Good day, welcome to the second quarter 2019 results conference call. For your information, today's conference is being recorded. At this time, I'd like to turn the call over to Korhan Bilek, Director of Treasury and Capital Markets Management. Please go ahead, sir.
Thank you, Ellis. Hello, everyone. Welcome to Turkcell second quarter 2019 results call. Today's speakers are our CEO, Mr. Murat Erkan, and our CFO, Mr. Osman Yilmaz. We have a brief presentation, and afterwards, we will be taking your questions. Before we start, I would like to remind you to review the disclaimer of our presentation. Now, I hand over to Mr. Erkan.
Good morning and good afternoon, everyone. Welcome to Turkcell second quarter 2019 result call. On behalf of the Turkcell family, I am glad to announce another solid set of results made possible by the effort of our dedicated team. With a focus on our customers and innovative solution, we continued strong double-digit growth in this quarter. We recorded 21% annual top line growth and TRY 2.6 billion EBITDA, with a 41.2% EBITDA margin. Record high ARPU growth, both in postpaid mobile and fiber residential. Higher usage of data and digital services supported these strong results. Our new strategic focus, digital business services, contributed strongly to both the corporate segment and overall group results. Including both recurring and one-off projects, its first six months performance was up 62%.
Solid operational performance, coupled with effective cost management, has led us to revise our full year EBITDA margin guidance up to 39%-41%. We have further strengthened our balance sheet with proven finance management and cash generation capability. As at end of June, our net debt to EBITDA ratio has improved by 0.2 x year-on-year to 1.2. Today, our board of directors has taken the decision to hold general assembly on September 12, 2019. Proposed a new dividend distribution date, keeping the total dividend amount the same at TRY 1 billion. Moving to next slide. Some further detail on our financial performance. We recorded a TRY 6.2 billion top line on 21% growth and TRY 2.6 billion EBITDA on roughly 20% growth. Our EBIT reached TRY 1.3 billion with a 20.8% margin.
Going forward, we will monitor and communicate EBIT performance as an additional metric. We believe EBIT is more transparent by eliminating the impact of new IFRS standards. We registered a net income of TRY 465 million on a 12% rise. Net income before the one-off provision rose 27% year-over-year. These provisions are related with the past case of transaction. Capital expenditures remain under control with 15% operational CapEx over sales ratio. In the first half, revenue rose 20% to TRY 11.9 billion with a 40.7% EBITDA margin. EBIT reached TRY 2.4 billion with a 20.1% margin. Moving to next slide. As outlined in the first quarter results call, we have determined three strategic focus area. Our digital services, digital business solutions, and our techfin platform. Let me say a few word on our action in each of these with quantitative data in the upcoming slides.
For digital services, operational performance indicators are in line with our plans. Having gained considerable popularity, we have begun monetizing them through advertising, brand collaboration, and others, as we already do with subscriptions. In digital business solution, we are working on new projects through which we serve both private and public sectors. With this strong pipeline, we expect this segment to grow and increase its contribution to group financials. Regarding techfin, it has been a busy quarter with several new products and services launch on the Paycell platform. We are committed to capitalizing on this well-established payment platform, leveraging our technology. Moving to next slide. Now we turn to our digital services. We have continued to enrich the user experience with exciting new features. Our digital communication and experience platform, BiP, sees daily message traffic of 300 million, up fourfold in a year.
The innovative instant translator service within BiP is offered in over 100 languages. Our digital music platform, Fizy, serve approximately 3.7 million active users. We intend to increase our interaction with Fizy user by offering them music trivia on a platform in the near future. Furthermore, Fizy, our digital publication app, Dergilik and TV+ offer personalized content recommendation using AI technology. We expect this feature to boost customer loyalty. Next slide. Now a few words about our new focus area aimed at digitizing the economy. digital business solution, we offer tailor-made end-to-end digital solution to both private and public sectors. These include cloud, cybersecurity, IoT, data center, and digital integration. Our aim is to become market leader in three years, driven by our wide range of solutions, strong infrastructure, and ecosystem. This year, we have added new customers and projects, as well as strong digital partners to our portfolio.
As a result, the solid three-year performance of this business line was reflected in 62% growth. We are confident this business is set to grow further and increase its contribution to group financials. Moving to next slide. In the techfin area, we have recently launched a number of new products and features on Paycell platform. Turkcell customers can easily top up their public transportation card in Istanbul on their mobile phones via the Paycell application. With this option of paying through their phone bills. Paycell Card now has a pocket money feature designed for the convenience of parents. Further, we introduced cash card to the Paycell Card family. It is now possible to withdraw cash on the card from any ATMs. Also, 24/7 money transfer with just a phone number is now possible with the Paycell app. Separately, Paycell has been part of local meal card initiative.
This partnership has launched Paycell Card, which will be put in use initially by Turkcell employee as of 1st of August. Paycell Card inherits both public transportation Istanbulkart and meal card feature. It is accepted at a steadily growing number of sales points. Going forward, we will launch additional service on Paycell, which we expect to grow at nearly 30% per annum in the medium term. Moving to next slide. Let's look into our operational performance. Our value proposition and innovative customer focus campaign underpinned the strong rise of postpaid, fiber, and digital services subscriber during the quarter. Postpaid mobile subscriber, which generates more than three times the ARPU of prepaid, rose by 215,000. The monthly average churn rate has largely remained stable at 2% on a yearly basis. Blended mobile ARPU rose to TRY 40.7, which upsell to higher tariffs and continuing effect of price adjustments.
Increasing 16.6% year-on-year on a like-for-like basis. Growth reached 20.5%. On the fixed broadband front, our fiber subscribers continued to grow by 15,000 net addition. Residential fiber ARPU posted record growth of 17.2% year-on-year. This reflects strong upsell performance. We continued the effect of price adjustment and rising demand for our TV services. Superbox, our fixed wireless access product, provides fiber-like speeds at locations not covered by a fiber network. Strong demand for this product available only at Turkcell has continued its pace. Superbox is now used by approximately 130,000 households, up from 50,000 in Q1. Next slide. We have continued our smart marketing campaigns, which contributes to customer loyalty and appreciation. Our subscriber participation in both the duo campaign and the Shake & Win campaign continued, rising on a quarterly basis.
Starting from this quarter, we have begun to offer comfortable tariffs in the first four sectors. With these hybrid tariffs, our customers can subscribe as postpaid and yet consume as if they were prepaid. This solution has swiftly become popular. Half of the subscriptions to these tariffs were new to Turkcell. All in all, customers have continued to recommend Turkcell to a significantly higher degree than the competition, as seen in our net promoter score. Next slide. Now an update on data and 4.5G subscription plan. Average mobile data usage rose 33% in a year to 6.6 Gb per user. The main driver of this increase is a higher number of greater consumption of 4.5G users at 8.2 Gb per user. Out of 31.4 million customers signed up for 4.5G services, 19 million have 4.5G compatible smartphones offering room for growth.
Together with vendors, we frequently hold attractive smartphone campaigns that increase demand, mitigating the effects of the regulatory limitation on installment and higher taxes and retail prices. Accordingly, there were half a million net addition of 4G-compatible smartphone in the second quarter. Next slide. Let's look at our performance in international markets. Turkcell International generates 8% of group revenue. Our operation generates top-line growth of 16% year-over-year in local currency terms on the back of strong ARPU. This rises to 15% in TL terms with the impact of currency movements. EBITDA margin improves on a like-for-like basis was 1.2 percentage point. This analysis mainly eliminates the impact of radio frequency usage costs. Capitalization started as of Q4 2018 in accordance with IFRS 16. In Ukraine, long-awaited mobile number portability was launched in May. This is a major step towards a fair competitive environment.
Our subsidiary, lifecell, continues its focus on expanding 4G penetration and the use of digital services. Its three-month active 4G user reached 40% of total mobile data users, who consumes 8.2 Gb per month on average. Next slide. Now a few words on our sustainability initiatives. Our digital services and solution, corporate practices, and business processes evolve around sustainability. We take all steps to track and reduce our carbon footprint and disclose our performance regularly. We have also been listed on Borsa İstanbul Sustainability Index since its launch. Our sustainability effort have an MSCI ESG rating of A. Our technology support the value we place on human life. With our social project focused on technology-based education and entrepreneurship for women, children, and disabled, and refugees. We aim to make tangible difference in their lives. This quarter, we have extended our sustainability effort to our financing activities.
We have signed a three-year term sustainability link loan agreement of EUR 50 million with BNP Paribas. With this loan, we will continue to sustainable growth by reducing our carbon footprint further while lowering our financial cost on condition of meeting certain targets. We will lead the market in pursuing a greater use of such a product to support sustainability. Next slide. In the light of our six-month financial and operational performance, we are confident of exceeding our previous guidance. Accordingly, we revise our 2019 EBITDA margin guidance upward from 38%-40% to 39%-41%. We reiterate our revenue growth and operational CapEx to save ratio guidance. Looking ahead, we are confident of delivering on this guidance without the need further revision. I will now leave the floor to Osman for financial overview.
Thank you, Murat. Let's take a closer look into the financials. In the second quarter, group revenues rose 21.3% year-on-year, corresponding to an incremental TRY 1.1 billion. TRY 895 million of this increase is from Turkcell Turkey on the back of strong ARPU and higher contribution from corporate segments. International subsidiaries contributed TRY 160 million, thanks to increased data consumption in Ukraine, as well as the positive impact of currency movement. The incremental contribution of our consumer finance company was almost flat in the quarter, given its deleveraging. It will likely turn negative in the second half of the year. EBITDA rose by 19.6% year-on-year to TRY 2.6 billion, with a margin of 41.2%. In a quarterly trend comparison, our EBITDA margin marked a one percentage point improvement. This was mainly due to a solid rise in revenues plus lower G&A and S&M expenses.
It's worth noting that we achieved a net customer gain while keeping marketing expenses under control. EBIT increased by 18.3% year-on-year to TRY 1.3 billion with a margin of 20.8%. Next slide. Now let's take a closer look at our techfin company's performance. Financell sales growth has slowed down as expected this year, while Paycell sales growth momentum continues. In a market of regulatory limitations and increased retail prices and taxes, Financell sales consumer loan portfolio decreased to TRY 3.2 billion. We expect this declining trend to continue until around TRY 2.5 billion. While this means a lower top-line contribution, it is positive for the group cash flow. Cost of risk rose slightly to 2.9%, still below the market average for general purpose loans. Loan insurance penetration of 97% over the past one year will help us reduce this ratio.
Pro forma net income of finance sales, excluding fair value of swaps, would be TRY 110 million in the first half of the year. Meanwhile, our payment services company, Paycell, continued its momentum on 32% yearly revenue growth. Its EBITDA growth was 31% with a 74% EBITDA margin. Having introduced numerous products and services with a strong pipeline, we are confident that this business is set to resume its strong growth in the medium term, thereby compensating for the slowdown in financial contribution. Now, some highlights from our balance sheet and leverage. As at the end of the quarter, our net debt position declined to TRY 11.4 billion from TRY 11.7 billion at March end, with a leverage ratio of 1.2x . Our telco-only net debt was TRY 8.2 billion with a leverage ratio of 0.9x .
The underlying factors that led to TRY 374 million decrease in the net debt balance were TRY 460 million decrease through the cash generated from operations and the continued deleveraging of our consumer finance business at the level of TRY 495 million, in line with our expectations. On the negative side, currency movements led to a net TRY 340 million increase in net debt, while lease obligations rose around TRY 170 million in the ordinary course of business. Our expected performance and seasonality in the following quarters supports our goal of further reducing leverage to one times. Next slide. Let me give you more color on our consolidated cash position. Our cash position rose by TRY 3.3 billion in the first half. Our operations generated TRY 4.8 billion of EBITDA.
The working capital increase of around TRY 1.1 billion in the first half resulted mainly from lower trade payables due to seasonality and frequency usage fees paid for prepaid customers amounting to TRY 330 million, offsetting the positive impact of financial deleveraging. In the second half of the year, we expect a positive contribution from working capital due to higher collection and higher payables, thanks to seasonality, in addition to the continued positive impact of finances. Excluding proceeds from the Fintur sale, investing activities led to a cash outflow of TRY 2.5 billion. Of this figure, EUR 90 million and $50 million advanced payments helped us to fix currency rate and benefit from discount on network procurement. In financing activities, we utilized the EUR 235 million equivalent loan from the CDB, vendor financing from EKN of $50 million, and the EUR 50 million sustainability-linked loan from BNP Paribas in the first half.
Together with the repayment, the net impact from financing was around TRY 7 million. Next slide. I will go into the management of foreign currency risk. We continue to hold the bulk of our cash in hard currency as a natural hedging tool. In addition, with hedging instruments in place, the share of FX debt declined from 83% to 42%. We are in a long net FX position of TRY 207 million as at the end of second quarter. As stated before, we target a neutral FX position going forward. This concludes our presentation. We are ready to take your questions. Thank you.
Thank you. Ladies and gentlemen, we will now start our question and answer session. If you wish to ask a question, please press zero one on your telephone keypad. To participate in our written Q&A, type your question into the ask a question text area, then click the submit button. Thank you for holding until we have our first question. Our first question comes from JP David from JPMorgan. Please go ahead.
Hi. Thank you for the opportunity. A couple of questions on Paycell and then just one on the financials. Firstly on Paycell, I just wondered if you could confirm whether this is a very CapEx light model like most mobile financial services, i.e., that the CapEx to sales would be quite low around this business. Also around Paycell, you mentioned a number of new features that you're introducing over the medium term. I wondered if you could give a little bit of color around how price sensitive customers are in using Paycell as an application. Are they more interested in features? Are they more interested in price? Just switching gear and for clarification, I just wanted to understand why in your net financial gains and losses, you incurred a loss, both before hedging and after hedging.
I would have thought that the hedging element would have gone the other way and provided a little bit of an offset. Just wondering if that's a sort of a one-off thing. Thank you.
Okay. Thank you very much for the question. First of all, our Paycell, actually our techfin solution, is quite low CapEx solution actually. Very, very limited CapEx around it, which is very usual in this type of business. I would confirm that the CapEx part is not too high. Obviously, the IT tools and softwares investment happening around it, but more or less this is it. I think the CapEx part is quite low. Also customer acquisition cost is also low for us because we are utilizing our existing resources, our
Shops are online channels and a set of digital channels. In this side, this is our advantage actually. On the customer type of Paycell, in Turkey, as far as I know, there are 20 million unbanked people in Turkey. If you think that at least more or less 40%-50% of them are customers, then it shows our opportunity. Obviously, our technical solution and Paycell solution, not just addressing our just Turkcell customer, also our other customers as well. Quite a variety of customer base. Obviously, the addressable market is unbanked customer. For the financial part, let me give the word to Osman to answer this long position and short position.
Actually, the increasing financial expenses was a result of increased cost of hedging. On a quarterly basis, our hedging cost is around TRY 1.70 million. This is mainly the result of increasing TRY swap rate. Turkish rates was quite volatile during the course of first half of the year. The rates rang from 100%-15%, this resulted in a volatility in our financial expenses, and this mainly comes from the derivatives which are not subject to hedge accounting. The fair value deviations between the first quarter and second quarter resulted in increased financial expenses for the second quarter. We can say that this is a one-off because we are not supposed to see another large swing in the interest rate given the current existing levels of interest rates. The March and April events were kind of one-off events.
We might deem it to be a one-off event.
Thank you.
Our next question comes from Igor Kywan, Bank of America, Merrill Lynch. Please go ahead.
Yes, hi. It's Igor. Thanks for the call and for the opportunity to ask questions. I have three questions, if I may. The first one would be on the stronger EBITDA margin and less pressure than we've seen in Q1. Can you please explain again the key drivers on what efficiencies have been realized versus Q1? Second question on these new taxes which is implemented on the activation of handsets which are not purchasing in Turkey. Do you expect any impact on the business as a result? Third question would be on the 5G licensing. Is there any clarity at this stage? Thank you so much.
Okay, Igor. Thank you very much. For the first question regarding our EBITDA margin improvements, the quarter-over-quarter EBITDA margin improvement was a reflection of our successful performance in growing our ARPU, resulting in higher margin service revenue and managing our cost effectively, especially on sales and marketing side. We had heavy cost control. Regarding second question about 5G and 5G expectation and roadmap. Actually, we don't expect an auction in the short-term horizon for 5G. We have a successful 4.5G infrastructure ready for software upgrade anyway. Please note that fixed wireless access in one of our technologies that will be widespread with 5G. I am proud to state that we have wide-spectrum resources we are already using in this technology. We don't see any difficulty on this side. We'll see the regulation authority decision anyway.
Thanks.
Igor, your second question, could you please repeat?
Yeah, I missed your second question. Could you repeat your second question?
Yeah, sure. The second question was more on this new taxation for the registration of handsets which are bought abroad. Do you think there's going to be any impact on the business? Just, sorry following up on the first question on the EBITDA margin. It wasn't a question versus the, on the quarter-on-quarter, but more on the year-on-year. If you look at the year-on-year pressure, it's significantly less, especially on the Turkish margin versus in Q1. Just wondered if you could elaborate a little bit on the cost side and what has been kept more under control than in Q1. Thank you so much.
The answer is more or less same because we have an inflation repricing on the ARPU side, but the impact will come with a period of time. Versus Q1 to Q2, we see that impact will more than Q1. This is mainly ARPU result. Regarding handset part, obviously this is government decision and they decide to increase the taxation. We haven't seen a dramatic impact on our terminal sales and device sales in Q2. Obviously, we had some hit from last year's installment part. Other than that, we see quite steady performance on the terminal side.
Thank you so much, very clear. Thank you.
Our next question comes from Hervé Drouet , HSBC. Please go ahead.
Yes, good afternoon. Thank you for the presentations. A couple of question from my side as well. Firstly, in terms of the new additions you managed to bring, are you happy with the current trend in terms of new additions you are getting in the mobile segments? Do you think your sales and marketing cost control will remain on the same trend as we've seen in H1, looking in H2? Second question is back to these FX loss, and especially this TRY 300 million loss you put in Q2 on your fair value of the hedging and derivatives. I was wondering, could you give us a bit more clarity on how that has been calculated? You mentioned interest rate. I was wondering, is it short-term Turkish interest rate here you are talking about? Or long-term 10-year treasury bonds driven movement? Finally, on maybe the content.
There's been some issues with right issues on the football right in Turkey between Digiturk and the Football Federation. I was wondering, could potentially Turkcell be interested in getting more involved with premium content such as Turkish football rights?
Okay. Let us start with the first question regarding net addition of mobile subscriber. Actually, we took several action targeting price-sensitive customer, holding innovative customer-focused campaigns, and offering additional value proposition which had a positive impact on customer acquisition. We started to see positive trend starting from March and continue this trend in the second quarter. Actually, we stated this as Q1 conference call as well. We have observed that considerable portion of the customer that churned in Q4 2018 and Q1 2019, returned back to Turkcell quality in Q2 2019 as well. We have continued our inflation pricing practice in 2019, as well as by enhancing the value that we have been able to enrich our services, and provide more to our customers. Regarding sales and marketing part, obviously, we'll continue to control our sales and marketing costs during the rest of the year.
Regarding second question, loss in Q2, fair value. I think Osman can answer this question, and we'll come back to the third question.
Actually, we have two types of hedges on our balance sheet, long-term hedge and short-term hedge. Long-term hedges are typically for hedging our long-term foreign currency liabilities. We have short-term hedges on our balance sheet from overnight to three months maturities. The short-term hedges are typically for liquidity management and also for hedging our FX liabilities in our consumer finance company. Most of our long-term hedges are subject to hedge accounting, they do not create much swings on our fair value calculations. The swings in the interest rates were more fierce in the short end of the yield curve. The yield curves moved sharply up to 1,000% back to 30% in only couple of days. It also coincided with the quarter end. It created swings on our fair value calculations.
We can say that it is mainly driven by the volatility in short-term rates. The long-term hedge do not create volatility since they are subject to hedge accounting.
Regarding third question, content of football right. I think our TV platform is doing very well in terms of revenue, in terms of subscriber on both our IPTV side and OTT side. For the football right, I think this is quite expensive price to capture just one body. I don't know, Digiturk, we are hearing from news like you're hearing. I think we need to involve more customer and go deeper into the segment so that anybody can get this return back. As of today, I cannot comment on are we interested or not, because they have another two years contract with the Federation. We'll see what's going to happen.
All right. Thank you very much.
Our next question comes from Ondrej Cabejšek, UBS. Please go ahead.
Hi. Thank you. A couple of questions from me, please, and mostly on the techfin efforts. First of all, on Paycell, if you could just give some light on whether you're facing any regulatory hurdles or banking industry pushback here with the initiatives that you are launching. If, for example, you obtain some licenses for products that you currently cannot provide, whether there is an upside to this 50% CAGR that you're guiding for. Second question on the consumer finance business, if you could just explain a bit how you are able to achieve 15% EBITDA growth on a consumer portfolio that is decreasing year-over-year by almost or maybe even more than 30%. Thank you.
Regarding techfin, I think, to be honest, we are not facing regulatory issues. Actually, we do see some regulatory changes which help techfin players to be positioned better in the market. For example, we just have seen that mobile POS regulation gets issued, so everybody can get mobile POS 1st of September, which is good news for techfin companies. We see that draft open banking process and regulations under preparation. These are good news for our techfin platform. We hope to see these regulatory changes happen soon so that we can be competitive in the market. For the second question, Osman will answer regarding financing.
Actually, there are two main factors driving EBITDA growth on the portfolio. First, the effect of slowdown will be more visible in the second half as the slowdown started in August last year. The second factor is net interest margin widened on better cost of funding management. Our net interest margin widened since the last year's last quarter. These two factors resulted in higher EBITDA growth than expected, but we will see a slowdown going forward.
Thank you. Maybe just want to follow up on the device sales, please. You mentioned in the report that your equipment revenues almost doubled year-over-year. I assume that you've had a couple of campaigns here. The question is, are these completely outside of any sort of financing schemes that you might have? Whether basically you driving the device sales outside of this is a way to avoid the limitations that have been in place on consumer loans since last year.
Yeah. First of all, the revenue increase was coming from digital services business. These are the project device sales, which is part of the project. These type of sales has nothing to do with financing or financing company. This is kind of one-time projects in the Digital Business Solution area.
All right. That's clear. Thank you very much.
Our next question comes from Ivan Kim at Xtellus Capital. Please go ahead.
Yes, good afternoon. Three questions from me, please. First, just going back to the consumer finance company. The net interest margin widened, as you mentioned, and quite significantly, about 250 basis points, if you look at the information that you provide. I was just wondering whether it's sustainable or we should expect it to compress back to 4%, 5% level. That is the first question. The second question is just going back to 5G, which remained unanswered. When should we expect that, what spectrum to be sold, and maybe something you can share with us on the cost. The third and last question on the digital business services. You mentioned some of that growth that you've shown in the first half was one-off. I was just wondering what percent roughly of the growth was one-off. Thank you.
Okay. Let me answer question two and question three. Then Osman will respond for question one. For the digital business services, it is not one-off anymore because there will be continuous one-off projects in digital business solution. This is typical business solution behavior. Our DBS, we offer tailor-made and end-to-end digital solution to both private and public sectors. These includes hardware, cloud, cybersecurity, IoT, data center, digital integration, et cetera. This contributes strongly to both corporate segment and overall group result. At the end of the day, this is typical behavior of this segment. We will continue to see one-time project probably every quarter, every month. I hope to see every day, to be honest. This is nature of the business. Regarding 5G, it is difficult to say about the cost part of it because everybody thinks differently.
There are different behavior in the market, a different behavior in different countries. For Turkey's side, we are preparing ourselves for every option, but on the other hand, we already invested heavily on the spectrum of 4.5G, so we want to utilize this 4.5G spectrum as much as we can. Let's come back to the first question regarding Financell. I give the word to Osman.
Net interest margin on consumer finance company widened since last September from the positive duration gap that we have on the balance sheet. Also dynamic repricing of the loans helped us to keep net interest margin high and stable. Actually, we expect net interest margin to remain stable over the course of this year. We are not expecting a contraction in net interest margin going forward, given the lower interest rate environment in Turkey.
Okay, great. Thank you. Just maybe a follow-up on 5G, please. There is nothing on both timing and what spectrum will be available? Thank you.
Yes.
Exactly, yeah.
Okay, thank you.
Our next question comes from Alexander Vengranovich, Renaissance Capital. Please go ahead.
Yes, good evening. I have a couple of questions. The first one is probably a little bit more general, but can you please discuss the competitive advantages you have in mobile video and Paycell? If you compare yourself with your main competitors on the market, can you please differentiate a little bit why Turkcell is better than competitors in this segment? That's the first question. The second question is more specific on mobile segment. I've noticed that over the last two years, the gap of the blended ARPU between Turkcell competitors has widened quite substantially. Can you please discuss whether you think this gap will be sustainable and you want to keep it, or you think you might be targeting sort of a more aggressive behavior on the market and instead of increasing the ARPU, you might be looking at improvement of your subscriber base?
That's probably it. Thank you.
Let me start with question one, which is regarding Paycell and mobile. First of all, we have quite strong customer database. We know their payment cycle, their behavior, their location, this kind of thing. Also we have quite strong sales channel all over Turkey, and we see that they are visiting our shops. Actually, digital shops as well as physical shops. We see that 18 million people every month visit our shops. This is opportunity for us on the Paycell side. Regarding mobile ARPU growth. ARPU growth was mainly driven by higher data consumption and digital services usage, and offset effort as well as the continued effect on inflationary pricing. I cannot count as one. I probably have three or four behaviors that help us on the ARPU growth side.
You basically plan to keep pushing the data usage on your tariffs, and you don't see?
Yes
strong response from your competitors on the tariff side. Basically the situation of the market is pretty stable and everybody is just pushing the tariff, sorry, the data usage right now, and not trying to compete on the tariff side, right?
Obviously, we are in mobile and fixed telecommunication market. We see that response from our competition, but we have quite strong digital services, strong sales channel, and campaign capability, and marketing, and brand. I do see that we will see response from competition.
Okay.
This is a fact of life. This is how we can act and react on the competition side. I think we will continue executing well from this aspect.
Okay. Maybe just a quick follow-up on video content. We previously discussed a little bit the rights for football championship, maybe you can also discuss a little bit the production of the exclusive content, like TV shows or movies. Do you think about that? Is that something where you might be engaged in the future, you think the market and your subscribers are not requiring that exclusive video content on your platforms?
Yeah. To be honest, we would like to be platform provider to our consumer, so that anybody has an interesting content, could be exclusive, non-exclusive, small, big, whatever, they can come to our platform and provide the solution to our customer. We don't want to be exclusive on any shows because we don't see that it's survival for company like us. We will provide giving services to whoever has interesting content, very welcome to our platform. We can share the value, share the profit.
I got the approach. Are you doing that right now? Do you have any exclusive partnerships with the content producers?
Not necessarily exclusive partnership, but we have partnership with lot of content providers.
Okay
in Turkey and outside Turkey. It shouldn't be the exclusive agreement with them. Partnership is good.
Okay. Thank you.
Our next question comes from Cemal Demirtas, Ata Invest. Please go ahead.
Thank you for the presentation. My question is related again to the equipment revenues. When we look at the figures, if we exclude the impact of that growth, equipment revenues, we see around 14.4% growth in Turkcell Turkey. If we assume that this equipment revenue jump in second quarter is temporary, how do you think you will achieve your growth guidance of 18%-19%? In the international side, we have a less currency appreciation. If we assume that the currency will remain at current level, what are your views about the rest of the year, at least from the currency side, if the currency stays at current levels, the hedging impact and, of course, the top-line growth? What are your base assumptions for the rest of the year? Thank you.
Regarding equipment revenue, this revenue was always part of our revenue. It is not one-time revenue that we face in Q2. We'll continue have equipment revenue as part of our business, especially digital business solution as well as our terminal sales. Equipment revenue will be there. I think this is response for first question. This is not just temporary jump in our results. On the second question, it is very difficult to comment on the currency level. I think the inflation is becoming under control in Turkey. Also we do see currency decrease after the election, so we don't expect an election next four years. It seems things should be stable and getting more and more stable right now. I think it's not easy to comment on this one, but I do see that things are improving.
As a follow-up about the equipment revenue side, could you compare with the profitability of your overall business? Does it have any dilutive effect or improving effect? Thank you.
Actually, I would say I don't see any improving effect, but I don't see dilutive effect as well because since we have equipment sales increase, we do keep our EBITDA and EBIT margin similar level. This is not the case. The reason for that, we are utilizing our existing resources to use multiple functions. For instance, we don't have additional sales team for selling equipment. We don't need such a things or our G&A expense also already spending, so we have very limited G&A expense on the equipment sales. These are accelerating our margin. Also we see that nominal EBITDA part, we see that positive impact as well. I think this is relatively quite good business.
Okay. My last question is about subscriber growth. After fourth quarter, we see some increase in your subscriber base, and we see your price are more competitive. Could you give us some clue about your price index? Are you planning to gain further quantity? How do you see the competitive environment for the rest of the year? Thank you.
Obviously, on the competition side, we don't see a lot of change. We believe in a right pricing reflecting the value that we generate for our customer. Over the past three years, we have been able to enrich our services and provide more to our customer. We'll continue our inflationary pricing practice in 2019, as well as by enhancing the value that we offer to our customer. Obviously, we will see that inflation coming under control. We'll see our pricing strategy based on this one as well.
Okay. Thank you.
We have no further audio questions. Dear speakers, we can now switch to the written questions.
This is Korhan. We have two questions from the web. Halil Ibrahim Kahve, considering your consolidated revenue growth in the first half was 20%, what is the reason behind maintaining slightly lower than this as your full year guidance for revenue growth? What are your expectations in the second half?
Let me give you some hint about it. There are a couple of factors which will be resulting in a revenue growth slowdown in the second half of the year. The contribution of international revenue will be lower as the positive impact of currency movement will lower the second half of the year. The significant Turkish lira depreciation happened in Q3 2018. We have already seen the slowdown in customer finance business revenue in the first half of the year due to regulatory limitation on customer loans for smartphone financing. Its revenue will likely to turn negative in the second half of the year due to the contraction of the loan portfolio. Accordingly, we also expect the device sales in our group revenue to slow down as a result of this regulatory limitation.
We will be transferring our sports betting operation to the winning party of Spor Toto tender as of August. These are the things that we see that our revenue slowdown. We expect slowdown in this area. We will continue to see the strong service revenue growth based on all-time high ARPU trend. Accordingly, we will be maintaining our operational profitability. We have signaled this by upgrading our EBITDA margin guidance this quarter. Regarding EBITDA margin guidance revision, in the light of our six-month financial and operational performance and our expectation for the second half of the year, we are confident of exceeding our previous guidance. We believe that there will be no further revision.
One more from the web also. Murat Inebekcili is asking, is there a likelihood of reversal of TRY 60 million provisions related to Kcell, and what was the reason for this liability?
Actually, there is no likelihood of any reversal of this provision. The main reason for this provision was Kcell had to terminate its active sharing contract with the local operators due to the change of control of the company after acquisition of the shares by Kazakhtelecom. It's a one-off event. There is no likelihood for reversal, and we are not expecting further impairment from this transaction.
Another question also from Murat Inebekcili. Quarter-on-quarter increase in depreciation was 17%. What was the driver for such an increase?
Actually, Q on Q increase in depreciation is less than 17%, it is 7%. The main reason behind the increase in depreciation is increase of network investment as well as capitalized expenses under IFRS 15 and 16.
Okay. For one last time, Walid, can you check if there are any further questions? Can you confirm?
Dear speakers, we have no further audio questions.
Okay. Thank you very much, all. This is the end of our call. We thank our CEO and CFO for their wonderful presentation, and thank you all for taking the time to participate in our call. See you next time. Bye-bye.
Thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.