TURKEY: Turkcell shrugs off Vodafone’s ‘cheque book’ revival
27 September 2010
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Extract from Vodafonewatch, report #85. Click through for: the Executive Brief from this month’s report; the Report Snapshot; or to contact us for more information about the full 52-page report, this industry standard monthly report service, and ongoing subscription access.
TURKEY: Turkcell shrugs off Vodafone’s ‘cheque book‘ revival
Sureyya Ciliv, Chief Executive of Turkcell, Vodafone’s main mobile market rival in Turkey, sought to use the firm’s Q2 FY10 analyst conference call to cast doubt on the sustainability of Vodafone Turkey’s recent, investment led turnaround programme.
Ciliv suggested the OpCo’s recovery, which has gained prominent billing in Vodafone’s recent results announcements (Vodafonewatch, 2010.05 and 2010.07-08), had been focused on revenue growth at the expense of profitability, adding that Vodafone “did not care about EBITDA [earnings before interest, tax, depreciation, and amortisation]“.
“ If you look at the results over the last three [or] four years, you would see that Vodafone’s revenue share has not changed significantly. It has been between 26% [and] 24% most of the time, and, if you look at …their revenues versus two years ago, you will see that they are at similar levels. And, you know, we look at revenue share …but we look at a lot of other KPIs [key performance indicators] as well. I think it’s important to look at the market dynamic by looking at the big picture and …not only one KPI, but many of them together. ”
“ Obviously, Vodafone Turkey is [within] Vodafone’s portfolio, the only subsidiary that has negative EBITDA, and their losses have also tripled in the last year versus the year before that. And also, by doing campaigns for telephones, terminals, and offering packages, sometimes these revenue numbers could include terminal values as well. So …if you ask me to give an overall view of the market dynamic, we see that [third placed] Avea, with its new management, is acting very rationally, and they have improved their EBITDA margin and they are making investments and decisions [with] a more balanced view. I think Vodafone appears in the market, where they have an open cheque [book], and it seems like they didn’t care about EBITDA, and we will see how long this continues. ”
“ Our strategy is very clear — really, more than revenue share or subscriber share, we are focused on growing our business, and I am using the words ‘growing our business’ in a profitable fashion for the long term. ”
“ We have taken actions to increase our focus on our market segments, go ahead with micro segmentation, and — using 3G, and mobile internet and mobile services — we are, all of Turkcell, with our partners …focused on delivering targeted, superior solutions to our target customers. And we are focused on how we do make sure we are delivering the higher value for those specific segments of customers. And this will give us customer satisfaction, customer loyalty. It will help us grow our business profitably, and to create ‘stickiness’ with our customers. ”
– Ciliv.
Revenue growth remains priority
Ciliv’s comments do have more than an element of truth — Vodafone Turkey’s revival strategy, instigated alongside an FY08-09 change of management, has been investment heavy, focusing primarily on galvanising revenue and subscriber growth through improved network quality (including 3G rollout), tariff revamps, and strengthened distribution, rather than efficiency and margins (Vodafonewatch, passim). The OpCo returned to revenue growth in the second half of FY09-10, but saw operating loss widen to £127m (EUR152m) in the same period.
Vodafone has previously said the OpCo is aiming to regain profitability in FY10-11, but has yet to report progress on that front — the Group’s recently released Q1 FY10-11 figures (Vodafonewatch, 2010.07-08) did not contain profit data (standard practice for Q1); and executives have indicated that revenue growth remains the priority.
“ The revenues: we’re really happy with the progress over the last two quarters, and especially based on this quarter. We got [an] all time high in June [2010]. When it comes to profit, it’s sort of a profitability focus, maybe more in year two from now. We need to first build a high market share position in Turkey, which we are about to do, and then we are now increasingly focused on the operational and capex efficiency in Turkey. ”
– Morten Lundal, Chief Executive of the Group’s Africa and Central Europe Region, in comments accompanying the Q1 FY10-11 results.
It is unclear whether Ciliv is being reasonable with his criticism, which appears to give Vodafone no recent credit whatsoever, but his outspokenness could signify collateral damage. Turkcell would not be the first dominant incumbent to misinterpret — or misrepresent — the actions of an aggressive challenger. Cynically, he could be hoping to drive activist investors to pressure Vodafone into reprioritsing EBIDA over revenue share.
Vodafone will undoubtedly be concerned about the local bottom line weakness, but might also be pleased both to have reversed revenue weakness and dismissed the threat of being overtaken by Avea. In retrospect, Vodafone initially invested badly in Turkey (at the time it arguably looked canny), possibly repeating Japan market mistakes of overly prioritising profitability and overly relying on Group level capabilities. Now, Vodafone appears to be playing double or quits, and backing its local managers, which does not seem illogical in a developing market and buoyant economy. It also gives the Group opportunity to try growing an OpCo out of trouble, rather than its more conventional approach of extracting efficiency gains.
Vodafone Turkey, financial highlights and key performance indicators (KPIs), H2 FY09-10
[Table omitted.]
Source: Vodafone and Market Mettle’s Vodafone Report 2010-11: Strategy & Insight.
[Further reference: Q2 2010 Turkcell Iletisim Hizmetleri A.S. earnings conference call -- final -- FD Wire, 5 August 2010.]
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Report: #85
Covering: August/September 2010
Published: September 2010
Next issue: October 2010
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