Turk Telekomunikasyon AS

IST:TTKOM.E

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gellie, your Chorus Call operator. Welcome, and thank you for joining the Türk Telekom conference call for the first quarter financial and operational results. [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. Madam and gentlemen, you may now proceed.

[Sabriye Çullas, executive]

Hello. Welcome to 2018 year-end 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. Paul, you can go ahead.

[Boulos Doany, executive]

Thank you. Hi, everyone. Thank you for joining this call. Before I start the presentation, I would like to start with a few words about our recent changes on the corporate structure.

In December, the 55% block shares were taken over by the special purpose vehicle Levent. Following this, we have the related board changes and we also have an extraordinary general assembly. We now have a more agile board structure with 9 members from the previous 12, with a valuable contribution of our new board members we will be continuing to implement our long-term business plan in a more determined manner and grow the company, creating a value for all the stakeholders.

I will continue with strategic highlights of this quarter on Slide 3. In this quarter we continue to deliver on our strategic objectives after a challenging third quarter. The early actions undertaken by both the government and the company started to deliver results enabling our outstanding performance across all KPIs in the fourth quarter of 2018.

The team managed excellent execution of our primary strategic imperatives of driving fixed broadband penetration growth with defensive fixed voice as well as increasing mobile market share along with our opportunistic move into the Pay TV growth segment benefiting from the state of play in the TV market, which I will explain a bit later on.

In terms of fixed broadband, we got almost 40% of our fixed broadband net additions in the first quarter -- in the fourth quarter, sorry, through our affordable penetration campaign entry package, Internet Bizden. Based on the penetration campaigns as well as partnerships with existing companies are also continuing to grow through these new channels.

We are well positioned to deliver value with digital and ICT solutions in addition to core services. We continue to drive digital services through our Tivibu GO, which is our next-generation -- new generation TV platform; Muud, which is our digital music platform; and e-dergi, which is the digital reading platform; and Tambu, our national keyboard.

Tambu has reached 8.3 million downloads by the end of last year, more than double its nearest competitor. Tambu was viewed 17 billion times, 36 billion interactions were generated over its application since its launch. We renewed in December new features in Tambu with a new customer interface. The new features include location-based food and beverage venue search, web search engine and keyword search from domestic content with stronger basis for monetization and we will be elaborating on this more in the next quarterly reporting.

Our other customer-focused platform, which is the Online Service App, Online Islemler was downloaded 23.8 million times since its launch, supporting our strategy of providing best-in-class self-service customer experience and driving operational efficiency.

TT Mobil subscribers using the app exceeded 10 million in 2018. In the fourth quarter, we integrated our Corporate Security Services under the largest Cyber Security Center in Turkey addressing increased cyber security threats. We target to provide end-to-end solutions in global standards to our customers, leveraging on our strong position in telecommunication space and strong brand positioning.

We continued our initiatives to drive efficiency by utilizing infrastructure effectively. We value infrastructure sharing opportunities to minimize duplication of infrastructure and unnecessary duplication. As you may recall, we announced the signature of our cooperation protocol with Turkcell, Vodafone, Türksat and Türk Telekom. The protocol aims efficient use of existing infrastructure and acceleration of new business.

Within the scope of this protocol, we recently completed the pilot project with Vodafone in Sincan, Ankara. While the incremental CapEx of the project is financed by Vodafone, Türk Telekom will own that infrastructure. We believe this leasing model with a built-in CapEx contribution can form the basis of our next-generation network, such as slicing radio over 4.5G and getting ready for 5G where we can beat the fiber to the most economic point of the other operators networks, in this case, obviously, will be Turkcell and Vodafone, who are the mobile network operators in this market. This is what we call actually fiber to the site, FTTS. We have more to say about this in the next quarter.

We're also evaluating sharing opportunities with all players in the mobile sector including active sharing, as you may have seen within the Vodafone dongle duct. And package sharing, we have had with Vodafone for a long time and RAN leasing options which would be more cost-effective to do with Turkcell in the larger cities. So we are looking really at all alternatives and we have now at least one working model that works very well in low population density, which is where we have a coverage challenge and we cannot, obviously, monetize on that investment.

For a sustainable subscriber growth, we continue our focus on cross-sell, benefiting from our integrated structure. Share of customers providing consent for sharing their information within the CT group companies increased to 72% from 66% a year ago.

Triple play drives the increased multiple ownership and among the constant universe of customers who consented a year ago, our multi-play product ownership increased from 58% to 63% in the fourth quarter last year.

Our Corporate Venture Capital strategy to invest in scalable ventures in priority verticals is moving forward. Our stake in Doctor Turkey, 5%, is moving forward and we have made a recent transaction at 6.9% first tranche in MentalUP, an education vertical. MentalUP, our app, is a game-based learning platform for K-12 students to provide educational and developmental brain training web and also for students but also for adults. We will continue to invest in such type of opportunistic openings in verticals such as health, education and possibly also in energy and in any other viable horizontal.

On Slide 4, net subscriber additions. We delivered strong subscriber growth in the fourth quarter across all business lines with our integrated business model and our unmatched diversified portfolio and penetration increase initiatives. We cost effectively executed our strategy of growing our customer base, seizing opportunities for cross-selling and effective retention management, leveraging on our effective multiproduct offers total number of telecom subscribers reached 46 million with 1.2 million net adds in the fourth quarter last year. For the full year, net subscriber gain was 4.3 million, by far outperforming the previous year of 2.8 million.

Mobile subscriber base reached 21.5 million with 718,000 net additions in the fourth quarter 2018, the highest fourth quarter. For the full year, net subscriber gains reached 1.9 million, the best annual net adds since the IPO. Importantly, our quarterly mobile churn rate decreased 6%, the lowest churn achieved, again since the IPO. We added 1.2 million net new broadband subscribers in 2018, again the best performance over the last decade on the back of our penetration growth initiatives across all channels. And in the fourth quarter, net additions was 308,000.

Home TV subscribers reached 1.7 million with a record full year net add 492,000. Tivibu Home moved from the fourth player position in 2016 to the second position in Q1 '18 in the Pay TV market and this position was reinforced throughout 2018, strengthening our base for the wireless home strategy.

Lastly, the positive trend in fixed voice subscriber additions continued supporting the momentum of our fixed broadband entry package penetration campaign. The number of total fixed voice subscribers continued to sustain growth for 6 consecutive quarters with 108,000 net additions in the fourth quarter.

Slide 5, financial performance. I will briefly present, because Kaan will give you more detail. During the quarter, we continued our balanced focus of subscriber growth and ARPU growth executing with financial discipline.

Our TRY 8.4 billion EBITDA exceeded the high end of our EBITDA guidance range of TRY 8 billion to TRY 8.2 billion. Our 2018 EBITDA margin was outstanding at 41.3% on the back of our efficiency program executed across the entire company. We delivered a turnaround in underlying EBITDA margin with 4.2 percentage point improvement over the past 2 years, supported by a more streamlined organization, effective cost control, scale advantages, integrated synergies and enhanced efficiencies on the back of data growth and some digitization.

While FX rates impacted our net income negatively in the first 9 months of '18, we had a strong recovery in the fourth quarter.

Our fourth quarter net income was TRY 2.2 billion, a significant improvement compared to net loss of TRY 113 million last year thanks to stronger operating performance and improved FX environment.

Fixed broadband performance on Slide 6. Our strategy to increase fixed broadband penetration continues to bear fruit driving strong growth in the fixed broadband market. We had 308,000 net new subscribers in the fourth quarter, out of which around 40% came from the entry package, our affordable entry package. Moreover, regional penetration campaigns also supported our growth with the best performance over the last decade. Net subscriber additions in 2018 was 1,163,000, and our fixed broadband base reached 10.9 million.

The contribution of partnerships with existing companies in our net additions is increasing, in line with our strategy to drive penetration through a more diverse distribution channel. In addition to our channels coming in Turkey, we also cover 70% of households through these companies.

Fiber and upsells are also driving our growth, where customers enjoy super fast speeds. Our fiber subscribers exceeded 3.6 million, increasing 254,000 in the fourth quarter. More than 80% of the total broadband subscriber net additions came via fiber offers. Share of our subscribers who prefer over 20 megabits per second increased to 37% in the fourth quarter, which was 31% a year before.

In September, we had price increases in the range of 12% to 15% for existing campaign prices for new activation. Overall, with tariff changes, the existing share of fiber product up-sell from entry packages we see an acceleration in the ARPU growth. Our ARPU increased to TRY 45.9 in the fourth quarter, by 3.3% quarter on quarter and we expect further momentum in this year.

We provide our customers a wide variety of offerings, building on our strength to provide abundant capacity efficiency. Starting from 2019, we lifted fair usage quota for unlimited tariffs and launched high-capacity offers, we also included 6 megabit per second and 12 megabit per second in our portfolio to add affordable pricing points during the transition to unlimited world.

As a customer-oriented company, we continue to invest for better connectivity and best-in-class customer service in every city in the country. We continue to strengthen our position in fiber ownership, increasing our fiber network to 282,000 kilometers and Fiber Home Passes to 18.6 million as of end of last year.

Mobile performance on Slide 7. We also delivered excellent mobile results. We gained almost 2 million net subscribers in 2018, which is a record, supported by our cross-selling activities and synergy offers, including, for example, our mobile TV cross-sell as well as our improved network quality and coverage, benefiting from our full spectrum.

Number of total subscribers exceeded 21.5 million by year-end. We added 718,000 subscribers in the fourth quarter. Based on the limited reporting from competition, we believe we are outperforming them in terms of market share growth as we are better able to maximize our differentiation ability, in particular, cross-selling.

Overall, 2018 results show that we are on track to increasing our mobile market share to our desired fair share towards the 1/3.

In the fourth quarter with our customer-oriented initiatives and effective retention management, we have the lowest churn rate ever in mobile at 6%, which also shows that we can grow our subscribers effectively.

In addition to our solid fundamentals, our online transactions at our loyalty campaign principal and new touch points within our customers had a major contribution to our strong retention performance.

While accelerating the pace of subscriber growth, we also had a strong ARPU. Our mobile ARPU increased by 11% year-on-year with higher data consumption combined with inflationary price increases.

The market continued to be more rational in the fourth quarter. In the beginning of the quarter, that quarter we closed our aggressive tariffs in line with the market. We launched new headline acquisition campaigns with around 15%, 20% higher prices. In December with those new tariffs it was another 10% increase. Supported by these actions, our service revenue growth accelerated to around 20% year-on-year in the fourth quarter from 12% in the beginning of the year. However, our reported mobile revenue growth was 14% lower than the service revenue growth due to one-off provision and our more prudent strategy in relation to device business.

Mobile data on Slide 8. In the fourth quarter last year, LTE population coverage expanded to 91% from 83%. Meanwhile, the share of LTE users continued to grow, reaching 46% share among our mobile subscribers, up 11 -- from 11 -- by 11% from a year ago.

Average monthly data usage increased from 4.8 gigabytes last year to 6.1 gigabytes in the fourth quarter, with LTE-compatible smartphone penetration reaching 75%.

Similarly, our leadership in smartphone penetration continued with 83% of our total mobile subscriber base. With strong consumption growth and price increases, our data revenue increased by 25% in the fourth quarter last year.

On the other hand, in the fourth quarter we offered less free data via our loyalty campaign since if it’s compared to Q3, when we offered more substantial data to affecting customers, as such our data usage decreased slightly while revenue per gigabyte increased quarter-on-quarter.

TV performance, Slide 9. We would like to remind you that this is an opportunistic strategy in relation to pushing for Pay TV, targeting the mass market benefiting from, firstly, limited penetration due to high prices of the main Pay TV players as well as a very high free-to-air customer base, aiming to penetrate as many homes as possible using satellite television for our growth market as we happen to have satellite television as well as our fixed broadband offering over broadband for a top up price over the main FBB price.

At the end of the fourth quarter, we reached 1.6 million Tivibu Home customers, with the best annual performance in net adds increasing our Home TV base by 492,000.

During the year, satellite net additions were particularly strong as we focused on our wireless phone strategy, addressing the mass TV market with affordable prices. And again, these are very easy to restore and incur less customer experience issues enhanced, of course, now by our Tivibu GO offer which means we can provide additional features and that can drive either additional WiFi demand or hopefully also some mobile data.

As we are now the #2 player with 23% market share in the large 3 markets, surpassing both cable TV and D-Smart we are now increasing prices to cover for our increased set-top box FX exposure. Therefore, while continuing to focus on wireless home strategy, we will also target to monetize our existing customer base with a more cost-effective approach.

Building on our cost-effective content strategy, we will continue to broadcast Turkish Basketball League for 3 years. We also decided to shift focus to non-exclusive outsourced TV channels, in-house cinema channels in line with our content cost optimization strategy as there is very little differentiation in the markets in Turkey. And also we have to recognize that there are very lax copyright enforcements in this area, investments in content are not an option to any of the current TV players such as beIN, D-Smart or the online players as they are called.

Now all of which fixed broadband and wireless data where we gain from their growth through fixed broadband wholesale and WiFi access. Accordingly, our ARPU stats increased quarter-on-quarter. Nevertheless we keep our prices at attractive levels compared to

[Audio Gap]

[Operator]

Ladies and gentlemen, we apologize for the pause. Please hold your line. You will be hearing music until the session resumes.

[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, thank you for holding. We are to resume our conference.

[Boulos Doany, executive]

Okay. Sorry about that interruption. So we are on FBB and accordingly our ARPU stats increased quarter-on-quarter. Nevertheless, we will keep our prices at attractive level compared to the previous players in the market, especially with regards to our synergy of bundling this cross-selling business with mobile broadband especially our Tivibu campaign and driving Tivibu GO across the entire market.

Meanwhile, the number of subscribers overall with Tivibu GO has now reached 2 million, with 394,000 net additions during the year. Our focus will continue to increase Tivibu GO subscribers and building on this platform.

Fixed voice, finally, on Slide 10. The result of fixed voice segment in the last year shows a clear sign of success on executing on our well designed strategy. The fixed voice is an important component of our integrated offering and, obviously, an important revenue source. For Türk Telekom, fixed voice subscribers will provide additional benefits and other services such Internet Bizden, the entry package. This also supports our retention acquisition performance in the fixed voice. This strategy enables our strong results for the last 6 quarters, with subscriber growth in this legacy voice services despite many substitutes. In 2018, we increased our fixed voice subscribers by 338,000, 108,000 in the fourth quarter. This performance is clearly outstanding.

We not only increased our subscriber growth, increased our fixed voice revenues managing this through a tariff structure. In 2018, fixed ARPU also seen some increase with TRY 22.5 in the fourth quarter. We also are recontracting at higher prices. With these initiatives, the fixed voice revenues posted a positive annual growth of 5%.

And I'd like now to hand over to Kaan Aktan.

[Kaan Aktan, executive]

Good afternoon, ladies and gentlemen. We are now on Slide 12 to discuss our financials in more detail. Fourth quarter consolidated revenues reached close to TRY 5.4 billion, growing 12.5% year-on-year. When we exclude IFRIC 12, top line growth was close to 14%. Mobile and fixed broadband segments will remain contributors which both grew at strong double-digit rates of 14% and 15%, respectively.

In the fourth quarter of 2018, the increase in mobile service revenues was actually around 20% year-over-year, while we reported mobile revenue growth of 14%. This was impacted with lower commissions on device sale and also one off provision of TRY 32 million, which is related to regulation on fixed user charges. As you might remember, we have a decline now in device commissions due to our more prudent approach in device sales and this also led to lower receivable cost. It's important to note here that this impact will be mostly in the base of 2019 with reduced exposure to device business, we are also comfortably positioned considering the discussions on limiting the number of installments in device sales.

Our International revenues growing 46% year-on-year in the fourth quarter. This is driven by higher FX rate and higher volumes especially through telecom international, our international arc in wholesale data, voice and roaming services. We are very satisfied with the performance of our fixed voice revenues which increased by 5% year-over-year after many years of decline, but fixed revenue still diluted revenue growth to some extent. When we exclude the fixed voice revenues from our underlying revenues, revenue growth is around 16% instead of 13.8% in the last quarter.

With respect to pricing dynamics, we continue to execute pricing actions in a disciplined manner without sacrificing our strategy of value penetration and data consumption. Major cost pricing plans according to the macro environment, at the same time, we are not ignoring market signings.

In fixed voice, we increased some tariff components such as [ transfer and ] transport fee in the last quarter. We also increased tariff pricing by 10% to 15% in January. In fixed broadband, we increased our prices to new customers by 12% to 15% in September last year. Additionally, we increased our prices for uncommitted subscribers by around 25% in mid-January.

In mobile, in the beginning of last quarter, we closed our aggressive tariffs and announced new headline prices with 15% to 20% increase.

In December, in addition to that, we launched new tariffs with another 10% price increase. All these pricing actions will be impacting revenue growth in [indiscernible] subscriber.

The next excellent development is the turnaround in EBITDA margin, continued throughout the year, including last quarter. In the whole year, we delivered TRY 8.4 billion EBITDA, this is well above the high end of our EBITDA guidance. The margin was 41.3%, which is 7.3 percentage points higher than in prior years. This is supported by both scale economy due to growing customer base, efficiency measures undertaken in office management, including organizational realignment, integration synergies and utilization and prudent receivable management. Even when we exclude IFRS impact, which was [ in demand for the first time last year ] the EBITDA margin is still at 38%.

EBITDA margin in the last quarter was also excellent and it was at 41.3%. When we exclude IFRS impact, the margin was 37.8%, and again 6 percentage points higher than the same quarter from prior year.

One of the key success factors for us is to make the turnaround in EBITDA margin sustainable. And I believe that the company protected positions to deliver this outcome.

If you check ARPU financial disclosure, you will also see that the contribution of our mobile operation to the consolidated EBITDA is now above 30%, it came on the back of 56% year-over-year increase in mobile contributed EBITDA.

In the fourth quarter last year, operating expenses decreased by 3.2%, excluding IFRIC 16, which was intact. I know that these are complicating our numbers, but the growth in operating expenses [indiscernible] the FX impact was 4.1% year-over-year. [indiscernible] revenue growth for inflation for devaluation with respect to [indiscernible] disciplined OpEx management had severely impacted our financial delivery.

In the fourth quarter, we [indiscernible]. Commercial costs declined by 6.7% year-over-year. There is still room for continued efficiency on commercial expenses via enhancing digitalization mainly affected by potential and existing customers. Considering the successful commercial performance over the last year we also proved that we can have an efficient and also effective commercial infrastructure [indiscernible] channels, these are all contributing to the sustainable performance.

Another factor in OpEx performance is the positive impact of wealth-related risk management policy [indiscernible] approaching [indiscernible] management. As such provision for doubtful receivables declined by 71.1% year-over-year.

Personnel expenses increased by only 2.3% year-over-year in the last quarter, the same is a result of simplification efforts, share of personnel expense in total revenues now declined from 70% in 2016 to 40.8% in the [indiscernible].

[indiscernible] High FX rate increased our network expenses in the fourth quarter, while we also had an increase in tax expense in relation to strong growth in mobile revenues. There is also a change in calculation methodology [indiscernible] effective for mobile. Accordingly, network and technology expenses combined with tax expenses increased 28% year-on-year in the last quarter.

As I said, we already expected to see some negative impact especially from FX-related network expenses and for this quarter we also experienced relative energy prices which rose around 40% of the total increase in [indiscernible] we tend to be more optimistic going forward [indiscernible].

Growth of interconnection expense was 20% year-over-year in the last quarter, which is mostly due to increase in the telecom international sales volume and also the FX impact with TRY 1.4 billion net financial income in the fourth quarter, this is due to depreciation in Turkish lira. So it's fundamental to the underlying business, we've been able to report TRY 2.2 billion net income.

CapEx in the fourth quarter was at TRY 1.5 billion. The CapEx in the full year of 2018 was TRY 4.1 billion. This is in line with our plan despite the challenging FX environment. Excluding the impact IFRS 16 underlying CapEx was TRY 3.4 billion. With this, we changed the CapEx to sales ratio to15.8%, this is down by around 1 percentage point compared to 2017.

We are now on Slide 13. At the end of fourth quarter, our net debt decreased to TRY 15.8 billion from TRY 18.1 billion. And we have 1.86x net debt-to-EBITDA, and this is also down from 2.3x in the prior quarter.

The decrease is due do Turkish lira depreciation as well as strong cash flow. We have a strong liquidity of TRY 4.5 billion cash at the end of the quarter.

We are comfortable with financing given our strong cash flow generation and everything. Alternative financing is through -- such as blended financing. At the same time, you probably heard we decided to carry out in preparation for the issuance of debt instrument of up to a total amount of $500 million, depending on market conditions and we already applied to market swaps for this purpose.

We are now on Slide 14. I would like to give some highlights on our hedge position. The additional cost phasing cross currency swap transactions of around $445 million during the fourth quarter.

We now reached to $1.9 billion equivalent of participating cross currency swap position in total. The fixed portion of cash was slightly down to 33%, which is at the end of year, this is due to debt repayment as well as operational necessities for keeping Turkish lira for the early January settlement. But we will continue using cash to hedge our FX base, including FX based cash at around $600 million, average ratio significantly increased to 67% in the last quarter. And this is up from 41% in the first quarter of 2018. We may continue executing new hedging transactions when we feel that we have the right market condition.

And let me also tell you that our balance sheet is now especially compared to a year ago, it's far more resilient to any potential hikes in FX rates.

Looking at our cash flow generation, our unlevered level cash flow in 2018 was TRY 3.5 billion. This is more than double compared to 2017. Our impressive EBITDA growth, normalized CapEx cycles following the payment for key licenses and also sound working capital management drove an outstanding cash flow performance. We anticipate strong cash flow generation will continue over the next 12 months [ and there will be no license ] repayment similar to last year and strong EBITDA generation together with disciplined CapEx to also support our cash flow generation positively.

As we all know, cash flow is a very critical KPI for a telco. This is really the end result of everything we do and [ recently an indication ] for sustainability of the business model.

Our ability on cash flow generation, we hope that it will enable us to deleverage to our comfort zone of 1.5x EBITDA -- net debt-to-EBITDA within the next 1 to 2 years.

Another [ key market ], our mobile operations has also continued with the cash flow generation in 2018, which was what we expected but we are also excited to see this traffic.

We are now finally on Slide 16, the 2019 guidance. We are expecting consolidated revenue growth including IFRIC 12 to be at 15% to 16% year-on-year; EBITDA to be at TRY 10 billion to TRY 10.2 billion level. CapEx will be at TRY 5.5 billion to TRY 5.7 billion. Again, these are all including to mention the impact of IFRIC 16 which will be implemented first time in 2019.

In terms of top line, we expect an accelerated growth supported by price increases as well as [indiscernible] subscriber growth. We will have balanced focus between our planned subscriber performance so that we ensure sustained growth of our business. The positive momentum in subscribers entering 2019 gives us high confidence for delivering our year end plan.

Our guidance now implies around 40% [ EBITDA ] margin when we adjust for IFRS 16 impact, which is well beyond change versus last year. CapEx to sales ratio adjusted again for IFRS 16, is also unchanged. So without [ the protection ], we continue our focus on optimization and we will ensure that we manage the impacts of higher inflation.

In the commercial spending, we will prioritize the projects with the highest return in the short term and also on the margin expenses that are not linked to [indiscernible]. On sale-side we are optimizing promotions and subsidiary and [indiscernible] efficiency moreover, we'd like to use our online sales channel, including our online customer [indiscernible].

We will focus on improvement in content expenses for TV. We will also focus on monetizing our [ existing subsidized TV]. For [indiscernible] expense side, we are also focusing on increasing quality and capacity in Tier 2 operations together with structural improvement. We already launched an early retirement incentive program. This will increase efficiency in the coming years.

Overall, we expect another strong year in 2019, and we have -- we believe that we are very well positioned for leveraging the current momentum in our business.

Now I would hand over the call to [indiscernible].

[Sabriye Çullas, executive]

Start Q&A. We can start Q&A.

[Operator]

[Operator Instructions] The first question is from the line of [indiscernible] [ Jordan ] with [ Reorg ].

[Unknown Analyst]

I was just hoping to get a bit more information on the EBITDA increase. It's a very substantial figure. So if you could provide a bit more color on what drove that. And likewise, the cash, cash equivalents dropped quite significantly. Would you be able to also provide a bit more color on that? That would be much appreciated.

[Kaan Aktan, executive]

For EBITDA performance, our strategy, as we mentioned during that are -- initially. But there are basically 2 basic factors. One is the gross margin improvement, which comes from price increases as well as we are now growing the size of the customer base. Obviously, there is an impact coming from that front. The other thing is definitely the reduced share of profits within the revenue that's -- we have clear initiatives throughout the year which will lead to a better and more efficient OpEx spending. It is a combination of onshore focus and the impact of growing business having a better pricing environment and it is growing [ substantially ]. And the -- I think your second question was the reduced cash balance at the end of the year. I suppose there are again 2 factors. Naturally, we try to reset the [indiscernible] highest impact [indiscernible] any move downward movement FX rate from one part to another should be impacting our cash balance that is on the Turkish lira. The other factors we are now starting amortization of our [indiscernible] platform and the first move [indiscernible] in the last quarter of that -- in the last quarter of last year. That also impacted our cash balance.

[Operator]

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

[Herve Drouet, analyst]

Two question on my side. Firstly, on employee expenses, it has been a mere mid-single digit growth. I was wondering, with the high inflation we have, should we expect more inflation on the expense of employees in 2019? And from which quarter do you think we may have that effect? And secondly, on CapEx. I just -- I mean if we clean -- if we looked at your guidance for 2019 and we remove the impact of the accounting change in IFRS 16, it still points to a relatively quite significant increase of CapEx for '19. Could you give us a bit more light on where do you think this increase of CapEx will come? And if you have plugged in any assumption of currency movement that may impact the CapEx?

[Kaan Aktan, executive]

For the first question. The impact of inflation on [indiscernible], first, obviously, we will adjust the wages and salaries in line with the inflation. But it doesn't start from January. This is partially adjusted out to the midyear [ via ] the transport [ for any of the ] salary increases. It should give us a higher increase in what people made compared to last year, that's for sure. But we will try to keep the total growth under the level of the inflation by executing synergy and authorization program. And for the CapEx side. Actually, we don't -- we didn't achieve very aggressive FX scenario for 2019. We don't assume a negative or increase due to the FX rate. I didn't assume any significant one-off large item to standard CapEx. It will be for us business as usual, and we will -- if you look at the last 2 years especially, we tried to increase the percentage of CapEx that [ we have currently for ] infrastructure, not really significantly, but this is more than the other year. And this is gained on the back of increased revenues and increased return on those sort of growing market, growing customer base. And we feel like it's a big concern that [indiscernible] our CapEx will be spent on our infrastructure project. It will be a continued executing this program with [indiscernible]. But again, we don't assume any major one-off item in our CapEx.

[Operator]

The next question is from the line of [indiscernible] [ Anna ] with VTB Capital.

We have lost connection. We will continue with the next question from Mr. [ Ozbek Mehte ] from Unlu & Company.

[Unknown Analyst]

I just wanted to make clear something about your guidance. You're guiding TRY 10 billion to TRY 10.1 billion of EBITDA, including the impact of the IFRS 16 reconciliation I think which you expect to have a positive impact of TRY 650 million the TRY 700 million. If we convert it to the comparable EBITDA, it should be more -- or slightly lower than TRY 9.5 billion. And if I make the calculation and assumption correct, it points out to around 40% EBITDA margin guidance at the comparable level with 2018 reporting standards. So if it is correct, if my calculation is correct, where do you see the reason of declining EBITDA margin on a year-over-year basis for 2019?

[Kaan Aktan, executive]

Well, to be honest, we tend to see less performance compared to 2018. It's less 41%, you're right when we make the calculation [indiscernible] IFRS 16 which comes to something like 40%. But you should also consider that we will be growing the revenue by mid-teen numbers, which means there will be in absolute terms continuous improvements with EBITDA and we would have mentioned the impact of the inflation -- inflationary adjustment in our cost base, we really try to be more cautious on providing around 40% like-for-like -- 40% EBITDA margin in the guidance.

[Operator]

Our next question is from [indiscernible] Asset Management.

[Unknown Analyst]

Just on the point of CapEx, could you maybe talk a little bit about the outlook for the rollout of 5G? Where -- what the timing potentially is for spectrum auctions? And when you're -- when you are thinking about rolling that out and what sort of magnitude in terms of cost we should factor for that? Then if -- are there any costs in your mind for, let's say, concession extension over the next year or 2 that we should consider as well?

[Boulos Doany, executive]

Thank you. Actually now let me start by confessing something first. As you know, the earliest renewal date on the concessions are 2023 for the 2G license, which is [indiscernible] on the 2G would be this company, I believe Vodafone as well. And then we have the 6 concessions in the same time, 2026. The 3G and 4G expire 2029. Now first, let's look at 5G expectation. The 5G expectation, firstly, would require that the 4.5G -- or 4G LTE license be minimum 15 years from the date of the issuance of the 5G. So we're talking 2029 in itself would need an extension. Otherwise, the 5G wouldn't necessarily have to be [ spotified ] coverage realistically and the issue with 5G mostly, as you know very well now, is that people are mostly concerned on their coverage obligations. So the way we are approaching this here in this country and the way we're talking to decision-makers and also sector-wise is that we need to see that the mobile investments that will be made in 5G benefit from the 4.5G license terms. The 4.5G license terms are technologically neutral, they're not specific in terms of technology. But they have, of course, the spectrum band associated with each party's license in the 800 megahertz band, et cetera, all the way up. And going forward with 5G, whatever the new balance would be, it is logically possible to expand the existing licenses, 4.5G with additional spectra bands, obviously, for payment and receivables payments. Are we seeing examples now where countries are not overcharging? For this we're seeing countries that are overcharging. And then, of course, will be the term. The term would have to extend, obviously, towards the mid-2030. So if we look at the markets' expectation in this particular country and how the licensing may fit within this, we can see now that the mobile licensing needs to cater to, let's say, [ mid-30s to end-30s ] and the duration defining the coverage obligation of 4.5G is roughly sufficient to provide for the government's interest related to coverage, their coverage for example when they are, as you know, the universal service network, for example, to provide areas that are uneconomic to cover. So you can say that the public interest has been mostly covered to over 4.5G. Therefore, it is our hope that 5G will be a lot more opportunistic rather than obligatory and that should be done by competition. Now if this assumption is right, and there's no reason for it not to be right, we haven't seen any negativities in this regard, we would like to see the market actually, that the market should be looked at in terms of what bandwidth you are providing for customer, which takes you to the 5G level, where you can monetize much higher bandwidth if the customer wants it. And then you can monetize capacity, which is the gigabyte that the customer use. That, of course, will be very helpfully done over a 4.5G. And of course we still also have 3G licenses and so on over that, the value of which is uncertain and what band will be needed. So you can see here that one advantage we are very keen on is a form of radio slicing in the 4.5G capacity. What this means is that operators will be able to slice that capacity because we really have good spectrum in this band, all the operators, and we can then provide fiber to the most economic point to any operator. This is what we call fiber to the site, which I alluded to partly in my introductory statement. What this would mean is that the other operators will be able to have satisfactory fiber added to their radio access point whether they are 4.5G access point or even 5G or even by the way [indiscernible] regardless of what the customers need. This seems to be the direction -- at least, this is the last discussion we had at the center just 2 days ago at the level of the CEOs of the companies and the related departments. So going in this way, as we now have a model as to how this can be done, we see that we can have minimum replications, minimum duplications of unnecessary infrastructure. They benefit from the extensive [indiscernible] bank of this company. How the fiber itself will be financed of course [indiscernible] is one model. So we see this market direction is important. Then Argela is one of our subsidiary companies have invested 5 years of R&D in radio slicing [indiscernible] network are active now in the open [ network forum and ONAP ] and have done successful installations with Verizon and Telefónica, for example, on Orange. So we see that the direction operators may take here in this market we will offer this to both Vodafone and to [indiscernible]. We will obviously, trying to partner something that covers the [indiscernible] which is a local base station. The obligations on our 4.5G is 45% of our base stations to be local, but of course, that could not be met. While [indiscernible] the primary provider, they have practically all of Vodafone, most of Turkcell and a good part of ours. So going forward, we see the opportunity of slice with fiber access, extend 5G through 5G new spectrum on the 4.5G authorization agreement, extend its term. This seems to be a practical way of doing it, which is not overly expensive to be effective and allows us to serve the market and have some reasonable level of competition but with minimization of duplication. This is also why, by the way, our sharing over 4.5G, for example, active sharing, I think that I had mentioned earlier, are also very important for the -- all of us. And the fixed mobile of CapEx contribution will work very well on our fiber to the site FTTS model, which is very key for this type of direction that the sector can take. So we have had this level of discussion with all the operators and we think that if we offer this solution, the government side of course are fully aware of all of this, find that this is a win-win all the way around [indiscernible] so we are, as we say, seeing the market the existing authorization agreement and benefiting from the local content obligation. By that, I mean, [ OLAC ] will extend it to Argela solution. We find this can be a workable approach. Of course so long as the other parties who are using Argela can get it on a fair price. And that's the basis that we are working with, that we get the same price we would pay. This will also support [ OLAC ] what he needs. They cannot go beyond the 4G -- or 4.5G, whatever, LTE standard. You see? That's kind of like what we expect. So we are very -- as an operator, we may benefit from this. We can lower the cost of the other operators, so they also don't need to unnecessarily invest. In that sense, we are optimistic as to where this market may go, especially if we are able to provide a near 5G experience over 4.5G with slicing which means people can use their existing handsets but get a spectrum -- rather, get a bandwidth that they're paying for. Operators can then monetize bandwidth, not only capacity. I mean, today if you have a high ARPU customer that is getting very cheap gigabytes but just happens to pay more if he wants to make sure that he gets more bandwidth secured, that can give a very good opening, for example, to Turkcell as they are leading in that segment of the market and we can enable that through technology which we are developing and is now working. Plus of course our extensive fiber where they need it. Clearly, where they can use their own fiber, they will be using that. So when it is cheaper, they would use ours. So in that sense, that's the basic state of play. At least I can tell you as effective.

[Unknown Analyst]

It's just if you were to do all of this, I guess, how much would it cost? And is this a 2020 cost? Is it a 2021 cost? Or when should we expect it?

[Boulos Doany, executive]

I don't think that we will see any high demand or expectation from the government side for a very early type 5G licensing. More importantly, will be ensuring the 4.5G and perhaps some level of slicing that we can do in the next let's say, 1 or 2 years. So -- I mean, more than that, I don't see an immediate expectation for a license or a network obligation is how I can answer you. And we don't think that it will be overbearing on us if and when it comes.

[Unknown Analyst]

And then with regards to the concession extension, is that something that you would expect to have any cash outflow for over the course of the next couple of years?

[Boulos Doany, executive]

Well, on the mobile side, the examples that I gave -- the government will have the choice of putting a formulation on to, for example, if you are extending your 2G license, what is the value of that license today other than, frankly, the powers of it? So Turkcell, for example, would benefit from having those powers extended. Ours peaks in 2026. So that's why we are looking at this really totally as a sector. So Turkcell would be able to unlock value earlier. And then this idea of a power company may become more viable. As you notice from the way I'm giving you the answer is that we are really looking at this all together as a sector to see how this may work. Then on the fiber part, the solution would be the one [ FTTS ] that I gave you. And frankly, between these 2 with active sharing, it doesn't really matter when anything mobile comes so long as the renewal terms are defined by a formulation, which we have now proposed a formulation that we are all happy with. And so I'm kind of like optimistic on that level in relation to a payment. The other option, of course, is to alter the months -- the revenue share as we now pay, for example, 7.5% plus 5% at the moment. That's another way for the government to consider charging us. They will be charging our revenue rather than charging money upfront. On the fixed concession 2026, that one can also operate in the same way, by the way. And that's [indiscernible] so it's a bit further out but we would like in the course of this year and next year. We got actually clarity on this. We have shared let me say, I can call it a realistic expectation of what this model would be and we have not seen any negative signs on it. So again, even on that, we are optimistic.

[Operator]

[Operator Instructions] The next question is from the line of [indiscernible] [ Anna ] with VTB Capital.

[Unknown Analyst]

Yes. Sorry, I was disconnected. Sorry if I missed something. So my first question is about consumer behavior during fourth quarter and January this year. So due to these recent upward price adjustments, do you see any change in the customers' behavior? Do you expect that customers' additions might slow down significantly in 2019? Or consumer traffic consumption will slow down? And my second question is about the cost of hedging. So due to the fact that you have expanded your hedge ratio, could you update what's the current cost of your -- average cost of debt, including hedging?

[Boulos Doany, executive]

Okay. Thanks, [ Anna ]. Look, the strategy of the company under the current market conditions are -- really not affected that much in the sense that, first of all, as you know that we have entry packages, for example, especially on the broadband part, where we need to increase the Internet penetration. So that's an absolute necessity, a strategic requirement for this company. And we have a cost-effective way of doing that, that regulatory authority have approved. It is not of course exclusive to TTNET, it's actually going to the entire market. This one, for example, definitely is not affected by inflation. On the fixed voice, of course, that's more of a defensive strategy to keep something going, we have been a bit more careful in that sense and we have executed, I think, successfully in that regard because this is more of a protective approach. In relation to going to upsell, for example, where we have to provide levels of inflationary increase, we have to consider one thing. That if you compare an inflationary increase between, let's say, a telecom service and electricity -- home electricity service. In your home, for example, when the bill increases, you're not actually using much more electricity, you're not consuming more kilowatt hours where you are. So when they increase the price per kilowatt hour, so what happens is that you are paying a higher price and consuming the same amount of electricity. So you can choose to consume less, that's your choice. But in reality, most people are consuming what they need. The difference with a telecom is that they are getting a lot more data, which is their new demand. Voice, most people have more voice than -- they're paying for more voice than they are using, same applies to message. So the thing really is about data. And in this type of a market, people are happy to pay for that additional data with an inflationary increase because it is an inflationary market. But we have been sensitive to the government's objective of limiting the inflation increases. And in this regard, we are in a good situation because we are actually giving our customers more. So all operators kind of like gave the right thing to the customers at the time that suited them. That's how the -- call it, let's say, we manage the expectations of the customers. So what you actually are giving your customers is more capacity, they get more capacity. What we have to be careful with is when we give them bandwidth. So it means that if someone wants capacity in broadband and they take, for example, a cheaper package because it has lower speed. The one who can afford to pay more would then use [indiscernible] with a full inflation as you should because your costs are also going up. That's basically how it is managed between us. And the inflation increase expectation, meaning that we are careful with inflation increases. In fact, we passed that test as well. So we have no concerns as well as that regards. Kaan

[Kaan Aktan, executive]

Yes. The cost of debt and cost of hedges, I will try to give you some numbers and I think it will help you to make a calculation on the cost of overall financing. At the end of the quarter, we had roughly $3.8 billion gross debt, which is purely dollars and euro-denominated bonds. And our total hedge portfolio, the value of it is $1.9 billion, in dollar terms. So which is [ 50% ] of the total gross debt. Our -- normally, our debt in original terms, the cost of it is between 3% to 4%. The cost of that 50%, which is hedged on different instrument, the average cost end of the year end is low to mid-teens level. This is, obviously, some of it was executed in the fourth quarter where we had higher costs. And some of it were executed in the prior quarters which had lower cost. But latest average cost, is as I said, low to mid-teens. If we are to execute as of today new transaction, it will come at mid-teens or slightly higher than mid-teens. But again, we will try to give similar data information going forward in every quarter if we have other transactional [indiscernible] executed.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Ms. Gözde Cullas for any closing comment. Thank you.

[Sabriye Çullas, executive]

This concludes the conference. Thank you a lot for participating.

[Operator]

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