Türk Telekomünikasyon Anonim Sirketi (TTKOM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the Türk Telekom Conference Call and live webcast to present and discuss the 2025 Q1 financial and operational results. [Operator Instructions] The conference is being recorded. [Operator Instructions] We are here with the management team, and today's speakers are CEO, Ümit Önal; and CFO, Omer Karademir. Before starting, I kindly remind you to review the disclaimer on the earnings presentation. Now I would like to turn the conference over to Mr. Ümit Önal, CEO. Sir, you may now proceed.

Hello, everyone. Welcome to our 2025 First Quarter Results Conference Call. Thank you for joining us today. Before I start my speech, I would like to kindly inform you that I will have to leave a bit early due to the last minute change in my schedule. I will try to take a few questions, if time allows. However, my colleagues will be here and ready to address your questions. An escalating tariff war has raised significant concerns around the world trade order, sending shock waves to financial markets globally. At home, the CBRT has swiftly introduced a series of measures to contain the recent volatility in financial markets driven by the local developments and global tariff conflicts. The bank posted its easing cycle in its April meeting and opted for an unexpected 350 basis points hike in policy rate to reemphasize priority on bringing inflation down and to maintain lira flexibility. While the CBRT left its year-end inflation forecast range of 19% to 29% unchanged, year-end inflation expectation moved to 30% from 28% in the April market expectations survey, which was conducted before the CBRT's recent trade decision. Finally, inflation fell below 38% according to the recently announced April data in an ongoing albeit slower disinflation trend as the monthly CPI picked up to 3% from 2.5% in March. We have been closely watching the recent developments and market volatility in order to assess their potential impact on the subscriber behavior and our businesses, which seemingly has been absent so far. As such, we stand confident about the 2025 guidance we shared earlier, but remain alert on both the local and global news flow ahead. We made a spectacular start to the year, primarily driven by the maintained strength in fixed Internet and mobile performances. In fixed Internet, even to date, very few ISPs followed our retail tariff price revision introduced around mid-March. Competition in mobile sector somewhat eased from its peak in December, but remained high in general with intense promotional activity in the aftermath of general price adjustments. Data consumption once again confirmed solid demand from subscribers. Now starting with financial and operational overview on Slide #3. Consolidated services increased by 18% to TRY 46 billion. Excluding the IFRIC 12 accounting impact, revenue growth was also 18%. Once again surpassing the top line growth, consolidated EBITDA rose by 27% annually to TRY 18 billion along with strong 260 basis points margin expansion year-on-year to 39%. Net profit for the period came in at TRY 5 billion. CapEx stood at TRY 8 billion and free cash flow was TRY 8 billion compared to TRY 3 billion first quarter of last year. Net leverage improved to 0.37x (sic) [ 0.73x ]. Slide #4, net subscriber additions. We closed the quarter with 53.6 million subscribers in total, up 447,000 Q-on-Q. Excluding 155,000 lost in the fixed voice segment, quarterly net additions were 602,000 despite a relative low seasonality in Q1. Mobile remains the largest contributor, but fixed Internet also surpassed our expectation for the period. In fixed Internet, subscriber dynamics were shaped by seasonality, Ramadan and largely unchanged competitive and pricing environment over the first quarter. Fixed broadband base was flat around 15.4 million, led by the Retail segment, we recorded 53,000 net additions. It would be reasonable to expect the impact of the latest pricing action in the retail market to become more visible in the second quarter. Overall churn rate dropped both Q-on-Q and year-on-year. On the Mobile front, subscriber acquisition remains a high priority for all operators in Q1, but it would be fair to say competition rolled back a bit from at times in December. A better-than-expected performance, the Mobile segment added 511,000 subscribers on net basis with another stunning quarterly performance, pushing up the total base to 27.9 million. While postpaid segment added 593,000 subscribers in a repetitive trend for quarters prepaid segment posted an 82,000 net loss both performing better than we expected. Fueled by the postpaid segment, the number of new acquisitions recorded the highest first quarter performance since 2014. Prepaid acquisitions also compared higher to same period of last year. Blended churn rate dropped year-on-year and compared favorably to our expectation. Slide 5, Fixed broadband performance. In accordance with our focus on ARPU growth, we took the first pricing action of the year and revised Fixed broadband tariffs in the retail segment on March 17th. We have seen very few competitors follow suit so far. We have extended the contract structure to 18 months from 15 months in new sales as this inflation continued. Finally, we have submitted our application for a price revision in the wholesale segment to the regulator. Pre-contracting performance beat our expectation, whereas up-selling remained quite strong. Volumes in both exceeded the levels seen in the same period of last year. We aim to take benefit of the higher volume of contract renewals during 2025 in order to support ARPU growth through recontracting and up-selling. Robust demand for high speed prevailed in the first quarter. 50 megabits and above packages made packages made 72% of new sales and 54% of recontracting. Average package speed of our subscriber base increased by 48% year-on-year to 74 megabits. 51% of our subscribers now use 50 megabits and above packages compared to 38% a year ago. The share of fiber subscribers in our total fixed broadband base increased to 90% from 86% a year ago. Surpassing prior quarter's performance, Q1 ARPU increased by a remarkable 19% year-on-year, that combined with a 1% growth in average subscriber base produced a solid 21% rise in FBB revenues. Moving on to mobile performance, Slide #6. Speaking to dynamic pricing, all operators took the first pricing action in January but tried to balance subscriber dynamics with promotional campaigns over February and March. Once again, the activity mostly shaped around the postpaid segment, but we have seen some momentum in the prepaid segment also. In some cases, campaigns were very effective in pricing and stayed open for quite extended periods of time. The MNP market also contracted from the last quarter after hitting its record high volume in December but kept advancing on an annual basis. We recorded the highest net quarter volume of the past 11 years in January, which was a relatively milder period in competitive pressures. Following this spectacular performance, we stayed on top of the MNP market as the most preferred mobile operator on a consistent basis. Postpaid net adds in the last 12 months totaled 2.1 million, reaching a historic high and growing the postpaid sales by an overwhelming 11% year-on-year. The ratio of postpaid subscribers in total portfolio climbed to 76% as of Q1 compared to 72% a year ago. In a strong trend, mobile blended ARPU showed no signs of dilution despite quarters of strong net subscriber additions, proving that we keep expanding our subscriber base in a fine balance. The 19% year-on-year increase in blended ARPU was a combination of 24% growth in postpaid ARPU and 10% contraction in prepaid ARPU. That, together with a 5% growth in average subscriber base produced an impressive 24% rise in mobile revenues. On Slide #7, let's take a look at how Q1 figures compared to our full year guidance. We are highly satisfied with the first quarter performance, which put us on track with our annual targets. The ongoing disinflation process has nicely supported the operational performance along with a strong revenue generation versus a relatively mild OpEx evolution in Q1 '25 despite the regular employee salary adjustment we implemented at the beginning of the year. 18% operating revenue growth and 39% EBITDA margin bodes well with our full year guidance, pointing to respective range of 8% to 9% and 38% to 40%. 18% CapEx intensity in the reporting period is yet distant to our 28% to 29% guidance range, but this is due to the typical seasonality in our CapEx spending, implying a slower pace in early months and an acceleration later in the year. Although Q1 results seem to pose upside risk to our full year guidance, particularly at the margin front, we prefer to observe the next quarter performance as well as the domestic and global macro environment before we consider any revisions. Before I conclude my presentation, I am pleased to confirm that we are now working on the final steps of renewing Türk Telekom's fixed line concession agreement together with related parties. As Mr. Simsek of the Ministry of Treasury and Finance, which holds 25% stake in our company has recently stated the concession period will be extended, leaving no doubt around the direction and nature of the progress in this matter critical for Türkiye's digitalization agenda. We are confident that the outcome of this healthy process will prioritize public benefit, sector requirements and Türk Telekom's mission to create value for its stakeholders on a consistent and sustainable basis. I would also like to take the opportunity to introduce Omer Karademir, our recently appointed CFO, who has taken over the role from Kaan Atkan. Omer has joined us from the Ministry of Treasury and Finance and holds a great deal of experience in asset liability management, risk management, liquidity management and capital allocation. I want to thank Kaan for his remarkable contribution to Türk Telekom over his long years of dedicated service. He will remain an adviser to Türk Telekom for some time to ensure a smooth transition of the strategic growth. Thank you. Omer, the floor is yours now.

Thank you. Good morning, and good afternoon, everyone. Well, thank you for such a warm welcome. I am truly pleased to be part of this big family and will be working hard with my colleagues to contribute to Türk Telekom's strategic growth. We are now on Slide #9, financial performance. Consolidated revenues surged to TRY 46 billion from TRY 39 billion a year ago on a strong growth trend, exceeding 18%. Revenue growth was slightly ahead of our budget, which incorporates a faster pace for the top line in the first half and a moderating one in the second half given last year's base effect in opposite direction in the same period. Excluding the IFRIC 12 accounting impact, Q1 revenue was TRY 44 billion, ahead of our expectation and up nearly 18% year-on-year, including increases of 21% in fixed broadband, 24% in mobile, 16% in TV and 31% in corporate data, as well as contractions of 9% in international, 2% in fixed voice and 6% in other segments. Fixed Internet and mobile have once again led growth together making 76% of operating revenue. The 2 lines of business made the largest contribution to growth with more than TRY 6 billion higher revenues in total year-on-year. ARPU evolution remains robust, thanks to continued subscriber expansion, pricing actions and healthy up-sell performance, that combined with respective average subscriber base expansion in excess of 1% and 5% in fixed Internet and mobile has driven the robust revenue performance. Growth in corporate data and equipment sales can largely be explained by price adjustments. Whereas contraction in ICT solutions is mostly attributable to an expectedly milder year in general, driven both by the high base effect and anticipated sector dynamics. Additionally, some revenues shifting into the next quarter amplified the first quarter softness. In our international business, the change in euro exchange rates remained well behind the annual inflation rate, pressured the performance in dollar terms. Continued erosion in the voice segment also led overall revenues lower year-on-year. Moving down to EBITDA, direct costs rose yearly by 6% year-on-year with interconnection cost and equipment and technology sales cost coming down by 6% and 21%, while taxes and cost of debt going up 22% and 17%, respectively. The decline in interconnection cost was driven by currency and inflation accounting impact. The drop in equipment and technology sales cost was parallel to contracting revenues from ICT solutions offered by Türk Telekom and its subsidiary Innova in the period. Tax expense rose in parallel with mobile revenue growth. Commercial costs went up by 13% year-on-year and other costs by 16%. Annual change in commercial costs were once again primarily driven by higher spending on marketing, advertising, brand and corporate communications. Under other costs, network expense remained flat year-on-year in the absence of any electricity tariff hikes within the first quarter, while personnel costs rose by 15%, largely owing to the regular nonunion person salary adjustment we take at the beginning of the year. Semiannual adjustments to union personnel salaries for the period covering September 2024 and February 2025, has also taken effect starting from March as per the terms of the agreement we announced back in November. Consequently, OpEx to sales ratio dropped below 61% from 63% in first quarter of 2024 and stayed nearly flat quarter-on-quarter thanks to continuously improving operational leverage. As a result, consolidated EBITDA grew 27% annually to TRY 16 billion from TRY 14 million in the same period of last year, along with a strong 260 basis points margin expansion year-on-year to above 36% mark. Excluding the IFRIC 12 accounting impact, EBITDA margin was slightly ahead of 40%. Recall that we had changed the calculation of amortization expense in last quarter. Accordingly, we had amortized the related intangible fixed assets either throughout their remaining useful life or throughout the expected expansion period of the fixed line concession agreement, whichever shorter. The so-called adjustment was applied for the amortization expense of related assets starting from 2024, but was recorded as a onetime adjustment in Q4. We have now restated Q1 2024 depreciation and amortization line for the adjustment in order to present Q1 2025 financials on like-for-like basis. Accordingly, we recorded TRY 8 billion operating profit, up 93% year-on-year, once again this slide is our robust performance. Coming to the bottom line, TRY 5.5 billion of net financial expense was 29% lower in single comparison, but 4% higher on quarterly basis. Annual trend can be explained by a 17% increase in U.S and Euro currency rates on average, well behind inflation. Lower net debt in -- has operational performance and free cash flow generation also helped. However, the quarterly change in exchange rates was about 9%, again largely intuitive for the trend in net financial expense quarter-on-quarter. Hedging costs have also gone up a bit due to recent volatility in financial markets. Obviously impact should be more visible from second quarter of 2025 onwards along with CBRT's recent tightening. We recorded TRY 3.5 billion of tax expense in total, largely driven by the deferred taxes leading to 41% effective tax rate. The variation from the ordinary cost of tax rate was largely driven by the indexation of last year's tax assets to Q1 2025 as per the inflation accounting principles and the gap between PPI and CPI. As a result, we generated TRY 5 billion of net income in the first quarter growing by more than 45% annually. Moving down to Slide #10, TRY 18 million of CapEx spend pointed to a 28% increase year-on-year owing to last year's significantly low base. CapEx intensity stood close to 18% for the period. Moving to Slide #11, debt profile. Net debt over EBITDA has inched down to 0.0x (sic) [ 0.73x ] from 0.8 a quarter ago. Cash and cash equivalents of which 41% is FX rate, totaled TRY 8 billion. The share of local currency borrowings within the total debt portfolio was 6%. The FX exposure included U.S. dollar equivalent of $1.7 billion of FX denominated debt, $1.4 billion of total hedged position and $90 million of hard currency cash. The hedged amount included a mere USD 20 million equivalent of FX-protected time deposit, expectedly down from $260 million a quarter ago. As the fixed deposits it offered, and this process is deposits. In fact the balance rooted entirely is niche as of April. We are now on Slide #12. We closed Q1 USD 200 million short FX postion. Excluding the ineffective portion of the hedge portfolio, mainly the participate in cross-currency swap contract, our short position was USD 280 million. According to the sensitivity of the profit and loss statement to exchange rate movements, a 10% depreciation of TL would have negative TRY 1 billion impact on Q1 PBT, assuming all else constant. Similarly, a 10% appreciation of TL will have a positive TRY 1.1 billion impact. Finally, we generated close to TRY 8 billion of annual free cash flow in Q1, strong operating performance and collection of remaining insurance coverage for the 2020 proceeds led a tripling free cash flow year-over-year. This concludes my presentation. We can open up the Q&A session.

[Operator Instructions] The first question comes from the line of Singh Madhvendra from HSBC.

Congrats on great set of results. Just two questions from my side, firstly on revenue growth, your guidance is high single digit kind of revenue growth but you have delivered really strong double digit growth. So I was wondering whether you are being conservative in guidance or are you expecting any significant slowdown in the coming quarters? So if you actually could talk about that. The second question is on margin. You already had the salary hike and your margins are almost close to 40% level. I suspect the salary hike came later in the quarter. So do you expect this margin level to be sustainable going forward? Or do you see some impact on margins in coming quarter because of the salary hike?

In our guidance, as we have discussed and as we have stated in our speech, our guidance for the revenue growth was 8% to 9%, but the realization is somewhere around 17%. We are not conservative, but as you may expect, it's too early to make a revision in the very first half of the year. But what is behind this -- if you are asking what is behind this high revenue growth, we can say that one reason for that is the last year's low basis. And the other one we can say the inflation expectation. And last but very important one, the operational income growth slightly above our expectations, with the balanced management of subscriber and ARPU. So these 3 main indicators impacted high growth than our year's guidance. But we should wait since we have -- we are closely monitoring the market and the international global development at the moment.

Let me add a few things on top of that. I think what's really important here is 8% to 9% for the full year. And remember that last year, we grew the operating revenues by 7% in the first half and then it accelerated to 17% in the second half of the year. So that is the kind of thinking that you should be forecasting for this year's first half and the second half taking this effect into account. Also, I mean, we said explicitly in our press release that the revenue growth so far has been a little bit ahead of our expectation, thanks to very strong pricing, subscriber growth and upsell and recontracting activities. But also, I mean, there have been some local and international developments that keep us a little bit conservative about the inflation outlook, and as you follow -- I mean, it's good that the Central Bank is still keeping the tight monetary policy, they increased the -- they did a tight rate hike, but also I mean they are considering perhaps inflation and that is affecting the inflation adjusted numbers in our forecast overall. So that is why we do acknowledge that the results point to some upside risk, but I think it's reasonable in this kind of an uncertain environment to wait a little bit and consider revision in the second half journeys. With regards to your question about the margin, basically the wage effect has entered to the results -- first quarter results for the nonunion salaries, personnel salaries starting from January. And then the adjustment has been made in March. So that will be seen in the second quarter of the year more so. But I mean, I don't think there is a significant downside risk to EBITDA margin. I mean we did again say in the press release that some of the costs lag a little bit. So we do expect them to accelerate starting from the second quarter, but that is in line . So 38% to 40% range is still viable, and we started the quarter at 39%, which is very, very strong. But I think I mean unless there is any surprises, negative surprises in the macro outlook, we do not expect any downside risk to that -- to those numbers.

And maybe for the margin side, I can make some consolidation on that. The expected increase in electric tariff also was later than we expect. So we haven't seen the impact of this expenditure in the first quarter of the year.

The next question comes from the line of indiscernible] with Barclays.

Congrats on results. I have just maybe one question. So previously, you were thinking about potentially coming to the market later this year depending on the concession renewal and 5G tender, et cetera. So given the current debt levels and just where the rates moved, what are you -- how are you thinking about potential issuance? Are you still considering it? Or would you consider other sources of funding in case you need to?

Based on your financing, our net debt over EBITDA is available. It is 0.7 for this quarter. So thanks to our case generating operations, we don't need -- we haven't need to borrow up to now for our operations. But upcoming 5G and renewable concession, yes, we will need to borrow from the market, but we are still monitoring and following the model and calendar of this operation based on the magnitude of these two main items, we are going to make the exact plan of our financing but we have several options on that. We can borrow from international markets as we have made last year as EUR 500 million bonds. We can also borrow from [indiscernible] and we have limits in domestic markets. Still, we have limits in domestic markets. And we have other financing instruments as ECA. So there are lots of options and the market is reachable and the creditors have demand to support financing to us.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. Let me now turn the conference over to Türk Telekom's management for any closing comments. Thank you. Excuse me, apologies for the interruption, we do have one last question from Demirtas Cemal from Ata Invest.

Congratulations for good results. My question is again related to concession and of course 5G. Do you have any models working on that? From the previous experience, I don't know maybe it's early, but at least when do you think we will have at least some picture, color on the potential for possible cases after 2027? At some point, are you going to share something on that more clear about that side because we have been expecting this year at some point, but I see that maybe because of some other reasons, it's not coming soon. But at what time we are going to be more confident about the direction or the potential costs related to concession and of course the 5G? I know it's very early maybe, but at some point, we need to go forward and the investments, for instance, how the investment to net sales will evolve going forward in case -- any example you have in -- I see some small concession agreements with more smaller populations but when do you think we will have at least some picture or ability to picture the situation?

Thank you for the question. I think you're right. But let's remember that the concession expiring on February '26. So we're hoping that this will be concluded this year. I think what we have communicated with you has been very consistent so far. We said that we are working on a process of extension or the renewal of the concession. And this was the only process that we have communicated with the investors and the analysts, although there were different news from here and there. Therefore, in that sense, I mean, we do think that the Treasury and Finance Minister's latest statements about the expansion of the concession agreement very valuable showing that the direction and the nature of the project is very important agenda for Turkey. Remember that this was an agreement reached in 2001 and it will be agreement renewed for the next 20, 25 years, so the discussions are being held very carefully and it's taking a little bit time to bring every one to a consensus. Again, I mean, so far what we have communicated is there will a formula, and this is really going to be a formula that every one is speaking for, the golden formula that will prioritize Türk Telekom's financial sustainability, healthy consumability and also healthy investment trajectory. And that is very important to us because we have so far -- had largest investor in this domain and we want to perfect that position. So these are the very discussions that we are speaking about. The model is really -- we don't know if we would share with you. But the alternative as -- CEO has several times mentioned in the past, it can be a lump sum payment, can be a revenue sharing model or it can be a combination of both but will not -- it will be driven by Türk Telekom's future plans in order to remain competitive in business and investment trajectory. So that's what I can share on the concession side. On 5G, I think this is more a sector thing rather than just Türk Telekom specific. We know that the agenda from again the Ministry of Transportation and Infrastructure is starting second half of the year and then are planned on that starting from next year. We are eagerly working on executive calendar. We've also stated that [indiscernible] so that's going to be the same band so that's going to be the main 5G frequency, it looks like, although not certain, also there are discussions around 126,000 in that frequency. So again, I mean, you know that we have included this year's number into our CapEx, but that only includes the preparation work. It doesn't include the tender CapEx which we will not know. So we are also eager to share calendar and the detail but what we know, we will share with you. I hope this is helpful.

Ladies and gentlemen, I will now turn the conference over to Türk Telekom management for any closing comments.

Thank you, everyone, for joining us today. We'll see you next time. Thank you. Bye-Bye.

Ladies and gentlemen the conference has now concluded, and you may disconnect your telephone. Thank you for calling and have a good afternoon.