Turkcell Iletisim Hizmetleri: First Quarter 2019 Results

“Strong Start to the Year and Targets Raised”

ISTANBUL–(BUSINESS WIRE)–Turkcell Iletisim Hizmetleri (NYSE:TKC) (BIST:TCELL):

  • Please note that all financial data is consolidated and comprises that
    of Turkcell Iletisim Hizmetleri A.S. (the “Company”, or “Turkcell”)
    and its subsidiaries and associates (together referred to as the
    “Group”), unless otherwise stated.
  • We have three reporting segments:

    • “Turkcell Turkey” which comprises all of our telecom related
      businesses in Turkey (as used in our previous releases in periods
      prior to Q115, this term covered only the mobile businesses). All
      non-financial data presented in this press release is
      unconsolidated and comprises Turkcell Turkey only figures, unless
      otherwise stated. The terms “we”, “us”, and “our” in this press
      release refer only to Turkcell Turkey, except in discussions of
      financial data, where such terms refer to the Group, and except
      where context otherwise requires.
    • “Turkcell International” which comprises all of our telecom
      related businesses outside of Turkey.
    • “Other subsidiaries” which is mainly comprised of our information
      and entertainment services, call center business revenues,
      financial services revenues and inter-business eliminations.
      Turkcell Ödeme ve Elektronik Para Hizmetleri A.Ş., our subsidiary
      responsible for payment services, was previously reported under
      Turkcell Turkey but with effect from the first quarter of 2019 is
      now included in “Other Subsidiaries”. We made this change due to
      the fact that its non-group revenues, which are not telco related,
      and consumer finance business related revenues now comprise the
      majority of its total revenues. All figures presented in this
      document for prior periods have been restated to reflect this
      change.
  • In this press release, a year-on-year comparison of our key indicators
    is provided, and figures in parentheses following the operational and
    financial results for March 31, 2019 refer to the same item as at
    March 31, 2018. For further details, please refer to our consolidated
    financial statements and notes as at and for March 31, 2019, which can
    be accessed via our website in the investor relations section (www.turkcell.com.tr).
  • Selected financial information presented in this press release for the
    first and fourth quarters of 2018 and the first quarter of 2019 is
    based on IFRS figures in TRY terms unless otherwise stated.
  • In accordance with our strategic approach and IFRS requirements,
    Fintur is classified as ‘held for sale’ and reported as discontinued
    operations as of October 2016. Certain operating data that we
    previously presented with Fintur included has been restated without
    Fintur.
  • In the tables used in this press release totals may not foot due to
    rounding differences. The same applies to the calculations in the text.
  • Year-on-year and quarter-on-quarter percentage comparisons appearing
    in this press release reflect mathematical calculation.

FINANCIAL HIGHLIGHTS

TRY million   Q118   Q418   Q119   y/y %   q/q %
Revenue   4,762   5,626   5,675   19.2%   0.9%
EBITDA1 2,022 2,239 2,281 12.8% 1.9%
EBITDA Margin (%) 42.5% 39.8% 40.2% (2.3pp) 0.4pp
Net Income   501   864   1,224   144.5%   41.7%

FIRST QUARTER HIGHLIGHTS

  • Strong set of financials:

    • Group revenues of TRY5,675 million, up 19.2% year-on-year
    • Group EBITDA of TRY2,281 million, with an EBITDA margin of 40.2%
    • Positive quarterly trend in EBITDA margin, up 0.4pp for the Group
      and up 2.2pp for Turkcell Turkey
    • Group net income of TRY1,224 million on strong operating
      performance, disciplined financial risk management and
      contribution of Fintur sale
  • Solid operational performance:

    • Mobile ARPU2 growth of 13.4% year-on-year,
      like-for-like ARPU3 growth of 19.6%
    • Residential fiber ARPU growth of 12.3% year-on-year
    • Digital services downloads reached 178 million
    • Mobile multiplay subscriber ratio4 reached 68.6%, up
      9.9pp year-on-year; multiplay with TV subscribers5
      reached 49.5%, up 3.8pp year-on-year
    • Data usage of 4.5G users at 7.8GB in March
  • The transfer of our stake in Fintur to Sonera Holding B.V. was
    completed. The final transaction value was EUR352.9 million. TRY772.4
    million profit was generated from the transaction.
  • Restructuring of the sales organization enables us to closely focus on
    customer needs and respond with more effective services and solutions.
  • We revise our guidance6 for 2019. Accordingly, we now
    target revenue growth of 17%-19% up from 16%-18% and an EBITDA margin
    of 38%-40% compared to 37%-40% previously. We maintain our target
    operational capex over sales ratio7 of 16%-18%.

(1) EBITDA is a non-GAAP financial measure. See page 13 for the
explanation of how we calculate Adjusted EBITDA and its reconciliation
to net income.
(2) Excluding M2M
(3) The ARPU of customers who
have stayed with Turkcell for at least 14 months
(4) Share of
mobile voice line users which excludes subscribers who have not used
their line in the last 3 months. Multiplay refers to mobile customers
who use voice, data and one of core digital services.
(5) Multiplay
subscribers with TV: Fiber internet + IPTV users & fiber internet + IPTV
+ fixed voice users
(6) Please note that this paragraph contains
forward looking statements based on our current estimates and
expectations regarding market conditions for each of our different
businesses. No assurance can be given that actual results will be
consistent with such estimates and expectations. For a discussion of
factors that may affect our results, see our Annual Report on Form 20-F
for 2018 filed with U.S. Securities and Exchange Commission, and in
particular, the risk factor section therein
(7) Excluding license
fee
For further details, please refer to our consolidated financial
statements and notes as at and for March 31, 2019 which can be accessed
via our website in the investor relations section (www.turkcell.com.tr).

COMMENTS BY MURAT ERKAN, CEO

Economic fragility has prevailed in the emerging markets in the first
quarter of 2019. Regardless, as Turkcell Group, we have delivered robust
results on the back of our solid business model built on strong pillars.
Our consolidated revenues grew yearly by 19.2% to TRY5.7 billion with an
EBITDA1 of TRY2.3 billion, resulting in an EBITDA margin of
40.2%. Including the TRY772 million profit generated from the Fintur
transaction, we reported TRY1.2 billion net income, 1.4 times higher
than for the same period of last year. Accordingly, we revise our
full-year guidance2 for 2019 upwards to 17% – 19% for revenue
growth and 38% – 40% for the EBITDA margin. In addition to our solid
financial performance, our leverage ratio has declined to 1.3x with the
contribution of the Fintur transaction, and we expect it to further
decline over the coming periods.

Demand for mobile data has remained strong this quarter with the
contribution of our digital services. Monthly average data consumption
of customers on our 4.5G network has increased 28% yearly to 7.4GB.
Total downloads of our digital services reached 178 million, while we
have continued efforts to increase the time spent on these services. In
the fixed segment, Superbox, our Fixed Wireless Access (FWA) product
providing fiber-like speeds at locations not covered by our fiber
network, has earned customer appreciation, reaching 56 thousand
subscribers. Our capability to provide the Superbox service for the
first time in Turkey through our wide frequency and strong
infrastructure has also proven our readiness for 5G.

As Turkcell, with our “customer first” motto we continue to
contribute to our people and our country.

We marked our twenty-fifth anniversary in February. Over the past 25
years, Turkcell has transformed from a conventional telco into the
world’s first digital operator. We have developed digital services; and
what’s more, we export technology. Following the one signed with
Moldcell, we have also signed cooperation agreements with ALBtelecom of
Albania, CG Corp Global of Nepal and Digicel Group of the Caribbean to
allow the use of our digital services. Our customer-focused approach,
which we have always pursued in achieving this success, will only gain
strength in the upcoming periods as we contribute to their lives with
new smart technologies. In this new era, we aim to strengthen our
emotional ties with our customers and have redesigned our sales
organization accordingly. We now have a structure enabling us to focus
on customer needs more closely, and design more effective services and
solutions.

We have three strategic focus areas.

We believe we can sustain profitable growth with a strategic focus on
three key areas: Our digital services, digital business solutions and
our techfin platform. While continuing to work on increasing the usage
of our locally-developed digital services, we plan to establish new
commercial partnerships for digital exports, the destinations of which
today number 38 countries. We will serve the digital transformation of
both private and public sectors through Digital Business Solutions, our
new subsidiary. The digitization of financial services, which in our
view offers great potential, as well as other new opportunities in this
field form the third focus area.

We continue our efforts towards a shared infrastructure.

As we offer our services through a strong mobile and fixed
infrastructure, we continue to work towards accomplishing a shared
infrastructure; one that best serves the interests primarily of our
country, but also of all parties involved. In this context, we already
provide fixed broadband to additional households through bilateral
agreements with Türksat and Vodafone Turkey. Regarding the next phase,
we believe in the necessity of joint investments into infrastructure to
position Turkey’s communication infrastructure among the best in the
world. We particularly perceive the importance of joint infrastructure
in the era of 5G, which will serve as the platform for Industry 4.0.

We are determined to pioneer Turkey’s technological advancement.

In April, we hosted the technology summit, which coinciding with our 25th
anniversary, was particularly significant. The latest advances,
particularly of locally manufactured technologies formed the agenda of
the summit in its 10th year. The summit hosted over 70
opinion and business leaders in around 30 sessions where 5G, artificial
intelligence, Industry 4.0, smart technologies, entrepreneurship, cyber
security, robotics and cloud technologies were the key topics of
discussion. Over 10,000 attendees in person witnessed the introduction
of our locally-developed AI-powered personal assistant “Yaani Assistant”.

We will continue to serve our country and people through our
investments.

Turkcell has accomplished its pioneering role in the technological
transformation of Turkey with its well-established infrastructure. We
have been the fastest growing telco globally on the back of our services
and solutions developed for our customers over the past three years. We
own a strong mobile network operating over the widest frequency in
Turkey. We have laid 43 thousand km of fiber and built eight data
centers, enabling us to provide high-quality services. For this, we have
already invested TRY50 billion in our technological infrastructure over
the past 25 years, and going forward we will continue our investments.

We will announce our 3-year targets in New York.

We have seen a strong start to 2019 and have revised our full-year
targets upwards. Accordingly, we are scheduled to announce our 3-year
targets on October 31, 2019 in New York at the Turkcell Capital Markets
Day.

We thank all our colleagues for the part they have played in our
success, along with our Board of Directors for their unyielding trust
and support. We also express our gratitude to our customers and business
partners, who have remained with us throughout our success story.

(1) EBITDA is a non-GAAP financial measure. See page 13 for the
explanation of how we calculate Adjusted EBITDA and its reconciliation
to net income.
(2) Please note that this paragraph contains forward
looking statements based on our current estimates and expectations
regarding market conditions for each of our different businesses. No
assurance can be given that actual results will be consistent with such
estimates and expectations. For a discussion of factors that may affect
our results, see our Annual Report on Form 20-F for 2018 filed with U.S.
Securities and Exchange Commission, and in particular, the risk factor
section therein

FINANCIAL AND OPERATIONAL REVIEW

Financial Review of Turkcell Group

Profit & Loss Statement (million TRY)   Q118   Q418   Q119   y/y %   q/q %
Revenue   4,761.6   5,626.3   5,675.3   19.2%   0.9%
Cost of revenue1 (2,134.9) (2,607.3) (2,730.2) 27.9% 4.7%
Cost of revenue1/Revenue (44.8%) (46.3%) (48.1%) (3.3pp) (1.8pp)
Gross Margin1 55.2% 53.7% 51.9% (3.3pp) (1.8pp)
Administrative expenses (154.3) (198.2) (190.6) 23.5% (3.8%)
Administrative expenses/Revenue (3.2%) (3.5%) (3.4%) (0.2pp) 0.1pp
Selling and marketing expenses (356.6) (500.8) (403.1) 13.0% (19.5%)
Selling and marketing expenses/Revenue (7.5%) (8.9%) (7.1%) 0.4pp 1.8pp
Net impairment loses on financial and contract assets (93.8) (81.0) (70.3) (25.1%) (13.2%)
EBITDA2 2,022.0 2,239.0 2,281.1 12.8% 1.9%
EBITDA Margin 42.5% 39.8% 40.2% (2.3pp) 0.4pp
Depreciation and amortization (979.8) (1,287.0) (1,178.1) 20.2% (8.5%)
EBIT3 1,042.1 952.0 1,103.0 5.8% 15.9%
Net finance income / (costs) (313.5) (18.5) (420.4) 34.1% n.m.
Finance income 355.6 (1,225.9) 583.0 63.9% (147.6%)
Finance costs4 (669.1) 1,207.4 (1,003.4) 50.0% (183.1%)
Other income / (expense) (33.5) 46.5 (51.8) 54.6% (211.4%)
Non-controlling interests (24.2) (77.7) (19.8) (18.2%) (74.5%)
Share of profit of equity accounted investees 0.3 0.8 n.a. 166.7%
Income tax expense (170.2) (38.7) (159.8) (6.1%) 312.9%
Discontinued operations 772.4 n.a. n.a.
Net Income   500.8   863.9   1,224.5   144.5%   41.7%

(1) Excluding depreciation and amortization expenses.
(2) EBITDA is
a non-GAAP financial measure. See page 13 for the explanation of how we
calculate Adjusted EBITDA and its reconciliation to net income.
(3)
EBIT is a non-GAAP financial measure and is equal to EBITDA minus
depreciation and amortization expenses.
(4) Fair value loss and
interest expense in relation to derivative instruments reported under
finance cost were netted off from respective fair value gain and
interest income in relation to derivative instruments reported under
finance income. Historical periods were restated to reflect this change.

Revenue of the Group rose 19.2% year-on-year in Q119. This was
driven mainly by growth in Turkcell Turkey revenues on the back of
successful execution of digital services focused strategy and upsell
performance.

Turkcell Turkey revenues, at 85% of Group revenues, increased 18.7% to
TRY4,833 million (TRY4,072 million).

  • Data and digital services revenues rose by 18.1% to TRY3,215 million
    (TRY2,722 million).

    • Higher number of data users, increased data consumption per user,
      rise in 4.5G smartphone penetration as well as the rise in
      penetration of digital services were the main drivers of growth on
      the mobile front.
    • Larger fiber subscriber base, price adjustments and upsell
      efforts, as well as the increased ratio of multiplay subscribers
      with TV, were the main drivers of growth on the fixed front.
  • Wholesale revenues rose by 38.9% to TRY232 million (TRY167 million)
    due to increased carrier traffic and the positive impact of currency
    movements.

Turkcell International revenues, comprising 7% of Group revenues, grew
by 52.0% to TRY425 million (TRY279 million), resulting mainly from the
rise in lifecell and BeST revenues.

Other subsidiaries’ revenues, at 7% of Group revenues, and which
includes information and entertainment services, call center revenues
and revenues from financial services were at TRY417 million (TRY410
million).

  • Please note that we completed the sale of our shares in Azerinteltek,
    our sports betting business in Azerbaijan, as of January 11, 2019. As
    we received the transfer of proceeds on December 27, 2018 and
    transferred the control of the subsidiary, we did not report any
    revenues in Q119 in relation to Azerinteltek operations.
  • Our consumer finance company’s revenues grew by 14.1% to TRY242
    million (TRY212 million). Revenue growth was impacted by the decline
    in consumer loan portfolio from TRY4.4 billion as of Q118 to TRY3.6
    billion as of Q119 due to the installment limitation on consumer loans
    for telecom devices.
  • Turkcell Ödeme ve Elektronik Para Hizmetleri A.Ş., our subsidiary
    responsible for payment services, was previously reported under
    Turkcell Turkey but with effect from the first quarter of 2019 is now
    included in “Other Subsidiaries”. We made this change due to the fact
    that its non-group revenues, which are not telco related, and consumer
    finance business related revenues now comprise the majority of its
    total revenues. All figures presented in this document for prior
    periods have been restated to reflect this change.

Cost of revenue (excluding depreciation and amortization)
increased to 48.1% (44.8%) as a percentage of revenues in Q119. This was
mainly due to the rise in cost of goods sold (4.6pp), despite the
decline in other cost items (1.3pp) as a percentage of revenues.

Administrative expenses were at 3.4% (3.2%) as a percentage of
revenues in Q119.

Selling and marketing expenses declined to 7.1% (7.5%) as a
percentage of revenues in Q119. This was mainly due to the decline in
selling expenses (0.7pp), despite the rise in other cost items (0.3pp)
as a percentage of revenues.

Net impairment loses on financial and contract assets were at
TRY70 million (TRY 94 million) in Q119.

EBITDA1 rose by 12.8% year-on-year in Q119,
leading to an EBITDA margin of 40.2% (42.5%).

  • Turkcell Turkey’s EBITDA grew by 9.7% to TRY1,910 million (TRY1,741
    million) resulting in an EBITDA margin of 39.5% (42.8%). Turkcell
    Turkey’s EBITDA margin improved by 2.2pp compared to Q418 (37.3%).
  • Turkcell International EBITDA2 increased to TRY194 million
    (TRY93 million) with an EBITDA margin of 45.6% (33.2%).
  • The EBITDA of other subsidiaries was at TRY178 million (TRY188
    million).

(1) EBITDA is a non-GAAP financial measure. See page 13 for the
explanation of how we calculate adjusted EBITDA and its reconciliation
to net income.

(2) We started to capitalize the frequency usage fees of lifecell in
Q418 in accordance with IFRS16 which led to a positive impact on
Turkcell International EBITDA. The change was implemented
retrospectively; impact regarding previous quarters of 2018 was booked
in Q418.

Depreciation and amortization expenses increased by 20.2% in Q119.

Net finance expense increased to TRY420 million (TRY313 million)
in Q119, mainly due to the higher interest expense of loans. Please note
that the Group started to apply hedge accounting as of July 1, 2018 for
existing participating cross currency swap and cross currency swap
transactions, in accordance with the IFRS 9 hedge accounting
requirement. Please see the IFRS report for details.

See Appendix A for details of net foreign exchange gain and loss.

Income tax expense declined 6.1% year-on-year in Q119. Please see
Appendix A for details.

Net income of the Group rose to TRY1,224 million (TRY501 million)
in Q119, mainly driven by strong operating performance, disciplined
financial risk management and contribution of the Fintur sale, which had
a positive impact of TRY772 million.

Total cash & debt: Consolidated cash as of March 31, 2019
increased to TRY8,888 million from TRY7,419 million as of December 31,
2018. Excluding the FX swap transactions for TRY borrowing, 79% of our
cash is in US$ and 21% is in EUR.

Consolidated debt as of March 31, 2019 increased to TRY22,867 million
from TRY20,156 million as of December 31, 2018. Please note that
TRY1,410 million of our consolidated debt is comprised of lease
obligations resulting from the implementation of IFRS 16.

  • Consolidated debt breakdown excluding lease obligations resulting from
    the implementation of IFRS 16:

    • Turkcell Turkey’s debt balance was TRY16,771 million, of which
      TRY9,727 million (US$1,728 million) was denominated in US$,
      TRY6,299 million (EUR997 million) in EUR, TRY214 million (CNY257
      million) in CNY and the remaining TRY531 million in TRY.
    • The debt balance of lifecell was TRY1,071 million all denominated
      in UAH.
    • Our consumer finance company had a debt balance of TRY3,610
      million, of which TRY1,759 million (US$312 million) was
      denominated in US$, and TRY1,077 million (EUR170 million) in EUR
      with the remaining TRY774 million in TRY.
  • TRY705 million of IFRS 16 lease obligations is denominated in TRY,
    TRY39 million (US$7 million) in US$, TRY178 million (EUR28 million) in
    EUR and the remaining balance in other local currencies (please note
    that the figures in parentheses refer to US$ or EUR equivalents).

TRY13,342 million of our consolidated debt is set at a floating rate.
Excluding the consumer finance business borrowings, TRY5,048 million of
consolidated debt will mature within less than a year.

Net debt as of March 31, 2019 was at TRY13,979 million. Including the
proceeds of the Fintur deal of EUR352.9 million (equivalent of TRY2,230
million as of March 31, 2019), which is booked under due from related
parties, net debt was TRY11,749 with a net debt to EBITDA ratio of 1.3
times. Excluding consumer finance company consumer loans, our telco only
net debt was at TRY8,108 million with a leverage of 0.9 times.

Turkcell Group has a long FX position of US$216 million as at the end of
Q119. (Please note that this figure takes into account advance
payments and hedging but excludes FX swap transactions for TL borrowing.
Derivatives (VIOP) and forward transactions are included).

Capital expenditures: Capital expenditures, including
non-operational items, amounted to TRY1,352.6 million in Q119. In Q119,
operational capital expenditures (excluding license fees) at the Group
level were at 15.6% of total revenues.

Capital expenditures (million TRY)   Q118   Q418   Q119
Operational Capex   (526.3)   (1,448.6)   (883.6)
License and Related Costs (188.0) (1.7) (0.7)
Non-operational Capex (Including IFRS15 & IFRS16)   (1,845.9)   (784.3)   (468.4)
Total Capex1   (2,560.1)   (2,234.6)   (1,352.6)

(1) Breakdown of capex for Q118 has been restated.

Operational Review of Turkcell Turkey

Summary of Operational Data   Q118   Q418   Q119   y/y %   q/q %
Number of subscribers (million)   37.3   36.7   36.6   (1.9%)   (0.3%)
Mobile Postpaid (million) 18.6 18.8 18.7 0.5% (0.5%)
Mobile M2M (million) 2.4 2.4 2.4
Mobile Prepaid (million) 16.0 14.9 15.0 (6.3%) 0.7%
Fiber (thousand) 1,248.7 1,385.6 1,411.1 13.0% 1.8%
ADSL (thousand) 916.6 905.6 861.7 (6.0%) (4.8%)
Superbox (thousand)1 3.5 33.5 56.4 n.m 68.4%
Cable (thousand) 9.7 n.a. n.a.
IPTV (thousand) 535.0 613.4 632.0 18.1% 3.0%
Churn (%)2
Mobile Churn (%)3 1.4% 2.9% 1.9% 0.5pp (1.0pp)
Fixed Churn (%) 1.8% 2.2% 2.0% 0.2pp (0.2pp)
ARPU (Average Monthly Revenue per User) (TRY)
Mobile ARPU, blended 31.5 35.0 35.7 13.3% 2.0%
Mobile ARPU, blended (excluding M2M) 33.6 37.4 38.1 13.4% 1.9%
Postpaid 45.4 49.5 50.6 11.5% 2.2%
Postpaid (excluding M2M) 51.5 56.4 57.4 11.5% 1.8%
Prepaid 15.3 17.4 17.2 12.4% (1.1%)
Fixed Residential ARPU, blended 55.3 56.6 59.8 8.1% 5.7%
Residential Fiber ARPU 55.9 58.2 62.8 12.3% 7.9%
Average mobile data usage per user (GB/user) 4.4 5.9 5.9 34.1%
Mobile MoU (Avg. Monthly Minutes of usage per subs) blended   344.8   356.4   393.1   14.0%   10.3%

(1) Superbox subscribers are included in mobile subscribers.
(2)
Presentation of churn figures has been changed to demonstrate average
monthly churn figures for the respective quarters.
(3) In Q117, our
churn policy was revised to extend from 9 months to 12 months (the
period at the end of which we disconnect prepaid subscribers who have
not topped up above TRY10).

Contacts

Turkcell
Investor Relations

Korhan Bilek, Tel: +
90 212 313 1888
[email protected]

Corporate Communications:
Tel: + 90 212 313 2321
[email protected]

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