Turkcell Group: 2015 Financial and Operational Review

Our audited annual consolidated financial statements including our consolidated statements of financial position as of December 31, 2015 and 2014 and our consolidated statements of profit and loss, comprehensive income, changes in equity and cash flows for the three years in the period ended December 31, 2015 and the related notes included in this annual report have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS Report”). The following financial and operational overview focuses principally on the developments and trends in our business in the full year 2015 and should be read in conjunction with the IFRS report. The figures are expressed in Turkish liras (TRY) unless otherwise stated. A year on year comparison of key indicators is provided and figures in parentheses following the operational and financial results for the year end 2015 refer to the same item for the year end of 2014 unless otherwise stated.

Turkcell Group: Financial Performance

CONSOLIDATED PROFIT & LOSS STATEMENT (MILLION TRY) 2014 2015 % CHANGE
Revenue 12,043.6 12,769.4 6.0%
Direct cost of revenues1 (7,383.9) (7,769.5) 5.2%
    Depreciation and amortization (1,639.4) (1,667.8) 1.7%
Gross Profit Margin 38.7% 39.2% 0.5pp
Administrative expenses (562.7) (625.3) 11.1%
Selling and marketing expenses (1,974.6) (1,901.9) (3.7%)
EBITDA2 3,761.8 4,140.5 10.1%
EBITDA Margin 31.2% 32.4% 1.2pp
Net finance income / (expense) (291.6) (43.4) (85.1%)
    Finance costs (1,247.0) (799.5) (35.9%)
    Finance income 955.4 756.1 (20.9%)
Share of profit of equity accounted investees 207.3 367.3 77.2%
Other income / (expense) (76.3) (225.9) 196.1%
Monetary gain 205.1 0.0 (100.0%)
Non-controlling interests 428.2 164.1 (61.7%)
Income tax expense (730.4) (667.1) (8.7%)
Profit for the year 1,864.7 2,067.7 10.9%

1 Including depreciation and amortization expenses.
2 EBITDA is a non-GAAP financial measure.

CONSOLIDATED BALANCE SHEET DATA (YEAR END) (MILLION TRY) 2014 2015 % CHANGE
Cash and cash equivalents 9,031.9 2,918.8 (67.7%)
Total assets 23,694.2 26,207.3 10.6%
Long term debt 1,247.9 3,487.8 179.5%
Total debt 3,697.7 4,214.2 14.0%
Total liabilities 6,983.6 11,788.4 68.8%
Total equity 16,710.6 14,418.9 (13.7%)
CONSOLIDATED CASH FLOW (MILLION TRY) 2014 2015 % CHANGE
EBITDA1 3,761.8 4,140.5 10.1%
LESS:
Capex and license (2,144.8) (8,536.2) 298.0%
Net interest income/ (expense) 819.3 445.8 (45.6%)
Other (1,633.8) 1,987.0 (221.6%)
Net change in debt 100.5 (225.3) (324.2%)
Cash generated / (used) 903.0 (2,188.1) (342.3%)
Cash balance before dividend payment 9,031.9 6,843.8 (24.2%)
Dividend paid - (3,925.0) -
Cash balance after dividend payment 9,031.9 2,918.8 (67.7%)

1 EBITDA is a non-GAAP financial measure.

PROFITABILITY AND SOLVENCY RATIOS (%) 2014 2015 % CHANGE
Gross Profit Margin 38.7% 39.2% 0.5pp
EBITDA Margin 31.2% 32.4% 1.2pp
Net Profit Margin 15.5% 16.2% 0.7pp
Total Liability / Equity Ratio 41.8% 81.8% 40.0pp
Total Debt / EBITDA Ratio 98.3% 101.8% 3.5pp

Explanatory Notes:

Revenue2: Group revenues grew by 6.0% to TRY12,769 million (TRY12,044 million) in 2015. Turkcell Turkey revenues, constituting 90% of Group revenues, increased by 9.5% to TRY11,481 million (TRY10,480 million) on the back of a 10.2% rise in consumer segment revenues to TRY9,127 million (TRY8,282 million) and 6.5% growth in corporate segment revenues to TRY2,032 million (TRY1,907 million). Voice revenues, comprising 52% of Turkcell Turkey revenues, declined by 2.7% in parallel to industry trends while data revenues rose by 38.1% with increased smartphone penetration to 52%, a higher number of data users and increased data usage, and services and solutions revenues increased by 38.5%. Turkcell International revenues decreased by 24.8% to TRY856 million (TRY1,138 million) mainly due to yearly currency devaluation in Ukraine and Belarus, and decline in Turkcell Europe revenues due to change in its business model. Other subsidiaries’ revenues, comprised of our information and entertainment services, call center revenues, and inter-business eliminations, grew by 1.6% to TRY432 million (TRY425 million).

2 Please refer to page F55 in this report for the definition of Turkcell Turkey, Turkcell International and Other Subsidiaries in the Notes to the Consolidated Financial Statements.

Direct cost of revenues: Direct cost of revenues rose by 5.2% to TRY7,769 million (TRY7,384 million) while as a percentage of revenues falling to 60.8% (61.3%) in 2015. This was driven by the decrease in interconnect costs (0.7pp) and depreciation and amortization expenses (0.6pp), more than offsetting the rise in various other cost items (0.8pp).

Administrative expenses: Administrative expenses as a percentage of revenues rose by 0.2pp to 4.9% (4.7%) in 2015 due to the increase in various cost items as a percentage of revenues in 2015.

Selling and marketing expenses: Selling and marketing expenses as a percentage of revenues declined by 1.5pp to 14.9% (16.4%) due to lower selling expenses (1.0pp), marketing expenses (0.4pp) and other cost items (0.1pp) in 2015.

EBITDA: Group EBITDA rose by 10.1% to TRY4,141 million (TRY3,762 million) with an EBITDA margin improvement of 1.2pp to 32.4% (31.2%) in 2015. This was achieved by a decline in selling and marketing expenses of 1.5pp as opposed to the rise in direct cost of revenues of 0.1pp and general administrative expenses of 0.2pp.

Net finance expense: Turkcell Group registered a lower net finance expense of TRY43 million (TRY292 million) in 2015, mainly due to lower translation losses of TRY489 million (TRY1,111 million), despite the increase in interest expenses and decline in interest income from time deposits.

The share of profit of equity accounted investees: Our share in the net income of unconsolidated investees, comprised of Fintur, increased by 77.2% to TRY367 million (TRY207 million)* in 2015. In 2014, Fintur’s financials were impacted by non-cash charges of US$125 million, stemming from a write down of operational assets and impairment charges relating to goodwill and fixed assets. These charges negatively impacted our Group financials by TRY116 million on the basis of our 41.45% share in Fintur in 2014.

*In 2014, share of profit of equity accounted investees also included A-Tel.

Income tax expense: The income tax expense declined by %8.7 to TRY667 million (TRY730 million), of which TRY591 million comprised current tax charges and TRY76 million was the deferred tax expense recorded.

Net income: Group net income as per IFRS rose by 10.9% to TRY2,068 million (TRY1,865 million) year-on-year, mainly due to higher EBITDA, lower translation losses recorded and higher contribution from Fintur, despite the decline in interest income earned on time deposits, the rise in interest expenses on loans and one-off impacts.

Total debt: Total debt as of December 31, 2015 rose to TRY4,214 million from TRY3,467 million as of September 30, 2015, in consolidated terms. We issued a Eurobond with an aggregate principal amount of US$500 million and utilized EUR500 million of debt under our loan agreement with China Development Bank, while we performed loan repayments of US$700 million this quarter following the debt restructuring of lifecell and BeST.

Turkcell Turkey’s debt balance was TRY3,766 million, of which TRY1,631 million (US$560.9 million) was denominated in US$ and TRY1,628 (EUR512.2 million) in EUR. The debt balance of lifecell was TRY442 million, denominated in UAH. Meanwhile, BeST had a debt balance of TRY6 million, denominated in BYR.

TRY1,775 million of our consolidated debt is set at a floating rate, while TRY726 million will mature within less than a year. (The figures in parentheses refer to US$ or EUR equivalents).

Cash flow analysis: Capital expenditures, including non-operational items and 4.5G license, were at TRY8,536 million, of which TRY7,752 million was related to Turkcell Turkey and TRY770 million to Turkcell International. In 2015, operational capex as a percentage of revenues was realized at around 20%.

Donations: Turkcell İletişim Hizmetleri A.Ş. donated TRY 11,989,544 to various associations, foundations and charitable organizations in 2015.

Adjusted Net Income - Net Income Reconciliation:

We use “adjusted net income” as a means of presenting our income excluding net foreign currency gain / (loss) (including tax and minority impact), monetary gain (inflation impact), interest income on time deposits of Turkcell İletişim Hizmetleri and items which we believe to be “one-off” or items that took place for the first time in the relevant year.

The reconciliation of adjusted net income to income is as shown below. Please note that this is a non-GAAP measure and that we may in future presentations change the scope of items that we deduct from net income to arrive at “adjusted net income.”

Below table presents reconciliation of Turkcell Turkey adjusted net income to net income per IFRS:

NET INCOME IMPACTS (MILLION TRY) FY14
Adjusted net income 1,913
Net foreign currency gain/(loss) 151
Interest income on time deposits of Turkcell İletişim Hizmetleri A.Ş. 470
Cancellation of provision booked for A-Tel 24
Subscriber reimbursements (36)
ICTA penalties (108)
Other impacts (8)
 
Net income - IFRS 2,406
NET INCOME IMPACTS (MILLION TRY) FY15
Adjusted net income 2,256
Net foreign currency gain/(loss) 302
Interest income on time deposits of Turkcell İletişim Hizmetleri A.Ş. 181
Contract termination expense (129)
Additional cost in relation to Turk Telekom settlement (51)
4.5G VAT receivables discount (30)
ICTA penalties (10)
Other impacts (35)
Net income - IFRS 2,484

Below table presents reconciliation of Turkcell Group adjusted net income to net income per IFRS:

NET INCOME IMPACTS (MILLION TRY) FY14
Adjusted net income 2,190
Net foreign currency gain/(loss) (tax & minority included) (703)
Interest income on time deposits of Turkcell İletişim Hizmetleri A.Ş. 470
Monetary gain 205
Fintur impairment expense (111)
BeST impairment expense (35)
Cancellation of provision booked for A-Tel 24
Subscriber reimbursements (36)
ICTA penalties (108)
Other impacts (31)
Net income - IFRS 1,865
NET INCOME IMPACTS (MILLION TRY) FY15
Adjusted net income 2,590
Net foreign currency gain/(loss) (tax & minority included) (404)
Interest income on time deposits of Turkcell İletişim Hizmetleri A.Ş. 181
Monetary gain -
Contract termination expense (129)
Additional cost in relation to Turk Telekom settlement (51)
4.5G VAT receivables discount (30)
ICTA penalties (10)
Other impacts (79)
 
Net income - IFRS 2,068

Operational Review (Turkey):

SUMMARY OF OPERATIONAL DATA 2014 2015 % CHANGE
Number of subscribers 35.9 35.8 (0.3%)
  Mobile Postpaid (million) 15.2 16.6 9.2%
    Mobile M2M (million) 1.5 1.9 26.7%
  Mobile Prepaid (million) 19.4 17.4 (10.3%)
  Fiber (thousand) 735.1 899.4 22.4%
  ADSL (thousand) 456.2 620.8 36.1%
  IPTV (thousand) 60.1 223.7 272.2%
Churn (%)
  Mobile Churn (%)1 28.3% 27.3% (1.0pp)
  Fixed churn (%) 17.7% 16.7% (1.0pp)
ARPU-Average Monthly Revenue per User (TRY)
Mobile ARPU, blended2 22.5 24.5 8.9%
  Postpaid 37.7 38.5 2.1%
    Postpaid (excluding M2M) 41.5 42.7 2.9%
  M2M 3.2 3.3 3.1%
  Prepaid 11.6 12.4 6.9%
  Fixed Residential ARPU, blended 47.4 48.7 2.7%
Mobile MOU-Average Monthly Minutes of usage per subs (blended) 275.3 296.6 7.7%

1 As per our churn policy, prepaid subscribers are disconnected from the system if they do not top-up above TRY10 during a nine month period. Additionally, in the fourth quarter of 2015, 379 thousand subscriptions which had not topped-up at all within the stipulated period were also disconnected. 2 In our 2014 Annual Report, Q414 release, and 2014 20-F, we presented mobile ARPU blended, postpaid and prepaid for 2014 of US$11.2, US$18.8 and US$5.8, respectively. These figures have since been revised to US$10.3, US$17.2 and US$5.3, respectively. No changes have been made to the corresponding TRY figures.

On the mobile side, our postpaid customer base continued to expand and reached 16.6 million on 1.4 million net additions during the year, we believe driven by our value focus. Accordingly the postpaid share in the total subscriber base reached 48.7% (43.9%). Total mobile customers declined by 624 thousand to 34.0 million in 2015 due to the contraction in the more price sensitive prepaid segment.

On the fixed front, our growth momentum continued, with customers exceeding 1.5 million on the back of our expanding fiber network, strong sales force and customer care efforts. The Turkcell TV platform continued its firm growth throughout the year, reaching 224 thousand users. Including mobile TV and web TV users, Turkcell TV users reached 558 thousand as at the end of 2015.

Mobile churn rate was at 27.3% (28.3%) in 2015 while fixed churn rate stood at 16.7% (17.7%).

Mobile ARPU rose by 8.9% to TRY24.5 (TRY22.5) with the continued favorable change in subscriber mix, our upsell strategy, increased mobile broadband usage, mobile services revenue growth and our focus on high value customer groups. Fixed Residential ARPU improved by 2.7% to TRY48.7 (TRY47.4).

Mobile MoU rose by 7.7% to 296.6 minutes (275.3 minutes) in 2015 with our increased postpaid base and upsell strategy.

Smartphone penetration on our network reached 52%, supporting higher data usage. We registered 3.4 million3 yearly additions and reached 16.1 million smartphones on our network, of which over one third is already 4G enabled.

3 Approximately 1.1 million of these smartphone net additions were due to an adjustment in relation to devices which were not previously classified as smartphones.