Genesys Conference Call

This transcript was prepared by “Genesys Conferencing Europe” for Türk Telekom’s 2011 H1
Results Earnings Call. For the complete audio recording please visit the Türk Telekom IR
Website at www.ttinvestorrelations.com
Turk Telekom
Tuesday, 19th July 2011
15:30 Hrs UK time
Chaired by Abdullah Kaya
Abdullah Kaya
Thank you, Moderator. Good afternoon, ladies and gentlemen, and welcome to Turk
Telekom’s 2011 First Half Conference Call. I'm Abdullah Kaya, Head of IR. Before
proceeding, let me mention that this document contains financial information that is
reported under IFRS, and it is audited. We invite you to read the complete disclaimer
included in the first page of the presentation.
Now, let me turn the call over to our Group CEO, Hakam Kanafani.
Hakam Kanafani
Hello. Good afternoon, everybody.
I would like to go quickly over the market update and the consolidated performance, and
then give the mic to my colleague, Erem, Vice President and CMO of Turk Telekom
Group.
So, we are very happy with our success, and our successful performance in all business
segments. Fixed voice revenue has stabilised from Q4 2009 levels, with the success of
bundle tariffs introduced in 2010.
ADSL revenue growth continues at double-digit levels, by enhancing the up-sell and
enhancing the revenue.
Subscriber and revenue growth at the AVEA level.
Mobile market competition has intensified during H1 2011. Of course that’s not new
news, it’s the story continues here in Turkey.
Higher quotas and speeds are now offered to our ADSL subscribers. This is one of our
differentiating propositions.
Network investments continue in both Mobile and Fixed Line.
And we have the strategic cooperation with Telefonica O2 in the German market coming
up in a week or two.
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For the consolidated performance, if you look at… there's a 12% increase from Half One
2010, in terms of revenue, to Half One 2011. Revenue growth for 2011 is likely to exceed
guidance, mainly from the Mobile side, caused by the Mobile side, revenue increase.
On the EBITDA level you will see that there's a 12% increase from Half One 2010 to Half
One 2011. EBITDA growth from both Fixed and Mobile ()()().
As for the net income, you will see there is a –3%, a decrease from Half One 2010 to Half
One 2011. Although net income is similar to Half One 2010, despite foreign exchange and
hedging losses of about 368 million in Half One 2011.
Right, now, I pass the microphone to my colleague, Erem. Erem Bey.
Erem Demircan
Thank you, Hakam Bey. Good afternoon. This is Erem Demircan, VP of Marketing to
Telekom. Very briefly I will go through our Fixed Line presentation.
On page six, you can see that actually we made an important launch. It’s a small one, but
it’s an important launch, in June, with XOOM Tablet, because tablets are very important
for the broadband, and actually, we made a contract with Motorola for this year, as
exclusive… we have the exclusive rights to sell Motorola XOOM Tablets, and we are very
happy with the performance since we started selling Tablets. And of course it’s important
product, as it stimulates the usage on Internet as well. The numbers are very small, but we
hope it will increase in the coming months.
As Hakam explained, the bundle packages continue to grow strongly, and as of now we
have got 6% of our subscribers on minute bundle packages, and the Fixed portion of the
revenue is now 67%, and you will recall that when we were going for the IPO it was on
the level of 30%.
And this year we continued to make new campaigns on tariffs. Home Advantage start
packages now include the calls to Mobile, and also international directions, and this
promotion extends until the year end, and we also sees that that stabilises the mid of usage.
We are targeting this year more niche segments, since the beginning of the year, like we
made some targets and campaigns for the villages, for housewives, and we also
concentrate mainly to corporate SMEs and SOHOs (?). Last year the rebalancing was
mainly for residential. This year we concentrate more to corporates, SMEs and SOHOs.
On the next page, page seven, very briefly the information about ADSL.
Fibre to the neighbourhood projects that we started a few years ago now covers over 3
million homes. To be exact, 3.3 million homes, and now we have 12,000 outdoor disc (?)
clamps already working all over Turkey that of course enables us to offer much higher
speed, and that makes us also to up-sell our products.
We also launched Tivibu Home, as you'll recall, in Quarter One, and now it’s available in
30 cities, and of course Tivibu Web was very successful with subscribers more than a
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million now, and that is establishing a good platform for us, for our future projects in
online business.
The Triple Play Tariff Packages, we also launched; today at 99 lira you can have unlimited
Internet, unlimited voice calls, and also IPTV.
Our international capacity increased to the terabit level, so 1.2 terabit of speed now we can
offer, and I think that was 30 gigabits in 2005. Of course that is by the support of
PANTEL acquisition that we made last year that enables us to reach the terabit league in
the telecom industry.
And we are also continuing our new PC offering, and also the Tablet included in the
range, with onboard (?) capacity and Wifi usage as well.
The eight-megabit initiative that we started in May 2009 now reached 82% of our old
subscriber base, and also our unlimited, the up-sells to unlimited packages now consists of
55% of our customer base. That leads to 18.1 gigabytes of usage per subscriber, and the
good thing is that not only some of the subscribers are increasing, but all subscribers are
increasing their use.
On page eight we look at some of the numbers. By the PSTN revenues still stable in the
seventh consecutive quarter, and increasing the revenues of ADSL and international
revenue, we increased our revenues 11% compared to last year in the first half, and
EBITDA is still over 50%.
On page nine, looking at the number of subscribers, in ADSL you can see that there is a
slight increase in ADSL subscribers, but we have been through these quarters in the past
as well, where we've got a lot of new initiatives that we'll be discussing later in ADSL for
the second half of the year, and we were very good in increasing the ARPU, especially
with the increase of prices, unlimited package prices, beginning of the year, and actually
there were the two questions in the past, if you are still leaving the price initiative in the
market and our price increase may be itself, and also price increase in format advantage
packages this year shows that we are still in control of pricing of the market, which is very
important for our people.
On page ten you can see our PSTN highlights, very briefly. Now, an important initiative
that we discussed some of our friends that are participating in this teleconference that
actually there are 18.4 million homes in Turkey, where about 12.5 million homes already
have PSTN, while 6 million homes already have ADSL, so we have 6 million homes that
do not have PSTN today. That's a good potential for us, so this is the reason we launched
our NDSL, Naked DSL, services. At the moment it’s only to alternative (?) selling Naked
DSL, and the number, only in a few months, already reached 100,000. We see this as a
good potential, as a good tool for us to answer to the areas where we do not have PSTN, to
the niche segments that do not own PSTN.
If you look at ARPU levels you see that from Half One 2010 to ()()() it's 22 lira, and the
subscriber base is 1.8% less, but you can see that 100,000 is also added on Naked DSL.
On page 11, if you look at headcount, it’s stable, compared to annual 2010. It’s on the
level of 25.7 thousand headcount, and it consists of about 20% of our revenue.
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This is briefly about our Fixed Line business. Later on we can reply to questions.
Now I'll hand over to CEO of Avea for his update.
Erkan Akdemir
Good afternoon. Firstly I will give you a quick assessment of the market, plus I will run
through the selected set of the initiatives and finally I will share the highlights of our
business performance.
Firstly, as for the market, last quarter was broadly a repetition of the first quarter.
Continuation of the aggressive pricing, coupled with the very high level of this funding (?)
behaviour (?) and continued aggressive incentives this channel.
We have seen no signs of recovery in the market. One can say that the SIM growth is back
in the market, thanks to the new regulation of the pre-paid churn, it has extended the life of
the nearly 1 billion pre-paid SIMs that we estimate.
In this challenging market we think that we have delivered the good results: significant
revenue and subscriber growth, all time high revenues, stable profitability. The results are
the indication that our strategy is working. Remaining competition on pricing, continuing
to improve our key levels for customer needs, such as the network channel, churn and
device.
Now, I want to give you a flavour of what we are doing across the multiple servers.
On all tariffs we are keen to remain active and competitively to our offers. Our last set of
the Postpaid offers is all-direction only is a good example. From the 16th tier up to the 19th
tier there is now the whole set of the all-direction offers in the market.
On our retention and loyalty activities we are improving day by day, putting the subscriber
at the centre of what we offer them, making the offer tailored, but keeping it profitable.
On the network we have reached a total of 19,000 base stations, combining both 2G and
3G. Rollout is continuing, and there is further work to be done to reach satisfactory levels.
On the channel, our footprint is increasing, as well as the quarter shows it's being
delivered at these critical touchpoints.
We have also started our cross-selling TTNET products.
On devices we are increasing the number of campaigns with the Apple, Nokia, HDC and
Samsung driving our feature phone and smart phone sales, and supporting retention
performance.
For the brand we are aiming for the fair share of (), yet channelling a differentiated
proposition with the latest TV commercials in particular.
Overall, all these activities are gradually impacting the business positively.
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Moving on to the next slide, we have achieved a record level of revenues in the last
quarter, 759 million Turkish lira is 8% up quarter on quarter, and 18% up versus last year.
It is important to underline that we have achieved this revenue despite the fierce
competition in the market. As our revenue we're growing now almost 20%, we broadly
maintained our EBITDA margin at around 9%.
Next slide. Our blended ARPU continued to increase. Now it is the level of 20.5 TL, is the
highest ever in the market.
There are three key reasons for continued ARPU surge. The first is the increasing share of
Postpaid subscriber base, given our focus, and second is the Prepaid ARPU increase, as a
result of the successful cross-sell and up-sell work. Third is the content increase in the data
ARPU. On a segmented basis Postpaid ARPU is at 31.8TL is 6% up versus a year ago,
and Prepaid ARPU is up 10.9TL, 11% up versus a year ago.
Moving on the next slide, our subscriber base reached the 12.2 million by the end of June,
and keeps growing. We have now around 1 million additional Postpaid customers versus a
year ago. The growth was particularly strong in the last quarter, more than 40,000 net
addition.
We have a very talkative subscriber base. MoU reached an all-time high, means 309 units,
which is driving by () as well as both directional ().
Now I finish with David to take you through the financials.
David Cook
Thanks very much, Erkan.
So if we go to slide 18 of the pack, obviously there's a consolidated P&L.
As has been said earlier, overall our revenue grew about 11.5%. That was both strong
growth in both the Fixed Line and Mobile.
EBITDA grew just over 12%, so slightly higher than the revenue growth.
And operating margin maintained the 43% level.
As Hakam Bey earlier said, I think the key thing is on net income: although it's stable year
on year, actually underlying that income is a 29% growth, if you exclude the FX loss
position.
If we now look at the balance sheet, clearly the big thing on the balance sheet, the big
movement, is really around net debt. Our net debt increased about 1.1 billion, year on
year. This is partially because of the FX, because the FX inflates our debt portion of the
balance sheet, and the other thing is that we did the PANTEL acquisition last year. That
added about another 400 million to our debt position. And then we've paid more dividend
this year than the growth in EBITDA. And those are the key reasons behind that net debt
position increasing slightly.
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In terms of the cash flow, I think what you can see there quite clearly is the cash flow from
this year and last year were about the same, with the increasing dividend slightly offset by
working capital declining, or growing slightly more than it did last year.
In terms of net cash position, yes, we used more than 240 million cash so far, but in fact, if
you look at the debt movement, the funding needs, this six months, compared to the first
six months last year was around about 800 million up. Again, a lot of that's around the FX
bloating the debt, the funding position, and the other thing is the dividend being a lot
higher than last year, because remember our dividend’s around 2.2 billion this year,
compared to 1.6 billion last year.
If we now look at the… on slide 21, the summary revenue breakdown, what we can see
here is the growth of 11.5%, or 9% if we exclude PANTEL, so if we look at the
underlying organic growth. And the key three areas are the usual suspects, ADSL, Mobile,
and corporate data, all three growing in good single-digit numbers, especially Mobile,
given the fact that we had the MTL cut last year.
And the other key thing there that doesn’t look a good number, Fixed Voice or PSTN
being flat, but actually, stability in Fixed Voice is a major impact and the key thing about
this business () having top line growth, and as Erem said earlier, 67% of that Fixed Voice
revenue now is recurring fees, so not variable, every month, based on usage, which creates
even more stability, going forward.
If we now look at slide 22, Opex breakdown, I won't say much about this, because we'll
talk about the Fixed and the Mobile Opex later. I think the key thing here, as everybody
will notice, is the big increase in the commercial, which is around about 19% year on year.
This is a large part around the Mobile area, and, as Erkan mentioned earlier, it's quite an
aggressive, intensive competition area, and everybody’s spending a lot of money on
marketing in that area.
So if we now look at the Fixed Line business, so slide 23, on the overall P&L, what we see
here is revenue growth around 11%. Again, exclude PANTEL, so pure organic is around
8%, so a very high single-digit number.
And EBITDA margin is still above 50%, again, very good business, for any telco business
on a Fixed Line, 50% EBITDA is superb, but to have that with a high single-digit revenue
growth is extraordinary.
On the revenue breakdown what brings that revenue? Once again, as we said on the
overall, ADSL is a key component. This, as we said earlier, is driven more by ARPU than
subscriber growth, and that's critical, especially in a market where we've got a lot of
competition coming from ISPs winning market share, to keep the ARPU growing is a
good sign for the future of this business.
The other thing, corporate data, is around 24% growth. It always has been a high growth
area, but again, it's from a small number, but it’s important that that area keeps growing.
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Now, I suppose the only other point to bring out is the domestic interconnect. Not a huge
growth, but this is really been driven by all that activity on the Mobile, where the big
growth, the traffic in Mobile, is driving more traffic towards the Fixed Line.
If we now look at Fixed operating expenses, we see regional growth and Opex slightly less
than the growth in Fixed Line revenue.
Personnel. Personnel looks quite a high growth, around about 11%, year on year, but
within there, I think we mentioned last time, there is an accounting change on the
calculation for vacation pay, and what we've also got is we've been implementing
incentive plans to change our labour force, which we've tended to do most years. This year
we've done a lot more of it in the first half, so in fact year on year we've had probably 16
million more costs on incentive plan this year than previous year, and if you take that, and
the accounting change of vacation pay out, what you're actually looking at is the personnel
costs are increasing around about 8%, so actually below, significantly below the revenue
growth, which is what we've always said, we want to try and keep it below the revenue
growth level.
On the international expenses, this is purely related to the PANTEL business now being
incorporated into the business.
In terms of maintenance, maintenance year on year is stable, but as you'll probably all
notice, in Q1 it was very low, a lot lower than last year, so what you see is a big growth
Q1 to Q2, mainly because of the phasing difference between last year and this year.
If we look at bad debt, or doubtful receivables, as it says here, that's mainly a factor of
how brilliantly we worked last year, with the new process on improving our debt recovery
on our old debts, and that meant a credit of 1 million in the first half of last year.
Obviously not something we've ever expected to be able to repeat on a continual basis,
going forward.
If we now move to slide 26, and the Mobile business, what we see here, again, revenue
growth 13%, if you remember Q1, Fixed grew actually more than Mobile. Now we're
seeing a more normal position where Mobile is growing more than Fixed Line.
In terms of EBITDA I could say wonderful things like, EBITDA grew 30%, but the reality
is this is from a very low base. EBITDA margins nobody in the Mobile business in Turkey
is happy with their EBITDA margins. It’s still a very competitive market, and it's still a
problematic market in that respect.
But I think if we look at the operating loss number, I think the key thing here, for going
forward, is if we look at the operating loss in the first half, it’s 11%, which means that the
breakeven point in this business at the operating level is now 20% of revenue, whereas if
you look at the first half of 2010, it was 25%, and this is the good news that we bring to a
more easier breakeven position, which is going to be important going forward for this
business.
If we look on the Opex side, on slide 27: Opex again has grown 12%, slightly below
revenue, which is why EBITDA margin is slightly up. The big increase was commercial,
31% up year on year, and this again was driven because if you recall last year, Q1 was a
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very low commercial activity, and I remember at the time we said, look, we've pulled
down a notch, and we weren't spending like the rest, but from Q2 onwards we started to
engage in the market, like everybody else, and it’s slightly over Q4, but this is where the
market is at the moment.
On the other costs, this is largely related to network expansion that we've done over the
last 12 months, which drags in Opex along with the Capex.
So that's the end of the Mobile and Fixed.
On the debt profile, on slide 28, my last slide, I think the only point to note on here is our
net debt to EBITDA still remains below one times, which is a very good position, and
excellent, really, where we are.
This now ends the management presentation, and now I would like to turn the call over to
the Operator, and open it up to your questions.
Questions and Answers
Jean-Charles Lemardeley
Yes, hello. Just two questions on your line statistics on PSTN and ADSL, I mean, obviously
very strong performance in the Fixed business on revenues and EBITDA, but just, you had
a pick up in line losses in PSTN and a slow down in ADSL. Can you elaborate a little bit
more on both? I mean, is it in PSTN, it sounds, you're talking about having promotions on
Fixed to Mobile and International calls, yet your ARPU has done well, but you had some
line losses, so just can you elaborate a little bit on that?
And on ADSL, you know, what's the source of… what's the reason for the slow down? Is it
3G competition? Presumably that probably cannot be sustained. I mean, presumably
people… Would you expect people who sign up on 3G to eventually move to Fixed
broadband because the consumption needs are, you know, too high for 3G? I mean, can
you just talk about trends in these two areas?
Erem Demircan
Okay. This is Erem Demircan again. Very briefly, maybe some points about PSTN.
You are right. We made a price increase in Home Advantage, and then start (?) offering all
directional minutes, and as I said, actually, this stabilised the MoU. Actually, you can see
the net change in the number of subscribers, but the more important part is of course the
gross churn and the gross acquisition.
Now, when you're looking at gross churn numbers, actually, we are in quite good shape, in
that sense that we can… with good retention offers; our gross churn is good numbers.
We had a problem in gross acquisition, and for this because ()()() was the entry-level price
was 22 lira Home Advantage packages. We had also Classic and Standard packages,
which are 14 lira and 16 lira, but they were close to new acquisitions, and actually,
because we can secure the revenues, what we did is end of June we developed and
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launched a new target package that we call Sadahat (?), which is actually priced at 16 lira,
so now we changed the entry level of PSTN, which we see very important, and that also so
that people can reach this price level much easier, because as I said, the real concern is not
only gross churn but mainly it was on the acquisitions, and our dealers, we had a dealer
meeting, are very motivated about this new offering, which starts at 16 lira. We hope that
in the coming quarters we'll see the effect of this new package.
On ADSL, for several reasons there are… but we believe that we have got good initiatives
to start. There are two groups of potentials, as I tried to explain during my presentation.
One is the people who have PSTN, but who don’t have ADSL, and the second group is
who doesn’t have both PSTN and ADSL. We are developing, with our ISTs, all the ISTs
together, new products and new services targeting those both groups, as if you look at the
previous year’s quarters there are some quarters where we have also slow down of
numbers, but most of the time in the following quarters, we were able to achieve a high
acquisition, and we believe that those initiatives that we are starting, and some of them are
starting even this week. We cannot tell you because it’s not yet released. We believe we
can achieve better numbers.
Thank you very much.
Atinc Ozkan
Yes, hi. Thank you. This is Atinc Ozkan from Credit Suisse. Thanks a lot for the detailed
presentation. I have many questions. I'll just keep it to two for the moment, being, the first
one is regarding are there a rights issue? Have you received up to now any indication
from your minority partners regarding their stance there, and if Isbank, let's say, decides
to get diluted, what would be the implication on your put option liability? Or their
minority stake in Avea.
And my second question, I guess, is regarding slide 13, where you are mentioning some
ongoing channel transformation for Avea. If you could share more details regarding what
have you achieved, and what has been the impact of this channel transformation on your
product availability, I'll be very pleased. Thank you.
Hakam Kanafani
We are… this is Hakam Kanafani, Group CEO. Just to highlight, for the Avea project we
are doing this to make Avea as a standalone company, stronger and can face the
competition, the very harsh competition in this country. So this is the goal. And when we
have done this, the main assumption is that our partners are going to contribute, and this is
what we are assuming, that a good partner, and we will ()()() anyone. So this is our stance
and our position, and what's driving us.
David Cook
In terms of the second part of your question, the production, the product upturn evaluation
will depend on, again, independent third party, what they value at, but I think the key
points from your perspective is that's pure balance sheet. It does not impact the income
statement whether product value goes up or down, which I think is the key consideration
from an investor perspective.
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Hakam Kanafani
And in terms of Avea… this is Hakam Kanafani again, just before my colleague, Kadir,
the Chief Strategy Officer from Avea, speaks, I took his permission just to say that I think
Avea did the right thing, and they were very selective on how effective their plan can be.
So the management of Avea, when they have chosen to go and grab subscribers, they did
this not out of a knee jerk reaction because others are trying to do it, and some are failing,
is that they said, look, we think that we are now at a time with this competition, with this
plan, where our MoU will increase, our ARPU will increase, our revenue will increase, net
additions will increase, and we don’t think we're going to have to get a big hit on
EBITDA, and it's an opportunity to grow our customer base and move forward with it, and
try to improve on the rest as we go. And I think it was a very courageous and smart
decision, and I'm very happy to see that after the third quarter of implementing this plan
that we see these results. I'm particularly impressed with the net additions, which I think,
when you look at… when you compare the companies on the ground in Turkey, when
everybody, you know, showcases their cards, I think you will see that Avea’s performance
is very good in that domain.
Kadir Bey.
Kadir Boysan
Okay. Good afternoon to you all. It’s Kadir Boysan speaking now.
On the question of channel transformation there are actually three dimensions, the way we
look at it. The first one is the footprint. Our penetration in the non-exclusive channel as
well as our number of exclusive actually stores. Number two is about the quality of
service, although look and feel that we provide in these touchpoints, and the last one is
actually coming on top of it, is the role (?) distribution and the wholesale structure.
What we've gone through is we're increasing on the first item. We're increasing our
footprint, our number of stores, firstly on the exclusive area, as well as increasing on our
penetration for the non-exclusive sub-dealer segment.
On the second part, in terms of quality, we are actually redesigning our exclusive stores,
where we reach more than 100 stores already, and we have actually achieved a significant
actually improvement in terms of both the number of customers coming in as well as
activations.
And the third dimension is about the structure. We're improving and making more
efficient to make sure that it is actually effectively run, and the incentives run through all
the way from the distributor, wholesaler, down to the sub-dealer.
Kadir Bey, if I may follow up on the exclusive side, should we expect you to expand your
footprint further more in the exclusive segment of the distribution channel? Thank you.
Let me really tell you what I understand from the question. We are in the process of
increasing our number of stores, but our competition is well ahead of us. We’re just
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getting to a level where we're going to feel comfortable, and where we feel it is
satisfactory for our plans.
Okay, crystal clear. Thank you very much.
Cesar Tiron
Hi, it's from Morgan Stanley. I have one question on the Mobile. Can you please explain,
go again through the dynamics of the Postpaid ARPU and explain why we have this
increase, while Postpaid ARPU was declining for the past quarters? Is it because you
stimulated the usage and that has expanded in your existing subscriber base, or is it
because the 400,000 Postpaid subscribers that you've gained this quarter, some of these
must be from the other operators, and probably spend more than your existing base? If
you can help with that? Thank you.
Okay. Kadir Boysan speaking here again. On the Postpaid ARPU it’s a combination of
both, but if you think about numbers of subscribers coming in, versus the existing ones, it's
predominantly the existing ones actually making the majority of our base, and what we
have done, as Hakam Bey summarised right at the beginning, day by day we're improving
our cross-sell and up-sell, actually, the system effectiveness and the number of offers we
provide for existing base.
Nevertheless, we has also underlined that the newcomers are also coming at the high level,
where we expect them to come, in line with our plans.
Okay. Thank you.
Vera Sutedja
Yes, it's from Erste Bank. I have a question again on Avea, with the converting the debt
into the equity. Can you just explain at a general level what will be the impact on the
P&L, cash flow and balance sheet, just to get a better understanding of the transaction?
And the second question would be this FX impact is significantly larger, gets very, very
large, and what do you think would be the… is going to affect your cash outflow severely,
or do you think it might even affect the dividend? If you can give a brief update about that,
that would be great, thanks.
David Cook
Okay, this is David Cook here. In terms of P&L and in fact on the Avea Is (?) goes
forward, it depends, of course EGM has to approve it, but assuming it does, and it goes
ahead, if there is… if they both, both partners contribute then it makes no real difference,
overall, because our share of Avea stays the same. If there's a scenario where maybe
Isbank will, for whatever reason, doesn’t take a full share, then what that effectively
means is that Turk Telekom will own a greater proportion of Avea.
As to what that will mean to dividends will depend upon whether Avea, going forward,
makes a net loss or a net income, because, clearly, if it makes a net loss, we take a slightly
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higher percentage of that loss. If it makes a profit, we make a slightly higher percentage of
that profit.
Now, one of the good things about capitalising debt is you get rid of most of the interest
expense, and therefore the point where they can make profit becomes a lot easier, because
you take out all that huge expense, interest expense, out of their P&L, and as we said
earlier, their operating profit percentage for being breakeven has come down from 25%
revenue down to 20%, so it's a good sign for going forward.
So that's effectively for the group, because what we do lose on the TT side is the interest
income, but we pay tax on that, and we offset by we lose more or less the equivalent to
minority ownership on Avea.
So it’s marginal, really, the impact on dividend of this operation in the worst case. But in a
more… you know, equally, the chance there is no impact of it.
In terms of FX, FX is all about the euro dollar, where they're moving against the lira, and
these last six months it's not so much the dollar, it’s the euro has moved very strongly
against the lira, about 14.5% increase. One bright spot for us and a bad thing for Europe is
they seem to be having a bit of a crisis, so it could mean we might see a reverse of quite a
lot of that FX loss.
Now, most of this FX is unrealised, so it’s not cash. Whether unrealised or realised, if it's
there at year-end, it impacts dividends, because dividends are paid on net income, not on
cash availability, under the Turkish ()()() rules. Does that answer your question?
Yes. And there is one question I would like to know, is it possible to give us what is the
accumulated loss carried forward of Avea?
We could do, but actually it doesn’t make a lot of difference to this, because what we said
in the paper is we're taking 3.6 billion of those and equitising it, to () with our loan. Our
loan’s somewhat higher.
But it makes no difference, because the losses don’t get written off, even when we
equitise.
So there won't be any impact of using more of the accumulated loss carry forward for your
tax, for example?
()()(). If Avea starts making a huge profit, so in corporate planning, let's be realistic, it's a
lot of losses there that at the moment it’s still a loss-making business, but it’s a long way
forward to make huge profits to recover where this will become an impact.
I understand. Thank you so much.
Ivan Kim
Hi. I'm Ivan Kim from Renaissance Capital. Two questions, please, if I may? The first one
would be on the Fixed Line EBITDA margin in the second quarter, because if I break
down the first half in the quarters, I'm looking at a quite weak margin in the second
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quarter of 51.8% in the Fixed Line business, versus 53.5% in the first quarter, probably
you could give some…
Hakam Kanafani
Quite…? Sorry, can you repeat the… Quite weak, you said?
Yes. Because I'm looking at (overtalking).
(Overtalking)?
I mean, quite weak, of course, not in general, but just compared to the previous quarters…
Yes, compared to the previous quarter, you're right. Yes, I got the message, yes. Because
it's a little lower than the previous quarter. You're right.
Could you probably provide some insights in why is that? And the second one is just on
the situation in the Mobile market, so you were saying that the competitive situation has
intensified and we've seen the evidence of this, and, you know, and competitors’ numbers,
but in the second quarter again, you’ve seen quite some pick up on the usage, and growth
in the ARPU, quarter on quarter, quite robust growth. So can you probably say now that
the situation is levelling out and improving? Thanks a lot.
David Cook
Okay. It’s David here. I'll take the question on Fixed Line collapse in profitability. I think,
simplistically, I think, as I said earlier, if you look at the maintenance phase in Q1, Q2,
and we did mention this when we announced the Q1 results, we said that the maintenance
costs were particularly low, even compared to last year, and so what you've got is a big
change in that. That alone explains practically most of the difference in profitability. So
that's the key… two key reasons. So there's no underlying change in the profitability
position of the Fixed Line business.
Okay.
Kadir Boysan
I'll take the second question, Kadir Boysan speaking here, about the Mobile market.
What we see is actually in the same quarter as Hakam Bey summarised the repetition of
Quarter One, and it remains extremely aggressive, and if you look at what happened in the
last two, three months, there was actually no sign of rationalisation or recovery, as you
may call it.
So, going forward, it’s a very difficult call, when and if it comes along. But on your
comment in relation to MoU, yes, our MoU is up, versus the quarter, and that's part of our
attractive both Postpaid and Prepaid offers, which provide actually a significant number of
minutes for on net and off net minutes, and that's going up. So we don’t…
Okay, thank you.
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Yes.
San Dhillon
Hi, guys, Sam Dillon here, from Barclays Capital. A couple of questions. On your Naked
DSL customers, which I believe are about 100,000, could you provide some colour on
whether those are new customers to Turk Telekom, or existing customers dropping their
voice line? And secondly, on the PSTN ARPU growth, which was flat in the quarter, albeit
at an impressive number, given the price increases in February, are we seeing that some
of the customers who aren’t in the bundled tariffs reducing their usage in the Fixed Line?
Thanks.
Erem Demircan
Okay. Let me reply this question. This is Erem Demircan. Regarding Naked DSL, this is a
very good question. Actually that was one of the things that I would like to mention,
which I forgot during the presentation. That's a very good question. Actually, out of this
100,000 subscribers, only 5% of them are existing PSTN subscribers. So there is no
cannibalisation at all. So the offer is targeting only the new segment, and 95% of those
100,000 subscribers are actually from the group that I mentioned, you know, those 6
million homes who doesn’t have PSTN and ADSL to date. So this is the reason we see this
as a very good product. It complements our product, our existing product range. This is the
reason that TT is selling this product.
Regarding the second question, I couldn’t understand the question, about ARPU growth.
Hakam Kanafani
Can you repeat your second question, please? Sam, from Barclays?
No, no, of course. So the ARPU growth, it was flat. The PSTN and the ARPU growth was
flat in the quarter, and I suppose if you compare that to the price increases you put into…
put through in February, one could argue that the usage, and the base, which is not
bundled, must be reducing to offset the price increases you’ve put through. I just wanted
to understand if, A, that was an accurate assessment, and, B, if it was, what is actually
happening in that base that is not bundled?
Erem Demircan
Okay. Now, regarding the PSTN, the ARPU and MoU, of course, to date 70% of the
revenue is flat fees, so the revenue and ARPU is less linked to the usage, actually. When
you look at the usage patterns of our subscribers, the 12.5 million residential subscribers
for the last one year actually didn’t reduce their usage. Mainly the usage decrease was on
our SME and corporate customers, but there the number of lines didn’t decrease, so what
we are doing at the moment, as I mentioned before, is we are targeting more to niche
segments like corporates, SMEs and SOHOs, where we are offering higher minutes for the
existing revenues (?), because we are not losing revenue, we are not losing subscribers, but
we are losing only MoU there, which we are stabilising with the new offers we are making
to those specific target groups.
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Hakam Kanafani
Okay. This is Hakam Kanafani. Can I make a quick comment about the Naked DSL,
ADSL? I think Erem’s answer was very clear, and the Sales efforts led by our Chief Sales
Officer and the team, I think is quite focused. But even, even if there is still… there is
some cannibalisation there, I think it's good. And as we have always promised the
investors, and the analysts, when there is a regulatory move, we try and make it into an
opportunity, and not just say, you know what? No, we're not playing. And leave the court
for someone else.
So this is something that it is difficult for a Fixed Wire operator to play that game. Even
more difficult to put it in front of the analysts, and to show it, but this is something that we
must do. We are a courageous operator, and I think this is something that's happened, by
the Regulator, and we are doing this, and we believe that if someone is leaving, and we
can get something at maybe slightly lower ARPU, it's actually better than not getting that.
So we think that this is… And it also competes with the competition, who is trying to draw
blood from you, and take as many subscribers as possible, and tell them all the different
sales pitches. So I just wanted to add this comment to my colleague, Erem’s update there.
Okay.
And I don’t know if you had mentioned, but I just want to refer you also, it's not in the
Fixed PSTN, I'm talking about the ADSL, where today we have in Q2 55%, and you'll see
a solid increase in the PSTN subscriber breakdown of the limited and unlimited. You will
see it on page seven. I think… this is also one thing that I wanted to… we wanted to
highlight here, and you will see that on the ADSL side we went from 41% unlimited to
50% unlimited, to 55% unlimited. And I think this is also a good, solid path we are
moving in, to combat all of these different competitive issues. (Overtalking).
Okay, guys, thank you.
Can Oztoprak
Hi, this is Jan from Finance Analyst. Regarding this Naked ADSL, I understand that you
turned a threat into an opportunity, which is very positive, of course. I just wanted to ask,
what sort of a growth do you target at this front?
Hakam Kanafani
Well, I… it’s a good question. I think we will have more clarity, maybe a little later. Now
we are taking this as a defensive precaution. We don’t see that this is something that's
going to be, you know, extremely high, but we will see that it will… it might turn into a
significant number. Remember, this has just been… this is something that we have to deal
with early on, and it took a lot of time. We are a big company. It takes us a lot of time to
make a decision like this, getting all the negatives, getting all the positives, testing here,
you know, because we have a lot to lose if we make a decision. We think we made the
right decision. We believe in this decision and we think that it has improved our arsenal of
weapons, and at this stage to tell you where this is going, I think, to be very frank with
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you, it's a little bit too early. But we will build up something, and we will have our IR
Director discuss with you where this might go in the next few months.
Okay, thanks.
Closing Comments
Abdullah Kaya
I think we are done with the questions. Thanks, everyone, for joining us today. We
appreciate your time, () this afternoon. Thank you, and have a good evening.
Hakam Kanafani
Okay. Thank you everybody.