Turkcell Iletisim Hizmetleri AS

IST:TCELL.E

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Mina, your Chorus Call operator. Welcome, and thank you for joining the Turkcell's Conference Call and Live Webcast to present and discuss the Turkcell Third Quarter 2022 Financial Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

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 Yagci, executive]

Thank you very much, Mina. Hello, everyone. Welcome to Turkcell's third quarter 2022 results call. Today, 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 the presentation for our safe harbor statement. Now I hand over to Mr. Erkan.

[Murat Erkan, executive]

Thank you, Serdar. Good morning, and good afternoon, everyone. Welcome to Turkcell's third quarter earnings call and thank you for joining us. We left behind another quarter where macroeconomic challenges continued to weight on the economic activity around the world.

While inflation remains to be a major concern, especially in Turkey, domestic demand was still strong as rising prices prop up consumer spending. We recorded 57% revenue growth in the third quarter, enabled by consecutive price adjustment and upsell performance coupled with a growing subscriber base.

Strong rebound in roaming, ongoing momentum in digital business services and techfin, also positive contribution from international operations supported top line growth. Amidst continuing inflationary pressures on EBITDA grew by 49% year-on-year, implying just short of 41% margin.

On the back of growing EBITDA and proactive FX management, we recorded a net income of TRY 2.4 billion, increasing 68% year-on-year. Higher mobility and strong tourism activity enabled us to accelerate the growth in the subscriber base with 1 million net additions.

In the first 9 months, we gained a total of 2.2 million net subscribers further strengthening our leadership in the market. Lastly, this quarter, with a focused approach, the revenue share of digital channels in the consumer sales achieved 23% and setting a record. In consideration of these results, we further increased our full year guidance, which I will elaborate on my last slide.

Moving to next slide. Let's take a look at our operational performance in mobile. In line with historical trends, this quarter was marked by increasing mobility coupled with a sharp rise in foreign visitor to Turkey, exceeding pre-pandemic levels. The market continued to grow on back of [Technical Difficulty]

[Operator]

Ladies and gentlemen, we apologize for the pause. Please hold your line. You will be hearing music until the session resumes. Ladies and gentlemen, we'll resume our conference. Thank you.

[Murat Erkan, executive]

Sorry for interruption. So let me start with the second slide. Let's take a look at our operational performance in mobile. In line with historical trends, this quarter was marked by increasing mobility coupled with a sharp rise in foreign visitors to Turkey, exceeding pre-pandemic levels.

The market continued to grow on the back of tourist arrivals as well as the demand from the corporate segment. Accordingly, we recorded strong net adds of 420,000 in postpaid and 506,000 in prepaid subscribers. Blended mobile ARPU growth ramped up to 49% year-on-year from 33% in the previous quarter.

The main reasons behind the acceleration were consecutive price adjustment since December of last year, upsell performance and the higher data usage during the summer. On top of the price adjustment of the past 3 quarters, we made another increase in September and tariffs have been doubled for a new subscriber compared to last year.

Despite price adjustment, we continue to observe stable churn levels in the mobile segments thanks to our energy capabilities, strong brand perception, network quality and extensive distribution channels. Despite a very slight increase compared to the previous quarter as expected due to increased mobility, our churn rate was identical to that of last year in this quarter. Confirmed by our Net Promoter Score, the consumer continued to recommend to a significantly higher degree than the competition, underlining our premium position in the mobile segment.

Moving to the next. In the fixed broadband segment, we gained net 68,000 fiber subscribers on the back of rising demand for high-speed connection in the back-to-school period. Our focus on price adjustment and upsell to the higher speed packages has supported ARPU growth of 27%. ARPU growth in the fixed segment lags behind that of mobile for 2 reasons.

First, contract turns are longer as per market dynamics. And the second, the incumbent operator was reluctant to make meaningful price adjustments until October. We have started to offer 12 months contract to address the first concern and also increased price following the incumbent's very recent actions.

The fiber churn rate of 1.2% was not much affected by price increase and higher mobility in this quarter thanks to our superior speed and customer service quality. Proceeding with our fiber rollout plan, we added 240,000 home passes in this quarter. Year-to-date, we have reached around 90% of our annual target with over 700,000 additions. On the IPTV side, we're pleased to see continued interest in our 3+ service, with 45,000 net additions this quarter. Overall, IPTV penetration in our fiber subscriber base has exceeded 66%, rising 3 points year-on-year.

Next slide. And now in the next 2 slides, we go through the developments of our strategic focus areas. Let's start with our digital services and solutions, where we gained 1.2 million paid users year-on-year, reaching almost 5 million. The revenue of digital OTT services, which include core OTT services rose 66% year-on-year, mainly driven by cloud storage, TV and music streaming.

On the TV+ side, our paid subscriber base continued to grow. As we successfully delivered on our [ BiP ] and TV+ led strategy, our OTT TV subscribers reached 932,000, up 25% year-on-year. Our cloud service platform, Lifebox, reached 1.7 million paid subscribers on a solid rise of 47% year-on-year, successfully addressing rising interest in cloud services as a result of ongoing digitization of everyday lives. On the digital business services side where we serve corporates and enterprises, this quarter was marked by exceptional revenue growth of 107%.

Tailor-made and digital transformation projects were instrumental in this growth. Additionally, by more than doubling tier revenues, data center, cloud and business application services further supported growth. The backlog from the system integration project totaled TRY 1.5 billion, which is set to contribute to the top line over the upcoming quarters. We continue to acquire new value-added business, for instance, the established Turkey's electric vehicle talks IT infrastructure with high processing power.

Next Slide. Third is our techfin focus. Our techfin business had a strong quarter with revenues up 77% year-on-year. As Turkey's leading payment platform Paycell was the main driver of this growth, increasing its revenues 105% year-on-year. The ongoing shift to the digital payments was evident to tripling total transaction volume and the 21% rise in active users hitting over 7 million.

Among the revenue lines, the leading products Pay Later sustained its strong revenue trend as mobile payment will double year-on-year. Another strong platform vertical is Paycell Card, where the transaction volume rose fourfold. Lastly, revenue contribution from POS solution also continued as we ramp up our android POS devices in this market.

Furthermore, Paycell was launched in the third quarter to serve users on that continent. The company will initially provide money transfer services targeting mainly to Turkish population, money flow from and to Europe. Further to that, we're planning to launch digital wallet, debit card and investment product solutions.

On the consumer financing side, finance sales revenue rose 57% on a larger loan portfolio, achieving TRY 2.9 million. Despite a growing loan book under unfavorable macro condition, the cost of risk remains at a healthy level of 1.3%.

Next slide. Now let's take a look at our performance in the international market. Turkcell International segment revenue grew by 79% year-on-year, mainly thanks to the currency movement and to some extent, Lifecell's growth. Despite the ongoing war in Ukraine, Lifecell revenue grew by 10% yearly in local currency terms, mainly with the increase in ARPU.

Lower interconnection costs and sustained marketing expenses more than compensated for the rising analysis pressures. Lifecell's EBITDA margin improved by around 3 percentage points to 60% in the third quarter. In Belarus, BeST revenue rose 9% thanks to mainly the price increase and upsell performance. The contraction in handset sales continued to positively impact the EBITDA margin.

Next slide. As communicated before, we are proud and excited to be a part of Turkey's electrical vehicle project talk, which unveiled the Gaming Technology Conference last week on the occasion of Turkish Republic Day. The first domestic car is expected to hit the road in March, March of next year. And we'll be the first electrical SUV produced in Continental Europe by a nontraditional manufacturer. The facility will have a production capacity of 175,000 units per year and aims to produce a total of 1 million vehicles of 5 different models by 2030.

At Turkcell, we are not only glad to contribute to Turkish dream of innovation, but also work towards the aim of leveraging our position in e-mobility services. By leveraging our capabilities in digital services, we integrated fizy as a native music application of the car.

Moreover, we recently announced that we are working to integrate Paycell's payment system and digital financial solution into tax mobility solution. Thanks to e-wallet card storage and [indiscernible] infrastructure provided by Paycell top users will be able to create their own talk wallet and make payments at charging station without having to exit the vehicle.

Next slide. I would like to end my presentation by sharing our updated guidance for the full year of 2022. Taking into consideration our 9 months performance, we once again revised our guidance upwards. Accordingly, we raised our revenue growth target to 47% to 48% and EBITDA guidance to around TRY 21 billion.

On the CapEx side, we changed our guidance to around 20%. Thanks to our controlled CapEx management. Please note that these expectations do not account for the implication of like the adoption of inflationary accounting in the future.

I will now leave the floor to our CFO, Osman.

[Osman Yilmaz, executive]

Thank you, Murat. Now let's take a closer look at our financial performance. In the third quarter, our group revenues grew by 57% year-on-year, corresponding to an incremental rise of TRY 5.3 billion. Turkcell Turkey recorded a revenue growth of 57% in this quarter; thanks to an expanding subscriber base, gradually increasing ARPU growth as a result of dedicated price adjustments throughout the year and strong momentum of digital business services.

Doubling year-on-year, strong performance of wholesale and roaming revenues was another driver of the top line growth. Turkcell International revenues comprising 11% of the Q3 top line contributed TRY 700 million, mainly with the positive impact of currency movements and better-than-expected performance of Lifecell.

Our techfin segment made TRY 218 million contribution. Paycell revenues, which accounts for 49% of the segment rose by 105% year-on-year. This performance was due mainly to traction in the Pay Later product as well as our POS solution that has been on an uptrend since its launch.

Additionally, Financell's revenue was up 57% year-on-year, thanks to a greater loan portfolio, average interest rates and rising contribution of insurance business revenues. Improvement of the other segments' contribution on a yearly basis was mainly thanks to a rise in sales from digital channels and higher equipment revenues.

Next slide. Now some highlights on EBITDA development. EBITDA rose by 49% year-on-year to TRY 6 billion, and margin decreased by 2.2 points year-on-year to 40.9%. Two main factors behind this contraction were wage hikes and higher energy prices. On the personnel expenses side, we reflected the rise in minimum wage to our wage ancillary's budget in July, which was the second increase of the year.

Our energy expenses more than tripled year-on-year as of Q3, stemming from globally increasing electricity prices and higher utilization in data centers. On the other hand, lower growth of cost of goods sold and interconnection costs as a percentage of revenue, limited the margin contraction. Turkcell International segment recorded a 52% EBITDA margin in this quarter. As a percentage of revenues, lower S&M expenses and improvement in the international cost of Ukraine operations more than compensated the higher radio expenses.

Lastly, group S&M expenses only recorded a limited increase of 0.1 points as a percentage of revenues, while we managed to add 1 million subscribers to our portfolio just in this quarter. Next slide. Now more detail on our free cash flow generation. In line with our expectation, we generated TRY 2 billion free cash flow in this quarter. This cash flow generation was mainly on the back of strong EBITDA generation of TRY 6 billion.

Our working capital improved around TRY 80 million, mainly resulting from a positive impact from trade receivables, thanks to better collection performance and higher trade payables due to seasonality as well as the support from advance payments realized in the previous quarter. To note, the increase in receivables from financial services was mainly due to Financell's expanding loan portfolio.

Next slide. Let's take a close look at our CapEx management. We continue to focus on fixed segment investments in order to introduce our pure fiber technology to new customers, given the sustained demand. In Q3, around half of operational CapEx was accounted for by the fixed segment.

Accordingly, we recorded 711,000 home passes in the first 9 months of the year. Having advanced the quality of mobile network in the past years, we are now able to focus more on expanding our fiber footprint. In Q3, our operational CapEx to sales ratio was at 17%, which brings the 12-month figure to 18.9%.

We expect a higher CapEx in Q4 given the seasonality. On the fiber front, while CapEx intensive continues to increase, it will normalize as we ramp up monetizing of new home passes. All in all, we are progressing in line within our plan.

Next slide. Now a few words on our balance sheet. As of Q3, our total cash position increased from TRY 22 billion to TRY 24 billion. Of this increase, TRY 1.9 billion stemmed from currency movements. Recall that there was a cash outflow of TRY 1.3 billion as dividends in July.

Our gross debt position increased to TRY 52 billion from TRY 48 billion. Currency movements led to around TRY 2.9 billion increase in total debt. As a result, our leverage has improved this quarter to onetime, thanks to strong EBITDA growth and higher financial assets.

Excluding the finance business, the figure was 0.9x. The bulk of our cash remains in hard currencies. Excluding FX loss, 55% of our cash is in U.S. dollars and 17% in euros. This cash is sufficient to cover our debt service until 2025.

Next slide. Lastly, I will go into the management of our FX currencies. At the end of Q3, we had around $1.9 billion equivalent of FX debt and around $1.2 billion equivalent of FX-denominated cash as a net FX position.

Additionally, we had around $700 million derivative portfolio comprised mainly of proxy hedges, which shield us independent of currency fluctuations. Overall, we have a limited short net FX position of USD 19 million. Going forward, we continue to target a neutral FX position.

This concludes our presentation. And we can now open the line for questions. Thank you very much.

[Operator]

[Operator Instructions] The first question comes from the line of [ Movis Steel with Stroges ].

[Unknown Analyst]

Congrats on the very strong results. Great. Okay. So you have presumably spoken about ending the year nearly 1.5x net leverage. Now net leverage actually went down to 1.2x from 1 point -- sorry, 1.0x from 1.2x in 2Q '22. So I was wondering what do you now think we should expect for net leverage at year-end 2022?

[Osman Yilmaz, executive]

I guess this is the only question. Actually, we completed this quarter, as we said, with the leverage of 1x. Our target is to keep this -- keep the leverage at these levels, given that we don't have any big CapEx cycle inside in near future, like 5G. We continue to focus on our fiber investments and invest less in mobile network since we had already done a bulk of investments in the past 5 years. So excluding for the currency impacts, we keep -- we aim to keep our leverage target around 1x going forward.

[Unknown Analyst]

That's excellent news for us, I guess. Your EBITDA is obviously growing stronger than expected, which has to with deleveraging. But I was wondering if given the high cash position, you've accumulated like bonds are trading below par, if you are looking into accelerating the bond debt reduction? [Technical Difficulty]

[Operator]

Ladies and gentlemen, thank you for holding. We will resume the conference shortly. The conference will now resume, thank you.

[Murat Erkan, executive]

Could you repeat the question? Second question, we couldn't get the question.

[Unknown Analyst]

Sure. I was wondering if you're planning to accelerate the bond debt reduction, given the very high cash position you have accumulated while bonds are trading below par?

[Murat Erkan, executive]

Yes, it is one alternative for us to use our cash to buy back bonds, which are trading very cheap in the current credit conditions, both locally and globally. But unfortunately, the liquidity in the secondary market is very thin. So we are not able to buy back as we wish. So we use our cash in relatively more liquid instruments at the moment. But bond buybacks are an important item on our treasury's agenda. So we look for opportunities to increase our bonds.

[Unknown Analyst]

Great. And the last question is related to private penetration. Your uptake rate is very high at 41%. And you obviously mentioned that among new homes passed even 50%. So I was wondering if you can provide an outlook on the topic here where do you see penetration rates trending going forward, do you have any homes pass targets for this year and next year?

And then you also mentioned that the government is paying for some of your fiber CapEx. So I was wondering if you can expand a bit how the dynamic works. For example, what the proportion is between fiber CapEx that you pay for yourself compared to that of the government? And if it reverses you or it pays a direct play?

[Osman Yilmaz, executive]

Okay. I didn't get your point about government restriction on the CapEx side because we don't have any constraint on the government limitation for the fiber CapEx. For the fiber side, we aim to reach around 800,000 fiber home pass. We already get like around 700,000-710,000 level.

So we -- it seems that we're going to reach our targets. And for the take-up rate part, our take-up rate is quite strong. Obviously, while we are adding new home passes, we can see some slight decrease on the take-up. But we're going to recover as soon as we penetrate to the market. We penetrated new home passes that we get. So we don't see any issue on the take-up rate side. We're going to see that it's going to continue to slightly increase on the take-up rate side.

[Unknown Analyst]

The question on the government was not about restrictions. But I think you once mentioned that the government is paying for some of your CapEx. So the subsidies or reimbursement or something like that. And I was wondering how this dynamic works?

[Osman Yilmaz, executive]

No, no. Actually, this is not related with fiber. Government doesn't give any incentive, any payment on the fiber side, fiber CapEx side. But we have universal fund, which is used on the mobile side for the area that have a very limited customer lives. This is -- but this is related with mobile, not the fiber side. We don't get any incentive or any CapEx support from the government or anywhere else. I wish we have.

[Operator]

The next question comes from the line of Kennedy-Good, Jonathan with JPMorgan.

[Jonathan Kennedy-Good, analyst]

Just one from my side. You mentioned there were no real plans for 5G. I just wanted to -- if you could refresh us on whether there are any renewals of licenses coming up or spectrum auctions that we should be aware of in the near to medium term? And thoughts on 5G rollout eventually, please?

[Murat Erkan, executive]

Okay. First of all, let's focus on the 5G side. Obviously, there is no official time line for 5G announced by the regulatory ad. And 5G is a vital technology that we can facilitate the digitalization of industries and contribute to the economic development of country. However, we believe there are some issues that are needed to be addressed, first, for how to launch such as the fiber connection of base station, 5G capable smartphone penetration and development of local manufactured equipment.

As of 29 of July, we officially launched commercial 5G in Istanbul Airport with a special regulatory permission that is issued to all operators. And Turkcell customers and international roamer can get 5G support, 5G part of it. We will position this airport as a commercial 5G pilot cluster. And we would like to use it as a base of create an R&D and test facility test side of the equipment. As to the license cost and rollout CapEx, it is difficult to give any estimate, to be honest. And we'll see the time line. And there is no official tender announcement yet.

On the 2G renewal side, we are talking with the regulatory in terms of renewing 2G at least for the end of our 3G and 5G -- sorry, LTE spectrum license end, which is 2029. So as soon as we get some conclusion, we'll go and announce this position. So -- but it is not going to be a big thing for us. It should be another 6 years extension of the 2G. And obviously, 2G is coming to the end.

[Operator]

[Operator Instructions] The next question comes from the line of Nagy, Nora with Erste Group.

[Nora Nagy, analyst]

Two from my side, please. Today, we've seen the release of the inflation in Turkey, which topped 85%. And I was wondering if this could mean further price increase to come even this year, so in December, maybe? And then the second question about any more if you have in Turkey about another minimum wage increase and if yes, by how much?

[Murat Erkan, executive]

Okay. Let me start from the second part of the question. Obviously, having such a high inflation environment, we will see some increase on the -- on minimum wage salary. But our expectation is starting from next year as a usual time line. I don't know how much because it really depends on the government policy and the discussion with all the shareholders. So -- but you can assume that we can see some increase on the minimum wage salary in Turkey.

Regarding inflation pricing, as the leading operator, our priority in the high inflation environment is to adjust our prices in a more frequent and the timely manner. So our approach has given competitors to opportunity to adjust their price as well because we are the leading operator. We start adjusting our prices on the mobile segment in December last year. And we have made further increase in March, June and September. We saw that these price adjustments were followed by the competition to an extent.

Despite the effective pricing on the mobile side, competitive dynamics and it leads to more limited price increase on the fixed segment. In spite of the continued demand for fixed broadband services, the incumbent operator was reluctant to make meaningful price adjustment until October, which was evident in the limited revenue growth and significant EBITDA margin contraction.

Accordingly, we had fewer price increases in the fixed segment. In October, the incumbent operator made a meaningful price revision, which was also followed by us on November 1. Furthermore, telecommunications is a necessity service for our customer, unlike a discretionary item demand to our services and have limited price elasticity.

Additionally, the price of other spending items is also rising, which makes consumers less sensitive to price adjustments as well. So therefore, it's fair to state that we do have the ability to reflect higher inflation to our prices. Our accelerated ARPU growth over the last quarter's also confirm this.

[Operator]

[Operator Instructions] The next question comes from Demirak, Kayahan with AK Investment.

[Demirak Kayahan;AK Investment, analyst]

Also, congratulations on the strong results. I have a few things on my mind. The first thing, I understand that the prices for the new mobile tariffs almost doubled in September with the cumulative price increases. So I mean, for the existing tariffs, I mean, for the renewables, where do you see the price growth as of September?

[Murat Erkan, executive]

I mean, obviously, it reflects to our ARPU numbers. And I think we see that 60% to 70% level.

[Demirak Kayahan;AK Investment, analyst]

Okay. And I was hoping to get more color for the next year. Maybe could you give us some color, some direction regarding the expected blended ARPU growth for the next years given the pricing actions you take so far?

[Murat Erkan, executive]

Obviously, we had increased 4x during this year. So it really depends on the inflation journey in Turkey for next year. So -- but we have just one rule which we're going to follow inflationary pricing. If we see inflation is decreasing, we're going to react based on that. If we see inflation increasing, we're going to react based on that. So I cannot comment from now about inflation process. But I mean whatever it happens we're going to follow this.

[Demirak Kayahan;AK Investment, analyst]

Okay. And as for the next year's results, in terms of the expected CapEx intensity, do you think that the churns around 20% as of sales is sustainable since you don't expect any further investments on that front in the near term?

[Murat Erkan, executive]

To be honest, we would like to expect similar CapEx intensity for next year. Obviously, for the CapEx side, there are a dependency that we cannot control, which is like currency and other things. But to be honest, we would like to stick on our CapEx intensity side for next year as well.

[Demirak Kayahan;AK Investment, analyst]

Okay. Understood. And the final question was about -- it's about the dividend payment. You were usually paying around 50% payout ratio, but you reduced it to 25% this year, I mean, given the difficult operating environment and the rising cost of debt. So the leverage seems now quite comfortable. What should we expect on that front at least in terms of your [indiscernible]?

[Murat Erkan, executive]

Yes. Based on the normal condition, we will come back to our normal procedure, which is 50% distribution of the net income. So I mean, we don't -- I mean, as long as we don't see any different things on macro, micro, whatever, we will continue, we're going to stick on our policy because we -- our policy is quite clear, so we're going to keep our policy.

[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, executive]

First of all, thank you very much for joining our third quarter results call. And also, I would like to apologize for the interruption of the communication. But anyway, thank you very much for joining us and good afternoon and good evening to everyone.

[Ali Yagci, executive]

This concludes our call. Thank you very much all for joining. Hope to see you in the next one.

[Operator]

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