digital services and solutions grew by 87% year-on-year due to price adjustments and expansion of paid users. We have reached significant milestones in our flagship services. OTT TV services have surpassed the 1 million mark, while the cloud storage service exceeded 2 million users. By surpassing 1 million active users in Pakistan, we further expanded its user base through the partnership with Jazz. Our standalone paid user base reached 5.5 million, rising 2% annually. On the other hand, TV+ is intensifying its collaboration with both local and international digital platforms and partnering with leading global studios. Moving on to our next focus area, digital business services constitute 10% of Turkcell revenue, having registered 82% year-on-year growth. The main growth drivers were system integration projects, data center, and cloud businesses, each doubling their revenues annually. Notably, the backlog from system integration projects has reached TRY 2.9 million. Next slide. Our third focus area is techfin. In the second quarter, Paycell revenue rose 95% year-on-year. Pay Later has more than doubled its volume and remained a key driver of Paycell revenues. This growth was supported by increased payment in mobile app stores and expanded user base, and volume of ready-to-use limits. The Paycell card has also supported this remarkable performance, thanks to increased money transfers and higher card fees. In May, the nationwide joint QR project was launched, which enabled our customers to make payments using the Paycell app at any location with a QR code. Turning to financials, revenue grew by 87% with an expanding loan portfolio and rising interest rates. The loan book reached TRY 4.7 billion with 88% growth. Next slide. Now international subsidiaries. The Turkcell International segment, which accounts for 10% of the group top line, grew by 48% year-on-year in Q2. Excluding the currency impact, the organic growth was 38%. Thanks to increasing data roaming revenue and also price adjustments, lifecell revenue in Ukraine rose 36% year-on-year in its local currency, well above inflation. The EBITDA margin improvement of 1.2 percentage points was mainly driven by lower interconnection and energy expenses as a percentage of revenue. BeST revenue rose 22% year-on-year in its local currency, comfortably exceeding inflation. The MTR rate revision at the end of 2022 and a disciplined OpEx resulted in a 20-point margin improvement. Next slide. I would like to end my presentation by sharing our updated guidance for 2023. Taking into consideration our outstanding first-half performance, we have revised our revenue growth target to around 71%, EBITDA guidance to around TRY 37 billion, and maintain CapEx intensity at around 22%. I will now leave the floor to our CFO, Mr. Kamil Kalyon.

Kamil Kalyon, Acting CFO

Thank you very much, Murat. Now let's dive into our financial results. Our group revenues had an incremental rise of TRY 9.2 billion, corresponding to 74% growth year-on-year. Turkcell Turkey revenues were the main driver of the performance, thanks to the expanding subscriber base and solid ARPU growth. Digital services growth also supported the remarkable performance. Turkcell International revenue grew by 48%, lower than the overall group due to lower inflation and limited currency depreciation. Techfin business grew by 93% year-on-year with an incremental rise of TRY 383 million as evidenced by the traction in financial services companies, Paycell and Financell. Next slide, please. Now let's look at our EBITDA performance. Turkcell Group EBITDA reached TRY 9.5 billion, reflecting solid revenue growth. In Q2, EBITDA margin expanded by 3.7%. The increase in employee expenses was offset by a decrease in interconnection expenses, cost of goods sold, and energy costs as a percentage of revenue. Of note, a 15% reduction in electricity prices, which was introduced for industrial consumers in April, supports the margin. Also, we shall inform you that following the minimum wage increase in July, we have also increased our wages by around 37%, which will weigh on our financials starting from Q3. Next slide, please. Let's take a closer look at our CapEx management. In the second quarter, we kept implementing our disciplined CapEx plan, which brings our last 12-month CapEx intensity ratio to 20.7%. Mobile and fixed investments account for more than 70% of total CapEx. Mobile CapEx investments had a higher share in total CapEx compared to last year as we had to make around TRY 420 million one-off CapEx due to an earthquake. However, we managed to keep single-digit intensity. On the fixed side, even though we slightly exceeded our annual target, it was lower than previous years. As we have mentioned before, this year we are mostly focused on monetizing our fixed investments for the rest of the year. Next slide, please. Our cash position increased by TRY 7.8 billion in the second quarter. FX movements had an impact of TRY 6.2 billion on the cash position. Our gross debt position grew by TRY 18.7 billion in Q2. The increase in gross debt is mainly due to TRY 14.8 billion currency depreciation. We ended the quarter with a net debt position of TRY 28.2 billion. Thanks to the strong EBITDA generation, our net leverage remains around 1x, and excluding Financell, it is 0.8x. The remaining FX debt service is around US$156 million this year, which is manageable given the cash position and committed credit lines. The majority of our cash continues to remain in hard currencies. Excluding FX swaps, 58% of our cash is in U.S. dollars and 10% in euros. Next slide, please. Lastly, I will go into the management of foreign currency risk in Q2. 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 financial liabilities on our balance sheet. On the asset side, we had US$1.4 billion equivalent FX financial assets and US$645 million derivative portfolio, mainly comprised of proxy hedge, namely futures and forwards. Overall, we ended up with a long FX position of US$84 million, which is within our neutral FX position definition. This concludes our presentation, and we can now open the line for questions. Thank you.

Ece Mandaci, Analyst

Congratulations on the strong results. I have a couple of questions on your guidance and potential ARPU growth going forward. The first is about the subscriber additions on the mobile side. We are seeing there a slower increase compared to previous years or previous quarters. So is that stable performance going to be sustainable for the second half? How would you think about or guide on subscriber addition? The second question is about the mobile ARPU growth. We have seen a significant recovery. And was there any price adjustment on the mobile? Or was it just fixed side as of August? Should we think above 90% ARPU level or a more normalized level given the high base of last year for the second half, particularly on mobile ARPU? And thirdly, I saw that you have upgraded your guidance for the full year. On the EBITDA margin side, I think that you are a bit more cautious regarding the EBITDA margin performance for the second half. Is it due to the expectation of higher cost inflation because you're also making price adjustments? Could you please provide some more color about these questions?

Murat Erkan, CEO

First of all, regarding subscriber growth and subscriber growth target. In the mobile segment, we experienced net additions of 165,000 subscribers in the second quarter. This is supported by the seasonal effect, which is lower than the normal trend. Essentially, 404,000 net additions in postpaid were partially offset by the net loss in the prepaid segment. Rising new acquisition price held and alternative data solutions for tourists particularly impacted the price sensitivity of prepaid subscribers. However, we believe that this alternative solution could pose security risks. On the fiber and IPTV side, net subscriber additions continue as usual, supported by net adds. For this year, we expect a net add of around 1 million subscribers as well. Regarding the second question, regarding mobile ARPU growth and price increase. We did increase prices for mobile in August; they were not at the same time, but we increased our price during August. We will closely follow inflation. As everybody knows, our strategy is based on inflation pricing. So we're going to closely follow the inflation, and during any inflation increase, we will increase our prices. For the EBITDA guidance, there are two reasons for our caution. One of them is, in the first half, the energy price decreased, so it has decreased by 15% in April. For the next half, we anticipate some price increases for energy prices. The second thing is the increase in employee salaries, which we had to adjust in July by 37%. This will also impact second half EBITDA. However, we are confident to recover EBITDA, but it's going to be around 40% level anyway.

Cemal Demirtas, Analyst

My question is about the financial expense side. When we look at the details, we see a significant increase in financial expenses. As you don't have a very large long-short FX position, you have some net debt position. Even if we come up with the FX changes from the first quarter to the second quarter, and we multiply it by your net debt position, we come up with TRY 10 billion in financial expenses. Could you give us more detail on how we should approach your financial expenses? Because your EBITDA is strong, which is good, and your guidance has revised that. The FX impact is possibly on those numbers too. So how should we think about reaching the bottom line? Because EBITDA is strong but huge financial expenses. If you didn't hedge, what would be the result? I would like to understand the effect of all those hedges on your bottom line. How did it save you? And if you didn't hedge, what would happen in the second quarter? If you have any color on that.

Kamil Kalyon, Acting CFO

Thank you very much, Cemal, for the question. As you know, following the sharp currency movement in the fourth quarter of 2021, strike levels were some of the call options that we sold as part of our participation in currency swaps well exceeded. Consequently, to maintain the particulars of our hedging portfolio, we opted for short-term derivative instruments as the current market conditions have not been ideal for the long term. We have a net long FX position of US$84 million at the end of the second quarter, as you say, which is in line with our neutral position definition. The hedging costs of short-term instruments have normalized after the elections, but we saw an increase in the FX rates, unfortunately. The majority of our FX gain has arisen from the increase in the FX rate, which offset the loss arising from the valuation of our short-term derivative contracts due to the normalization of the TL interest rate curve. Despite this negative impact from the interest rate curve, our derivative portfolio printed a positive M2M valuation, which helped us to keep our FX loss limited. Going forward, the movement of the swap curve will also have an impact on FX gains and losses. However, we aim to stick around our FX-neutral definition as we declared previously, plus or minus US$200 million. I should also note that we continue to evaluate market conditions. If we can find favorable conditions, we might consider restructuring our portfolio.

Cemal Demirtas, Analyst

So in the third quarter, are you going to use similar instruments? If you assume that the currency will be more stable, should we also expect your EBITDA to remain high and your financial expenses to go down? Is that the model we can take?

Kamil Kalyon, Acting CFO

Yes, it could be, but it depends on the economic management of interest policy. Currently, the interest rates for loans in Turkish lira are quite high. They might even increase further in the next period. If interest expenses rise in this manner, we could face additional financial costs.

Cemal Demirtas, Analyst

Okay. And as a follow-up question, rather on the operational side. We see that prices are increased again. When we look at competitors, they are also increasing their prices to just match the increase in costs. How do you see the third quarter outlook? You revised your guidance, but how do you see from your side about the pricing, and at least also the subscriber additions? What could be the trends for the third quarter?

Murat Erkan, CEO

Firstly, concerning the price increase and competition, as a market leader, we have raised our prices in response to inflation, and it appears our competitors are doing the same. In terms of fixed-line services, it’s challenging to predict future developments, but we are observing some positive shifts that suggest we can increase our prices. For mobile services, as the leading operator, our priority in this high inflation environment is to adjust our prices promptly. We will continue our current approach in response to inflation. Regarding the strategic outlook for Türk Telekom and Turkcell, which is guided by the Wealth Fund, most expect the 5G licensing to occur not this year but next year. The Wealth Fund supports both companies with a diverse portfolio of 22 subsidiaries. We are in competition for telecom licensing, but I don’t foresee any conflicts. As mentioned, we anticipate that 2024 will be the year for 5G licensing or spectrum tender as well.

Kayahan Demirak, Analyst

I have a couple of questions. The first one, did you cancel any other price increases this year in formulating the guidance? Or otherwise asking this, when should we expect another price increase given the direction of your cost inflation? That’d be my first question.

Murat Erkan, CEO

For this question, we just increased our prices. We're going to follow the inflation. My feeling is that by the end of the year, we can expect one more price increase. But obviously, there will be a price increase for next year, not for this year's numbers or revenues. But I think we can expect a price increase for the last quarter in Q4.

Kayahan Demirak, Analyst

And would it be possible to provide any direction in terms of the expected CapEx intensity for next year? I mean, should we expect something lower than this year, or a bit higher given the expansion plans?

Murat Erkan, CEO

Yes. To be honest, it is very difficult to see for next year's CapEx guidance. Our aim is to decrease our CapEx ratio. My expectation would be a little lower, but not by much. However, it's too early to say because we don't know the FX situation, as approximately 75% of our CapEx depends on foreign exchange. It is really difficult to forecast for next year CapEx. The macro conditions can give us sometimes hard times and sometimes good times. We'll see, but it is too early to say anything about 2024.

Kayahan Demirak, Analyst

Okay. And the final question I have for international operations. The numbers in Ukraine are looking quite strong, given the difficult operating environment. There is decent growth in USD terms, and margins are going up. Should we expect this to continue going forward? How do you see the situation over there?

Murat Erkan, CEO

Obviously, you’re asking a difficult question because Ukraine is under war. Based on existing behaviors, I mean, we will see successful operations over there. But this is, at times, really challenging while an ongoing war is happening. We are pleased with lifecell's performance. Things are getting easier but it doesn't mean it is like before the war. As everyone knows, Ukraine has lost around 8 to maybe 10 million people, and it is uncertain if they'll return. It's really difficult to forecast for next year or the coming years. But so far, we are good. If things stabilize, we will continue as well as we are today, but it is under war, and it's difficult to comment on this.

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.

Murat Erkan, CEO

Thank you very much for joining us, and have a good day. Have a good night, whatever it is. Thank you. Bye, bye.

Ali Serdar Yağcı, Investor Relations and Corporate Finance Director

Thank you for joining us. We hope to see you next month.

Kamil Kalyon, Acting CFO

Thank you. Bye, 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.