Turkcell Iletisim Hizmetleri A.S. — 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. Filed March 15, 2019; the filing reports annual results, not standalone 2018 Q4 financial figures. Financial statements are audited and prepared under IFRS as issued by the IASB, in Turkish lira (TRY).
Business context
Turkcell is a Turkey-based converged telecommunications and digital-services operator, with operations also in Ukraine, Belarus, Northern Cyprus and Germany. Turkey accounted for 85.8% of 2018 revenue. The Group reported 48.9 million subscribers, including 36.7 million in Turkey, and is pursuing a “digital operator” strategy alongside investment in mobile and fiber networks.
Key financial metrics
Amounts below are TRY millions unless stated otherwise. Changes are year over year.
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | 21,292.5 | 17,632.1 | +20.8% |
| Gross profit / gross margin | 7,146.5 / 33.6% | 6,281.9 / 35.6% | Profit +13.8%; margin down 2.0 pp |
| Operating profit / operating margin | 4,359.9 / 20.5% | 2,932.4 / 16.6% | Profit +48.7% |
| Adjusted EBITDA (non-IFRS) / margin | 8,788.0 / 41.3% | 6,228.3 / 35.3% | +41.1% |
| Profit for the year | 2,177.3 | 2,037.8 | +6.8% |
| Profit attributable to Turkcell shareholders | 2,021.1 | 1,979.1 | +2.1% |
| Basic and diluted EPS (TRY) | 0.93 | 0.90 | +3.3% |
| Net cash from operating activities | 5,829.9 | 3,101.3 | +88.0% |
| Net cash used in investing activities | (4,535.6) | (3,304.6) | Greater outflow |
| Cash and cash equivalents, year-end | 7,419.2 | 4,712.3 | +57.5% |
| Total debt, including lease obligations | 20,155.5 | 12,536.1 | +60.8% |
| Net debt, as reported in debt reconciliation | 12,736.3 | 7,823.8 | +62.8% |
| Capital expenditures, reported measure | 7,643.0 | 4,087.4 | +87.0% |
Revenue growth reflected higher data and digital-services use, customer upselling, fixed-broadband growth and expansion of financial services. Turkcell Turkey revenue rose 18.2%; Turkcell International revenue rose 36.5%, partly reflecting currency translation. Operating profit benefited from lower selling and marketing expense as a share of revenue and lower other operating expenses. Adjusted EBITDA is management’s non-IFRS measure and is not a substitute for IFRS profit or operating cash flow.
Cash generated before interest and tax payments rose to TRY 8,145.9 million from TRY 4,503.6 million; interest paid increased to TRY 1,658.3 million from TRY 909.9 million. Cash-flow purchases of property, plant and equipment and intangible assets were TRY 5,225.6 million combined. The reported TRY 7,643.0 million capex measure includes non-operational items and TRY 3,000.5 million of IFRS 15/IFRS 16 adjustments, so it is not directly comparable with those cash purchases.
Material changes versus 2017
- Net finance costs widened to TRY 1,687.0 million from TRY 322.9 million. Finance costs increased to TRY 3,619.1 million, including net foreign-exchange losses of TRY 2,695.0 million versus TRY 718.5 million in 2017.
- Gross margin declined despite higher gross profit, as cost of revenue grew faster than revenue. Depreciation and amortization rose to TRY 4,288.0 million from TRY 2,597.0 million.
- Turkish mobile subscribers fell by about 0.4 million, to 33.7 million, while fixed subscribers increased to 2.3 million. Mobile ARPU increased to TRY 33.9 from TRY 29.8; average monthly mobile churn increased to 2.1% from 1.9%.
- Debt and capital spending increased substantially. The reported debt-to-equity ratio rose to 126% from 83%.
- Turkcell adopted IFRS 9 and IFRS 15 and early adopted IFRS 16 in 2018 without restating comparative periods. IFRS 16 added right-of-use assets and lease liabilities; IFRS 15 capitalized subscriber-acquisition costs. These changes affected reported expenses, assets, debt and EBITDA comparability.
Outlook, commentary and risks
- Management expected 2019 operational capex to be approximately 16%–18% of revenue and described plans to continue network, fiber and digital-service investment. This is forward-looking guidance, not a guarantee.
- Management cited Turkey’s 2018 currency volatility and 20.3% year-end inflation as sources of pressure. Foreign-currency debt and equipment costs, while much revenue is earned in local currencies, create exposure to exchange-rate movements; hedging may not fully offset it.
- Liquidity was supported by TRY 7.4 billion of cash, but scheduled debt service, investment needs and dividends remain significant. The filing says cash held in hard currencies was equivalent to about USD 1.4 billion and repayments including interest were about USD 874 million in 2019 and USD 550 million in 2020.
- Key risks include Turkish economic and political conditions, intense competition and OTT substitution, pricing and other regulatory actions, data privacy and cybersecurity, supplier concentration, network and spectrum obligations, and ongoing shareholder disputes that have affected corporate governance and decision-making.
- Legal and tax contingencies include a TRY 247.8 million 2016 SCT/VAT assessment under settlement review, a TRY 138.2 million Ministry of Trade fine under litigation, and continuing tax and regulatory investigations. Management did not record provisions for certain disputed assessments where it judged an outflow less than probable or uncertain; outcomes may differ from its assessment.
- Inteltek was notified in February 2019 that its sports-betting tender was awarded to another bidder; after a transition period, the business was expected to cease by August 2019 absent a successful legal challenge or new tender. The activity represented about 1% of 2018 consolidated revenue.
- The Group signed an agreement to sell its 41.45% Fintur stake for EUR 350 million, subject to regulatory approvals and closing adjustments; completion was expected in 2019. The CEO resigned effective March 15, 2019, with the sales EVP serving as acting CEO.
- No 2018 dividend had been declared in the filing; the 2018 annual general meeting had not been called as of March 7, 2019. Turkcell paid TRY 1.9 billion in 2018 relating to 2017.
Most important facts for investors to verify
- How much of the 2018 EBITDA and expense changes reflect recurring operations versus IFRS 15/16 adoption, reclassifications and capitalized subscriber-acquisition costs.
- Debt maturity, currency and interest-rate exposure; the adequacy and effectiveness of hedges; and whether operating cash flow can support the stated capex outlook and debt service.
- Collections and credit quality in Financell: its TRY 4.2 billion loan book, impairment allowances and sensitivity to Turkish economic conditions and handset-financing restrictions.
- Developments in material tax, competition and regulatory proceedings, including whether assessments or penalties result in cash payments beyond recorded provisions.
- Regulatory approvals and proceeds from the proposed Fintur sale, the effect of Inteltek’s lost tender, and the status of the 2018 dividend decision.
- Whether shareholder disputes, the CEO transition and board-governance constraints affect strategy, investment decisions or distributions.