Operator: Good day, and welcome to the second quarter 2017 results conference. Today's conference is being recorded. At this time, I would like to turn the call over to Korhan Bilek, Director of Investor Relations and Mergers and Acquisitions. Please go ahead.

Korhan Bilek: Thank you, Ashley.

Hello, everyone. Welcome to Turkcell's Second Quarter 2017 Results Call. Today, speakers are our CEO, Mr. Kaan Terzioglu; and our CFO, Mr. Bulent Aksu.

Our C-level executives and IR team are also participating in the call. We have a brief presentation, and afterwards, we will be taking your questions. Before we start, I'd just like to remind you to review the disclaimer of our presentation. Now I hand over to Mr. Terzioglu.

Kaan Terzioglu: Thank you, Korhan. Good afternoon, and good evening, and welcome to Turkcell's Second Quarter 2017 Results Call. Turkcell has been on an exciting transformational journey towards becoming a global digital services provider. We have worked tirelessly to evolve into a digital services-focused experience provider that enriches our customers' lives. Today, we are in New York to ring the closing bell at The New York Stock Exchange and to announce and celebrate our second quarter results, which demonstrate that our customers have embraced this digital transformation wholeheartedly.

Our services are designed to accompany our customers throughout their day, from home to office and while mobile or in a social environment. And so we have developed a portfolio of innovative and competitive applications. To date, our core digital services have been downloaded 64 million times and this is 100% increase in the number of downloads since Q2 2016. Leveraging our network capabilities and the power of the 4.5G network, our services combine the best of OTT world, the best of capabilities of a converged telecom services operator as the main digital operator, reaching higher standards of quality and customers' experience. This, in return, spells higher customer satisfaction and loyalty.

As such, digital services have grown to represent 18% of Turkcell Turkey revenues in Q2 '17, and we have -- we expect this segment to claim a higher proportion going forward. Next page. Using Turkcell's digital services, our customers have redefined the ways in which they interact, read, listen, watch and store their memories. Today, BiP, the first and leading global product of our digital services portfolio, is a platform for 25 million messages and 1 million minutes of calls per day. UpCall offers an enhanced call experience.

Nearly 0.5 million unknown numbers are identified through UpCall every day. Our digital publication application, Dergilik, has brought a breath of fresh air to the sector. In June alone, over 2.1 million magazines were read on this platform, greatly exceeding the print format. Over 6 million songs are streamed daily on fizy, our digital music platform, by users who spend 22 minutes on average listening to music on fizy every day. TV+ has 1.5 million sessions per day.

Each user spends over 51 minutes on the app per day compared to just 7 minutes prior to 4.5G launch. lifebox, personal cloud app, is home to over 1.1 billion documents and where 110 million uploads are made in June alone. The monthly data consumption of lifebox users reached 110,000 gigabytes in June. In the second quarter, we launched our new service, SiM, which aims to help women in their daily lives with quick tips, new shopping guide and discounts as well as education for their kids. This is a type of service that augments Turkcell's connection with customer segments.

Shortly after its launch in May, SiM reached 474,000 downloads and 181,000 monthly active users. Next page. Now let's take a look at highlights of this quarter. Our revenues grew 28.5% to TRY4.3 billion. Our EBITDA grew 14 -- 41.6% to TRY1.5 billion.

Building on top of the previous quarter's record results, these revenue and EBITDA figures are new heights, marking the peak of the past 10 years. This was on the back of a growing customer base, rising demand for data and greater usage of our products and services. Our data and digital services revenues grew 79% year on year with the higher number of 4.5G users, higher smartphone penetration of 70% and rising data usage reaching 5.9 gigabytes per user in June as well as 6% growth in total subscribers while mobile churn rate was 4.2% due to value propositions and attractiveness of our digital services. The share of Multiplay customers using our mobile voice, data and digital services reached 47%, nearly doubling from 24% level of the year before. Our consumer finance company, Financell, continued its growth trend with outstanding loans amounting to TRY3.5 billion.

This second quarter performance has prompted an update on the guidance. We revised our top line growth expectations from 16% to 18% to 21% to 23% and EBITDA margin from 32% to 34% to 33% to 35%. Another important development in this quarter was the TRY3 billion dividend approval at the May 25 Turkcell General Assembly. This first installment has already been paid with the remainder to be paid on September 15 and December 15. This decision reflects our solid financial results and balance sheet.

We are pleased to have distributed a total of TRY7 billion of dividends, nearly 54% of our net income since 2010, in line with our dividend policy. Next slide. Let me go into the details with a brief overview of the second quarter results. At the group level, we registered 28.5% revenue and 41.6% EBITDA growth, the highest of the past 10 years. We continued our outstanding growth performance in the second quarter, clearly differentiating us from our local and global peers.

These figures also represent all time high quarterly revenue and EBITDA in nominal terms both at the group and Turkcell Turkey level. Our solid operational performance led to a strong bottom line as well. Accordingly, our net income rose by 69.2% to TRY 704 million. Our quarterly capital expenditures remained under control at 16.7% of revenues, bringing the first half CapEx or sales ratio to 15%. Moving on to the next page.

Let me go into the details of Turkcell Turkey, which represents 88% of our group revenues. In the second quarter, our revenues grew by 26.4% to TRY3.8 billion. We recorded 40.6% growth in EBITDA to TRY1.3 billion. Second quarter revenue growth including financial services, our consumer service finance business, was at 29.7% with an EBITDA margin of 34.4%. In the first half, taking consumer finance operations into consideration, our sales grew to 27.6% to TRY7.6 billion, while EBITDA margin was realized at 34.9%.

Next page. Let's elaborate further on Turkcell Turkey's operational performance. This quarter, we delivered a strong customer net add performance of 850,000, which brings us to 2.1 million net adds year-on-year. On the mobile side, we recorded the highest quarterly net customer add of the past six years of 757,000. Of this, 253,000 were prepaid and 503,000 were postpaid.

Our share of postpaid users rose to 53%. On the fixed side, our customer base exceeded 2 million on 60,000 quarterly net adds, of which 32,000 were fiber and 28,000 were ADSL. IPTV customers reached 436,000 with 34,000 quarterly net additions. Mobile blended ARPU rose to TRY 30.8 on a yearly growth of 13.7%. Mobile ARPU growth was mainly driven by our upsell efforts as well as our favorable change in customer mix and higher data and digital services usage on our 4.5G network.

Fixed residential ARPU rose 2.7% in the second quarter on the rise in Multiplay customers with TV. Our innovative approach to digital services has had a positive impact on customer satisfaction and loyalty, fortifying retention. As a result, mobile churn rate continued to decline to 4.2% in Q2. This level puts us on a league of our own in the sector. Next page.

With the contribution of successive marketing activities, like Shake & Win, Shake & Fold and Ramadan campaigns, 4.5G users' data consumption reached 5.9 gigabytes in June. This boosted total per capita data consumption 69% year-on-year to 4.1 gigabytes. Meanwhile, the number of customers subscribing to our 4.5G services continued to rise, reaching 28 million. Today, only 13 million smartphones on our network are 4.5G-compatible, which indicates substantial untapped potential to more than double 4.5G customers. I'm glad to say that, in this quarter, we reached our target of 70% smartphone penetration, which we had expected to achieve by the end of 2018.

Financell, our consumer finance business, has been the major factor behind this accelerated performance. Recently, we launched our new T-series premium smartphone, T80. Combining high technology with affordable price, T80 enables users to enjoy 4.5G speeds and pre-installed Turkcell digital services. Integrated with virtual-reality platform, T80 provides customers a 360-degree virtual reality experience with the first operated branded headset. Next page.

Our growth engines, data and digital services. Mobile data revenues continued their solid growth, rising 65% in Q2. Higher smartphone penetration and increased number of data users and higher consumption per users have contributed to this result. Meanwhile, fixed data revenues were up 28% due to the rise in customer base, higher consumption and price increases. Revenues from digital services tripled to TRY 692 million.

This growth comes mainly from Turkcell TV+, Dergilik, fizy, lifebox and other mobile services. The share of our legacy business, voice and SMS, is now only 20%. All of these numbers together add up to a picture where data and digital services grew 78.6%, representing 65% of Turkcell Turkey's total revenues. Only a year ago, this figure was 46%. Moving to the next page.

All of these results have been possible with our customers' enthusiasm in embracing a digital world and lifestyle and their willingness to adopt Turkcell's wide range of digital services. On the mobile side, the increased penetration of our digital services has led to the consistent growth of our triple-play customers. Today, doubling the level of a year ago, 47 out of every 100 mobile customers uses at least one of our digital services. The main campaign that introduces our digital services to our customers is the phenomenal Shake & Win campaign, widely used every week on Fridays. As a result of our higher penetration, revenue from triple-play customers today comprises 65% of mobile services.

On the fixed side, we reached the homes of 41 out of every 100 fiber residential subscribers with our IPTV offering. Our IPTV offering is now also available on Apple platform. Each digital service reflects different levels of ARPU uplift and churn reduction impact, which ranges in between TRY 1.5 to TRY 6.5 for ARPU and 0.2 and 0.8 for churn rates. This reflects an ARPU for our triple-play users 3 times that of a single play customer. Next page.

This slide shows a deep dive into our core digital services. BiP continuously enhances its capabilities and content to better service 4 million monthly active users. This quarter, BiP launched an in-app gaming platform in partnership with Orange Games Europe. UpCall is a service that is quite hard to replicate by any OTT, given our technological advantage as a telco. UpCall users enjoy a smart calling experience with built-in Yellow Pages, caller ID tagging, 1-click group call and call with pictures and subject.

UpCall already has 472,000 monthly active users ahead of its official launch. fizy marked a milestone by exclusively launching the new album of Turkey's megastar, Tarkan. This quarter, fizy has made the charts for almost -- most of the downloads at Apple's App Store, reaching 1.6 million active users. 1.2 million users watched Tarkan's live concert via fizy. We continue to expand the content of Dergilik.

Over 330 magazines are available on Dergilik to 752,000 monthly active users who spend on average half an hour per day. TV+ with 150 channels continue to offer a world of viewing across all devices and screens to more than 1 million monthly active users. These never miss their favorite show, thanks to up to 24-hour rewinding and catch-up functionality. After TV and fizy, now lifebox is also available on Apple TV as of this quarter, and monthly active users of lifebox has reached 729,000. Next slide.

TV is one of the major services of our convergence strategy, and all metrics of OTT and IPTV are on a continuous uptrend. In the second quarter, TV users have reached 1.5 million, doubling from a year ago. New channels continue to be launched while a new user friendly interface was introduced in May. Reflecting our aim of transforming the video viewing experience to the smart device, average per user viewing duration on the OTT TV+ application has risen to 51 minutes as of July. Likewise, on Turkcell's network, we observed significant demand from mobile users for TV+ with a daily data usage of 55,000 gigabytes.

This is more than 15 fold that of the closest peer and underlying the strength of our technology offerings and content. Next slide. Now let's look at our consumer finance company, which is active in techfin. Financell leverages our valuable customer database where we have 26 million credit scored customers exist. We have made 3.7 million consumer loans available to our customers to date for their smart device purchases.

Financell continued its steady growth in Q2. The consumer loans portfolio at the end of the quarter had reached TRY3.5 billion. As a responsible approach to financing our activities, they attached a loan protection and life insurance policy to our financing offers, the number of which reached 600,000 in the second quarter. In April, we successfully securitized TRY100 million of our Financell receivables, marking a first for the nonbanking sector in Turkey. Now we are prepared for a second asset backed security issuance, which will further contribute to our balance sheet management focus and improve our cash flow generation capability.

Paycell, giving our customers differentiated payment options, is seeing increased traction from our customers. We have observed its transaction volume of TRY146 million in the first half of the year. The number of credit cards registered on Paycell platform has now reached 1 million. Furthermore, in addition to our ongoing partnership with Google Play, Paycell can now also be used on the Apple platform as well. Recently, in a landmark in our techfin field, Paycell was granted e-money license by the banking regulator, BRSA.

Paycell can now offer its new generation payment card and our aim to have 10 million Paycell Card users within the next three years' time frame. Next slide. Let's talk about Turkcell International, which comprises 6% of our group revenues. Our International operations grew 26.5% year on year to TRY256 million for the quarter with an EBITDA margin of 25.6%. lifecell in Ukraine is the major component of our International business with 61% share.

lifecell revenues rose 20.5% in TRY terms with the rise in mobile data revenues coming from higher data usage on the 3G network. We introduced BiP gaming, fizy radio platform and lifebox services, which strengthened our strategy of widening Turkcell's global digital service footprint. Including the impact of tower cell and leaseback operation, the EBITDA margin came in at 25.9% in lifecell. In the second quarter, BeST, our operator in Belarus, revenues grew by 50.3% with an EBITDA margin of 6.6 percentage points. BeST continued to offer 4G services in Minsk, Vitebsk and Grodno.

Since the launch of 4G, more than 10% of our customers have experienced 4G services, which increased data consumption and data revenues. Our Northern Cyprus operation recorded 18.7% year-on-year growth with 38.1% EBITDA margin. Growth is also sustained by data demand of our customers. Starting from this quarter, we would like to revitalize our efforts to launch our virtual mobile network in Europe, Turkcell Europe, to lead to 1 million customers over the next 12 months. Next page.

More customers, higher ARPU, lower churn, higher Multiplay subscribers, higher smartphone penetration and more data consumption resulted in better-than-expected first half performance. Encouraged by this solid foundation, we revise our 2017 top line guidance upwards from 16 to 18 percentage points growth to 21 to 23 percentage points growth, and from 32% to 34% EBITDA margin to 33% to 35% EBITDA margin. We reiterate our guidance on CapEx-to-sales. I now hand over to Bulent for the financials.

Bulent Aksu: Thank you, Kaan.

Good afternoon, and good evening to all participants. Let's take a closer look into the financials. In the second quarter, group revenues rose by 28.5% year-over-year corresponding to TRY958 million in nominal terms. This came mainly from growth of the subscriber base and the strong ARPU performance of Turkcell Turkey and Turkcell Consumer Finance Company bringing an additional TRY112 million, Turkcell International EBITDA an incremental TRY54 million to our revenues. EBITDA rose by 41.6% year-on-year to TRY1.5 billion.

This was mainly due to a solid drive in revenues and an effective cost-transformation program while we identify the areas of potential improvement, ranking from head office processes to operating costs in the field. We also reviewed main procurement and OpEx items to create synergies among the business units. As a result, the EBITDA margin improved by 3.1 percentage points to 33.8%. Moving to the next page. The second quarter [produced] net income of TRY704 million on 69.2% growth.

TRY428 million higher EBITDA margin was the main driver of this growth. In the terms of depreciation and amortization, we have a comparable base period in the second quarter wherein we see a smaller negative impact in the bridge chart. The other positive impact came from the change in the fair value of cross-currency swap transactions amounting to TRY118 million, which nets of FX gain and loss. Fintur's contribution was TRY8 million net loss in Q2 2016. Yet, as expected, it had no P&L impact in Q2 as in the previous quarter.

Moving on to the next page. Now I would like to talk about our balance sheet and leverage details. At the end of the second quarter, our net debt position was TRY6.2 billion with a net debt-to-EBITDA ratio of 2 -- 1.1 times. Excluding the impact of consumer finance companies loans, our telco-only net debt is TRY 2.7 billion with a leverage of 0.5 times. In this quarter, our telco net debt increased by TRY 1.5 billion due to payment of the last installments of the 4.5G license and the first installment of our dividend payments.

Net of these items, our telco cash flow generation is at TRY 1 billion positive in Q2. Moving on to the next page. Let me give you more color on our consolidated cash position. The major cash flow items of the quarter include an EBITDA of TRY1.5 billion; capital expenditure of TRY773 million, of which approximately TRY700 million was related to the Turkcell Turkey; net interest income of TRY139 million; and a net change in debt of TRY451 million; the final installment of the 4.5G license payment of TRY1.5 billion and the first installment of the dividend payment amounting to TRY1 billion. As a reminder, our dividend policy is to distribute minimum 50% of profits.

Together with this year's decision, total dividend for the years 2010 and 2016 amounts to TRY7 billion, 54% of our net income for that period, which is in line with our policy. Moving on to the next page. Now I will go into the management of foreign currency risk. As a hedging mechanism, we hold 67% of our cash in hard currency, in line with our hedging policy. We also made cross-currency swap transaction with our FX-denominated loans.

As a result, our short FX position is at $203 million at end of second quarter. Given the size of our operations and balance sheet, our board advises us to keep our short FX position below $ 700 million, which we define as comfort zone. In the second quarter, we were well within the comfort zone. This is the end of our presentation today, and we can now start the Q&A session.

Operator: [Operator Instructions] We do have a question from Ivan Kim from VTB Capital.

Your line is open.

Ivan Kim: Two questions, please. First, I just was wondering whether there was anything as of late regarding the special communications taxation and potential changes to that? Secondly, I wanted to ask you whether you think Turkcell is going to be subject to wholesale fiber regulation and whatever you think of it and potential scenarios around the wholesale fiber regulation. And the last thing, just a bit probably more technical, but if I look at Turkcell Turkey revenue, it looks like that a lot of your growth is coming outside of mobile and fixed. So I'm just wondering what's driving that.

It doesn't look to be wholesale because you disclose wholesale separately, so I was just wondering what's driving this non-mobile and nonresidential fixed revenue growth.

Kaan Terzioglu: Ivan, thank you very much. Let me start with the first question you have on special communication tax. Of course, tax legislation is under the authority of the Finance Ministry and I would not want to speculate on what they intend to do. But the obvious is, as we move more to digital services and data, the differentiation of taxation on voice services and data services is having an impact on our numbers.

I do not expect an increase in the taxation burden of our industry, given the fact that Turkey is the most heavily taxed telecoms industry in the entire world. But of course, this is the -- this is something that the government needs to answer more than us. With regard to our wholesale fiber regulatory environment, our percentage of fiber assets in Turkey is probably about 20% of what the telecom has, so I do not expect any additional regulatory control for Turkcell on the fiber market. But of course, again, the subject of the question should be that they call regulatory office. With regard to our revenue distribution, as we have indicated, the triple play customers we have on mobile and triple play customers on fixed, on the mobile side now, 47% of our customers are having triple play services from us meaning that they have one additional digital service subscription with us in addition to voice and data service.

And more than 40% of our fixed subscribers are having IPTV as part of their contracts. So when you look into telecom services and digital services, the way you are looking at it is probably comparing us to an old fashioned telecom business model rather than the business we are in right now. So we consider our overall mobile and fixed services integrated with our digital services. So that's why you see a potential drop in voice, but actually an overall increase in telecommunication services including the digital services. Thank you for the question.

Operator: [Operator Instructions] And we do have our next question from Walid Bellaha from Barclays. Your line is open.

Walid Bellaha: I have a couple of questions. Regarding net leverage, so including the consumer finance unit, right now you're at 1.1. Just wanted to understand whether you had any sort of guidance towards the net leverage position for the whole group that you feel comfortable with going forward.

And my second question is regarding funding. Given the current market conditions -- capital market conditions, would you consider coming back to the bond market?

Kaan Terzioglu: Walid, thank you very much. First of all, thanks for asking this question because, I think, our leverage guidance, which is 1.5% now needs to be a little bit further disclosed in terms of how it fares in between our consumer finance business and telco operations. And later on, I'm going to ask Bulent to answer that question in terms of where we are standing on both of the different sides. With regard to the funding options, our three year business plan actually is still fully funded.

We will, of course, be looking into the market conditions, but we don't have any plans for the time being. Bulent, can you give more detail on the leverage question?

Bulent Aksu: On the leverage side, as I mentioned during the presentation, only for telco business, we have a 0.5 multiple and including the finance company, it's 1.1. And for the year-end, as a guidance, it's 1.5 for only telco business. And for the finance business, we have a guidance for equity multiple. It's around 5% -- 5 multiple.

Operator: [Operator Instructions]
Muhterem

Kaan Terzioglu: There is a webcast question that I see here asking whether we would also make a play in satellite TV business as Turkish Telecom has done it. I personally believe that the satellite TV business is overcrowded and we do not see that as a market that we can add value necessarily with our digital services, so we have no intentions in going into satellite TV business.

Operator: [Operator Instructions] We do have one more question from Dalibor Vavruska from Citigroup. Your line is open.

Dalibor Vavruska: Just a quick question.

In terms of your revenue, where are the main surprises for you? Obviously, you have done better than expected in operating your guidance. What surprised you the most between the two quarters? And I also wanted to ask about wholesale revenues, specifically if you can comment on the trend there. And my second question, if I may, is on the consumer company. I mean, obviously, depending on your willingness to provide credit for the customers, you can manage to a certain degree your growth. So I'm wondering how you decided -- how you're deciding how much you push this credit and whether it may be in anticipation of some economic slowdown next year, if you're expecting it, or slowdown of the growth rate, whether you'll be more strict about providing the credit next year than you are now or how you look at it.

Muhterem

Kaan Terzioglu: Sure. Dalibor, thank you very much and also thanks a lot for the recent report that you put through. I think it catches really our strategy in a very, very realistic way. Now what surprised me the most, frankly speaking, I would -- I was not expecting to have so low rates on the churn. Actually, since we have implemented inflationary pricing, we have been steadily increasing our prices and I was expecting a higher churn rate given the reaction of the markets towards that.

So the good surprise is that our customers are seeing the value and they are sticking with us despite slightly higher prices that we are putting forward in the market. That's why -- that's what has surprised us a little bit on the revenue upside that we have seen, and I'm very glad to see that happening. With regard to the consumer finance business, we have a healthy scoring method. And so far, we have issued 85% of all consumer finance loans in Turkish market in a 10-month operation cycle. And what we have also added to our portfolio as part of responsible financing, we are insuring every credit with an unemployment and life insurance policy so that the borrowers are actually are insured against losing their jobs or health.

So I believe we are on a very healthy position in terms of our nonperforming loan ratio as well. [Majorly], it's important to watch the markets and the Turkish economy's direction, but I think, overall, it's a healthy market and we like the business we are in and we will keep on our current strategy moving onwards. Thank you.

Operator: [Operator Instructions]

Kaan Terzioglu: I see here actually a question about the Fintur exit process from Can Oztoprak, Unlu & Co. Frankly speaking, our work on the Fintur exit continues hand in hand with our both partner and shareholder, Telia, and I do expect closure to this process within the end of this fiscal year.

Thank you, Can.

Operator: I have another question over the phone from Ondrej Cabejsek from Berenberg. Your line is open.

Ondrej Cabejšek: I'd just like to follow up on the last question. In terms of M&A, international M&A, particularly with regards to Global Tower, whether there's any update because we've seen news [indiscernible] that there are some tower cells in the region, et cetera, whether you have anything on that?

Kaan Terzioglu: Thank you, Ondrej.

Now with regard to the Global Tower, it's part of our asset-light strategy. As we move on, we would like to really highlight the hidden assets within our balance sheet and we believe Global Tower is one of them. It has a big potential, and we do keep our intentions in terms of making this asset public. But the time will tell. I don't have a time line in front of us.

We still have some additions to our portfolio to straighten up the value and we will only do it when it is the right time and when we are ready.

Ondrej Cabejšek: Maybe if I can follow up on that, please. There's been -- your competitors are talking about active network sharing. I was just wondering, because you're not the party usually mentioned in these talks, how you look at that within that market?

Kaan Terzioglu: Well, we have publicly indicated our preference for sharing infrastructure. And while active network sharing is, at this point, is not one of our priorities, we are open for any type of infrastructure sharing on both fixed and mobile.

For the time being, our scope is mostly on the passive elements of these networks.

Operator: [Operator Instructions] It appears there are no further questions at this time. I'd like to turn the conference back over to the speakers for any additional or closing remarks.

Kaan Terzioglu: Well, thank you very much. We will now go to The New York Exchange trading floor to ring the bell.

Thank you very much for participating with us on this call, and looking forward to the next one. Thank you.

Operator: That concludes today's conference. Thank you for your participation. You may now disconnect.