Turkcell Iletisim Hizmetleri Second Quarter 2019 Results

“Strong Momentum Continued”

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 June 30, 2019 refer to the same item as at June 30, 2018. For further details, please refer to our consolidated financial statements and notes as at and for June 30, 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 second quarter and half year of 2018 and 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. On December 12, 2018, Turkcell signed a binding agreement and on April 2, 2019 completed the transfer of its shares in Fintur to Sonera Holding B.V., the majority shareholder of 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

Q218

Q219

y/y%

H118

H119

y/y%

Revenue

5,105

 

6,191

 

21.3

%

9,867

 

11,866

 

20.3

%

EBITDA1

2,134

 

2,553

 

19.6

%

4,156

 

4,834

 

16.3

%

EBITDA Margin (%)

41.8

%

41.2

%

(0.6pp)

42.1

%

40.7

%

(1.4pp)

EBIT2

1,088

 

1,287

 

18.3

%

2,130

 

2,390

 

12.2

%

EBIT Margin (%)

21.3

%

20.8

%

(0.5pp)

21.6

%

20.1

%

(1.5pp)

Net Income

415

 

465

 

12.1

%

916

 

1,690

 

84.5

%

Net Income excluding Kcell indemnity provision

415

 

526

 

26.6

%

916

 

1,750

 

91.1

%

SECOND QUARTER HIGHLIGHTS

  • Strong financial performance continued:

    • Revenues of TRY6,191 million, up 21.3% year-on-year
    • EBITDA of TRY2,553 million, with an EBITDA margin of 41.2%
    • EBIT of TRY1,287 million, with an EBIT margin of 20.8%
    • Net income at TRY465 million, up 12.1% year-on-year

      • Net income of TRY526 million on 26.6% year-on-year growth, excluding recognition of liability in relation to Kcell SPA
    • Improved leverage with a 0.3x year-on-year decline to 1.2x
  • Solid set of operational results:

    • Mobile postpaid quarterly net additions of 215 thousand
    • Mobile ARPU3 growth of 16.6% year-on-year, like-for-like ARPU4 growth of 20.5%
    • Record high residential fiber ARPU growth of 17.2% year-on-year
    • Digital services downloads of over 180 million
    • Multiplay with TV subscriber ratio5 reached 50.8%, up 4.0pp year-on-year
    • Data usage of 4.5G users at 8.9GB in June 2019
    • 19 million 4.5G compatible smartphones on our network, up 0.5 million quarter-on-quarter
  • We revise our EBITDA margin guidance6 for 2019. Accordingly, we now target an EBITDA margin of 39%-41% compared to 38%-40% previously. We maintain our revenue growth target of 17%-19% and operational capex over sales ratio7 target 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) EBIT is a non-GAAP financial measure and is equal to EBITDA minus depreciation and amortization expenses.

(3) Excluding M2M

(4) The ARPU of customers who have stayed with Turkcell for at least 14 months

(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 June 30, 2019 which can be accessed via our website in the investor relations section (www.turkcell.com.tr).

COMMENTS BY MURAT ERKAN, CEO

With a focus on the customer and our innovative solutions, we are growing at full speed

As Turkcell Group, we continued our strong double-digit growth in the second quarter. Our consolidated revenues rose 21.3% to TRY6.2 billion, while EBITDA1 increased 19.6% to TRY2.6 billion, achieving a 41.2% EBITDA margin. Net income amounted to TRY465 million on a 12.1% increase. With these results, we generated TRY11.9 billion in revenues and the all-time-high first half net income of TRY1.7 billion.

Our solid financial results on the back of a larger customer base, strong ARPU growth, rising data demand, and the higher usage of our innovative products and services, coupled with our effective cost management, prompt us to revise our EBITDA margin guidance2 upwards to 39% – 41%. We reiterate our revenue growth guidance of 17% – 19% and operational capex to sales ratio3 guidance of 16% – 18%.

Those who prefer Turkcell’s broadband services at the speed of light now number 1.4 million

Our customer-focused innovative campaigns and value propositions were instrumental in the rise of postpaid, fiber and digital services subscribers during the quarter. Postpaid mobile subscribers, whose ARPU is 3 times that of prepaid, rose by 215 thousand in this quarter. Our residential fiber subscribers were at 1.4 million with 15 thousand net additions, while those who also use our TV+ services have reached 50.8%4 of our fiber residential subscriber base.

The strong demand for our innovative fixed wireless access (FWA) product Superbox, available only at Turkcell, has maintained its pace. Superbox, which provides fiber-like speeds at locations not covered by a fiber network, has earned customer appreciation and is now in around 130 thousand households.

Increasing data and digital services usage, upsell to higher tariffs and increased postpaid subscribers have reflected to our ARPU figures. Mobile ARPU5 rose 16.6% year-on-year, reaching TRY40.7. Starting this quarter, we have begun to offer “Comfortable Tariffs” that simplify our customers’ lives. With these hybrid tariffs, a first for the sector, our customers can subscribe as postpaid, and yet consume as if they were prepaid. This solution has gained traction within a short time frame. Half of the subscriptions to these tariffs were new to Turkcell. Meanwhile, our residential fiber ARPU rose by a record high of 17.2% to TRY66.1 on the back of our value proposition renewed early this year, upsell to higher tariffs, and higher multiplay ratio with TV.

We confidently advance in our three strategic focus areas

We have continued to enrich and advance the user experience of our digital services, one of our strategic focus areas. Our digital communication and experience platform BiP, where average daily message traffic has increased fourfold to 300 million in a year, today offers innovative instant translation services in 106 languages. Our digital music platform fizy, where we focus on advertising and brand collaborations, now serves approximately 3.7 million active users. Furthermore, fizy, as well as our digital publication application Dergilik and TV+ offer personalized content recommendations by leveraging AI technology. We will continue to lead the digital transformation of Turkey with our digital services developed by over one thousand Turkcell engineers and developers with our strong infrastructure and data centers.

We have recorded strong revenue growth with our digital business solutions, our second area of strategic focus. In the first half of the year, this business line generated TRY693 million in revenues on 62% growth. We are confident of continuing this trend with our customized solutions for both the private and public sectors, thereby contributing to their digital transformation.

Regarding tech-fin, our third strategic focus area, we have launched a number of new products on Paycell where our aim is to become Turkey’s largest payment platform. Turkcell customers can conveniently top-up their public transportation IstanbulKart on their mobile phones via the Paycell app, with the option of paying through their phone bills. Next, we have made things easier for parents by introducing a “pocket money” feature on Paycell Card, where active users of the latter have increased fourfold over the past six months. Further, by launching the “Cash Card” within the Paycell Card family, we have enabled cash withdrawals. Our Paycell app, downloaded 4 million times to date, has begun to offer 24/7 money transfer with just a phone number. In addition, Paycell has been part of the local meal card initiative, namely Paye Kart, which inherits both public transportation İstanbulKart and meal card features. Paye Kart is accepted at a steadily growing number of sales points.

We support sustainability with our initiatives

We installed our group’s first solar power plant in the Turkish Republic of Northern Cyprus in May as part of our activities in the energy sector. The Northern Cyprus Turkcell Solar Power Plant was completed in just four and a half months thanks to our dedicated efforts. We always act with an awareness of sustainability, considering people, the environment and the economy as a whole. By signing a three-year term sustainability-linked loan agreement of EUR50 million with BNP Paribas in May, we have bridged our sustainability efforts and financing activities. With this loan, we will contribute to sustainable growth by reducing our carbon footprint and delivering on our responsibility to the environment, while reducing our financial costs. Our overarching aim is to safeguard natural resources of the world for future generations, while contributing to sustainable growth. We aim to lead the market in facilitating the greater use of such products, thereby supporting sustainability.

Meanwhile, we have tirelessly worked to position Turkey as a technology producer. Accordingly, we have recently announced the configuration of ASELSAN-produced local 4.5G mobile antennas with the contribution of Turkcell engineers on our live network. A thousand of these antennas, which are also 5G-compatible, will be configured to our network by year-end.

Our leverage ratio has improved

We have continued to strengthen our balance sheet with our prudent finance management and cash generation capability through robust operations. As of the end of June, our net debt to EBITDA ratio had improved yearly by 0.3 times to 1.2x, widening the gap between the comparable universe in our sector.

We are once again the sector leader thanks to our customers’ appreciation

As Turkcell, and in line with our strategic priorities, we are dedicated to offering our customers an unmatched experience driven by innovation and operational excellence. Accordingly, with the appreciation of our customers, we are, once again, the sector leader in terms of total revenues this quarter. Going forward, we will build on our customer-focused approach and contribute to their lives with new smart technologies.

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.

(3) Excluding license fee

(4) Multiplay subscribers with TV: Fiber internet + IPTV users & fiber internet + IPTV + fixed voice users

(5) Excluding M2M

FINANCIAL AND OPERATIONAL REVIEW

Financial Review of Turkcell Group

Profit & Loss Statement (million TRY)

Quarter

Half Year

Q218

Q219

y/y%

H118

H119

y/y%

Revenue

5,105.3

 

6,191.1

 

21.3

%

9,866.9

 

11,866.5

 

20.3

%

Cost of revenue1

(2,345.7

)

(3,018.5

)

28.7

%

(4,480.6

)

(5,748.7

)

28.3

%

Cost of revenue1/Revenue

(45.9

%)

(48.8

%)

(2.9pp)

(45.4

%)

(48.4

%)

(3.0pp)

Gross Margin1

54.1

%

51.2

%

(2.9pp)

54.6

%

51.6

%

(3.0pp)

Administrative expenses

(158.8

)

(184.9

)

16.4

%

(313.1

)

(375.5

)

19.9

%

Administrative expenses/Revenue

(3.1

%)

(3.0

%)

0.1pp

(3.2

%)

(3.2

%)

 

Selling and marketing expenses

(404.3

)

(413.4

)

2.3

%

(760.9

)

(816.5

)

7.3

%

Selling and marketing expenses/Revenue

(7.9

%)

(6.7

%)

1.2pp

(7.7

%)

(6.9

%)

0.8pp

Net impairment losses on financial and contract assets

(62.3

)

(21.4

)

(65.7

%)

(156.1

)

(91.8

)

(41.2

%)

EBITDA2

2,134.3

 

2,552.8

 

19.6

%

4,156.2

 

4,833.9

 

16.3

%

EBITDA Margin

41.8

%

41.2

%

(0.6pp)

42.1

%

40.7

%

(1.4pp)

Depreciation and amortization

(1,046.1

)

(1,265.8

)

21.0

%

(2,025.9

)

(2,443.9

)

20.6

%

EBIT3

1,088.2

 

1,287.0

 

18.3

%

2,130.3

 

2,390.0

 

12.2

%

EBIT Margin

21.3

%

20.8

%

(0.5pp)

21.6

%

20.1

%

(1.5pp)

Net finance income / (costs)

(486.4

)

(571.7

)

17.5

%

(799.8

)

(992.1

)

24.0

%

Finance income4

651.9

 

(200.4

)

(130.7

%)

924.9

 

334.7

 

(63.8

%)

Finance costs4

(1,138.2

)

(371.4

)

(67.4

%)

(1,724.8

)

(1,326.8

)

(23.1

%)

Other income / (expense)

(30.2

)

(73.8

)

144.4

%

(63.7

)

(125.7

)

97.3

%

Non-controlling interests

(14.4

)

(14.3

)

(0.7

%)

(38.6

)

(34.1

)

(11.7

%)

Share of profit of equity accounted investees

 

1.0

 

n.a

 

1.7

 

n.a

Income tax expense

(142.2

)

(163.0

)

14.6

%

(312.4

)

(322.7

)

3.3

%

Discontinued operations

 

 

n.a

 

772.4

 

n.a

Net Income

415.1

 

465.2

 

12.1

%

915.8

 

1,689.6

 

84.5

%

(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 regarding derivative instruments reported under finance cost were netted off from respective fair value gain and interest income regarding derivative instruments reported under finance income starting from Q418. Furthermore, starting from Q219, interest income on financial assets and interest expenses for financial liabilities, both measured at amortized cost, are represented on a net basis. Historical periods were restated to reflect these changes.

Revenue of the Group grew by 21.3% year-on-year in Q219. This growth was mainly driven by the strong ARPU performance of Turkcell Turkey on the back of increased data consumption and digital services usage, and upsell efforts.

Turkcell Turkey revenues, at 85% of Group revenues, grew by 20.5% to TRY5,261 million (TRY4,366 million).

  • Data and digital services revenues rose by 20.1% to TRY3,399 million (TRY2,830 million).

    • On the mobile front, the increasing number and data consumption of 4.5G users, rising digital services usage, price adjustments and upsell to higher ARPU offerings were the main drivers of data and digital services revenue growth.
    • On the fixed front, the main drivers were the increased ratio of multiplay subscribers with TV, price adjustments and upsell efforts.
  • Equipment revenues rose to TRY613 million (TRY302 million) driven by campaigns that we held in Q219 to support 4.5G smartphone penetration and corporate projects.
  • Wholesale revenues rose by 36% to TRY286 million (TRY210 million) on the back of increased carrier traffic and the positive impact of TRY depreciation on FX based revenues.

Turkcell International revenues, constituting 8% of Group revenues, grew by 48.4% to TRY492 million (TRY332 million), driven mainly by the strong ARPU performance of lifecell and positive impact of currency movements.

Other subsidiaries’ revenues, at 7% of Group revenues, which includes information and entertainment services, call center revenues and revenues from financial services rose by 7.4% to TRY438 million (TRY408 million).

  • We completed the sale of our shares in Azerinteltek, our sports betting business in Azerbaijan, as of January 11, 2019. We received the transfer of proceeds on December 27, 2018 and transferred control of the subsidiary. We did not report any revenues in Q219 in relation to Azerinteltek operations.
  • Our consumer finance company’s revenues were at TRY235 million (TRY231 million) in Q219. Revenue growth was impacted by the decline in the consumer loan portfolio, from TRY4.7 billion as of Q218 to TRY3.2 billion as of Q219, due mainly to the installment limitation on consumer loans for telecom devices.

Cost of revenue (excluding depreciation and amortization) increased to 48.8% (45.9%) as a percentage of revenues in Q219. This was due mainly to the rise in cost of equipment sold (4.9pp), despite the decline in other cost items (2.0pp) as a percentage of revenues.

Administrative expenses declined to 3.0% (3.1%) as a percentage of revenues in Q219.

Selling and marketing expenses declined to 6.7% (7.9%) as a percentage of revenues in Q219. This was driven by the fall in marketing expenses (0.8pp) and selling expenses (0.6pp), despite the rise in other cost items (0.2pp) as a percentage of revenues.

Net impairment losses on financial and contract assets declined to TRY21 million (TRY62 million) in Q219.

EBITDA1 rose by 19.6% year-on-year in Q219 leading to an EBITDA margin of 41.2% (41.8%).

  • Turkcell Turkey’s EBITDA grew by 15.7% to TRY2,128 million (TRY1,840 million) with an EBITDA margin of 40.5% (42.1%).
  • Turkcell International EBITDA2 rose to TRY230 million (TRY122 million) leading to an EBITDA margin of 46.8% (36.9%).
  • The EBITDA of other subsidiaries rose by 13.2% to TRY195 million (TRY172 million).

Depreciation and amortization expenses increased by 21.0% in Q219 year-on-year.

Net finance expense increased to TRY572 million (TRY486 million) in Q219 year-on-year. This was driven mainly by higher interest expenses resulting from borrowings and lease obligations. 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 increased 14.6% year-on-year in Q219. Please see Appendix A for details.

Net income of the Group increased by 12.1% to TRY465 million (TRY415 million) in Q219 year-on-year, driven mainly by strong operational performance, despite higher interest expenses resulting from borrowings and lease obligations, and higher depreciation and amortization expenses. Please also note that we booked a provision of TRY60 million in Q219 for recognition of liability in relation to Kcell Share Purchase Agreement regarding the past Kcell transaction. Excluding this provision, our net income would have increased by 26.6% year-over-year in Q219.

Total cash & debt: Consolidated cash as of June 30, 2019 increased to TRY10,687 million from TRY8,888 million as of March 31, 2019 driven mainly by the Fintur proceeds of TRY2,230 million received at the beginning of Q219. Excluding the FX swap transactions for TRY borrowing, 80% of our cash is in US$, 17% in EUR and 3% in TRY.

Consolidated debt as of June 30, 2019 declined to TRY22,062 million from TRY22,867 million as of March 31, 2019. Please note that TRY1,577 million of our consolidated debt is comprised of lease obligations.

(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. The change was implemented retrospectively for 2018; impact regarding previous quarters of 2018 was booked in Q418. We started to capitalize the frequency usage fees of BeST in Q219 in accordance with IFRS16. The impact regarding Q119 was also booked in Q219. These changes positively impacted Turkcell International EBITDA.

Consolidated debt breakdown excluding lease obligations:

— Turkcell Turkey’s debt was at TRY16,300 million, of which TRY9,389 million (US$1,631 million) was denominated in US$, TRY6,132 million (EUR936 million) in EUR, TRY212 million (CNY254 million) in CNY and the remaining TRY567 million in TRY.

— Our consumer finance company had a debt balance of TRY3,025 million, of which TRY1,631 million (US$283 million) was denominated in US$, and TRY920 million (EUR140 million) in EUR with the remaining TRY474 million in TRY.

— The debt balance of lifecell was TRY1,136 million, all denominated in UAH.

  • TRY826 million of lease obligations is denominated in TRY, TRY25 million (US$4 million) in US$, TRY176 million (EUR27 million) in EUR and the remaining balance in other local currencies (please note that the figures in parentheses refer to US$ or EUR equivalents).

TRY12,343 million of our consolidated debt is set at a floating rate. Excluding consumer finance business borrowings, TRY5,707 million of consolidated debt will mature within less than a year.

Net debt as of June 30, 2019 was at TRY11,375 million with a net debt to EBITDA ratio of 1.2 times. Excluding consumer finance company consumer loans, our telco only net debt was at TRY8,160 million with a leverage of 0.9 times.

Turkcell Group has a long FX position of US$207 million as at the end of Q219. (Please note that this figure takes into account advance payments and hedging, but excludes FX swap transactions for TRY borrowing. Derivatives (VIOP) and forward transactions are included).

Capital expenditures: Capital expenditures, including non-operational items, amounted to TRY1,808 million in Q219.

Contacts

Investor Relations

Korhan Bilek, Tel: + 90 212 313 1888

investor.relations@turkcell.com.tr

or

Corporate Communications:

Tel: + 90 212 313 2321

Turkcell-Kurumsal-Iletisim@turkcell.com.tr

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