Earnings Call: Q1 2021

May 3, 2021

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome and thank you for joining the Trexell's conference call and live webcast to present and discuss the TerexCell's Q3 2021 Financial Results Conference Call. In only mode and the conference is being recorded. The presentation will be followed by a question and Call. At this time, I would now like to turn the conference over to Mr. Ali Sidayake, Investor Relations and Corporate Finance Director. Mr. Yahi, you may now proceed. Thank you, Nehalis, and hello, everyone. Welcome to Turkcell's Q1 2021 results call. Today's speakers are our CEO, Mr. Murat Erkamp and our CFO, Mr. Osman Yilmas. We have a brief presentation and afterwards we'll be taking your questions. Before we start, I'd like to kindly remind you to review the last page of this presentation for our safe harbor statement. Now I hand over to Mr. Ekam. Thank you, Alistair. Good morning and good afternoon. Thank you for joining us today. We had a strong start to year delivering robust financial results despite the prevailing challenges of pandemic. This performance was possible due to our customer centric strategy built on a diversified business model. This strategy has enabled the continuation of solid growth in total subscribers by 705,000, marking the highest level of the past 3 years. Our strong and fast platform, convenient digital face channel and value offer have been instrumental in this success. Accordingly, we recorded 17.5 percent top line growth, Generating TRY 7,800,000,000 consolidated revenue. EBITDA reached TRY 3,300,000,000 on 17.7% growth with a 42 point 2% EBITDA margin. Net income was TRY 1,100,000,000 on 26.6 percent year on year growth. Overall, these results have confirmed our confidence in achieving our full year guidance levels. Next slide. Let's have a look at our operational performance in the Q1. On the mobile phone, we gained a net 410,000 postpaid 190,000 prepaid subscriber. Our postpaid customer base reached 22,400,000, reflecting 66% of total on a 3 point rise year over year. Strong momentum in a net addition is a reflection of our commitment to strengthening our subscriber base. Our efforts to establish a customer driven mentality throughout the company have played an important role in this performance. As such, our mobile churn rate was 1.8%, the lowest level of the past 3 years. In the fixed broadband segment, strong demand has continued under prevailing mobile limitations and remote working conditions. We recorded 50,000 fiber subscriber addition with our high speed and unlimited fiber Internet offers Designed to meet the need for speed at home office. In addition, there were 23,000 net addition to our fixed wireless access service, Superbad, this quarter. Further, we are pleased to see robust demand for our TV services. With the addition of net 49,000 IPTV customer, we now offer this service to 61 Out of every 100 households among our residential fiber customers. We landed mobile ARPU rose to 49.9 Sorry, 49.9 percent on an 8.7% rise. We felt the negative effect of pandemic On the roaming revenue generation and are on the trend for additional data quota purchases. Despite this growth was driven by a larger postpaid subscriber base, higher data consumption and price adjustments. Fiber residential R2 growth was at 8.8 percent to SEK 74.3 trillion mainly on demand for higher speeds as well as our price adjustment. Reflecting the rising trend in inflation, we expect to record double digit ARPU growth next quarter. Next, an update on data usage and 4.5 gs subscription plans. Average mobile data usage rose 29% year on year to 12.6 gigabyte per user. Limited mobility and continued lockdowns have impacted the mobile usage growth. For a healthy user on our network have continued their growth trend, contributing to mobile data usage. Out of 32,400,000 customers signed up for 4.5G services. Around 70% had for our healthy compatible smartphones, still indicating significant room for growth. Overall, Smartphone penetration has reached 84%, with 91% of these being 1 and half year competitor. Next slide. We work with the mindset that prioritize our customers' needs in our decision making. To achieve this, a segmented approach help us address those needs more effectively. In that regard, the Applications designed to address our core segments. The active user revenue increased 16% year on year growth, suggesting more engagement on this platform. Additionally, our key strength, including our well invested network infrastructure, extensive distribution channel And strong brand loyalty stands out as core factor in customer decision making. With all of the above, customer head continued to recommend Turkcell over the competition this quarter, Even widening the large gap to the 2nd path. Next slide. I will go into detail on action in our strategic focus area on the next three slides. First, let's consider our digital services. The standalone revenue from digital service continued its strong growth at 20% year over year, reaching TRY367,000,000. The paid user base reached 3,200,000, up by 200,000 during the quarter. It has been an exceptional quarter for BiP. There were 32,000,000 downloads in a single quarter. Half of those were from beyond 30. Overall, 3 month active users have reached 40,000,000. This differentiates itself from the competition acting on its data only with users permission policy. With this, we continue to enhance user experience, position it as the best communication platform. It has also been a good quarter for our TV business. With greater content and penetration on big screens, We have gained a remarkable number of new users, both on IPTV and the OTT platform. Another highlight on the quarter was the launch of our cloud gaming platform, Game plus in March In collaboration with NVIDIA, it captured over 10,000 paid users in just 15 days. Thanks to cloud based game technology, eliminating the need for high speed hardware, users can access over 9 50 games. Going forward, we aim to launch our own mobile game publishing business. Over the coming quarters, we will focus On launch of the B2B models of Fizzi, Livebox and Bitnip with a brief further manifestation. Next slide. Next are our Digital Business Services. We continue to Pioneer to digital transformational corpus in Turkey. This strategy has brought a 27% increase In digital business service revenues, reaching TRY 452,000,000. We are glad to see The strong demand for our digital business services, particularly data center and cloud, security services, New generation technologies and managed services. We signed over 700 new contracts with a total contract value of nearly TRY 0.5 billion. Overall, the backlog from system integration and managed services projects signed to date has reached TRY 1,100,000,000. We strengthened our global partner system with the addition of Palo Alto Networks. Our team has gained further expertise with certification program. Also this quarter, we have been busy with several launches In the area of cybersecurity, IoT and cloud services, the security orchestration, automation And response service facilitates faster action in the event of cyber attack. Forensic services Enable understanding of the underlying weakness in a cyber attack along with the action plan. In IoT, the Turkish digital facility sorry, Turkcell digital facility with diversified services Enriched, service at Copilot as well as new user experience on Tuxed Cloud were among other highlights of the quarter. Next slide. 3rd is our Technion focus. Total Technion Services revenue were TRY 223,000,000 despite the continuous contraction in finance sales revenue due to the regulatory limitation. Paycell's growth was robust at 53% on a year on year basis. It has been yet another successful quarter for Paycell, With its active user reaching 5,300,000, mobile payment transaction volume has doubled year on year. Furthermore, the volume of business realized through the Paycell card was 4x that of last year. As to Ancel says, while there is contraction in the market due to regulatory limitation as well as the pandemic, We observed that some demand has shifted to cash sales over the past 2 years. As Strict said, We are also relevant in cash sales through our sales channels. Financell in its 5th year has diversified its focus to cover new segments, including residential, SMEs and corporates In addition to consumer, Financel is the market leader in the finance sector, including banks, With a 25% market share in consumer loans below the TRY 5,000 threshold. In insurtech, our subsidiary Duanecels product portfolio, including insurance for devices, Women health and accidents is now available through our digital platforms. We believe that the insurtech business complements our tech In March, U. S. Has begun to offer unemployment insurance that ensures To sell subscription for up to 6 months in case of our employment. Next slide. Now a few words on our performance through our digital channel. There were 32,000,000 visits per month to our website. Our digital application had 23,000,000 3 months active users. Overall, the conversion of digit The actual transaction was 1.7x than over the previous year. In particular, Data plan purchase and Turkish to the top up transaction volume over this platform were even higher at 3.7 times. As an update to our tech and electronic marketplace, our customer can now easily see and access Passage to our digital operator application. Passage has gained pace in expanding this portfolio and a reliable supplier base. Overall, with that 9 percentage point increase, the percentage of customer sales of Turkcell Turkish generated on the digital channels has reached 15.7% in this first quarter in the Q1. Now let's take a look at our performance in the international markets. Turkcell international revenue Comprising 9% of consolidated revenue grew by around 27% year on year in the Q1, Mainly on strong growth in Ukraine operation as well as the positive impact of currency movements. Lifestyle Ukraine revenue grew by 20% in local currency terms. This was driven mainly by subscriber base growth, Price increases and higher data users despite the hit on the roaming business. Its 3 month active mobile subscriber reached 8,000,000 on average, approximately 7% growth. LiveSouth positively contributes to group performance with its increased net income and cash generation ability. Next slide. Before I finish my part, I would like to touch upon our action on the ECC front. On the environmental front, we have committed to energy use exclusively from renewable source before 2013. We are confident that we can achieve this target, which were recent which we Recently also shared at the GSMA Mobile Net 0 event in late April. On the social investment front, We are glad to have become the sponsor of Turkey's women's national football team. Also, given our responsibility Regarding wider digital inclusion, we are building technologies launched in nursing homes for the elderly. Also, starting in Q1, we have put into practice our flexible working model, shifting to remote working for a good. By doing so, we aim to increase overall productivity, also contributing to our sustainability targets. Further, we have continued working on new projects that aim to increase the number of women in the Turkcell Group workforce. On the governance front, as I believe all of you may have noted, we have our annual general assembly on the 15th April. With the appointments made at the meeting, all seats on our board are now filled in line with corporate governance principles. A dividend of TRY 2,600,000,000 have also been approved at the same meeting, the first installment of which was distributed last Friday. I will now hand over to Osman for a look at financials. Hope you're all safe. Stay safe and healthy. Thank you. Thank you very much, Marathe. Now let's take a closer look into our financials. This was a strong quarter for our company. With a 17.5 percent growth, we generated TRY 7,800,000,000 in revenues. While the pandemic still poses few challenges, Our diversified business model, coupled with strong operational performance in our core telecom business, have been instrumental in this performance. Group EBITDA reached TRY 3,300,000,000 on an 18% growth, indicating 42.2 percent EBITDA margin. On the back of robust operational profitability and prudent FX risk management, we generated TRY 1,100,000,000 net income at a 20 7% yearly growth. Overall, we are on track with this result toward our full year targets. Next slide. Before I dive into our revenue breakdown, I would like to briefly explain the changes in our reporting under IFRS from Q1 onwards. 1st and foremost, we now report Techs in Business as a new segment, reclassified from the segment called other. Techs in business include our consumer finance company, our payment services company and our InsuTech company. By doing so, we aim to monitor the overall performance as a whole and separately as this segment has different dynamics than our core business. Secondly, consumer operations of our subsidiary, which includes retail channel operations, smart devices management and consumer electronics sales through digital channels, They've been reconciled in the other segment from Turkcell, Turkey. Other segment also comprises the non group call center operations and our energy business. This presentation will enable us to crystallize the performances of our core telecom operations and complementary relatively lower margin and growth I should highlight that these changes have no impact on our operating profit, bottom line or the cash flow statement. Next slide. Now some details on our revenue and EBITDA development. This quarter, the increase in revenues was by TRY 1,200,000,000, 700,000,000 of it was from Turkcell, Turkey. Larger subscriber base, rising data and digital service consumption and price adjustments were instrumental in Turkcell Turkey's performance. Turkcell International revenues rose by 26.6 percent contributing TRY 150,000,000 in this quarter. Lifecell Ukraine's strong growth was the main driver in addition to the positive impact of currency movements. Under Techfin, Financia's revenue decline was compensated by the $34,000,000 revenue contribution from Paycell. Other segment contribution of TRY 315,000,000 was mainly through the increase in equipment revenues accelerated by the presence of our digital channel. Strong revenue growth has been the key driver for the 18 point rise in EBITDA. With higher equipment sales, EBITDA margin remained flat. Next slide. Now I would like to talk about our balance sheet and leverage details. As at the end of Q1, our gross debt position increased to TRY 25,000,000,000 from TRY 21,600,000,000 Q4 end Due mainly to currency depreciation and new borrowings. In Q1, dollar appreciated by 13% and the euro by 8.5%. Currency movements resulted in around TRY 2,500,000,000 increase in total debt. Our Cash position increased by TRY 1,600,000,000 to TRY 13,500,000,000 in Q1. This increase was mainly driven by new borrowings and FX movements. Meanwhile, our free cash flow generation was impacted by seasonal working capital needs. This mainly included TRY 400,000,000 wireless usage tax payment And advanced payments to our vendors, reducing payables balance. The vast majority of our cash remains to be in hard currency, And this cash is sufficient to cover our debt service until 2025. As of Q1 end, Group net debt was around TRY 11,400,000,000 with a 0.9x leverage ratio. Excluding the tax in business, this was at 0.8x. Next slide. Now some highlights on our foreign currency risk management and liquidity strength. Our balance sheet is strong with some $1,600,000,000 equivalent cash in hand with a long FX position of around US200 $1,000,000 With hedging instruments in place, the share of FX debt declined from 81% to 44% at the end of the quarter. These hedging instruments have limited to net FX loss with TRY 276,000,000, which would have been TRY 1,600,000,000 otherwise. As the main reason of our borrowings, I would like to share some details regarding our CapEx. Overall, Around 75% of our operational CapEx is in foreign currency. And for 2021, we had planned to invest around 90% of our CapEx in mobile and fixed infrastructure. We deem continuous investment in our infrastructure to meet rising demand for data And to reflect the technological advancements crucial. Superior network quality is one of our key strengths that we are committed to keep in place. In particular, by the rising demand for mobile data, our target to increase our fiber home base by 500,000 And continued demand for our data services, data center services and digital services are the underlying reasons for the accelerated CapEx budget for this year. Next slide. Let's take a closer look at our texting company's performance and first In the Q1, Financia revenue declined by 20% to TRY 130,000,000 mainly due to lower consumer loan portfolio along with lower average interest rates. Its EBITDA decline was slower, resulting in 4.5 percentage points rise in EBITDA margin. This was driven mainly by the cost of risk improvement with better credit scoring, Successful collection performance and sale of doubtful receivables. Accordingly, the cost of risk ratio declined to 1%. Even excluding NPL sales, cost of risk would still be below 2%, the lowest in 3 years. Net income increased by 51% year on year to TRY 95,000,000, driven mainly by lower FX loss after hedging. Next slide. Paysal registered a remarkable performance in Q1, achieving 52.6% year on year revenue growth. With a focus on expanding its business, Paysal concentrated its efforts on growing non group driven revenues. Accordingly, non group revenues rose 81 point 4 percent year on year this quarter. Pay sales growth was positively impacted by the increasing demand for e commerce and digital payments. Turkcell was able to monetize this demand with its mobile payment solutions, particularly direct carrier billing and e money solutions. Mobile payment transactions volume more than doubled, while transaction volume through PayStar cards is nearly 4 times dead of last year. The number of active PayStar cards is nearly 2.5 times of last year's and reached to around 560,000. Paycell's 3 months active users reached 5,300,000. The rise in active users was driven mainly by increased digital content consumption and expanding merchant channel and ease of use of the Paycell application. Paycell is now accepted at 13,000 merchants as at the end of the quarter. Payside's EBITDA rose by 46% year on year, resulting in an EBITDA margin of 54%. The strong operational performance resulted in a robust net income rise of 41% to TRY 40,000,000. Payscale will continue its strong growth in the upcoming periods through further penetration and service diversification. This concludes my presentation. We can open the line for your questions. Thank you very much. Ladies and gentlemen, at this time, we will begin the question and answer session. And the first question is from the line of Eki Mendecki of BNP Securities. Please go ahead. Hi, thank you very much for the presentation and congratulations on the strong results. I have three questions. One is on the prospects regarding revenue growth in consumer segment going forward. Since the inflation trends have changed in Turkey, should it be fair to assume higher The growth generation in the quarters ahead, this is my first question. Secondly, Could you please, if it's possible, give more information regarding the breakdown of digital service revenues? Is it fair to assume that now this application has a higher revenue share in overall? And thirdly, lastly, there was the comments of the Chairman of ICTA regarding the 5 gs tender in Could you please also provide any comments about your view on the potential calendar going forward? Thank you very much. Thank you, Ejem. First of all, for the question regarding ARPU and higher SG and A IRRPU. In the upcoming quarters, we aim to improve our ARPU growth to double digit level. We expected the inflation to decline towards the end of the year. We believe that the gap between our ARPU Growth and inflation will be contracting. In a challenging macro environment with a high inflation And rising unemployment, we will be targeting a balanced revenue growth through ARPU increase and customer additions. Moreover, as part of our diversified business model, we will also focus our strategic focus areas, which will be supporting our Top line growth. Especially, I would like to insist on the Q1 It was apple to apple in terms of roaming because last year, there was roaming revenue after the pandemic. This year, there is no roaming trend. This also impact the ARPU growth level as well. Regarding breakdown of business owners revenue, to be honest, the biggest share is TV business. So we have TV, music, live tracks and bit, our main driver of the Revenue side, but the biggest share is in the TV side. Regarding 5 gs tender, so we don't have official road map announced By the regulation yet and a couple of days ago, the Deputy Minister of Transformation and Infrastructure Stated that they are planning to hold a tender in 2022 and commercial services to be launched in 3, 2023. On our side, we have been continuing our preparation for 5 gs for last couple of years. We have conducted tests through collaboration and network vendors And then other people. We are seriously taking an active role in international organization Setting this to Sandoz. We are focusing on different use case of 5 gs, reaching out as many vertical sectors as possible, While maintaining local R and D focus, with this scope, we're testing 5 gs heavily And real time, this virtual reality cases, 5 gs, live TV broadcasting and other tests are conducted. So we believe that digitalization is vital for Turkey's sustainable economic growth. Going forward, we will continue to provide test and best in class technology for this purpose. But still, it's not that clear for our side. So 2,003 seems The service timeline. I hope I answered all three questions. Thank you very much. The next question is from the line of Ivan Kim from Extellus Capital Partners. Please go ahead. Hi, good afternoon. Three questions, maybe for me to please quickly. So Firstly, can you talk about the key NPS drivers for you? So what are the reasons your NPS is stronger than wireless And probably getting into increasing, you know, you keep increasing prices. And then secondly, can you please talk about the fiber rollout plans? The plan for this year is clear, But longer term, do you still aim to do sharing or your decision is pretty much to do it yourself now? And then finally, can you please I'll talk about the opportunities to monetize ZIIP because it looks fairly kind of very good scale now. So probably there is opportunity to get more earnings from there. Thank you. So first of all, for drivers for MPS, there are 3 areas. One of them are segmented Customer centric strategy. We focus our customer based on young, premium And women and other loyalty services. So customer appreciate our focus on the segmented side. Obviously, we invest a lot to our smart network. So we have widest, fastest, smartest network, so this is appreciated by the customer. And also, Our widest distribution network on sales channel, we are not just selling product, we are giving services and supporting our customer to utilize technology. So I believe all three letters on the NPS side. Regarding fiber rollout plans in long term, So for this year, we hope to see 500,000 homepass. Next 3 years, we would like to continue 500,000 even more than that next couple of years. And we see that we have a demand driven approach by regional focus In terms of capacity management, and as long as demand is there, we'll continue to invest in fiber. And the 500 ks is the minimum per year next 3 years, I believe. Regarding the 3rd question, I couldn't catch the 3rd question. Could you repeat the 3rd question? Yes, sure. Thank you The third question is just opportunities to monetize deep, the messenger, Because for now, I believe there is not a ton of revenue coming from it. But now with a lot of connections That you saw in the Q1, so maybe you can consider monetizing it a little bit more. Thank you. Okay. Obviously, BIP we have been investing BIP in terms of monetizing BIP. Our approach is really different than the OTT players' other messaging platform because We are utilizing Telkor capabilities into our infrastructure. So in our BIP With a different way of approach, we can monetize it through the voice on net, off net utilization With services on top of it. And obviously, we can converge it to our Paycell Capabilities with a deep integration, customer approach as well. So I think We have a number of cases to monetize the bid, but We are also looking for opportunities with the international operators for 1 market together. Since we know how to deal with telco approach, there are telcos around the world who can utilize Bit is just their instant messaging platform with a white label approach. Also, we are looking forward to stake for sales to other operators, other potential Stakeholders as well. Right. Thank you. We are actually integrating it with PayFac. So it will be most promising. Thank you very much for your answers. And the next question comes from the line of Keihan Demirak of AK Investment. Please go ahead. Hi. Thank you very much for the presentation. I just had a follow-up on the ARPU growth maybe. A few questions. On the postpaid, Arthur, I mean, you had very strong net additions on the postpaid side for the past Maybe more than a year, which we supported the blended ARPU growth, but it seems like this Impact now is phrasing the way. So what I'm trying to understand is that how diluted is the new Postpaid additions in terms of price compared to your average postpaid ARPU. So on a like for like Maybe is it possible to give a rough number for the postpaid ARPU growth excluding the new additions? And also to explain this trend, I mean, do you see some kind of transition to lower priced packages between your Thanks, Trevor. It's very clear. So in essence, so in different ways, what I'm trying to understand the reasons behind the relatively We closed in the postpaid ARPU. And also as a follow-up, this brings me to the inflationary pricing up. Now there is a significant gap between the headline information and the ARPU growth, 8% versus 18%, 17%. So I mean, how much do you this divergence to close? Also, are you basing your price increases Based on your year end inflation targets, do you have any targets on that side that you can share? Thank you. Thank you, Laurent. First of all, our postpaid ARPU is still Impacted by the roaming revenue due to travel restrictions, some of our revenue source like Add on data packages, calls and revenue, overuse charges and also impacted during the quarter. Moreover, as you know, we also focus on switching prepaid customer to postpaid subscription. While These switches have positive impact on blended ARPU, but they negatively impact the postpaid ARPU as the subscriber firstly choose entry level postpaid packages. One of our strongest part is We have ability to grow and get up into higher packages. So strong postpaid acquisition also had an impact on postpaid ARPU performance as well. Our like For live postpaid ARPU growth was 8.4% in the Q1. So I think As for the compression of our ARPU growth and inflation, we started the year by adjusting our price. Yes, we cannot see the full impact of those price actions immediately due to the contracted nature of our business. Furthermore, we also observe that people in Turkey now are more concerned regarding their purchasing power as well as job security. Therefore, it's more difficult to make material price adjustment in this environment. On the other hand, Due to the current macro environment, in the Q1, we saw a quick rise on the inflation side, which was beyond our expectation. All in all, these factors widened the gap between our Our to grow penetration in the Q1, but we see that we're going to recover this growth level coming quarters. I'm not sure where we can meet at like 70% level. But as you know, we would like to come as close as possible. Thank you. Understood. And just to make some remarks on that, I mean, Inclosing is the one side of the equation. Also, how do you think of the FX side? I mean, the other substantial CapEx needs on the USP front, which related All particularly related with your mobile business, also the long term business FX. So I mean given the pricing, Sal, how do you take the FX size into account or are you considering that Cost pressure coming from that side. Thank you. Okay. Thank you very much. The FX is very important factor, Especially in the telco business. But we are well prepared actually Living in Turkey and operating in Turkey make us quite cautious on the FX side. So our FX part is well hedged at this moment. Plus, we see that FX might impact our investment. So we make our investment earlier than the plan. So this also help us to manage this FX situation. So far, the FX is under control. We don't hope that FX will increase dramatically. So this is In our guidance and in our plan, the existing situation and the FX. Thank you. And just one final quick question. About asset monetization, you were hoping to see some development On the Super Online side, this year, is that still counts? Yes. It is not just Super Online, but Super Online is also one of the assets Yes, we do like to monetize. But because as we shared in our 2020 year end conference call, We continuously evaluate asset in our business portfolio for strategic action in order to maximize value for our shareholders. Among those assets, Super Online stands out as the best candidate for an IPO Given the size and growth potential, at this point, we are at the exploratory phase regarding a potential IPO. However, we should note that market condition are quite critical for an IPO decision. Currently, we observe Strong demand to IPOs in Turkish market, yet the demand is mainly coming from local retail investors. The size of those IPOs are also relatively small compared to Spero Online. For a sizable potential IPO like Spero Online, The interest of international investors will also be important. Therefore, foreign investor, add back to the market would be one of The critical one of the criteria that we're going to consider. Okay. Thank you. Understood. Thank you very much for your time. Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Turkcell management for any closing comments. Thank you. I would like to thank everyone who joined the conference call. I hope we're going to meet with a healthy condition next coming quarters. Thank you very much. Good morning and good afternoon again. So ladies and gentlemen, thank you very much. This is the end of our call. Thank you all for taking the time to participate in the call. Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant evening. Goodbye.