Turk Telekomunikasyon AS

IST:TTKOM.E

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Türk Telekom Conference Call Third Quarter 2018 Financial and Operational Results. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Gözde Çullas, Head of Investor Relations; Dr. Paul Doany, CEO; and Mr. Kaan Aktan, CFO of Türk Telekom. Lady and gentlemen, you may now proceed.

[Sabriye Çullas, executive]

Hello. Welcome to 2018 First Quarter Results Conference Call. We are here with the management team. Today's speakers are our CEO, Dr. Paul Doany; and our CFO, Kaan Aktan.

Before we start, I kindly remind you to review the notice on our earnings presentation.

I will now hand over the call to Paul Doany. Thank you.

[Boulos Doany, executive]

Thanks. Thank you, Gözde. Before starting, I would like to welcome the new members of the board. I believe that the new additions would provide important oversight and contribution to the company with their expertise in strategic planning, financing, entrepreneurship in finance, especially in our telecom sector and this will be in great support of all stakeholders. With the valuable contribution of our new board members, we would continue to implement our business plan in a more determined manner and support in growing the company in the direction that we have grown so far and also contribute to the economy of the country overall.

On a side note, however, yesterday, we lost one of our board members, Mr. Abdullah Tivnikli, who served on several company boards over the past 10 years. We offer condolences to his family. May he rest in peace. He will be missed by all the management team who knew him.

I would like to start with strategic highlights of the quarter on Slide 3. Our strategy is fully on track. As you can see, we continue to deliver on our strategic priorities. Our results demonstrate the strength and resilience of the business, together with the benefits of our early actions, which supports the changing environment that we are now going through. Having said that, Turkey is fundamentally unique. And it's young, dynamic and tech-savvy population with a huge growth potential, offering numerous business opportunities. And we remain confident about the future growth and development prospects of the country and businesses in general.

We continue to execute our successful strategy of driving fixed broadband growth through penetration-focused campaigns, which also proves to be helpful in the current macro environment. 50% of fixed broadband net additions in the third quarter came via penetration campaigns. Importantly also, upsell from our early -- from our entry-level tariffs also accelerated with more than 35% of our entry-level tariffs already upsold. There is significant potential for future growth in fixed broadband with the support of our penetration initiatives. Of course, in this environment of inflation pricing incentives, this also supports the initiative of showing that we have low pricing.

We also maintained our focus on best-in-class customer experience with digital solutions. We had significant improvements on our online self-service path, Online Islemer. Corporate satisfaction score has increased substantially to 4.6 stars among our U.S. users in the third quarter. The number of TT mobile users of the app more than doubled in the first 9 months of the year, reaching now 8.8 million, corresponding to 54% of our smartphone users. In the quarter, we launched new tools that enabled successful performance of the app as user-friendly interfaces, making it easier for subscribers to interact with us, and themes that enable us to land campaigns to provide better value for our subscribers. Our loyalty campaign, providing also rewards and free data and free minutes to our customers, has been an important contributor for momentum in this channel. I'm encouraged with the current improvements we have with these both for its contribution in our customer experience journey and also in operational efficiency improvement, which is a matter we will be discussing shortly, and increasing, therefore, shareholder value.

Regarding our digital portfolio, we would like to also highlight some new KPIs on Tambu, our digital keyboard. Downloads reached, in October, 7.2 million and the number of engagements via the Tambu toolbar increased to 14.7 billion since launch. These KPIs form a solid basis for future monetization. We will be releasing a new version of Tambu very shortly with features such as toolbar integrated food and drink, local search, web search as well as gamification module. As a very recent development in our digital portfolio, we also launched Eleq, which is our live mobile game, developed by Argela subsidiary. This platform will also have future exciting applications, which will be -- we will announce in due course.

During the third quarter, we continued our disciplined approach regarding capital efficiency. Following the cooperation protocol, which is the leasing of Fixed Electronic Communication Infrastructure, this long lease in protocol we discussed earlier, we took some Vodafone chipset and telco there. We announced in the second quarter. The third quarter, we signed the first pilot project with Vodafone, which, of course, will be also used by Superonline, our Turkcell, for fixed infrastructure leasing in Sincan, Ankara. And excavation works have already started in the selected area, so this is a very exciting development as we now have both a mobile for fixed sharing, and we now have a leasing model for the fixed.

Within the scope of this agreement, we will be -- we will have -- Vodafone will have a 15-year lease agreement with us, which, of course, is very efficient for their accounting of this CapEx contribution. So for them, they can account for it as a CapEx. And for our -- we're getting the money for its asset CapEx. So the favorable prices for both sides. And this model allows us also to utilize existing infrastructure effectively, for which, of course, the using party will be paying a leasing charge while supporting all sector players in a more efficient capital utilization and, therefore, minimizing duplication.

On the other hand, we continue to evaluate options to spread mobile sharing. I've indicated before our Zonguldak is, in fact, a sharing module in which there's a one-for-one sharing on our facility. We also have passive sharing, as you know very well. And now we are also working on active leasing model, which means rather than being a one-for-one, the using party, say us, going on to Turkcell or Vodafone, we would pay a leasing charge to have access to their active facility, not only their passive facility, which means basically the base station and therefore, using our own spectrum onto their facility. We hope to be announcing something in that regard relatively shortly.

Otherwise, we have what we already have for now, which is a good progress on both mobile and fixed to minimize duplicate investments in this important period of FX exposure. In the third quarter, we also continued to leverage on our strong subscriber base with our attractive multiproduct offers. While we achieve to accelerate the number of subscriber additions to the record high levels, it is encouraging to see that more and more subscribers opt to have multiple telecom products. We now have the consent of 72% of our subscribers for sharing their information within the Türk Telekom Group companies. And among the constant universe of customers we consented -- who -- sorry, who consented last year to share their multi-product information, this has increased from 58% in the third quarter 2017 to 63% in the last -- the third quarter this year driven by triple plays.

The final strategic highlighting is relating to consumer finance. In the third quarter, we launched a new consumer financing model to address mobile handset financing requirements of our customers in cooperation with ING Bank and Hemenal Finansman. With the help of this model, we will be -- we'll facilitate our subscriber mobile handset purchases, while we will also be better able to manage our receivables risk. My friend, Kaan Aktan, will be covering this in his part.

Now to Slide 4. Our integrated business model with unmatched diversified portfolio in addition to benefits of our penetration initiatives, enabled us to deliver impressive subscriber growth in the third quarter. The number of total Türk Telekom subscribers have now reached 44.7 million, increasing by 10.4% year-on-year. It's the highest pace of the base growth since the IPO. Subscriber additions in the last 12 months was 4.2 million, which is -- again, is on this net add performance since the IPO. The main contributor to total subscriber net add of 1.2 million in this quarter is 586,000 net mobile subscriber additions. In the last 12 months, we gained more than 1.6 million mobile subscribers. We added 1.2 million net new broadband subscribers in the last 12 months, with 288,000 net additions in the third quarter, fueled by penetration-focused Internet Bizden campaign.

In the Home TV, we ended the quarter with 1.6 million subscribers, reinforcing our #2 player position in the pay TV market. We have 149,000 net additions in the third quarter. Finally, positive trend in fixed voice subscriber additions continued with 90,000 net additions in the third quarter, supported by the momentum we had in penetration campaigns in the broadband segment.

Now on Slide 5 with financial performance. During the quarter, we continued to execute with financial and pricing discipline without sacrificing on our strategy of driving penetration and data consumption for sustainable growth. Our revenue growth in the third quarter accelerated to 19% year-on-year. The strongest top line growth the company achieved since IPO. Exceeding IFRIC 12, revenue growth was 17% year-on-year. EBITDA performance outpaced revenue performance with an increased 34% year-on-year, reflecting strong revenue growth and our strong focus on efficiency improvements.

EBITDA margins was outstanding at 42%. After hitting bottom in 2016, our EBITDA margin has been expanding, thanks to all the initiatives undertaken by the team. On the back of this outstanding performance in EBITDA and revenue, we decided to raise our 2018 guidance, and Kaan Aktan will be providing that to you shortly. On the other hand, negative impact of FX rates increased markedly in this quarter. We had more than 30% depreciation of the lira against both dollar and euro, and this resulted in a TRY 2.8 billion net loss. On the other hand, underlying performance was very strong. Excluding impacts of FX losses and hedges -- FX hedges, our net income increased to TRY 1 billion in the last quarter from TRY 638 million a year ago by accelerating the top line growth and improved EBITDA margin. It's also important to highlight that we generated a significant increase in unlevered free cash flow to TRY 3 billion in the first 9 months, and also Kaan Aktan will be providing more detail on that.

Moving on to Slide 6 on fixed broadband. We maintained our operational momentum in fixed broadband as our focus on penetration led to another quarter of strong subscriber additions. Our fixed broadband base increased to 10.6 million, with 288,000 net new subscribers in the third quarter, out of which 50% came from the Internet Bizden. At the same time, our fiber subscribers reached 3.4 million, up 229,000 in the third quarter, the highest third quarter fiber net adds we have achieved so far. Additionally, we also had a seasonality in fixed broadband third quarter, thanks to back-to-school period back in September.

Our partnerships with existing companies continue, and their contribution in our net additions is increasing in line with our strategy of driving both penetration using diverse distribution channels. New deals with new HSD companies in other regions are progressing, and we aim to have presence in 32 cities, covering almost 70% of households shortly. This will prove, in my opinion, to be a very important step over the next 12 to 24 months. So it's a substantial investment we make at this time.

During the third quarter, we implemented some price increases. At the beginning of July, we made our traditional yearly inflation price adjustments at around 9% to 10% for uncommitted subscribers. In addition to this, we had higher inflation than we anticipated. We had another price increase in September at around 10% to 15% to the existing campaign prices for new activations. That increase is incremental to what we budgeted initially.

Overall, those tariff updates increasing share of premium fiber product and accelerating upsells from Internet level packages, for instance, the 35% of the entry package subscribers have upgraded their tariffs so far, allowing us to generate an ARPU growth year-on-year to TRY 44.4 contrary to the trends in the first half.

Next, Slide 7 on upselling dynamics. Our subscribers are getting more value from our broadband products, benefiting from extensive range of our portfolio with different speeds and capacities. Specific to the third quarter, the share of subscribers with above 25 megabit per second speed in our total fiber broadband base increased to 36% from 30% a year ago. Significant demand for clear -- for higher capacities continues, with the fixed broadband average daily usage of over 90 gigabytes of data per month. The share of subscribers using above 100-gigabyte packages doubled 16% from the total broadband base from 8% a year ago.

We have a Fiber Homepass of 17.9 million, and we're present in every city in the country. Going forward, efforts of upselling in higher speeds capacities will provide value to our subscribers will continue.

Next slide. On mobile performance, we delivered an excellent set of third quarter results in mobile in line with our growth strategy. We achieved an outstanding performance by adding 586,000 net new subscribers, coupled with robust ARPU growth. The number of total mobile subscribers reached 20.8 million at the end of the third quarter, with 1.6 million net adds in the last 1 year, out of which 1.4 million was in high-value postpaid segments.

As shown in the graph on the right hand, in the first 9 months of the year, we outpaced Turkcell with our strong net addition of 1.2 million, the highest first 9 months -- sorry, 9 million net additions we've had since 2014. We have been consistently increasing our subscriber market share, and our quarter -- third quarter subscriber additions give us comfort on continuation of that performance going forward. We aim to strengthen our position in the mobile market with new partnerships, such as we have now with Vestelcell, which will be launched soon. And this will also provide for further drive of Tivibu over their new television sets, which do not require a setup box. While accelerating the pace of growth and subscriber addition, we also had a visible ARPU uplift in the third quarter. The main drivers of 10% annual growth of our mobile ARPU are increasing data consumption and better tourism activity supporting roaming revenues. Apparently there are signs of easing competition pressures in the overall market. And we have been making price increases around 15% to 20% in our mobile acquisition status since the beginning of October.

Mobile data on next slide, Slide 9. Share of LTE users continue to make progress in the third quarter, reaching 44% of our mobile base, up by 12 percentage points from a year ago, while our LTE population coverage expanded from 80% to 89%. Acceleration of average monthly data usage by 38% year-on-year to 6.5 gigabytes, with limits -- with increasing LTE compatible smartphone penetration to 75%, resulted in 23% annual growth in data revenues in the third quarter. Data revenue share was 56% -- sorry, of our mobile service revenues in the same quarter. Similarly, leadership in smartphone penetration continues with 82% of our total subscriber base. Going forward, our alternative consumer financing model, Kaan will explain a bit more on that part relating to smartphone penetration.

Slide 10, TV performance. In television, we also delivered very successful results. As of the end of the third quarter, we have 1.6 million Tivibu Home subscribers, an increase of 149,000 in the last quarter. Satellite net additions were particularly strong as we continued to push our wireless home strategy, in which we aim to address the mass TV market with affordable pricing.

On the other hand, amid current inflationary environment, the following market trends -- and following market trends, we increased the prices of our TV portfolio. Still, we kept our prices at attractive levels compared to premium players in pay TV market to address each house, especially where -- with our synergy offers like mobile plus Tivibu campaign. In the third quarter, 96% of the satellite TV sales was with a mobile synergy offer. I think this is a very important metric that indicates how a bundle with a mobile satellite provides for a future upsell, such as the future data into these homes because this is a wireless home and they would be needing Tivibu Go, which will require more mobile data, and we'll have more to say about that in this coming quarter.

We have taken many steps in Tivibu business so far, rising to the #2 player in the market with 21% market share, outstripping both cable and D-Smart, while we had only 10% market share 2 years ago. In addition to the importance of content, this performance demonstrates the strength of being an integrated player with diverse segments, large customer base and strong sales network. We have not only the Turkish Basketball League broadcasting rights, this was even for 3 years, but we also have 200 TV channels, 6,000 plus VOD with differentiating self-install options and user interfaces. We are providing all of these features with attractive prices, especially with the mobile TV bundle since we are positioning TV as an attractive tourism model.

Just an extra note on the television market in general is that there are no mass-market players with any level of premium local content. Most of the local content is provided in a free-form with ad revenue coming from conventional advertising over television. That is actually the reason why catching pay TV, even though it's a very aggressive price, is in a very easy to access mode which I think is unique in a market like Turkey where people watch a lot of TV but have limited choices of premium content for pay TV, meaning the revenue comes from advertising.

Next Slide 11 is fixed voice. The performance we delivered in fixed voice over the last 1 year is a clear sign of the success of our actions. We provisioned fixed voice as a valuable component in our bundles. And to Türk Telekom fixed voice subscribers, we provide additional benefits in our other services. Latest example of this approach is the Internet Bizden. This is bearing proof for more than 1 year, delivering subscribers -- subscriber gains in these traditional voice services despite substitution from mobile, voice and/or VoIP. In the first 9 months of this year, we gained 230,000 net fixed voice subscribers. During the first 9 months, there is also an increased trend -- increasing trend in the fixed voice ARPU from 22.5 in the third quarter. We implemented 9% price increase to our uncommitted subscribers in our fixed voice that is coupled with increases in some onetime of -- use. We're also recontracting at higher prices. We closed relatively aggressive offers. All in all, third quarter fixed voice revenues posted a positive annual growth of 1.2% after many years of decline.

I hand over to Mr. Aktan.

[Kaan Aktan, executive]

Thank you, Paul. Hi everyone.

We are now on Slide 13 with more details on financials. Quarterly revenues reached to now TRY 5.4 billion. This is growing at 19% year-on-year. The main contributors were mobile and fixed broadband, which post viewer -- strong double digits rates of 18% and 14%, respectively. Growth in mobile is particularly strong, with service revenue increase of 90%. This is driven by both subscriber and ARPU growth.

We had one-off mobile revenue booking in this quarter, which mostly offsets the impact of lower commission revenues on device sales. If you remember, we had a decline in our device commissions due to our new present approach in device sales by putting simply the first focus on collection performance. In order to further support these initiatives, we now started the consumer financing program with partner financial institutions. ING Bank and

Hemenal Finansman, which is a subsidy of QNB Turkey are included in this program. This model will allow us to reduce the debt risks and which have -- which we have already achieved to some extent as of today. This will also enable us to design more attractive device campaigns and strengthening our competitive position in the market. We started offering this financing model in more than, today, 60 Türk Telekom stores and our target is rolling out quickly to reach 90% of our exclusive stores in the last quarter of this year or early next year.

Our international revenues are up by 45% year-on-year. This is driven by high FX rate in the third quarter. Our fixed voice revenues contributed positively this -- to the consolidated revenue growth after many years of decline. During the quarter, we maintained our pricing discipline. We are adjusting our pricing plans according to new parameters of our macro environment. We took out the adjustments in fixed broadband in the third quarter. We increased fixed voice prices in the last quarter. And in mobile, we have started having material price changes in October.

All our efforts are for reaching to our long-term market share target of 30% in mobile, but the -- while being still financially disciplined.

And cable was boosted in the quarter due to not only record high revenue growth but also thanks to our disciplined cost management efforts. We focused on group synergies, organizational streamlining, digitalization and receivable controls. These factors led to 34% growth year-on-year in EBITDA, much higher than revenue growth.

In the third quarter, we had an optimized commercial spending. Excluding IFRS 16 impact, we have 50% year-over-year decline in commercial costs. There is room for further efficiency on commercial expense side, such as directing more of our customers to our digital channels for both acquisition and customer service after digital invoice and subscription.

On the other hand, higher FX rates and increasing electricity prices draw our network expenses higher in the third quarter. We also had an increasing tax expense in relation to strong growth in mobile revenues. All in all, network and technology expenses combined with tax expense increased 31% year-on-year.

It's also important to point out that personnel expenses increased by 8.8% year-on-year in this quarter. The effects of rate increases of non-unionized personnel will be mostly visible in the second quarter of next year, this will give us some flexibility until the reflection of inflation to revenues. For this year, we now expect mid- to high single digits, closer to mid-level growth in personnel expenses. EBITDA margin in the third quarter was very sound at 42%. You will see, exclude IFRS 16 impact, EBITDA margin as 39%, indicates 2 percentage point improvement compared to a year ago.

Looking at the trend, I'm very pleased to see that the turnaround in EBITDA margin, which has started last year, has now reached to a sustainable level, which is about 40%. This TRY 5.1 billion net financial expense in the third quarter due to decline in Turkish lira against dollar and euro. As a result, we recorded TRY 2.8 billion loss in the bottom line. I would like to emphasize that excluding FX impact, net income is at TRY 1 billion, which is showing close to 60% annual growth on the back of revenue growth and operational efficiencies. We are taking many measures to reduce the impact of future FX headwinds. I will explain them in the next slide.

The other type -- tax income is close to TRY 1 billion in the third quarter, since it also is recorded during the period where most of the fixed telecoms saw their financials, it's allowed us to use scale forward close as quickly due to strong fundamentals of the stand-alone entity. CapEx in this quarter was at TRY 1.2 billion. This is in line with our plans. Year-on-year growth is due to base impact, and we grow to maintain our Capex guidance despite the depreciation of Turkish lira.

We are now moving to Slide 14. At the end of the third quarter, our net debt increased to TRY 18.1 billion and we had 2.3x net debt-to-EBITDA. The increase is mainly due to noncash FX sources, while we had a very strong cash flow as we will discuss. We have a covenant limit of 2.5x in our -- in all our loan agreements. Our covenant limit is comparatively low considering the industry standards and practices. We believe that we can also comfortably increase this if needed. We have strong liquidity of TRY 6.2 billion as cash at the end of the quarter. We only have TRY 2.5 million debt repayment during the next 2 quarters. We also have a committed facility of around TRY 100 million.

We will continue with our present approach, and we plan to maintain sufficient liquidity. We will also need the financing instrument, such as vendor financing, refinancing of the existing debt and also TL-based financing. We might also consider a Eurobond issuance early next year, and the decision will depend on getting the best market conditions.

Looking at our hedge position. The executive additional participating cross currency swap transactions of $200 million plus EUR 180 million during the quarter. We've reached now to around $1.5 billion equivalent of participating cost currency swap position in total. On top of that, we have increased a fixed portion of cash as a total HR FX-based debt. At the end of the quarter, our FX-based cash is at 84% of the total cash, which is up from 61% over a year ago. The dollar equivalent of our currency cash is now $837 million. As we discussed before, because of a high Turkish lira depreciation that protection of our existing hedges has declined. Addressing -- in order to address that increase, the protection, therefore, develop our existing hedges during the third quarter. Including the FX-based cash, our hedged portion of the debt increased to 57% in this quarter which was 44% in the second quarter. And we have plans to go above 60% on to year end.

We are now on Slide 15. Our impressive EBITDA growth, normalized CapEx and sound working capital management gave us an outstanding cash flow performance. We expect that that strong cash flow generation will continue over the next 12 months, since there will be no licensee payments or dividend payment. Our unlevered free cash flow in 9 months, in year-to-date was TRY 3 billion, which is compared to around TRY 300 million of last year. We also expect a high cash flow in the fourth quarter. It's also encouraging to see that now, our mobile opportunity is contributing to the creation of operating free cash flow.

Our ability on cash flow generation will enable us to deleverage to our comfort zone and in order to get to 1.5x in 1 to 3 years' time. And it's clearly seen on the chart, on this page, our current leverage is a well behind the leverage ratio of many EMEA telecom operators.

Finally, on Slide 16. You can see our revised guidance. In the first 9 months, our top line excluding that, IFRIC 12, adjustments grew 12% year-over-year, and our EBITDA reached TRY 6.2 billion, with a margin of 41%. On the back of the initiatives we have undertaken and strong performing in this quarter, we are now raising our year-end guidance. We expect the consolidated revenue growth to be around 13%, which was previously 11%; consolidated EBITDA to be at the range of TRY 8 billion to TRY 8.2 billion, which is up from TRY 7.6 billion to TRY 7.8 billion; and consolidated CapEx to be at TRY 4.2 billion.

Now we may start the Q&A session.

[Sabriye Çullas, executive]

Operator, we can take the questions.

[Operator]

[Operator Instructions] First question comes from the line of Tiron, Cesar with Bank of America Merrill Lynch.

[Cesar Tiron, analyst]

I have 3 questions, hope that's okay. The first one would be on the infrastructure sharing. Could you please share any metric, which you feel are relevant so we better understand how material these agreements would be with a 2- to 3-year view, for example, in terms of CapEx savings? Second, on the mobile side. Can you please share with us what you think drove the ARPU increase, both in postpaid and prepaid, besides the price hikes that you've implemented, especially it seems those impact postpaid ARPU in one go. And then the third question would be on OpEx. So looking at your margins excluding the IFRS changes, they've increased by about 200 basis points compared to last year. Is it fair to assume that some of this is due to the delay in the inflation pass-through for some of the cost? I mean, obviously, we have your revised guidance on EBITDA for 2018, but is it fair to say that some of those costs might only increase materially in 2019?

[Boulos Doany, executive]

Okay. I'll take the infrastructure sharing quickly. Look, I mean, the basic idea behind -- for example, let's say a mobile passive sharing is primarily a one for one. So what that means basically is that a caller for a caller. So the saving there is that you would be just installing your own active base station onto somebody else's passive. If, however, you're doing active sharing, then the entire costs of CapEx and OpEx is then shared primarily. If it's a sharing model, it's 50-50. If it's a leasing model, what we plan to do -- because the sharing model is a bit more obvious, when you do it in a one-for-one basis, even if you end up shutting down a station, relocating a base station, those costs, of course, we will be shared equally. At a certain point, you're saving is primarily up to, say, 50% of what you are doing. If it's a pay model, then what we do there is that we're going to be comparing what's the better price that we can get between Turkcell and Vodafone, especially for the urban areas. The urban areas, it would be more efficient to do it this way, especially in that you'll be paying one rental. So if you take site rental plus facility running costs, plus of course the CapEx annualized, it can decline to -- up to something around half. Ideally, of course. It approaches half in the ideal world. So that's basically how it works in the mobile field. In the fixed line field, the mobile there is made -- based actually on a CapEx contribution model. So the value to the requesting party is that somebody wants to use our infrastructure. The alternative to them is to roll it out themselves. So the win for them is that they would be doing around half of the funding, which presumably would be roughly around what should be their equity, if you like, for this type of investment. And the rest of it would be leased from us. The advantage, of course, to the acquiring party, it's cheaper than doing it themselves and you could say that their CapEx exposure would be around half where it would be if it's done otherwise. These are the numbers that we have found would work for both sides, by the way, because the first model that we tried on the fixed -- on Istanbul was more like a 75-25, that didn't work. 50-50 worked. Of course, the advantage to telecom in this particular case is that we are able to meet demand without us cutting the full CapEx increment. It suits the acquiring party as well. That, therefore -- and of course, we end up owning the assets, and we did it in a manner that the acquiring party can also account for it in a manner that worked. But I think what we've learned from the fixed line model, we are now trying to design a mobile that's a pay model. So what you pay incrementally for, for the party to carry your infrastructure is a CapEx contribution, in this case from us, on a right of use, almost indefinite. We account for it as a CapEx because it will be on like a 15-year lease. We can also account for it, therefore, efficiently. And of course, the total cost should end up being ideally around half what it would if you do it yourself.

[Hakan Dursun, executive]

My name is Hakan, Chief Marketing Officer. For the mobile part, actually, in the third quarter of 2018, we issued the revenue -- service revenue growth of 19.2%, which is a very strong revenue performance. And this performance is also above income on service revenue growth. At the same time, we were able to achieve a strong net adds in the last 4 quarters. We had significant net adds, and we were able to increase our subscriber market share for more than [ 500 ] percentage points. So given that our strategy on mobile is to get to above top of the market share but not at the cost of profitability, our execution proves that we will be able to execute and achieve our strategy on the mobile side because if you were able to achieve a market share increase as well as a 10% up increase and in total, our markets -- the -- our mobile service revenue is growing very strongly. Third quarter in the market, while the ratio in the quarter -- in terms of pricing, the incumbent started increasing the prices in the market, which Vodafone followed and also we followed. Also going forward, we will evenly -- opportunity even to watch the market move and you still get an opportunity to on -- rationalizing the prices further. We will definitely take a final issue on that, but we will also continue to gain market share on subscribers there.

[Kaan Aktan, executive]

So this is Kaan. And so regarding your question on OpEx and the impact of inflation and actually also the devaluation, well, it depends on which line item you are referring to. As I mentioned during the call, especially on the network technology side, the impact had been already referred into our numbers, it came through the increased prices because of FX-based spending on -- especially network and technology and also by the price increase in electricity and energy cost in the same line item. The other significant part of the OpEx comes from headcount-related costs, and it will be safe to say that the full impact of the inflation adjustment, the next time we'll do it, will be mostly visible when we come to the midyears next year. We are adjusting the salaries in the second quarter for the ballpark of the -- of our headcount and issue the full impact reflected to the numbers in the third quarter. For the commercial standing and also for the receivables, which is kind of a reflection of the commercial activity, we are very disciplined and independent of the impact of the inflation, which we might have found next year. We would still be very disciplined in the standing.

[Operator]

Next question comes from the line of Davis, JP with JPMorgan.

[J. P. Davids, analyst]

I have 2 questions. This is JP from JPMorgan. The first one is on your hedging in the quarter. You mentioned that you've added additional cost currency swaps and strengthened existing hedge positions. Can you give us an indication of what this will do to your effective interest rate going forward? I assume that these cost currency swaps come with certain costs attached to them. Separately, it looks like you've put through a material revaluation of your plant property and equipment. Can you please talk us through that and what the impact may be on the depreciation schedule going forward?

[Kaan Aktan, executive]

Yes. We have a mixed portfolio of all transactions and new transactions that we executed in the third quarter. So very briefly, the average cost of the hedge portion of that is now around 10% to 11%. And combined with unhedged portion, the total cost will be roughly around 6% to 7%. For the -- but naturally, the new hedges especially are coming at a higher cost. We may have some further transactions to be executed in the last quarter, but the amounts and the size will not be as significant as it is so far. For the revaluation of the asset, so naturally, this is not a new company so all the assets on the real estate side will record it of the historic values and ability to discount is compared to the fair market value. And we wanted to bring more visibility to the value of those assets and also to grow or protect our equity. So this doesn't change our plants or no plants on the real estate. It will be business as usual with those outfits, so the company will fully depend on its operating performance and cash flow going forward.

[J. P. Davids, analyst]

Just to confirm, you said that the overall effective interest rate was between a corridor of 6% and 7%. Is that correct?

[Kaan Aktan, executive]

Yes, that's true. That's it.

[Operator]

The next question comes from the line of Reznick, Mitch with Hermes.

[Mitch Reznick, analyst]

Two, debt related. On the covenants, so 2.2x getting close to 2.5. You mentioned you can increase the covenant room. Could you specify some specifics around that? Have you started negotiations? Is that done? Where do you think that needs to go in terms of the covenant room? I mean, obviously, from an operating point of view, things are moving well and fine, so I don't suppose that would be an issue. Just some color around that. And then on the plans for the Eurobond issue, you mentioned early next year. I assume proceeds would be to redeem the existing bond that matures in '19. Just some clarification on that. And then, can you talk through the cash value of the hedges that you have now, the ones that are in the money just so we can have that number to add back to the liquidity profile of the business?

[Kaan Aktan, executive]

Yes. The end of the quarter, first quarter, this is -- this was the time where we had the dollar rate as close to 6. Our covenant -- actually, covenant was at 2.3. We are considering the current level of the FX and also the -- improving the EBITDA performance every quarter. And I would like to remind you that the official measurement is -- it's midyear and end of year. So when we approach the year end, there will be a sizable headroom still left to 2.5, the contractual obligation of the company. So in that sense, we are in a much comfortable place as of today. The discussions are very new with the bank. So it will be -- it needs -- needing to give you any reference to the new level of whether it's doable easily or in a short period of time. So when we have more details on the new levels, then we start the discussions, we'll definitely let you know. And the -- what was the second question? I remembered the third one, but the...

[Mitch Reznick, analyst]

Sure, yes. I rattled off too quickly. The third question was on the -- your comments about the plans to issue a Eurobond in -- early in '19. Just a confirmation the -- these proceeds would be for redemption of the existing bond.

[Kaan Aktan, executive]

That's true. That's one of the -- I mean, for -- one of the alternative financing. So we will be, obviously, very careful in getting the right price if we do it next year. I say next year because we see the window of opportunity to be -- that would be if I come into an opportunity, that's how we see the market next year with a better price than what we have today. But that's not the only option. If we get it, obviously, we may use the cash for repaying our bonds in midyear to next year, but that other -- we have other alternative as well. Obviously, the best tool is the cash we generate because the company is very clearly in a very strong cash flow generation period. That's something we expected to see, but this is also very, very clearly reflected through our numbers. And we expect to have a similar trend to be in place for the next 12 to 18 months. But other than this, we are still investing and buying and procuring equipment from international suppliers. And normally, we want them to provide a certain financing together with the procurement through ECA. We always have the opportunity to tap that market with ECA. And as I said, we may even consider a local currency borrowing. It should be all about getting the right price, getting the right risk composition.

[Mitch Reznick, analyst]

Okay. And then the last question I had was on the cash value of the hedges that are in the money. Can you...

[Kaan Aktan, executive]

Yes. We have a positive net mark-to-market in those items. But currently, we don't have a plan to unwind, so that we can use the cash in case.

[Mitch Reznick, analyst]

Okay. And is it -- so the value of these hedges, is it -- can you give a number? And -- or you can just steer me to the financials.

[Kaan Aktan, executive]

I can get it for you. All details are in footnotes on the financial statement.

[Operator]

The next question comes from the line of Drouet, Herve with HSBC.

[Herve Drouet, analyst]

A couple of questions. The first one is firstly about the initiatives, some government initiatives to remit inflation. I wanted to -- on your side, how you are involved with your initiative and what do you believe will be the impact in the coming quarters. And do you believe that those initiatives are going to last? And looking forward, how potentially that may impact the way you -- affecting your future tariff and how the regulator might be involved potentially in term of a wholesale pricing? The second question is on the cost side. You mentioned, obviously, the -- I mean, on the impact of inflation, especially on energies and network cost, which has to come relatively quickly. But back to the employees cost. Can you remind us when do you usually renegotiate the -- as -- their salaries? I mean, is it something more -- you do more in Q1 and where we may see more of inflation impact on the employee cost more towards the beginning of 2019? Or -- and if it is the case, where do you think we might see the expense employee cost that you know growing at that time? Do you think it tends to be below inflation? And finally, just about the savings, back to the first questions you may get from sharing of the network. You were mentioning this 50% potential savings you may do on CapEx by this sharing. I just wanted to mention, does it include -- when you say that, is it total cost, i.e. the CapEx plus the living cost, everything being taken into total? So both of them, so both sides, do you believe you can achieve this 50% savings results CapEx sharing exercise?

[Hakan Dursun, executive]

Yes, let me start with the first part. To manage the revenue side of our business, the basic kind of answer is the pricing part, apart from us. We have recent deducted inflationary pricing adjustments to almost all our services. I mean, in summary, we increased our mobile prices around 15%, 20% in the last couple of weeks, plus we also applied to -- that 15% increase to our fixed broadband focus in the market, which is also very recent. And we will continue to act in a financially disciplined way, of course, to manage our revenues positively. And for the government side, we haven't seen any pressure from the government side yet, and we aren't expecting it, too. The government last announced the inflation campaigns for volumes participation, so there is nothing mandatory. And we have full support on this program as the main company in this country. And we need to be participating to this campaign with a 10% discount for the first 3 months of a constructive acquisition campaign on selected tariffs in mobile, fixed broadband and TV businesses, which in total is a positive business case for us anyways. And this is also ensuring a smooth transition for our increased prices at the same time. So we see this is as a positive. For the second question, I will ask Kaan to answer.

[Kaan Aktan, executive]

Basically, we have 2 group of employees, as you can call them white collars and blue collars. The blue-collared part, which is smaller in number of headcount and also the shares they get from the total headcount costs, they may have slight adjustments at the beginning of the impact -- impacts will be limited and there are -- the real adjustments, the real impact of the inflation will be -- will come with the agreements we signed with the first group at midyear. For the bulk part, it's a -- I mean, the white collar is -- the inflation adjustment is made in end of April. So when we finish the second quarter or when we get to the first quarter numbers, all the adjustments will be fully reaccepted into the numbers. Until then, the first and second quarters, there will be a gradual increase in the headcount-related cost. But I'm excluding from the discussion potential moves between in-house and outsourced employees because from time to time, we may have different approaches because we are also using some outsourced services. Sometimes we take them into the company as an employee or we are doing the opposite of it. But if anything happens in that sense, we will give enough detail.

[Boulos Doany, executive]

Okay. I mean, your question on sharing. When I give the 50% as the, if you like, ideal number. If you imagine, for example, like greenfields, mobile, 2 operators sharing model, each one runs their spectrum in their -- on their own base facility or on somebody else's, if they were splitting everything, one-for-one, their rough saving will be around 50%, right? Of course, in reality, if you are relocating your base station to fit onto somebody else's, so you're gridding up, there are costs to do that. That's why it wouldn't be really 50% if you have an existing facility. And if you get to the active leasing model, it will also depend on the charging margin and what is the cost to the party on which you are going and therefore, it's important to grid to other party's network and to find which of them is giving you a lower price. If you were to compare, let's say, for example, doing it in a built-up area where you need to build 5,000 additional base stations compared to going onto somebody else's, the saving is unlikely to be the absolute full 50% in this case. So the share model would normally work better. If it's a pay model, the idea there is to go with whoever gives us the lowest price.

[Operator]

Next question comes from the line of Singh, Maddy with Morgan Stanley.

[Madhvendra Singh, analyst]

Just a couple of questions. Firstly, on the debt side of things. Given the impact we have seen and volatility you have seen on the currency, do you think that their strategy of continuing to borrow in hard currency is still the right strategy to follow? Or would you think that maybe reducing the hard currency exposure on that side somewhat and -- like deliver as fast, especially given that you're not paying a dividend as well. And then maybe if that means you grow a bit slower, that, that is okay. And secondly, just a related question on that, assuming that there would be no dividend for this year given the FX losses and all, what do you think -- how do you think 2019 dividend would look like?

[Kaan Aktan, executive]

For the funding part, the first part of the question, I mean, local currency funding is obviously within our plan. We made this decision to raise local currency exposures in our cost of funding. I mean, to -- the way to do it is -- obviously, the more preferred -- they used to create a real Turkish lira exposure by borrowing in local currency, and that's mostly through the -- from the local party. But we didn't have the right market conditions for doing that. So when we have the right price and the right level of liquidity in that market, we definitely like to be part of it through a -- maybe a local bond issuance of -- or the different instrument. But if you see -- either way the act is for dealing the FX with, we will be using the relative instrument to come with our share -- our currency exposure to local currency exposure. That will, obviously, be our -- already have -- we already have a large debt portfolio. The easiest way for a -- to come here to local currency is to reduce the alternatives. We will also continue doing that. And I think in the long term, that will be a real Turkish lira debt instrument within our portfolio.

[Madhvendra Singh, analyst]

And what about our dividend?

[Kaan Aktan, executive]

For the dividend side, obviously, we are very straightforward on the policy for the dividend. The -- it said if they didn't make income, then distribute it -- this is distributed. When I look through the numbers for that year and the -- under that -- right here is -- as of today, it will be very difficult. It's hard to say that there will be dividend next year based on those factors.

[Madhvendra Singh, analyst]

Sorry. I meant about the dividend for 2019 earnings. So the one which will be paid in 2020, not 2019.

[Kaan Aktan, executive]

I mean, again it's the same principle. The same principle will be in place. And so far, there's no change to that. You could see there is net income the -- in next year. Then if you consider the dividend payment of -- again, it's totally dependent on the shareholder decision. If they feel that should...

[Madhvendra Singh, analyst]

Sorry, the -- speaking over you, sorry. Basically do you know -- the background of the question is that I have heard that in the future, you will have a change in legislation which will allow you to remove FX losses from the calculation of net income to pay a dividend. So I'm just wondering, by when can you actually start doing that?

[Kaan Aktan, executive]

I think that's not the -- this isn't taken to -- from that perspective. I mean, what we know, it's not impacting the formulation of the dividend payment. It's a formulation for local legislation to coincide with the capital and liquidity ratios. They are -- if the net income -- but the -- now the shareholder wants to keep the money in the company because we had a loss in this year that -- so it will be fully dependent on their decision. So I think it will be too early to make a judgment on that one.

[Operator]

The next question comes from the line of Ozkan, Atinc with Wood & Co.

[Atinc Ozkan, analyst]

This is Atinc from Wood & Company. First of all, please accept my deep condolences for your board loss. If I may, I have -- I'd like to ask 3 questions. First one is regarding your recent accounting change and the way you account for your land bank, is this just a more realistic accounting practice being taken into consideration? Or a final future disposal, disposals to raise cash? So that's the first question. The second one is that earlier in the presentation Kaan mentioned the net debt over EBITDA target in 3 years, but I missed that. Was that 1.5x? If you could clarify that, I will be pleased. And my third question is regarding your pay TV segment. Now that you are in -- you have a good #2 position, what's the end sign of widening use of Netflix on your network and whether this is a social concern for you? And any plans you may have to invest in additional premium contract, if you could elaborate on those.

[Kaan Aktan, executive]

Well, the first question on the land bank building, well, as I mentioned in the -- I think it was in a prior question, it's purely for bringing visibility and transparency to the balance sheet by putting the right sale or the fair value of the asset and we'll stray from the equity. So there is no change in our plans for disclosing or not disclosing the asset. So we will not be depending on anything -- in any funding or cash that will be -- we can generate from the sale of the fixed asset. That's not within our plan. The company has already made sure the way of deleveraging. If you look to the numbers, in dollar base in midyear, last year, our net debt was around $3.6 billion. Now we are at the level of $3.1 billion. And maybe we are being in a hard way, but we are deleveraging the company by simply creating cash flow on the operation and that will continue. For the covenant part, I mean, we always want to convert to 1.5 level. But there is a part that we cannot control in this, and it's -- solely, it's the FX rate. So we are still -- we have no unhedged portion of the debt. So the timing on the FX, that may be used up or down in our leverage ratio, but we definitely would love to be below 2 and converge to 1.5 in 2 to 3 years' time.

[Hakan Dursun, executive]

I mean, for the TV part, we are happy to reach that 25% -- 21% market share, up from 10% 2 years ago. Our pay TV strategy is to offer affordable prices to this market, especially with satellite TV and possibly other services. We have a very strong content that we can offer and to offer a good price and this includes the Basketball League exclusive for 3 years, the English Premier League, all documentary channels, 6 channels, video-on-demand content, music channels. So it's a very strong content proposal and it's getting a very good reaction in the market. Regarding global content players like Netflix, we do not see them as competitors. And so our Tivibu product, service, business structure, accordingly, we see them as complementary. So we are evaluating every opportunity to cooperate and add to our existing strong content. So we don't see them as a competitor in this sense. Of course, for such players, there is also an opportunity to own the corporate data website and data center placement site. So we are always open to such opportunities and in discussions with such players on a continuous basis.

[Boulos Doany, executive]

I think if you mean -- this is Paul, Paul Doany. If you mean that on like network carriage, like video capacity carriage, as a burden on the network...

[Atinc Ozkan, analyst]

Yes, that's exactly what I meant.

[Boulos Doany, executive]

Yes. Okay. So the answer to that basically is that Netflix' market share in Turkey, in fact, is very small. And we're very happy to carry that traffic because people -- if you really want to know what the biggest burden on our video carriage, then Netflix is definitely not one of them. A good part of that would be general YouTube and some illegal film watchers, which actually are, of course, it's illegal, but in fact they need connectivity for that so we take the average within our 90 gigabytes added capacity for Home. So a very, very small percentage of that is actually, normally, pay type, which is -- which for us is very important in the sense that we actually want people, of course, to need more, to upsell more in relation to capacity. So any form of pay service the customer pays for, they pay us and they pay Netflix, it's very good. If they have access to, like, free video, which frankly, is the bigger share of what we have to carry, that's actually what we use to upsell. So as there is more demand, if anything, that's also good for us. In relation to our pay TV, the complementary part that -- what Hakan has mentioned is that if you watch anything when you want it, such as YouTube or Netflix or whatever because you can watch it as you stream it, the difference between our normal satellite TV is that, that's basically coming through satellite and therefore, the catch-up version of it is what we can provide other, Tivibu Go, for example, and that becomes something very important, whether you have a fixed broadband connection in the home or the ability for one, such as a copper line in there or you can have more data on your mobile. And again, all of these are ways that we can use to upsell or carry more data. So we're not actually in that burden syndrome.

[Operator]

The next question comes from the line of Latmiral, Ludovico with Kairos Partners.

[Ludovico Latmiral, analyst]

So I've got two questions actually. First, I would like to know whether you think that there might be a capital increase somewhere in the future. And then could you please tell us kind of a bit more on the interest rates that you pay. If I got it right, from the other question from JPMorgan, you're hedging around 11% and then you have again some 6% of effective rate. So this makes something like 17% on your USD-based debt, is that right?

[Kaan Aktan, executive]

Okay. For the capital increase, we don't see any such things for now or in the future. We don't have any proposition or request from the shareholders for sharing their capital increase in the company. For the second question, the -- I said that the hedged portion comes with a -- now a cost of 10% to 11%. The unhedged portion comes with a cost of 3% to 4%. So the weighted average for the total debt portfolio comes to 6% to 7%. I don't -- those numbers are clear and they make sense?

[Ludovico Latmiral, analyst]

Yes. So may I ask you, which is the rate in Turkish lira, Kaan? So I guess that if it's 4% in U.S. dollars, then...

[Kaan Aktan, executive]

Yes. The -- I mean, the -- obviously, 10% to 11% is the rates for the Turkish lira, part of -- or the hedge part of the -- okay, it seems the -- off the slides 6% or 7% over the total value of the debt and you get the net interest charge on the cash basis from that -- from the total debt.

[Boulos Doany, executive]

You had a question on capital increase...

[Kaan Aktan, executive]

Yes, I...

[Boulos Doany, executive]

Okay.

[Kaan Aktan, executive]

That's [ a 3-parter ].

[Boulos Doany, executive]

Okay.

[Kaan Aktan, executive]

We can have the next question.

[Operator]

The next question comes from the line of Farazi, Dilawer with Loomis, Sayles.

[Dilawer Farazi, analyst]

It's Dilawer Farazi here from Loomis, Sayles. A quick question. Given the volatility in FX rates that we're seeing, what's your -- the hedge ratio you -- I think you alluded to everyone you want to be around 60% by the end of the year. What -- how do you actually structure your hedging strategy? Do you look at it on a quarter-by-quarter basis? What's the process involved in that? That's the first question. Second question is around the covenant renegotiation. Can we expect to have news on that by the end of this year? Or is it an imminent thing? Or is it an ongoing sort of long, drawn out process?

[Kaan Aktan, executive]

For the covenant question, obviously, it's not a -- it's still a more pressing issue for us right now. Looking at, well, the FX rate, it -- that will -- we simply -- we want to have the flexibility in case there are -- there is -- for the volatility in the FX rate. But again, if the negotiations are not moving in the direction that we like them to be, so we will not participate to any such deal. So -- and I cannot tell you that there is an -- officially a start of process -- in the shape of such process there aren't -- it's -- this is just an -- right now, an idea, and which is why we are bringing this up. So -- and let me remind you that, again, this TRY 6 is the currency rate, it's the end of the quarter we're at 2.3 market rate. And what was the first question again?

[Unknown Analyst]

It was about the strategy, yes.

[Kaan Aktan, executive]

I got it. Leverage ratio. So the first part of long-term plan, by the way, so the leverage ratio that you saw, we had a plan to increase gradually the hedge portion of the debt every quarter. So obviously, the volatility that we saw in the third quarter, we ran a little bit higher than what we planned, and we are still wanting to be above 60%, not to stay at 60%. It will again depend on the market conditions. So far, the rate seems to be in a far better level compared to the end of the quarter, but the other currency is obviously the level of the interest rate. So whenever we see that we have the right numbers and we can get the effective protection in return for a meaningful cost, so we may have a higher percentage of getting that, give you the level that we want to get. It's lira, but just say that we want to be above 60% for the time.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Türk Telekom management for any closing comments. Thank you.

[Sabriye Çullas, executive]

Yes. Everyone, thank you for participating we can now close the call.

[Kaan Aktan, executive]

Thank you.

[Sabriye Çullas, executive]

Thank you.

[Boulos Doany, executive]

Thank you.