Turkcell Iletisim Hizmetleri: Fourth Quarter and Full Year 2018 Results

“1440 STRATEGY LED TO SUPERIOR FINANCIAL AND OPERATIONAL
PERFORMANCE”

ISTANBUL–(BUSINESS WIRE)–Turkcell Iletisim Hizmetleri A.S. (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.
  • 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 December 31, 2018 refer to the same item as at
    December 31, 2017. For further details, please refer to our
    consolidated financial statements and notes as at and for December 31,
    2018, 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
    fourth quarter and for the full year 2017 and 2018 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   Q417   Q418   y/y %   FY17   FY18   y/y %
Revenue   4,666   5,626   20.6%   17,632   21,292   20.8%
EBITDA1 1,739 2,239 28.8% 6,228 8,788 41.1%
EBITDA Margin (%) 37.3% 39.8% 2.5pp 35.3% 41.3% 6.0pp
Net Income   216   864   300.1%   1,979   2,021   2.1%
 

FULL YEAR HIGHLIGHTS

  • Remarkable financial performance in a challenging macro environment:

    • All-time high revenue and EBITDA at the Group level
    • Group revenues up 21% year-on-year, 49% on two-year cumulative
      basis
    • Group EBITDA up 41% year-on-year, 90% on two-year cumulative
      basis, EBITDA margin at 41.3%
    • Strong group net income of TRY2,021 million
    • Operational capex over sales ratio2 at 18.5%, in line
      with our plan
    • TRY1.9 billion dividends distributed
    • Guidance delivered thanks to effective cost control measures and
      business model hedging strategy comprising three pillars; right
      pricing, FX & interest rate hedging and liquidity management
  • Solid operational performance:

    • 94% rise in digital services downloads worldwide to 169 million
    • 347 thousand net postpaid mobile subscriber additions in 2018
    • Data usage of 4.5G users at 8 GB in December
  • 2019 Group guidance3; revenue growth target of 16%-18%,
    EBITDA margin target of 37%-40% and operational capex over sales ratio2 of
    16%-18%.

FOURTH QUARTER HIGHLIGHTS

  • Strong financial results achieved:

    • Group revenues and EBITDA up 20.6% and 28.8%, respectively leading
      to an EBITDA margin of 39.8%
    • Group net income of TRY864 million; stable quarterly run-rate
  • Operational momentum continued:

    • Mobile ARPU4 growth of 15.8% year-on-year on the back
      of digital services focused strategy
    • Mobile multiplay subscriber ratio5 reached 66.7%, up
      10.9pp year-on-year; and multiplay with TV subscribers6 reached
      48.6%, up 4.2pp year-on-year
    • Leading NPS in the sector reflecting strong customer appreciation
  • Binding agreement with respect to the transfer of our stake in Fintur
    to Sonera Holding B.V., the other shareholder of Fintur, signed on
    December 12, 2018; the deal is expected to be completed soon.

(1) EBITDA is a non-GAAP financial measure. See page 15 for the
explanation of how we calculate Adjusted EBITDA and its reconciliation
to net income.

(2) Excluding license fee

(3) 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 2017 filed with U.S. Securities
and Exchange Commission, and in particular, the risk factor section
therein

(4) Excluding M2M

(5) 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.

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

For further details, please refer to our consolidated financial
statements and notes as at and for December 31, 2018 which can be
accessed via our website in the investor relations section (www.turkcell.com.tr).

COMMENTS BY KAAN TERZIOGLU, CEO

As Turkcell Group, we have concluded another successful year of
operations, having taken firm steps in accordance with our digital
business model. While our digital transformation has reached its 4th year,
our 1440 strategy focused on creating value for every minute of our
customers’ lives, has led to superior performance, both in operational
and financial terms. I am delighted that we have accomplished the vision
we set as the “Digital Operator”, having fulfilled the very definition
of one, creating new business areas in a challenging environment, and
reaching a point where this model is now extended to the wider world.

2018 was a year where challenging macroeconomic conditions shaped global
and local markets, where global trade decelerated, the emerging markets
saw capital outflows and the Turkish Lira depreciated against foreign
currencies. And yet, we delivered a strong performance, actually
exceeding our initial targets. Turkcell Group’s total revenues grew
20.8% to TRY21.3 billion, while EBITDA1 rose 41.1% to TRY8.8
billion leading to an EBITDA margin of 41.3%. 2-year cumulative growth
in revenues reached 49% while EBITDA grew 90.2%. Despite the challenging
macro environment, we reported a net income above that of 2017 at TRY2
billion. Our capital expenditures2 were in line with our
plans, at 18.5% of revenues.

As reflected by this solid set of results, our digital operator model
and strong balance sheet and business model hedging strategies have
successfully passed a significant stress test. I would like to share
with you the main components of our strategy that have made this
performance possible, and the progress we have achieved throughout the
year.

We increased our share of 1440 minutes with our digital services

In 2018, we continued to expand and enrich our digital services
portfolio with new features, a key pillar of our digital operator
transition. We saw 169 million downloads of our digital services,
receiving a higher share of our customers’ 1440 minutes and creating
greater value for them within those minutes.

Our digital communication and experience platform BiP has been equipped
with two important capabilities this year. BiP now allows the use of two
numbers on a single handset, as well as money transfer, in addition to
its enriched messaging experience, multiuser video and voice call
capability and subscription to service provider channels. We reached
34.6 million downloads and 11.5 million active users3 of BiP
on the back of rising customer appreciation in 2018.

fizy, over which 7 million songs were streamed daily in the fourth
quarter, reached 3.2 million active users3, while TV+ became
one of Turkey’s largest digital TV platforms with its customers reaching
3.4 million users4. Dergilik, now with international
magazines in its portfolio, led evening editions of newspapers to be
published once again in Turkey. Reaching 12.5 million active users3,
Dergilik continued to transform the publishing sector.

Turkey’s search engine, Yaani, which we launched at the end of 2017, has
been downloaded 7.6 million times to date, while its active users3 have
reached 3 million. Over Yaani, the web version of which we now also
offer our customers, 2.7 million searches were performed on average
every day.

In the attractive gaming market, we are committed to growth on multiple
platforms including Playcell, BiP Gaming and TavlaGo. Playcell, a
safe-zone for kids offering a variety of educational and entertaining
games, had 18.7 million total visitors in 2018, while BiP Gaming users
have reached 4.8 million as at the end of 2018.

We took effective steps to grow the digital economy

Our Fast Login application, which enables a secure and fast login
experience to mobile applications, and mobile and online websites, has
been used 232 million times to date by its 15.3 million registered
users. Thanks to Fast Login, Turkey became the first market to meet the
commercial sustainability criteria set by the GSMA (Global Mobile
Operators Association) in digital authentication, an area we consider
the cornerstone of the digital economy.

In techfin solutions, we strengthened the foundations of our business,
deepened our competencies, and increased our customer interaction. One
key focus, Paycell, continues its firm progress towards becoming one of
the strongest players in the mobile payment world. The Paycell
application has been downloaded 2.6 million times and more than 1
million Paycell Cards have been issued. Financell, our consumer finance
company, continued to facilitate our customers’ access to smart devices
supporting them with the loans it provided. This year we expanded our
competencies in financial services establishing Güvencell Sigorta, our
insurance agency; the first insurance product offered to our customers
was a health insurance package aimed at women.

Our traffic management, digital authentication and mobile payment
solutions introduced for online and mobile content and service providers
to grow e-commerce, offered a seamless digital experience to numerous
entrepreneurs this year.

Our customers increasingly benefited from our products and services.
We raised the bar in 4.5G.

The average data consumption of 4.5G users reached 7.6 GB on the back of
our innovative mobile services. Turkcell Turkey’s multiplay customer
ratio5 on the mobile front reached 66.7% with a 10.9
percentage point increase, while the ratio of multiplay with TV+ users6 reached
48.6% in the fixed segment.

Our infrastructure investments enable our customers to take full
advantage of the digital world. In April, we reached a new milestone by
serving at speeds in excess of 1 Gbps on our 4.5G network.

We initiated our NB-IoT services, deploying our products on our
infrastructure. We started to serve our customers with our NB-IoT
featured device, Filiz, together with its application aimed at
increasing agricultural productivity through remote monitoring.

As part of steps taken to ensure seamless and high-speed communication,
we launched Superbox, our FWA (Fixed Wireless Access) product, to great
appreciation from our customers. Moreover, we developed Dronecell, which
will enable us to provide 4.5G services in areas where intensive data
traffic is likely to be experienced. Dronecell, Turkey’s first flying
base station, will play an important role in ensuring uninterrupted
communication to save lives, particularly in emergencies and disasters.

We opened up our digital model to the World, launching the digital
export era.

In 2018, we also transferred our digital competencies to those countries
where Turkcell Group operates. lifecell, the first operator to implement
4.5G in Ukraine, is taking firm steps towards becoming the national
digital operator.

In accordance with our globalization vision, we aim to expand our
digital footprint not only in the countries where we operate, but also
throughout the wider world, by cooperating with other operators.
Established for this purpose, our subsidiary lifecell Ventures was
introduced to the international audience at the GSMA Mobile World
Congress, the most prestigious event of our industry, in Barcelona in
February 2018. lifecell Ventures conducted its first service export to
Moldcell with BiP and lifebox.

Another important development of 2018 was the sale of Fintur
subsidiaries, and ultimately the agreement to sell our stake in Fintur
to Telia, signed in December. This transaction enhances our efficient
balance sheet management and focus on growth through digital services,
and will result in a cash inflow of EUR 350 million upon completion.

We created value for our investors with our digital model and
business model hedging strategy

Strong operational performance combined with our Business Model Hedging
strategy, enabled us to achieve strong profitability and create
shareholder value, despite macroeconomic headwinds.

In a landmark development, with our 10-year, USD 500 million Eurobond
issuance in April, we became the first Turkish company to issue a
10-year bond since 2015. This has strengthened our balance sheet under
favorable financing conditions, while confirming market confidence in
Turkcell. Going forward, we plan to keep the average tenure of our debt
portfolio at 4-5 years. In addition to the bond issuance, we continued
to strengthen our liquidity and diversify financing sources, while
registering firsts for the market with vendor financing, lease
certificates, asset-backed securities and other debt instruments.

On the back of hedging instruments, we maintained FX risk at a minimum
level, generating solid profits, despite TL depreciation. Moreover,
hedge accounting principles minimized volatility, allowing for
predictable quarterly net profits throughout the year.

Including the TRY1.9 billion dividend paid out in 2018 with a yield of
7.2%, we have distributed nearly 60% of net profit recorded since 2010
to our shareholders.

We have invested in Turkey’s future with our technology, social
responsibility awareness and now, our Foundation.

We believe that investing in the future means investing in human
capital. Accordingly, we welcomed 232 young friends to the Turkcell
family within the scope of our GNCYTNK Project. Moreover, with the Whiz
Kids project, we support the education of gifted children, while also
supporting the education of children overcoming obstacles through the
Education without Boundaries Project. We cooperate with DQInstitute in
the area of DQ – Digital Intelligence, and help children to develop
digital awareness in order to become confident digital citizens.

We support entrepreneurship through various projects and applications,
primarily Beehive, our crowd funding platform.

“Hello Hope”, our application dedicated to serving Syrian guests in
Turkey, has reached nearly 1 million downloads. We will continue to
leverage our technology for the benefit of those who most need it.

In this respect, we took another important step by establishing Turkcell
Foundation. With a vision of developing Turkey into a technology
producer, Turkcell Foundation aims to gather Turkcell’s corporate social
responsibility activities under one roof and work to increase employment
opportunities by supporting scientists and the qualified labor force
required across all fields of endeavor.

The future is already here and we are ready for it

The near future will be shaped by technologies such as 5G, artificial
intelligence, block chain and augmented and artificial reality the world
over. As Turkcell, we have launched strategic alliances with leading
technology companies and universities domestically and abroad for the
past two years with respect to our studies into 5G. Related activities
continued in 2018.

The primary tool for processing the data generated by 5G will be
artificial intelligence/machine learning technologies. As Turkcell, we
are currently utilizing these technologies to enrich our applications,
to make more effective and efficient contact with our customers, and to
prevent identity fraud through image processing. Through our R&D Center
and creative human capital, we will continue to employ artificial
intelligence internally to the highest ethical standards in deploying
our services.

Our digital transformation process will keep up the pace.

On the back of our solid fundamentals, in 2019, we target7 Group
revenue growth of 16% – 18%, an EBITDA margin of 37% – 40% and an
operational capex to sales ratio2 of 16% – 18%. Meanwhile, we
will launch our DO1440 strategy at the GSMA Mobile World Congress next
week.

I would like to thank all our stakeholders, primarily our shareholders,
for their unyielding support during 2018, where we crowned our
transformation process into a digital operator with notable
achievements. I sincerely believe that our success story will continue
with the trust and support of all our stakeholders in the upcoming
period.

(1) EBITDA is a non-GAAP financial measure. See page 15 for the
explanation of how we calculate Adjusted EBITDA and its reconciliation
to net income.

(2) Excluding license fee

(3) 3-month active users

(4) IPTV users and OTT only cumulative active users

(5) 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.

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

(7) 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 2017 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)   Quarter   Year
  Q417   Q418   y/y %   FY17   FY18   y/y %
Revenue   4,666.0   5,626.3   20.6%   17,632.1   21,292.5   20.8%
Cost of revenue1 (2,315.7)   (2,607.3)   12.6%   (8,753.2)   (9,858.0)   12.6%
Cost of revenue1/Revenue   (49.6%)   (46.3%)   3.3pp   (49.6%)   (46.3%)   3.3pp
Gross Margin1   50.4%   53.7%   3.3pp   50.4%   53.7%   3.3pp
Administrative expenses (67.3) (198.2) 194.5% (645.2) (673.4) 4.4%
Administrative expenses/Revenue (1.4%) (3.5%) (2.1pp) (3.7%) (3.2%) 0.5pp
Selling and marketing expenses (544.1) (500.8) (8.0%) (2,005.4) (1,626.7) (18.9%)
Selling and marketing expenses/Revenue (11.7%) (8.9%) 2.8pp (11.4%) (7.6%) 3.8pp
Net impairment loses on financial and contract assets     (81.0)   n.m     (346.4)   n.m
EBITDA2   1,738.9   2,239.0   28.8%   6,228.3   8,788.0   41.1%
EBITDA Margin   37.3%   39.8%   2.5pp   35.3%   41.3%   6.0pp
Depreciation and amortization   (700.5)   (1,287.0)   83.7%   (2,597.0)   (4,288.0)   65.1%
EBIT3   1,038.4   952.0   (8.3%)   3,631.3   4,500.0   23.9%
Net finance income / (costs) (106.7) (18.5) (82.7%) (322.9) (1,687.0) 422.5%
Finance income 385.9 (1,225.9) (417.7%) 818.3 1,932.1 136.1%
Finance costs4 (492.5) 1,207.4 (345.2%) (1,141.2) (3,619.1) 217.1%
Other income / (expense) (625.8) 46.5 (107.4%) (698.9) (140.1) (80.0%)
Non-controlling interests (20.5) (77.7) 279.0% (58.6) (156.3) 166.7%
Share of profit of equity accounted investees 0.3 n.m (0.1) n.m
Income tax expense   (69.5)   (38.7)   (44.3%)   (571.8)   (495.5)   (13.3%)
Net Income   215.9   863.9   300.1%   1,979.2   2,021.2   2.1%
 

(1) Excluding depreciation and amortization expenses.

(2) EBITDA is a non-GAAP financial measure. See page 15 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 grew by 20.6% year-on-year in Q418.
Turkcell Turkey’s strong ARPU performance on the back of dedicated
execution of our digital services-focused strategy as well as our focus
on customer satisfaction was the main driver of this growth.

Turkcell Turkey revenues, comprising 85% of Group revenues, rose by
18.4% to TRY4,785 million (TRY4,041 million).

  • Data and digital services revenues grew by 16.1% to TRY3,177 million
    (TRY2,735 million).

    • Higher number of data users, increased data consumption per user
      and rise in penetration of digital services along with upsell
      performance were the main drivers on the mobile front.
    • On the fixed front, a larger subscriber base and increased ratio
      of multiplay subscribers with TV were the main drivers.
  • Wholesale revenues grew by 42.0% to TRY217 million (TRY153 million) on
    the back of increased carrier traffic and the positive impact of TRY
    depreciation on FX based revenues.

Turkcell International revenues, at 7% of Group revenues, increased
46.3% to TRY422 million (TRY288 million), mainly with 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 rose by 24.3% to TRY419 million
(TRY337 million). This was mainly driven by the increase in the consumer
finance company’s revenues to TRY247 million (TRY183 million) in Q418.

For the full year, Turkcell Group revenues rose by 20.8%.

Turkcell Turkey revenues grew by 18.2% to TRY18,266 million (TRY15,450
million).

  • Data and digital services revenues grew by 16.4% to TRY11,997 million
    (TRY10,304 million).
  • Wholesale revenues grew by 54.9% to TRY910 million (TRY587 million).

Turkcell International revenues rose by 36.5% to TRY1,457 million
(TRY1,067 million).

Other subsidiaries’ revenues grew by 40.8% to TRY1,570 million (TRY1,115
million).

Cost of revenue (excluding depreciation and amortization)
declined to 46.3% (49.6%) as a percentage of revenues in Q418. This was
mainly due to the decline in radio expenses (1.8pp), interconnection
costs (1.0pp) and other cost items (1.6pp), despite the rise in TRX
expenses (1.1pp) as a percentage of revenues.

The impact of new IFRS standards is TRY264 million positive in cost of
revenue items in Q418.

For the full year, cost of revenue decreased to 46.3% (49.6%) as a
percentage of revenues. This was mainly due to the decrease in radio
costs (2.4pp), interconnection costs (0.8pp) and other cost items
(1.4pp), despite the increase in TRX costs (1.3pp) as a percentage of
revenues.

Administrative expenses was at 3.5% (1.4%) as a percentage
of revenues in Q418. Administrative expenses included a positive impact
of TRY133 million in Q417 due to the change we made in our doubtful
receivable provision assumptions based on improvement in collection
performance.

Contacts

Turkcell
Investor Relations
Tel: + 90
212 313 1888

[email protected]

Corporate Communications:
Tel: + 90 212 313 2321
[email protected]rkcell.com.tr

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