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

Ladies and gentlemen, thank you for standing by. I'm Paulina, your Chorus Call operator. Welcome, and thank you for joining the Türk Telekom conference call and live webcast to present and discuss the second quarter 2026 and financial and operational results. We are here with the management team, and today's speaker is Omer Karademir, CFO. 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. Omer Karademir. Sir, you may now proceed.

Thank you, Paulina, and hello, everyone. This is Omer Karademir, Türk Telekom's CFO. Welcome to our 2026 second quarter results conference call. Thank you for joining us today. Let's go to Slide #3, financial and operational overview slides. First, I will start with a quick update on the quarter end markets. Overall, as Türk Telekom Group, we successfully closed the period with strong revenue growth and solid profitability despite global geopolitical tensions and macro impacts. Building on this strong first half, we are excited about the second half and full year growth prospects for our revenue and net profit. As you all know, geopolitical tensions continue to impact global markets, resulting in higher energy prices and inflation risks. U.S. has left its policy rate unchanged at its April and June meetings. In Turkey, annual CPI rose to 32.6% in May before easing to 31.8% in July. Central Bank kept its policy rate unchanged at 37%. Year-end inflation expectations rose to 29.2% in July 2026 market participants survey. In this volatile environment at Türk Telekom Group, we remain focused on sustaining our strong operational and financial performance through our disciplined and proactive approach. On the mobile business side, following the nationwide launch of 5G in Turkey on April 1, we introduced 5G to our subscribers with enriched tariff options. Rational competition continued in the mobile sector in the second quarter. Operators implemented price revisions in April and July. On the fixed Internet business side, we introduced new prices in retail segment in June and in the wholesale segment in July. Now on the group's financial results. Consolidated revenues increased by 9% to TRY 73 billion. Excluding the IFRIC accounting impact, revenue growth was 6%. EBITDA grew by 5% to TRY 29.4 billion with 40.4% EBITDA margin. As you know, IFRIC 12 revenues are investment driven and have relatively lower margin. In Q2, strong growth in IFRIC 12 revenues impacted EBITDA margin. Excluding IFRIC 12 impact, our EBITDA margin is 43.3%. EBITDA margin percentage expanded by 60 basis points year-on-year in the first half. We recorded TRY 6 billion net profit in the quarter. It declined 7% year-on-year and impacted by our long-term 5G fiber and license investments. CapEx, excluding solar investments and license stood at TRY 23 billion. It was higher in year-on-year terms due to 5G rollout and strong progress in fiber investments. Unlevered free cash flow stood at TRY 3.9 billion. This figure indicated a decline from TRY 9.4 billion in second quarter of last year, mostly as a result of higher CapEx. Net leverage remained flat in Q-on-Q basis and stood at 1x compared to 0.6x at 2025 year-end. In summary, I want to emphasize that these results once again demonstrate the strength of our diversified business model and disciplined financial management. Let's go to Slide #4, our customer information. Our total subscriber base reached almost 58 million with 455,000 net additions Q-on-Q. Excluding 125,000 loss in the fixed voice segment, quarterly net additions were 580,000. Fixed broadband subscribers declined by 24,000 Q-on-Q to 15.4 million. Retail broadband subscriber base expanded by 28,000 Q-on-Q. Thanks to our continuous efforts to improve our analytical tickets, our retail churn rate for the second quarter was the lowest recorded in the post-pandemic period. Mobile segment added 539,000 subscribers on net basis, pushing up the total base to 32.7 million. Activation and churn volumes were lower in a year-on-year basis, driven by rational competitive environment. Subscriber growth remains robust with 24,000 net additions, excluding 116,000 M2M additions. Let's move to Slide #5, our fixed broadband performance. We continued our strong double-digit revenue and ARPU growth in fixed Internet. We introduced retail price revisions for new acquisitions in January and June. Subsequently, we introduced the wholesale price revision effective from July 1. We have seen other ISPs adjusting their prices in June and July. Next wholesale adjustment is to be implemented in January 2027. First half, the contracting volume scored higher year-on-year despite last year's high base. ARPU growth remains solid at 15% year-on-year in second quarter. Combination of solid upsell and sustained contracting performance along with successful price implementation enabled us to maintain high growth. We expect strong ARPU trajectory to continue in the second half of 2026. Average package speed of our total subscriber base increased by 57% year-on-year to 124 megabits per second. 69% of our subscribers now use more than 50 megabit per second speed package compared to 54% a year ago. Moving on to mobile performance, Slide #6. In second quarter, we continued our mobile customer growth. However, our revenue growth impacted by higher inflation. Based on competitive environment visible by the end of 2025, in first half of 2026. Mobile number portability MNP market size declined both quarterly and yearly. Türk Telekom finished second quarter as the leaders in the MNP market. On the pricing side, revisions were made in January, April and July. Postpaid and prepaid segments added 415,000 and 124,000 subscribers, respectively. Ratio of postpaid subscribers in total portfolio rose by 3.5 percentage points in year-on-year and reached over 80%. Mobile ARPU, excluding M2M, declined by 6% year-on-year in the second quarter. We expect our growth momentum together with pricing actions taken so far to enable improved real ARPU growth performance in second half of the year. Okay. Now we go to Slide #8 for our group summary performance. On the revenue side, consolidated revenues expanded by 9% to TRY 73 billion. Fixed broadband, corporate data and ICT projects led this strong growth. Driven by the acceleration in fiber investments, fixed wire revenues rose strongly. Excluding IFRIC 12 impact, Q2 revenues exceeded TRY 66 billion, up 6% year-on-year, including increases of 15% in fixed broadband, 12% in TV, 17% in corporate data and 30% in other segments. Fixed Internet and mobile revenues together accounted for 77% of operating revenue. Fixed Internet made the largest contribution to growth with TRY 2.9 billion higher revenues in total year-on-year. Corporate data, IT solutions and equipment sales added a further TRY 2.7 billion. While call center and international resource revenues declined by a combined TRY 1.6 billion, mobile revenues were lower by TRY 692 million. ICT Solutions recorded significant growth supported by new projects won by our subsidiary, Innova. Moving on to EBITDA side. Direct costs rose 11% year-on-year. Commercial costs rose 43%, mainly due to one-off cost increases, while other costs remained almost flat year-on-year. Increase in commercial costs was driven by one-off spending in sales and corporate communication to support 5G sales and distribution channel. We can expect these costs to moderate in the second half. Within other costs, network expense increased by 22% year-on-year on higher technology maintenance and repair costs. 5% year-on-year decline in personnel costs can be explained by the reduction in headcount at our call centers due to project completions in the second half of 2025. The decline in interconnection costs was driven by contracting international voice revenues. EBITDA increased by 5% year-on-year to TRY 29.4 billion. EBITDA margin declined by 170 basis points year-on-year to 40.4%. Excluding the IFRIC 12 accounting impact, the EBITDA margin realized at 43.3%. Coming to our net profit slide. Net financial expense increased year-on-year and quarterly impacted by 5G and concession-related unrealized FX hedge and discount expenses. Hedge expenses were also impacted by increase in average hedge costs impacted by volatility in the global markets since the end of February. We booked TRY 423 million net interest expense in the second quarter compared to TRY 705 million net interest income in the first quarter as we made a payment of USD 1.1 billion in the first quarter regarding 5G and concession renewal. Monetary gain increased by 8% Q-on-Q to TRY 16 billion. Despite the inflation rate being lower compared to the previous quarter, driven by the fact that the concession asset was inflation adjusted for 1 month in Q1 '26 versus 3 months in Q2 '26. As a result, we recorded net income of TRY 6 billion for the period. Let's go to next Slide #9 to review our CapEx numbers. CapEx spending rose to TRY 23 billion in the second quarter compared with TRY 17 billion of last year on the back of 5G rollout expenditures and strong progress in fiber investments. Regarding CapEx breakdown, fixed line CapEx, especially fiber access and core network investments has 51% weight in total. 23% of spending went to mobile, while another 15% went to IT and project investments and the remaining 11% for other investments. In summary, our CapEx intensity for the first half realized as 29.1%. Moving on to Slide #10. You can see our debt profile. Türk Telekom Group's cash and cash equivalents totaled TRY 25.6 billion. The FX exposure included U.S. dollar equivalents of TRY 3.2 billion equivalents of FX denominated debt, TRY 2.8 billion concession and mobile license liabilities, TRY 3.4 billion of total hedge position and TRY 99 million of hard currency cash. Net debt over EBITDA increased to 1x from 0.6x as of 2025 end on the back of 5G and concession renewal payments. Net debt EBITDA remained flat on a Q-on-Q basis. In January, we paid the first installment of 5G license, USD 365 million plus USD 219 million as VAT and the VAT amount of concession extension worth of USD 500 million. By the end of the year, we will pay the second installment of 5G license and the first installment of concession extension. The VAT payments will be net of. I want to highlight that our increased FX liabilities are driven by long-term investments in 5G spectrum and concessions. These future payments are extended over a long-term horizon until 2035, and all settlements will be made in Turkish lira equivalents. Additionally, we actively mitigate our currency risk exposure through targeted hedges. Last but not least, concession and 5G assets are revalued under inflation accounting and hence, creates monetary gains, which as a result, balance P&L impact overall. We are now on Slide #11, where we provide update on our cash flow and FX exposure. We recorded USD 2.4 billion short FX position compared to USD 102 million as of year-end duty booking of USD 2.8 billion 5G and concession renewal liabilities. Excluding those payments, our net FX loan position is positive USD 331 million. Finally, we generated TRY 4 billion of unlevered free cash flow in Q2 compared to TRY 9 billion in the same period of last year. Annual decline is mostly due to higher CapEx spending for 5G rollout and fiber investments. Moving on Slide #12, we provide updates on 2026 full year guidance. In first half year, our operational revenues were realized in line with our expectations in nominal terms. However, real growth impacted by higher inflation. As a result of our actions in pricing and growing business, especially in ICT, we expect the annual operational revenue growth to accelerate in the second half of the year. Hence, we expect to finish the year at 8% real revenue growth. Our first half EBITDA margin increased by 0.6 percentage points year-on-year to 41.3%, remaining within our guidance range of 41% to 42%. We maintain our guidance on the EBITDA margin. Considering the pace of progress in our fixed line investments as of the first half of the year and macro and inflation impacts, we expect our full year CapEx intensity to be realized at 34% at the upper end of our 33% to 34% previous guidance range. In summary, we are confident about our revenue growth, EBITDA margin and investment intensity outlook and excited about the second half growth potential. This concludes my presentation. Thank you for listening. Now we can open up the Q&A session.

[Operator Instructions] The first question is from the line of Maddy Singh with HSBC.

I have three questions, if I can ask. The first question is on the revenue performance in mobile, decline of around 2% in the quarter. So I was wondering what is the driver behind that? And is that a trend we should expect in the coming quarter as well? So that's the first question. Second question is on the guidance. Given that your first half growth is about 5.6% and the full year guidance of around 8%. So you were expecting some significant acceleration in second half. If you could talk about what is driving that optimism? Is it pricing? Or is it usage? So please, if you could give some color there? And then on the commercial cost increase, if you could break it down in terms of how much is purely because of 5G? And how long is that going to continue during this year?

Thank you for the questions. First, for the revenue performance of mobile, I want to start with your first question. The main reason behind the growth performance is coming from the macro side. This is inflation. The inflation increased higher than our expectation, not just our company's expectation, but also the CBRT and other actors. So that is one of the first reason for the mobile performance. And additionally, you will remember that because of the last year's competitiveness in the market impacted the prices in mobile market. But for -- at the beginning of this year, we have made price revisions. In January, it is 30% in April, it is 14%. In January, it is 30% -- in April, this is 13%. And in July, it is 16%. And we are expecting to see their effect in second half of this year, the price revisions. And in our operational results, you see we are the first in MNP market, and we are now at a second operator in the market. So we are expecting to -- we are expecting both the ARPU growth and revenue growth will be positive in the second half compared to the first half. The main reason is coming from the price revisions that we have taken. Since the subscriber base, the split of the price revisions will take some time in subscriber base. But second half, we will see the concrete results. About your second question about the revenue growth guidance, you have stated it was -- it is 5.6% in first half and the revised guidance is 8%. And wondering our acceleration for the second half. Firstly, there's a base effect for the first half of the year. And the inflation realization for the first half was higher than our expectation. As I stated in your mobile performance, mobile revenue performance question, it is the same for our revenue growth. The price actions not we have taken for the mobile, we have also taken for the fixed broadband side in January for the retail side, the price revision is 20% for January. For June, it is 30% for the retail side. For the wholesale side, in July, 1st of July, it was effective, it is 38%. So we will also see the impact of this price revisions in the second half of the year. I want -- I have to emphasize that the first half growth are in line with our budgetary expectation. And as I stated for the mobile sector, these pricing actions will impact the subscriber base. It will take some time, as you may expect. And we are expecting these actions offset negative impact of both elevated inflation and we are confident to reach our revenue growth. And in addition to that, for the ICT side, we have new business opportunities for ICT project business line. We expect the additional operational revenue growth from that side. So we are confident for our current revenue growth guidance. And your last question considering the increase in commercial cost. Our year-on-year increase in commercial expenses is TRY 1 billion. The increase specific to Q2 and we are considering as a one-off since the launch of 5G, both commercial activities impacted an increase on this commercial costs to support our trading activity, both mobile and fixed. And additionally, we can say sales and distribution channel support. So we are not expecting this to continue in the following quarters, and we expect it return to normal trend.

The next question is from the line of Evgenia Bistrova with Barclays. Please go ahead.

I have just two questions. So my first question, there were some news, and I think you've published like a press release on KAP regarding potential sale of Sukuk debt up to USD 1 billion abroad. Any color on that on the timing and the size and the use of the proceeds would be very helpful? And my second question is related to CapEx on the fixed broadband side. And maybe I'm just not fully understanding the reasons for the increased CapEx because when I think you announced the concession renewal, the message was that the expected investments in the infrastructure will be more or less in line with the historical investments on the fixed side. And now we are seeing a significant increase, obviously, this year. So do you expect the investments to normalize in the next several years? Or is this like the new normal level of CapEx that we can expect going forward?

Thank you, Evgeniya. For your first question concerning our possible Sukuk transaction. We had financing program last year, it has a total of USD 1.8 billion in order to cover our license payments of 5G and concession license. And we have still limit for both Sukuk and Eurobonds that we have issued last year, but we are not planning to tap the market for the remaining limits that we have the consent of Capital Markets Board. It was USD 1 billion and for 1 year validity, as you remember, the transaction was USD 600 million. The remaining is USD 400 million available from that. But we are not planning to tap the market for this existing Sukuk and it expires in September. So the first intention to renew our consent from Capital Markets Board, and it is still for USD 1 billion as a limit. We are not expecting to use this whole amount. The basic motivation for this financing is to cover the next year's license payments since we are covering all the payments of this year and half of the next year's license payments for 5G and concession. So the basic motivation for the Sukuk issuances to cover the next year's payment. For the size, yes, of course, the size will be determined Through the market appetite and the cost, these are important. We are going to look at the pricing and market appetite and this will be important for the size. And we have other alternatives in addition to Sukuk. We are access to different markets. We tapped the market for Eurobonds last year. We have access to Gulf region and we have ECA facilities. In addition to these financing opportunities, we have also access to international financial institutions. Concretely, we are now negotiating with EBRD and ADB as multilateral funding sources. And we have also ability to borrow from the local market. So there are different alternatives, and we have to optimize with the cost and the investors' appetite. For your second question on CapEx spending. Last year, our CapEx intensity ratio was 29%. And our historical levels are something on 20s. We are saying that we will reach these historical levels in a period of time. But for this year, the main reasons -- the increase in CapEx ratio is both 5G and the renewal of concession, mostly CapEx spending. So we are expecting normalizing in future years. I mean, next year or 2028, we are expecting it to be lower than this year. But for this year also, we have 5G rollout that also increased the CapEx ratio compared to last year. And our fiber also supports mobile network. We are connecting our 5G bands with the fiber. So this year is an exceptional year. We have to say that.

The next question is from the line of Cemal Demirtas with Ata Invest. Please go ahead.

My question is related to your investments and the license and concession fees. We see gradual increase in your depreciation expense side. And as of maybe second quarter, could we assume that this depreciation expense will continue to increase throughout the quarters? As your spending goes. How should we think about that? Because already in the second quarter, or should we assume that all the costs are capitalized in second quarter and this will remain stable? I would like to understand that part. And the other question is about the financing side. Again, should we assume that we had -- we saw the full impact of the higher debt burden on your financial starting by this quarter? And could we assume similar trend in the following quarters? That's my second question. The first one is about depreciation. The second is financial expense. And the third one is, what is the key topic on your side for the following 12 months as the top management of the company?

Thank you, Mr. Cemal. For the depreciation expense, Q2 run rate will continue. We have a full impact in Q2. So we may expect similar impacts in the following quarters. For your second question, concidering the financing side. The impact of the financial expenses increased by the payment of the license fees for 5G and concession. We have paid with the VATs $1.1 billion in first quarter. So that's why our both financial expenses and depreciation expenses increased. The key drivers behind financial expenses, we can summarize it like as a first reason, significant increase in FX and hedging expense on both a year-on-year and quarter-on-quarter basis, as I stated. And the second one, the conversion of net interest income into net expense on a quarterly basis following $1.1 billion, as I stated. That's the second reason. And the last, the discounted expenses because for the liabilities recognized on the balance sheet. But we expect a decline in hedging expenses in the second half of the year, in line with decrease in hedging costs. Since we stated that in first quarter investor call, we said that we are expecting an increase in the second quarter because of this geopolitical conflict, it impacted the cost of hedging. And we lead the increase of this hedging costs in Q2. But for Q3, we are seeing a decline in the hedging costs. So we are expecting a lower level of hedging costs in the financial expenses side. For your last question, the key topics on our mind are data centers is important. We are increasing our data center capacity. Right now, we have we have a capacity of 50 megawatts 50. And our new data center will be planning to build in Ankara. It is 82 megawatts, bigger than our -- almost 1.5x bigger than our existing data center capacity. And it will be -- we are expecting it to be operational in a couple of years. And we want to increase our size on this data center business. Artificial intelligence is also important. We are trying to use in our business, the solution of artificial intelligence, both commercial side and investment side. So that is important. And as the last, we are also prioritizing our cost optimization. Since we have commitments for the 5G and concession part, we try to make the cost optimization. And I want to make an addition for your second question also. Our total debt didn't change between Q1 and Q2. It is flat. That also -- that means our cash-generating business helps us to hold this level of debt. And after these license payments, we are also expecting a decline in our -- both leverage and net debt.

The next question is from the line of Yasin Sarihan with Yapi Kredi Yatirim. Please go ahead.

I have one question on mobile ARPU growth. So ARPU growth slowed in the first quarter and also continue at a similar pace this quarter, second quarter of this year. So I'm trying to understand the 5G contribution. So what second quarter mobile ARPU growth excluded 5G. And if there is a contribution from the 5G, how many points do you add to the mobile ARPU growth in this quarter? Because at this point, it is not apple-to-apple comparison because last year in the second quarter of last year, there were no 5G. And that's why I ask this question to understand the contribution of the 5G?