Turk Telekomunikasyon AS

IST:TTKOM.E

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Turk Telekom conference call and live webcast to present and discuss the fourth quarter 2022 financial and operational results. [Operator Instructions] We are here with the management team, and today's speakers are CEO, Umit Onal and CFO, Kaan Aktan. Before starting, I kindly remind you to review the disclaimer on the earnings presentation. Now I would like to turn the conference over to Mr. Umit Onal, CEO. Sir, you may now proceed.

[Ümit Önal, executive]

Hello, everyone. Welcome to our 2022 fourth quarter and year-end results conference call. Thank you for joining us today. We are devastated by the quakes that hit Türkiye's Southeastern region recently. We offer our sincere condolences to those who lost their loved ones tragically. We know that the impact on those who have been through this calamity is unimaginable.

We left 2022 behind, but many of its challenges, most importantly, geopolitical risks, high inflation, slowing global growth and climate change remain with us. Yet the sentiment from the World Economic Forum suggested that the 2023 global growth may not be as gloomy as it was seen before. Besides finally, we have seen inflation cooling off across the globe.

In Turkiye, inflation dropped to 64% by year-end after peaking at 86% in October, thanks to the widely known base effect. Although it is somewhat relieving to see inflation finally moving in the right direction, it is obvious that it will remain a major problem within the year ahead. On our side, operators increased their focus on subscriber acquisition, both in mobile and fixed internet in a typical trend that the sector is used to in the final quarters of the year.

Mobile continued enjoying a vigorous demand in warmer than usual winter months, while fixed interment tried to digest the most sizable price revisions of the year introduced starting from October. Data usage was robust in the final quarter, confirming a resilient demand for telco products despite macroeconomic issues.

Starting with Slide #3 on our presentation, net subscriber additions. Total number of telecom subscribers remained flat Q-on-Q at TL 52.8 million. Net subscriber additions were $1 million in 2022, including increases of TL 0.5 million in fixed Internet and $1.5 million in mobile. Fixed Broadband closed the year with 14.8 million subscribers amid 64,000 of moderate quarterly net additions after a robust performance in the third quarter, driven both by the back-to-cool period and purchases ahead of the retail price revisions introduced on October 1. Fiber subscribers rose to $11.5 million, taking the share of fiber subscribers in our fixed broadband base to 78% from 67% a year ago. Mobile portfolio extended to 35.5 million by adding 210,000 subscribers in Q4. Number of fixed voice subscribers declined by 330,000 during the quarter, in line with the prior quarter trend.

Slide #4, financial and operational overview. Revenue growth peaked in the final quarter as expected with an accumulating impact of price revisions and a timingly contracted customer base. Consolidated revenues grew by 5% year-on-year in Q4. line operational revenues recorded 57% increase. With that, consolidated revenues reached TL 48 billion in 2022, growing by 40% annual. Operational revenue growth was also 40% ahead of the guidance of 37%. Growing by 17%. Consolidated annual EBITDA was TL 19.1 billion, slightly ahead of the guidance. High base cost inflation and composition of revenue growth were the main reasons driving EBITDA margin to around 40%. Net income was TL 4.1 billion.

The negative impact of the change in FX and interest rates on the bottom line was partly offset by the deferred tax gain recorded throughout the year. CapEx was TL 13.9 billion for the year, where we closed to the TL 14 billion guidance. Net debt-to-EBITDA inched down to 1.47x from 1.54x a quarter ago.

Slide #5, fixed broadband performance. The final quarter of the year was a mixed bag of widespread year-end subscriber acquisition activity and rebalancing of price parity with the latter extending even into early months of 2023. Demand was slow sector-wise following the strong seasonality and pulled forward purchases in Q3 ahead of the price adjustments and even lower in our cases with widened gap in prices in the market.

We felt the impact on our new sales and churn performance, particularly on the retail side, a trend that repeated itself in every ramp of our price revisions we launched in December, June and October. Strong appetite for high-speed packages, both in new acquisitions and recontracting helped us pave the way to a smoother transition for the consumer to higher pricing levels. 24 megabits and above packages made more than 70% of new acquisitions.

Pricing and concentration on high-speed packages in new sales combined has driven Q4 ARPU 42% higher Q-on-Q. Upsell performance was continually robust in another heavy recontracting period. As a result, annual ARPU growth moved up to 38% and pushed the fixed broadband revenue increase to its highest level of 43%.

Average package speed of our subscriber base exceeded 32 megabits as of 2022, increasing by 34% over the year. More than 61% of our subscribers are now on 24 megabits and be packages compared to 43% a year ago.

Moving on to mobile performance, Slide #6. Based for new acquisitions run into the final quarter of the year. Though cooling off seasonally, demand was still solid to help operators stay focused around inflationary pricing. All operators introduced their device studies across the board around late December or early January. MP market grew remarkably Q-on-Q, first time in 5 quarters as subscribers shopped around for most advantageous packages out of intensified new end campaigns. We stayed on top of the market in networks for the fifth consecutive quarter. Churn rates stayed low in both segments, but particularly so in the postpaid base.

374,000 net adds in postpaid marked the best quarterly performance of the year for the segment. Prepaid segment, on the other hand, contracted about 165,000 as a result of the adjustment for the inactive subscribers. While postpaid made 66% of total mobile subscribers, our prime base stayed flattish Q-on-Q around 5.5 million subscribers. Prime has been a major contributor to ARPU over 2022 and will continue to be so, we believe, this year. 46% and 71% annual growth, respectively, in postpaid and prepaid ARPU combined into a 53% rise in blended ARPU, up from 40% in the third quarter.

A surging 63% growth in mobile revenue was strongly supported by diligent ARPU management and a hefty 1.5 million net additions over the last 12 months. Now I would like to give you some information about the impact of the recent earthquakes on our business on Slide #7.

We are deeply saddened by the huge earthquakes that struck Turkiye recently, leaving tens of thousands dead and injured. The disaster affected 11 provinces spreading across an area bigger than 100,000 square kilometers where 14 million people or 16% of Turkey's population lives. We had about 5 million subscribers in totaling affected regions, making almost 10% of our total base. Including the outsourced staff, we had 3,500 employees there.

Finally, the 2,600 mobile sites made 11% of the total we have across the country. This is still work in progress, and the numbers are certainly subject to change because of several uncertainties. But based on our early impact analysis, we estimate the revenue loss to be TL 1 billion to TL 1.5 billion, one-off CapEx to be USD 50 million to USD 60 million and one-off OpEx to be between TL 2.3 billion to TL 2.5 billion within 2023.

Moving on to Slide #8. As to telecom, our immediate reaction was to put all our resources to work to ensure uninterrupted communication care for our employees and their families and provide every support we can for the rescue and recovery efforts in the region. Our on-site inspections together with our executive and regional teams, starting from the early hours of the disaster helped us immensely bought in understanding the extent of the damage and taking the right actions in the most efficient way.

Our operational scale widespread presence across Turkiye and structured as the leading integrated telco operator of the country has certainly put us ahead of the competition in our agile and adept response in disaster recovery. We took swift action to send about 1,400 employees, including our voluntary rescue team take from all our Turkiye to the region to help recover disrupted operations and rescue efforts.

In early hours of the disaster, the ratio of active mobile sites in the affected region dropped close to 20% on average, with bigger impact in the 3 most highly affected provinces of Adiyaman, [ Atal ] and [ KahamaMarsh ]. Power outages in addition to the damage itself from the cracks has been a major limitation in serviceability. Still, we were able to make significant progress within dates.

We installed 224 mobile sites, sent 951 generators and supplied more than 350,000 liters of fuel to restore our operations. As you can see on the top right chart, we resumed the active mobile site level above 90% on the fourth day and would it even above 100% in the following days by adding more mobile sites than we permanently lost. We have also started the optimization work in the area. Further needs to be done to fully restore our network capabilities, sales activities and operation at the routines.

Obviously, the reconstruction plans and new forms of habitation in the affected provinces will be our road map for the medium to long-term strategy. Our actions on the disaster recovery front included sending 124 containers and maintain aid to the affected provinces and donating TL 2 billion for the earthquake relief.

We have also introduced several initiatives to support our subscribers. On the mobile front, our actions included immediate activation of suspended clients due to the date providing 1 month free communication services, free benefits, discounted additional packages and more. In fixed, we provided free access to all Turk Telecom WiFi spots and public pay phones, lifted cancellation fees and extended contract terms for all expiries until March.

Now let's take a look at 2023 outlook on Slide #9. Obviously, an event of such scale will have important economic consequences, both at the macro and micro levels. Besides, it seems the challenging trends in macroeconomic indicators, which played an important part on the very video business and our financial performance will prevail for another while. With that in our central focus, we formulated our 2023 budget after also carefully considering an attainable balance between growth, investment needs and cash flow performance. Accordingly, we expect our operating caves to grow by 52% to 55% year-on-year. Our EBITDA to be TL 23 billion to TL 25 billion and our CapEx to be CZK 17 billion to TL 19 billion.

We expect to maintain a dynamic pricing behavior throughout the year and the scale of our adjustments to be decided according to actual inflation and prevailing consumer sentiment. We foresee robust subscriber evolution along with continued growth in data consumption to support mobile revenue performance. Fixed internet top line, on the other hand, should be shaped by speed upselling, along with some limited net subscriber loss driven by the earthquake impact. EBITDA will be sensitive to consumer sentiment, growth composition, OpEx evolution and one-off quake related costs. Finally, targeting a lower intensity ratio year-on-year. The CapEx budget considers the 2023 portion of spending for damages from quakes and aims to support our growth plans in select priority areas as well as in fixed road band and mobile segments.

2022 was a puzzling year -- in an environment where we had no control on global and macro issues affecting us, we turned our focus on reinforcing our strengths which have, for decades, helped us differentiate ourselves from competition as well as overcome volatile and uncertain times. This paid a meaningful amount of time and energy on perfecting our technological capabilities, customer experience tools and digitalization agenda.

We believe we are well acute to brace for risks and capitalize on new opportunities in order to keep up with our duties to our stakeholders. Unfortunately, we started the year with a tragic crisis. We cannot possibly underestimate the instant or lagging multidimensional effects of such a catastrophic event, but we have been working around the clock to improve the situation every day and making significant progress to mitigate the impact. We certainly have a lot more work to do. And for that, we are empowered by the unique and most sincere unity that our nation has shown to heal altogether.

Now I will hand over the call to Kaan to discuss our financial performance in detail thank you.

[Kaan Aktan, executive]

Thank you. Good morning, and good afternoon, everyone. We are now on Slide 11. The financial performance. Our revenue growth continued its upward trend in the final quarter, reaching 55%, which is not higher than the 45% attained in the third quarter. Fixed Internet and mobile ARPUs peaked on the back of multiple price actions throughout the year. Subscriber growth, which was particularly strong in mobile throughout the year and healthy performance across the board despite the macro pressures.

Fixed broadband revenue growth was 43% compared to 35% a quarter ago. Net additions moderated in the after matter of strong seasonality in the third quarter and the most sizable price revision we introduced on October 1. Other ISPs have followed our retail price adjustments, but the process was repeatedly slow rolling into even January in some cases. As such, net addition performance once again shifted towards the wholesale segment. That said, we have seen improved activations and churn performance in November and December as others kicked off their pricing cycle.

Mobile top line growth surged to 63% in not only to continued strength in the market, but also to our robust strategy, achieving a healthy mix of ARPU growth and base expansion at the same time. We saw another solid performance in postpaid additions. Prime continues to be a powerful to further increasing the mobile ARPU. Fixed voice revenue recorded 24% growth while TV revenues expanded by 26% annually with a flattish subscriber base quarter-over-quarter.

Growth in corporate data and other revenues also picked up pace with respective 31% and 140% increase. Equipment sales, ICT projects and call center revenues remained as the primary drivers of the latter. Finally, Internet revenue was [Technical Difficulty] 37% guidance for the full year. Mobile had our performance making almost 7% of group's annual operating revenue. Our subsidiaries have also partly driven the better than guided top line performance in 2022. The contribution to group revenues has accelerated in the final quarter.

Third-party revenues generated by our subsidiary now increased by 83% year-over-year and made more than 11% of our consolidated revenues. We are now moving on to our operational performance. Consolidated EBITDA was up 30% to TL 5.6 billion with a margin of TL 37 million. Once again, last year's high base inflated the OpEx and faster growth in lower-margin businesses explain the downward trend in annual comparison. Excluding the [indiscernible], the margin was 40%. As such, we closed 2020 with 40% EBITDA margin for the full year, which was around 42%, excluding the accounting.

In the last quarter of the year, operating expenses increased by 74% year-over-year [Technical Difficulty] growth in OpEx was 83%. Increase in cost of equipment and technology sales surged to 138% year-over-year in parallel to research the number of projects acquired by both to Telecom and Inova in the final quarter of the year and insulated equipment and other costs attached to these projects.

Other direct costs grew by 70% year-over-year, owing to higher commissions paid on prepaid loading, shared revenues and value-added services revenues. Higher commissions were driven both by inflation and higher volumes. Trends in network and technology expenses, commercial costs and personnel expenses remained broadly unchanged from prior quarters.

Obviously, an inflated OpEx played a significant part on our 2022 margin -- then formulating the 2023 guidance, we believe we applied a reasonable caution to our assumptions driving the personnel network and commercial expenses, which constitute the bulk of our operating cost base. Change in personnel costs reflects the impact of the recently announced scheme that removes the age barrier for a certain group of pending pensioners in addition to the usual annual salary adjustments. Network expenses incorporate significantly higher unit electricity costs year-over-year.

Our CapEx spending was TL 13.9 billion in the year, which is within our budget, which assumes accelerated spending in the final quarter. It's important to highlight that our insurance covers all our assets against earthquakes at current replacement costs, including operational losses incurred from service disruptions caused by the recent disasters. All labor and installation costs are also under coverage based on our earlier experiences and considering both the size of the affected region and the scale of the damage compared to the quarters that took place in the past. We believe we should be able to recover damages through our insurance in around 18 months at the earliest. Therefore, although we have reflected some estimated onetime CapEx and OpEx impact into our 2023 guidance, we assume no insurance recovery will take place within this year.

Coming to the bottom line, net income was TL 1 billion, down year-over-year and Q-over-Q, while higher net financial cost and lower tax income led to annual decline and lower tax income despite a lower net financial expense, largely explained the quarterly change. U.S. and euro exchange rate increased by 1% and 10% quarter-over-quarter, respectively, when compared to previous quarter's close. Accordingly, the incurred loan tax losses in the comparison, short-term derivative instruments continue to be our main hedging tool, a relatively stable interest rate environment led to a flattish net interest expense in quarterly comparison.

Finally, although we once again recorded tax income, it was significantly lower both quarter-over-quarter than year-over-year, thanks to a reversal in inflation trend. We recorded TL 4.1 billion net income for the full year, down by 28% annually. Despite a 36% average increase in dollar and euro rates and higher interest rates year-over-year. The bottom line was supported by a TL 2.3 billion tax rate.

Our Board of Directors resolved to propose to 2022 ordinary general assembly that 2 telecom pays no dividend out of 2022 earnings. The decision reflects the need for innovative caution in light of recent demand and the concentration of our company's liquidity and investment requirements, along with possible volatility in financial markets on global or domestic macro uncertainties.

We are now moving on to Slide 12 with debt profile. Net debt to EBITDA inched down to 1.47x quarter-over-quarter is EBITDA growth improved -- hard currency debt continues coming down and lira remained on a relatively stable course. Cash and cash equivalents were TL 5.1 billion, of which around 54% FX base. This obviously excludes the TL 4.9 billion of FX protected time deposits, which is reported under financial investments. The FX exposure included dollar equivalent of TL 2.1 billion of FX debt, TL 2.3 billion of total hedge position, TL 150 million of FX-based cash.

As you can see on the bottom right chart on this page, the hedged amount includes a $250 million equivalent of FX protected time deposits, down slightly from TL 160 million in the third quarter. Considering the ineffective portion of the hedge portfolio, mainly the existing participating cross-currency contracts, the FX exposure was $460 million short position compared to TL 520 million short position a quarter ago. The share of local currency borrowing total debt for to also inched up to 16%.

We are now on the final slide, Slide 13. While the dynamics of the FX hedging markets remain unchanged from the quarters with long-term long end being still dysfunctional and theoretically speaking, extremely costly. As such, the short-term portion of our hedge portfolio continued sent, while net exposure contracted -- as a result of our efforts to narrow down the position, the FX sensitivity analysis we report regularly in our financial quarterly financial suggests assuming all else constant, a 10% increase in FX rates will have around TL 800 million negative impact on our pretax income. On the Flip side, the sanity analysis produces around $900 million positive impact in case of estimate depreciation in India. Finally, TL 1.9 billion of unlevered free cash flow in the final quarter placed the annual figure to TL 5.1 billion. This will conclude my presentation, and we can now open up the Q&A session.

[Operator]

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

[Unknown Analyst]

I just got a few questions, if that's okay. Could I firstly ask when you're expecting your EBITDA margin to bottom out and at what sort of level? Then with regards to your short-term debt maturities, what are your refinancing plans? And also, I could ask when you might look to address your 2024 euro bond -- and then finally, could you just provide any update as to where you stand with regards to an expansion of your fixed compression.

[Kaan Aktan, executive]

I think the first part of the question was around the margin performance that we should see this year. Obviously, we had a sizable adjustment in salaries starting from the beginning of January. And we will also incur the additional OpEx larger part of the additional OpEx due to the earthquakes in the first quarter and first half. This will mean that we should see the minimum margin during this time frame and hopefully expect to see some improvement in the second part of the year?

And the second question was around-- currently, we have around EUR 220 million committed facilities under 2 separate ECA agreement. We expect to have another one probably in this quarter, around EUR 80 million. If you look at the payment schedule of our existing debt, we see something less than EUR 300 million in terms of the short-term portion of the long-term debt -- and there is also the loans to be repaid, but they, by nature, they are all short term. And so far, we've been able to renew the existing Turkish lira portfolio, either with similar commercial loans or are introducing bonds to the local market.

For next year, obviously, there will be a Eurobond repayment on top of a few hundred million dollars of debt payments under long-term hard currency debt contract. Currently, we are holding around TL 10 billion cash. And again, we are pretty much -- pretty much secured to refinancing of this year. And hopefully, we should see a better environment when we close the year-end. But still, our plants will be around to have to be necessary facilities in place even if we don't have a similar Eurobond issue that would refinance 2024. So we will have our plans around this strategy. And for the concession part I turn to our CEO.

[Ümit Önal, executive]

[Interpreted] As you know, we have applied the relevant regulatory authority for the renewal of our concession, which will expire in 2026. In biennial Tear Leon. He said Ristorante, into Brannan, we triennial mutant who Marianne, needs. And again, as you know, our main shareholders, so we're not on the Turkey stated that he also wanted the concession issue to be clarified as soon as possible after the share transfer and that telecom was paved the way for this issue and that this issue was important in order to be able to make long-term plans for the company at the highest level. [indiscernible] know after the RTX disaster, this subject has come to the fourth for many areas, we believe that it is also very important and very supportive to solve this problem for all parties.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Turk Telecom management for any closing comments.

[Gulsen Ayaz, executive]

Thank you, everyone, for joining us today. I hope you have you enjoy your day. Thank you for joining.

[Operator]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]