Turkcell Iletisim Hizmetleri A.S. (NYSE:TKC) Q2 2023 Earnings Call Transcript

Turkcell Iletisim Hizmetleri A.S. (NYSE:TKC) Q2 2023 Earnings Call Transcript August 17, 2023

Operator: Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome and thank you for joining the Turkcell's Conference Call and Live Webcast to present and discuss Turkcell's Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Ali Serdar Yağcı, Investor Relations and Corporate Finance Director. Mr. Yağcı, you may now proceed.

Ali Serdar Yağcı: Thank you, Konstantinos. Hi, everyone. Welcome to Turkcell's second quarter 2023 results call. Today our CEO, Mr. Murat Erkan; and Acting CFO, Mr. Kamil Kalyon, will be delivering a brief presentation covering operational and financial results which will be followed by a Q&A. Before we kick off, I would like to kindly remind you to read our safe harbor statement placed at the end of the presentation. Now I'm handing over to Mr. Erkan.

Murat Erkan: Thank you, Serdar. Hello, everyone. Thank you for joining us. We delivered outstanding result in the second quarter. Our determined inflationary pricing strategy plays an instrumental role in delivering an ever accelerating performance. Outpacing the inflation, our revenue growth ramped up to 74% on a record ARPU growth and expanding subscriber base. Strategic focus area also supported top-line growth as always. On the profitability side, our EBITDA almost doubled reaching TRY 9.5 billion, driven mostly by strong top-line growth and reduced energy prices in Q2. We achieved a remarkable 44% EBITDA margin. This strong operational performance coupled with dynamic and prudent risk management, enabled a solid net profit of TRY 3.2 billion on a 70% year-on-year rise.

Considering this result, we further increased our full year guidance. Next slide. Let's take a closer look at our mobile operational performance. Our focus on postpaid subscriber yielded a substantial gain of 404,000 subscriber in Q2, capping a 70% postpaid share of the mobile base. Following the gloomy Q1, we resumed price adjustment in April. And as the competitors followed us, overall price level escalated in the market. However, temporary competitive offers were observed in the market, triggering an increasing MNP volume. Rising acquisition price level and alternative data solution for tourists impacted prepaid subscribers. The inflation figure for July indicates a surge in inflation during the second half of the year. Yet we are committed to price adjustments.

Accordingly, we raised our prices in August. As anticipated, the ripple effect of preceding price adjustment and intact upsell efforts propelled a remarkable 84% acceleration in mobile ARPU. The ARPU versus CPI spread widened further. Despite a slight increase due to line closure deferral from Q1, our mobile churn rate stood at 1.9%. Next slide. In the fixed broadband, our focus persists on fiber. Accordingly, we gained 40,000 fiber subscribers in Q2. The IPTV platform, a supportive factor in subscriber retention, grew with 35,000 net additions. We achieved 165,000 additional homepasses during 2 quarter. We are delighted to exceed our annual target of 300,000 in the first half, benefiting from more favorable FX rates. In line with our fiber expansion, the take-up ratio decreased just below 40%.

However, it is fair to expect the rate to remount for the remainder of the year as we aim to monetize this investment. This quarter, residential fiber ARPU grew strongly by 49% yield, surpassing quarterly average annual inflation after a long break, thanks to price adjustments. Longer contract duration and the reluctance of incumbent operator to make price adjustments have been affecting this segment adversely. To mitigate this factor, we have shifted our focus over the past year to offering 12-month contract or contract-free tariffs, resulting in 53% of our fiber customers opting for this plan by June. Lastly, we are pleased to see continued interest in high speed plans. The weight of these packages in the total fiber portfolio has increased by 11 percentage point year-on-year.

Next slide. On strategic focus areas, let's start with digital services and solutions. The standalone revenue of digital services and solutions grew by 87% year-on-year due to price adjustment and expansion of paid users. We have reached significant milestones in our flagship services. OTT TV services has surpassed the 1 million mark, while the cloud storage service exceeded 2 million users. By surpassing 1 million active users in Pakistan, we further expanded its user base through the partnership with Jazz. Our standalone paid user base reached 5.5 million, rising 2% annually. On the other hand, TV+ is intensifying its collaboration with both local and international digital platforms and partnering with leading global studios. Moving on to our next focus area, digital business services constitute 10% of Turkcell revenue, having registered 83 -- 82% year-on-year growth.

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The main growth drivers were system integration projects, data center and cloud businesses, each doubling their revenues annually. Notably, the backlog from system integration projects has reached TRY 2.9 million. Next slide. Our third focus area is techfin. In the second quarter, Paycell revenue rose 95% year-on-year. Pay Later has more than doubled its volume and remained a key driver of Paycell revenues. This growth was supported by increased payment in mobile app stores and expanded user base, and volume of ready-to-use limits. Paycell card has also supported this remarkable performance, thanks to increased money transfer and higher card fees. In May, the nationwide joint QR project was launched, which enabled our customers to make payments using Paycell app at any location with QR code.

Turning to financial. Revenue grew by 87% with an expanding loan portfolio and rising interest rates. The loan book reached TRY 4.7 billion on an 88% growth. Next slide. Now international subsidiaries. The Turkcell International segment, which accounts for 10% of the group top line, grew by 48% year-on-year in Q2. Excluding the currency impact, the organic growth was 38%. Thanks to increasing data roaming revenue and also price adjustments, lifecell revenue in Ukraine rose 36% year-on-year in its local currency, well above the inflation. The EBITDA margin improvement of 1.2 percentage point was mainly driven by lower interconnection and energy expenses as a percentage of revenue. BeST revenue rose 22% year-on-year in its local currency, comfortably exceeding the inflation.

The MTR rate revision at 2022 year-end and a disciplined OpEx result in a 20 points margin improvement. Next slide. I would like to end my presentation by sharing our updated guidance for 2023. Taking into consideration our outstanding first half performance, we have revised our revenue growth target to around 71%, EBITDA guidance to around TRY 37 billion, and maintain CapEx intensity at around 22%. I will now leave the floor to our CFO, Mr. Kamil Kalyon.

Kamil Kalyon : Thank you very much, Murat. Now let's dive into our financial results. Our group revenues had an incremental rise of TRY 9.2 billion, corresponding to 74% growth year-on-year. Turkcell Turkey revenues were the main driver of the performance, thanks to expanding subscriber base and solid ARPU growth. Digital services growth also supported the remarkable performance. Turkcell International revenue grew by 48%, lower than overall group due to lower inflation and limited currency depreciation. Techfin business grew by 93% year-on-year with an incremental rise of TRY 383 million as evidenced by the traction in financial services companies, Paycell and Financell. Next slide, please. Now let's look at our EBITDA performance.

Turkcell Group EBITDA reached TRY 9.5 billion, reflecting on the solid revenue growth. In Q2, EBITDA margin expanded by 3.7%. Increase in employee expenses was offset by a decrease in interconnection expenses, cost of goods sold and energy costs as a percentage of the revenue. Of note, 15% reduction in the electricity prices, which was introduced for industrial consumers in April, supports the margin. Also, we shall inform you that following the minimum wage increase in July, we have also increased our wage by around 37%, which will be weighing on our financials starting from Q3. Next slide, please. Let's take a closer look at our CapEx management. In second quarter, we kept implementing our disciplined CapEx plan, which brings our last 12-month CapEx intensity ratio to 20.7%.

Mobile and fixed investments in total account for more than 70% of the total CapEx. Mobile CapEx investments had a higher share in total CapEx compared to last year as we had to make around TRY 420 million one-off CapEx due to earthquake. However, we managed to keep single-digit intensity. On the fixed side, even though we slightly exceeded our annual target, it was lower than previous years. As we have mentioned before, this year, we are mostly focused on monetizing our fixed investments for the rest of the year. Next slide, please. Our cash position increased by TRY 7.8 billion in second quarter. FX movements had an impact of TRY 6.2 billion in the cash position. Our gross debt position grew by TRY 18.7 billion in Q2. The increase in gross debt is mainly due to TRY 14.8 billion currency depreciation.

We ended the quarter with a net debt position of TRY 28.2 billion. Thanks to the strong EBITDA generation, our net leverage remains around 1x and excluding Financell, it is 0.8x. The remaining FX debt service is around US$156 million this year, which is manageable given the cash position and committed credit lines. The majority of our cash continues to remain in hard currencies. Excluding FX swaps, 58% of our cash is in U.S. dollars and 10% in euros. Next slide, please. Lastly, I will go into the management of foreign currency risk in Q2. We have continued to keep majority of our cash in FX and also utilize hedging instruments as part of our prudent financial risk management approach. Looking at the FX position composition, we had US$1.9 billion equivalent of FX financial liabilities on our balance sheet.

On the asset side, we had US$1.4 billion equivalent FX financial assets and US$645 million derivative portfolio, mainly comprised of proxy hedge, namely futures and forwards. Overall, we ended up with a long FX position US$84 million, which is within our neutral FX position definition. This concludes our presentation, and we can now open the line for questions. Thank you.

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