Turkcell Iletisim Hizmetleri: Third Quarter 2019 Results

“PROFITABLE GROWTH ON STRONG OPERATIONAL PERFORMANCE”

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 September 30, 2019 refer to the same item as at September 30, 2018. For further details, please refer to our consolidated financial statements and notes as at and for September 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 third quarter and nine months 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

THIRD QUARTER HIGHLIGHTS

• Solid set of financial results delivered:
  • Revenues of TRY6,587 million, up 14% year-on-year and 43% on two-year cumulative basis
  • Turkcell Turkey revenues up 15% to TRY5,652 million
  • EBITDA of TRY2,839 million, up 19% leading to an EBITDA margin of 43.1%
  • EBIT of TRY1,641 million, with a strong EBIT margin of 24.9%
  • Net income more than tripled to TRY801 million on the back of strong operational profitability
  • Leverage at 1.0x on 0.8x year-on-year improvement
• Strong operational momentum continued:
  • Mobile subscriber quarterly net additions of 526 thousand on 503 thousand postpaid net additions
  • Mobile ARPU³ growth of 17.6% year-on-year, like-for-like ARPU⁴ growth of 20.1%
  • Superbox⁵ subscribers at 217 thousand, on 88 thousand quarterly net additions
  • All time high residential fiber ARPU growth of 19.8% year-on-year
  • Multiplay with TV subscriber ratio⁶ at 52.2% on 4.7pp year-on-year rise
  • 4.5G users’ data usage at 10GB in Q319
  • 19.6 million 4.5G compatible smartphones on our network, up 0.7 million quarter-on-quarter
• TRY1,010 million of dividends to be distributed on October 31
• 2019 Group guidance⁷ reiterated; revenue growth target of 17%-19%, EBITDA margin target of 39%-41% and operational capex over sales ratio⁸ 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) Superbox subscribers are included in mobile subscribers

(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 2018 filed with U.S. Securities and Exchange Commission, and in particular, the risk factor section therein.

(8) Excluding license fee

For further details, please refer to our consolidated financial statements and notes as at and for September 30, 2019 which can be accessed via our website in the investor relations section (www.turkcell.com.tr).

COMMENTS BY MURAT ERKAN, CEO

We have concluded a quarter of continued profitable growth on strong operational performance. We are achieving the positive results of our strategy, which we reviewed towards further customer centricity. Accordingly, while gaining over half a million new subscribers, the average revenue per user has also increased both in mobile and fixed broadband.

Our consolidated revenues were TRY6.6 billion, while EBITDA¹ reached TRY2.8 billion, delivering a 43.1% EBITDA margin. Net income more than tripled that of last year’s, reaching TRY801 million. With these results, we generated TRY18.5 billion in revenues on a 17.8% yearly increase and TRY7.7 billion in EBITDA on 17.2% growth in the first nine months. These results conform to our plans and we reiterate our 2019 full year guidance²; revenue growth target of 17%-19%, EBITDA margin target of 39%-41% and an operational capex to sales ratio³ of 16%-18%.

Our postpaid subscriber base grew by over half a million

We have set a new record in postpaid subscriber acquisition with our innovative offers responding to customer needs. As a result, our subscriber base increased by 526 net mobile subscriber additions. Total postpaid subscribers reached 19.4 million, to 56% of the total. Our strategy of satisfying customer hearts and minds by delivering unique, artificial intelligence-backed offers has underpinned this success.

Having one of the widest frequency bands and fastest mobile networks in the world enables us to offer the latest technology products such as Superbox⁴. Turkcell remains the first and only operator in Turkey capable of providing an FWA product offering fiber-like speed over a mobile network. Superbox subscribers increased by 88 thousand this quarter at an accelerated pace, reaching 217 thousand in total. Furthermore, our fixed broadband subscribers reached 2.2 million with 29 thousand net fiber subscriber additions. Multiplay with TV+ users⁵ rose to 52.2% of fiber residential subscribers.

Upsell to higher tariffs on increasing data demand per user, demand for digital services and increasing postpaid subscriber base have all reflected to ARPU levels. Mobile ARPU⁶ rose 17.6% yearly to TRY45.5, while fiber residential ARPU recorded all-time-high growth of 19.8%, reaching TRY68.4.

We are taking firm steps in three key strategic focus areas

We believe that achievements in three strategic areas defined in early 2019 will be the drivers of meeting our long-term targets. New services in corporate solutions, expansion of and partnerships for Paycell services, the expansion of Financell’s target customer segment and the advancement of digital services with differentiating features confirm our leadership in these areas.

In digital business solutions, a key focus area, we serve the digital transformation of both private and public sector companies on our strong network and through our analytical capabilities. In this regard, we have further invested in our data center business, a major pillar of our infrastructure. We have planned the inauguration of Turkey’s largest data center in Ankara for November 1^st, 2019. This environmentally friendly green building on 12 thousand m² white space will enhance our data center portfolio. With rising data storage capacity, we aim to serve Turkey’s digital transformation with our services.

The fifth city hospital, to which we provide integrated information technologies infrastructure within the framework of our digital business solutions, has commenced operations this quarter. Located in Bursa, the hospital is built on advanced technological infrastructure, enabling communication between medical devices. We proudly deliver Turkcell quality to city hospitals’ digital infrastructure, powered by our Hospital Information Management Systems software.

This quarter, we have also launched a new business model that enables our corporate customers to lease smartphones. Taking this model one-step further, we now also offer financing for corporates through Financell for their smart device and other technology needs, advancing their “digital transformation”.

Our innovate service in tech-fin, Paycell, is now advanced with new integrations. Meanwhile, our meal card investment, Paye Kart, is now an accepted payment alternative across a wider network. Welcome at over 7 thousand locations, Paye Kart also serves as a travel card for İstanbul. Having accomplished the integration of istanbulkart into Paycell, we have expanded the benefits of both products.

Total financing provided by Financell for consumers purchasing technological products on Turkcell sales channels has cumulatively reached TRY14 billion. Accordingly, we have enabled some 5 million individuals to satisfy their technology needs.

We continue our innovative digital services approach

Our communication and life platform BiP, so far downloaded 39.8 million times, is equipped with new feature that differentiate it from the competition. With the latest advancement, BiP users can make voice and video calls on alternative devices through the web even when if their phones are unavailable.

Continued focus on a robust financial structure

Financial markets have been mild and rather positive amid the macroeconomic rebalancing in the third quarter. In this environment, we have continued to strengthen our balance sheet with prudent financial management and cash generated through operations. As at the end of September, the leverage ratio improved by 0.8x year-on-year, down to 1.0x, widening the gap between ourselves and the peer group.

We aim to implement our sustainability approach across our entire business

Reflecting the sustainability focus of our business model, we have registered another first for Turkey with the wider use of the portable solar site. This environmentally friendly site is used for quality communication in those regions of seasonal population that lack a significant energy supply. With our investment in renewable energy technologies, we now have a capacity of producing around 480 MWh of electricity per annum though alternative energy sources.

We will announce our 3-year plans in London

We plan to announce and discuss our three-year targets, which we recently reviewed, as well as our strategic priorities on November 12, 2019 in London at the Turkcell Capital Markets Day.

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) Superbox subscribers are included in mobile subscribers

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

(6) Excluding M2M

FINANCIAL AND OPERATIONAL REVIEW

Financial Review of Turkcell Group

(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 and the respective fair value gain and interest income regarding derivative instruments are represented on a net basis. 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 this change.

Revenue of the Group rose 13.6% year-on-year in Q319 mainly driven by the strong ARPU performance of Turkcell Turkey on the back of rising data and digital services usage of subscribers and upsell efforts.

Turkcell Turkey revenues, comprising 86% of Group revenues, rose 15.2% to TRY5,652 million (TRY4,907 million).

– Data and digital services revenues grew by 21.9% to TRY3,806 million (TRY3,123 million).

• Rising number and data consumption of 4.5G subscribers, increased digital services usage along with upsell to higher ARPU offerings were the main drivers of revenue growth on the mobile side.

• The main drivers on the fixed front were the increased ratio of multiplay subscribers with TV, upsell efforts and price adjustments.

– Equipment revenues rose to TRY470 million (TRY419 million).

– Wholesale revenues rose to TRY327 million (TRY320 million) on the back of increased carrier traffic.

Turkcell International revenues, at 8% of Group revenues, rose 23.8% to TRY525 million (TRY424 million), mainly driven by the strong ARPU performance of lifecell and BeST on the back of rising mobile data revenues.

Other subsidiaries’ revenues, comprising 6% of Group revenues, which includes information and entertainment services, call center revenues and revenues from financial services were at TRY409 million (TRY468 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 the first nine months of 2019 in relation to Azerinteltek operations.

– Our contract with Spor Toto to carry out sports betting operations in Turkey has ended as of August 28, 2019.

– Our consumer finance company’s revenues were at TRY218 million (TRY252 million) in Q319. Revenues were impacted by the decline in the consumer loan portfolio, from TRY4.8 billion as of Q318 to TRY2.7 billion as of Q319, due mainly to the installment limitation on consumer loans for telecom devices.

Cost of revenue (excluding depreciation and amortization) decreased to 46.8% (47.8%) as a percentage of revenues in Q319. This was mainly driven by the decline in consumer finance business cost of funding (1.5pp) and Universal Project costs (1.0pp) despite the rise in other cost items (1.5pp) as a percentage of revenues. Please note that Universal Project is aimed at covering unserved rural areas and realized at cost.

Administrative expenses were at 2.8% (2.8%) as a percentage of revenues in Q319.

Selling and marketing expenses declined to 5.4% (6.3%) as a percentage of revenues in Q319. This was mainly driven by the decline in selling expenses (1.2pp), despite the rise in other cost items (0.3pp) as a percentage of revenues.

Net impairment losses on financial and contract assets increased to TRY126 million (TRY109 million) in Q319.

EBITDA¹ grew by 18.6% year-on-year in Q319 leading to an EBITDA margin of 43.1% (41.3%). This was driven by the increased share of telecommunications services revenues and effective opex management.

– Turkcell Turkey’s EBITDA rose by 16.8% to TRY2,392 million (TRY2,048 million) leading to an EBITDA margin of 42.3% (41.7%).

– Turkcell International EBITDA² increased to TRY236 million (TRY151 million) leading to an EBITDA margin of 45.0% (35.5%).

– The EBITDA of other subsidiaries grew by 8.3% to TRY211 million (TRY195 million).

Depreciation and amortization expenses increased by 22.8% in Q319 year-on-year.

Net finance expense decreased to TRY521 million (TRY869 million) in Q319. This was mainly driven by lower net foreign exchange losses after hedging despite lower interest income on bank deposits compared to Q318. 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 58.7% year-on-year in Q319. Please see Appendix A for details.

Net income of the Group ramped up to TRY801 million (TRY241 million) in Q319. This was mainly driven by a solid operational performance and lower net FX losses after hedging. Please note that, we booked a provision of TRY128 million for wireless tax related to 2018 and 2019 fiscal years in Q319 which had after tax net income impact of TRY116 million.

Total cash & debt: Consolidated cash as of September 30, 2019 increased to TRY10,975 million from TRY10,687 million as of June 30, 2019. Excluding the FX swap transactions for TRY borrowing, 72% of our cash is in US$, 17% in EUR and 11% in TRY.

Consolidated debt as of September 30, 2019 declined to TRY20,675 million from TRY22,062 million as of June 30, 2019 mainly driven by debt repayments of the consumer finance business and the impact of FX on foreign currency denominated debt. Please note that TRY1,544 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 TRY15,911 million, of which TRY9,321 million (US$1,647 million) was denominated in US$, TRY5,814 million (EUR940 million) in EUR, TRY204 million (CNY258 million) in CNY and the remaining TRY572 million in TRY.

– Our consumer finance company had a debt balance of TRY2,154 million, of which TRY1,139 million (US$201 million) was denominated in US$, and TRY601 million (EUR97 million) in EUR with the remaining TRY414 million in TRY.

– The debt balance of lifecell was TRY1,063 million, all denominated in UAH.

• TRY783 million of lease obligations is denominated in TRY, TRY18 million (US$3 million) in US$, TRY160 million (EUR26 million) in EUR and the remaining balance in other local currencies (please note that the figures in parentheses refer to US$ or EUR equivalents).

TRY11,072 million of our consolidated debt is set at a floating rate. Excluding consumer finance business borrowings, TRY6,321 million of consolidated debt will mature within less than a year.

Net debt as of September 30, 2019 was at TRY9,700 million with a net debt to EBITDA ratio of 1.0 times. Excluding consumer finance company consumer loans, our telco only net debt was at TRY6,975 million with a leverage of 0.7 times.

Turkcell Group has a long FX position of US$155 million as at the end of Q319. (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 TRY1,618 million in Q319. In Q319 and in 9M19, operational capital expenditures (excluding license fees) at the Group level were at 15.0% and 15.3% of total revenues, respectively.

(1) Breakdown of capex for Q318 has been restated

Operational Review of Turkcell Turkey

Contacts

Investor Relations

Korhan Bilek, Tel: + 90 212 313 1888

[email protected]

Corporate Communications:

Tel: + 90 212 313 2321

[email protected]

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