Thank you for holding ladies and gentlemen. Welcome to the Second Quarter 2012 Results announcement call on the 26th of July 2012. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)
I will now hand the conference over to Koray Ozturkler. Please go ahead sir.
Thank you, Patrice. I would like to welcome everyone to our conference call for quarter two 2012 announcement. As far as the procedure, I will go through a quick notice and then I will hand over the session to Mr. Ciliv for his presentation.
This presentation may contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially due to the factors discussed in this presentation. Please also note that all financial data are consolidated, whereas non-financial data are unconsolidated, unless otherwise specified. Thank you.
Good morning, good afternoon, and welcome to Turkcell's second quarter of 2012 results call. We are glad to report another solid quarter, with 13% revenue and 8% EBITDA growth. We recorded Group revenues of TRY2.6 billion, achieving double digit revenue growth for the third consecutive quarter, due to strong continued growth in all segments. With this outstanding quarter, the performance Turkcell generated its historic highest second quarter, actually highest quarter and healthier revenue.
While improving our top line, we manage to sustain a profitable business model in nominal terms. Our EBITDA rose year-on-year to TRY779 million, with an EBITDA margin of around 30.4%. Yet, prevailing intense competition continued to impact the margin levels of all players in the Turkish market. Strong operational performance, plus the absence of the one-off Belarus related items we recorded in the second quarter of last year, the increased Group net income to TRY534 million.
Moving on to page five to talk about the driving force of this growth. Page five. In the second quarter of 2012, Turkcell Turkey grew by 9% year-on-year, with an increasing pace over the past three quarters. This was driven by accelerated growth in voice revenues by 6%, despite intensified competition in the Turkish mobile market. Meanwhile, the mobile broadband business fell about 44% year-on-year revenue growth. The operational performance of our subsidiaries were strong. Their contribution to the top line grew at 37%, mostly driven by Turkcell Superonline and Astelit.
Overall, we are proud of the fact that Turkcell Group posted its third consecutive quarter of double digit growth with increasing momentum.
Let's have a broader look at the margin of the market in Turkey on page six. During the second quarter of 2012, competitors pursuit of market share remained unchanged, in light of increase of net incentives, and a further decline in average prices, which continued to pressure market profitability. Minutes of usage rose by 15% year-on-year to this record peak for the Turkish market of 297 minutes, while revenue per minute fell to 7.5 Turkish Kurus, 8% down on 2011, mainly due to aggressive porting offers with higher off-net incentives.
As highlighted earlier this year, we have been committed to defending our customer base for future growth. Our strategy is to sharpen customer focus and drive innovation and operational excellence. We strive to deliver superior customer experience.
We believe that we deliver great value to our customers through mobility and total telecom solutions, and we expect to receive an adequate return from these high value services that we provide. This is how we maintain our 53% market share, recording higher net additions in the second quarter, and deliver strong financial results.
Moving on to page seven. As highlighted earlier, we registered strong net additions of 192,000 to reach a total of 34.7 million subscribers. This further improved our postpaid base with around 536,000 new customers, thanks to a simplified tariff structure with attractive and affordable offers communicated during the first half, and our contracting efforts.
We are also pleased with a 5.6% rise in our blended ARPU, chiefly driven by a growing postpaid base in our subscriber mix, and a higher mobile broadband configuration. (Inaudible) to market trends, our MOU also rose by 14% year-on-year to around 250 minutes.
Now moving to next slide, we will look at the smartphone market. The smartphone markets remain the key to growth of our mobile broadband business. Therefore, we focus on driving smartphone penetration through a [Technical Difficulty] this portfolio includes the latest models in smartphone technology, as well as more affordable alternatives that nevertheless, provide an acceptable and productive user experience.
Recently, we included a new model to our portfolio, with the launch of Turkcell MaxiPlus 5, the successor to the Turkcell T-series smartphones and now, better equipped with smart applications developed in-house. Meanwhile the Turkcell MaxiPlus 5, designed for professionals, will be offered in the third quarter.
The arrival of Turkcell branded smartphones greatly helped in widening access to mobile internet through its affordable prices, compared to high but declining average smartphone prices in the market.
As a result of our efforts and thanks to our exclusive sales channel, which is the market leader in the smartphone sales and on the mobile operators, the number of smartphones reached 4.8 million by welcoming 500,000 new users during the quarter. Consequently, penetration in our network rose to 15%, emphasizing an exciting untapped potential in our subscriber base.
We expect a continued rise in the smartphone penetration of our base, up to around 20% by yearend.
Moving to page nine, on the strength of our network and our ambition to provide the best internet experience to our customers, we sustained the pace of growth in mobile broadband and service revenues. Overall, for the quarter, our mobile broadband and service revenues rose from TRY462 million to TRY546 million year-on-year, a contribution of all three components.
Second, that the share of mobile broadband and service revenues rose two percentage points to 25%. In a short period of time, since the launch of (inaudible) Turkey, while broadband revenues have risen fourfold from TRY60 million, to TRY240 million in the second quarter of 2012. With its 44% share, mobile broadband was the largest component of overall mobile broadband in service revenues. Going forward, Turkcell will continue to lead mobile broadband in Turkey, and we expect this increasing trend to prevail.
Page 10, our fixed broadband business, which is the third fastest growing FTTX operator of Europe, sustained it's momentum on continued investments during the second quarter of 2012. Turkcell Superonline continued to deliver impressive results, posting 65% year-on-year revenue growth, while nominal EBITDA rose by 133% compared to previous year. The EBITDA margin remained above 20% as in the first quarter. Moreover, I am pleased to say that Turkcell Superonline has continued to record positive EBIT for the fourth consecutive quarter. During the quarter, the residential segment grew by 92% on the back of continued subscriber additions. We increased our home passes to 1.30 million, with 342,000 FTTX subscribers.
Meanwhile in the corporate segment, we posted growth of 87% driven by integrated solutions at the Group level. Overall, we appreciate the success of our fixed broadband business, and expect an increasing contribution to the Group going forward.
I will now move to page 11, in the second quarter, we are delighted with sustained profitable growth of Astelit in Ukraine. Revenue was at $100 million, up 13% year-on-year. Meanwhile, the EBITDA margin was 30%, while a positive EBIT was registered for the first time. Please note that operating expenses for the second quarter, which are expected to increase in the second half, overall decreased as a percentage of revenues together with lower advertising spend.
During the quarter, Astelit recorded net subscriber additions of approximately 300,000 and increased its three months active subscriber base to 7.4 million. This was achieved through the regional growth strategy aimed at new acquisitions. I am happy to underline Astelit's growth factors and going forward, we expect its contribution to Turkcell Group to rise.
Moving to page 12, in short Turkcell Group had a solid first half where we exceeded our revenue expectation, and were in line with our planned EBITDA. Turkcell Turkey continued to strengthen its position in the market, while our subsidiaries further increased their top line and EBITDA contribution which we expect to continue going forward.
For the full year, with the success of Turkcell Turkey and subsidiaries, we believe that we may deliver better results for the Group, versus our initial guidance. Therefore, we've revised our guidance for the full year. Assuming that market conditions do not change significantly, we now expect Group revenues in the range of TRY10.1 billion to TRY10.3 billion, with Group EBITDA in the range of TRY3.05 billion to TRY3.2 billion.
Meanwhile with higher revenue expectation, we revised our guidance for Operation Group CapEx as a percentage of revenues from 17% to around 16%.
Thank you, and now I will hand over to Murat for the financial review.
Thank you, Mr. Ciliv. Good morning and good afternoon to all today's participants. In the second quarter of 2012, Group revenues rose by 13% year-on-year to TRY2.6 billion, almost equally driven by voice and mobile broadband and services, 61% of the nominal increase in revenues was attributed to the strong performance of the Turkcell Turkey. The 6% rise in voice revenues, plus 18% growth in mobile broadband and services led to a TRY174 million Turkcell Turkey contribution.
At the same time, subsidiaries contribution to the top line rose by 37% to TRY112 million, while their share in the consolidated revenues climbed to 16% from 13% a year ago. Quarter-on-quarter, Group revenues were up 8%, with voice revenues being the driving force.
Compared to the previous quarters, Turkcell Turkey's revenue rose by TRY165 million, of TRY148 million was generated from our voice business, and further TRY18 million was contributed by our subsidiaries.
Now moving on to the EBITDA slide on page 15, in the second quarter of 2012 consolidated EBITDA rose by 8% in nominal terms to TRY779 million, while the EBITDA margin was down by 1.2 percentage points to 30.4% compared to the same period of last year. As a percentage of consolidated revenues, direct cost of revenues excluding depreciation, amortization increased by 1.6 percentage points year-on-year, mainly due to the 1.4 percentage point higher interconnection costs resulting from rising of net minutes in Turkey.
General and administrative expenses as a percentage of revenues rose 0.3 percentage points year-on-year to 4.8% in the third quarter, mainly on higher bad debt expenses. Selling and marketing expenses as a percentage of revenues decreased by 0.7 percentage points year-on-year to 16.9%. This mainly arose from a declining marketing and frequency usage fee expenses, following our decision to charge frequency usage fees to prepaid subscribers as of June 2011.
Quarter-on-quarter EBITDA in nominal terms climbed 11% and the EBITDA margin rose by 0.9 percentage points, mainly due to a lower direct cost of revenues and general and administrative expenses as a percentage of revenues. The 0.6 percentage points rise in connection costs was offset by lower network related costs and wages and salaries as a percentage of revenues.
Moving on to the net income slide, Group net income rose to TRY534 million in the second quarter of 2012, compared to negative TRY21 million in the previous year. Please note that the loss recorded in the second quarter of 2011 was due to one-off items below the EBITDA line. These one-off items mainly stemmed from goodwill impairment and translation loss recorded in balance. Plus, a provision made in that quarter concerning the competition board's fine, which was reserved back in the third quarter 2011. Excluding one-off items, Group net income would have been TRY472 million in the second quarter of this year.
In this quarter, our company did not record any significant one-off items, thus, excluding one-off items, net income grew by 13% year-on-year due to higher EBITDA. Net income rose by 4% compared to the previous quarter, while the EBITDA increase was the key driver of this growth. The improvement in EBITDA was partially offset by the TRY17.5 million translation loss, greater than the gain a quarter ago.
I will now talk about our balance sheet on page 17. Our financial position remained strong with approximately TRY6 billion equivalent of cash on our balance sheet and a net cash position of TRY2.9 billion as at end of June. Our consolidated debt decreased to TRY3.1 billion. The decrease, partly resulted from the payment of the guaranteed loan of our 55% owned subsidiary Euroasia, amounting to $150 million in April.
The other major cash flow items in the second quarter of 2012 include capital expenditures amounting TRY327 million and the corporate tax payment in the amount of TRY125 million.
Then, we view the year-to-date data of the total CapEx figure of TRY580 million, TRY327 million related to Turkcell Turkey, TRY173 million to Turkcell Superonline and TRY80 million to the other subsidiaries.
This concludes our presentation today. And we will now take any questions that you might have and thank you very much.
Thank you, sir. (Operator Instructions) The first question comes from Alex Kazbegi. Please state your company name followed by your question.
Alex Kazbegi - Renaissance Capital
Yes, good evening. It's Alex Kazbegi from Renaissance Capital. Two questions. One is, again, I was wondering with these trends in the top line, the recovering so to say voice revenues and growing still data. The margin still is fairly, so to say, I wouldn't say weak, but there is so to say weaker recovery on the margin side, which is also supported by your own guidance, where you are more comfortable, so to say, give us the high number on the revenue side, but leave the margin in absolute terms, fairly unchanged.
So I was just wondering, I mean what does it take or what do you need to see what to do in order for profitability to improve, both in Turkey if you wish, in Ukraine? So if you could give us an idea of what we should be looking at here or what you are looking at?
The second question is, just about your Board composition. We are, so to say, beyond the timing of where CMB should have already intervened, and the question is, again, what is -- now CMB should be doing, what can it do, what is the timing on that, and when should we expect anything on the, so to say, Board membership to come through? Thank you very much.
Okay. About the first question, the quarterly profitability of a business depends on a lot of factors, and it depends on economy. It depends on competition and it depends on your investments of new products and services. So in the second quarter, economy last year in Turkey was 8.5%. It was the second fastest growing economy in the world. The first quarter, the result was 3.2%, so Turkish economy has slowed down.
Second, on the market front, the Turkish market is unusually price competitive and you can see this by the profitable levels of three mobile operators. So there is really intense competition and unfortunately there is very intense price competition. And that has been a very important factor in the first half of the year.
And the third part is we have a -- we are a technology company and the mobile Internet growth, mobile services growth is very exciting for us and it offers great opportunities for us. And all along we have been investing in new good businesses of the future. In the last two, three years, we have been investing in 3G and fiber's Internet business in Turkey, and we are investing in mobile services.
And in the second quarter, we continued to invest in new mobile services like Turkcell TV and we are investing in mobile finance, mobile health, mobile education, mobile entertainment. So all of these factors coming together plus a change in the mobile termination rate that has happened some time ago has created an environment where there is a lot of off-net calls and that results in, as you can see in the presentations, pretty high interconnect costs. So all of this coming together has created a small decline in our EBITDA margin versus last year.
I also want to point out that in Turkey, we do pay 15% treasury share that you should keep in mind. So if you are comparing Turkcell's profitability with some other companies, you should keep that in mind. So all of these factors have impacted but we are happy that in absolute terms, we grew our EBITDA by 10% in the first half versus the first half last year.
So let me ask if there is anybody from Turkcell who wants to add to this. Yeah, go ahead.
Alex Kazbegi - Renaissance Capital
Yeah. No, I just wanted to say that I understand the -- of course the large taxes, and by the way it was more a question -- tactical question whether you would expect generally the trend too for the margin to improve, not dramatically but even by 1 or 2 percentage points over the next one or two years, given again that you are now getting a better support from the revenue side?
I'll ask Emre to chime in on the latest conditions in the market, in the mobile market in Turkey. We do see some changes in pricing and maybe Emre can comment on it.
We've been talking about rationalization all along for -- as a condition for the profitability to go up in this market. And as Sureyya mentioned, the first quarters of this year were the most competitive price, competitive ever. But we feel that right now, it's time for revisiting the strategies and finding new strategies for all players in this market. We also said that we would be a responsible leader if there was ever a rationalization movement.
The last couple of developments last -- of the last week shows us that there is a promise that rationalization might finally happen in the market, but it's too early to see whether this will be permanent or not. But to answer your question, that would be one of the conditions for the profitability to improve in the markets.
Alex Kazbegi - Renaissance Capital
Okay, thank you. Now second question is for [Murat].
Yeah. Alex, about your second question, you asked about the Board membership. It is pretty clear that Capital Markets Board decision is to increase the number of independent Board members to at least one-third of the Board. So the deadline for this was June 30th. And then as you know, the general assembly was canceled. So, it is reality that we have not complied with the conditions Capital Markets Board has outlined.
I don't have any more insights than you do. I think -- there are at least three options. One of them is existing shareholders and Board members reach an agreement and then they -- the Board approves changes in Articles of Association and nominate independent Board members to be added to the Board.
The second option is Capital Markets Board takes an initiative to drive this change. And the third option is nothing happens and the status quo continues. I don't have any critical information I can give to you right now. I hope that this issue is resolved before the end of the year.
Alex Kazbegi - Renaissance Capital
But at least the CMB doesn't put on itself any time, so to say timeline to intervene. They basically left it open. They can intervene now, they can not intervene for a while?
According to the latest communication by CMB, they warned us that this deadline was coming and they wanted Turkcell to take action to comply. And then the deadline came and passed and I haven't -- I don't think Turkcell has heard from CMB about this since then. So it has been a little bit quiet in Istanbul.
Alex Kazbegi - Renaissance Capital
Okay, understood. Thank you very much.
The next question comes from Cesar Tiron. Please state your company name followed by your question.
Cesar Tiron – Morgan Stanley
Yes, hi, it's Morgan Stanley. So congratulations for this very strong results. I have two questions if possible please. Number one, can you please explain why is the churn increasing on a year-on-year basis because I thought you've launched some retention offers which partially explain your strong quarters. So why is the churn increasing on a year-on-year basis? That's the first question.
And the second question, if you can come back to those positive signs that you've seen in the market. I'm asking simply because we've seen these signs many times in the past two, three years and eventually they vanished after one or two months. So can you please say if those signs are really price increases as opposed to promotions that are being basically discontinued or promotions that are ending. Thank you very much.
Hi, this is Emre Sayin. I will answer the first question. The reason the churn numbers are increasing is due to a one-off effect from last year. When BTK, the regulator, increased the period for the involuntary churn, and that has resulted in unusually low churn figures. Last year and this effect has been canceled out right now. But of course comparatively it looks like the churn numbers are increasing. In fact, when we exclude those numbers the churn figures are actually under control and [they're] declining.
Cesar Tiron – Morgan Stanley
Okay, that's very close thank you. And on the promotions can you please [say] the [Technical Difficulty].
Okay. It's for the second question, if I understood correctly you asked are the signs really for the price increase or promotions, the positive signs mostly came from the area of new customers, tariffs for new customers and there was – basically a level increase in the tariffs for new customers. And that's a very good sign, because that's where most of the price competition takes place in the market. And I believe if that continues then it will also impact the existing customer base and it will give us a relief in terms of increased prices and increased EBITDA levels.
Cesar Tiron – Morgan Stanley
Do you see your competitors moving towards also aggressive retention offers? As opposed to aggressive offers which were more focused on taking customers from Turkcell?
I think I have not seen full picture, that all of our competitors are doing that, but I believe they should because, you know, when you look at the figures you see that this market will be moving towards better churn management taking care of your existing customer base. And I believe, all players in the market should focus on that rather than just trying to increase their number portability figures, which is actually hurting the market and we should all concentrate on making our existing customers happy. And that's the path to growth and to you know more profitable markets.
Cesar Tiron – Morgan Stanley
Thank you, very much.
(Operator Instructions) The next question comes from Vera Sutedja, please state your company name followed by your question.
Vera Sutedja – Erste Group
Yes, company name Erste Bank. I have a question regarding (inaudible), this 30% margin is this sustainable or this is highly related to the football championship?
And can I extrapolate the rates offered towards the end of the year considering the third quarter should be strong? Thank you.
I think (inaudible) the second quarter's numbers, I think there was a little bit unusually high during the European championship. There were a lot of companies who were advertising and consequently the price of advertising went up significantly. And our company decided to be more careful about advertising spend and as we explain in our presentations, marketing expenses were lower in the second quarter. And actually my understanding Ukraine did not get as many visitors as they expected during Euro 2012. So there is the impact of Euro 2012 as I explained I think, and I am as the CEO, I think it will be very-very difficult to hold onto 30% margin during the second half. My expectation would be between 27% and 30% some place there.
Vera Sutedja – Erste Group
The next question comes from Mehmet Agyuz. Please state your company name followed by your question.
Mehmet Agyuz – YapıKredi
Yes, hi, Mehmet Agyuz from YapıKredi. Congratulations on the very strong numbers. My question is on the mobile internet site, we had seen some slight deceleration in the growth, and increase – you mentioned about some improvements in the voice pricing, increase about the pricing in the data sites, whether are you seeing any pricing pressure with more emphasis on bundles and (inaudible) for the second half of the year. Thank you.
Mehmet, thank you very much for your comment on a performance in the first half, we appreciate it. And on the mobile internet side – on the mobile internet area, our management is very much focused on the related costs and building a reasonable profitable business model. So our strategy from Turkcell site will be to price adequately appropriately because we see mobile data traffic increasing very rapidly. It has increased 70-fold almost in the last three years. And we only have about 15% of the of our customers on smartphones. So there is 85% to go, as a result, there will be a lot of investments required. So it is important for us to be careful about pricing appropriately, so that we can fund – we can make the right investments with the adequate return on investment going forward.
So we are becoming more careful about pricing, but I also want to say, you know, this is a emerging market, it's a – it's in the early phases of this developing market and in the early phases I think Turkcell and other operators were introducing some introductory price offers, but we now see the volumes increasing and the smartphone penetration increasing. So we will be very careful going forward about data pricing. I think it is key to profitability in the future.
Mehmet Agyuz – YapıKredi
Understood, thank you very much.
There are no further questions at this time. Please continue with any other further points you wish to raise.
At this time, thank you for participating to our call. We appreciate your questions. Please remember that audio recording is available to you for next two weeks. And also IR team is here to talk to you after and onwards. Thank you very much for participating. Bye, bye.
This concludes today's conference call. Thank you for participating.
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