Turkcell (NYSE:TKC, ISE: TCELL), the leading communications and technology company in Turkey, today announced its results for the third quarter ended September 30, 2011. All financial results in this press release are unaudited, prepared in accordance with International Financial Reporting Standards (“IFRS”) and expressed in Turkish liras and dollars unless otherwise stated.
HIGHLIGHTS OF THE QUARTER
- Turkcell Group recorded its highest ever quarterly revenue of TRY2,527 million (TRY2,327 million) on 10.9% QoQ and 8.6% YoY growth, mainly as:
- Turkcell Turkey’s revenues rose by 4.8% to TRY2,174 million (TRY2,075 million) driven by increased mobile internet revenues and postpaid subscriber base.
- Turkcell Turkey’s mobile internet revenues grew by 71.5% to TRY207 million (TRY121 million).
- Total revenues of subsidiaries[2] improved by 39.8% to TRY353 million (TRY253 million), while their contribution to the top line rose to 14.0% from 10.9% YoY.
- Turkcell Turkey recorded positive net subscriber additions for the second consecutive quarter, at 368K in Q3 2011.
- Group EBITDA[1] margin grew by 2.9 pp to 34.5% compared to a quarter ago (31.6%), while the margin was 37.1% last year. Group EBITDA rose strongly by 20.8% to TRY871 million from TRY721 million QoQ, while improving from TRY864 million YoY.
- Total EBITDA of subsidiaries[2] improved by 47.4% to TRY118 million (TRY80 million), while their contribution to Group EBITDA rose to 13.6% (9.3%) YoY.
- Turkcell Group registered a net income of TRY537 million (TRY556 million) in 3Q 2011 compared to a net loss of TRY21 million a quarter ago, mainly due to solid operational performance and lower impact of one-off items QoQ.
COMMENTS FROM THE CEO, SUREYYA CILIV
“In the third quarter of 2011, Turkcell Group revenues rose by 9% year-on-year to a historic high quarterly figure of TRY 2.5 billion, while we recorded EBITDA of TL 871 million and net profit of TRY 537 million.
As we had foreseen, we managed to further strengthen our growth momentum in the third quarter through our investments in customer satisfaction and innovative offers, despite continued aggressive price competition in the sector. Turkcell Turkey’s revenues returned to growth with a 5% year-on-year increase. Additionally, our operational profitability grew by 19% compared to the previous quarter, while we became the operator of choice by gaining net 368 thousand subscribers.
Since 2007, our investments in 3G and a fiber optic network have reflected our belief in the strong growth potential of both Turkey and the sector. Consequently, we have maintained our leadership in the fields of mobility, internet, smartphone and application, creating value both for our customers and Turkey itself. In the smartphone market, we are widening access to broadband internet in Turkey, as well as strengthening our leadership by providing our customers with an excellent internet experience at affordable prices with the Turkcell T20, the successor to the Turkcell T10. Meanwhile, with our mobile broadband technology that has set an example the world over, I expect us to experience robust growth in the mobile internet arena.
In the third quarter, our activities led to continued and robust mobile internet growth of 71.5% year-on-year, where the share of mobile internet and service revenues in those of Turkcell Turkey overall also climbed to 24.3%. Furthermore, parallel to our broadband focus, we boosted Turkcell Superonline’s revenues by 36%.
In the third quarter of 2011, the contribution of our subsidiaries to revenue increased by 40% from the previous year, while their share in consolidated EBITDA rose from 9% to 14%.
Along with our employees, the core factor behind our success, I am proud of the new successes that Turkcell has continued to achieve. And so I thank our customers, employees, business partners and shareholders for their support.”
OVERVIEW
Total subscriber base in the market overall has grown for the second consecutive quarter, driven by the impact of seasonality and increased data subscriptions. During the quarter, based on our estimates mobile line penetration remained flat at around 86% and similar levels are expected for the year-end.
The Turkish mobile market remained competitive as in previous quarters. In the postpaid segment, competitors continued to increase incentives. On the prepaid front, despite observing some rational moves in the previous quarter, in this quarter competition rose on aggressive port-in offers, maintaining its focus on the youth segment with low price bundled offers. On the terminal front, competition intensified with a wider portfolio of devices and segmented offers available for contracted smartphones. The market’s focus on contracted smartphone sales continued in Q3 2011, where additional monthly fees for smartphone acquisition were again reduced, resulting in an upward trend in smartphone sales.
During the quarter, despite a competitive market of continued price aggressiveness through low priced offers, we successfully managed to sustain our momentum with 368K total net additions, enabling us to record around 324K net postpaid additions. In Q3 2011, we recorded the lowest churn rate since the MNP launch, while increasing blended ARPU levels YoY. We achieved this through a greater focus on customer retention and satisfaction, along with our continued focus on growing the postpaid subscriber base by offering segmented tariffs and data subscriptions, and by encouraging switches and increasing the contracted subscriber number. On the prepaid front, we recorded prepaid net additions of 43K for the first time since Q4 2008, mainly through boosting package penetration by upsell and cross sell via bundled offers. Dealer incentives in the sales channel were amended accordingly so as to promote upsell and package penetration, in addition to contracting subscribers in order to ensure a decline in churn and rise in revenues.
On the data and terminals front, reflecting our data penetration strategy, we focused on offering wide device portfolio and segmented contract offers at affordable prices, which contributed to 100% YoY growth in smartphone number on our network to 3.4 million (1.7 million). Meanwhile, we introduced the affordable second version of Turkcell’s branded android smartphone, the T20, at a retail price of TRY478. According to independent market research, the T20, launched in July, was the best-selling smartphone model in August.
Accordingly, Turkcell Turkey’s mobile internet revenues rose by 71.5% YoY to TRY206.7 million (TRY120.5 million). And the share of mobile internet and service revenues in Turkcell Turkey’s revenues rose by 3.8 percentage points to 24.3% (20.5%).
Despite competitors’ continued pursuit of market share in Q3 2011, the market remained almost unchanged, while average revenue per minute was flat QoQ.
For Q4 2011 when compared to a year ago, we expect better revenue and EBITDA in nominal terms, while the EBITDA margin is likely to remain flat YoY. As we communicated to the market in the previous quarter, we maintain the lower end of our TRY9,300 – 9,600 million revenue and TRY2,900 – TRY3,050 million EBITDA guidance for 2011.
FINANCIAL AND OPERATIONAL REVIEW OF THE THIRD QUARTER 2011
The following discussion focuses principally on the developments and trends of our business in the third quarter of 2011 in TRY terms. Selected financial information for the third quarter of 2010, and the second and third quarters of 2011, both in TRY and US$ prepared in accordance with IFRS, and in TRY prepared in accordance with the Capital Markets Board of Turkey’s standards, are also included at the end of this press release.
FINANCIAL REVIEW OF TURKCELL GROUP
Profit & Loss Statement y/y % q/q %
(million TRY) Q310 Q211 Q311 chg chg
Total Revenue 2,327.4 2,279.2 2,527.0 8.6% 10.9%
Direct cost of revenues[1] (1,272.5) (1,436.3) (1,477.0) 16.1% 2.8%
Depreciation and amortization (308.6) (381.1) (337.4) 9.3% (11.5%)
Gross Margin 45.3% 37.0% 41.6% (3.7pp) 4.6pp
Administrative expenses (120.6) (102.0) (94.8) (21.4%) (7.1%)
Selling and marketing expenses(379.3) (400.9) (421.3) 11.1% 5.1%
EBITDA[2] 863.6 721.1 871.3 0.9% 20.8%
EBITDA Margin 37.1% 31.6% 34.5% (2.6pp) 2.9pp
Net finance income / (expense) 72.1 (128.7) 81.2 12.6% –
Finance expense (29.7) (283.9) (61.0) 105.4% (78.5%)
Finance income 101.8 155.2 142.2 39.7% (8.4%)
Share of profit of associates 52.6 55.8 59.5 13.1% 6.6%
Other income / (expense) (2.0) (195.1) 14.9 – –
Income tax expense (138.6) (105.5) (162.3) 17.1% 53.8%
Non-controlling interests 17.2 12.0 10.0 (41.9%) (16.7%)
Net Income 556.3 (21.4) 537.2 (3.4%) –
(1) including depreciation and amortization expenses.
(2) EBITDA is a non-GAAP financial measurement. See page 15 for the reconciliation of EBITDA to net cash from operating activities.
Revenue:
In Q3 2011, revenues grew by 8.6% YoY to TRY2,527.0 million (TRY2,327.4 million), which was mainly achieved through 39.8% growth in the total revenues of consolidated subsidiaries and 24.1% rise in the mobile internet and services revenues of Turkcell Turkey.
Turkcell Turkey’s revenues rose to TRY2,173.6 million (TRY2,074.6 million) YoY, thanks to 71.5% growth in mobile internet revenues, and a rise in subscriber base and ARPU levels, despite declining prices in the Turkish mobile market.
Compared to the previous quarter, consolidated revenues rose by 10.9%, mainly due to an 8.7% rise in mobile voice and other revenues of Turkcell Turkey resulting from subscriber additions, together with 7.7% growth in blended ARPU, a 14.4% rise in the mobile internet and services revenues of Turkcell Turkey, and 16.3% growth in the total revenues of consolidated subsidiaries.
Turkcell Turkey’s interconnection revenues rose by 52.2% year-on-year to TRY215.2 million (TRY141.4 million) in Q3 2011 due to increased incoming minutes, which brought about a rise in the share of interconnection revenues in Turkcell Turkey’s revenues to 9.9% (6.8%).
Direct cost of revenues (including depreciation and amortization):
This item increased by 16.1% to TRY1,477.0 million in Q3 2011 (TRY1,272.5 million). In the meantime, direct cost of revenues as a percentage of total revenues rose to 58.4% (54.7%). This mainly stemmed from the rise in interconnection costs (up 2.7 pp), wages and salaries (up 0.3 pp) and other items (up 0.7 pp).
Compared to Q2 2011, the direct cost of revenues as a percentage of total revenue decreased by 4.6 pp from 63.0%. This mainly arose from lower depreciation and amortization (down 3.4 pp), as well as lower wages and salaries (down 0.4 pp) and other items (down 0.8pp).
Depreciation and amortization expenses fell by 11.5% QoQ, mainly as a TRY95.5 million portion of a TRY188.1 million impairment charge relating to BeST was recorded under depreciation and amortization expenses in Q2 2011, although a TRY40.7 million expense was recorded in Q3 2011 due to the revision of certain fixed assets’ useful lives.
In Q3 2011, Turkcell Turkey’s interconnection costs rose to TRY229.0 million from TRY162.1 million in Q3 2010, which resulted in a rise in Turkcell Turkey’s interconnection costs as a percentage of revenue to 10.5% (7.8%).
Administrative expenses:
Expenses as a percentage of revenues declined by 1.4 pp to 3.8% in Q3 2011 (5.2%), mainly due to a corresponding 1.5 pp fall in bad debt expenses as a percentage of revenues. This is mainly due to improved collections in Q3 2011, as well as the impact of the change in bad debt provision calculation methodology in Q2 2010 resulting in higher bad debt expenses for Q3 2010. Compared to Q2 2011, general and administrative expenses as a percentage of revenues dropped 0.7 pp from 4.5% in Q2 2011.
Selling and marketing expenses:
Expenses as a percentage of revenues remained almost stable at 16.7% (16.3%) in Q3 2011. Frequency usage fees as a percentage of revenues fell 2.3 pp, while selling and marketing expenses rose by 2.1 pp YoY.
Compared to Q2 2011, selling and marketing expenses as a percentage of revenues declined by 0.9 pp from 17.6% in Q2 2011, mainly due to the 1.1 pp fall in marketing expenses.
EBITDA:
In Q3 2011, EBITDA in nominal terms rose to TRY871.3 million (TRY863.6 million), while the EBITDA margin was at 34.5% (37.1%). Direct cost of revenues (excluding depreciation and amortization) was up 3.7 pp, which was partially offset by 1.4 pp lower administrative expenses.
Compared to Q2 2011, direct cost of revenues (excluding depreciation and amortization), general and administrative, and selling and marketing expenses fell 1.3 pp, 0.7 pp and 0.9 pp respectively, which resulted in an EBITDA margin improvement of 2.9pp in Q3 2011.
Net finance income / (expense):
In Q2 2011, net finance expense of TRY128.7 million was recorded, mainly due to a TRY298 million translation loss recorded by group companies of which 255.0 million is related to BeST resulting from approximately 72.6% decline in the rate of Belarusian Ruble against the currency basket, divided equally into USD, EUR and Russian Ruble, in comparison to the rate to the currency basket as of 31 December 2010.
In Q3 2011, we recorded net financial income of TRY81.2 million, mainly due to TRY117 million interest income mainly from bank deposits, offset by a TRY24 million quarterly translation loss. This loss is chiefly driven by the TRY78 million loss at BeST resulting from 12.8% devaluation in BYR/ US$ rate in Belarus, as well as from the TRY64 million loss at Superonline following the 13.2% devaluation in TRY/ US$ rate in Turkey, given its US$ denominated liabilities. In the meantime, a TRY159 million translation gain was recorded at Turkcell Turkey due to US$ denominated net assets, which partially offset the translation loss recorded at the subsidiaries.
Share of profit of equity accounted investees:
Our share in the net income of unconsolidated investees, consisting of the net income/(expense) impact of Fintur (income of TRY74.0 million) and A-Tel (expense of TRY14.5 million), rose by 13.1% to TRY59.5 million (TRY52.6 million) YoY. This was mostly due to the higher net income contribution of Fintur. Compared to the previous quarter, our share in the net income of unconsolidated investees rose by 6.6% from TRY55.8 million to TRY59.5 million.
Income tax expense:
The total taxation charge in Q3 2011 rose to TRY162.3 million (TRY138.6 million) YoY. A total tax charge of TRY211.6 million was related to current tax charges, while a deferred tax income of TRY49.3 million was recorded in the quarter.
y/y %
million TRY Q310 Q211 Q311 chg q/q % chg
Current tax expense (151.2) (126.8) (211.6) 39.9% 66.9%
Deferred Tax income /
(expense) 12.6 21.3 49.3 291.3% 131.5%
Income Tax expense (138.6) (105.5) (162.3) 17.1% 53.8%
Net income:
Turkcell Group registered a net income of TRY537.2 million (TRY556.3 million) compared to a net loss of TRY21.4 million a quarter ago, mainly due to solid operational performance and lower impact of one-off items compared to the previous quarter.
In Q2 2011, TRY255 million translation loss and TRY188 million impairment charge were recorded for BeST due to the devaluation in Belarus (explained under net finance income/ expense). The value of the Belarusian official ruble continued to erode during Q3 2011 which led to a TRY78 million translation loss stemming from BeST’s TRY677 million (US$367 million) foreign currency denominated net liabilities. The BYR/ US$ rate announced by the National Bank of the Belarusian Republic on September 30, 2011 was 5,599. On November 1, 2011, BYR/ US$ rate increased to 8,450. Based on the estimated calculation, as a result of this increase in BYR/ US$ rate between September 30, 2011 and November 1, 2011, approximately TRY263 million (US$146 million) of translation loss is expected to be recognized in Q4 2011 financials. In the meantime, as a result of the impairment test to be performed in Q4 2011, impairment charge might be recognized in the Q4 2011 financials.
Total Provisions:
Total legal provisions related to Turkcell Turkey amounted to TRY182.7 million as at 30 September 2011, which mainly includes TRY140.4 million provisions regarding the dispute with respect to call termination fees, together with TRY40.1 million provisions recorded during the quarter for the Telecommunications Authority fine on the “GSM Maximum Tariff Schedule”. Please note that TRY68.2 million provisions concerning the Competition Board fine (recorded in Q2 2011) were reversed in Q3 2011 as a result of the management opinion together with the assessment of legal counsels and independent auditors.
Total Debt:
Consolidated debt amounted to TRY3,451 million as of September 30, 2011. TRY1,057 million (US$573 million) of this was related to Turkcell’s Ukrainian operations. TRY2,410 million of our consolidated debt is at a floating rate, while TRY1,210 million will mature within less than a year. In Q3 2011, debt/annual EBITDA ratio rose to 120.3% in TRY terms.
Cash Flow Analysis:
Capital expenditures in Q3 2011 amounted to TRY402 million, of which TRY239 million was related to Turkcell Turkey, TRY40 million to our Ukrainian operations, TRY86 million to Turkcell Superonline and TRY12 million to BeST.
Kaynak : 