Company Quick10K Filing
Turkcell
Price5.86 EPS1
Shares2,200 P/E7
MCap12,896 P/FCF4
Net Debt1,711 EBIT3,174
TEV14,608 TEV/EBIT5
TTM 2019-12-31, in MM, except price, ratios
20-F 2019-12-31 Filed 2020-04-02
20-F 2018-12-31 Filed 2019-03-15
20-F 2017-12-31 Filed 2018-03-22
20-F 2016-12-31 Filed 2017-03-20
20-F 2015-12-31 Filed 2016-03-18
20-F 2014-12-31 Filed 2015-03-10
20-F 2013-12-31 Filed 2014-03-21
20-F 2012-12-31 Filed 2013-04-08
20-F 2011-12-31 Filed 2012-04-20
20-F 2010-12-31 Filed 2011-04-18
20-F 2009-12-31 Filed 2010-04-27

TKC 20F Annual Report

Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16.
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 3 Provides The Required Disclosures of The Uncertainty Arising From Ibor Reform for Hedging Relationships for Which The Group Applied The Reliefs.
EX-1.1 d57951dex11.htm
EX-8.1 d57951dex81.htm
EX-12.1 d57951dex121.htm
EX-12.2 d57951dex122.htm
EX-13.1 d57951dex131.htm

Turkcell Earnings 2019-12-31

Balance SheetIncome StatementCash Flow
10.08.06.04.02.00.02011201420172021
Assets, Equity
4.63.72.81.80.90.02011201420172021
Rev, G Profit, Net Income
1.60.90.3-0.4-1.0-1.72011201420172021
Ops, Inv, Fin

20-F 1 d57951d20f.htm 20-F 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 1, 2020

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission File Number: 1-15092

 

 

TURKCELL ILETISIM HIZMETLERI A.S.

(Exact Name of Registrant as Specified in Its Charter)

 

 

TURKCELL

(Translation of Registrant’s Name into English)

Republic of Turkey (Jurisdiction of Incorporation or Organization) Turkcell Kucukyali Plaza Aydinevler Mahallesi Inonu Caddesi No:20 Kucukyali Ofispark Maltepe Istanbul, Turkey (Address of Principal Executive Offices) Mr. Zeynel Korhan Bilek Telephone: +90 212 313 8150 Facsimile: +90 216 504 4058 Turkcell Kucukyali Plaza Aydinevler Mahallesi Inonu Caddesi No:20 Kucukyali Ofispark Maltepe Istanbul, Turkey (Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) ofthe Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Ordinary Shares

Nominal Value TRY 1.000*

 

TKC

 

New York Stock Exchange

New York Stock Exchange

 

*

Not for trading on the NYSE, but only in connection with the registration of ADSs representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission

Securities registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Ordinary Shares, Nominal Value TRY 1.000                2,200,000,000

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  ☒   Accelerated Filer  ☐   Non-Accelerated Filer  
    Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards* provided pursuant to Section 13(a) of the Exchange Act. ☐

 

*

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐   

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      2  
ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE      2  
ITEM 3.    KEY INFORMATION      2  
   3.A SELECTED FINANCIAL DATA      2  
   3.B CAPITALIZATION AND INDEBTEDNESS      7  
   3.C REASONS FOR THE OFFER AND USE OF PROCEEDS      7  
   3.D RISK FACTORS      7  
ITEM 4.    INFORMATION ON THE COMPANY      29  
   4.A HISTORY AND DEVELOPMENT OF THE COMPANY      29  
   4.B BUSINESS OVERVIEW      31  
   4.C ORGANIZATIONAL STRUCTURE      90  
   4.D PROPERTY, PLANT AND EQUIPMENT      91  
ITEM 4A.    UNRESOLVED STAFF COMMENTS      92  
ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS      92  
   5.A OPERATING RESULTS      98  
   5.B LIQUIDITY AND CAPITAL RESOURCES      108  
   5.C RESEARCH AND DEVELOPMENT, PATENTS AND LICENSESETC.      113  
   5.D TREND INFORMATION      113  
   5.E OFF-BALANCE SHEET ARRANGEMENTS      115  
   5.F TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS      115  
   5.G SAFE HARBOR      116  
ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      116  
   6.A DIRECTORS AND SENIOR MANAGEMENT      116  
   6.B COMPENSATION      121  
   6.C BOARD PRACTICES      122  
   6.D EMPLOYEES      123  
   6.E SHARE OWNERSHIP      124  
ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      125  
   7.A MAJOR SHAREHOLDERS      125  
   7.B RELATED PARTY TRANSACTIONS      125  
   7.C INTERESTS OF EXPERTS AND COUNSEL      125  
ITEM 8.    FINANCIAL INFORMATION      126  
   8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION      126  
   8.B SIGNIFICANT CHANGES      127  
ITEM 9.    THE OFFER AND LISTING      127  
   9.A OFFER AND LISTING DETAILS      127  
   9.B PLAN OF DISTRIBUTION      128  
   9.C MARKETS      128  
   9.D SELLING SHAREHOLDERS      128  
   9.E DILUTION      128  
   9.F EXPENSES OF THE ISSUE      128  
ITEM 10.    ADDITIONAL INFORMATION      128  
   10.A SHARE CAPITAL      128  
   10.B MEMORANDUM AND ARTICLES OF ASSOCIATION      128  
   10.C MATERIAL CONTRACTS      140  
   10.D EXCHANGE CONTROLS      140  
   10.E TAXATION      141  
   10.F DIVIDENDS AND PAYING AGENTS      147  
   10.G STATEMENT BY EXPERTS      147  
   10.H DOCUMENTS ON DISPLAY      147  
   10.I SUBSIDIARY INFORMATION      147  
ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      147  
ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      150  
ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      151  
ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      151  
ITEM 15.    CONTROLS AND PROCEDURES      151  
ITEM 16.      152  
   16.A AUDIT COMMITTEE FINANCIAL EXPERT      152  
   16.B CODE OF ETHICS      152  


Table of Contents
   16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES      153  
   16.D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      153  
   16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      153  
   16.F CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT      154  
   16.G CORPORATE GOVERNANCE      154  
   16.H MINE SAFETY DISCLOSURE      158  
ITEM 17.    FINANCIAL STATEMENTS      158  
ITEM 18.    FINANCIAL STATEMENTS      158  
ITEM 19.    EXHIBITS      159  


Table of Contents

INTRODUCTION

This is the 2019 annual report for Turkcell Iletisim Hizmetleri A.S. (“Turkcell”), a joint stock company organized and existing under the laws of the Republic of Turkey. The “Company”, “we”, “us”, “our”, “Group” and similar terms refer to Turkcell, its predecessors, and its consolidated subsidiaries, except as the context otherwise requires.

Our audited Consolidated Financial Statements as of December 31, 2019 and 2018 and for each of the years in the three-year period ended December 31, 2019 included in this annual report have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in different tables may vary slightly, and figures shown as totals in certain tables may not total exactly. In this annual report, references to “TL”, “TRY” and “Turkish Lira” are to the Turkish Lira, and references to “$”, “U.S. Dollars”, “USD”, “U.S. $” and “cents” are to U.S. Dollars and, except as otherwise noted, all interest rates are on a per annum basis. In this annual report, references to “Turkey” or the “Republic” are to the Republic of Turkey.

Statements regarding total market size in Turkey are based on the Information and Communication Technologies Authority’s (“ICTA”) or operators’ announcements, and statements regarding penetration are based on the Turkish Statistical Institute’s (“TUIK”) announcements pertaining to the Turkish population.

References to the Information and Communication Technologies Authority or the ICTA include its predecessor entity, the Telecommunications Authority.

We have not independently verified the information in industry publications or market research, although management believes the information contained therein to be reliable. We do not represent that this information is accurate.

The methodology for calculating performance measures such as subscriber numbers, average revenue per user (“ARPU”) and churn rates varies substantially among operators, and is not standardized across the telecommunications industry, and reported performance measures thus vary from those that would probably result from the use of a single methodology. In addition, subscriber numbers in the mobile communications sector may be difficult to calculate as a result of individuals having more than one SIM card, or SIM cards being removed due to periods of inactivity. The differing methodologies for calculating these performance indicators make it difficult to draw comparisons between these figures for, and to determine the relative market share of, different mobile operators.

FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements within the meaning of section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this annual report, including, without limitation, certain statements regarding our operations, financial position, and business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “continue”, or similar statements.

Although we believe that the expectations reflected in such forward-looking statements are reasonable at this time, we can give no assurance that such expectations will prove to be correct. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are contained in cautionary statements in this annual report, including, without limitation, in conjunction with the forward-looking statements listed below, and include, among others, the following:

 

   

competition from our historic competitors and/or the entrance of new direct and indirect competitors in the market due to new applications and regulatory changes in Turkey with respect to certain technologies;

 

1


Table of Contents
   

our growth strategy being partly dependent on new investment opportunities;

 

   

instability in the political environment and/or downturn in the economy, as well as volatile international markets in Turkey and/or internationally, in particular as a result of the ongoing COVID-19 global outbreak;

 

   

foreign exchange rate risks which could affect the Turkish macroeconomic environment and could significantly affect our results of operation and financial position in future periods if hedging tools are not available at commercially reasonable terms;

 

   

reduction in cash generated from operations and increased capital needs, which may increase our borrowing requirements, and consequently, our finance costs and exposure to the risks associated with borrowing;

 

   

regulatory decisions and changes in the regulatory environment;

 

   

failure by us, our local partners with whom we enter into cooperation agreements or similar agreements, or one of our suppliers, to comply with laws and regulations regarding unethical business practices, including bribery and corruption, and international sanctions;

 

   

interests in several companies that may expose us to various economic, business, political, social, financial, liquidity, regulatory and legal risks and may not provide the benefits that we expect;

 

   

risks related to our dependence on network and IT systems and the products and services we provide through third party suppliers, as well as our exposure to technological changes in the communications market, including industries where we traditionally do not compete;

 

   

various risks with respect to our base transceiver stations performance, including spectrum limitations and frequency costs, certain coverage and local production obligations relating to the 4.5G license and alleged health risks and zoning limitations related to our base transceiver stations;

 

   

our dependence on certain suppliers for network equipment and the provision of data services as well as distributors;

 

   

Turkcell’s complex ownership structure and ongoing disagreements among our main shareholders;

 

   

legal actions and claims to which we are a party;

 

   

inherent limitations of the effectiveness of our internal control over financial reporting and other controls;

 

   

our ability to retain key personnel, our partners and their employees; and

 

   

volatility in the market price of our ADSs.

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

ITEM 3.

KEY INFORMATION

3.A Selected Financial Data

Our audited annual Consolidated Financial Statements including our consolidated statements of financial position as of December 31, 2019 and 2018 and our consolidated statements of profit or loss, other comprehensive income, changes in equity and cash flows for the three years in the period ended December 31, 2019 (“Annual Consolidated Financial Statements”) included in this annual report have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

2


Table of Contents

Effective from the fourth quarter of 2015, our financial statements have been presented in TRY only, the currency in which we recognize the majority of our revenues and expenses. We no longer present financial statements in USD. This change has allowed us to align our Turkish and US reporting.

The following information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects”, our audited consolidated statement of financial position as of December 31, 2019 and 2018, and the related consolidated statements of profit or loss, other comprehensive income, changes in equity, and cash flows for the years ended December 31, 2019, 2018 and 2017, and the related notes appearing elsewhere in this annual report.

The following table presents our selected consolidated statements of profit or loss, financial position and cash flows data as of and for each of the years in the five-year period ended December 31, 2019, presented in accordance with IFRS as issued by the IASB which have been derived from our audited Consolidated Financial Statements as of and for the year ended December 31, 2019 and as of the respective years.

 

    2019     2018     2017     2016     2015  
    (TRY millions, except share data and certain other data)  
Selected Financial Data Prepared
in Accordance with IFRS as
Issued by the IASB

Consolidated Statement of Profit
or Loss Data
     

Total revenue(1)

    25,137.1       21,292.5       17,632.1       14,285.6       12,769.4  

Cost of revenue(2)

    (17,083.5     (14,146.0     (11,350.2     (9,236.6     (7,769.5

Gross profit

    8,053.7       7,146.5       6,281.9       5,049.0       4,999.9  

Other income

    140.7       241.4       74.4       78.6       44.5  

Administrative expenses

    (779.8     (673.4     (645.2     (721.8     (625.3

Selling and marketing expenses

    (1,555.2     (1,626.7     (2,005.4     (1,910.9     (1,901.9

Net impairment losses on financial and contract assets

    (338.9     (346.4     —         —         —    

Other expenses

    (487.3     (381.5     (773.3     (312.8     (270.4

Operating profit

    5,033.3       4,359.9       2,932.4       2,181.9       2,246.8  

Finance income

    297.5       1,677.1       597.2       618.3       455.5  

Finance costs

    (2,025.1     (3,364.1     (920.1     (791.1     (499.0

Net finance costs(3)

    (1,727.7     (1,687.0     (322.9     (172.8     (43.4
Share of loss of equity accounted
investees(4)
  (15.7)     (0.1)     —       —       —    

Profit before income tax

    3,289.9       2,672.8       2,609.5       2,009.1       2,203.3  

Income tax expense

    (785.6     (495.5     (571.8     (423.2     (667.1

Profit from continuing operations

    2,504.3       2,177.3       2,037.8       1,586.0       1,536.2  

Gain/(loss) from discontinued operations(4)

    772.4       —         —         (42.2     367.3  

Profit for the year

    3,276.7       2,177.3       2,037.8       1,543.8       1,903.6  

Attributable to:

         

Owners of the Company

    3,246.5       2,021.1       1,979.1       1,492.1       2,067.7  

Non-controlling interests

    30.2       156.3       58.6       51.7       (164.1

Profit for the year

    3,276.7       2,177.3       2,037.8       1,543.8       1,903.6  

Basic and diluted earnings per share – from continuing operations(5)

    1.14       0.93       0.90       0.68       0.94  

Consolidated Statement of Financial Position Data (at period end)

         

Cash and cash equivalents

    10,238.7       7,419.2       4,712.3       6,052.4       2,918.8  

Total assets

    45,715.0       42,765.3       33,982.5       31,600.2       26,207.3  

Long-term debt(6)

    12,677.4       13,119.6       8,258.0       6,935.1       3,487.8  

Total debt(7)

    20,305.7       20,155.5       12,536.1       9,781.2       4,214.2  

Total liabilities

    27,632.0       26,711.7       18,937.4       15,531.8       11,788.4  

Share capital

    2,200.0       2,200.0       2,200.0       2,200.0       2,200.0  

Total equity

    18,082.9       16,053.6       15,045.1       16,068.4       14,418.9  

Weighted average number of shares(8)

    2,183,922,483       2,184,750,233       2,193,184,437       2,193,184,437       2,200,000,000  

 

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Table of Contents
     2019     2018     2017     2016     2015  
     (TRY millions, except share data and certain other data)  
Consolidated Cash Flows Data(9)       

Net cash inflow from operating activities

     9,026.6       5,829.9       3,101.3       607.1       1,901.3  

Net cash (outflow) from investing activities

     (3,027.3     (4,535.6     (3,304.6     (2,976.7     (3,563.0

Net cash (outflow)/ inflow from financing activities

     (3,478.0     (534.4     (1,566.7     4,839.0       (4,887.4

Other Financial Data

          

Dividends declared or proposed(10)(11)

     —         1,010.0       1,900.0       3,000.0       —    

Dividends per share (declared or proposed)(11)

     —         0.46       0.86       1.36       —    

Gross margin(12)

     32%       34%       36%       35%       39%  

Adjusted EBITDA(13)

     10,426.4       8,788.0       6,228.3       4,619.5       4,140.5  

Capital expenditures(14)

     7,224.7       7,643.0       4,087.4       3,494.4       8,536.2  

 

(1)

Total revenue includes telecommunication services revenues, equipment revenues, revenues from financial services, call center revenues, and revenue and commission fees on betting business (Note 5).

(2)

Total cost of revenue includes depreciation and amortization charges, cost of goods sold, payments for our treasury share (the amount paid to the government under our license) and universal service fund, interconnection and termination fees, employee benefit expenses for technical personnel, frequency expenses, radio costs, transmission fees, cost of revenue from financial services, roaming charges, and billing and archiving costs (Note 10).

(3)

As at December 31, 2019, interest income and expense on financial assets measured at amortized cost are shown netted of on our consolidated statement of profit or loss. The Company has presented financials as of December 31, 2018, 2017, 2016 and 2015 accordingly for which the amount is TRY 255.0 million, TRY 221.2 million, TRY343.3 million and TRY 300.5 million, respectively.

(4)

As of October 1, 2016, Fintur was classified as held for sale and reported as discontinued operations, and on December 12, 2018 the Group signed the definitive agreement to transfer its total shareholding in Fintur to another shareholder of Fintur, Sonera Holding B.V. (“Sonera Holding”). The transfer was completed on April 2, 2019 for a final value of TRY 2,229.6 million (EUR 352.9 million) (Note 16). Gain on sale of the associate amounting to TRY 772.4 million has been recognized under gain from discontinued operations.

(5)

2019, 2018, 2017, 2016 and 2015 EPSs are computed over the “Weighted average number of shares”.

(6)

Long-term debt consists of long-term loans and borrowings, debt securities issued as well as long-term lease obligations.

(7)

Total debt consists of long-term and short-term loans and borrowings, debt securities issued as well as lease obligations.

(8)

In 2019, we purchased 827,750 shares at a price range of TRY 11.89 to TRY 12.24; in 2018, we purchased 8,434,204 shares at a price range of TRY 10.01 to TRY 12.33, and in 2016 we purchased 6,815,563 shares at a price range of TRY 8.92 to TRY 9.99 as part of our share buyback decisions on July 27, 2016 and January 30, 2017. The transactions amount to TRY 9,998 thousand, TRY 94,620 thousand and TRY 65,606 thousand, respectively. Treasury shares are deducted from Equity (Notes 26 and 27).

(9)

The presentation of statement of cash flows for the year ended December 31, 2015 has been revised in 2016.

(10)

The dividend paid in 2017 was related to the years 2010 through 2016. TRY 1,900 million dividend paid in 2018 relating to the year 2017 was approved by the Annual General Assembly on March 29, 2018 and paid in three installments. The dividend paid amounting to TRY 1,010 million in 2019 relating to the year 2018 was approved by the Annual General Assembly on September 12, 2019, and paid in October 31, 2019. The Annual General Meeting for 2019 has not been called for as at April 1, 2020.

(11)

Dividends per share were computed over 2,200,000,000 shares. The dividends per share were TRY 1.36, TRY 0.86 and TRY 0.46 for the years ended 2016, 2017 and 2018 respectively (equivalent to $0.23, $0.15, and $0.08 respectively as of December 31, 2019).

(12)

Gross margin is calculated as gross profit divided by total revenues.

(13)

Adjusted EBITDA is a non-GAAP financial measure that is defined as the profit of the Company for the period before finance income, finance costs, income tax expense, other income, other expenses, monetary gain, gain or loss from discontinued operations, share of profit or loss of equity accounted investees and depreciation and amortization. A reconciliation of Adjusted EBITDA to net income is presented below.

(14)

Capital expenditure in 2018 and 2019 includes the impact of IFRS15 and IFRS16 adjustments amounting to TRY 3,000.5 million and TRY 2,441.5 million, respectively.

 

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Non-IFRS measures

Adjusted EBITDA is a non-GAAP financial measure that is defined as the profit of the Company for the period before finance income, finance costs, income tax expense, other income, other expenses, monetary gain, gain or loss from discontinued operations, share of profit or loss of equity accounted investees and depreciation and amortization. Our management reviews Adjusted EBITDA as a key indicator each month in monitoring our financial performance. Net income is also considered by our management as an indicator of our overall business performance, which includes results from our operations, financing and investing activities. Adjusted EBITDA is not a measurement of financial performance under IFRS and should not be construed as a substitute for profit for the period as a measure of performance, or cash flow from operations as a measure of liquidity.

Adjusted EBITDA, among other measures, facilitates performance comparisons from period to period and management decision making. It also facilitates performance comparisons from company to company, subject to differences in the way it is calculated by different companies. Adjusted EBITDA as a performance measure eliminates potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact of changes in effective tax rates on periods or companies) and the age and book depreciation and amortization of tangible and intangible assets (affecting relative depreciation and amortization expense). Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in evaluating the performance of other mobile operators in the telecommunications industry in Europe, many of which present Adjusted EBITDA when reporting their results.

Nevertheless, Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation from, or as a substitute for analysis of, our results of operations, as reported under IFRS.

Some of these limitations are:

 

   

it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

it does not reflect changes in, or cash requirements for, our working capital needs;

 

   

it excludes the share of profit or loss of equity announced investees and discontinued operations;

 

   

it does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

it excludes depreciation, amortization and impairments and although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

   

it does not reflect other income and expense items which are generally beyond the scope of our ordinary operations;

 

   

it is not adjusted for all non-cash income or expense items that are reflected in our consolidated statement of cash flows; and

 

   

other companies in our industry may calculate this measure differently from how we do, which may limit its usefulness as a comparative measure.

We compensate for these limitations by relying primarily on our results under IFRS and using Adjusted EBITDA measures only supplementally. See “Item 5. Operating and Financial Review and Prospects” and the Consolidated Financial Statements contained elsewhere in this annual report.

 

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The following table provides a reconciliation of Adjusted EBITDA, as calculated using financial data prepared in accordance with IFRS as issued by the IASB, from net profit, which we believe is the most directly comparable financial measure calculated and presented in accordance with IFRS as issued by the IASB.

 

     Year ended December 31,  
     2019     2018     2017     2016     2015  
     (Million TRY)  

Profit for the year

     3,276.7       2,177.3       2,037.8       1,543.8       1,903.6  

Gain or (loss) from discontinued operations

     772.4       —         —         (42.2     367.3  

Income tax expense

     (785.6     (495.5     (571.8     (423.2     (667.1

Consolidated profit before income tax

     3,289.9       2,672.8       2,609.5       2,009.1       2,203.3  

Share of loss of equity accounted investees

     (15.7     (0.1     —         —         —    

Depreciation and amortization

     (5,046.6     (4,288.0     (2,597.0     (2,203.3     (1,667.8

Other operating income/(expense), net

     (346.6     (140.1     (698.9     (234.2     (225.9

Net finance (costs)

     (1,727.7     (1,687.0     (322.9     (172.8     (43.4

Adjusted EBITDA

     10,426.4       8,788 0       6,228.3       4,619.5       4,140.5  

The following table presents selected operational data:

I. Operating Results

 

     As of and for the
year ended December 31,
 
     2019      2018      2017  
Industry Data                     

Population of Turkey (in millions)(1)

     83.2        82.0        80.8  

Turkcell Data(2)

        

Number of mobile postpaid subscribers at end of period
(in millions)(3)

     20.4        18.8        18.5  

Number of mobile M2M subscribers at end of period
(in millions)

     2.6        2.4        2.3  

Number of mobile prepaid subscribers at end of period
(in millions)(3)

     12.4        14.9        15.6  

Number of fiber subscribers at end of period (in thousands)

     1,484.7        1,385.6        1,204.3  

Number of ADSL subscribers at end of period (in thousands)

     719.1        905.6        921.4  

Number of IPTV subscribers at end of period (in thousands)

     719.7        613.4        505.9  

Total Turkcell Turkey subscribers at end of period (in millions)

     35.7        36.7        36.7  

Total Turkcell Group subscribers at the end of period
(in millions)(4)

     46.7        48.9        50.2  

Mobile average monthly revenue per user (in TRY)(5)

     39.8        33.9        29.8  

Postpaid

     56.4        48.2        43.0  

Postpaid (excluding M2M)

     64.1        54.9        48.5  

Prepaid

     18.3        16.9        14.9  

Fixed Residential average monthly revenue per user (in TRY)(5)

     64.5        55.7        53.6  

Mobile average monthly minutes of use per subscriber(6)

     415.3        359.5        347.1  

Mobile Churn(7)

     2.7%        2.1%        1.9%  

Fixed Churn(8)

     2.1%        1.8%        1.8%  

Number of Turkcell employees at end of period

     4,060        4,065        3,967  

Number of employees of consolidated subsidiaries at end of period(9)

     21,813        20,120        19,768  

 

(1)

The population of Turkey for 2019, 2018 and 2017 is based on TUIK’s announcements.

(2)

For a discussion of how these metrics affect our revenues, please see “Item 5A. Operating Results, —VI. Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018—a. Revenues”.

 

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(3)

Subscriber numbers do not include subscribers in Ukraine, Belarus, the Turkish Republic of Northern Cyprus and Germany.

(4)

Subscriber numbers include subscribers in Ukraine, Belarus, the Turkish Republic of Northern Cyprus and Germany.

(5)

We calculate average revenue per user using the weighted average number of our mobile or fixed subscribers, as relevant, in Turkey during the period.

(6)

Average monthly minutes of use per subscriber is calculated by dividing the total number of incoming and outgoing airtime minutes of use by the average monthly sum of postpaid and prepaid mobile subscribers in Turkey for the year divided by twelve.

(7)

Average monthly mobile churn rate represents the rate of mobile subscriber disconnections during a certain period and is the percentage calculated by dividing the total number of subscriber disconnections during a certain period by the average number of subscribers for the same period. For these purposes, we define “average number of subscribers” as the number of subscribers at the beginning of the period plus one half of the total number of gross subscribers acquired during the period. See “Item 4.B. Business Overview—V. Churn” for information concerning subscriber disconnection policy, changes in the policy and change in presentation as of the third quarter of 2018 and as of 2019.

(8)

Average monthly fixed churn rate represents the rate of fixed subscriber disconnections during a certain period and is the percentage calculated by dividing the total number of subscriber disconnections during a certain period by the average number of subscribers for the same period. For these purposes, we define “average number of subscribers” as the number of subscribers at the beginning of the period plus one half of the total number of gross subscribers acquired during the period. Churn refers to our fixed subscribers in Turkey that are both voluntarily and involuntarily disconnected from our network. Fixed churn rate includes switches between Fiber and ADSL.

(9)

See “Item 6.D. Employees” for information concerning our consolidated subsidiaries.

3.B Capitalization and Indebtedness

Not applicable.

3.C Reasons for the Offer and Use of Proceeds

Not applicable.

3.D Risk Factors

The following is a discussion of those risks that we believe are the principal material risks faced by our Company and its subsidiaries. No assurance can be given that risks that we do not believe to be material today will not prove to be material in the future. Consequently, the risks described below should not be considered to be exhaustive.

Competition in the Turkish telecommunications market may adversely affect the growth of our business and our financial condition, and the competition that we face may evolve with our business strategy.

The majority of our revenue comes from our operations in Turkey. Competition in this market and regulatory actions, in particular those that limit our ability to respond effectively to competitive pressures, may adversely affect the growth of our business and our financial condition. If the competition we face intensifies or the market slows or develops in unexpected ways, this could harm our business and financial condition.

In our conventional Turkish telecommunications market, we currently face price competition on telecommunication services from two other operators, Vodafone Telekomunikasyon A.S. (“Vodafone”) and Turk Telekomunikasyon A.S. (“Turk Telekom”). Turk Telekom’s majority shareholder, Oger Telecom, has defaulted on the bank loans it used to finance its stake in Turk Telekom. Accordingly, the ownership of Oger Telecom’s 55% stake was transferred to a special purpose company established by the creditor banks in late 2018. Its creditor banks have announced the launch of a sale process for their stake in September 2019. We cannot predict how this situation will be resolved or whether there will be changes in its strategy or ownership in the meantime. The outcome of this situation could have a significant impact on the competitive environment in which we operate.

A key element of our strategy is to offer digital services. As a result, we expect to find ourselves increasingly in competition with companies that specialize in the development of internet applications and services (namely “over-the-top”, or “OTT” services). The leading companies in these businesses have the advantage of operating in more lightly regulated environments and are generally global entities (WhatsApp,

 

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YouTube, Spotify, etc.), while our Company is, as of today, primarily a Turkey-based telecom company with a smaller global footprint operating in a heavily regulated market. Most of these global players have entered the Turkish market, thereby creating a highly competitive environment in these businesses, which may negatively affect the growth of our digital services businesses. In addition, newer applications from less well-known developers are constantly being introduced and may disrupt areas of the digital services industry in which we seek to compete. These established and newer applications and services make use of the internet as a substitute for some of our more traditional services, such as messaging and voice. Reduced demand for these telecommunications services has had and are expected to continue to have an adverse impact on our revenues. Furthermore, other “traditional” operators in Turkey also offer such services that they have developed independently or in partnership with global OTTs as part of their offerings, thereby further increasing competition in the local market. Moreover, pirated digital content is provided by multiple online platforms in Turkey, some of which offer a large selection of high-quality content that is readily accessible online and through dedicated apps, which has significantly, and may continue to negatively, affect the demand for the digital content we offer, in particular our TV and music services, which has had and may continue to have an adverse impact on our revenues generated through these services. A further obstacle to our digital services growth is that certain apps offered by our competitors are already embedded in the phones of our customers, which increases their visibility and accessibility in comparison with the apps we offer. For example, the Apple Music app, which is a competitor of our fizy app, is embedded into iPhones and is thus significantly more accessible. Additionally, as a result of Huawei being placed on a US trade blacklist in 2019, resulting in Google removing the licensed version of its Android mobile operating system from future Huawei devices, the development of the mobile apps we offer will become more costly and time-consuming as these will have to be adapted for Huawei’s upcoming Harmony app ecosystem.

In our conventional telecommunications business, in the past, Turkey’s principal telecommunications regulator, the ICTA, has interfered with our ability to price our services and respond to competitive pressures. Regulatory actions, in large part from the ICTA, have been a significant factor in shaping the development of the Turkish market and in our ability to respond to changes in the market. Regulatory actions have often favored our competitors, such as interconnection rates which have been set asymmetrically and have facilitated increased competition. It is possible that the ICTA may also act to regulate other areas of our business, including data and digital services, and we cannot predict the impact that such regulation would have on our ability to execute our strategy and on our competitive position. Furthermore, sub-brand initiatives of the existing competitors, and new licenses and authorizations issued by the regulator such as fixed telephony service and mobile virtual network operator (“MVNO”) licenses have made it easier and/or more attractive for new direct and indirect competitors to enter the market.

In some businesses, we are dependent on our competitors for certain services that we provide. For example, we are reselling XDSL from the incumbent operator Turk Telekom and we are dependent on their sales service in this business. Therefore, any delay or negligence of Turk Telekom could result in dissatisfaction of our customers and lead to churn of our XDSL subscribers. Competition in the market may also be adversely affected by changes in a number of other areas that are not specific to telecommunications, such as taxes (in particular taxes on our services and on mobile devices), increases in interest rates, depreciation of the Turkish Lira against the U.S. Dollar or Euro, adverse macroeconomic developments and changes in consumer behavior. Any one of these could in turn adversely affect the development of our business and consequently, our financial results.

Our growth strategy is partly dependent on new investment opportunities, which could affect our business and financial condition, and the return on our investments cannot be guaranteed.

In addition to growing our existing business, our strategy for growth involves selectively seeking and evaluating new investment opportunities and participating in those meeting our criteria. We may pursue inorganic growth opportunities, principally in Turkey and in countries in which we are already present, in order to leverage our experience and technological base in mobile or fixed telecommunications and/or services. We may also pursue opportunities which include alliances, such as MVNOs, management service agreements, branding and know-how support services, digital services cooperation and marketing partnerships. In accordance with our convergence strategy, the opportunities that we pursue in some markets, including Turkey, may include services that would be adjacent or complementary to services that we already offer in such markets.

Further, we may provide services in related areas and also consider investing or increasing our investments in business areas outside of the scope of our core business. Examples of opportunities that we are currently considering or investing in outside of our traditional telecommunications activities include the following:

 

   

As part of our strategic focus on growing our digital services business, we offer our digital services outside of Turkey to other operators through our subsidiary Lifecell Ventures Cooperatief U.A.

 

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(“Lifecell Ventures”) based in the Netherlands, which offers Turkcell’s digital communications, entertainment and transactional applications. Lifecell Ventures’ business model is based on charging consultancy, brand and license fees in return for provision of digital service infrastructure and know-how to other operators. We cannot ensure the commercial success or profitability of this business, which depends on our and our partners’ ability to compete against global and local players in these markets, as well as the local competitive environment, consumer trends and preferences and market conditions, all of which may be significantly different from the Turkish market. Furthermore, as this business grows and expands into new markets, namely through additional digital services cooperation agreements and similar agreements, we will face increasing reputational, regulative and commercial risks in those new markets, both directly and through our local partners.

 

   

We are one of the six founding partners with a 19% share of a company named Turkiye’nin Otomobili Girisim Grubu Sanayi ve Ticaret A.S. (“Turkiye’nin Otomobili”, or “TOGG” or “Turkey’s Car”), established in June 2018 to manufacture electric passenger cars in Turkey in the coming years. The initial capital agreed upon stands at EUR 500 million, to which all parties have committed to contribute as per the level of their individual stakes. As of March 20, 2020, we invested TRY 28.5 million as our share of the initial capital, and the total paid-in capital of TOGG stands at TRY 150 million. The company has launched the prototype electric car on December 27, 2019 and targets full production in 2022. Our Company aims to act as the technology partner in this new business in which we face new risks, namely financial, development and manufacturing process risks. We also face risks related to the shared control of TOGG, namely the risk of violating anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (“FCPA”) and European Union regulations as well as applicable economic sanctions and embargoes and other risks. For further information relating to the corruption and sanctions laws to which we are subject, see—“If we, our local partners with whom we enter into cooperation agreements or similar agreements, or one of our key suppliers fail to comply with laws and regulations regarding unethical business practices, including bribery and corruption, and international sanctions, this could adversely affect our business and financial condition” below.

 

   

Our subsidiary Turkcell Enerji Cozumleri ve Elektrik Satis Ticaret A.S. (“Turkcell Enerji”) has been engaged in electricity trading, wholesale and retail sales since 2017 through its electricity supply license from the Turkish Energy Market Regulatory Authority (“EMRA”). This business exposes us to various risks, including regulatory risk and the risk of trading electricity on commercially non-viable terms, the cost of electricity being significantly affected namely by exchange rates (imported resources such as natural gas and coal account for more than 40% of electricity production in Turkey), the available supply of natural gas and regulatory actions. Further, the profit margins in this business are currently lower than that of our telecommunications businesses. In addition, as the owned capacity in solar energy investments of Turkcell Enerji increases, this might bring in additional operational, financial, regulatory and other risks.

 

   

Our subsidiary Turkcell Odeme ve Elektronik Para Hizmetleri A.S. (“Turkcell Odeme” or “Paycell”) is one of the founding partners of Sofra Kurumsal ve Odullendirme Hizmetleri A.S. (“Sofra”). Sofra is mainly involved in the provision of services via various means such as service coupons, meal coupons, meal cards, electronic coupons and/or smart cards, as well as vehicle payments and smart keys. The financial success of this company cannot be assured, as its growth is largely dependent on its capacity to penetrate a highly competitive market which is largely controlled by a few key players. Additionally, all three Sofra stakeholders share equal rights, namely in terms of board nominations, and the unanimous consent of the shareholders is required in the context of general assemblies, thereby possibly slowing down the decision-making process and affecting our ability to execute business decisions and take other actions that we consider to be in the best interest of the company.

 

   

We have entered the smart device (smartphone, tablet, notebook) operational leasing business as an alternative to providing consumer finance loans for smart devices. This is currently offered to the corporate segment only. The commercial success of this business is largely dependent on our ability to successfully collect the operational leasing payments, as well as on our capacity to lease the devices, service the devices through third party partners during the term of the loan, and then sell the devices that have been previously leased and refurbished on commercially viable terms. In particular, we will face the risk that the Banking Regulation and Supervision Agency’s (“BRSA”) current regulation imposing a cap on the number of installments with regard to consumer loans for mobile phones and smart devices might be applied or be deemed to apply to, the device leasing business, which could negatively affect demand and consequently the development of this business. This business will also lead to an increase in our inventory balance coupled with a higher capital expenditure requirement.

 

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New investments may not achieve expected returns or returns that are in line with those of our core business in Turkey, which may result in high value erosion. In many of the markets and businesses in which we have invested, may invest or may increase our investment, it may take several years and significant expenditures to achieve desired profitability, if at all. As part of our strategy as a converged player offering multiple telecommunications services, we may consider acquiring fixed operators in certain of the markets in which we operate. Any such acquisition would increase our exposure to the risks associated with these countries and these types of businesses. If we become a minority shareholder in an investment, we might encounter difficulties in protecting our shareholder rights. In addition, if an asset in which we have invested does not provide the expected returns, we may consider disposal at a sale price that may be below carrying value or liquidation.

Any instability in the political environment and/or downturn in the economy, as well as volatile international markets, in particular as a result of the ongoing COVID-19 global outbreak, in Turkey and/or internationally may have an adverse effect on our business and financial condition.

With a substantial portion of our revenues, assets and business derived from and located in Turkey, and denominated in Turkish Lira, adverse developments in the Turkish economy and political environment are likely to have a material adverse effect on our business and financial condition. The performance of the Turkish economy may be affected by global, regional and domestic economic and political developments. In particular the COVID-19 global outbreak has introduced additional uncertainty regarding the outlook for Turkey and for our business.

Turkey has, from time to time, experienced volatile political, economic and social conditions. Since 2002, the AKP (the Justice and Development Party) won governing majorities four times during a period in which Turkey’s economy generally enjoyed growth and stability. Turkey held its inaugural presidential election in 2014, based on the constitutional changes implemented following the constitutional referendum held in 2007. Recep Tayyip Erdogan, leader of the ruling AKP, won the election in the first round. On April 16, 2017, a majority of Turkish voters approved a referendum amending certain articles of the Turkish Constitution to expand the powers of the president to create an executive presidency. Turkey’s political stability has been affected by the coup attempt against the government in power in 2016. In June 2018, Turkey held its first dual parliamentary and presidential elections, and then-President Recep Tayyip Erdogan won in the first round and became the Executive President for the next five years.

In August 2018, the Turkish economy experienced currency volatility where the Turkish Lira depreciated sharply due to growing tensions between the US and Turkey over the detainment of US pastor Andrew Brunson, in addition to the tightening of the financial markets monetary policy expectations. During this period, the TRY experienced an important depreciation and inflation reached double digits. The Turkish economy experienced further volatility as a result of the U.S. Executive Order 13894 of October 14, 2019 “Blocking Property and Suspending Entry of Certain Persons Contributing to the Situation in Syria” (“Executive Order”) following Turkey’s military operation in Syria and the Office of Foreign Assets Control (“OFAC”) adding some Turkish ministers and ministries to its Specially Designated Nationals List (“SDN List”). Although OFAC removed the sanctioned ministries and ministers from the SDN List on October 24, 2019, the Executive Order could potentially at any time be reactivated against Turkey. Also, sanctions stemming from the U.S. legislative branch, notably the Protect Against Conflict by Turkey (PACT) Act and the Promoting American National Security and Preventing the Resurgence of ISIS Act, and the judicial branch, such as the ongoing U.S. v. Halkbank case involving criminal charges against the Turkish state-owned bank Halkbank alleging that it helped Iran evade U.S. sanctions, pose a constant threat to the Turkish political environment and its economy. Draft bills primarily involve sanctions against the Turkish Government’s top management and Turkey’s energy and finance sectors, along with regulations to activate the sanction provisions under the 2017 Countering America’s Adversaries Through Sanctions Act. Furthermore, the U.S. National Defense Authorization Act (NDAA), which was approved by President Trump on December 31, 2019, involves sanctions against Turkey and notably bans the delivery of F-35 fighter planes and imposes sanctions against the TurkStream natural gas pipeline project. Turkey also faces risks relating to EU-based sanctions, such as those stemming from EU Council Regulation (EU) 2019/1890 of 11 November 2019 concerning restrictive measures in view of Turkey’s drilling activities in the Eastern Mediterranean. These and other sanctions and legislative or judicial actions may individually or in the aggregate adversely affect the Turkish economy and, in turn, result in a material negative effect on our business, financial condition and results of operations.

In 2019, policymakers introduced easing through a number of channels in a bid to rapidly return the economy to growth. Starting in July, the Central Bank of the Republic of Turkey (“CBRT”) cut its policy rate by 1200 bps in total to 12% by the end of the year. The CBRT also designed a new reserve requirement mechanism

 

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to encourage the growth of banks’ loan books by as much as 15% in real terms. In 2019, primary expenditures have grown by 18.9% y-o-y, compared to a 8.3% rise in tax revenues. As a result, after registering negative y-o-y growth for three consecutive quarters, the Turkish economy saw positive growth in the third and fourth quarters and, expanded by 0.9% y-o-y in 2019. Inflation eased substantially throughout the year, slowed from 20.35% y-o-y in January to 11.84% in December. As a result of a strong easing policy, loan growth increased from -9.7% in January to 19.5% in December, the ratio of nonperforming loans reached 5.3%, and according to the International Monetary Fund (“IMF”) definition, the headline budget deficit increased by 5.3% of GDP. Along with these leveraged figures, U.S sanctions and deterioration of risk appetite towards Turkey could negatively affect the economy. Additionally, the Turkish Lira could face massive sell-off, inflation figures and expectations could spike and international investors’ worries about Turkey’s foreign currency debt obligations may be triggered.

Any deterioration in loans or in the general economic outlook may negatively affect our mobile and consumer finance businesses along with other industries. Geopolitical and domestic political factors are other sources of uncertainty and impose further risks on the country’s economy. More generally, in our view, among the major threats to the global economy in 2020 are weak global growth, trade tensions between U.S. and China, the potential for a significant slowdown in the Chinese economy and European and US political uncertainty, notably in light of the upcoming US presidential elections. A number of institutions, such as the IMF, are updating their growth forecasts downward mainly as a result of the negative effects of tariff increases enacted in the U.S. and China. According to the recent indicators and surveys, the Eurozone economy has been slowing from previously high levels, due to weakening domestic demand due to decreased industrial production following the introduction of revised auto emission standards, subdued foreign demand in Germany as well as the uncertainty surrounding Brexit. As the largest exporting partner, a slowdown in Germany and the Eurozone presents an important risk to the Turkish economy. The effect of prolonged low energy prices on commodity-exporting countries in the region such as Russia, Saudi Arabia and Iran may negatively affect the terms of trade between these countries and Turkey. Also, fragile growth outlook in Turkey’s key export destinations and geopolitical risks stemming from instability in Iraq, Syria, Iran, Georgia, Cyprus, Egypt, Tunisia, Israel, Armenia, Ukraine and Russia are additional sources of risks for Turkey. Since December 2010, political instability has increased markedly in a number of countries in the Middle East and North Africa, such as Libya, Tunisia, Egypt, Syria, Jordan, Bahrain and Yemen. As a result of the conflicts in Syria, millions of Syrian refugees have fled to Turkey and more can be expected to cross the Turkish-Syrian border if the unrest in Syria continues or escalates. Any continuation or escalation of political instability or international military intervention in Syria may act as a destabilizing factor for Turkey. The high number of refugees within Turkey’s borders and foreign intelligence agents infiltrating both refugee camps and local communities remain current threats.

The recent global outbreak of the Coronavirus (“COVID-19”), a virus causing potentially deadly respiratory tract infections, has caused and may cause additional slowdown in the global economy, as is evidenced by the ongoing sharp fall in investments, exports and industrial production. On March 27, 2019, the International Monetary Fund officially declared that the global economy has entered recession as a result of the spread of COVID-19. As COVID-19 spreads globally, financial markets are factoring in higher risk in their prices and experiencing historical levels of volatility and selloffs. Turkey has been and will continue to be affected. A series of measures have been announced in Turkey to combat the effects of COVID-19, such as the Central Bank of Turkey’s targeted additional liquidity facilities to banks aimed at securing uninterrupted credit flow to the corporate sector, tax cuts and primary debt and interest payments deferments; however, we cannot predict the impact, if any, of these measures on the Turkish economy. Should these measures be ineffective in countering the effects of the outbreak on the economy, customers in our home market and abroad could, namely, experience a significant deterioration in purchasing power, leading to a material negative impact on our revenues and a surge in corporate bankruptcies. In addition, these measures will be costly and will thus add to Turkey’s state debt and may eventually result in additional pressure on the value of the TRY relative to other currencies. Moreover, measures taken by the public and private sectors both in Turkey and abroad in response to COVID-19, including travel restrictions, the closure of stores (including ours), the promotion of social distancing and the adoption of work-from-home by companies and institutions, could have a material impact on the amount and ways our customers use our networks and other products and services and, in turn, our business and our investment requirement. In particular, COVID-19 has resulted in a substantial decrease in international travel, which has had an adverse effect on our roaming services (inbound and outbound) and if continued for a long duration, will result in a material adverse effect on our roaming revenues and results of operations. Although we are monitoring the potential impact of COVID-19 to our business in Turkey and abroad, its impact on our business and financial condition is unknown at this time.

 

 

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Slower growth and inflationary pressures as a result of the factors described above may have a negative impact on consumer sentiment, resulting in a decrease in sales which could have an adverse effect on our business, financial condition and results of operations. Furthermore, geopolitical risks are currently prevailing, primarily on the basis that relations with the U.S. continue to be fragile on various fronts, and this could potentially lead to volatility in the future. There can be no assurance that the political and more importantly geopolitical situation within Turkey or its neighboring countries will not deteriorate. The rise of protectionism and the threat to globalization is likely to impact political and economic affairs. These, coupled with rising geopolitical risks, might deter politicians from implementing economic programs, may individually or in the aggregate adversely affect the Turkish economy and, in turn, our business, financial condition and results of operations.

Foreign exchange rate risks could affect the Turkish macroeconomic environment and could significantly affect our results of operation and financial position in future periods if hedging tools are not available at commercially reasonable terms.

We are exposed to foreign exchange rate risks because our income, expenses, assets and liabilities are denominated in a number of different currencies, primarily Turkish Lira, U.S. Dollars, Euros, Chinese Renminbi (“CNY”), Ukrainian Hryvnia (“UAH”), and Belarusian Ruble (“BYN”). Fluctuations of Turkish Lira, Ukrainian Hryvnia, Belarusian Ruble, and Chinese Renminbi versus U.S. Dollars and Euros, have had and may have an unfavorable impact on us. In particular, a substantial majority of our equipment expenditures is currently, and expected to continue to be, denominated in U.S. Dollars and Euros, while the revenues generated by our activities are denominated largely in local currencies, in particular the Turkish Lira, Ukrainian Hryvnia, Belarusian Ruble and Euro. As of December 31, 2019, our total debt was TRY 20,306 million (including TRY 1,533 million of lease obligations). Consolidated debt breakdown (excluding lease obligations), as of December 31, 2019, was as follows: Turkcell Turkey’s debt was at TRY 15,994 million, of which TRY 9,096 million (US$ 1,531 million) was denominated in US$, TRY 5,425 million (EUR 816 million) in EUR, TRY 201 million (CNY 237.2 million) in CNY and the remaining TRY 1,272 million in TRY. Our consumer finance company debt was TRY 1,733 million, of which TRY 1,194 million (US$ 201 million) was denominated in US$, and TRY 214 million (EUR 32 million) in EUR with the remaining TRY 325 million in TRY. The debt balance of lifecell LLC (“lifecell”) was TRY 1,044 million, all denominated in UAH.

In addition, we are exposed to currency mismatches with respect to certain capital expenditures and off-balance sheet obligations, in particular with our universal service obligations for the installation of infrastructure in uncovered areas of Turkey, a service that we have contracted to provide for an amount in TRY, but which requires expenditures in foreign currencies (primarily in USD, but also Euro and Chinese Renminbi). Also, the financing of infrastructure investments, potential license fee payments and any other potential investment opportunities could lead to an increase in our U.S. Dollar and/or Euro debt, further increasing our currency exposure. The effect of the depreciation in TRY is typically reflected in inflation rates in 3-6 months on average. According to the research of the CBRT, the exchange rate pass through realization in Turkey is around 10-15% and this figure might be well over 20% in an overheated economy. High exchange rate pass through creates increasing production prices which is eventually reflected in consumer prices. Between 2011 and 2015 additional point impact on inflation was 1.8 when average inflation was 8.2%. See “Item 8. Financial Information” and Note 35 to our audited Consolidated Financial Statements included in “Item 18. Financial Statements” of this annual report on Form 20-F. Devaluations that are not matched by adjustments in our tariffs have had, and may continue to have, an adverse effect on our results of operations and our liquidity. See “Item 4B. Business Overview—IV. Tariffs”. We are also exposed to currency exchange rates on the prices of the smartphones that we rely on for the promotion of our digital and data services. After the 2008 financial crisis, with the flow of cheap funding, the Turkish economy experienced import driven growth. Therefore consumption patterns have shifted towards foreign currency denominated goods along with raw materials and intermediary goods used in production. Production has been negatively impacted by the price inflation of raw materials and intermediary goods. Depreciation in TRY triggered inflationary pressures which resulted in a deterioration in the purchasing power of consumers. Coupled with slow growth and low purchasing power, consumer demand has fallen. Turkish Lira depreciation has made smartphones that are procured in hard currencies more expensive for our customers, thus potentially reducing new sales of such devices and curbing the market for the services, which may have a negative impact on our profitability and financial position.

According to the CBRT, the TRY depreciated by 12.9% against the U.S. Dollar and 10.3% against the Euro in 2019. As of March 20, 2020, according to the CBRT, the TRY has depreciated a further 9.7% against the U.S. Dollar and 6.1% against the Euro compared to the closing rates on December 31, 2019. Our currency hedging strategy includes derivative transactions and accumulating hard currency by using Turkish Lira cash from our operations. In addition, we have been further diversifying our currency exposure by entering into agreements with our vendors in local currencies, particularly in Chinese Renminbi.

 

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While we are currently able to hedge our principal TRY exposure to the U.S. Dollar and the Euro on commercially reasonable terms, no assurance can be given that we will continue to be able to do so under all circumstances in the future, in particular taking into account the context created by the COVID-19 epidemic, which has had, and is likely to continue to have, a material impact on the volatility of global markets which, in turn, may lead to a material increase in our financing costs. The increase in public debt in Turkey may also result in increased pressure on the value of the TRY. For further information relating to our financing obligations, see—“Reduction in cash generated from operations and increased capital needs may increase our borrowing requirements, which may increase our financing costs and our exposure to the risks associated with borrowing” below. In several of the other countries in which we have businesses, in particular Ukraine and Republic of Belarus (“Belarus”), there are no or few tools to hedge foreign exchange rate risks effectively due to restricted and undeveloped financial markets in these countries. Any significant fluctuations in the value of the TRY relative to other currencies could have an adverse effect on our business, financial condition and results of operations.

Reduction in cash generated from operations and increased capital needs may increase our borrowing requirements, which may increase our financing costs and our exposure to the risks associated with borrowing.

We continue to experience challenging macroeconomic, regulatory and competitive conditions in our markets that may reduce cash generated from operations, and we may continue to face increased funding needs, in particular to finance our technological expansion and investments. In the previous three years, this included the payment of the Turkish 4.5G license fee, Ukrainian 4.5G license fee and related capital expenditures in Turkey and Ukraine, as well as having a consumer finance company in Turkey. Furthermore, in 2018 and 2019, we paid TRY 1.9 billion and TRY 1.0 billion dividend, respectively, and made capital expenditures and debt repayments, which significantly reduced our available cash.

Looking ahead, we expect to continue to experience moderate cash outflows in relation to new licenses and network roll-out, continuing fiber development and potential dividend payments. The ongoing disputes among our shareholders may also have an impact on our liquidity position, to the extent that they may affect dividend payments. In the past, as a result of such disputes, dividends were not paid for several years and then the resulting backlog was eventually paid in a short period of time. Our liquidity position may also be negatively impacted if our shareholders request dividend payments which are higher than our dividend policy. Our working capital requirements have increased in the last three years in particular after our consumer finance company began its operations. The BRSA’s existing regulation imposing a cap on the number of instalments with regard to consumer loans for mobile phones significantly decreased the demand for new loans and thus has reduced our related working capital requirement accordingly. However, working capital requirements could once again increase should the BRSA increase the maximum number of instalments on mobile phone related loans or should we enter into the device leasing business for consumers, both of which could drive the demand up considerably. These cash outflows have in the past reduced, and may continue to reduce, our liquidity. Reduced liquidity may lead to an increase in our borrowing requirements and thus our borrowing costs. Our borrowings may expose us to foreign exchange rate risk, interest rate risk and possibly, to increases in our total interest expense, each of which could have a material adverse effect on our consolidated financial condition and results of operations.

We enter into derivative transactions and keep our cash in hard currencies to manage the risk with respect to the Turkish Lira. For the year ended December 31, 2019, as a result of fair value changes in derivative instruments, net derivative assets of TRY 7.6 million are recognized in our consolidated financial statements. However, derivative transactions might have costs and may not fully cover all of our risks, and significant judgment is used by the Company’s management to determine the fair value of these instruments due to the use of an internally-developed model, which includes significant assumptions related to the treasury curves and credit spreads. For a discussion of our critical accounting policies, see “Critical Accounting Policies” in Part III, Item 5- Operating and Financial Review and Prospects. Furthermore, no assurance can be given that we will continue to have access to financing, or be able to conduct derivative transactions, on terms that are economically viable, or at all.

As of December 31, 2019, our total debt was TRY 20,305.7 million. TRY 10,188.5 million of our debt portfolio consisted of financing obligations paying interest at fixed rates. The remainder of our debt portfolio pays interest at floating rates, which has been decreasing within the last year but could expose us to increased costs if rates increase. In 2015, we arranged a number of financing facilities with a principal amount of approximately $2.9 billion (partly in U.S. Dollars and in Euro) for the refinancing needs of the Company and our subsidiaries and to fund infrastructure investments and any other potential investment opportunities, which has significantly increased our indebtedness. Of this financing amount, we issued a 10-year Eurobond with an aggregate principal amount of $500 million and utilized $500 million in October 2015, which was followed by a

 

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EUR 1.25 billion, 10-year loan facility from the China Development Bank (“CDB”). EUR 500 million of this facility was immediately utilized. EUR 195 million, USD 325 million and RMB 251 million were utilized from this facility until its availability period expired in April 2019. Furthermore, in June 2016 we utilized USD 500 million and EUR 445 million under a 5-year club loan agreement with five international banks. Repayments of the CDB and club loan facility, on a semi-annual basis, have already started and further, on February 11, 2020, our Company announced the prepayment of the club loan facility. Accordingly, the outstanding two principal repayments of the loan, which are originally due in June 2020 and September 2020 and which in total amount to EUR 148.4 million and USD 166.7 million, were completed on March 23, 2020.

In April 2018, we issued another 10-year Eurobond bond with an aggregate principal amount of $500 million and a fixed coupon rate of 5.80% per annum in order to finance upcoming debt service. In 2019, we signed a USD 150 million 10-year export finance facility covered by Exportkreditnämnden (EKN) of Sweden in order to finance our procurement from a global vendor, and a EUR 50 million 3-year sustainability linked loan with an international lender in order to refinance existing indebtedness. In March 2020, we signed a EUR 50 million 5-year green loan to be utilized to finance sustainable investments such as renewable energy, energy efficiency, green digital services and green buildings under the internationally recognized Green Loan Principles. In addition, no assurance can be given that unexpected cash outflows will not be required, which could further erode liquidity and increase borrowing requirements.

In February 2020, a law was enacted in Turkey (Law No. 7222 regarding Amending Banking Law and other Laws) which enables investors to act collectively according to changing conditions, and issuers and investors to agree on changing the terms and conditions of debt instruments in accordance with their interests, which may have a negative effect on our consolidated financial condition and results of operations.

As we understand from what we observe in the market, the Financial Conduct Authority (FCA) plans to phase out LIBOR by the end of 2021 and from then on, the Secured Overnight Funding Rate (SOFR) is expected to replace LIBOR. Furthermore, regulators are also discussing the replacement of EURIBOR, although it is expected to remain in place for another period of 5 years. As of March 20, 2020, we have neither discussed with nor been approached by any financial institution to replace LIBOR and/or EURIBOR with a new reference rate in our existing loan or hedging agreements.

In the last three years, we have also borrowed to finance the business of our consumer finance company and the working capital requirements of our subsidiary in Ukraine. We may continue borrowing to finance our infrastructure investments, consumer finance company (depending on how the market evolves), loan repayments and any other potential investment opportunities. Additionally, we continued to make excess TRY cash of Turkcell available to other group companies located in Turkey as short-term TRY loans at arm’s length basis in line with prevailing market conditions under the framework shareholder loan agreement signed with respective group companies in 2018.

Some of our borrowing agreements contain cross default clauses, which could trigger an event of default under such agreements in the event of a default by a Group company under its own borrowing agreements (such default by that Group company being subject to certain thresholds).

Regulatory decisions and changes in the regulatory environment could adversely affect our business and financial condition.

We are subject to a significant range of legislative and regulatory requirements, both in Turkey and internationally. Compliance with new and existing laws and regulations has had, and is likely to continue to have, a significant impact on the ways in which we do business. This may include but is not limited to the impact on our ability to set our pricing and offer new and existing services, including converged services, on customer use of our services, the way we handle, process and store customer data, the terms of our subscriber contracts, the way we can communicate with customers, including in particular our ability to contact subscribers with our offers, our ability to implement any planned or future network or infrastructure sharing initiatives and our ability to obtain and maintain licenses. Furthermore, the laws, regulations, regulatory orders and licenses under which we operate are subject to interpretation and enforcement by regulators with which we are not always in agreement. Complying with regulations may be costly, and failure to comply may lead to significant penalties, criminal prosecution, adverse publicity and the loss of licenses in the affected line of business or country and could adversely affect our business, financial condition and cause significant reputational and brand damage with customers, investors and regulators. Furthermore, our licenses generally have specified terms and renewal is not assured. For more information on regulation and how it may impact our business, see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry”.

 

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Pricing is one of the areas in which we are subject to regulation. In the recent past, the ICTA and Ministry of Transport and Infrastructure regulations and actions relating to our voice, SMS, data and value added/digital services have negatively affected our pricing and our ability to design and launch campaigns and offers. One of these regulations regarding the retail pricing per voice minute has been lifted and the regulatory burden has consequently been significantly reduced. The ICTA reintroduced the “mobile retail price cap” obligations in 2018, from which Turkcell had been exempt since 2016. The ICTA adopted a decision, which sets new price caps applicable to fees for activation/ deactivation, name/title change, account takeover, MSISDN change, SIM card change and detailed bill information, effective as of October 1, 2018. Following this decision, new price caps applicable to calls, SMS, international calls and directory assistance service have also been introduced, effective as of January 1, 2019. Turkcell applied for withdrawal of this decision, which was rejected by the ICTA. Turkcell filed a lawsuit for stay of execution and the cancellation of Article 1 of the decision. The case is pending as at March 20, 2020. Further, with the decision taken by the ICTA on April 12, 2018, operators are now subject to new processes related to the reimbursement of the remaining balances to prepaid subscribers whose subscriptions are terminated for various reasons, which may be material depending on the size. ICTA, through a board decision taken at the end of 2018, has imposed obligations on operators to record and to keep up-to-date identity information on their subscribers (both consumer and corporate segments), matching this information with the products/numbers that are being used. ICTA also requires that operators complete missing information on existing subscribers and to terminate these subscriptions if the information is not provided within a given date. Likewise, foreigners are required to register their subscriptions with their “foreign identity number” if they are to use their subscription for more than 90 days, otherwise their subscriptions must also be terminated. These new obligations have resulted in a one-time bulk deactivation of subscriptions, especially of the subscriptions of foreigners, impacting our churn rates in the third quarter and particularly in the fourth quarter of 2019. New subscriptions are completed only if the required identity information is given upfront.

In addition, interconnection rates are still set by the ICTA, and, there is a possibility that further regulatory actions may adversely affect our Company’s wholesale revenues. In addition, the ICTA has determined and may in the future determine that we are an operator with significant market power and as a result impose certain constraints on us, while imposing less stringent ones on other mobile telecommunications operators in the market, both of which may adversely affect our business and financial condition. For more information, see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry”.

Expectations and standards with regard to privacy and data protection have been increasing both globally and in Turkey. Stricter privacy laws and regulations are being adopted or existing legislation is being more strictly interpreted and enforced by the authorities, which require companies to invest more diligence and effort towards ensuring compliance. While we are primarily subject to Turkish data protection legislation, the European General Data Protection Regulation and other foreign privacy legislation also have the potential to affect our business through some of our subsidiaries established in the EU and other countries, as well as some of our products and services provided to persons in the EU. Breach of such regulation may potentially result in penalties up to a maximum of 4% of global annual turnover or EUR 20,000,000. Ensuring compliance with these various privacy legislations is a long-lasting commitment, which requires substantial costs, and it is possible that despite our efforts, governmental authorities or third parties will assert that our business practices fail to comply. Changes in privacy legislation or in interpretation of the existing legislation could have an adverse effect on our business and data processing operations and/or subject us to significant civil and criminal penalties, business disruption or reputational harm.

Furthermore, given that we process personal data, namely of our customers and employees, we are subject to the Law No. 6698 on The Protection of Personal Data and the regulations of the Turkish Personal Data Protection Authority, as well as data protection legislation under the Electronic Communications Law and the ICTA’s data protection regulations. We are further subject to the Capital Markets Board’s Communiqué on Information Systems Management numbered VII-128.9 and Communiqué on Independent Audit of Information Systems numbered III-62.2, which entered into force on January 5, 2018 and introduced new obligations with regards to information systems for certain legal persons. For more information, see “Item 4.B. Business Overview-Regulation of the Turkish Telecommunications Industry”. Should we fail to properly implement and comply with these data protection laws and regulations, we might face administrative fines of up to approximately TRY 1,000,000 (this amount is subject to a legal revaluation increase each year) per breach, depending on the nature of the failure(s), as well as criminal sanctions or other regulatory actions by the Personal Data Protection Authority, and face administrative fines up to 3% of yearly net sales of the ICTA-regulated companies in breach. Changes to such data protection laws may impose more stringent requirements for compliance and impose significant penalties for non-compliance. In particular, we are facing increased risks with regard to these laws and regulations as the number of our Paycell customers in relation to whom we hold

 

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sensitive data such as credit card information- increases rapidly. Additionally, our Company collects a significant amount of personal data from our digital service products users, such as BiP, fizy, lifebox and TV+, and the scope of this data collection has increased significantly following our recent artificial intelligence implementation aimed at providing personalized content to our customers. If we or those with whom we share information fail to comply with these laws and regulations, our reputation could be damaged, possibly resulting in lost future business. In addition, the cost and operational consequences of responding to breaches and implementing remediation measures could be significant.

The Ministry of Transport and Infrastructure informed the operators on June 7, 2018 that they primarily have to request from the most prevailing operator in terms of infrastructure in Turkey—which is Turk Telekom—to perform the excavation work on their behalf. Although Turkcell filed a lawsuit to remove this measure no assurance can be given that we will be successful in doing so, This situation has negatively affected our ability to expand our fiber network and may affect our future investments.

Taxation and charges are also areas in which we are subject to specific regulations. We are, for example, subject to a Special Communication Tax (“SCT”), which is set at 7.5% across all product lines, and transceiver and receiver unit surcharge payments are set at 5% of monthly net sales since January 2018. Such taxes have affected, and could continue to adversely affect, consumer demand for products and services and our results of operations.

We are increasingly involved in providing financial services to our customers. As a result of the establishment of our insurance agency company and our participation finance company (not operational yet) as well as our existing operations in consumer finance, payment and e-money services, we are subject to a variety of banking and finance laws and regulations (the principal regulators include the BRSA, the CBRT and the Insurance Directorate under Undersecretariat of the Treasury). Moreover, pursuant to our focus on services such as TV and music, we are subject to broadcasting and copyright laws and regulations. Turkcell Enerji, which we fully own indirectly, holds an electricity supply license from EMRA for the purposes of electricity energy trading and wholesale and retail electricity sales. This company is subject to laws and regulations governing the electricity market in Turkey. These regulations are different from those that we currently encounter in our core communications business in Turkey and we will need to obtain and develop the expertise required to comply with these laws and regulations, which may be costly. As we enter new businesses, such as the automotive industry, service coupons and meal cards, we will also be exposed to the regulatory regimes and decisions specific to those businesses.

Notably, in February 2020, the Law No. 7222 Amending Banking Law and Certain Other Laws, Capital Markets Law Article No. 103 was amended so that administrative fines imposed by the Capital Markets Board are indexed to public companies’ financial performances instead of yearly updated fixed administrative fines so far. Accordingly, administrative fines are calculated up to a maximum of the greater of 1% of gross sales proceeds or 20% of pre-tax profit, which may have a significant negative impact on our results of operations.

If we, our local partners with whom we enter into cooperation agreements or similar agreements, or one of our key suppliers fail to comply with laws and regulations regarding unethical business practices, including bribery and corruption, and international sanctions, this could adversely affect our business and financial condition.

We are subject to various laws and regulations relating to unethical business practices, including bribery and corruption, and international sanctions. Bribery and anti-corruption laws in effect in many countries prohibit companies and their intermediaries from making improper payments to public officials for the purpose of obtaining new business or maintaining existing business relationships. Certain anti-corruption laws such as the FCPA also require the maintenance of proper books and records, and the implementation of controls and procedures in order to ensure that a company’s operations do not involve corrupt payments. Since we operate in several countries, and given that some of our clients, or local partners with whom we enter into cooperation agreements or similar agreements, are government-owned entities and that our projects and agreements often require approvals from public officials, we face the risk that our employees, local partners, consultants or agents may take actions that are in violation of our policies and of anti-corruption laws. In many parts of the world where we currently operate or seek to expand our business, local practices and customs may be inconsistent with our policies, and could violate anti-corruption laws, including the FCPA and European Union regulations, as well as applicable economic sanctions and embargoes. Our employees, local partners or other parties acting on our behalf or with whom we enter into cooperation agreements or similar agreements, or our suppliers, could violate policies and procedures intended to promote compliance with anti-corruption laws or economic sanctions,

 

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regardless of whether we had participated in such acts or had knowledge of such acts at certain levels within our organization. Any of the foregoing could result in criminal prosecution and sanctions, fines penalties, withdrawal of licenses against us, companies in which we invested, and our and their officers and employees and significant damage to our reputation, and negatively affect our competitive advantage and financial position. There can be no assurance that acts of corruption will not occur or be alleged in respect of any of our activities or those of our current or past affiliates.

We have strong commercial ties to several Chinese vendors from which we have in the past purchased network equipment, and currently have a significant installed base of their equipment, including in the context of the development of our 5G network infrastructure and cloud and IT infrastructure. We also have access to financing from the China Development Bank which facilitates the purchase of Chinese equipment. Should any one of them become subject to U.S. sanctions, or should we or any entity in our supply chain be compelled to terminate a relationship with a vendor as a result of the direct or indirect reexport restrictions implications resulting from an entity being added to the Entity List prohibitions of the U.S. Commerce Department’s Bureau of Industry and Security (BIS), which would affect our ability to purchase their equipment in the future and require us to find alternative suppliers, or should we be compelled to terminate or suspend our relationships with these vendors for any other reason, namely as a result the ongoing tensions between China and the U.S., this may lead to an increase in our costs or otherwise affect our ability to develop and maintain our increasingly advanced network infrastructure and negatively affect our competitive advantage and financial position.

We hold interests in several companies that may expose us to various economic, business, political, social, financial, liquidity, regulatory and legal risks and may not provide the benefits that we expect, and our pursuit of acquisition opportunities may increase these risks.

Our investments in subsidiaries and associated companies within Turkey and internationally have and are likely to continue to expose us to economic, political, social, financial, regulatory, currency devaluation and legal risks. These risks have affected and could adversely affect our result of operations and the carrying value of assets in our financial statements.

Through our subsidiaries in Turkey and internationally, we engage in businesses outside of the scope of our core mobile business. These other businesses are subject to risks that are in some respects different from those of our mobile business. We will need to obtain the expertise required to compete and operate in these new businesses, which may be costly. No assurance may be given that we will succeed and that we will not incur losses that could adversely affect our business and financial condition. For example, several of our subsidiaries are providing financial services including, for instance, insurance, providing credit, payment intermediation and bill payment services, which are different from those in our traditional telecommunications activities and increase our exposure to certain risks that are common to both. Providing financing and financial services to our customers exposes us to liquidity and market risk, credit risk, fraud risk and cyber-attack risks, in particular with respect to credit cards and personal information that we process and hold. This includes through the expansion of our mobile payment business, Paycell, in Turkey, Ukraine and the Turkish Republic of Northern Cyprus (limited services).

We also have a consumer finance company Turkcell Finansman A.S. (“Financell” or “Turkcell Finansman”), which manages the high working capital requirements and bad debt expenses arising from the high demand in the Turkish market for “bundled” offers featuring both communications services and a communications device, particularly a smartphone. Having commenced operations in 2016, Financell carried loans outstanding at December 31, 2019, which totaled TRY 2.52 billion. Our cost of risk has improved to 3.2% in December 2019 from 1.97% in December 2018; this may increase in the event that our lending criteria fail to preserve the quality of our assets, and/or in the event of economic activity and macroeconomic slowdown in Turkey and in Turkish Republic of Northern Cyprus, where, for the latter, we have offered consumer financing up until June 1, 2019. The foregoing may lead to losses and eventual tightening of lending criteria, which in turn may cause a reduction of the loan portfolio, which is likely to affect our profitability. Furthermore, the demand for consumer loans might be negatively affected by financial conditions, particularly interest rates and FX rates since most smartphones’ pricing is largely dependent on hard currencies. With regard to Financell’s swap agreements, if the FX rates are volatile and, for example, result in a substantial difference between the rates forecasted by our treasury and the spot rates at maturity, this could result in significant losses and a decrease in revenue and otherwise affect our profitability.

The Turkish financial sector, including banks, financial leasing and factoring companies, payments and e-money institutions and consumer financing companies, is regulated by the BRSA. The BRSA may enact changes in regulations regarding consumer finance activities, which might restrict part of our consumer finance business.

 

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As such, initially on August 15, 2018, later on February 26, 2019 and most recently on January 14, 2020, restrictions on the number of installments depending on the purpose of the loan have been adopted through amendments in the relevant legislation. The maturity of certain type of loans (other than loans to consumers for housing finance and complementary goods and services in relation to home renovation/improvement, the financial leases for homes leased to consumers, other loans for the purpose of purchasing real estate, loans for the purpose of financing education and learning fees and loans for any refinancing of the same) are explicitly determined under the Regulation on the Principles regarding Incorporation and Activities of Financial Leasing, Factoring and Financing Companies. Accordingly, Financell may provide loans of up to three months for mobile phones with a retail price of TRY 3,500 and above and up to twelve months for mobile phones with a retail price of below TRY 3,500, down from twenty-four months on average up until mid-2018. This has negatively affected the number of smartphone sales in the Turkish market, which has had and is expected to continue to have a negative effect on the size of the digital services and solutions market. The long term growth prospects of our digital services and solutions businesses depend in part on the continuing expansion of the number of smart phone users in the market. Furthermore, on November 14, 2018, the BRSA noticed the factoring, leasing and financial institutions via an article, restricting the distribution of dividends for 2018 and dividends earned before 2018 to only be distributed by prior approval of the BRSA. Further to a recent decision, starting from March 19, 2020, a “cultural fund” of 1% over import value shall be paid for imported or manufactured mobile phones which have voice recording qualifications. The President of Turkey was given the authority to increase the Special Consumption Tax rate on mobile phones from 25% to up to 50% since February 2019. An increase in this tax may negatively impact the number of mobile phones sold in Turkey. We cannot rule out the possibility of further increases in tax rates or new taxes and charges, including on mobile devices, data, and services. These restrictions may include a prohibition on financing of specific goods or services in the future. More generally, the consumer finance sector is rapidly evolving and no assurance can be given that we will be able to adapt to market trends and that new competitors will not emerge. If this were the case, we may not be able to realize the synergies that we expect from our consumer finance business.

Furthermore, our subsidiary Kule Hizmet ve Isletmecilik A.S. (“Global Tower”) operates a large portfolio of telecommunication towers in several countries. In the event of expiry, non-renewal or termination of certain concessions or licenses of Turkcell, Turkcell may be forced to transfer to ICTA the tower assets it owns where ground lease agreements are executed by Global Tower, which would lead to a loss of revenue and have an adverse effect on our business and results of operations.

Turkcell Group has investments in emerging markets including Belarus, the Turkish Republic of Northern Cyprus and Ukraine and has activities that involve other emerging markets. Legal systems, institutions, commercial practices and economies in emerging markets tend to be relatively underdeveloped and some may also suffer from relatively high rates of fraud and corruption. Were we to be affected by corruption, we could incur significant penalties under applicable anti-corruption legislation, including the U.S. Foreign Corrupt Practices Act as well as reputational harm. Turkcell Group also retains relevant risks with regards to its divested businesses.

In some countries, we hold our investments with another shareholder or local government. Should there be a disagreement between us and other shareholders, no assurance can be given that we will be able to take the course of action we believe is appropriate. In these cases, we may consider exiting, or alternatively increasing our investment in order to take control, which may be costly. There can be no assurance that political, legal, economic, social or other actions or developments in these countries or involving such companies and individuals will not have an adverse impact on our investments and businesses in these countries. Investors may be reticent to invest in a company doing business in such countries or other countries that may be at risk due to the political instability. These factors could have an adverse effect on the demand for and the price of our shares. In this regard, we have and are likely to continue to experience issues in some of our Turkish and international businesses that adversely affect our Company. Recent issues include the following:

 

   

Our operations in Ukraine are adversely affected by the ongoing conflict with Russia, weaknesses of the state institutions, civil unrest and economic problems in that country, although, by the end of 2019, Ukraine has been able to keep macroeconomic stability demonstrating GDP growth and decreasing inflation. Due to the ongoing crisis in the Crimea region following its annexation by the Russian Federation, we were eventually obliged to discontinue services there in the fourth quarter of 2014. We completely wrote-off our assets in the Crimea region, while retaining our license and frequency rights. We continue to evaluate our options with respect to the disposal of lifecell’s assets in Crimea and the actions that we may take may raise challenges with respect to compliance with lifecell’s license requirements. Furthermore, the current military and political crisis in the Eastern part (mainly in

 

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Donetsk and Luhansk, otherwise referred to as the ATO zone) with Russia remains unresolved and could lead us to evaluate our options in the Eastern region. The ongoing crisis may adversely affect the Ukrainian economy and our results of operations in Ukraine and/or the value and security of our assets and operations there. We are unable to predict the likely course or duration of these events, or the extent of the adverse impact that they have had and are likely to have on the telecommunications market dynamics and composition, our investment in Ukraine and our operations there.

 

   

In Ukraine, the local currency, the Ukrainian Hryvnia (“UAH”), appreciated against the U.S. Dollar by 1.4% in 2018 and by 14.5% in 2019 according to National Bank of Ukraine (NBU). The UAH depreciated by 17.4% against the U.S. Dollar as of March 20, 2020 as compared to closing rates on December 31, 2019. Consumer price inflation slowed to 4.1% in 2019, from 9.8% in 2018, and this downward trend is expected to persist into the first half of 2020. Rapid decline in inflation makes room for steady easing monetary policy by the NBU. The NBU cut its key policy rate by 450 bps from 18% to 13.5% in November. More aggressive cuts are possible in 2020, if risks are avoided. Inflation is expected to shift lower, but still above the NBU’s target of 5%. Ukraine’s key event risks will be related to the steps necessary to agree a new IMF deal, notably on the banking sector. Another uncertainty relates to the talks with Russia regarding gas transit, with the current contract having expired at the end of 2019. As of December 31, 2019, our debt balance (excluding lease obligations) related to lifecell was UAH 4.2 billion (equivalent to TRY 1,044 million). lifecell’s foreign currency revenues were 4.0% of its total revenues and its foreign currency operational expenses were estimated at 6.0% of its total revenues as of December 31, 2019.

 

   

Our development strategy in Ukraine was marked by our acquisition in 2015 of the 44.96% stake in lifecell that we did not own, with a view to strengthen our regional position, a restructuring of lifecell’s balance sheet and the acquisition of a 3G license at a cost of UAH 3,355 million (equivalent to TRY 376 million as of March 19, 2015) paid in 2015. Furthermore, between 2015 and 2018 we paid a total of UAH 886 million for the conversion of spectrum from military use in three installments. In addition, in 2018, we paid a total of UAH 1,704 million for a 4G license. Significant deployment costs were incurred in 2018. These investments have further increased our country and currency risk exposure and there is no assurance that we will monetize this investment.

Additionally, the official process for the redistribution of radio frequencies in the 900 MHz range was completed by Ukraine’s National Telecommunications Authority (“NKRZI”) on March 18, 2020. Accordingly, the frequency band of lifecell in 900 MHz was increased from 3.8 MHz to 5.6 MHz for UAH 121.2 million, effective as from July 1, 2020 for five years. The license fee has been fully paid. This new license will require further investment in Ukraine, increasing our exposure in this market and may consequently negatively affect our profitability.

In another development, the Mobile Number Portability (“MNP”) has been launched in Ukraine as of May 1, 2019. Due to the lengthy and cumbersome practice of MNP, as at March 20, 2020, a negligible number of subscribers have changed operators. We are in a continuous effort to improve this process; however, we may not be successful in doing so.

Recent ownership change in Vodafone Ukraine may change the dynamics in the competitive environment to our disadvantage, which may adversely affect our financial and operational performance. Apart from these economic and political risks, our operations in Ukraine could also expose us to operational, competitive, regulatory and legal risks, all of which may prevent us from delivering our strategic targets. These risks have affected and could adversely affect our result of operations.

 

   

The Belarusian economy returned to growth in 2017 following two years of recession and remained positive for 2018 by 3.1%. Following a weak start to the year, Belarus economy accelerated visibly in 2019. GDP growth was reported at 1.4% as of Q3 2019.

The country still remains vulnerable to global shocks which may trigger renewed weakness in the country’s ability to service its external debt and any depreciation of the local currency, BYN, which could in turn lead to a reduction in the value of our investment in this country. Inflation decelerated relatively in 2019 by decreasing to 4.7% from 5.6%. According to the National Bank of the Republic of Belarus (NBRB) the BYN depreciated against the U.S. Dollar by 9.5% in 2018 and appreciated in 2019 by 2.6%. The BYN depreciated by 20.8% as of March 20, 2020 as compared to the closing rate on

December 31, 2019. The recent slowdown in inflation and the dovish shift of global and neighbor (Russia) central banks make space for gradual policy easing in Belarus. The NBRB cut the refinancing rate by 100bps to 9.0% in 2019. The NBRB expects inflation to be at the 5% target at end-2019, and

 

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sees the next year’s environment as dovish / disinflationary given the lower inflation in Russia and globally, as well as the expectation for the economy to be close to its steady state. Devaluation risks still remain, as limited currency reserves, high debt repayments and the current account deficit coupled with the close ties to the Russian economy put the recent BYN stabilization at risk and creates inflationary and devaluation pressure. Belarus has suffered from hyperinflation in the past and may again in the future.

In line with our strategic priority of improving our balance sheet structure, debt of CJSC Belarusian Telecommunication Network (“Belarusian Telecom”) was restructured in 2015. As part of the restructuring, Belarusian Telecom’s total existing intra-group loans were converted into subordinated loans, provided directly by Turkcell. As of December 31, 2019, Belarusian Telecom’s debt (excluding lease obligations) was BYN 0.9 million (equivalent to TRY 2.4 million as of December 31, 2019) owed to financial institutions and a BYN 1.5 billion (equivalent to TRY 4.1 billion as of December 31, 2019) subordinated loan owed to Turkcell. This subordinated loan was converted to the local currency BYN from EUR on April 1, 2019.

 

   

In Belarus, as the third operator in the market, we face regulatory and operational difficulties and no assurance can be given that the situation will change in our favor in the future. These risks have affected and could adversely affect our reputation and results of operations.

 

   

An IMT spectrum tender is expected to be held in 2020 as the regulatory body of the Turkish Republic of Northern Cyprus, where we have a subsidiary called Kibris Mobile Telekomunikasyon Limited (“Kibris Telekom”), issued the draft rules of the tender for consultations in December 2019. As per the draft tender terms, all currently allocated and the new spectrum will be technology-neutral and the operators will be able to use them for any technology (e.g. 2G, 3G, 4G or 5G), thereby increasing the efficient use of the spectrum and operational flexibility. Such tender may require additional investments, including in fiber, which would in addition require us to obtain permits that we have no certainty of receiving and without which 4G network profitably would be difficult to achieve. Also, there may be a tender to restructure the incumbent telecom operator, TRNC Telecommunications Office, although this has not yet been the subject of an official announcement. We face the risk that we may not be permitted to participate in the tender, and/or that the tender be awarded to one of our main competitors, which would adversely affect our growth and our competitiveness in the region. Further, this tender may include the issuance of a third mobile license, which may increase the competition and adversely affect our results. In the near past, there have been political discussions regarding the reunification of Cyprus, which, if resumed, may bring growth opportunities for our subsidiary, but may also lead to risks including unfavorable changes in applicable regulations, an increase in competition, an increase in capex requirements and loss of revenues.

 

   

Turkcell Foundation of our Company (“Foundation”), established in October 2018 in Turkey, intends to bring mainly all charities and donations, namely in respect of technology and education, under one roof on a voluntary basis. The board of directors of the Foundation consists of five members, all of which have been appointed among the high-level executives of Turkcell. The Foundation may be exposed to various Turkish regulatory and legal obligations specific to foundations.

Our international and Turkish subsidiaries may not benefit us in the way we expect for the reasons cited above, as well as other reasons, including general macroeconomic conditions, poor management and legal, regulatory or political obstacles. For many of these subsidiaries, we do not expect to achieve desired levels of profitability in the near or mid-term. We may also in response to such conditions consider increasing, restructuring or exiting certain of our investments and we may be required to establish new legal entities or engage in new business lines due to our business needs or recently introduced regulations. In addition to the foregoing, the new Turkish Commercial Code and related legislation may require us to provide new capital or other financial support to certain of our controlled subsidiaries, which may divert resources from other needs.

Furthermore, in addition to investing in our international operations, we also engage in business through roaming agreements in a number of countries. In international markets in which duopoly markets exist, such as the United Arab Emirates or the Maldives, operators tend to increase their roaming prices despite the overall trend of declining roaming prices in the world, which could increase our roaming costs. The terms on which we enter into roaming agreements may change over time, adversely affecting our ability to sustain or enter into such agreements on commercially viable terms.

 

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We face risks related to our dependence on network and IT systems and the products and services we provide through third party suppliers as well as our exposure to technological changes in the communications market, including industries where we traditionally do not compete.

We are dependent on certain systems and suppliers for information technology (“IT”) and network technology (“NT”) services, and also carry a significant inventory, and our business continuity is at risk due to our exposure to potential natural disasters, sabotages, regular or severe IT and network failures, human error, security breaches and other cyber security incidents and IT migration risk, any of which could have an adverse effect on our operations, damage our reputation and affect our relationships with our customers and/ or our employees and result in a fine under relevant data protection legislation.

We are heavily dependent on IT and NT systems as well as their suppliers and employees for the continuity of our business. Although we devote significant resources to the development and improvement of IT and NT and of security, backup and continuity systems, we could still experience IT and NT failures and outages due to system deficiencies, human error, natural disasters such as floods, unsuccessful migration to alternative or improved IT and NT systems, or other factors including but not limited to unintentional third party interruptions. Notably, a significant portion of Turkey’s population and most of its economic resources are located in a first-degree earthquake risk zone and Turkey has experienced a large number of earthquakes in recent years, which may result in significant damages to the IT and NT systems our business depends upon. These factors also put at risk the substantial inventory that we hold which, if damaged, could adversely affect business continuity and our results of operations.

Mobile networks are migrating towards internet protocol (“IP”) technology to transport information. These networks open up the possibility for IP-based services. However, once these services are introduced into the IP domain, the mobile network may be harmed by potential attacks. The threats on the mobile network can originate from external sources, such as the public internet, or internal sources, such as terminals connected to our mobile network. Despite the systems and infrastructure which we have put in place to address these security concerns, we could encounter successful attacks on our infrastructure, which could have an adverse effect on our operations, damage our reputation and affect our relationships with our customers.

Our IT and NT services are exposed to hacking, sabotage and other cyber security threats, and terrorist or other destructive acts, any of which could have an adverse effect on our operations, damage our reputation and affect our relationships with our customers and/or our customers, incur substantial additional costs and result in a fine under relevant data protection legislation and lawsuits from affected customers.

Our commercial success is heavily dependent upon the security and continuity of our services, and maintaining the security of our customers’, employees’ and suppliers’ personal and financial data, intellectual property, and other confidential and sensitive data is essential to our business. In common with other high-profile businesses which are targeted for cyber-attacks, our networks and systems are constantly exposed to a variety of different cyber threats and we have experienced an increased number of sabotage incidents, as well as attempted cyber-attacks of varying degrees of sophistication by unauthorized parties attempting to obtain access to our computer systems and networks. We believe that no such attacks have succeeded in obtaining access to our critical systems, although in practice such attacks may develop over long periods of time during which they can remain undetected.

Based on our Cyber Defense Center practices, we have experienced many privilege theft and escalation attempts which have been stopped before causing any harm to our services and products. Also, many phishing and malware activities were detected and stopped, notably a global malware attack in October 2018 aimed at several telecommunication companies including Turkcell, which aimed at taking control over our clients and servers. So far, none of these attacks are regarded as material incidents. A successful hack could disrupt our network and our ability to provide services and/or could result in, for example, unauthorized access to, misuse, loss, or destruction of our data or systems and theft of sensitive or confidential data, including personal information of our employees and customers, and theft of services and/or funds. Our data and systems are currently particularly vulnerable to cyber-attacks due to the fact that a significant proportion of our employees work remotely in the context of the ongoing COVID-19 crisis. While we are in the process of reviewing the cyber security incident insurance alternatives that are available to us, we currently do not have such insurance, and a compromise of our security systems or those of our business associates, that results in the information we hold being accessed by unauthorized persons, could adversely affect our reputation with our customers and other stakeholders, as well as our operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a breach could require that we expend significant additional resources related to the security of information systems and could disrupt our operations.

 

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Although we closely follow general technological trends in communications and technology, we may be unable to adapt to rapid technological changes in communications and information technology, which could result in higher capital expenditures and a greater possibility of commercial failure.

Rapid technological changes in communications and information technology are redefining the markets in which we operate and the products and services we offer, shortening product life cycles and facilitating the convergence of various segments, including in our core mobile communications businesses. If we fail to anticipate, invest in and implement new technologies with the levels of service and prices that customers demand or to respond effectively to technological changes, our business, financial condition and results of operations could be adversely affected. In addition, such new technologies require significant capital expenditures and it is impossible to predict with any certainty whether the technology selected by us will be the most economical, efficient or capable of attracting customer usage, or whether such technologies will be developed according to anticipated schedules, will perform according to expectations or will achieve commercial acceptance. Although we are following general technological trends in communications and technology, there can be no assurance that we will be able to develop new products and services that will enable us to compete efficiently.

We have become active in providing products and services for industries other than telecommunications, many of which are developed and/or maintained by third party providers. Our reliance on these third party providers to help us navigate the regulatory, security and business risks of industries where we traditionally do not compete adversely affects our business.

The operation of our business depends, in part, upon the successful deployment of continually evolving products and services, including for applications in industries other than telecommunications, such as TV, music, energy, mobile financial and payment services, insurance agency services, corporate services such as meal coupons, mobile education solutions, authentication solutions, data center services and entertainment and community services. We are reliant upon third party providers to help us navigate risks relating to security, regulations and business in the industries where we do not traditionally compete. Changes in such industries may impair our partners’ business and/or negatively impact the content we are developing, such as for entertainment, which, in turn, could have a material adverse effect on our business and financial condition.

We are subject to a variety of risks with respect to our Base Transceiver Stations (“BTSs”) performance.

Spectrum limitations and frequency costs may adversely affect our ability to provide services to our subscribers and the cost to us of providing such services.

Our spectrum licenses have specified terms and are subject to renewal upon a payment of a fee, but renewal is not assured. The loss of, or failure to renew, our licenses could have a material adverse effect on our business and financial condition. Those licenses have also specified radio spectrum. The spectrum is a continuous range of frequencies within which the waves have certain specific characteristics. The number of subscribers that can be accommodated on a mobile network is constrained by the limited amount of spectrum allocated to the operator of the network and is also affected by subscriber usage patterns and network infrastructure. After the IMT Advanced (known commercially as “4.5G”) auction held on August 26, 2015 in Turkey we have 2x10 MHz of FDD spectrum in 800 MHz band, 2x12.4 MHz of FDD spectrum in 900 MHz band, 2x30 MHz of FDD spectrum in 2100 MHz band, 10 MHz of TDD spectrum in 2100 MHz band, 2x29.8 MHz of FDD spectrum in 1800 MHz band, 2x25 MHz of FDD spectrum in 2600 MHz band and 10 MHz of TDD spectrum in 2600 band. Although the acquired spectrum can potentially be used for the next generation network technology known as 5G, some services that are specific to 5G and our future capacity needs will require us to eventually obtain new spectrum. If we are unable to maintain or obtain licenses for the provision of 5G specific telecommunications services or if our licenses are not renewed or are renewed on less favorable terms, our business and results of operations could be harmed. On the other hand, an earlier than expected 5G spectrum tender by the ICTA with the possibility of excessive prices can result in additional costs and investment, including capital expenditures. If the demand for 5G services fails to materialize at a level in line with the industry assumptions, the return on investment may not meet our expectations. Any of the foregoing factors could affect our profitability and our competitive position.

As we experience growth in our subscriber base and demand for mobile services and data, and as we offer a greater number of services, we will require additional capacity. We may face capacity problems, which may in turn lead to deterioration in our network’s quality and may negatively impact our operational results.

 

 

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We were awarded a license allowing us to deploy an IMT advanced network (“4.5G”) in Turkey in October 2015. There are certain coverage and local production obligations imposed by the tender. Potential increase in coverage requirements or failure to abide by the requirements of our licenses or applicable regulations may have an adverse effect on our business and financial condition.

Our 4.5G build-out has required significant financial investments and there can be no assurance that we will be able to meet all of the 4.5G license terms and conditions. The cost of the 4.5G license as well as the capital expenditure required in connection with our 4.5G build-out has been significant. Furthermore, the license agreement contains certain terms that may weigh on the profitability of this investment and may have an adverse effect on our 4.5G investment plans in the future. These include terms regarding minimum required use of local equipment and procurement from local small and medium sized enterprises engaged in production in Turkey in meeting infrastructure obligations, an active network sharing obligation for a portion of the population, high coverage obligations for roads and railroads and significant taxes and spectrum usage fees. With respect to the local procurement requirement, there is not enough research and development, product development and production capacity in the local market to meet the license requirements and thus it has not been possible to comply. We have requested ICTA to waive this requirement initially for 2015-2016, 2016-2017, 2017-2018 and 2019. However, the ICTA has not yet responded to our Company. In addition to the above obligations, we must ensure that our network equipment suppliers employ a certain number of engineers and local researchers in their local R&D centers. Although efforts have been made, we do not believe that compliance has been achieved. No assurance can be given that ICTA will not find us to be in breach of our license as a result of the foregoing, which could harm our competitive position and our profitability.

In addition, if we fail to obtain additional frequencies in the future at a reasonable cost, the competitive coverage advantage of our Company may be adversely impacted. The cost of obtaining new frequencies has increased significantly in recent years and is expected to continue to increase. This has had and is likely to continue to have an adverse impact on our cost of providing competitive coverage and also on our results of operations.

Consistent with the nature of terminal technology development, traffic on the 2G network is expected to shift to the 3G and 4.5G networks. Although we aim to migrate our 2G customers to the 3G and 4.5G networks before the expiry of our 2G license in 2023, we might not be successful in doing so, and in such case we would face the risk of losing the 2G traffic and the corresponding revenue should our 2G license extension request to the ICTA be denied, which could affect our profitability and our competitive position.

There are alleged health risks and zoning limitations related to our BTS which may adversely affect our ability to provide services at certain areas. The fiber business is also affected by local limitations.

We are aware of allegations that there may be health risks associated with the effects of electromagnetic signals from BTS and from mobile handsets. While we believe that there is currently no substantiated link between exposure to electromagnetic signals at the level transmitted by our BTS and mobile handsets and long term damage to health, the actual or perceived health risks of mobile communications devices could adversely affect us through a reduction in subscribers, reduced usage per subscriber, increased difficulty in the leasing and acquisition of site locations for base stations and exposure to potential liability. Furthermore, we may not be able to obtain insurance with respect to such liability on commercially reasonable terms or at all.

In recent years, legal proceedings have been brought against mobile operators seeking the removal of base station sites for health reasons. In addition, the Turkish Supreme Court overruled the decisions of some local courts, finding that a base station in question could have negative effects on human health over the long term. If the number of those cases increases or if new regulations were to result, these could have a material adverse effect on our operations and financial results. Such legal proceedings may make it more difficult for us to establish and maintain such sites. Furthermore, from time to time, there are conflicting and confusing reports in the media about the health effects of BTS. These reports have even caused local residents in certain regions to form large protests in strong objection to the BTS sites. Such obstacles have made it increasingly difficult to build new BTS sites and maintain our existing sites. The ICTA has issued an updated regulation which further tightened electromagnetic field limits. This may negatively impact network quality and increase our capital expenditures.

There are zoning limitations related to our BTS that require operators to obtain construction permits and certificates, which may be costly and may have an adverse effect on our operating results. Zoning law in Turkey

 

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requires mobile operators to obtain certifications for all existing and new BTS, which may result in significant compliance costs and/or closing of BTS for which certification cannot be obtained, negatively impacting our financial condition. An exception to this requirement for base stations was rescinded by a court decision. As a result of this situation, some municipalities take actions to suspend the construction of BTS or order their demolition. The amendments made in the Planned Areas Zoning Regulation came into force on July 25, 2019. With the related amendments, rooftop cellular systems and tower installations were separated. Towers and reinforced concrete station installations are excluded from the scope of the license exemption. On the contrary, a building license will not be required for rooftop BTS. However, there are certain ridge limitations for rooftop BTS. Also, there remains some uncertainty regarding the provisions on building aesthetics and silhouette, permits of the flat owners and the project implementation. Any difficulty in maintaining or building BTS due to health concerns and our inability to obtain the required permission and certificates, may negatively impact the quality of our network, including our ability to expand and upgrade it, and affect our operational performance.

In 2012, metropolitan municipalities were authorized to consider the requirements of city and building aesthetics and electronic communication services when certifying BTS sites. Municipalities regulate the choice of operators’ BTS locations, and if we do not have, or are unable to obtain, a site selection certificate in our preferred location, we may be compelled to move our BTS to another less desirable location. In addition, the Site Selection Certificate Regulation entered into force in January 2018, applicable only to BTS sites established after December 2012. This fee is updated on a yearly basis and is set at TRY 3,640 for the year 2020. Such regulation is likely to lead to additional operational costs, and the certificate processes for implementation of sites may delay the permit process.

Our fiber business must excavate to lay new cables and repair existing cables, and there is an obligation to get permission for excavations from authorized municipalities or institutions. In some areas, excavations may have to be stopped due to the high cost of tariffs requested from municipalities. Our investment plans may be affected due to excavations being banned during certain seasons within the administrative boundaries of municipalities. Also, since June 2018 operators primarily have to request from the most prevailing operator in terms of infrastructure in Turkey—Turk Telekom—to perform the excavation work on their behalf, which might negatively affect our ability to expand our fiber network and our future investments (see—Regulatory decisions and changes in the regulatory environment could adversely affect our business and financial condition). In some cases, we could face the risk that, although we get the approval of the Ministry of Transport and Infrastructure institutions subordinate to the Ministry of Transport and Infrastructure do not recognize these approvals and do not give permission to excavate. In addition, a law in force has increased the number of metropolitan municipalities and in some cases, the size of their territory was increased, which may have the effect of increasing our coverage obligations and the number of BTS required to meet such obligations. Furthermore, right of way conflicts with major municipalities to establish fiber optics infrastructure may affect our ability to provide services and to maintain operational excellence. Related regulatory actions in the future are likely to increase our costs and affect results of operations, in many cases, adversely.

We are dependent on a small number of suppliers for network equipment, information systems and handsets and for the provision of data and services. We also rely on a small number of distributors. The failure of any of our counterparty such as suppliers or distributors may have an adverse effect on our business and financial condition.

We purchase our communications network equipment from a limited number of major suppliers. Our business is dependent on a small number of critical suppliers in areas such as network infrastructure, information systems and handsets and distribution. Further, we have worked with only two distributors in Turkey since 2015, which creates concentration risk. Any financial difficulty or failure of any of our suppliers and/ or our distributors in terms of timing and quality may adversely affect our business and financial condition. Such suppliers and distributors could fail to provide equipment or service on a timely basis as a result of a disruption to the global supply chain due to the ongoing COVID-19 global pandemic. If such failures occur, we may be unable to provide products and services as and when requested by our customers, or we may be unable to continue to maintain or upgrade our networks. Because of the cost and time lag that can be associated with transitioning from one supplier to another, our business could be substantially disrupted if we were required to, or chose to, replace the products or services of one or more major suppliers with products or services from another source, especially if the replacement became necessary on short notice. Any such disruption could increase our costs, decrease our operating efficiencies and have a material adverse effect on our business and financial condition.

Our competitive position could also be adversely affected if our suppliers fall behind technological developments compared to the suppliers of our competitors. Adverse economic conditions have negatively affected and may continue to affect our domestic and international suppliers, leading to a contraction in their

 

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business, which in turn may lead to a decrease in the quality of the services that they render to us and adversely affect timely delivery of such services, thereby negatively impacting our business and operations. In particular, if prices at which we purchase products from our domestic and international suppliers increase, namely as a result of currency depreciation and inflation—both in Turkey and internationally—, we need to pass on all or a large portion of these additional costs to our customers to be able to maintain our margins. However, we may be unable to increase the selling price of products or services to fully or partially offset the price increases by our suppliers (some of which have considerable negotiating power), particularly if our main competitors choose not to implement such price increases. In addition, our existing license agreements or new regulations may require us to purchase network equipment from specified suppliers or meet certain specifications regarding our existing suppliers. Equipment from these suppliers may not always be compatible with our existing equipment or the supplier may fail to integrate it, and our employees may not be familiar with the technical specifications and maintenance requirements of equipment from these suppliers. Furthermore, if our suppliers fail to meet the requirements, we may end up violating the terms of our license agreements. These factors could also have a material adverse effect on our business and financial condition.

Turkcell’s complex ownership structure and ongoing disagreements among our main shareholders have adversely impacted in the past and may impact decision-making on important matters in the future. These ongoing disputes may lead to further regulatory or legal actions, and affect the ownership and control of our Company.

Our principal shareholder is Turkcell Holding A.S., which holds 51% of Turkcell’s shares as of March 20, 2020, based on the Company’s share book. Sonera Holding sold 13.07% of our shares to the market in two tranches (May 10 and September 21, 2017) which led to an increase of 48.95% in our publicly held shares.

Turkcell Holding A.S. is 52.91% owned by Cukurova Telecom Holdings Limited and 47.09% by Telia Finland Ojy. Cukurova Telecom Holdings Limited is 51% owned by Cukurova Finance International Limited and 49% by Alfa Telecom Turkey Limited. According to public filings (a Schedule 13D filed in November 2009), Alfa and Telia Company entered into an agreement regarding a possible consolidation of their holdings in Turkcell into a new company. In a Schedule 13D filed on December 16, 2014, Alfa has deleted references to this agreement.

Cukurova and Alfa are involved in a long-running dispute regarding, in summary, amounts due by Cukurova to Alfa and Alfa’s claim to take ownership of Cukurova’s indirect 13.8% interest in our Company in settlement of such amounts. In 2014, as a result of a court decision, Cukurova paid Alfa $1.6 billion to release this claim. Cukurova has been provided loan financing amounting to $1.6 billion by the Turkish state-owned Ziraat Bank for which an indirect 13.8% interest in our Company has been provided as collateral. According to the latest publicly available information, Alfa and Cukurova remain in a stalemate over a right given to Alfa to buy Cukurova’s stake and rights of Cukurova to either buy Alfa’s stake or sell its own stake to Alfa. This dispute and other disputes have effectively blocked shareholder decision-making on important corporate matters, and could have an adverse effect on the ability of our management to execute business decisions and take other actions. We cannot predict how the resolution of this dispute will affect our Company, whether other disputes will be resolved and whether our shareholders will be able to achieve agreement on matters regarding the operation of our Company.

The shareholding structure and the ongoing disputes have adversely affected our Company in a number of ways and present a number of risks, including in particular:

 

   

Our Articles of Association contain quorum and majority requirements, at various levels, for shareholder meetings and decisions. Failure to achieve a quorum or the required majority vote can block decisions that require shareholder approval. Prior to our shareholders’ meeting held in 2015, we have had difficulty convening shareholder meetings and numerous items submitted to our shareholders have not been approved, including the distribution of dividends, the approval of our dividend policy, the election of independent board members, the release of directors for actions taken and the approval of financial statements. In 2012, 2013 and 2014, due to lack of quorum, the annual general assemblies could not convene on time. A general assembly was eventually convened on March 26, 2015. The annual general assembly meeting for 2016 and 2017 convened on May 25, 2017 and March 29, 2018; respectively, but in both instances did not approve all items submitted to it. It was decided at the annual general assembly meeting for 2017 that three members of the Board of Directors appointed as per the decision of the Capital Markets Board (“CMB”) shall be dismissed and three new candidates proposed by Turkcell Holding A.S., our majority shareholder, shall be appointed in their place.

 

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A number of corporate governance requirements were enacted under Turkish regulations by the Capital Markets Board with mandatory effect from June 30, 2012.

We were unable to comply with some of these requirements because of a lack of consensus among our main shareholders, including a requirement that one-third of our Board members and that all of our Audit Committee members be “independent”.

Under the Capital Markets Law, the CMB has the power to take action against the Company, our Board members and our main shareholders in respect of the various governance issues that have arisen or to amend the Articles of Association without general assembly approval. Under such powers, starting from March 2013, the CMB directly appointed all of our independent Board members so far. The CMB appointed members’ terms of office will last until new appointments are made in accordance with applicable legislation, which may as in the past include by CMB appointment. Mr. Ahmet Akca, Mr. Atilla Koc and Mr. Mehmet Hilmi Guler continued to serve as independent Board Members as per the letter of Capital Markets Board dated March 8, 2019, and were subsequently replaced by Nail Olpak, Afif Demirkiran, and Tahsin Yazar as per the resolution issued by CMB dated March 5, 2020.

No assurance may be given regarding the impact of past or future CMB actions, future Investor Compensation Center actions, or any future legal actions against our Company, on the overall company strategy, convening of our general assembly or the distribution of dividends.

Compliance with our home country governance rules is an important element of our compliance with the listing requirements of the New York Stock Exchange (“NYSE”). Failure to comply with such rules could jeopardize the continued listing and trading of our ADRs on the NYSE.

For so long as our main shareholders are in dispute and/or unable to achieve consensus, we are likely to continue to experience difficulties obtaining corporate decisions, including with respect to the matters discussed above, and we may have difficulty obtaining decisions regarding our business and operations. This situation may also lead to further regulatory and legal actions being taken in respect of our Company, the nature and effects of which we cannot predict. Ongoing disputes among the shareholders may affect the ownership and control of our shares, the demand for and price of our shares and our ability to manage our business, and no assurance can be given that the interests of these shareholders will be aligned with those of our other shareholders.

We are involved in various claims and legal actions arising in connection with our business, which could have a material effect on our financial condition.

We are subject to investigations and regular audits by governmental authorities in Turkey, including the Competition Board, the ICTA, tax authorities and certain other parties, and governmental authorities in other countries in which we have operations. We are currently involved in various claims and legal actions with such authorities. We set aside provisions on an as-needed basis with regard to our ongoing disputes in line with applicable accounting standards. However, no assurance can be given that the provisions we set aside will be sufficient to cover any actual losses under these matters, or that new disputes will not arise under which we would face additional liabilities and reputational risk. For a more detailed discussion of disputes that we presently believe to be significant, see “Item 8. Financial Information” and Note 38 to our audited Consolidated Financial Statements included in “Item 18. Financial Statements” of this annual report on Form 20-F.

We face a risk of tax audits and claims in many different areas that are subject to taxation, such as corporate tax, value added taxes and others. Such audits and claims have led to significant tax assessments and penalties in the past and may again in the future. In addition, changes in tax laws and non-tax regulations may lead to the growth of our tax burden and may, as a result, materially adversely affect our financial condition and results of operations. Disputes related to taxation have been particularly significant and major penalties have resulted.

Current tax and other disputes include the following:

 

   

We have had ongoing disputes regarding the application of the Turkish Special Communication Tax (“SCT”) to prepaid card TL/package sales made via our sales channels over numerous years. In accordance with the Law No. 6736 the Company filed applications for the restructuring of penalties and interest on the Special Communication Tax regarding the disputes on the tax amount for the years 2008-2012 in November 2016. The tax office accepted the restructuring application for the years 2008, 2009, 2010, and 2012, and we paid the restructured amount and settled the disputes in November 2016. On the other hand, the tax office rejected the application for the restructuring of SCT regarding the dispute on the tax amount for the year 2011. The Company also filed a case for the cancellation of

 

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aforementioned rejection act of Tax Office for the year 2011. The hearing was held and it is expected that the court will grant a decision. In the cases regarding the cancellation of the SCT assessment for the year 2011, Council of State accepted our appeal and decided to reverse the first instance court decision in favor of the Company, on the ground that; in the case filed for the cancellation of the rejection act regarding our Company’s request to restructure the cases filed for the year 2011, the court decided in favor of the Company (decision has not been notified to the Company yet) and since the mentioned case will affect these cases, finalization of the respective decision should be waited.

 

   

In accordance with the Law No.7143, in August 2018, the Company filed applications for the restructuring of penalties and interest on the SCT regarding the disputes on the tax amount for the years 2013 and 2014. In August 2018, the tax office accepted the restructuring application for the years 2013 and 2014, and Company paid the restructured amount and settled the disputes by October 2018.

In addition, tax investigation reports for the years 2015 and 2016 were delivered to us. Tax Authority imposed tax assessments; (i) TRY 85.13 million in total, comprising TRY 34.05 million in principal and TRY 51.08 million penalty in relation to SCT for 2015 and (ii) TRY 61.7 million in total, comprising TRY 24.69 million in principal and TRY 37.04 million penalty in relation to SCT for 2016.We have concurrently applied for settlement. The successful settlement meeting was held in December 2019 and the assessment has been closed officially following settlement. Our Company remains under investigation on the same matter for the year 2017. Although the Ministry of Finance has addressed this issue through Communiqués enacted on January 1, 2018 for the periods after December 31, 2017, we may be subject to penalties or litigation for the year 2017.

Following a limited tax investigation at our Company with respect to Value Added Tax (“VAT”) and SCT pertaining to financial years 2015 and 2016, the Large Taxpayers Office made an additional request with respect to the taxation of applications included in some of the bundled offers and packages offered to our customers for financial year 2016 and imposed a tax assessment of TRY 247.8 million in total, comprising TRY 53.8 million in principal and TRY 80.7 million penalty in relation to SCT, and TRY 45.3 million in principal and TRY 68.0 million penalty in relation to VAT. A settlement request related to this assessment has been sent to the Revenue Administration for the period of 2016 in December 2018, and accordingly, a successful settlement meeting was held on December 26, 2019 and the assessment has been closed officially following settlement.As a result of the settlement, a single amount of TRY 199 million was settled (including the late payment interest) in relation to: (i) SCT assessment related to prepaid card TL/package sales made via our sales channels for the years 2015-2016 and (ii) VAT and SCT assessment related to the taxation of applications included in some of the bundled offers and packages offered to customers for the year 2016. The settled amount has been paid within the legal term and assessments were closed.

 

   

Under our licenses (2G and 3G) and Authorization Certificate (4.5G) as part of our license, we pay a monthly treasury share equal to 15% of our gross revenue subject to some exemptions. We are currently subject to ongoing audits in this in relation to the periods through 2019, and the Turkish Treasury may change its views based on its interpretations of treasury share calculations. Therefore, unanticipated treasury share liabilities and fines may also be levied.

 

   

According to Serial Nr. 7061 Law, as of January 1, 2018, Treasury Share investigations will be made by the Ministry of Finance. Investigations are held by the Ministry of Finance for the first time and there is no assessment for the year 2018 and period of January to September 2019. An investigation related to October—November of 2019 was initiated on February 2, 2020.

 

   

The Company’s management decided to apply for VAT and corporate income tax base increase mechanism for 2017 in accordance with Law Serial No. 7143; accordingly, there will be no tax assessment for the applications related to VAT and CIT but the Company may remain subject to tax assessment for other taxes payable by it.

 

   

The Company is also under investigation for (i) the year 2017 with regard to SCT and (ii) the year 2018 with regard to SCT, Corporate Income Tax and VAT.

 

   

Operators must pay license and annual utilization fees for the wireless equipment to ICTA. Before January 1, 2018, the fee amount was calculated with respect to the amount per unit of wireless equipment (TRx) and as of January 1, 2018 the fee is calculated as 5% of monthly net sales amount. We argue that the content services are provided without any infrastructure requirements, and therefore, that they should not be considered as mobile electronic communication services. Accordingly, for the January 2018 TRx payment, a lawsuit has been filed and for the months thereafter, no TRx fees were

 

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calculated over content services. The Court accepted the case in favor of the Company. The ICTA appealed the decision before the Regional Administrative Court, which rejected the appeal request. In October 2019, additional TRx amounts relating to content services were requested from the Company by ICTA. Based on management’s opinion in accordance with the relevant legislation of ICTA, TRY 128.4 million was paid in November 2019, for 2018 and 2019 fiscal years and legal actions has been taken for 2018. Case is pending.

 

   

Under the Ministry of Trade’s investigation with regard to value added services, subscription contracts and device campaigns, we received an administrative fine amounting to TRY 116.2 million. We filed a lawsuit for the stay of execution and cancellation of the penalty, which led to the withdrawal of the penalty and the related audit reopened. The Court decided that there is no need to grant a decision regarding the withdrawal of the administrative fine. The Council of State granted a final decision and approved the First Instance Court decision. No assurance can be given that significant penalties will not again be imposed and that further disputes will not arise.

As a result of the investigation, the Ministry of Trade decided to impose an administrative fine amounting to TRY 138.2 million against the Company. The Company filed a lawsuit for the cancellation of the administrative fine. The Court accepted the case in favor of the Company and cancelled the administrative fine. Istanbul Governorship appealed the decision. The Company replied the appeal request in due time. The case is pending.

 

   

Administrative fines and refunds were requested in the investigation conducted by ICTA to determine whether the Company complies with the «Procedures and Principles for Protection of Consumer Rights in the execution of Value Added Electronic Communication Services» regulation. Prior to the final decision taken by the Board within the scope of the investigation ICTA has decided: (i) to give 5 months to prove the operators’ claims that “it should not be concluded that all subscribers subject to violation are getting services without their will” (ii) to meet the consumer refund complaints regarding the services provided with the same purchasing method during this period and (iii) to submit the detailed report on these actions within a month following the 5 month process. Should our defenses are not accepted, a significant fine can be imposed and refunds may be required as a result of the examination.

 

   

Due to some subscriber complaints, data doubling campaigns are examined by the ICTA in terms of the appropriateness of the campaigns and whether there is an increase in the fees of contracted campaigns. Administrative fines and refunds were requested regarding the data doubling campaigns. Should our defenses not be accepted, a significant fine can be imposed and refunds may be required as a result of the examination.

 

   

Administrative fines were requested in the context of the ICTA investigation related to some reporting errors (both for 3G and 4.5G) and the failure to fulfill the obligations regarding the minimum required use of local equipment and procurement from local small and medium-sized enterprises for the 2013—2016 and 2016—2017 periods under the 4.5G license terms.

 

   

The Turkish Competition Board has, for several years, alleged that we have abused our dominant position in the Turkish mobile market through our exclusive practices directed at our dealers. While there is no ongoing investigation of Turkcell regarding such allegations, this and similar actions may have financial consequences and hinder our ability to respond to the competition.

For a more detailed discussion of our disputes that we presently believe to be significant, see Note 38 to our audited Consolidated Financial Statements included in “Item 18. Financial Statements” of this annual report on Form 20-F.

Although we maintain and regularly review our internal control over financial reporting, there are inherent limitations on the effectiveness of our controls, particularly as our Company grows and enters into new businesses.

We maintain and regularly review internal control over our financial reporting. However, internal control over financial reporting has inherent limitations and there is no assurance that a system of internal control over financial reporting, including one determined to be effective, will prevent or detect all misstatements on a timely basis. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance regarding financial statement preparation and presentation. This risk is exacerbated by our rapid growth into new activities, which creates additional challenges in identifying risks and designing and implementing systems to control them. Furthermore, we operate in a decentralized structure in which most compliance functions are managed at the level of our operating companies rather than at the parent company level, which can further complicate the process of identifying risks and designing and implementing systems.

 

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Our systems may not always allow us to detect and prevent fraud or other misconduct by our employees, representatives, agents, suppliers, dealers or other third parties. We may be exposed to fraud or other misconduct committed by our employees, representatives, agents, suppliers, dealers or other third parties that could subject us to litigation, financial losses and sanctions imposed by governmental authorities, as well as affect our reputation. Such misconduct could include misappropriating funds, conducting transactions that are outside of authorized limits, engaging in misrepresentation or fraudulent, deceptive or otherwise improper activities, including in return for any type of benefits or gains or otherwise not complying with applicable laws or our internal policies and procedures.

Our latest review as of December 31, 2019, similar to last year, has revealed certain deficiencies in our controls, although none that we believe constitutes a “material weakness”. Our controls have, in the past, suffered from deficiencies and no assurance can be given that others will not emerge in the future. A failure to detect or correct deficiencies and weaknesses in a timely manner could have an adverse effect on the accuracy of our financial reporting and on our operations and may also cause financial losses.

Our business consolidated financial results and/or operational performance could be adversely affected unless we retain our key personnel, our partners and their employees.

Our performance depends, to a significant extent, on the abilities and continued service of our key personnel. Competition for qualified telecommunications and technology personnel in Turkey and elsewhere is intense, in particular in the area of cyber-security. In addition, we depend on our dealers, distributors and their employees for the growth and maintenance of our customer base. The loss of the services or loyalty of key personnel could adversely affect our business and financial condition and could lead to breaches of confidentiality, particularly if a number of such persons were to join a competitor. Furthermore, should a significant number of our employees, or certain members of our key personnel, be unavailable due to measures (e.g., quarantine, confinment, etc.) implemented in the context of COVID-19 or other pandemics, or should we suffer the loss of such employees as a result of COVID-19 or other pandemics, this may have a material adverse effect on our operations, including customer service, sales, and the deployment, operation and maintenance of our networks.

Our ADS price may be volatile, and purchasers of ADSs could incur substantial losses.

The market price of our ADSs may be highly volatile and could be subject to wide fluctuations, in particular due to the fact that trading in the ADSs will take place in different currencies (U.S. dollars on the NYSE and Turkish liras on the Borsa Istanbul), and mostly at different times (resulting from different time zones, different trading days and different public holidays in the United States and Turkey), resulting in the trading prices of these securities differing on these two markets. Securities markets worldwide experience significant price and volume fluctuations. In particular, the long-term effects to the global securities markets of epidemics and other public health crises, such as the on-going COVID-19 crisis, are difficult to assess or predict, and may include a further decline and volatility in the market prices of our ADSs. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our ADSs in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including changes in our quarterly operating results or dividends, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of negative research reports about our industry, failure of securities analysts to cover our shares or changes in financial estimates by analysts, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industry we operate in or individual scandals. Consequently, in response to these events, the market price of our ADSs could decrease significantly, and purchasers of ADSs could incur substantial losses.

 

ITEM 4.

INFORMATION ON THE COMPANY

4.A History and Development of the Company

Turkcell Iletisim Hizmetleri A.S. (“Turkcell”), a joint stock company organized and existing under the laws of the Republic of Turkey, was formed in 1993 and commenced operations in 1994. Our principal shareholder is Turkcell Holding A.S., which holds 51.00% of Turkcell’s shares based on the Company’s share book. Based on

 

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publicly-available information, we believe that Turkcell Holding A.S. is 52.91% owned by Cukurova Telecom Holdings Limited and 47.09% by Telia Finland Oyj. Based on publicly-available information, we believe that Cukurova Telecom Holdings Limited is 51% owned by Cukurova Finance International Limited and 49% by Alfa Telecom Turkey Limited.

The address of our principal office is Turkcell Iletisim Hizmetleri A.S., Turkcell Kucukyali Plaza, Aydinevler Mahallesi Inonu Caddesi No:20 Kucukyali Ofispark, Maltepe, Istanbul, Turkey. Our telephone number is +90 (212) 313 10 00. Our website address is www.turkcell.com.tr. In July 2000, we completed our initial public offering with the listing of our ordinary shares on the Borsa Istanbul and our ADSs on NYSE.

We operate under a 25-year GSM license granted in April 1998, a 20-year 3G license granted in April 2009 and a 13-year 4.5G authorization certificate granted in October 2015.

Our GSM license was granted in April 1998. Under our license, we pay the Undersecretariat of the Treasury (the “Turkish Treasury”) a monthly treasury share equal to 15% of our gross revenue. Of such fee, 10% is paid to the Ministry of Transport and Infrastructure for a universal service fund.

In early 2009, we were granted a 20-year type a 3G license, which provides the widest frequency band and we signed the related 3G license agreement on April 30, 2009. The 3G license agreement has similar provisions to the aforementioned 2G license agreement.

In 2013, we won an auction held by the Ministry of Transport and Infrastructure related to universal service, which requires installing sufficient infrastructure to uncovered areas with a population of less than 500 and the operation of the service in these areas for three years. This contract was extended through December 31, 2019 and the extension contained new requirements to provide mobile broadband services and to operate the new and existing networks together. The Ministry of Transport and Infrastructure extended the contract under the same conditions through June 30, 2020, and is preparing a new auction for the operation of the universal service beyond June 30, 2020.

In the 4.5G auction held on August 26, 2015, we were awarded a total frequency band of technology agnostic 172.4 MHz, the largest amount of spectrum of any operator. We commenced offering 4.5G services from April 1, 2016. The 4.5G license is effective for 13 years until April 30, 2029. The total fee of EUR 1,623.5 million (excluding VAT and interest payable on the installments) was paid in four installments, where the last installment amounting TRY 1,535 million (originally EUR 413.8 million, converted by the buying exchange rate on January 2, 2017 announced by CBRT) was paid in April 2017.

Turkcell has a total frequency bandwidth of 234.4 MHz, which corresponds to 43% of total spectrum available to the mobile operators in Turkey. The large spectrum assets, including the wide frequency bands on 1800 MHz and 2600 MHz, along with a strong network deployment, have enabled us to provide the fastest 4.5G speeds over 1 Gbps through carrier aggregation combinations and availability of advanced user devices supporting new features. In this scope, in April 2018, we showcased 1.2 Gbps peak speed in our live network with a commercial smartphone, aiming to provide our customers with the highest peak speeds in the world provided by the latest technological advancements. Turkcell supports up to 1.2 Gbps speeds on its network and this allows customers to get better network experience and access mobile services at speeds comparable to fiber broadband.

Following the 4.5G launch, Turkcell focused on providing innovative and pioneering digital services; which differentiates its offerings from the competition. We develop and manage digital services and solutions to address the diverse needs of both consumers and corporate customers, thereby enriching their lives.

We have a strong track record of profitable operations with total revenues of TRY 25,137.1 million, Adjusted EBITDA of TRY 10,426.4 million and net income of TRY 3,246.5 million (excluding non-controlling interests) for the year 2019. We have achieved these results while continuing to invest in our network to support our strategy of offering quality services and innovative solutions, with capital expenditures totaling TRY 7,224.7 million for the year 2019.

Our subscriber base has grown substantially since we began operations in 1994. At year-end 1994, we had 63,500 subscribers, and by year-end 2019 that number had grown to 46.7 million for the Group.

 

 

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In addition to our operations in Turkey, we have various international operations. For more information, see “Item 4.B. Business Overview—International and Domestic Subsidiaries”.

4.B Business Overview

Over the past 25 years, Turkcell has played a central role in the development of the telecom industry in Turkey, first as a traditional mobile operator, then as a converged telecom operator, and finally as the digital operator. Over recent years, we have strived to pioneer the provision of digital services in the telecom industry and have retained our position as the telecom market leader in Turkey on the back of our service quality, value proposition and strong distribution network. We have shifted to an organizational structure with the aim of increasing efficiency and simplifying our business processes, as well as strengthening our position as a provider of converged communications, digital services, digital business solutions and techfin services.

We have differentiated our network through its quality and speed of service built on extensive spectrum rights covering 43% of the total spectrum available to mobile operators, and with an extensive network coverage. We have also focused on building an advanced fiber network to support our mobile and fixed offerings, including broadband and television. We have our own fiber network that is currently capable of offering 10 Gbps— a first for Europe.

We had 46.7 million subscribers in Turkey, Ukraine, Belarus, the Turkish Republic of Northern Cyprus and Germany as of December 31, 2019. In Turkey, we had 35.7 million total mobile, fixed and IPTV subscribers as at the same date.

Our business is divided into two main reportable segments: Turkcell Turkey and Turkcell International.

 

   

Turkcell Turkey. Our Turkish telecommunications business represents the largest share of our business, accounting for 85.5% of our revenues and 84.3% of our Adjusted EBITDA in the year ended December 31, 2019. During the first half of 2015 we realigned our strategy in Turkey to focus on developing innovative and integrated telecommunications solutions for consumer, corporate and wholesale customers in Turkey by leveraging our leading brand, extensive customer base, technological capabilities and strong distribution channels. We have invested in what we believe to be the most advanced mobile and fiber networks in Turkey and have the broadest 4.5G spectrum in Turkey, which we believe provides us with a competitive advantage by allowing us to provide high quality and high speed data service to our customers, as well as providing digital services on top.

 

   

Turkcell International. Turkcell International accounted for 8.0% of our revenues in the year ended December 31, 2019. We have telecommunications operations in a number of emerging market geographies that we believe are complementary to our operations in Turkey and the potential to export our business model. These geographies include Ukraine (which accounted for 5.3% of our revenues in the year ended December 31, 2019), Belarus (which accounted for 1.5% of our revenues in the year ended December 31, 2019) and the Turkish Republic of Northern Cyprus (which accounted for 0.8% of our revenues in the year ended December 31, 2019) and Germany.

 

   

All other segments. Mainly comprised of our consumer financing services, information and entertainment services in Turkey and call center revenues. This segment accounted for 8.8% of our revenues in the year ended December 31, 2019, of which 2.3% is attributable to intersegment eliminations.

We have a strong track record of profitable operations with total revenues of TRY 25,137.1 million, Adjusted EBITDA of TRY 10,426.4 million and net income of TRY 3,246.5 million (excluding non-controlling interests) for the year 2019. We have achieved these results while continuing to invest in our network to support our strategy of offering quality service and innovative solutions, with capital expenditures of TRY 7,224.7 million for the year 2019.

We are the only company listed on both the NYSE and the Borsa Istanbul, and had a market capitalization of TRY 30.4 billion as of December 31, 2019, making us the seventh most valuable publicly traded company in Turkey at that time.

 

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I. Industry

a. Overview

GSM, one of the digital standards for mobile communications, was developed in 1987 to facilitate the unification and integration of mobile communications worldwide.

Since Turkcell was founded in 1994, mobile technology has evolved from GSM (2G) to UMTS/HSPA+ (3G) to LTE/LTE-Advanced (4G/4.5G), and recently to 5G, providing new capabilities and extensive improvements in customer experience. 2G was originally intended to carry voice, with some limited data and messaging capabilities, whereas the focus in 3G shifted more to data, along with simultaneous voice and data capability. 4G has brought fully IP-based architecture where everything is considered data. The advent of 4G/4.5G technologies has enabled the introduction of increasingly sophisticated services featuring lower latency and higher data speeds, and capability to provide a variety of enriched services beyond mobile broadband, especially for vertical markets such as health, smart cities, transportation, agriculture, education and entertainment. Turkcell currently offers 2G, 3G and 4.5G technologies. Currently, 5G is not commercially available in Turkey, however we are preparing to ensure that we will be ready for 5G. For example, we have demonstrated our 5G FWA capability in a millimeter wave band (28GHz), which was the first 5G live network test in Turkey.

Our Company has also branched out in to the development of fixed line networks, including fiber-optics connecting directly to the home, creating a fiber-to-the-home (“FTTH”) network. In order to fill the gap in the areas where fiber cannot be provided, feasibly deployed, or that are constrained by ADSL service, an alternative fixed wireless access (“FWA”) solution is also offered.

b. The Turkish Telecommunications Market

We believe that the Turkish telecommunications market has growth potential due to favorable demographics, including a relatively young population and lower penetration levels compared to Western Europe and other developed markets.

There were 83.2 million people living in Turkey as of December 31, 2019. According to a TUIK announcement, the estimated median age of the Turkish population is 32, which is lower than elsewhere in Western Europe, and the majority of the population lives in urban areas.

There are currently three major operators in the telecommunications sector in Turkey, Turkcell Turkey, Vodafone Telekomunikasyon A.S. (“Vodafone”) and Turk Telekomunikasyon A.S. (“Turk Telekom” and together with its mobile segment Turk Telekom Mobil (“TT Mobil”, formerly known as Avea) and TTNET, or “Turk Telekom Group”). In 2019, the total revenue of the Turkish mobile and fixed markets was TRY 57.3 billion compared to TRY 49.2 billion in 2018, according to the operators’ announcements (for the calculation of total market revenues, non-group call centers and financial services revenues are added to Turkcell Turkey’s reported revenue and Turk Telekom’s construction revenue is excluded).

Vodafone entered the Turkish mobile market by acquiring Telsim on May 24, 2006 from the Savings Deposit Insurance Fund. In December 2018, Ojer Telekomunikasyon A.S.‘s shares in Turk Telekom (representing 55% of the company) were transferred to a special purpose vehicle, Levent Yapilandirma Yonetimi A.S., and on September 2019, a financial adviser was mandated for the sale of those shares.

II. Strategy

Over the past 25 years, Turkcell has played a central role in the development of the telecom industry in Turkey. This has been achieved as a result of our core competencies, which include excellent customer relations, high quality infrastructure, market-leading technology as well as a skilled work force. In the next three years, we will strive to continue the profitable growth of the Group by leveraging our competencies and focusing on three key strategic areas, in addition to growing in our core telecom services: digital services, digital business solutions, and techfin services.

The key part of our strategy is growth of our core telecom operations. Our vast home market offers the potential for further growth of our customer base which we intend to increase by focusing on the postpaid segment, while also increasing the revenues generated from these subscribers. We believe the fixed broadband market also offers significant growth potential through fiber and FWA products, which we will pursue accordingly. Furthermore, we aim to maximize the potential of our digital channels both in terms of subscriber acquisitions and device sales. Our core competencies, which are stated above, will prove instrumental in further growth of our key strategic focus areas.

 

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Turkcell began its digital transformation with the vision of becoming a “digital operator”—a provider of the full set of digital experiences for its customers and a leader in the digitization of the economy in countries where it operates. Our unique portfolio of digital services are made available to our customers through our market-leading telecom capabilities, which set us apart from global over-the-top (“OTT”) players. Our services in various areas such as TV, music, publishing and communication have played a major role in the improvement of our ARPU and churn levels. We are now focusing on monetizing these services, particularly on their revenue generation on a standalone basis. Already offered by our international subsidiaries, our digital services are set for expansion in new markets through commercial partnerships, mainly with other telco operators.

We continue to support our digital operator model with investments in industries that have synergies with our digital business. We have established a digital business solutions company that provides tailor-made, end-to-end information & technology (ICT) solutions —connectivity, hardware, cloud services, security services, IT integration and solutions using AI, Internet of Things (“IoT”) and Big Data—for enterprise customers particularly in the healthcare, energy, public and transportation sectors by leveraging our ability to combine telecom and IT services and thereby adding value in the course of their digital transformation.

We also focus on techfin services, namely through our digital payment services platform, Paycell, which has established key vertical business lines including mobile wallet, carrier billing, utility payments, money transfer, QR code payment and POS services. Going forward, Paycell will focus on scaling its products, targeting both consumers and over 1.6 million merchants. We are committed to capitalizing on this well-established payment platform. In addition, our consumer finance company, Financell, enables users to purchase smart devices.

III. Customer Segmentation and Services

a. Customer Segmentation

In Turkey, as of December 31, 2019, we had a total of 35.7 million subscribers including 32.7 million mobile subscribers, 2.3 million fixed broadband subscribers and 719.7 thousand IPTV subscribers.

With our digital operator vision and as part of our increased focus on customers, we take a number of actions designed to increase customer base and loyalty, and such loyalty actions are designed in line with the targeted segments’ lifestyles, needs, priorities, and expectations.

The aims of the segmentation are to:

 

   

attract new customers;

 

   

increase the loyalty of existing Turkcell customers;

 

   

create value for changing needs of customers with the support of digital services;

 

   

ensure behavioral and emotional brand loyalty; and

 

   

ensure a seamless series of positive brand experience throughout all customer touch points.

On a broader scale, Turkcell Turkey divides its customers into three main categories:

Consumer Category

In the consumer category, we manage our mobile customers either under the mass segment or under one of our two large sub-segments, youth and premium. In addition, a micro segmented approach has been applied throughout the year, meaning that each customer is matched with offers that best suit their needs and expectations. In line with our goal of being a digital operator and enlarging our customer base, we provide numerous offers and campaigns enriched with our digital services, in accordance with market dynamics and customer demand, such as BiP, fizy, TV+, Dergilik and lifebox.

Fixed broadband customers are consolidated under a single segment (residential) and managed under the consumer category along with mobile consumers. By positioning the residential segment under the consumer category, we aim to enhance convergence between mobile and fixed businesses. Under the residential segment, we have our fiber internet customers, who use our own fiber infrastructure, and our DSL and cable customers, to whom Turkcell is a reseller.

Corporate Category

The corporate category for our mobile and fixed customers comprises our small and medium business customers and as well as our enterprise customers. We provide differentiated mobile and fixed communication offers for each of these customer groups. Additionally, in 2019 we renewed our portfolio of corporate products

 

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and services with a new vision of accompanying our corporate clients through every stage of their digital transformation process through our system integration, digital business infrastructure, digital business applications, managed services, cloud services, Internet of Things products & solution management and Big Data & analytics services. For this purpose, we transformed and relaunched our subsidiary, Turkcell Satis ve Dijital Is Servisleri A.S. (“Turkcell Satis”) in January 2019.

Wholesale Category

Our wholesale category focuses on managing wholesale voice, data and roaming services with the national licensed operators, international operators and network-centric business owners such as data centers and content providers.

For roaming services, the wholesale category strives to achieve the best international coverage for customers to have continuous communication wherever they travel and to enable all visitors to enjoy the service quality of Turkcell.

For wholesale data and voice services, our main strategy is to become the regional junction point in an increasingly digitally hyper-connected world, and while promoting our infrastructure in the international market, we are focused on growing as a preferred wholesale partner of local operators in the domestic market as well.

b. Services

We provide high quality mobile and fixed voice, data, TV and digital services to our subscribers throughout Turkey. We provide a range of traditional telecommunication and digital services, enabling our customers to call, search, stream music and watch videos. Our mobile subscribers can choose between our postpaid and prepaid services. Currently, postpaid subscribers sign a subscription contract and receive monthly bills for services. Prepaid subscribers must purchase a starter pack, which consists of a SIM card with 3GB of monthly data and a balance of TRY 35, or monthly 750 minutes, 250 SMS and 25GB of data, with 20GB additional quota for their every TRY 34 or more top-up (TRY refill) up to 3 times in 120 days following the opening of the lines. As of December 31, 2019, we had 12.4 million prepaid subscribers and 20.4 million postpaid subscribers, compared to 14.9 million prepaid subscribers and 18.8 million postpaid subscribers as of December 31, 2018.

We provide a range of fixed services in Turkey including voice, broadband and IPTV to consumers and a wider range of services to our corporate customers from cloud services to traffic carrying. We provide these services through a combination of our own fiber infrastructure, through sharing agreements and leased copper ADSL lines. As such, we offer fixed broadband services through the cable infrastructure of Turksat, the government-owned provider of cable and wireless broadcasting, high-speed internet services, and direct to home broadcasting services in Turkey. Starting in September 2018, our fixed broadband tariffs are valid for a 12-month commitment (down from 24 months), and we continue to have some customers on 24-month commitments. As of December 31, 2019, we had approximately 2.3 million fixed broadband customers of which 1.5 million were fiber customers, 719.1 thousand were ADSL customers and 49 thousand were cable customers, compared to 2.3 million fixed broadband customers of which 1.4 million were fiber and 905.6 thousand ADSL customers as of December 31, 2018.

(i) Voice Services

Voice services are among the key services that we provide to our customers. Voice services consist of high-quality mobile communication services on a prepaid and postpaid basis and fixed voice services for consumers and corporate customers.

(ii) Broadband

Our broadband services consist of mobile broadband, fiber to the home/building and ADSL Docsis, cable, LTE and fixed wireless broadband services over our mobile network.

Our capability to offer 4.5G in 81 cities in Turkey has resulted in increased network abilities and data speeds. We believe that 4.5G services coupled with the wider availability of technological products has contributed to a more connected life for our customers, resulting in an increase in overall internet usage.

Smartphones, which combine the features of a mobile phone with those of other popular digital mobile devices (e.g. personal digital assistants, media players, GPS navigation, digital camera) and have an open operating system (e.g. iOS, Android, Windows Mobile) allowing access to the internet and running a variety of

 

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third-party and owned software applications, are an important component of the growth of our mobile broadband and digital services businesses. Smartphone penetration on our network reached 76% by the end of 2019, up from a 74% penetration at the end of 2018. This growth resulted mainly from non-smartphone customers shifting to smartphones as a result of the various campaigns promoting 4.5G enabled smartphones. As of December 31, 2019, the number of subscribers who have signed up for 4.5G on our network was 30.7 million. This represents 94% 4.5G subscriber penetration of our mobile customers in Turkey. With the increase of 4.5G penetration, average mobile data usage reached 7.4 GB per month in 2019, vs. 5.2 GB per month in 2018, while average mobile data usage of 4.5G users reached 9.1 GB per month in 2019, vs. 6.8 GB per month in 2018. The table below shows the number of smartphones on our network and smartphone penetration for the periods indicated:

 

     2019     2018     2017     2016     2015  

Number of smartphones on our network (millions)

     22.0       22.4       22.1       19.2       16.1  

Number of 4.5G compatible smartphones in our network (millions)

     19.2       18.0       15.7       11.3       —    

Penetration(1)

     76     74     72     64     52

 

(1)

Smartphone penetration is calculated as the ending number of smartphone subscribers (excluding smartphone subscribers with deactivated status) divided by the ending number of Turkcell mobile voice subscribers (excluding Turkcell subscribers with deactivated status).

A wide variety of data offers are made available as part of our voice and terminal bundled campaigns, where terminals are sold by dealers, to increase LTE available device penetration, and enhance the mobile broadband experience. Since February 2014, the sale of smartphones through credit cards with installment plans has been banned in Turkey. Turkcell initiated Financell in 2016 to offer its customers consumer loans in their purchase of smart devices. As a macroeconomic prudential measure, the BRSA has introduced a limit to the number of installments for consumer loans, starting from September 2018. As of January 2020, smartphones and tablets with a retail price at or above TRY 3,500 can be offered with a maximum three-month installment plan, whereas the maximum installments is increased to 12 months for those with a retail price of up to TRY 3,500.

Distributors, dealers, Financell and Turkcell offer joint campaigns to the subscribers, which may include the sale of devices by the dealer and a communication service to be provided by us. In addition, we are selling handsets ourselves as a principal. A variety of devices are offered through these campaigns, such as smartphones, LTE available modems and tablets and some complementary products such as accessorizes, game consoles, headsets and virtual reality sets. Since 2018, we are delivering attractive joint campaigns with models of brands in high demand such as Samsung, Apple, Huawei and some local handset manufacturers such as Vestel and General Mobile. We believe this contributes to increased smartphone penetration and data usage and further builds customer loyalty by offering a technologically advanced product at a competitive price.

When we sell goods or services as a principal, income and payments to suppliers are reported on a gross basis in revenue and operating costs, respectively. If we sell goods or services as an agent, revenue and payments to suppliers are recorded in revenue on a net basis, representing the margin earned.

We offer fixed broadband internet packages to our residential customers. We also offer internet, voice and TV bundles, where we benefit from the use of our own fiber. The ratio of customers using multiplay with TV services reached 53.3% as of December 31, 2019, from 48.6% a year ago. We need the incumbent’s network to provide services outside our own fiber infrastructure, and in these circumstances we differentiate our offering with our unique brand and our excellent customer service. Therefore, outside of our own fiber infrastructure we are only able to offer double-play packages with broadband and voice to our customers. We do not offer IPTV service on DSL because our TV technology is IP-based and has a multicast structure, and for technical reasons DSL infrastructure cannot support this type of service. We emphasize our “no hidden prices” value proposition with our broadband products by not charging our customers for activation, modem or installation services separately, and by offering high-speed fiber broadband at attractive prices.

In addition to the internet, voice and TV bundles, our residential broadband customers are offered the fixed broadband and fiber device bundled campaigns, where significant discounts on specific models of smartphones, tablets and modems are offered to customers with 12 or 24 month internet service contracts with our Company.

We also serve our customers with our FWA service called “Superbox”, which offers wireless high-speed internet access for customers and primarily preferred by those who are at locations with no fiber infrastructure. Superbox is the first and the widest FWA service in Turkey. The required equipment is included in the subscription plan and uses the LTE Advanced network as a backhaul to provide internet connectivity. As of December 31, 2019, we reached 323 thousand Superbox customers in Turkey, from 33 thousand customers a year ago.

 

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(iii) Digital Services

Over the course of the past four years, Turkcell has invested in developing its own digital applications and services. Turkcell has a large portfolio of mobile applications which can be downloaded from app markets and are available on both iOS and Android platforms. These applications are available for any user regardless of their choice of mobile operator. Some of these digital services are owned and managed through Lifecell Ventures, a 100% subsidiary of Turkcell incorporated in the Netherlands. All of these apps are created and sustained by our in-house mobile application development team comprised of more than 1,200 engineers.

Turkcell seeks to differentiate itself by providing innovative and pioneering solutions in collaboration with its strong solution providers and various partnerships. We are also focused on marketing our digital services portfolio to trusted telecom operators around the world.

Among others, below are the strategic digital services on which we focus our efforts (in no particular order):

 

   

BiP is an integrated IP-based communication and life platform;

 

   

TV+ enables subscribers to watch live television channels and on-demand video content on their mobile devices and through the IPTV platform;

 

   

fizy is a digital music platform to stream and download music, listen to radio and watch video and live concerts;

 

   

lifebox is a personal cloud service that facilitates data storage;

 

   

Dergilik is a digital publishing platform which enables access to popular local and international magazines and newspapers;

 

   

Yaani is a search engine application, e-mail platform and browser, designed to understand the unique syntax of the Turkish language and allows users to browse, search the internet, and e-mail safely and quickly;

 

   

Digital Operator is an application for our customers to track their bills and usage, change their account settings and make transactions and purchases;

 

   

Goals on Your Mobile (Goller Cepte) allows fans to play games, follow their team and be updated on a wide variety of categories such as match scores and player transfers;

 

   

Turkcell Academy provides digital learning contents and services in various categories;

 

   

UpCall is a call management service, available only to Turkcell subscribers in Turkey and KKTCell subscribers in the Turkish Republic of Northern Cyprus; it enables users to identify the caller, reach unknown numbers and block spam calls;

 

   

Kopilot connects cars to smartphones and enables real-time monitoring of metrics on the vehicle’s performance and driving experience; and

 

   

Supercam ensures the safety of the home and workplace through communication with internal and external cameras.

We regularly monitor the performance of our digital services portfolio through KPIs, including the number of downloads, three-month active users (number of unique users who, in the past three months, have logged into the app at least once) and other KPIs that are relevant to each individual service.

BiP

BiP is an integrated IP-based communication platform with the following key features:

 

   

Instant messaging, sending photos, videos, audios and documents;

 

   

Group messaging, disappearing messages in the pre-defined time;

 

   

Instant translation;

 

   

Communicating with non-BiP users via SMS and network call;

 

   

Entertaining content: Creating and sharing internet memes, a wide range of emoji;

 

   

High quality VoIP, video call, group video call up to 10 people;

 

 

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Integrating two numbers under BiP;

 

   

Virtual number service which enables customers to have a mobile number without a SIM card and make/receive calls through the application;

 

   

“Discover” section on business, contests, weather and many more;

 

   

Money transfer;

 

   

Ability to share location with contacts, and

 

   

Emergency communication feature.

The BiP Discover section offers a connected life experience as a marketplace that consists of various entertainment and information services. This section offers two-way communication between users and services. BiP Discover serves over 200 different services, including top Turkish banks, TV shows, celebrities, content providers and customer services, with around 50 million followers.

In 2019, we invested in BiP’s infrastructure to enable Multicloud Architecture, through which operators can build their own digital communication platform, thereby safely storing their communication data in their country as well as customizing their app by changing the brand, app logo and providing their local services. Moreover, all app users (BiP or its customized apps working on this multicloud infrastructure) can seamlessly communicate between each other.

BiP was downloaded 41.6 million times in 192 countries with 11.1 million three-month active users as of December 31, 2019. In 2019, 274 million messages were sent daily on average.

TV+

Turkcell’s multi-screen TV platform TV+, launched in October 2014, delivers an enhanced television viewing experience to its subscribers anywhere, any time with more than 150 channels. Its unique features as compared to other platforms include the abilities to pause and rewind live streams, record to cloud and the capability to switch between four screens. TV+ offers the Ultra HD supported 4K content box and 4K content on IPTV platform. With a view to increase TV+ penetration, we have also deployed TV+ on Apple TV, Android TV, and Smart TV applications. As of December 31, 2019 TV+ reached 4.1 million subscribers, 719.7 thousand of which were IPTV users. TV+ was downloaded 15.4 million times to date.

fizy

Turkcell’s digital music service fizy enables its users, through the application and the web version, to access more than 35 million songs, videos, live concerts and radio channels with high quality sound for a monthly subscription fee with “standard” and “premium” options that also includes data available for this service. Premium users can stream music on fizy without any ad interruptions, and have the flexibility to listen to songs offline. The application offers personalization through enhanced-AI technology. As of December 31, 2019, fizy was downloaded 25.9 million times and had 3.5 million three-month active users. Users listen to nine million songs per day on average. Fizy is also available in Ukraine, Germany, Belarus and the Turkish Republic of Northern Cyprus.

lifebox

Turkcell’s personal cloud service, lifebox, is the first local cloud-storage service in Turkey. It enables users worldwide to store their photos, documents, contacts, and videos in one secure, convenient and personal space with auto sync abilities, and to share them easily. lifebox also offers a phone book synchronizing feature. Each user who downloads and logs into the application is given 5GB of storage space free of charge. In 2019, lifebox began to offer the PhotoPick feature, which uses AI to suggest the best photo for Instagram. As of December 31, 2019, lifebox was downloaded 13.4 million times and had 3.3 million three-month active users, with 43.5 files uploads per user per day on average.

Dergilik

Our digital publishing app, Dergilik, gives users access to more than 1,500 popular magazines, including international ones, and more than 50 newspapers published in Turkey. Dergilik is offered in two main subscription options: standard subscription with limited access to the content and premium subscription with full access. All magazines and newspapers available on Dergilik are also available for download. The application is enhanced with auto-download as well as favorite pages and magazines features. Dergilik users can also reach

 

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websites of magazines and newspapers free of data charge. As at the end of December 2019, Dergilik was downloaded by 13.7 million customers and had 3 million three-month active users. Starting from the third quarter of 2019, our reporting of three-month active users excludes those users who utilized the zero-rating benefit of Dergilik magazines and newspapers via browser.

Yaani

Yaani is a search engine and browser, providing a fast, secure and stable browsing experience, combined with a unique set of features through the Yaani browser. Yaani is available for both iOS and Android devices, and is also available as a browser. Yaani was created based on Turkey’s specific user patterns and can access local content first, thereby increasing the relevancy of the searches. Yaani was downloaded 9.7 million times and had 3.7 million three-month active users as of December 31, 2019. YaaniMail was launched in December 2019, as an all-access, cross-platform email service, offering a user-friendly email experience with a seamless design.

Goals on Your Mobile (Goller Cepte)

Goals on Your Mobile is a sports application designed for soccer fans. It provides super league goal videos, VAR (Video Assistant Referee) videos, free mobile sports games, betting analysis and the latest sports news. The application was downloaded 12.0 million times and had 4 million active users as of December 31, 2019.

Turkcell Academy

Turkcell launched the Turkcell Academy service in 2014. Enriched with Turkcell’s technology and training know-how and content partnerships with leading institutions worldwide, Turkcell Academy provides access to a digital and innovative world of knowledge. Turkcell believes that accessible knowledge with mobility will facilitate equal opportunities in education and empower its users.

Turkcell Academy offers services for both consumers and corporates. As for consumers, Turkcell Academy has a website and a mobile application that provide digital learning content and services in various categories such as technology, innovation, personal development, marketing, leadership and certificate programs. Regarding the corporate service, the Learning Management System (“LMS”) of Turkcell Academy enables users to easily prepare trainings, courses, exams and questionnaires. User management on the LMS is easy-to-use and the platform also allows detailed training-tracking and reporting. Further, it is also a highly developed evaluation tool due to its capabilities of simultaneously reporting the responses.

Digital Operator

One of our priorities as Turkcell is to drive customer loyalty through the digital platform. Within the scope of this strategy, we have invested in our digital self-service channels. The primary channel is our mobile application called “Digital Operator” with which we provide our customers the ability to track their bills, usage and settings and execute transactions and purchases. Digital Operator had 48.6 million downloads and 21.2 million three-month active users in 2019.

In 2019, we continued to use the Digital Operator app as the platform to offer a successful marketing campaign called “Shake & Win”, which has delivered 1.3 billion gifts to date, where most of these gifts were in the form of data, minutes or trial subscriptions to digital services such as TV+, fizy, Dergilik, lifebox, BiP and Paycell. We also launched Turkcell Gift Pool, a loyalty and gamification hub within the app where users can browse and claim gifts, rewards and privileges. Since its launch in October 2019, 12 million customers visited Turkcell Gift Pool over 100 million times. These have become a substantive medium for Turkcell subscribers to discover and experience our digital services.

UpCall

UpCall is an application enriching and facilitating our customers’ calling experience with its different features offered through our capabilities as a telecommunication operator. When a call is received from a number that is not saved in the user’s phonebook, the caller’s ID is displayed. The UpCall application also offers a smart search feature that enables the access to the identity of the owner of an unknown number based on the Turkish National Telephone Directory. Further, the application is capable of initiating a group call with a single click;

 

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offers the opportunity to add a topic, picture or a sticker to the calls; enables a “do not disturb mode”, and proposes a set of ring tones for users who want to inform callers that they are currently not able to answer the call. As of December 31, 2019, UpCall was downloaded 8.4 million times.

Kopilot

The Kopilot device, along with its application, was launched in July 2018 with the aim of making cars smarter. It connects cars to smartphones and enables real-time monitoring of metrics on the vehicle’s performance and the driving experience, providing helpful information on driving behavior and preventative maintenance.

Supercam

The Supercam device, along with its application, was launched in June 2018 to ensure the safety of the home and the workplace. This closed-circuit camera system, provides a heightened experience to a growing number of users through its intelligent features.

Digital Society Solutions

Turkcell is not only focused on services that increases ARPU levels but also eager to use its digital and technical competencies to create value for society, help disadvantaged groups to obtain equal social inclusion and create a better future. This focus resulted in several digital society solutions, including Hello Hope, My Dream Companion, Whiz Kids, DQ, My Sign Language and My Gem Inside.

Hello Hope is a mobile application which aims at facilitating the lives of Syrian refugees in Turkey, and was launched as a corporate social responsibility project in September 2016. Previously recognized by the GSMA for best use of mobile technology in humanitarian and emergency situations, “Hello Hope” received another award from the World Summit for Information Society (WSIS), led by the International Telecommunications Union (ITU), the UN body for the telecommunications industry in 2017. Additionally, “Hello Hope” was selected among globally inspirational projects by the UNESCO-Pearson Initiative for Literacy and by mEducation Alliance.

The Whiz Kids project was initiated in 2016 under the auspices of the Ministry of National Education, and is aimed in particular at underprivileged children in rural areas of Turkey who show exceptional talent to realize their potential through the education of new technologies. Within the scope of the project, Turkcell first established technology laboratories for technological productivity; where students are introduced to robotic coding, 3D printers, robots and software equipment as well as Maths, Space Science, Internet of Things and Artificial Intelligence. Turkcell also created the Whiz Kids mobile application in 2019.

The DQ mobile application, launched in January 2019, is a project initiated by DQ Institute, aimed at improving children’s technical, cognitive, meta-cognitive, and socio-emotional competencies that are grounded in universal moral values and enable individuals to face the challenges and harness the opportunities related to digital services.

The My Dream Companion (“MDC”) application enables the visually impaired to access information in a fast and easy manner, and provides them more active and independent social life. Users can access thousands of daily news items, columns, audio books, trainings and magazines. MDC’s indoor navigation technology provides the visually impaired with and access to detailed information with regard to the stores they are passing by in shopping malls, and directs them to the appropriate store. Transportation technology of the application provides accessible transportation experience. Moreover, MDC provides audio description over a mobile application -a world first- without requiring any extra equipment or software.

My Sign Language is a mobile application that seeks to improve communication between hearing impaired people and people who do not know sign language. Written or spoken words/expressions can be instantly translated into video by the 3D Sign Language translator. It includes the most comprehensive Digital Sign Language dictionary with more than 3,500 words.

My Gem Inside is a mobile application offered fully free of charge to everyone in Turkey, that supports the cognitive, emotional and behavioral development of children with autism, and their development through inclusive education.

 

 

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Arikovani (‘Beehive’ in Turkish) is a crowdfunding platform that helps entrepreneurs obtain funds needed to execute their technology or innovation-oriented projects. The main objectives of Arikovani are to increase Turkey’s domestic technology production and raise social awareness around technology production. By the end of 2019, 73 projects had raised over TRY 5.6 million with individual backers and corporate companies. Turkcell supports every project at the “crowd funding” stage and encourages other corporates to support these projects.

Digital Identity Management Services

Fast Login is a secure universal login solution which allows users to securely access a wide array of digital services and websites using their mobile phone or e-mail account for authentication. It is powered by GSMA under the Mobile Connect name and was launched in December 2015. Simply by matching the user to their mobile phone, Fast Login allows them to login to websites and applications quickly without the need to remember passwords and usernames. Fast Login is integrated to 60 Turkcell and 26 non-Turkcell applications with new technology upgrades. In 2019, Fast Login, having reached 23.2 million registered users, was used 490 million times with its easy, fast and secure mobile authentication service.

Mobile Signature, launched in February 2007, enables mobile subscribers to sign electronic documents and transactions with a legally-binding digital signature using SIM cards. Mobile Signature users can easily verify their personal identity in a digital environment and complete transactions remotely.

One Time Password is widely used by service providers as a secondary factor for authentication of transactions. The service allows service providers to send a single-use password via SMS to their end users in order to ensure transaction security. It is commonly used for online banking processes and login transactions.

(iv) Digital Business Services and Solutions

We have drawn up a completely new business model to offer vertical solutions in transportation, finance, healthcare, education, logistics, production, retail, energy and in similar fields with the aim of meeting needs of all industries. Moreover, added value services will be developed based on advanced technologies such as artificial intelligence, Internet of Things, and big data while alternative financing models will be offered as part of this new business model. We provide end-to-end digital solutions to private sector companies and public institutions. Thus, we contribute to Turkey’s growing digital economy offering value propositions which enable enterprises to increase their revenues.

Digital Business Infrastructure

Turkcell aims to increase the efficiency of companies through its digital business infrastructure solutions such as Domain, DNS, Web Hosting and Database services.

Turkcell has two managed Wi-Fi solutions. Smart Wi-Fi provides Wi-Fi Hotspot services to small businesses with certain core features that include the storing of Wi-Fi records, all-access carrier, consumer analytics and customer-oriented marketing. Enterprise Wi-Fi provides customizable Wi-Fi hotspot services for enterprises. It is fully compliant with data privacy regulations and is equipped with online advertising features, Wi-Fi analytics and access-logs storing capabilities.

Turkcell Single Office service enables companies to switch their on-premise PBX hardware to a cloud-based unified communication service. This service is fully managed and operated by Turkcell teams, and customers are provided with IP phones and flexible payment models.

Managed Security Services is provided to corporate customers for their cyber-security needs and includes DDOS protection, managed firewall services, penetration and vulnerability services, threat intel services and a managed security operation center.

SD-WAN (software-defined networking in a wide area network) Services, launched at the beginning of 2019, provides tools for enterprise customers to minimize the time allocated for network management and to strengthen branch security. With SD-WAN technology, Turkcell enables cloud-based network services such as firewall, security and routing for enterprise customers. SD-WAN also provides multi-tenant architecture, bonding detailed monitoring, and app-based traffic engineering features.

 

 

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Digital Business Applications

Business Applications gives corporate customers a competitive advantage by providing non-core industrial solutions. Fleet management, employee tracking, push-to-talk services, cloud-based SaaS products, digital invoicing solutions, and new generation cash register solutions are available to streamline customer processes and provide operational efficiency through new revenue streaming channels, better customer reach and experience.

With the rise of the enterprise applications market as well as improvements in mobile internet, cloud services and mobile devices, businesses have been undergoing a strategically important process of digital and mobile transformation. Turkcell continues to be a strategic business partner to companies in all industries for transformation projects that aim to render all processes manageable via mobile devices anytime and anywhere.

Managed Services – End to End Solutions

We offer our end to end digital solutions that we implement in our corporate business sector. In these projects, we analyze the needs of our customers from every sector and provide tailored solutions to our customers’ individual needs—we have implemented close to 1,000 projects to date. With our project management team, we implement network, security and system management, application management, end-user support, data center services, digital transformation, IoT, mobile applications, mobile user support and many other solutions and services in accordance with the business processes of our customers.

Cloud Services

Turkcell offers a wide range of cloud solutions for its corporate customers. These services range from co-location solutions to infrastructure (next generation virtual server, virtual data center), backup, disaster recovery and security services. In 2019, Turkcell managed over 8,000 virtual servers and protected more than 5 Petabyte of data for its corporate customers. As of December 31, 2019, our datacenters are based across eight locations in Turkey on approximately 33,500 sqm. of total data center white space area.

In addition to traditional data centers located in Dudullu, Kartal, Davutpasa, Yenibosna and Sogutozu, with a total white space area, refers to the area where IT equipment are placed, of approximately 15 thousand sqm., we built our first new generation data center in Gebze in 2016, which has an area of 33 thousand sqm. with 10 thousand sqm. of white space and 30 MVA power capacity, thereby meeting the highest corporate standards. In 2018, we invested in our Izmir data center which has 2,350 sqm. white space. In late 2019, we built a new third generation data center in Ankara, the largest in Turkey with its 12 thousand sqm of white space area.

Turkcell offers cloud-based applications from its data centers. Apart from the basic hosting and e-mail solutions, Turkcell offers cloud-based productivity applications, such as e-company, which enable corporate customers to manage their financial processes with already integrated accounting, e-invoice, e-ledger and e-archive invoice products.

We have integrated all of our cloud services on the website, www.turkcellbulut.com. Through this platform, users may configure their infrastructure and software services within minutes and manage them through a self-service portal. Users can use the latest technologies providing business continuity over Turkcell Cloud without undertaking investment costs.

IoT Products & Solution Management

Since 2009, Turkcell has focused on its Machine-to-Machine (“M2M”) and IoT business, whose principal markets in Turkey are car telematics, team tracking, fleet management, POS terminals, security alarms, smart metering, mobile health management, smart agriculture, smart energy and sales force automation applications. Turkcell launched Turkey’s first M2M Platform in March 2012. With the M2M Platform, customers can manage their devices more effectively. As of December 31, 2019, the number of M2M subscribers increased to 2.6 million compared to 2.4 million as of December 31, 2018.

In addition to the M2M Platform, Turkcell launched its IoT Platform in November 2019, which enables enterprises to transform ordinary devices into connected devices and data into actionable information. It gives them control of their IoT solutions, providing them with the visibility and intelligence required to transform how they do business. An online dashboard of tools and data feeds, Turkcell IoT Platform is a one-stop IoT platform for device management, data collection, data visualization, application development and runtime analytics. Turkcell IoT Platform runs on turkcellbulut.com, which is a fully automated cloud platform. It offers true multi-tenancy, scalability & high availability and security.

 

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Turkcell will continue to pioneer this business line with the release of services on upcoming new technologies such as consumer/corporate IoT and NB-IoT (NarrowBand-Internet of Things). Turkcell aims to launch new end-to-end solutions on specific IoT verticals in the upcoming periods.

Transportation & Energy

Smart transportation, a key IoT vertical for Smart Places & Business Applications, refers to the integrated application of smart technologies and management strategies in mobility systems, which includes B2C/B2B vehicle tracking, connected car solutions and fleet management. Within the Turkcell Kopilot product family, Turkcell DBS enables firms to track their fleet on maps, access critical reports about their fleet and encourage their drivers to drive safely through a single, user-friendly platform.

Turkcell designs industry 4.0 and energy solutions that increase the productivity of enterprises in the field of intelligent production and integrated energy solutions. Turkcell provides solutions to create smart factories and has explored various needs and solutions in the overall energy market. We offer smart energy solutions through partnerships since 2015 to help corporates monitor their energy consumption and increase their efficiency. Turkcell has recently launched a new smart energy service named ‘Turkcell Enerjim’, which targets corporate customers.

Smart Cities & Environmental Solutions

Smart cities and environmental solutions aim to digitally facilitate the lives of citizens and help government institutions deal with challenges raised by urbanization and operate more efficiently. Turkcell aims to expand its role on the smart city value chain through its solutions for transportation, energy, environment, security management, etc. with its strong business partner ecosystem.

Turkcell continues to support farmers by investing in the field of digital agriculture and livestock. In 2019, more than thirty thousand farmers grew their crops more efficiently with the help of Turkcell SMS information services, including village-based daily weather forecasts and right cultivation method recommendations.

Turkcell Filiz, launched in late November 2018, is a mobile application and used with the soil-weather IoT station. It provides instant data regarding fields and aims to increase the productivity of farmers by assisting them with their irrigation and spraying decisions according to soil and weather conditions.

Smart Ear Tag provides real-time monitoring and analysis of farm animals in order to enable farmers detect and prevent livestock health issues.

Big Data & Analytics Services

Turkcell offers analytics services to companies to help them understand sector dynamics. These services also enable companies to obtain information on their customer base by providing demographic and behavioral analysis or competitor analysis to help them support their marketing strategy through data.

Turkcell Insights as a Service (Business Insights)

Turkcell re-designed its B2B insight services in 2019 to create an end to end solution for B2B customer market research needs. Turkcell provides a comprehensive market research or performance report to several sectors on brands’ and competitors’ customer profile, branch visits, crowdedness, and purchasing behavior, etc. This serves as an innovative and data-based alternative to traditional market research. Also, base station signals are used for location analytics and mobility index projects to create data-based decision-making process for transportation and public sectors, or help companies boost their outdoor marketing activities by enabling them to find the best locations that match their brand.

Turkcell Analytics as a Service (Business Analytics)

Turkcell has developed unique solutions to enrich customer offerings by analyzing the behavioral data of Turkcell users. These services help customers improve their analytics models such as credit risk scoring, fraud scoring, digital customer scoring and customer segmentations.

 

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Location Based Services

Corporate customers can monitor and manage their sales forces and fleets with Ekip Mobil (“Team Mobile”). Team Mobile is a management console that allows customers to view their field teams/vehicles on a map, define alarms for specific regions and create direct communication channels to the field. Team Mobile can be used on any mobile device and comes at a minimal investment cost for companies.

Management of Hospital Information Systems

We are involved in “City Hospitals” projects in cooperation with Ronesans Health Investment (four city hospitals) and Akfen (one city hospital). Five city hospitals currently operate through “Management of Hospital Information Systems” built by Turkcell. Further, we have reached an agreement for two new city hospitals which will be in service in 2020. Through these agreements, we have strengthened our leading position in the public-private partnership market in terms of both the number of beds and the number of hospitals.

Partner Ecosystem and Vendors

We focus on creating prospects for hardware and system integration projects through Partner Ecosystem. Our wide network of these business partners enables our services to achieve sales targets. Moreover, we have also entered into special partnering agreements with global IT vendors to provide a wide range of products and services for our customers.

See “Item 3.D. Risk Factors” for a discussion of the regulatory changes affecting our digital services & solutions.

(v) Techfin Services

Turkcell focuses on techfin services through our digital payment services platform, Paycell, and our consumer finance company, Financell.

The vision of Paycell is to be an enabler on financial inclusion with the combination of technology and financial services. Paycell was established to provide techfin services including mobile wallet, direct carrier billing, inter-city subway/bus card uploads (Istanbul-Card), utility payments, money transfers, prepaid cards (physical and virtual), QR code payments and POS solutions. We are committed to capitalizing on this well-established payment platform by leveraging our technological know-how as well as our advanced infrastructure. Paycell’s aim with end-to-end payment solutions is to bring the merchants and the consumers together, by offering ease-of-use, new technology and tangible benefits to the consumers while facilitating further revenue generation for the merchants through payment and CRM solutions. For its customers, Paycell, through the Paycell mobile application, offers quick and easy payments via QR code, easy money transfers, loyalty advantages and cross-promotions, which position Paycell as a “Super App”. In the fragmented techfin market in Turkey, where competition is focused on providing solutions in particular verticals, Paycell differentiates and stands out with its strong positioning enabled by its wide portfolio of services as well as its access to its parent Turkcell’s deep technology expertise, large customer base and sales channel. Meanwhile, Paycell’s core value proposition for merchants is the ability to know their customers better, offer targeted deals and offer a quick and easy method of payment which, at the same time, accumulates customer data for the merchant. Paycell also offers online payment infrastructure systems in order to increase its foothold both in online and offline commerce.

Moreover, regulatory environment, which have become more supportive following the introduction of recent legislations mainly on mobile POS usage, open banking, and e-money, also has the potential to positively impact techfin activities.

Our consumer finance company, Financell serves to meet the financial needs of individual and corporate customers for their technology products. Furthermore, Turkcell Sigorta Aracilik Hizmetleri A.S. (“Turkcell Sigorta”), established in 2018, is specialized in the field of tech insurance, where technology and insurance meet.

(vi) Wholesale

(i) International Roaming

Our coverage extends to many countries around the world through our roaming agreements. As of December 31, 2019, we believe we have further enhanced our position as a leading mobile operator of international roaming services in Turkey by expanding our partnership in 208 destinations throughout the world, pursuant to commercial roaming agreements with 581 operators.

 

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We provide roaming services for prepaid subscribers of foreign mobile operators visiting Turkey since July 2002. As of December 31, 2019, we offered prepaid roaming to the prepaid subscribers of 380 operators from 168 destinations. We offer roaming services for Turkcell prepaid subscribers traveling abroad since October 2004. As of December 31, 2019, we offered prepaid roaming to Turkcell prepaid subscribers through 427 operators in 186 destinations. We also offer GPRS roaming since October 2002. As of December 31, 2019, we provided GPRS service through 201 destinations by 504 GPRS roaming partners. As of December 31, 2019, our subscribers can send SMS to more than 724 mobile operators located in 209 destinations. Since December 2005, our subscribers are able to send and receive MMS to and from subscribers of foreign operators. As of December 31, 2019, our subscribers were able to send MMS to 390 mobile operators in 142 destinations. As of December 31, 2019, our subscribers enjoyed 3G mobile internet connections with 437 operators in 190 destinations. On January 20, 2015, we launched LTE roaming services for our subscribers at many different locations around the world. As of December 31, 2019, our subscribers experienced LTE roaming services with 236 operators in 124 destinations. On April 1, 2016, we launched LTE roaming services for visitors from many different countries. As of December 31, 2019, subscribers of 203 operators from 103 different locations experienced LTE roaming services on the Turkcell network.

We have entered into direct international roaming agreements with GSM operators around the world, including in Cuba, Iran, Sudan, Libya and Syria. These arrangements have been entered into in the ordinary course of business and on arm’s-length terms that we believe to be in line with industry standards. Under roaming arrangements in the listed countries, our net revenues for roaming on our Turkish network totaled less than TRY 9.4 million in 2019 while our net expense for our subscribers roaming on the networks of operators in the listed countries was less than TRY 3.5 million. In terms of revenue generation, we do not believe that our roaming arrangements with operators in Cuba, Iran, Sudan, Libya and Syria are material. For additional details regarding our international roaming agreements with Syria, please refer to “Item 4.B Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA)”.

(ii) Wholesale Voice

Turkcell and Superonline Iletisim Hizmetleri A.S. (“Turkcell Superonline”) together supply wholesale voice service by establishing interconnection agreements with fixed line and mobile operators and international carriers.

As of December 31, 2019, Turkcell Superonline had interconnection agreements with over 50 national and international carriers. Turkcell has interconnection agreements with Turk Telekom, Vodafone, TT Mobil and other Fixed Telephony Service Operators and via these agreements, parties connect their networks to enable the transmission of calls to and from their mobile communications system. As of December 31, 2019, Turkcell had interconnection agreements with over 40 fixed line and mobile operators and carriers.

For Turkcell, current interconnection rates are based on the ICTA’s decision on Mobile Termination Rates (“MTRs”) and Fixed Termination Rates (“FTRs”). ICTA designated Turkcell as an operator having significant market power in the mobile access and call origination markets. Due to this designation, Turkcell is obliged to provide access and call origination service to MVNOs and directory service providers. As of December 31, 2019, Turkcell had agreements with 11 Directory Service Providers. Commercial negotiations in view of reaching agreements with MVNOs are ongoing. For more information, see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry”.

(iii) Wholesale Data

Our vision on wholesale data is to become a preferred regional player in a digitally hyper-connected world. To do this, we have developed a robust infrastructure which includes 11 border crossings from Turkey to other jurisdictions. Five border crossings are towards Europe where we offer various options to connect with important European cities through protected and completely separate routes. Six of the border crossings are towards the East, where we offer capacity services to the Caucasus and Caspian region as well to the Middle East.

In accordance with our strategy, Turkcell Superonline is also establishing and executing a domestic wholesale business strategy to provide wholesale products such as bit stream access via its FTTx fiber coverage, infrastructure services, backbone transmission, Ethernet, IP transit capacities, cyber security and VPN services to operators, service providers and data center companies in the domestic market in Turkey.

Turkcell Superonline is leading the localization strategy for Turkey’s data and internet traffic by developing partnerships with national operators, internet exchange platforms, Tier-1 operators, global/local content and cloud service providers to enable direct access to all networks and also commercializing internet traffic.

 

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Turkcell Superonline aims to transform the Silk Road into the Fiber Road, and has been taking important steps to develop Istanbul as the world’s newest internet base due to its geostrategic location. Accordingly, the company provides a bridge between east and west, which supplies a continuous connection with partnerships with the Tier-1 operators and strategic partners between Asia, the Middle East and Europe, such as RCN. Turkcell Superonline provides telecom services to more than 100 international operators including Tier-1 companies. As of December 31, 2019, we have the capacity to carry more than 8 Tbps of international traffic.

IV. Tariffs

Our charges for voice, data and digital services consist mainly of bundles and also monthly fees, usage prices, and volume discount schemes and options under various tariff schemes.

We have various segmented tariff plans for mobile that target specific subscriber groups (postpaid or prepaid, corporate or consumer). A majority of our customers choose all-inclusive packages which include minutes to Turkcell, intra-company calls (for the corporate segment) and all national calls, data and some of our digital services.

“Comfort Packages” is a new payment plan structure launched in 2019 through which subscribers enter into a postpaid subscription contract under which monthly renewal is not mandatory and where add-on packages may be purchased via top-up packages. With Comfort Packages, our aim is to attract new subscribers and also, switch prepaid subscribers to the postpaid payment model.

Turkcell’s fixed offers are based on speed and quota. The tariffs are designed by taking different needs of different customer segments into consideration. Turkcell’s own fiber infrastructure enables fiber offers with speeds of up to 1000 Mbps, usually bundled with our TV product. In 2018, Turkcell also begun to offer a tariff for a speed of 10,000 Mbps. Turkcell’s ADSL service offers speeds up to 8 Mbps and also come as bundled with voice service. Since 2016, VDSL is offered to our customers using DSL products, with higher speeds of up to 100 Mbps. Cable offers speeds up to 24 Mbps. Our FWA product Superbox offers speeds up to 375 Mbps.

Turkcell’s strategy is focused on providing high quality service and creating value with an innovative approach rather than competing on prices. Accordingly, Turkcell aims to offer the best network quality to its customers, and also to be a leader in digital services. Better user experience and differentiated offers provide Turkcell with the flexibility to price its tariffs based on cost and investments and to apply an inflationary pricing policy.

(i) Consumer Tariffs and Loyalty Programs

We mainly offer bundled packages including voice, data, SMS and various digital services. We focus on providing a leading mobile experience in Turkey, and in order to meet customer needs in different segments (such as youth) we offer a large portfolio of tariffs. Data quotas have become the key selling point in our tariffs which are enriched with our digital services.

We regularly selected cities, based on our market share, where we can deliver incremental growth, and deploy special tariff plans and campaigns to increase customer acquisition.

Our aim is to provide offers that are tailored to the individual needs of our customers, considering their location, tenure, and risk score. As a result of such efforts, in 2019 we increased upsell (i.e., customers that have been upgraded to a higher paid tariff) and we observe the positive reflections on ARPU growth.

We have various tariffs bundled with smart device campaigns offered jointly by our dealer channel. Such tariffs include voice minutes, SMS and data and digital services bundled with smart devices, and with these, we aim to facilitate a higher mobile broadband and digital services usage.

In fixed broadband products (fiber, DSL and Cable internet), we have various tariffs for different internet speeds and quota. We offer 15 Mbps to 1000 Mbps internet speed for fiber internet, which we serve through our own infrastructure. In 2018, we have launched our fiber internet offer with 10 Gbps speeds, which is offered only by our Company in Turkey. Starting in 2018, our fixed broadband tariffs are generally for a 12-month commitment (down from 24-months) while we continue to have customers on 24-month commitments. Starting late 2018, in line with regulatory developments, we removed the fair usage quota from our fixed broadband tariffs, offering a constant speed experience to our customers. Furthermore, we have started to offer services to our customers through the Vodafone and Turksat infrastructure as part of our mutual infrastructure sharing agreements.

 

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We also offer IPTV service, namely TV+, bundled only with our fiber internet service on our fiber infrastructure. Our fixed voice service is bundled with our fixed broadband service. Further, we also tablet and desk phone campaigns in which terminals are offered jointly by dealers, bundled with Turkcell Superonline fixed data products.

For customers without fiber connectivity, we launched a wireless high-speed internet access service called Superbox. The required equipment is included in the subscription plan and uses our 4.5G network.

Turkcell intends to provide advantageous price schemes to consumer and corporate customers when abroad. With a customer-oriented focus, Turkcell offers alternatives to its subscribers with high- and low-roaming usage. All Turkcell postpaid customers can enjoy “Roam Like Home” offer, enabling them to use their domestic tariff while abroad by paying a certain daily fee.

We have three applications called Platinum, GNC, and Turkcell Bizce (formerly SIM) which serve as platforms for our loyalty programs.

Platinum is an application for both consumer and corporate subscribers with the Platinum tariff. Platinum tariffs include rich package content and are for those customers with a certain minimum ARPU level. Further, the Platinum app provides privileges and gifts such as plane tickets, free books, attractive co-branding offers, car park services at several shopping malls and more. Our digital services such as TV+ and lifebox are bundled with Platinum tariffs.

GNC is an application for the youth segment for both Turkcell subscribers and non-Turkcell users. The GNC app gives free internet two times a week through gamification. The GNC app also provides co-branding offers, and numerous education and career opportunities via Turkcell Academy. For a broader service for this segment, Turkcell WiFi hotspots provide high-speed internet in 61 university campuses. As part of this service, mobile connect technology provides all students, regardless of their respective operator, one GB of free internet on campus, while those who prefer Turkcell postpaid packages receive ten GB of free internet monthly. In 2019, Turkcell WiFi was used by more than 100 thousand users.

SIM, the first digital platform in Turkey specific to women for both Turkcell subscribers and non-Turkcell users, has been rebranded as “Turkcell Bizce” in March 2020. This is the women platform that supports equal opportunity, personal development and economic engagement for women. The usage of Turkcell Bizce is data free, enabling a better customer experience with new app design.

In addition, we have been conducting a marketing campaign called “Shake & Win”, which can be deemed a loyalty program. The campaign is available through our online self-service channel called “Digital Operator” (application) and extends various gifts including free one-month subscriptions to some of our digital services, free daily or weekly data quota. Also, we provide special gifts to our loyal customers who have beenTurkcell customers for over ten years and Platinum customers.

Further, in 2019, we launched a new loyalty program in the form of a marketing campaign via gamification called #youdoit. The campaign is available through a channel on BiP and announces a new task on a digital service every week. Customers who accomplish their weekly tasks are entitled to weekly data packages. This campaign has also contributed 4.9 million new users to our digital services to date, and will be used as a valuable loyalty platform for our digital services going forward.

We have also launched an interactive campaign called “Surprise Point” where customers join through BiP app and visit certain locations to receive similar gifts as in the case of Shake & Win campaign. These campaigns have not only helped to increase data usage, but also enabled our subscribers to become familiar with our digital services. They have also contributed to customer retention by increasing their loyalty.

(ii) Corporate Tariffs and Loyalty Programs

We focus on meeting the specific needs of varying corporate customer segments with tailored offers coupled with the best network and service experience. We offer various bundle packages including voice, data, SMS, company on-net and/or flat minutes and digital services. As we strive to become corporates’ technology partner in their digital transformation journey, we also provide a wide range of integrated solutions for them through our subsidiary, Turkcell Digital Business Solutions. These services include cloud services, security solutions, systems integration, consulting, innovation projects for the business fields of the future; such as data analytics, the Internet of Things, M2M Communication, Industry 4.0, and Artificial Intelligence.

 

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One of our key focus is to provide our corporate customers with the best internet experience in both fixed and mobile connectivity. Through Turkcell Superonline’s independent fiber backbone as well as the DSL infrastructure of the incumbent fixed operator, we deliver fixed internet services.

We also aim to reduce the operating costs of our corporate customers by offering attractive co-branding offers for their main cost items. For example, the Win at Work loyalty program helps companies meet their basic company needs such as courier services, car leasing and translation at special discounted rates. Further, launched in 2019, our advantageous smartphone leasing plans aim at reducing their smart device procurement costs.

(iii) Wholesale Tariffs

In 2019, ensuring the necessary wholesale roaming cost basis has enabled us to support the new roaming consumer and corporate tariffs and propositions “Roam Like Home” was one of the main focuses of Wholesale Roaming Agreements.

Based on Turkcell’s roaming agreements, Turkcell hosts subscribers of foreign operators on its network. When a subscriber of a foreign operator makes a call using Turkcell’s network, that subscriber’s operator pays us our inter-operator tariff for the specific call type. inter-operator tariff is a wholesale tariff applied between mobile operators with roaming agreements.

Interconnection rates in Turkey are based on the ICTA’s decision on the interconnection tariffs for Turkcell, Vodafone, TT Mobil, Turk Telekom and fixed telephony service operators.

With respect to data sales, Turkcell intends to provide competitive prices to promote Istanbul as a regional hub for peering and IP transit services and international capacities, as well as to support the domestic wholesale market through its robust network with feasible commercial conditions.

V. Churn

The mobile churn rate is the percentage of disconnected subscribers calculated by dividing the total number of subscriber disconnections during a period by the average number of subscribers for the same period. For these purposes, we define “average number of subscribers” as the number of subscribers at the beginning of the period plus one half of the total number of gross subscribers acquired during the period. Churn refers to subscribers that are both voluntarily and involuntarily disconnected from our network. Under our disconnection process, postpaid subscribers who do not pay their bills are disconnected and included in churn upon the commencement of a legal process to disconnect them, which commences approximately 180 days from the due date of the unpaid bill. Pending disconnection, non-paying subscribers are suspended from service (but are still considered subscribers) and receive a suspension warning, which in some cases results in payment and reinstatement of service. Prepaid subscribers who do not provide the necessary payment for a period of 270 days are disconnected (this was changed in 2010 from 210 days). Under our churn policy, prepaid subscribers are disconnected from the system if they do not top-up above TRY10 during a twelve-month period.

In the first quarter of 2017, our mobile churn policy was extended from the regulatory minimum in Turkey of 9 months to 12 months, except with regard to prepaid customers who last topped up before March of each year, which will be disconnected by year-end at the latest. Prior periods have not been restated to reflect the change in churn policy. The mobile churn rate for 2017 disclosed in this document have been positively impacted by this change, in part due to the fact that we have been successful in reactivating certain subscriptions during the additional three-month extension. We believe that following this revision, the seasonality effect in churn rate, which is caused by periodic subscriber acquisition, has been reduced to a great extent. In this regard, we have deactivated 580 thousand inactive prepaid customers in 2019-end. Additionally, ICTA, through a board decision taken at the end of 2018, has imposed obligations on operators to record and to keep up-to-date identity information on their subscribers (both consumer and corporate segments and including the fixed segment), matching this information with the products/numbers that are being used. The decision also requires that operators complete missing information on existing subscribers and to terminate these subscriptions if the information is not provided within a given date. Likewise, foreigners are required to register their subscriptions with their “foreign identity number” if they are to use their subscription for more than 90 days, otherwise their subscriptions are also terminated after another period of 90 days during which they can only receive calls. These new obligations have resulted in a one-time bulk deactivation of subscriptions, especially of the subscriptions foreigners, impacting our churn rates in the third quarter and particularly in fourth quarter of 2019. In the third and fourth quarter of 2019, a total of 1.9 million mobile subscriber lines were disconnected as a result of this regulatory change. New subscriptions are made if and only if the required identity information is given upfront. We will monitor subscriptions accordingly and terminate if necessary (in cases of death, deportation, etc.). Such deactivations are expected to continue in the upcoming quarters but the impact is be expected to significantly lower.

 

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In 2019, the average monthly mobile churn rate increased to 2.7% from 2.1% in 2018. Excluding the impact of the aforementioned regulatory change, this rate would be 2.3%.

The churn rate for the fixed broadband products is calculated in the same way as the churn rate for the mobile products (except in fixed broadband, customers that change infrastructure from fiber to DSL/Cable or vice versa counted in churn rate). Fixed broadband subscribers’ connection speed is decreased to 128kbps in 10-90 days according to the financial risk segment of the customers in case they do not pay their bills (changed in 2019 from 15-62 days). The legal process commences in 45-110 days from the due date of the unpaid bill (changed in 2019 from 104 days). The average monthly fixed churn rate was increased from 2.1% in 2019 compared to 1.8% in 2018. This rate also includes the minor effect of ICTA’s new aforementioned regulatory decision.

Starting in the third quarter of 2018, we changed the presentation of churn figures to demonstrate average monthly churn figures which we believe corresponds to market practice.

We have what we believe to be an adequate allowance for doubtful receivables in our Consolidated Financial Statements for non-payments and disconnections amounting to TRY 795.8 million and TRY 938.5 million as of December 31, 2019 and 2018, respectively.

VI. Seasonality

The Turkish mobile communications market is affected by seasonal peaks and troughs. Historically, the effects of seasonality on mobile communications usage has positively influenced our results in the second and third quarters of the fiscal year and negatively influenced our results in the first and fourth quarters of the fiscal year. These seasonality effects have been less significant as we typically launch market campaigns to address the change in demand levels. Local and religious holidays in Turkey generally affect our operational results positively through higher consumption.

The Turkish fixed broadband market is also affected by seasonal peaks and troughs. Historically, the effects of seasonality on fixed broadband usage have negatively influenced our results in the third quarter of the fiscal year. This is mainly due to summer holidays when both usage and acquisition numbers decrease and churn increases due to residents moving.

VII. Mobile and Fixed Network

a. Coverage

Statements regarding our 2G coverage are based on the ICTA’s specifications as well as the TUIK’s announcements regarding the population, and statements regarding our 3G coverage are based on the ICTA’s 3G coverage calculation specifications issued on April 25, 2015. Statements regarding 4.5G coverage and performance are based on our own calculations, pending publication of ICTA specifications.

Our mobile communications network is designed to provide high-quality coverage to the majority of Turkey’s population throughout the areas in which they live, work and travel. Coverage also includes a substantial part of the Mediterranean and Aegean coastline. We enhanced coverage in low-populated areas (populations of less than 1,000 people) as well. In terms of 2G, we have significantly exceeded the minimum coverage requirements of our license.

We have also expanded our mobile communications network to add capacity to existing service areas and to offer service to new areas. In addition, in 2018, within the scope of the Ministry of Transport and Infrastructure’s Rural Coverage Project as part of universal services which we started in August 2013, about one thousand 4.5G base stations covering 1,623 villages with populations of less than 500 were installed. As per the universal service obligation, the network infrastructure serving these areas has to be shared by all operators. People living in these villages are currently served by LTE services (in addition to 2G) in a similar service quality provided in the urban areas. The daily lives of the 250 thousand people in these villages have been improved thanks to enhanced mobile communication and high-speed mobile internet services. ULAK (local network vendor producing 4.5G base stations)’s 4.5G radio equipment was used markedly, corresponding to about half of total deployments.

We commercially launched 3G simultaneously in 81 provinces and major cities in Turkey in July 2009. Benefiting from higher-quality communications provided by the widest spectrum in 3G, Turkcell will continue to offer seamless communications services to its customers with what we believe to be the most extensive coverage amongst its competitors.

 

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In 2019, we have continued to develop and improve the coverage and capacity of our network. In urban areas, we increased both coverage and capacity by placing network infrastructure in commercial sites such as shopping malls, business complexes and entertainment centers. We have been using 3G and 4.5G Small Cells (such as Femto, pico and micro) to enhance our coverage and capacity where necessary. Additionally, 3G and 4.5G repeaters have been used to extend the network coverage without adding new sites.

Our fixed communications network is designed to provide high capacity and high-quality service to consumer and corporate customers. Moreover, we believe that it is well designed and implemented to provide capacity to our mobile network. Our fixed network has the capability to carry large volumes of data and internet traffic in-country, and is also connected to national and international telecom operators.

As of December 31, 2019 our own fiber network reached 46,035 kilometers and connects all cities across Turkey. In 21 cities we have fiber to the home (“FTTH”) network and home pass, whereby the number of premises that are connected to our fiber network has reached nearly 3.6 million. Through partnership engagements in 2019, we have become capable of delivering fiber and cable (hybrid-fiber coaxial) internet service to 6.7 million households in 28 cities. We also provide enterprise Wi-Fi services.

In the fixed access network we have two main network structures called fiber to the building (“FTTB”) and FTTH. In FTTB network, we are installing switches to access our subscribers. In FTTH networks, we are installing Gigabit Passive Optical Network (“GPON”) and 10-Gigabit-capable symmetric passive optical network (“XGS-PON”) equipment which is the latest access network technology for residential and business subscribers. These network structures enable Turkcell to offer triple play services (High speed internet, TV, Voice over IP). The fixed access network also provides bandwidth requirement for mobile sites with Metro Ethernet services. In addition to our current network expansion, Turkcell has started using Turksat cable infrastructure to provide high speed internet service to new customers.

b. Quality of Service

The ICTA published a “Regulation on Quality of Service in the Electronic Communications Sector” on September 12, 2010, effective as of December 31, 2011 (see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry” for further details). The Turkcell network is currently above the standards set by the ICTA statement. Typically, “Call Drop” was one of the major Quality of Service figures that we focused on during 2019.

Dropped calls are calls that are terminated involuntarily and are measured by using the ratio of total dropped calls during all day. Using such industry standards for dropped calls, our dropped call rate for our 2G&3G network has further decreased below 0.29% in 2019.

The rate of service quality is being enhanced continuously due to extensive network optimization and investments in our 2G and 3G network to improve the quality and capacity of the network. According to the statistics gathered from vendors, Turkcell has one of the best 2G and 3G dropped call rates compared to other networks around the world. As Turkcell has built one of the most robust LTE networks globally, in terms of VOLTE performance, Turkcell has already obtained a low drop rate in VOLTE, which is below 0.26%.

We have been offloading voice and data traffic by utilizing small cells in the network for an improved customer experience. Together with Turkcell Superonline, we have also implemented Wi-Fi offload integrated with the Turkcell 3G and 4.5G networks to further enhance the customer experience. Additionally, we are using a variety of solutions such as the Special Distributed Antenna Solutions (especially for major stadiums) indoor active systems that simplify deployment and streamline capacity/coverage expansions, and outdoor products to optimize the coverage and capacity of our Radio Access Network.

Turkcell received the first ISO 9001 certificate in 1999. Since then, independent firms have been auditing Turkcell’s management system annually and have been renewing the certificate every three years within the scope of International Mobile Communications Design, Installation, Operation, Sales and After Sales Services. The most recent certificate was received on December 3, 2019 based on ISO 9001:2015 Quality Management Standards. This certificate will be valid until December 3, 2022. In addition, Turkcell received the ISO/IEC 20000-1:2005 IT Service Management System Certificate in January 2011. As the first telecommunications company to receive the ISO 20000-1:2005 certificate in Turkey, Turkcell has promoted the adoption of an integrated process approach to effectively deliver managed services to meet business requirements. Turkcell and Superonline still maintain ISO 20000 certificates (ISO 20000-1:2011).

 

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On the fixed network side, we monitor traffic utilization in our access network continuously to prevent any saturation and upgrade the capacity as soon as possible. Turkcell modifies and redesigns the network topology to meet the future requirements which allows us to improve our quality of service performance.

The optical transmission network relying on Dense Wavelength Division Multiplexing (“DWDM”) systems with Automatically Switching Optical Network (“ASON”) and Optical Transport Network (“OTN”) using protection mechanisms benefits from alternative fiber routes wherever available. This increases the capabilities of re-routing in the event of service interruption. Thus, the delivered point to point services provides an availability experience up to 99.999%; a quality level defining the transmission network as an upper level “carrier-class” network.

c. Network Evolution

(i) Radio Network

With the 172.4 MHz spectrum acquired in the 2015 auction, Turkcell spectrum holdings reached 234.4 MHz, corresponding to 43% of total spectrum assets available to mobile operators in Turkey. Leveraging the advantage of our large spectrum assets and significant network infrastructure investments, our 4.5G network evolved from peak speeds of 375 Mbps to 1.2 Gbps. Currently, Turkcell’s 4.5G network supports LTE Advanced Pro technology, providing high-end features like 4x4 MIMO, 256QAM, 3-4-5 Carrier Aggregation, Narrow Band IoT (NB-IoT), eMTC and LAA. In the future, as technology and its ecosystem evolve to new heights, we expect to introduce new capabilities to sustain our technology leadership, enhance customer experience and enable new services.

We upgraded our network in 32 provinces by modernizing our 2G and 3G network, attaining higher capacity, better customer experience and up to 35% energy efficiency. This modernization has also enabled us to utilize our spectrum assets more efficiently and helped speed up our spectrum refarming efforts in 900 MHz and 2100 MHz bands. By conducting modernization projects, we have achieved an energy efficiency improvement up to 35% on our 3G/2G networks. The modernization also enables us to use multiple technologies (LTE, UMTS and GSM) in a mixed mode configuration in the same hardware units located at the sites, providing smaller footprints and cost reduction as we repurpose existing spectrum for newer technologies.

Although the 900 MHz band is still primarily used for GSM900, we have been rolling out UMTS900 to provide a much stronger 3G coverage layer for voice calls redirected from the 4.5G network via a technique called CS Fallback (CSFB) for deep indoor and improved rural coverage. This has been possible with certain previous projects such as Thin Layer Project for GSM 900, by which we have extracted enough spectral capacity to partially re-farm the 900 MHz band for UMTS. As the next step, we have started deploying second UMTS900 carrier, which leads to a more efficient utilization of 900 MHz band and generate additional capacity. As we migrate 3G traffic to 900 MHz, we obtain a capacity boost in the 2100 MHz band, which allows us to repurpose it gradually for LTE. In this regard, we have started deploying LTE in the 2100 MHz band, previously used by 3G only, for more efficient usage with LTE2100, enlarging our 4.5G footprint in a cost-efficient manner and improving user experience.

In the IMT-Advanced (“4.5G”) tender held on August 26, 2015, Turkcell acquired large amounts of FDD spectrum: 2x10 MHz from the 800 MHz, an additional 2x1.4 MHz from the 900 MHz, 2x29.8 MHz from the 1800 MHz, additional 2x10 MHz from the 2100 MHz and 2x25 MHz from the 2600 MHz frequency bands. And for TDD frequencies, 1x10 MHz from the 2100 MHz and 1x10 MHz from the 2600 MHz bands were also acquired. All frequency bands are technology-neutral and can be used for any technology, providing efficiency and flexibility for spectrum usage in the network. We currently use the 900 MHz band for 2G and 3G, the 2100 MHz band for 3G and 4.5G, and the 800 MHz, 1800 MHz and 2600 MHz bands for 4.5G.

For voice services, Voice over LTE (VoLTE) has been supported from day one to provide voice services over our 4.5G network. We activated EVS (Enhanced Voice Services) on our VoLTE voice service to further enhance the voice quality and thus became among the first mobile operators in the world supporting this high-end feature. The applicable regulations mandate that our 2G network remains active until April 2023; however most of our voice traffic is already carried by our 3G network, which has enabled us to gradually make our 2G network leaner without impacting our customers. As the terminal support base grows, we expect voice services to be migrated to the 4.5G network from legacy 3G/2G networks.

In order to provide a solution for VPN over wireless technologies like 4.5G, we have announced the Mobile VPN offer to our corporate customers. With this solution, corporates are able to connect to the internet cloud over a wireless interface using 4.5G technology, without sacrificing their service quality requirements. This is a fast and flexible solution for connections between their branch offices and headquarters.

 

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Through our ongoing investment in 4.5G infrastructure, we became the first operator in Turkey to support NB-IoT, which is required for a new generation of innovative IoT applications on 4.5G networks. This technology is now available on request across our whole 4.5G footprint and enables machines to communicate faster and more effectively. Furthermore, through our Cat-M (eMTC) network support which enables fleet management, asset tracking and smart metering, we are able to provide higher data transfer throughput and have greater mobility for M2M communications. With regard to international recognition, in 2018, we won two technology awards for our accomplishments in RAN technology, namely for our ‘Connected Parking’ project from IoT World Europe (Best End to End IoT Solution Award) and ‘Smart Irrigation’ project from Telecoms World Middle East (Innovation Award).

We provide a “Wireless to the Home” or FWA (Fixed Wireless Access) service called Superbox, which offers wireless high-speed internet access for customers without fiber connectivity. The required equipment is included in the subscription plan and uses 4.5G network as a backhaul to provide internet connectivity in customers’ premises. As part of 5G preparations, we have demonstrated 5G FWA capability in a millimeter wave band (28GHz), which was the first 5G live network test in Turkey.

For real-life scenarios in which the terrestrial network may be down or unable to provide the required coverage, we have developed a technology called ‘Dronecell’ which provides 4.5G coverage from airborne drones with the help of a micro base station installed on the drones. This solution can be useful when communications in the areas are affected by natural disasters, or when temporary coverage in some other areas is necessary.

Offering a unique experience to our customers with our strong 4.5G infrastructure, we continue our efforts to prepare our network for 5G. We have thoroughly tested the Massive MIMO technology (for both frequency division duplex (“FDD”) and time division duplex (“TDD”)), which can be deployed to meet capacity demands in dense areas. These collective activities help to maximize spectral efficiency, further enhancing network capacity and improving overall user experience. We believe that Turkcell has a significant competitive advantage with its Massive MIMO, in addition to having the widest spectrum in Turkey.

Furthermore, we have been closely cooperating with our network vendors for long term prospects through projects that enable Turkcell to deploy the latest technologies even before their availability on the market. This puts Turkcell at the forefront of the technology race and allows for the evaluating of the new technology benefits in the development phase, and then their timely deployment upon their commercial availability.

Turkcell continues to provide extensive support to projects involving domestic products, mainly for fulfilling obligations related to the usage of domestically produced network equipment as per the 4.5G license. We cooperate with domestic companies regarding base stations, antennas, transports and infrastructure solutions. For example, the ULAK Project initially started as an initiative of the Undersecretariat for Defense Industries (UDI), aimed at designing and developing national software and hardware components for an LTE-Advanced communication system and enhancing Turkey’s self-sufficiency in this area. ULAK has become a network vendor, producing 4.5G base stations. The first deployments of ULAK base stations in the network were realized in a city in the north-eastern part of Turkey. Additionally, CTG (Communications Technologies Group) aims to provide an end-to-end local and national 5G solution, which is funded by TUBITAK (The Scientific and Technological Research Council of Turkey). Turkcell is one of the major project partners of this group, and is responsible for generating use cases and requirements.

In the scope of 5G technology as Turkcell we participate in the activities of international organizations such as 3GPP, ITU-T, NGMN, 5G IA (the private arm of 5G-PPP) ONF, TIP and GSMA by joining in meetings, work groups, projects and programs to follow the latest developments and shape our future strategies accordingly. In this context, Turkcell has started to lead NGMN’s “5G Pre-Commercial Networks Trials” project, aiming to test the earliest 5G equipment prototypes in the field. Moving beyond the state-of-the-art in another project, the 5G-MOBIX consortium serves to develop 5G-enabled cooperative, connected and automated mobility for vehicles, where Turkcell is the leader of the Greece-Turkey corridor. For 5G-MOBIX, which happens to be the first 5G-PPP and also the Horizon2020 project of Turkcell, C-V2X use cases tailor-made to ameliorate impediments to an efficient crossing of the hard borders between Turkey and Greece. To extend its reach and knowledge base, Turkcell has also signed agreements with vendors (Ericsson, Huawei, Samsung, ZTE, Aselsan) to collaborate in the research & development activities as well as realization of novel 5G use cases. In addition to technology organizations and vendors, Turkcell has been engaging with universities and research centers. Specifically, a MoU for 5G Research and Development has been signed with some major universities in Turkey within the scope of “The 5G Valley” initiative led by the ICTA.

 

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With the leading global vendors including Ericsson, Huawei and Samsung, we have been demonstrating and trialing 5G since 2017. Within the scope of the first 5G use cases, we tested FWA and AR/VR to take additional steps into the 5G era.

(ii) Transmission Network

Turkcell is the first operator in Turkey to start deploying All-IP NodeBs throughout its network. We currently have an All-IP mobile backhaul for BTSs, Node-Bs and eNodeBs that provides resiliency, ease of operation and operational expense advantages. In addition, we have also invested in topology redundancy projects due to our IP/MPLS backhaul for better service availability. Backhaul bandwidth capacities were increased for wide coverage of up to 450 Mbps 4.5G applications and the Microwave Radio Link network was modernized for Native Ethernet and Adaptive Modulation support to increase availability and reduce outages resulting from severe rain conditions. Usage of fiber connectivity is moving further from High-RAN aggregation points towards Low-RAN aggregation points. Furthermore, fiber to mobile site applications have been started for 4.5G readiness of sites with very high traffic. Due to higher bandwidth requirements of the 4.5G users, we have migrated from SDH based leased lines to DWDM, or dark fiber multi-Gigabit Ethernet links on the high traffic aggregation points.

We have also started a renovation program in order to converge fixed and mobile backhaul transport networks, scheduled to be completed in 2020. More than 25% of the transport-IP network was converged with high scale and the leading-edge technology routers in order to be ready for the capacity demand of 5G applications.

(iii) Core Network

The whole Turkcell Core Network is currently composed of IP based layered structure Next Generation Network (NGN) nodes, supporting all mobile standards, including 2G/3G/4.5G. By using a Geographical Redundant Pool (GRP) structure, we get (i) full redundant MSC-Ss, (ii) redundant physical interfaces to MGWs, (iii) CAPEX efficiency, and (iv) improvements in radio network KPIs. By implementing IMS (IP Multimedia Subsystem) based VoLTE (Voice Over LTE) and SRVCC (VoLTE Voice Continuity to 2G/3G), all subscribers can use seamless HDVOICE technology.

We have deployed and continue to develop our all IP Mobile Broadband GPRS network to provide the high speed and reliability to meet the demand of our businesses and consumers. 2G/3G/4.5G data services are given from our converged core network, which is designed to support all mobile broadband.

(iv) Fixed Network

Our own fiber optic network provides up to 1000 Mbps high speed internet service in 21 cities across Turkey. We are installing and investing in EDGE technology access equipment in our network. We believe that with this strategy Turkcell will be ready to offer future customer experiences. Since February 2018, we offer 10 Gbps high speed internet as an on-demand service.

We are providing end-to-end Wi-Fi services for our Enterprise customers, which enables their guests to access WiFi. The Enterprise Wi-Fi service includes installation with authentication services, and further provides the necessary interface.

We also provide smart Wi-Fi services for Soho Customer, which provides login and Wi-Fi connectivity to customers. The service provides plug and play for easy installations.

We use Turksat cable network for Fixed Virtual Network Operator (FVNO) services, with the goal of reaching more homes with our services.

Furthermore, Turkcell has launched commercial 400 Gpbs per wavelength using single channels in its backbone. We are continuously investing in our backbone network in order to be prepared for bandwidth-intensive services with the latest technology. Fixed networks provide backhaul that not only connects the signal towers to the telecom network, but also allows for enough bandwidth to support operations in 4.5G. This is creating an environment in which optical cabling and fiber to Ethernet media converters are among the most important parts of a mobile network. As a result, fiber will remain an integral part of telecom networks.

 

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(v) Services and Platforms

We have an intelligent network and other service platforms enabling our services and we also provide secure and controlled access to the network for the content and service providers to provide messaging and data services. This infrastructure is being improved to open up more capabilities on the network for the application and content providers. New infrastructure also contains a portal where subscribers buy services, receive promotions and enroll for campaigns easily.

d. Network Operations

We have primarily employed experienced internal personnel for network engineering and other design activities, while employing suppliers for our network infrastructure and as our partners in product/service development. Our suppliers install the base station cell site equipment and switches on a turn-key basis, while subcontractors employed by our suppliers perform the actual site preparation.

e. Network Maintenance

We have entered into several system service agreements. Under these agreements, our mobile and fixed communications network, including hardware repair and replacement, software and system support services, consultation services and emergency services are serviced by local providers. Our subcontractors perform corrective and preventative maintenance on our mobile and fixed communications network in the field, although providers repair all the network equipment. We have regional operation units with qualified Turkcell staff that operate and maintain our network in Turkey.

In addition, the Turkcell Network Operation Center located in Istanbul monitors our entire network 24 hours a day, 365 days a year, and ensures that necessary maintenance is performed in response to any problem.

f. Site Leasing

If a new coverage area is identified, our technical staff determines the optimal base station location and the required coverage characteristics. The area is then surveyed to identify BTS sites. In urban areas, typical sites are building facades and rooftops. In rural areas, masts and towers are usually constructed. Our technical staff also identifies the best means of connecting the base station to the network. Once a preferred site is identified and the exact equipment configuration for that site is determined, we start the process of site leasing and obtaining necessary regulatory permits. Site leasing processes and construction of the masts or towers are performed by our wholly-owned subsidiary, Global Tower. We lease the land and provide site management services (yearly rental payments, contract renewals, rework permits) through Global Tower. If we decide to buy the land, another wholly-owned subsidiary, Turkcell Gayrimenkul Hizmetleri A.S. (“Turkcell Gayrimenkul”), handles the necessary procedures. We also manage all these processes for technical demands for Turkcell Superonline and Global Tower.

g. Business Continuity Management (“BCM”)

Turkcell Business Continuity Management identifies potential threats and their impact and provides a framework for building resilience with the ability to create an effective response that safeguards the interests of our key stakeholders, their reputation, brand and value-creating activities. We established the Business Continuity Management System (“BCMS”) to implement, operate, monitor, review, maintain and improve the business continuity.

Turkcell BCMS is assisted by business continuity coordinators at technical and non-technical groups. Regular BCM training and awareness programs are carried out throughout the organization. The effectiveness of BCMS is monitored every year through internal/external audits, and integrated exercises, the results of which are reviewed in management review meetings. In 2019, we exercised and tested our business continuity plans, communication and warning procedures to ensure that they are consistent with the business continuity objectives.

Turkcell’s BCM will be able to cover the majority of Turkcell’s operations through potential environmental events and natural disasters. Our purpose is to ensure the continuity of the voice call, messaging, data/internet and societal security services for Turkcell, availability of fixed voice call services, data/internet, hosting services, data centers and societal security services for Turkcell Superonline, provision of site acquisition and contract management services for infrastructure requirements of mobile operators, TV/Radio broadcasters and technical infrastructure suppliers and installation, testing, commissioning, operation and maintenance of tower, in building, roof top infrastructure/sites for Global Tower at acceptable predefined levels following disruptive incidents.

 

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Business continuity plans are prepared by taking into consideration the customer’s expectations, company policies and legal obligations. They are regularly exercised to guarantee the operation of time-sensitive business activities in case of business disruptions. We are continuously improving our business continuity capacity in accordance with the “ISO 22301 Societal Security, Business Continuity Management System” internationally while preserving our image as a reputable and solid integrated service provider.

h. Enterprise Risk Management (“ERM”)

Turkcell’s Enterprise Risk Management team is responsible for coordinating the process of identifying, assessing and overseeing actions by management and the company’s business units to manage the risks that may affect the business objectives of the company. ERM supplies an information platform to management regarding the risks that may impact the decision-making process. Turkcell ERM aims to develop an approach of integrating risk management with the core management processes as well as enterprise risk culture. While doing this, Turkcell uses an ERM framework which is compatible with the COSO ERM framework and the ISO 31000 Standard. Based on ERM procedures, risks are identified and evaluated in terms of impact and likelihood. Risk responses controls, issues and actions are developed and the entire process is monitored.

Turkcell’s ERM team is the owner of an enterprise risk database. A range of management tools are used for risk identification and evaluation such as workshops, brainstorming sessions, risk reporting from division directors and risk contacts, in-depth interviews with the management team and research reports while coordinating the process of identifying and assessing risks. The risk database, monitored by the ERM team and new risks and opportunities, updates on on-going risks, financial risks, cyber risks and risk and trend research from the around the world are reported to the Early Detection of Risk Committee bi-monthly.

VIII. Sales and Marketing

We design our sales and marketing strategy around subscriber needs and expectations. We try to ensure the loyalty of our subscribers by providing offers, campaigns and our advanced service delivery platforms.

a. Sales Channel

We support our sales efforts through one of the largest retail telecommunications distribution networks in Turkey, with more than 1,300 branded stores, many with prime locations, as well as more than 4,000 semi-branded dealers as of December 31, 2019. Our two exclusive distributors provide our products and services as well as consumer technologies (such as handsets, tablets, notebooks, IoT devices and accessories) and aftersales services for this wide network of dealers, while eight exclusive Turkcell Distribution Centers (TDCs) focus solely on semi-branded dealers. We also have a door-to-door sales force and home technology management team, which realizes approximately 135 thousand connected home technology transactions per month. This provides us an important channel on which to distribute our integrated solutions directly into the homes of Turkish consumers. We also operate a dedicated corporate direct sales team of over 657 personnel who can offer tailored solutions to their respective segments.

Our nationwide distribution channel is an important asset that helps us differentiate ourselves from our competitors and achieve our sales targets. Our strong and extensive distribution network consists of distributors, TDCs, Corporate Solution Centers, semi-branded dealers and Turkcell Branded Stores (Turkcell Plus & Turkcell), as well as points of sale for scratch cards and prepaid airtime, including digital channels, ATMs and Points of Sale (POSs). We sell postpaid and prepaid services, fixed and mobile solutions and digital services to subscribers through our distribution network. The number of branded and semi-branded dealers, including corporate solution centers, totaled over 5,450 sales points as of December 31, 2019.

Digital transformation has continued at full speed in our retail channel. At the beginning of 2018, we completed the physical transformation of Turkcell stores and have been offering the latest technologies and digital services to customers since then. In addition, sophisticated store concepts reflecting customer trends were put into place at selected locations. As the most important step in digital transformation, strategic infrastructure investments were realized at the stores where physical transformation was completed. The first major change occurred in the supply chain model.

The Turkcell GO project digitizes the sales dialogue between our employees and our customers. The sales platform of Turkcell GO presents the smart phones, tariffs and digital services to the customer with a customer based visual design, easy and meaningful way. GO offers personalized tariff model to the customers and helps to deliver a higher customer experience. Meanwhile GO also provides the opportunity of instant training for employees.

 

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Turkcell stores product portfolio has been enriched with new products such as Superbox, subscription to Digiturk and Paycell. In addition, more than 200 institutions’ bills have become payable at Turkcell stores.

In 2019, we continued basic retail employee certificate program with a 94% success rate, which corresponds to the rate of the certified employees in the total store sales force. In addition to the basic program, we had launched the “Advanced Retail Certificate Program” for experienced store employees in 2018. In 2019, our Advanced Retail Certificate Program has continued as a face-to-face training program in collaboration with Marmara University, and is aimed at training our employees in retail sales.

Furthermore, we prepared a Finance Certificate Program in order to provide our store employees with finance expertise. A total of approximately 5,000 store employees successfully completed the training and qualified for the “Insurance Training Center” exams.

Our non-branded dealer network provides us with a high penetration of Turkcell products and services in Turkey. Adding one more TDC to our ecosystem, our 8 TDC’s are aimed at enhancing our distribution effectiveness in the non-branded channel and ensuring the timely and efficient distribution of Turkcell products and merchandising materials. They also facilitate the Turkcell brand and offer awareness in this competitive channel.

Alternative sales channels are re-designed under four main branches: Call center, online channel, which includes the company’s web site and the Digital Operator app, non-telco sales and the Turkcell Flagship Store.

We offer our customers fast and safe access to our products and services 24/7 via our call center, our web site (www.turkcell.com.tr) and the Digital Operator app. Our web site has been serving as a sales channel since 2012. Besides Turkcell’s digitalized products and services, we have offers under other categories, including smartphones, tablets, computers, mobile accessories and home technologies. Another channel is our non-telco channel (which consists of ATMs, Call Centers, internet branches of banks and chain stores) where we provide our customers with the opportunity to access Turkcell’s products easily and quickly. We also proactively reach our customers and satisfy their needs easily and safely when they need our products and services through our telesales channel. Further, we also serve through our flagship store in Istanbul.

Alternative sales channels are the main channel for digital services sales. In 2019, 1.8 million units of TV+, lifebox, fizy products have been sold over alternative sales channels using big data in conjunction with our analytical models and machine learning.

All dealers are compensated based on the number of new subscribers they sign up and the level of such subscribers’ usage, as well as additional incentives based on their performance.

Our sales management team develops strong relationships with dealers and promotes brand loyalty among them through a variety of support and incentive programs. Training programs aim to educate dealers’ personnel on the technical aspects of our products and services, as well as sales techniques to increase sales and enhance customer relations. Our specialized sales employees, who are obliged to obtain a certificate to be eligible to work at the stores, serve around 220 million visitors annually. The certification program for our employees is quite extensive and involves different stages. The program began in April 2016 and has been widened with the inclusion of online assessments. The program has been created with a view to improving employee experience and making Turkcell an attractive work place. The technological development projects, coupled with merchandising services, digital display and channel specific campaigns, helps to support the sales efforts across all of our sales channels.

Corporate clients are managed in four different segments: Public Accounts, Strategic Accounts, Major Accounts, Small and Medium Sized Businesses Accounts. The first three segments’ customers are directly contacted by Turkcell’s Account Managers, while dealers and telesales teams manage the Small and Medium Sized Business segment.

Within Turkcell’s sales teams, along with Telecom Services, Mobile Product and Solution Specialists, Fixed Product and Solution Specialists, Corporate Data Network, DC Cloud, Cyber Security Specialists and Managed Services teams specialized in IT solutions cater to the corporate clients. Vertical solution teams were formed to develop such solutions for eight sectors including retail, manufacturing, energy, healthcare, education, finance, transportation and logistics. These teams aim to create cross industry solutions to serve the digital transformation of Turkcell’s corporate clients.

 

 

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Turkcell also provides turnkey mobile and digital transformation and IT outsourcing projects for large corporations with the contribution of solution partners in Turkcell Satis.

b. Advertising

Turkcell has positioned itself as a digital operator, providing a portfolio of digital services that add value to its customers’ lives. We base our communication efforts on three pillars that underline our digital operator strategy. The first pillar comprises our four key assets that we believe ensure our position as the market leader: our integrated mobile and fixed infrastructure, the social responsibility projects that we undertake throughout the year, our brand perception; and the “firsts” we have marked in the Turkish market. The second pillar focuses on providing offers that are tailored to the needs of our customers through analyzing their behavior with enhanced AI features. The third pillar includes our digital services that connect our customers with what the digital world has to offer.

c. Customer and Experience Management

The key part of our customer and experience management strategy is to provide basic and premium services through several channels in a customer-focused manner. Our goal is to maintain a continuous relationship with our customers through fostering a high level of customer satisfaction. We continuously ask our customers how satisfied they are with the service they receive and for any suggestions through near real-time mobile surveys. We aim to achieve operational excellence throughout all customer touch points across every customer segment by continuously improving and simplifying processes and services. Customer feedback is the major input for Turkcell’s continuous process and journey for improvement.

With respect to the provision of customer services we mainly work with our subsidiary Global Bilgi Pazarlama Danismanlik ve Cagri Servisi Hizmetleri A.S. (“Turkcell Global Bilgi”). Turkcell Global Bilgi offers 24/7 contact center services at several sites. In 2019, Turkcell Global Bilgi managed approximately 113 million calls received through its interactive voice response system. Turkcell’s customer service strategies for contact centers are implemented by Turkcell Global Bilgi. We audit their operations along with monitoring whether customer services and customer satisfaction programs are executed in line with Turkcell’s customer strategies. Turkcell Global Bilgi also offers telesales and Information and Communication Technology (ICT) helpdesk services. Turkcell Global Bilgi’s success has been affirmed by a number of domestic and international awards in 2019.

We have prioritized the “digitalization” of our customers. Accordingly, we have invested in our online self-service channels and aim for the migration of our customers on those channels.

Our primary online self-service channel, the Digital Operator app offers efficient solutions under “Digital Shop”, “Digital My Account” and “Digital Support” sections. Under the Digital My Account section, our customers can complete Turkcell related transactions such as paying bills and verifying their usage. Under “Digital Shop” section, the app offers Turkcell products according to customers’ usage habits as well as any device, accessory, application or package that is in our portfolio. Under “Digital Support”, we offer customer service solutions. The three-month active customers of the application reached 21.2 million.

Our customers can also manage their fixed internet subscriptions from the same Digital Operator application by switching between their accounts within the application. Nearly 300 thousand Turkcell Superonline customers make 2.7 million transactions monthly using the Digital Operator app.

For corporate customers, account managers are assigned for an exclusive service. An account manager serves as the single point of contact and provides solutions in response to customer needs. While we serve our corporate customers by categorizing them under four segments, we also support them through e-mails, calls and dedicated back offices under the umbrella of our contact center. We have corporate customer representatives to support direct requests from our public accounts, strategic and major enterprises, medium businesses and/or to support indirect requests received through our account managers. In addition, for small businesses, we aim to meet faster and higher quality service standards by providing online solutions to support our sales teams with our “Field Support Desk”. Moreover, we have enriched our corporate application called “My Company” with the addition of new tariff and bill features, fast login and new campaigns to improve digital customer experience. In 2019, 82 thousand companies have experienced the convenience and speed of doing self-service transactions for their corporate lines by using My Company app for an average of 12 million transactions monthly. In 2019, 230 million transactions were implemented over My Company’s web and mobile application platforms, which were used by 196 thousand companies.

 

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Turkcell developed chat-based service channels, where customers can access us anytime and anywhere quickly and easily without connecting to the call center . Customers can also contact Turkcell via instant messaging to ask a question about their lines or our applications. In 2019, there were 1.6 million such chat sessions on average per month. With artificial intelligence based chatbot technology, Turkcell has increased the automation level of its instant chat-based services for its customers.

Turkcell connects with social media users 24/7 with a total of 54 accounts on Facebook, Twitter, Instagram, YouTube and LinkedIn. We respond to nearly 165 thousand comments from 50 thousand social media users per month.

We conducted numerous projects to improve customer experience over IVR, a digital channel connecting Turkcell to its customers. We enabled customers to check their credit limits via IVR and complete their transactions over the digital channel without connecting to the call center. Turkcell can proactively provide customers who contact the call center with complaints regarding calling and internet experience with real-time solutions and offer location reset services.

Turkcell has received ISO 10002 certification since 2011 and continuously renews its ISO 10002 certification annually within the scope of design, installation, operation, sales, and after-sales services of global mobile communications within Turkcell functions. The latest certification ISO 10002: 2004 Quality Management-Customer Satisfaction-Complaints Handling Certificate was received in 2019.

Turkcell encourages all employees to embrace an “I’m here for my customer” approach and awareness. In this respect, Turkcell initiated the “Customer Action Transformation Program”. As part of this program, all Turkcell employees are expected to take decisions and design products and services with the aim of making customers feel safe, valuable and happy. As part of this program, we analyzed and interpreted a high level of customer feedback received through our call centers, social media channels as well as through chat and emails in 2019. Based on these analyses, we have determined areas of improvement and put an action plan in place.

IX. International and Domestic Subsidiaries

A component of our strategy is to grow or improve our business in our home market and in the international markets where we are already present. Continued strong operations in the countries in which we are currently present is important for us. We believe these operations offer growth opportunities and we expect them to provide additional value to the Group in the future.

While continued improvement of our current operations is a key priority, we will seek and evaluate the opportunities of offering our portfolio of digital and financial services, both in Turkey and in international markets, and increasing their number of users.

Ukraine—lifecell

We acquired our interest in our subsidiary lifecell (formerly known as “LLC Astelit” or “Astelit” operating under the “life:)” brand) on April 2, 2004, by purchasing the entire share capital of Astelit’s parent, CJSC Digital Cellular Communications, from its shareholders.

On July 10, 2015, we completed the acquisition of SCM’s 44.96% stake in our Netherlands-based subsidiary Euroasia Telecommunications Holding B.V, which owns 100% of LLC Astelit, and which merged with Lifecell Ventures in December 2016. The terms of the acquisition required a payment of $100 million as consideration for the acquisition, the payment of Astelit’s debts obtained through and with the guarantee of SCM Group, the termination of all guarantee agreements to which SCM Group was party and the release of SCM Group in this regard. In accordance with IFRS 10 “Consolidated Financial Statements”, the acquisition of the remaining 44.96% in Astelit for a total consideration of $100 million was considered an equity transaction and the deficit representing the difference between the non-controlling interests was derecognized, while the consideration paid for the acquisition of shares amounting to TRY 929 million was deducted from retained earnings in July 2015.

Following this transaction, Astelit’s borrowings obtained from and with the guarantee of SCM Group were repaid in July 2015. The Group converted a material portion of Astelit’s borrowings to equity and restructured Astelit’s remaining borrowings in order to mitigate the foreign exchange risks associated with borrowings denominated in foreign currency. Astelit’s capital was increased by $686 million (equivalent to TRY 1,995 million as of December 31, 2015) and Astelit obtained $66 million (equivalent to TRY 192 million as of December 31, 2015) subordinated loan directly from the Company in the third quarter of 2015.

 

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After ten years of successful history in the industry, on January 15, 2016 Astelit announced a new stage of its development which started with large-scale rebranding into “lifecell”, and in connection therewith changed its legal name to “lifecell LLC” on February 2, 2016.

In April 2016, lifecell sold 811 towers to a subsidiary of Turkcell in Ukraine, UkrTower LLC (“UkrTower”), and signed a tower lease agreement which allows lifecell to leaseback these assets.

On July 7, 2017, Turkcell injected $74 million (equivalent to TRY 268 million) in the capital of lifecell. Funds were allocated for the repayment of the abovementioned subordinated loan. On July 10, 2017, lifecell repaid $72.8 million to the Company (equivalent to TRY 264 million): $66 million of principal and $6.8 million of interest.

On February 8, 2018, the capital of lifecell was increased again by $65 million (equivalent to TRY 259 million) in preparation for the 4G license tender in Ukraine. The injection was executed in four tranches: $10 million on February 9, 2018, $30 million on February 14, 2018, $20 million on April 4, 2018 and $5 million on August 9, 2019.

On September 11, 2019, lifecell obtained a EUR 28 million (equivalent to TRY 175 million) subordinated loan directly from the Company. The proceeds were used for the reduction of the lifecell loan portfolio. As of 31 December, 2019, the company utilized loans fully denominated in local currency of UAH 4.2 billion (equivalent to TRY 1.0 billion as of December 31, 2019) under the guarantee of Turkcell.

As of December 31, 2019, lifecell had 8.9 million registered subscribers. The majority of those were prepaid subscribers. lifecell’s three-month active subscribers had reached 7.4 million as of December 31, 2019.

The company is known in the market as dynamic and innovative as it was the first to introduce a number of new technologies and products in the Ukrainian mobile market. The company is highly motivated to sustain its innovation leadership in marketing and sales. There were 265 exclusive lifecell shops in 130 cities across Ukraine as of December 31, 2019. There are 33 “facelifted” and 232 shops in full lifecell branding as of December 31, 2019. In addition, lifecell products are available at 28,000 other sales points throughout Ukraine. As of December 31, 2019, lifecell provided roaming services in 202 countries via 590 roaming partners and eight satellite operators.

The Ukrainian telecommunications market is regulated by the Cabinet of Ministers of Ukraine (main state policy), the newly formed Ministry of Digital Transformation, the State Service of Special Communication Administration (“SSSC”) (technical policy aspects) and by the National Commission for the State Regulation of Communications and Informatization (“NCCIR”) controlled by the President of Ukraine and which carries out general telecommunication market regulation and inspection.

NCCIR held the 3G license tender on February 23, 2015. lifecell submitted a bid of UAH 3,355 million (equivalent to TRY 376 million as of March 19, 2015) and was awarded the first lot, which is the 1920-1935 / 2110-2125 MHz frequency band. Furthermore, lifecell paid a total of UAH 886 million for the conversion of spectrum from military use in three installments between 2015 to 2018. After winning the tender, lifecell launched 3G services on June 4, 2015, becoming the first operator to offer a 3G+ network in Ukraine.

As of December 31, 2019, lifecell provides 3G services in all cities of Ukraine (excluding Crimea and Sevastopol city and uncontrolled territories of the Luhansk and Donetsk regions) with a population of over 2,000 inhabitants, and in total more than 1,858 settlements nationwide. This corresponds to a coverage of approximately 93.42% of the population of Ukraine or 95.54% geographical coverage with 7,087 base stations. As of December 2019, lifecell has the widest 3G geographical coverage over the country based on its own calculations by using operators’ relevant disclosures. lifecell ceased recording revenues from Crimea and Sevastopil city as of the end of September 2014 and impaired its assets in that region. Furthermore, in 2016 the operator has also discontinued services in and lost its revenue stream from the uncontrolled territories of Luhansk region and since February 2017 lifecell has been unable to provide mobile services and ceased recording revenue in the disputed part of the Donetsk region. The company impaired its assets in the disputed part of the Donetsk and Luhansk region in the fourth quarter of 2017. Cumulative capital expenditure for the development of lifecell’s coverage amounted to $2.3 billion as of December 31, 2019.

 

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NCCIR held the 4G license tenders for the 2600 MHz band on January 23, 2018 and for the 1800 MHz band on February 26, 2018. lifecell was awarded 4G licenses for 15 years, at a cost of UAH 909 million (equivalent to TRY 173 million as of December 31, 2018), and UAH 795 million (equivalent to TRY 151 million as of December 31, 2018) for the 15 MHz in each frequency band, the latter of which was paid in April 2018. In February 2018 lifecell made payments of UAH 187 million (equivalent to TRY 36 million as of December 31, 2018) to PrJSC VF Ukraine, and in May 2018, UAH 19 million (equivalent to TRY 4 million as of December 31, 2018) to JSC Kyivstar for the installment and conversion of spectrum from operators use.

After winning the tenders, lifecell launched 4G services in the 2600 MHz band on March 30, 2018 and in the 1800 MHz band on July 1, 2018, becoming the first operator to offer 4.5G services in Ukraine nationwide.

As of December 31, 2019, 4.5G from lifecell is available in over 3,857 towns and settlements in Ukraine, while in more than 643 Ukrainian towns and settlements lifecell is the only operator providing 4G network services. As of December 2019, lifecell is a leader in terms of smartphone penetration with 80.1% of the Ukrainian telecommunication market.

In line with Turkcell Group’s digital services strategy, in 2017, lifecell launched a number of unique digital services. lifecell was the first mobile operator to launch the cloud application lifebox, the Ukrainian radio application fizy, the Ukrainian online magazines application lifecell Magazines, the sports dedicated application LifeSport offering no data consuming packages for video, social networks and digital communication. All these digital services are also available to the users of other telecom operators. In response to the need of the Ukrainian market for cardless and cashless payment services, lifecell introduced its online money transfer tool available online. As of August 2017, Paycell LLC has been incorporated as a subsidiary of lifecell in order to operate as a financial institution and perform loan granting, leasing, money transfer and e-money services. Licenses for leasing and loan granting has been obtained as of October 2017, and licenses for e-money and local currency transfers have been obtained in September and October 2018, respectively.

lifecell is continuously focused on company security (tools, processes, people) and investment in security infrastructure. In January 2017, lifecell’s Corporate Security Department developed Emergency Notification System (“ENS”). ENS is a cloud-based solution serving as a tool for instant emergency alerts and mass notification of a certain target audience via voice messages, SMS and e-mail. The solution was applied by lifecell during the massive global cyber-attack of June 27, 2017. In September 2017, the company signed a Memorandum for cooperating with the Department of Cyber police of the National Police of Ukraine. lifecell provided the cyber-police with the license for ENS employment that helped the Ukrainian government to create an environment resistant to IT security attacks and coordinate the actions of people in case of emergency.

Mobile Number Portability (MNP) had been introduced to Ukrainian customers in May 2019, after almost 10 years of postponing. The company was also the first among all operators providing its subscribers with a free online registration procedure enabled via BankID.

Demonstrating the advantages of the LTE based solutions, lifecell deployed the first segment of NB-IoT networks in 2019, running successful pilot projects with public and private companies working in the energy sector. Together with its partner, lifecell also built LoRaWAN networks covering Kyiv, Lviv, Kharkiv, Odessa, Dniproas well as other settlement (in total more than 34), that had been successfully used as a platform to deliver smart solutions to some retailers, developers, energy and agriculture companies.

In May 2019, lifecell and Ericsson Ukraine deployed the first 5G network demo segment and presented its advanced capabilities at the Sweden-Ukraine Business Forum in Kyiv. The speed test was attended by state representatives, regulators and the media, and reached 25.6 Gbps download throughput using spectrum in the ultra-high frequency band of 28 GHz.

lifecell also introduced the first “digital kiosks” to the market in 2019, set up in some major shopping malls in Kyiv, that allowed customers to purchase SIM cards at any time of the day.

On October 29, 2019, lifecell and three other leading mobile operators signed a Memorandum of Understanding with the Ukrainian Government to reorganize radio-frequency resources to the 900 MHz band. It will ensure maximum coverage of the entire territory of Ukraine with 4G mobile communication, including rural areas and main roads. Accordingly, in March 2020, lifecell’s 900 MHz frequency band has been increased from 3.8 MHz to 5.6 MHz. These frequencies, which are currently being used for 2G services, will also be utilized for 4G services. Ukraine’s National Telecommunications Authority opted not to hold a tender process and the

 

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license fee for lifecell was determined as UAH 121,176,000 (equivalent to US$ 4.6 million as of March 19, 2020, the payment date). The license fee has been fully paid. The respective license will be effective as of July 1, 2020 for five years.

In line with global tech trends, lifecell was the first operator among the «big three» in Ukraine to launch eSIM in November 2019. Earlier, lifecell had strengthened its portfolio of digital services with MobileID that became available for Ukrainian business customers.

Elevating its customers’ digital experience, lifecell launched public transportation SMS-ticket in four large Ukrainian cities with plans to expand this service to other regions.

In December 2019, lifecell became the sole operator to have launched 3G/4G in the Dnipro Metro, in Ukraine’s fourth largest city, in the test mode.

Belarusian Telecom

On July 29, 2008, Beltel Telekomunikasyon Hizmetleri A.S. (“Beltel”) signed a share purchase agreement to acquire an 80% stake in Belarusian Telecom, which provides services using GSM and UMTS technologies, for a consideration of $500 million. On August 26, 2008, control of Belarusian Telecom was acquired from Belarus’ State Committee on Property and $300 million of the total consideration was paid. An additional $100 million was paid in December 2009 and a further $100 million was paid in December 2010. An additional payment of $100 million will be made to the seller in instalments contingent of the financial performance of Belarusian Telecom. For more information, see Note 28 (Other non-current liabilities) to our Consolidated Financial Statements.

As at December 31, 2019, Belarusian Telecom had 1.5 million registered subscribers, the majority of which were prepaid, and its three-month active subscribers reached 1.1 million as of December 31, 2019. Belarusian Telecom is the leader of Mobile Number Portability in Belarus in terms of number of port-in subscribers’ count. Belarusian Telecom has 10 own stores, 140 exclusive and more than 320 non-exclusive sales points and the sales from online store continuously increases with the growing customer demand.

As at December 31, 2019, Belarusian Telecom operated 2G and 3G services in all cities with a population of more than 10,000, and provided 2G services on all principal intercity highways and roads of the Republic of Belarus, which corresponds to coverage of approximately 99.9% of the entire population of Belarus, or 97.7% geographical coverage. Belarusian Telecom also offers 4G service in August 2016 on LTE infrastructure established by JLLC Belarusian Cloud Technologies (“beCloud”) and provides 4G services throughout the country in around 190 cities, towns or settlements as of December 31, 2019. In Belarus, the only LTE license is owned by beCloud and beCloud is the only infrastructure provider for LTE services. Availability of 4G services to our customers has improved the quality of data services and customer experience. As of December 31, 2019, the share of 4G subscribers in the three-month active subscribers segment reached 54.6%, fostering mobile data consumption and digital services usage.

Belarusian Telecom has a wide range of products in its portfolio, which consists of voice and data products, terminal offers and an enriched digital services portfolio. BiP, fizy, lifebox, Magazines, TV+ and Games Platform are the main services in the digital services portfolio. In January 2019, Belarusian Telecom launched a digital tariff plan “Play” which is a unique offer in the market, combining all digital services in a single package.

In line with our strategic priority of improving our balance sheet structure, we restructured the debt of Belarusian Telecom in 2015. As part of the restructuring, Belarusian Telecom’s total existing intra-group loans were converted into a subordinated loan, provided directly by Turkcell. Following the restructuring, Belarusian Telecom’s debt was EUR 612 million subordinated loan. On April 1, 2019, this EUR nominated subordinated loan was converted to the local currency amounting to BYN 1.46 billion (equivalent to TRY 4.1 billion as of December 31, 2019) is owed to Turkcell as of December 31, 2019.

In Belarus, the lack of pricing regulations in the wholesale and retail mobile markets to prevent dominant operators’ abusive pricing practices continued to have an adverse impact on our business. We continue to hold discussions with authorities for the implementation such regulations.

 

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Lifetech LLC

Lifetech LLC (“Lifetech”), which is a subsidiary of Turkcell Group, was established in 2012. It is 99.9% owned by Belarusian Telecom and has around 160 professionals located in Belarus. Lifetech provides a full cycle of software development services and develops custom and platform-based solutions to its clients located in Belarus, Turkey, the Netherlands, the Russian Federation and the Turkish Republic of Northern Cyprus. In April 2019, Lifetech became a member of High-Technology Park of the Belarus.

Kibris Telekom

Kibris Telekom, a 100% owned subsidiary of Turkcell, was established in 1999 in the Turkish Republic of Northern Cyprus. As of December 31, 2019, Kibris Telekom had 0.5 million registered subscribers.

On April 27, 2007, Kibris Telekom signed a license agreement for the installation and operation of a digital, cellular and mobile telecommunication system with the Ministry of Public Works and Transportation of the Turkish Republic of Northern Cyprus. The license agreement became effective on August 1, 2007 and replaced the previous GSM-Mobile Telephony System Agreement dated March 25, 1999, which was based on revenue-sharing terms. The new license agreement granted GSM 900, GSM 1800 licenses. The license agreement is valid for 18 years from the date of signing. The license fee was $30 million including VAT and financed by Kibris Telekom through internal and external funds.

On March 14, 2008, Kibris Telekom was awarded a 3G (IMT 2000/UMTS) infrastructure license at a cost of $10 million including VAT, which was paid at the end of March 2008.

In 2012, Kibris Telekom acquired Internet Service Provider and infrastructure establishment and operation licenses. Kibris Telekom applied for a right of way to major municipalities and the Ministry of Transportation in order to establish a national fiber optic infrastructure. On January 24, 2014, a protocol was signed between Kibris Telekom and the Ministry of Transportation for the right of way for highways. Total fiber optic infrastructure implementation is at 69 kilometers by the end of 2019.

The National Regulatory Authority started to decrease mobile termination rates gradually in July 2014 over a year; with around a 71% decline in total, from TRY 0.10 to TRY 0.03. The rates were then increased by 62% to TRY 0.05 in August 2019.

According to the requirements of Electronic Communications Law, prepaid lines were registered in 2015. On May 7, 2019, an amendment was made to the Electronic Communications Law making signed contracts obligatory for prepaid subscribers.

At the end of 2016, for the first time in the communication industry, Turkcell launched its digital brand Lifecell in the Turkish Republic of Northern Cyprus, offering services only through internet-based digital services. In the fourth quarter of 2017, Lifecell Digital Ltd. (“Lifecell Digital”) was incorporated in order to operate as an Internet Service Provider company and offer converged telecom services. Lifecell Digital also acquired an infrastructure license in December 2018.

As of January 22, 2018 mobile number portability had come into effect in the Turkish Republic of Northern Cyprus.

The interoperability of mobile phones across the island officially began on July 11, 2019. This was a very important confidence building measure and marked a historic moment for the island. Turkish Cypriots and Greek Cypriots, travelling to both sides of Cyprus, had been losing their connection prior to the implementation of this measure.

Turkcell Europe GmbH

Turkcell Europe GmbH (“Turkcell Europe”) was founded by Turkcell in 2010 as an MVNO providing service over the T-Mobile (Deutsche Telekom AG) network. Headquartered in Cologne, Germany, Turkcell Europe commenced activity in March 2011.

Until the end of 2014, Turkcell Europe continued its operation as an MVNO and offered Turkcell’s service quality across both Germany and Turkey. In order to increase the efficiency of our operations in Germany, we

 

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made changes to the business model in 2014 from a “wholesale traffic purchase” agreement to a “marketing partnership”. The Marketing Partnership agreement between Turkcell Europe and Telekom Deutschland Multibrand GmbH, the subsidiary of Deutsche Telekom was signed on August 27, 2014, which involved the transfer of Turkcell Europe subscribers and operations to a Deutsche Telekom subsidiary as of January 15, 2015. Turkcell and Deutsche Telekom agreed to rebrand Turkcell Europe into the “lifecell” brand. This marketing partnership will end on April 30, 2020 pursuant to the respective agreement.

As of December 31, 2019, Turkcell Europe had 170 thousand registered subscribers. Turkcell Europe’s revenue contribution to the Turkcell Group amounted to TRY 2.2 million in 2019.

Turkcell Global Bilgi

On October 1, 1999, Turkcell Global Bilgi was established to provide telemarketing, telesales, and call center services, particularly for Turkcell Group. In 2005, Turkcell Global Bilgi completed its transition from call center to contact center as Turkcell Global Bilgi started to manage customer contacts at every channel. Since then, in addition to providing services to Turkcell, Turkcell Global Bilgi started offering customer care services to companies in banking, retail, e-commerce, insurance, energy, public sector and the airline industry. In 2016, Turkcell Global Bilgi announced its presence as a “Customer Experience Center”. By completing its business model transition from customer care to customer experience, Turkcell Global Bilgi started to analyze customer experiences deeper, gaining vast experience in the process. On August 4, 2017 Turkcell Global Bilgi obtained an R&D center certificate from the Ministry of Science, Technology and Industry. As of December 31, 2019, Turkcell Global Bilgi had 13,840 employees, 57% of these employees serve Turkcell’s customers and 36% serve the customers of other clients, while the remainder works as administrative personnel. Turkcell owns approximately 100% of Turkcell Global Bilgi.

Since 2008, Turkcell Global Bilgi owns a 100% stake in Global Bilgi LLC, which operates in Ukraine and provides telesales and call center services to lifecell and many other companies in the Ukrainian, Russian and English languages at six locations with 728 employees.

Inteltek Internet Teknoloji Yatirim ve Danismanlik Ticaret A.S.

Inteltek Internet Teknoloji Yatirim ve Danismanlik Ticaret A.S. (“Inteltek”) offers information and entertainment services. Turkcell holds 55% of Inteltek through its wholly-owned subsidiary Turktell Bilisim Servisleri A.S. (“Turktell”), while Intralot S.A. Integrated Lottery System and Services, a Greek company, holds 20% and Intralot Iberia Holdings S.A., a Spanish company, holds 25%.

Inteltek entered into a contract on August 29, 2008 with Spor Toto Teskilat Baskanligi (“Spor Toto Directorate”) in order to operate a sports betting business for a ten-year period. In addition to the foregoing, Inteltek signed a mobile betting dealer agreement with Spor Toto on January 12, 2010, which gives it the right to operate 1,000 mobile terminals. On August 29, 2018, Inteltek signed a new agreement with Spor Toto Directorate for up to one year, or until a new license is tendered.

On November 15, 2018, Inteltek agreed to sell its 51%-owned subsidiary Azerinteltek QSC (“Azerinteltek”) to Baltech Investment LLC (“Baltech”), a shareholder of Azerinteltek with a 24.5% shareholding. The transaction was completed on January 11, 2019 for a total consideration of EUR 19.5 million.

On November 27, 2018, Spor Toto Directorate held the Tender for Procurement of Fixed Odds and Pari-Mutuel Betting Based on Sports Competitions by Procurement of the Same By Legal Persons of Private Law (the “Spor Toto Tender”). However Inteltek was the sole bidder, and consequently the Spor Toto Tender was cancelled. On February 13, 2019, Spor Toto Directorate held the Super Toto Tender once again whereafter Inteltek was notified that the Spor Toto Tender had been awarded to the other bidder. Following a transition period of up to six months, Inteltek’s operations in sports betting ceased in August 2019.

The respective revenues comprised approximately 1% of our 2019 consolidated revenues.

Our Company’s subsidiaries Turktell, Turkcell Global Bilgi and Turkcell Satis signed a binding term sheet on January 14, 2020 to transfer their total shareholding of 55% in Inteltek, including all rights and liabilities, to the other shareholder of Inteltek, Intralot Iberia Holding SAU. The respective transaction is expected to be completed within the first half of 2020, once the final share sale and purchase agreement is signed and necessary legal approvals are obtained. The final value of the transaction will be determined based on the IFRS net book value of Inteltek and no material impact is expected on our financial statements.

 

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Turkcell Superonline

Turkcell Superonline has a-fixed telephony services authorization, which allows the company to provide call origination and termination for consumers and corporations, as well as wholesale voice carrying services. It also has authorization to provide satellite communication services, infrastructure operating services, internet services and wired broadcasting services, and mobile virtual network operating services. Currently, the company carries the majority of Turkcell’s traffic, previously carried by Turk Telekom (the incumbent operator). Turkcell Superonline was founded in 2009 through the merger of our subsidiary Tellcom with the Superonline business acquired from the Cukurova Group.

Established as an innovative telecom service operator, and with its extensive international connectivity, Turkcell Superonline offers its international and national clients wholesale voice termination, international leased data lines, internet access, telehouse and infrastructure services. Furthermore, Turkcell Superonline is active in the retail broadband market, bringing fiber optics to residences. Turkcell Superonline provides fast communication technology with its own fiber optic infrastructure in Turkey and provides telecommunication solutions to individuals and corporations in the areas of voice, data and TV.

Turkcell Superonline is a telecom operator providing fixed network communication solutions to telecom operators, corporations and households in the areas of data, voice and video. Bringing one of the world’s fastest internet services to Turkey through cooperation with major international operators, we continue to invest in order to transform the “Silk Road” into a “Fiber Road” by expanding our own infrastructure across Turkey with a fiber network stretching to every corner of the country. We believe that the group synergy arising from being a 100% subsidiary of Turkcell Group, along with our top quality services and our goals stated above sets Turkcell Superonline as a worthy candidate to become the most preferred service provider of choice.

We believe that Turkcell Superonline differentiates itself through its commitment to the quality of after-sale services. Turkcell Superonline supplies corporations with industry-leading service-level agreements utilizing its professional technical support personnel and highly qualified team of consultants.

Turkcell Superonline won the tenders of BOTAS, Turkey’s state-owned pipeline company, and TEIAS, Turkey’s state-owned electric power transmission company, for the indefeasible right to use the capacity of the fiber optic cables already installed by BOTAS for 15 years in 2009 and TEIAS for 15 years in 2017, including the right to install additional fiber optic cables and to use the capacity of these fiber optic cables during the same period. These transactions have been considered both as a finance lease as the lease term is for the major part of the remaining useful life of the fiber optic cables already installed by BOTAS, and Turkcell Superonline made a significant investment during the initial period of the lease agreement which is an indicator that the transaction is a finance lease. The recognized cost of the indefeasible right of use as of December 31, 2019 is TRY 118 million.

Turkcell Superonline began to provide 1000 Mbps service to homes in May 2011 for the first time in Turkey in line with Turkcell Group’s strategy of providing state-of-the-art technology for its customers with top-quality service. Turkcell Superonline has rendered Turkey as one of the first five countries in the world where a 1000 Mbps connection is provided to homes thanks to this service option. As of February 2018, Turkcell Superonline started to offer 10 Gbps connections on a demand basis.

On January 31, 2014, Turkcell Superonline signed a share purchase agreement to acquire a 100% stake in Metronet Iletisim Teknoloji A.S. (“Metronet”). In April 2014, the control over Metronet was acquired from Es Mali Yatirim ve Danismanlik A.S. for a consideration of TRY 27 million. Turkcell Superonline and Metronet merged on July 4, 2014. With this acquisition, Turkcell Superonline’s fiber in-city coverage increased to 14 cities, up from 12 at the time.

Turkcell Superonline merged with Turkcell Interaktif Dijital Platform Icerik Hizmetleri A.S. on December 28, 2016 (“Turkcell Interaktif”). Following the merger, Turkcell Interaktif was deregistered from Istanbul Trade Registry.

As of December 31, 2019, Turkcell Superonline has 46,035 thousand km of fiber backbone covering 81 major cities in Turkey and has 8 border crossings. Turkcell Superonline has fiber in-city coverage in 21 cities and increased its homepasses to around 3.6 million as of December 31, 2019 from around 3.4 million a year ago. Including partnership engagements, we are capable of covering 6.7 million households in 28 cities. We have five border crossings to Europe, offering various diversity options to important European cities through protected and completely diverse routes. With our stable fiber infrastructure and six border crossings to the East, we offer

 

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capacity services through Middle-East, CIS and Asia. Our next generation network designed over this strong infrastructure enables us to deliver high quality solutions to telecom operators, multinational and national private corporations and governmental institutions.

Turkcell Superonline is building and putting into motion its domestic wholesale business strategy as well providing wholesale products such as bit stream access via its FTTx fiber coverage, infrastructure services, backbone transmission, Ethernet, IP transit capacities, cyber security and VPN services to operators, service providers and datacenter companies in the Turkish domestic market.

Turkcell Superonline is leading the localization strategy for Turkey’s data and internet traffic by developing partnerships with internet exchange platforms, Tier-1 operators, global/local content and cloud service providers to enable direct access to all networks, and also commercializing internet traffic. Turkcell Superonline aims to continue to invest in and expand its own fiber optic network and further utilize the group synergy created with Turkcell.

On December 18, 2017, the Turkcell Board of Directors approved the issuance of management agreement based lease certificates (wakala sukuk) in accordance with capital markets legislation by Turkcell Superonline through an asset leasing company in the domestic market, for an amount of up to TRY 300 million, up to 12-month tenor, on various dates and at various amounts without public offering, as private placement and/or to be sold to institutional investors. On January 19, 2018, application for the approval of the issue programme for lease certificates was made to the Capital Markets Board, with approval being obtained on March 1, 2018. The first issue of TRY 125 million with a 6-month tenor was made in March 22, 2018 and matured on September 13, 2018. It was followed by the second issue of TRY 75 million on December 13, 2018 with 103-day tenor and the third issue of TRY 100 million on February 13, 2019 with 121-day tenor, which concluded the issue programme under CMB approval. On February 1, 2019, the Turkcell Board of Directors approved a new resolution to allow Turkcell Superonline to issue lease certificates for an amount of up to TRY 500 million under the same conditions above. Three issuances of TRY 400 million in total were made out from this resolution, and the outstanding (lease certificate) amount is TRY 175 million as at March 20, 2020. On March 24, 2020, the Turkcell Board of Directors approved the issuance of lease certificates by Turkcell Superonline through an asset leasing company based in Turkey. The issuance in the amount of up to TRY 600 million must be made in Turkish Lira terms with maturities of up to 12 months, and be offered in the domestic market, in one or more tranches, through private placements and/or sales to institutional investors without a public offering.

JCR Eurasia Rating has evaluated Turkcell Superonline in an investment-level category on the national and international scales and assigned the ratings on the Long-Term National Scale as ‘AA (Trk)’ and the Short-Term National Scale as ‘A-1+ (Trk)’ with ‘Stable’ outlooks on May 17, 2019.

Global Tower

Global Tower was established in 2006 as a 100% subsidiary of Turkcell and commenced its operations in 2007 to provide infrastructure management by leasing places on towers to private and public entities and institutions. It is the first and only tower company in Turkey and fifth largest tower company in Europe. In addition to Turkey, it has operations in Ukraine, Belarus and the Turkish Republic of Northern Cyprus. Today, it serves not only mobile network operators but also broadcasting, ISPS, energy, public institutions and other related industries. Its 100%-owned subsidiary in Ukraine, UkrTower, was founded in 2009 and its 100%-owned subsidiary in Belarus, Beltower LLC (“Beltower”), was founded in 2016. Beltower has a right of use agreement signed with Belarusian Telecom.

Global Tower operates a unique portfolio of 10,726 towers, 8,636 of which are located in Turkey. Global Tower owns 1,141 towers in Ukraine and operates 834 towers in Belarus, as well as 115 towers in the Turkish Republic of Northern Cyprus with right of use, through agreements with the tower owners to sublease them to third parties though revenue share agreements. Global Tower also provides service over 150 mobile towers. Global Tower provides fast and high-quality service to its customers in collaboration with its business partners.

In Turkey, Global Tower manages the processes of renting, maintaining and installing towers in 15 structured regions with its 4 solution partnerships and 3 installation subcontractors. With this structure, the distance between any two service points in Turkey is less than 90 km.

 

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Global Tower helps customers expand their network, enables peer-to-peer telecommunications and provides broadcasting field infrastructure solutions, turnkey setup services and professional operation-maintenance services. With its project management, field rental, construction works, telecommunications equipment setup and ready-for use field delivery solutions, it helps private and public institutions reach more customers.

Global Tower’s wide service range consists of:

 

   

Shared infrastructure services in tower/rooftop/in house fields

 

   

TV-Radio infrastructure solutions

 

   

E2E and wind power infrastructure solutions

 

   

M2M / Scada / Telemetry Infrastructure Solutions

 

   

GSM-R Solutions

 

   

Mini Data Centre Infrastructure Solutions

 

   

Mobile Tower Solutions

 

   

Acclimatized System Room Solutions

 

   

Energy infrastructure solutions

 

   

Hybrid Systems Solutions (Solar / Wind)

 

   

Infrastructure Maintenance and Operation Services

 

   

Field Acquisition and Contract Management Services

 

   

Satellite telecommunication solutions and services

The Turkcell Board of Directors decided to initiate an initial public offering (“IPO”) of Global Tower’s shares in June 2016. However, due to adverse macroeconomic conditions in the markets, the IPO has been postponed. We are evaluating the IPO option for the coming periods if and when financial market conditions become favorable.

On March 24, 2020, the Turkcell Board of Directors approved the issuance of lease certificates by Global Tower through an asset leasing company based in Turkey. The issuance of up to TRY 300 million must be made in Turkish Lira terms, with maturities up to 12 months, and be offered in the domestic market in one or more tranches as private placement and/or sold to institutional investors with no public offering.

Turkcell Teknoloji Arastirma ve Gelistirme A.S.

Turkcell Teknoloji Arastirma ve Gelistirme A.S (“Turkcell Teknoloji”), a wholly-owned subsidiary of Turkcell, commenced operations in 2007 in the TUBITAK Marmara Research Center Technological Free Zone in Kocaeli, Turkey. In 2015, Turkcell Teknoloji consolidated its operations at Kucukyali Technology Plaza, Maltepe, Istanbul, Turkey.

Turkcell Teknoloji’s R&D center employs over 900 researchers accredited by the Ministry of Science, Technology and Industry. Turkcell Teknoloji’s established team of experts develops a wide range of convenient and reliable solutions with innovative roadmaps. Through integrated intelligence and high-performance core capabilities, (Data Analytics and Artificial Intelligence, Blockchain, Network Technologies, IoT, VR/AR), Turkcell Teknoloji’s comprehensive portfolio addresses the following domains: mobile communication solutions, smart cloud platform and platform developed solutions, location based services and platforms, roaming solutions, geographic information systems, network management solutions, 5G infrastructure projects, customer relationship management and solutions, next generation value added services, music and entertainment services, IPTV services, mobile marketing solutions, mobile financial systems, campaign management systems, IoT, AR / VR, big data processing, business intelligence applications, smart SIM card solutions, digital identity technologies, image video processing, text analysis , suggestion engines, voice analytics, robot assistants, robotics process automation, mobile analytical platform, artificial intelligence in health, learning and education applications solutions, E-Mail and search engine solutions, digital broadcasting solutions, CDN (Content Delivery Network) Solutions, Over-the-Top (OTT) and block chain solutions.

In line with Turkcell’s strategy of expanding digital services and solutions and ICT services in international markets, Turkcell Technology aims to develop new digital and ICT services worldwide according to the latest technology and market requirements, and to expand the regions in which Turkcell Group provides services.

 

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With the goal of becoming Turkey’s leading R&D and innovation base, Turkcell Teknoloji demonstrates the value it attaches to innovation with its increasing number of patents each year. In 2019, the Turkcell Teknoloji R&D Center submitted over 511 new national and 20 international patent applications. As of December 31, 2019, Turkcell Teknoloji has 2,117 national and 148 international patent applications and 521 granted patents.

Turkcell Teknoloji cooperates with a wide network of national and international R&D companies, universities and research centers and plays an active role in international R&D programs. Hence, Turkcell Teknoloji is an active participant in European collaborative research programs.

Turkcell Teknoloji is an ICT company that sits on the boards of the Information Technology for European Advancement (“ITEA”) and CELTIC clusters of the Eureka program, a leading open network platform for international cooperation in innovation involving over 40 countries. ITEA is a transnational and industry-driven Research, Development and Innovation programme in software innovation in the ICT domain. On the other hand, the CELTIC programme which is the ICT Cluster focusing on Next Generation Telecommunications for the Digital Society, strengthens the competitiveness of the European industry by fostering European R&D cooperation in telecommunications and the well-being of society by stimulating innovative information and telecommunication services. Besides supporting the establishment of the European research vision and agenda, Turkcell Teknoloji also has a long history of developing research projects associated with these programmes, participating as a project leader, national leader or project partner. Turkcell Teknoloji works closely with its national and global partners to initiate new projects in the Eureka clusters and Horizon 2020 calls. Horizon 2020, publicly funded by the European Commission, is the biggest EU Research and Innovation program to promote discoveries and world firsts by taking great ideas from lab to market.

Turkcell Finansman

Turkcell Finansman (“Financell”), a wholly-owned subsidiary of Turkcell, was established in October 2015 with the approval of the Banking Regulation and Supervision Agency (“BRSA”, the financial institutions regulator in Turkey) and launched nationwide in March 2016. It is the first consumer finance company in the Turkish telecommunications sector to be focused primarily on meeting the financial needs of individuals and corporate customers, and provides financing solutions to existing or new Turkcell customers for their handset, tablet or accessory purchases. In September 2017, Financell established a branch in the Turkish Republic of Northern Cyprus and started handset financing operations. Due to growing cost and risks, the branch was closed in June 2019.

As of January 2020, smartphones and tablets with a retail price at or above TRY 3,500 can be offered with a maximum three-month installment plan, and those with a retail price of up to TRY 3,500 with a maximum 12-months installment plan.

With a prudent risk management approach, Financell mainly supports the smartphone sales of Turkcell and thus cooperates with a wide network of Turkcell points-of-sale across Turkey. Since 2017 Financell also offers insurance and bundled insurance products with consumer loans through a revenue sharing agreement with BNP Paribas Cardiff. This insurance product insured customers against unexpected circumstances that may occur, such as unemployment, death, disease, accidents and hospital stays.

Financell is funded by equity and borrowings from different sources. Even though the major funding source is bilateral loans from domestic and international lenders, Financell may also tap into the local debt capital markets for bond issues. In order to diversify its borrowing base, Financell also resorts to other funding alternatives such as asset-backed securities (“ABS”). From April 2017 to December 31, 2019, Financell executed six ABS issuances via Aktif Yatirim Bankasi A.S. (a domestic investment bank) at an amount totaling TRY 485 million. The first four ABS issuances and first two tranches of the fifth issuance and the first tranche of the sixth issuance totaling TRY 421 million have fully matured as at March 20, 2020. In addition, non-performing consumer loans amounting to TRY 184 million were sold to various asset management companies based in Turkey in 2019.

Financell had TRY 2.52 billion loans outstanding and TRY 3.0 billion of consumer loans had been granted as of year-end 2019. Cost of risk has increased to 3.20% in December 2019 from 1.97% in December 2018. The coverage ratio as of December 2019 was 72.4%. In 2019, Fitch Ratings assigned Financell ‘B+’ Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) and ‘AA-(tur)’ National Long-Term Rating.

In 2019, Financell added corporate entities to its existing individual customer portfolio. “Digital Transformation Finance” (DTF) which includes special-priced technological products, credit limits and interest

 

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rates, is offered to SMEs and commercial enterprises, facilitating their ability to get the latest technology. DTF enables them to spread their payments over a time thanks to installment facilities and to benefit from flexible payment plans. Financell aims to support corporates with financial and insurance services throughout their digital transformation journey.

Turkcell Sigorta

In June 2018, the insurance agency Turkcell Sigorta was incorporated as a subsidiary of Financell in order to offer various insurance products. Turkcell Sigorta operates in the field of tech insurance and aims to use Turkcell’s know-how in digital technologies and introduce innovations that are necessarily conducive to the advent of new economic paradigms, new processes and new products. Turkcell Sigorta launched its first insurance product in December 2018.

Turkcell Sigorta provides a wide variety of insurance products, including health and life, non-life (property insurance, electronic devices, errors and omissions, EAR (Erection All Risks), CAR (Construction All Risks), cash in transit, cash in safe, machinery breakdown, employers’ liability, political violence, third person liability, fidelity, professional liability, directors and officers liability) compulsory earthquake policy, marine cargo, motor third party liability and auto insurance to Turkcell and its subsidiaries’ employees. In addition, Turkcell Sigorta provides insurance advisory and claim advisory services to Turkcell Group. Turkcell Sigorta also provides other insurance products with leading insurance companies like Zurich and BNP Paribas Cardiff, such as device protection, travel insurance, personal accident insurance and critical illness insurance for women. Turkcell Sigorta aims to expand its product portfolio to small & medium business segments as well as a retail client base by offering simplex products and ease-of-purchase.

Turkcell Ozel Finansman A.S.

Turkcell Ozel Finansman A.S. (“TOFAS”), a wholly-owned subsidiary of Turkcell, was incorporated on February 16, 2018 with the approval of the BRSA in order to provide financing solutions in accordance with Islamic financing principles for purchases of goods and services. The company is currently awaiting the completion of BRSA processes.

Turkcell Odeme

Turkcell Odeme became operational as of March 2015 to create a convenient payment solution for users and to offer them a streamlined shopping experience under the “Paycell” brand. Paycell is a payment services platform providing digital payments and core financial solutions.

In August 2016 Turkcell Odeme acquired a Payment Service Provider License from the BRSA to become the first mobile network operator subsidiary holding this license in Turkey. With its brand “Paycell”, Turkcell has expanded its merchant network and reached over 7,000 points of sale by implementing easy and secure payment methods to new areas such as mobile app stores, restaurant chains, parking lots, transportation services, physical goods and airport fast track services. Paycell makes life easier for customers by offering direct carrier billing, money transfer, payment services and wallet, plus cash top-up for the Turkcell prepaid line and the public transportation card IstanbulKart as well as Paycell card. Paycell also provide merchants a QR based payment alternative and mobile POS solutions.

After it was granted an electronic money payment license in July 2017, Paycell launched digital money, prepaid card and utility bill payments though Paycell application and various Turkcell shops as well as non-Turkcell affiliated shops. In December 2017 Paycell entered into a 5-year contract with Visa to issue prepaid cards. Throughout 2018, the business grew at an accelerating rate and added on the features of peer to peer money transfer, expanded merchant integrations and increasing penetration of Paycell prepaid cards. 2019 was a year of expansion for Paycell with regards to larger scale merchants with high number of physical stores; such as Sok Markets and Burger King restaurant chain in Turkey. In addition to increasing its offline presence, Paycell has also expanded its online presence with integrations such as n11.com, Turkey’s second largest online marketplace and Kamil Koc, Turkey’s largest scale coach travel firm.

Paycell took its first step toward globalization in October 2017 by launching direct carrier billing services in Turkish Republic of Northern Cyprus. In 2018, Paycell launched e-money and local currency transfer services in Ukraine, allowing Ukrainian customers to make digital payments.

 

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As of December 31, 2019, Paycell had 4.5 million three-month active users (including direct billing service users) and the Paycell app was downloaded 5.0 million times. Paycell prepaid card reached 2.4 million and spending via Paycell prepaid cards in 2019 amounted to TRY 166.6 million. Paycell mobile payments active users reached 1.6 million. As of December 31, 2019, 4.4 million credit cards are registered at Paycell.

Paycell delivered TRY 252.2 million revenue in 2019 with 35% year on year growth, while its EBITDA reached TRY 160.4 million with a 63.6% margin.

Lifecell Ventures

Lifecell Ventures is a 100% subsidiary of Turkcell incorporated in the Netherlands.

In line with Turkcell Group’s strategic priority of monetizing its digital services, Lifecell Ventures is responsible for delivering our OTT services to the global markets and expanding Turkcell Group’s footprint by launching new offerings, accelerating the company’s owned OTT activities, growing current services and making strategic alliances with other operators. Lifecell Ventures uses technology to provide a digital experience to consumers worldwide and enable telecom operators to compete effectively by offering digital communications, entertainment, music, TV, transactional and e-commerce applications as well as cloud solutions on either a license or a white-label basis. Lifecell Ventures’ business model is based on charging implementancy, support, brand and license fees in return for provision of digital service technology and know-how to other operators. Lifecell Ventures has the ambition of contributing to taking telecoms to the “next level”, which is a more digital service focus, rather than being an infrastructure company.

Lifecell Ventures launched the first overseas digital solution partnership with BiP and lifebox services at Moldcell, the Eastern European operator with a revenue sharing model. The company expanded digital solution partnerships in 2019 with the launch of BiP and lifebox with the Albanian operator ALBtelecom, which operates in Albania with a population of three million. In February 2019, Lifecell Ventures signed a cooperation agreement with Digicel Group of the Caribbean. In January 2020, Digicel has launched lifebox, which is rebranded as Billo. In 2020, we aim to launch our digital services in 32 countries through alliances with other operators.

Turkcell Satis

Turkcell Satis (formerly known as Turkcell Satis ve Dagitim Hizmetleri A.S.) sells telecommunication and IT products through our flagship store and provides a wide variety of products via our website www.turkcell.com.tr. In 2016, Turkcell Satis started to sell equipment to other entities as corporate sales. In addition, since Turkcell Satis is experienced in the sector, it also acts as an intermediary between producer and distributors to support the determination of products, pricing, amount to be sold, sales support components and management of their inventory.

In January 2019, the company’s legal name was changed to Turkcell Satis ve Dijital Is Servisleri A.S., (often referred to as Turkcell Digital Business Solutions) and its area of operations have been expanded to cover end to end IT and technology related solutions and services for enterprises, including data center, cloud, security, digital transformation, system integration and IT managed services.

Turkcell Enerji

Turkcell Enerji, a 100%-owned subsidiary of Turkcell, was established on February 20, 2017 with the vision of being a leader in the transformation of energy markets in Turkey through digitalized, decentralized and decarbonized solutions. Turkcell Enerji owns an electricity supply license, issued by the Energy Market Regulatory Board (EMRA), on May 11, 2017, for a period of 20 years. This enables the company to trade electricity and/or electrical capacity. Turkcell Enerji supplies electricity to eligible residential, commercial and industrial customers in Turkey. In 2019, Turkcell Enerji has completed solar rooftop projects for renewable power generation at selected Turkcell Group buildings and data centers. The focus on renewable energy will continue with large-scale projects and investments.

Yaani Digital B.V.

Yaani Digital B.V. (formerly named NTENT Netherlands B.V., “Yaani Digital”) is a wholly-owned subsidiary of Lifecell Ventures and is incorporated in the Netherlands. It was acquired by Lifecell Ventures from NTENT, Inc, an American company, on May 14, 2019. The perpetual license and usage rights associated with the source codes of the Yaani search engine rest with Yaani Digital.

 

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Equity Accounted Investments

Turkiye’nin Otomobili

On November 2, 2017, Turkcell signed the Joint Initiative Group Cooperation protocol and on May 31, 2018 a Shareholders Agreement was signed by Turkcell with the intention of participating as a potential contributor in “Turkey’s Automobile Project”. Under this protocol, the signing parties agreed to determine the framework of the activities to meet the requirements of the project for designing, developing and manufacturing an electric car and establishing a sales and distribution network as well as establishing a local company to own the intellectual and industrial property rights of this car. Accordingly, on June 25, 2018, Turkiye’nin Otomobili was incorporated, in which Turkcell has participated as a founding partner with a 19% stake. AG Anadolu Grubu Holding A.S., BMC Otomotiv Sanayi ve Ticaret A.S., Kok Ulasim Tasimacilik A.S., Vestel Elektronik Sanayi ve Ticaret A.S. and Turkcell (through its wholly owned subsidiary Turkcell Gayrimenkul) have equal partnerships in TOGG each with a 19% shareholding; whereas Turkiye Odalar ve Borsalar Birligi holds 5%. The CEO of TOGG was appointed on September 1, 2018. On December 27, 2019, TOGG introduced its C-SUV and sedan electrical vehicle prototypes, which are currently being developed and scheduled for production in 2022. The paid-in capital of the company stands at TRY 150 million as of December 31, 2019. Turkcell is committed to participating to fulfill 19% of total committed capital of €500 million over the following years.

Sofra

Sofra, in which Turkcell indirectly holds a 33.3% stake, was incorporated on July 24, 2018. Belbim Elektronik Para ve Odeme Hizmetleri A.S., a subsidiary of the Municipality of Istanbul, and Posta ve Telgraf Teskilati A.S., the Turkish postal services company, act as shareholders together with our subsidiary Turkcell Odeme. Sofra enables personnel of customers to conveniently purchase food at member merchants with meal cards issued under the “PAYE Card” brand. PAYE Card also offers transportation payment services provided by the Municipality of Istanbul. In 2019, Turkcell Group employees started to use the PAYE Card. Sofra aims to enhance its customer and merchant network.

Non-Consolidated Group Companies

Turkcell Foundation

Turkcell Foundation (“Turkcell Vakfi”, “Foundation”) was founded by our Company on October 11, 2018. The Foundation is a not-for-profit organization aiming to develop and implement charity and donation programs with respect to and including, but not limited to, technology and education.

X. Potential Investments

Our efforts to selectively seek and evaluate new investment opportunities continue. Our strategy for growth involves selectively seeking and evaluating new investment opportunities and participating in those meeting our criteria. We may pursue inorganic growth opportunities both in Turkey and in countries where we are already present with a controlling stake in order to leverage our experience and technological base. We may also pursue opportunities which include alliances, such as MVNOs, management service agreements and marketing partnerships, and that may be in the area of mobile or fixed telecommunications and services.

We may also evaluate network sharing opportunities and participate in joint infrastructure companies within Turkey.

We will evaluate the opportunities of marketing the portfolio of our digital services in international markets to increase the users and our revenues from these services.

XI. Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”)

Based on our information and the information provided to us by our affiliates, as of the date of this annual report, we believe that certain of our business activities in 2019 and in 2020, and the business activities of certain of our affiliates, are subject to disclosure pursuant to Section 219 of ITRA.

During the year ended December 31, 2019, Turkcell had international roaming relationships with the following companies in Iran and Syria: TCI Mobile Company of Iran, MTN Irancell, Taliya Iran,

 

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Telecommunication Kish Co., Rightel, Syriatel and MTN Syria. Turkcell had gross revenues of approximately EUR 0.8 million and net profits of approximately EUR 0.5 million attributable to these agreements during the year ended December 31, 2019.

During the year ended December 31, 2019, lifecell had international roaming relationships with the following companies in Iran and Syria: MTN Irancell, Rightel, Syriatel and MTN Syria. lifecell had gross revenues of approximately EUR 0.9 thousand and no net profits attributable to these agreements during the year ended December 31, 2019.

Turkcell has developed several digital services like BiP, Dergilik, fizy, lifebox, TV+ etc. which are available for download online free of charge and have been downloaded from within Iran. The Company believes that these downloads from within Iran have generated no revenue or profits. For details regarding the risks we face with regard to our business in Iran, please refer to “Item 3.D—Risk Factors— Any instability in the political environment and/or downturn in the economy, as well as volatile international markets , in particular as a result of the ongoing COVID-19 global outbreak, in Turkey and/or internationally may have an adverse effect on our business and financial condition.”

Turkcell has voice interconnection agreements with Tadbir Ertebatat-E-Sigma (Sigma llc) of Iran. During the year ended December 31, 2019, gross revenues attributable to these agreements were approximately EUR 5.8 million, and net losses were approximately EUR 0.9 million.

Turkcell Superonline provided transit IP and leased line services through network interface agreements with Telecom Infrastructure Company of Iran (“TIC”). During the year ended December 31, 2019, gross revenues attributable to these agreements were approximately EUR 4.7 million, and net profits were approximately EUR 1.4 million. Furthermore, Turkcell Superonline has a business relationship with Teleka Maedeh Co. (Telecom Idea) based in Iran, which acts as its solution partner and agent. No revenue or net profits are attributable to this business relationship for the year 2019. Costs attributable to the services provided by Teleka Maedeh Co. were EUR 70.0 thousand for the year 2019, and all payments were made to QBIC ELECTRONICS TRADING LLC (a company based in the United Arab Emirates), an authorized intermediary.

We have made enquiries of our major shareholders regarding activities in Iran and Syria. Telia Carrier AB of Sweden is interconnected with the Telecommunications Infrastructure Company of Iran via an interconnection point outside of Iran. During the year ended December 31, 2019, gross revenues and net profits attributable to this business relationship were EUR 31.0 thousand and EUR 25.0 thousand, respectively. Telia Carrier AB of Sweden also receives international telephony traffic from the Syrian Telecommunications Establishment via an interconnection point outside of Syria. During the year ended December 31, 2019, gross revenues and net profits attributable to this business relationship were EUR 98.0 thousand and EUR 13.0 thousand, respectively. Furthermore, we have been informed that Telia Sweden, Telia Norway, Telia Latvia, Telia Lithuania, Telia Finland, Telia Estonia and Telia Denmark had bilateral roaming relationships with MCI Iran for voice and SMS (no data) roaming services. For the year ended December 31, 2019, total inbound costs were EUR 3.7 thousand and total outbound costs were EUR 107.1 thousand, although the corresponding payments have not been made or received.

Although it is difficult to do with a reasonable degree of certainty, we have concluded that our Iranian business partners described in this section may be owned or controlled indirectly by the Government of Iran. However, to our knowledge, none of the services provided by Turkcell and our affiliates in Iran described in this section have been used by the Government of Iran to commit serious human rights abuses against the people of Iran. Furthermore, we understand that the U.S. Department of the Treasury’s Office of Foreign Assets Control has issued a general license authorizing U.S. persons to engage in certain of the activities described in this section. We and our affiliates intend to continue the activities described in this section in 2020.

XII. Regulation of the Turkish Telecommunications Industry

a. Overview

All telecommunications activity in Turkey is regulated by the ICTA. The Electronic Communications Law No. 5809 (the “Electronic Communications Law”), which came into force on November 10, 2008, is the principal law governing telecommunications activity in Turkey. The Electronic Communications Law was published to correspond to the rapidly-evolving Turkish telecommunications industry, and all secondary regulations have been updated to be in accordance with this law. The duties of the ICTA, which may be exercised in a manner that is adverse to our operations and our financial results, include those described below.

 

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b. ICTA

The ICTA has the authority to grant licenses and set fees in the electronic telecommunications industry.

According to Article 8 of the Electronic Communications Law, electronic communications services are rendered and/or established (as in the case of an electronic communications network or infrastructure) and operated following ICTA authorization. Authorization is granted either through notification made in accordance with the principles and procedures determined by the ICTA, in cases where scarce resource allocation is not necessary, or by the granting of usage rights, in cases where scarce resource allocation is necessary (allocation of frequency, satellite position, etc.). Under the Electronic Communications Law, usage rights may be granted for up to 25 years; however, there is no clause relating to the term of notification. According to the Electronic Communications Law, the principles and procedures relating to the notification and granting of usage rights is determined by the ICTA through secondary regulations.

According to the Electronic Communications Law, usage rights can only be restricted where the resources are required to be operated by a limited number of operators and for the purpose of ensuring the effective and efficient use of the scarce resources. In cases where the quantity of rights of use is limited, Article 9-6(a) of the Electronic Communications Law allows the Ministry of Transport and Infrastructure to determine the criteria, such as (i) the authorization policy regarding electronic communications services which cover the assignment of satellite position and frequency band on a national scale and which need to be operated by a limited number of operators, (ii) the starting date of the service, (iii) the duration of the authorization and the number of operators to serve. While the criteria are determined by the Ministry of Transport and Infrastructure, the authorization is still granted by the ICTA.

The Electronic Communications Law establishes legal principles and broad policy lines that the ICTA must follow, some of which are stated below:

 

   

Creation and protection of a free and efficient competitive environment.

 

   

Protection of consumer rights and interests.

 

   

Protection of the objectives of development plans and Government programs, as well as the strategies and policies set by the Ministry of Transport and Infrastructure.

 

   

Promotion of implementations that ensure that everyone can benefit from electronic communications networks and services.

 

   

Ensuring non-discrimination among subscribers, users and operators under fair conditions.

 

   

Ensuring the conformity of electronic communications systems to international norms.

 

   

Protection of information safety and communication confidentiality.

 

   

Determination of the procedures and principles related to the personal data and protection of privacy.

The Electronic Communications Law also specifies general rules and principles relating to interconnection between operators. Agreements for interconnection are publicly available, but precautions are taken by the ICTA to protect the commercial secrets of the parties.

The Universal Service Laws, Law No. 5369, determines the procedures and principles governing the provision and execution of universal service and the procedures and the rules relating to the fulfillment of universal services in the electronic communications sector. In accordance with Law No. 5369, the scope of universal services is determined and periodically reviewed, with the review period not exceeding every three years, and can be re-determined by the President of Republic of Turkey.

The legislation designates the following as universal services: fixed-line telephony services, public pay telephones, telephone directory services to be provided in printed or electronic environments, emergency call services, internet services, passenger services to residential areas where access is solely provided by sea and sea communication and sailing safety communication services.

This law mandates that designated operators must provide universal services, and the General Directorate of Communication can demand that operators provide universal services on a national and/or geographical basis. Turk Telekom and the GSM operators are currently designated as universal services providers.

The Council of Ministers Decision No. 2011/1880, which was published in the Official Gazette numbered 27984 and dated July 4, 2011 allowed the use of the universal service fund to extend the mobile GSM network

 

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coverage listed in the annex of the decision to uncovered areas with a population of 500 or below. On February 13, 2013, we were appointed as universal service provider after a tender process and the related contract was signed on February 20, 2013. Under the aforementioned contract, Turkcell duly carried out its undertakings for installing sufficient infrastructure to cover 1,799 rural locations and the investment and operating expenses are compensated by the universal service fund of the Ministry of Transport and Infrastructure. This contract was renewed until December 31, 2019, and the extension contained new requirements to provide mobile broadband services and to operate the new and existing networks together. Recently, the Ministry of Transport and Infrastructure has approved the extension of the contract under the same conditions through June 30, 2020. The Ministry of Transport and Infrastructure is also preparing a new auction for the operation of the Universal Service beyond June 30, 2020.

The Electronic Communications Law also specifies general rules and principles relating to tariffs. Pursuant to the Electronic Communications Law, operators may freely determine the tariffs they apply in compliance with the relevant legislation and the ICTA arrangements. In the event of determination of the significant market power of the operator, the ICTA may determine the method of the approval, tracking and auditing of the tariffs. It may also determine the lower and upper limit of the tariffs and principles and procedures of the application of the same.

The Electronic Communications Law provides basic guidelines for the tariffs and pricing and thus leaves the detailed rules and enforcement to the ICTA. According to the law:

 

  (1)

The tariff may be determined as one or more subscription fees, fixed fees, call charges, line rentals, and similar fee items.

 

  (2)

Tariffs to be imposed in return for providing any kind of electronic communications services shall be subject to the following provisions:

 

  (a)

Operators shall freely determine the tariffs under their possession, provided that they comply with the regulations of the ICTA and the relevant legislation.

 

  (b)

If an operator is designated as having significant market power in the relevant market, the ICTA shall be entitled to determine the procedures regarding the approval, monitoring and supervision of tariffs as well as the highest and lowest limits of the tariffs and the procedures and principles for the implementation thereof.

 

  (c)

If an operator is designated as having significant market power in the relevant market, the ICTA shall be entitled to make the necessary arrangements to prevent anti-competitive tariffs such as price squeezing and predatory pricing and to supervise the implementation thereof.

 

  (3)

Procedures and principles pertaining to the implementation of Article 13 of the Electronic Communications Law, submission of tariffs to the ICTA and publishing and announcing them to the public shall be determined by the ICTA.

According to this regulation, the ICTA may intervene in the structure of our tariffs or may impose certain criteria relating to the revision of our tariffs. In Mobile Call Termination Market, all three operators are designated as having “Significant Market Power” (“SMP”). Accordingly, the mobile termination rates of all operators are being regulated by ICTA.

In the Mobile Access and Call Origination Market only Turkcell was designated as having SMP. As of January 1, 2020, the Mobile Access and Call Origination Market has been deregulated and Turkcell’s SMP designation was removed.

In addition to the duties and authorities stated above, the Law Regarding the Establishment of ICTA No. 2813 has been amended and the ICTA has been given the authority to apply a conciliation procedure for the receivables including administrative sanctions (except for the receivables that are intermediated for collection and the penalty requirement for the treasury share) and the debts of the ICTA. According to this provision, it is possible to settle on a part of the disputed amount and to waive the primary or secondary claims and the settled matters cannot be made the subject of a lawsuit or a complaint.

Telegraph and Telephone Law numbered 406 has also been amended such that in the event that the treasury share is not paid in full in the given period, the ICTA has the right to impose a penalty in the amount of one full amount of the incomplete or unpaid treasury share.

 

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c. Regulation on Quality of Service in the Electronic Communications Sector

The Regulation on Quality of Service in the Electronic Communications Sector, effective since December 31, 2011 is applicable to all operators that provide service to end users and sets out the procedures and principles to control the conformity of the services of operators. Mobile telephone operators are required to meet new service quality requirements and submit a report based on these requirements every three months to the ICTA. Additional requirements for service quality must be fulfilled. If the operators fail to reach these requirements more than once, this may result in the imposition of penalties. The results of quality measurements can also be made publicly available on the website of the ICTA for a period of one month, stating that the operator has failed to comply with the service quality requirements.

d. Regulation on Administrative Fines, Sanctions and Precautions in the Electronic Communications Sector

According to the Regulation on Administrative Fines, Sanctions and Precautions to be imposed on operators, effective as of February 15, 2014, the ICTA retains the right to impose fines in the event an operator submits incorrect or misleading documents or fails to submit documents as requested by the ICTA; does not submit such documents in a timely manner; does not permit inspection or audits to be made by the ICTA; uses unpermitted equipment or equipment not complying with standards or alters technical features of equipment; or does not pay fees arising from its use of licenses and frequencies; does not meet the regulations regarding numbering, number portability, calling line identification, access and interconnection, end-user tariffs, consumer rights, value added services, data protection, national security and public order, service quality and such or does not comply with the provisions of license agreements, telecommunications licenses and general authorizations or the legislation. The ICTA is authorized to impose sanctions and precautions as well as administrative fines.

In 2018, there has been another amendment to the aforementioned regulation which introduces a new provision addressing “natural persons” and “private legal entities which are not operators” under the Electronic Communications Law. According to the new provision, entities (including “natural persons” and “private legal entities which are not operators”) who fail to comply with the obligations determined by ICTA regarding national cyber-security activities and protective measures against cyber-attacks, or fail to implement the measures taken by ICTA, will be subject to administrative fines.

e. Regulation on Authorization regarding the Electronic Communications Sector

In 2009, the ICTA published the “Regulation on Authorization regarding the Electronic Communications Sector” (“Authorization Regulation”), which determines the principles and procedures for the authorization of the companies that seek to provide electronic communication services and/or to install or operate electronic communications networks or infrastructure. In 2016, there had been major amendments to the aforementioned Regulation. According to the amendments:

 

  (1)

Operators authorized with the limited usage right authorization may sell devices, make installations, carry out maintenance or give consultations if it is related to or necessary for its field of activity. As a result of this amendment, Turkcell is able to sell devices in relation to electronic communication services.

 

  (2)

Companies that apply to the ICTA for authorization should have paid the minimum amount of paid capital set by the ICTA. Those operators authorized before the amendment of the Regulation are also liable to meet this condition. According to the ICTA decision dated March 31, 2016, the operators authorized to provide Public Access Mobile Radio Service should have minimum paid in capital amounting to TRY 250,000 and the operators granted other authorization types should have minimum paid in capital amounting to TRY 1,000,000.

 

  (3)

All operators should obtain the consent of the ICTA prior to the transfer, acquisition or any other transaction regarding 10% or more of their shares. Those operators authorized with limited usage rights should also notify the ICTA within two months at the latest in case of a transfer, acquisition or any other transaction of their shares up to 10%.

 

  (4)

Operators should provide free call center services, which was not an obligation in the former Regulation.

 

  (5)

Operators should keep the traffic data of their customers for two years, which was set at one year in the former Regulation.

 

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  (6)

Operators are liable to notify the ICTA of any amendments to documents regarding the employees of the operators (including employee lists) which have been previously submitted to the ICTA.

 

  (7)

The ICTA is entitled to decline authorization applications and proceed with operator inspections to confirm the accuracy of the information and documents submitted during the authorization application.

In addition to the amendments of the abovementioned Regulation, the ICTA decision on Procedures and Principles Regarding the Usage of Caller Line Identification was published; the liabilities of the operators are increased.

f. Regulation on Mobile Number Portability (“MNP”)

Pursuant to Article 32 of the Electronic Communications Law, operators are required to supply operator number portability.

MNP allows subscribers to keep their existing telephone number when changing their telephone operator, their physical location or current service plan. These regulations have been operational in the fourth quarter of 2008. Since we believe the MNP regulations conflict with our rights under our license agreement, without due compensation, we filed a lawsuit in 2007 for the cancellation of the MNP regulation. While we do not object to the substance of mobile number portability, we do, however, believe that our rights under our license agreement should remain protected or, where they are violated, that we should be justly compensated. The Court rejected the case in June 2009 and we appealed the decision. The Plenary Session of the Chambers for Administrative Cases approved the court decision. We applied for the correction of the decision. The Court rejected the Company’s request of the correction of the decision. Turkcell made an individual application before the Constitutional Court, against the respective decision. The Constitutional Court process is pending. In 2009, the ICTA issued a new Regulation on MNP, abolishing the 2007 regulation and amended certain Articles of this Regulation in November 2015. Mobile subscribers are eligible to make a porting request only after 90 days of the date of activation of their first mobile connection.

g. Regulation on Security of Network and Information in Electronic Communications Sector

In 2008, the ICTA published the “Regulation on Security of Electronic Communication”, which determines the principles and procedures for precautions to be taken by the operators for eliminating or derogating the risks caused by threads or weaknesses of (i) the physical area of the operators, data, hardware/software security and reliability, and (ii) sustaining the reliability of human resources. In accordance with the regulation, our Company is required to comply with TS ISO/IEC 27001 or ISO/IEC 27001 standards. Turkcell was the first mobile operator in Turkey to receive the ISO/IEC 27001:2005 certification for its Network Operations function in 2008 covering all operations throughout Turkey. In 2011, Turkcell’s IT function was also certified for ISO/IEC 27001:2005 and Turkcell’s ISO/IEC 27001:2005 scope became one of the largest among telecommunication operators in Europe. In 2015, the Information and Communications Technology and Network departments successfully passed ISO 27001:2013 audits and were deemed to be in compliance with the ISO 27001:2013 version. By having an ISO/IEC 27001:2013 certificate covering telecom infrastructure operations, Turkcell fulfills its regulatory obligations and offers its customers the benefits of an internationally-recognized secure management of operations and services. In July 2014, the ICTA repealed the above regulation and published the “Regulation on Security of Network and Information in Electronic Communications Sector” which requires the Company to set up and maintain a specialized team to detect, prevent and report all cyber events and work in coordination with the National Computer Emergency Response Center, in addition to the abovementioned obligations.

h. Presidency Circular on Information and Communication Security Measures

The Presidency Circular on Information and Communication Security Measures, published in the Official Gazette numbered 30823 and dated July 6, 2019, aims to ensure the security of critical data, which may threaten national security or lead to the deterioration of the public order when the data privacy, integrity and accessibility is impaired. Pursuant to the Circular, an “Information and Communication Security Guide” is expected to be published by the Presidential Digital Transformation Office that will set out the information and communication security measures to be taken by the obligated organizations including public institutions as well as the enterprises providing critical infrastructure services.

i. Turkish Competition Law and the Competition Authority

In 1997, the Competition Law (No. 4054) established a Competition Board. The Competition Board consists of seven members who are appointed for a term of four years. It is an autonomous authority with administrative and financial independence established to ensure effective competition in markets for goods and services.

 

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The Competition Board can carry out investigations, evaluate requests for exemptions, monitor the market, assess mergers and acquisitions, submit views to the Ministry of Trade and perform other tasks stipulated by the Competition Law. The ICTA can apply to the Competition Board if it determines that agreements regarding access, network interconnection and roaming violate the Competition Law.

Any person or legal entity may file a complaint with the Competition Board. The Competition Board can take necessary measures to prevent violations and may impose fines on those who are liable for such prohibited practices. The Competition Board may impose fines of up to 10% of the annual gross income of the operators, which is constituted by the end of the previous financial year and determined by the Competition Board. The ICTA and the Competition Board entered into a Protocol on Cooperation in 2002, followed by follow-up Protocols in 2011 and 2015. The original Protocol established a framework whereby the ICTA and the Competition Board can cooperate on legal actions and policies regarding measures, regulations and inspections that affect competition conditions and competition in the telecommunications sector. The follow-up Protocols regulate the mechanisms to improve cooperation between the ICTA and the Competition Board.

j. The Principles on Applications Regarding Anticompetitive Acts in Electronic Communications Sector

One of the principles that the ICTA must follow is the creation and protection of a free and efficient competitive environment. The Electronic Communications Law specifies that the ICTA is authorized to set rules (that do not contradict the Turkish Competition Law) to prevent anticompetitive acts, to investigate the operators as officio or upon a claim, and to take necessary measures against anticompetitive actions. Considering that applications regarding anticompetitive acts are made by different methods and based upon a variety of documents, the ICTA published the “Principles on Applications Regarding Anticompetitive Acts in Electronic Communications Sector” on December 20, 2017 in order to clarify these points.

k. Regulation on the Establishment of Metropolitan Municipalities in Fourteen Provinces and of Twenty-Seven Districts and Amending Certain Laws and Decree Laws

The Law No. 6360 on the “Establishment of Metropolitan Municipalities in Fourteen Provinces and of Twenty-Seven Districts and Amending Certain Laws and Decree Laws” was published in the Official Gazette on December 6, 2012 and enacted on March 30, 2014 through municipal elections. The Law, increasing the number of metropolitan cities from 16 to 30, dissolves the legal entity of villages and special provincial administrations in cities where there are metropolitan municipalities. By the amendment of the Law for Metropolitan Municipalities, the number of metropolitan municipalities increased and the borders of certain metropolitan municipalities were extended. Following this amendment, the ICTA increased our coverage obligations, defined in our concession agreement, with its decision, based on this law amendment which requires us to make material capital expenditures. We filed a lawsuit for a stay of execution and cancellation of the ICTA’s aforementioned decision. The Council of State granted a motion for the stay of execution of ICTA’s aforementioned decision. The ICTA objected to this decision. The objection was also rejected in favor of Turkcell. The hearing was held on November 27, 2018. The Court annulled the decision of the ICTA. The ICTA appealed the decision. Turkcell replied to the appeal request in due time. The appeal process is pending. Since then the ICTA has been working on a new regulation aligned with the Law No. 6360.

l. Regulation on Base Station Implementation in Electronic Communication Sector

In 2012, according to Law No. 6360 and Municipality Law No. 5393, the Metropolitan Municipalities were authorized to give site selection certification to the BTS considering the requirements of city and building aesthetics and electronic communication services. The Site Selection Certificate Regulation was published in the Official Gazette dated January 27, 2018, and entered into force on the date of its publication. According to this regulation, a fee (TRY 3,640 per station for the year 2020) will apply only to the BTSs established after December 6, 2012.

m. Zoning Law and Construction Certificate Requirement of Base Stations

The Supreme Court of Appeals rescinded the regulation regarding the base stations exemption from obtaining construction permits on October 1, 2009. The existing zoning law in Turkey requires mobile operators to obtain construction certificates for all existing and new base stations, resulting in the shutdown of certain stations for which certification cannot be obtained. In Turkey, nearly half of the premises were built illegally without any permission. As a result, a number of municipalities started taking legal action such as affixing seals to suspend construction, or demolition orders against base stations, negatively affecting our coverage, quality of service and customer experience. We have also taken legal action requesting nullity of those acts. In addition, studies for altering zoning laws regarding procedures for building certifications are being prioritized.

 

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The Planned Areas Zoning Regulation was published in the Official Gazette dated July 3, 2017 and became effective as of October 1, 2017. The necessity of obtaining a building permission certificate and a construction permit, which is not possible in practice, was thereby abolished. This regulation authorized the establishment of a BTS without a construction license process, provided that necessary precautions are taken and ICTA approval received, and provided a special BTS installation procedure is followed. The following requirements must be met for a BTS to be established on private land and in buildings:

 

   

The Site Selection Certificate should be received prior to the establishment of the BTS.

 

   

Operators must undertake the technical responsibility of the installation.

 

   

The consent of apartment owners should be obtained prior to the establishment of a BTS.

 

   

A static report for the BTS installation should be obtained by operators.

 

   

The appearance of the BTS should not negatively affect the aesthetics, appearance and silhouette of the buildings.

 

   

The size of the antenna should not exceed 1.55 meters on roof-top sites.

However, in accordance with the decision to suspend the execution of the procedures of license, the amendments made in The Planned Areas Zoning Regulation came into force on July 25, 2019. With the related amendments, rooftop cellular systems and tower installations were separated. Towers and reinforced concrete station installations are excluded from the scope of the license exemption. On the contrary, building licenses will not be required for rooftop BTSs, although there are certain height limitations applicable to rooftop installations of BTSs.

n. Regulation on Waste Electrical and Electronic Equipment

In May 2012, the Regulation related to Waste Electrical and Electronic Equipment was published in the Official Gazette and became effective.

o. Regulation on the Internet

Law No. 5651 for the Regulation of Web Content has been revised by Law No. 6518, which became effective on February 19, 2014. The new law required that all internet access providers, which include all mobile and fixed network operators as well as all internet service providers, form a Union of Internet Access Providers (“UAP”) within three months, which was duly established. After the establishment of the UAP, if any internet service provider or any operator giving internet services fails to become a member of the UAP, it shall also be fined in an amount equal to one percent of the previous year’s revenues.

In addition, the new law raises the existing fines for not removing content as requested by the court. The law also introduces URL-based blocking of websites which requires new capital as well as operating expenditures for all internet access providers.

p. GSM Licensing in Turkey

The terms of license agreements are governed by the Authorization Regulation, and it provides that the ICTA approve the transfer of licenses to third parties, ensure continuation of services in the event of cancellation of a license and approve the investment plans submitted by licensees.

A GSM license is subject to the ICTA’s right to suspend or terminate operations under the license on the grounds of security, public benefit, and national defense, or to comply with the law. However, suspension or takeover of facilities under these circumstances is subject to the payment of compensation to the operator. The ICTA can also inspect such licensee and nullify its license if the licensee has materially failed to comply with the terms of its license. The ICTA may also terminate licenses in cases of gross negligence or non-payment of the authorization fee.

The licensee is responsible for installing telecommunications equipment in conformance with international signalization systems and abiding by the numbering plans. Furthermore, the licensee is obligated to make the necessary investments to offer the licensed service, including the design of the service, the making of financial investments and the installation and operation of the facility required for the service. Licensees are allowed to determine the prices for services, subject to the regulations of the ICTA. Upon the expiry of a license, including termination, the facilities and immovables of the licensee, in operating condition, will be transferred by the licensee in accordance with the license agreement.

 

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q. Our GSM License Agreement

General

Since April 1998, we have operated under a 25-year GSM license for which we paid an upfront license fee of $500 million. In 2002, we signed a renewed license agreement for our GSM license which provides that a monthly payment of 15% over our gross revenue paid to the Turkish Treasury shall be subject to the legal interest rate. If such payments are not duly paid twice in any given year, a penalty in an amount equal to triple the last monthly payment shall be payable to the Turkish Treasury. However, as a result of the aforementioned amendments made to the Telegraph and Telephone Law, it has been provided that in the event that the treasury share is not paid in full in the given period, the ICTA has the right to impose a penalty in the amount of one full amount of the incomplete or unpaid treasury share. In addition, we must pay annual contributions in an amount equal to 0.35% of our gross revenue to the ICTA’s expenses. After the tender relating to the allocation of additional GSM 900 frequency bands, made by the ICTA in June 2008, the license agreement was amended to include the additional frequency band, and was signed in February 2009 by Turkcell and the ICTA, which made small additional changes in the articles of the license agreement entitled performance bond and allocated frequency bands, and was signed again in February 2016 with small amendments. The license agreements of Turkcell were last amended in 2019.

Terms and Conditions

Under the license agreement, we hold a licensed concession to provide telecommunications services in accordance with GSM-PAN European Mobile Telephone System standards in the 900 MHz frequency band. Our license covers 55 channels and allocates telephone numbers between the 530 and 539 area codes in the national numbering plan. Our license also permits us to establish customer service centers, sign contracts with subscribers and market our services to subscribers. Our license was issued with an effective date of April 27, 1998, for an initial term of 25 years. At the end of the initial term, we can renew our license, subject to the approval of the ICTA, provided that we apply between 24 months and 6 months before the end of our license. Our license is not exclusive and is not transferable without the approval of the ICTA.

We paid a license fee of $500 million to the Turkish Treasury upon the effectiveness of our license. On an ongoing basis, we must pay 15% of our gross revenue, defined as of March 2006 to exclude interest charges for late collections from subscribers and indirect taxes such as 18% VAT, as well as other expenses and the accrued amounts that are recorded for reporting purposes to the Turkish Treasury. We are required to pay 10% of our existing monthly treasury share to the Ministry of Transport and Infrastructure as a universal service fund contribution. Since 2005, we are required to pay 90% of the treasury share to the Turkish Treasury and 10% to the Ministry of Transport and Infrastructure as a universal service fund contribution. As of January 1, 2018, all of our treasury share is paid to the ICTA, which then transfers it to the Turkish Treasury and the Ministry of Transport and Infrastructure as detailed above. The calculation method for the treasury share was later revised and consequently, the following are not be considered in calculation of the treasury share: overdue interests which are accrued to the subscribers for any unpaid balance, accrual amounts for the purpose of reporting, reflecting the installation and maintenance costs of the mobile radio stations to other mobile operators and finally, amounts for the purpose of correction accounting records which occur in the same year due to errors (such as customer information, type of business, amount and price).

Furthermore, under the Authorization Regulation, all kinds of share transfers, acquisitions and actions of the operators which are authorized by a Concession Agreement must be communicated to the ICTA, and such share transfers, acquisitions and actions shall be made with the written approval of the ICTA if they result in a change of control component of such operators. The “control component” is defined as “the rights that allow for applying a decisive effect on an enterprise, either separately or jointly, de facto or legally”.

Our license subjects us to a number of conditions. It may be revoked in the event that we fail to meet any of these conditions.

Coverage

Our license requires that we meet coverage and technical criteria. We must attain geographical coverage of 50% of the population of Turkey (living in cities or towns of 10,000 or more inhabitants) within three years of our license’s effective date and at least 90% of the population of Turkey (living in cities or towns of 10,000 or more inhabitants) within five years of the effective date of our license. This coverage requirement excludes coverage met through national roaming and installation sharing arrangements with other GSM systems and operators. Upon the request of the ICTA, we may also be required, throughout the term of our license, to cover at most two additional areas each year. Except in the event of force majeure, we must pay a late performance penalty of 0.2% of the investment in the related coverage area per day for any delay of more than six months in fulfilling a coverage area obligation. As at the end of 2018, we have met and surpassed all coverage obligations.

 

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Service Offerings

Our license requires that we provide services that, in addition to general GSM phone services, include free emergency calls and technical assistance for customers, free call forwarding to police and other public emergency services, receiver-optional short messages, video text access, fax capability, calling and connected number identification and restrictions, call forwarding, call waiting, call hold, multi-party and three-party conference calls, billing information, and the barring of a range of outgoing and incoming calls.

Service Quality

Generally, we must meet all the technical standards of the GSM Association as determined and updated by the European Telecommunications Standards Institute and Secretariat of the GSM Association. Moreover, we must meet the standards that the ICTA imposes under “Regulation on Quality of Service in the Electronic Communications Sector”.

Tariffs

The license agreement regulates our ability to determine our tariff for GSM services. The license agreement provides that, after consultation with us and consideration of tariffs applied abroad for similar services, the ICTA sets the initial maximum tariffs in Turkish Lira and U.S. Dollars. Thereafter, our license provides that the maximum tariffs shall be adjusted at least every six months. The license agreement provides a formula for adjusting the existing maximum tariffs. For the adjustment of the maximum tariffs established in Turkish Lira, the formula is: the Turkish Consumer Price Index announced by the Ministry of Commerce minus 3% of the Turkish Consumer Price Index announced by the Ministry of Commerce. For the maximum tariffs established in U.S. Dollars, the same method is applied to the USA Consumer Price All Item Index Numbers.

Although we believe the tariff structure in our license will, in most instances, permit adjustments designed to offset devaluations of the Turkish Lira against the U.S. Dollar, any such devaluation that we are unable to offset will require us to use a larger portion of our revenue to service our non-Turkish Lira foreign currency obligations. Additionally, in the event that the ICTA were to establish maximum tariffs at levels below those that would enable us to adjust our rates to offset devaluations, this could have a material adverse effect on our business, consolidated financial condition, results of operations and/or liquidity. The maximum tariffs set by the ICTA may constitute the highest rates we may charge for the services included in these customized service packages. Generally, the maximum tariffs set by the ICTA for particular services are set higher than the standard tariffs determined by the ICTA for those services. Such caps were in force at the beginning of 2016, until a decision rendered in March 10, 2016 by the ICTA annulled the maximum tariffs set by the ICTA in 2015. On September 20, 2018, the ICTA set the maximum tariffs at 0.5670 TRY/min for voice and TRY 0.4075 for SMS with regard to Turkcell and Vodafone on the basis of the obligations in their licence agreements. Since TT Mobil does not have such an obligation in its licence, a policy decision was taken by the Ministry of Transportation and Infrastucture for TT Mobil to comply with maximum tariffs. The latest ICTA Board Decision dated September 23, 2019 sets the rates at TRY 0.6494 TRY/min for voice and TRY 0.4668 for SMS as of October 1, 2019.

With respect to our retail tariffs, following a board resolution dated March 25, 2009, the ICTA set a lower limit solely with regard to Turkcell’s on-net retail tariffs. Pursuant to a decision rendered on August 16, 2016, the ICTA removed the aforementioned on-net retail price regulation.

The ICTA has in the past intervened and may again intervene with the charging period, impacting the prices we charge for our tariffs.

Relationship with the ICTA

The license agreement creates a mechanism for an ongoing relationship between us and the ICTA. The ICTA and Turkcell coordinate their activities through a License Coordination Committee (“the Committee”), which is responsible for ensuring the proper and coordinated operation of the GSM network, assisting in the resolution of disputes under the license agreement and facilitating the exchange of information between the parties.

License Suspension and Termination

The ICTA may suspend our operations for a limited or an unlimited period if necessary for the purpose of public security or national defense, including war and general mobilization. During suspension, the ICTA may operate our business, but we are entitled to any revenues collected during such suspension, and our license term will be extended by the period of any suspension.

 

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Our license may be terminated under our license agreement upon a bankruptcy ruling that is not reversed or dismissed within 90 days, upon our failure to perform our obligations under the license agreement if such failure is not remedied within 90 days, if we operate outside the allocated frequency ranges and fail to terminate such operations within 90 days or if we fail to pay our treasury fee.

In the event of termination, we must deliver the entire GSM system to the ICTA.

If our license is terminated for our failure to perform our obligations under our license, the performance guarantee given by us in an amount equal to 1% of the license fee may be called. The license agreement makes no provision for the payment of consideration to us for delivery of the system on such termination.

In the event of a termination of our license, our right to use allocated frequencies and to operate the GSM system ceases. Upon the expiration of the license agreement, initially scheduled to occur in 2023, without renewal, we must transfer to the ICTA, or an institution designated by the ICTA, without consideration, the network management center, the gateway exchanges, and the central subscription system, which are the central management units of the GSM network. We may apply to the ICTA between 24 and six months before the end of the 25-year license term for the renewal of the license. The ICTA may renew the license, taking into account the legislation then currently in effect.

Under our license agreement, any dispute arising from scope, implementation and termination of the agreement shall be brought before the Committee. If the dispute is not settled within 30 days before the Committee, it shall be referred to the parties. If the dispute is not resolved by the parties within 15 days, then it shall be settled by an arbitral tribunal in accordance with ICC Rules. The governing law of any arbitration is Turkish law and any such arbitration shall be conducted in English. Disputes relating to national security or public policy shall not be subject to arbitration proceedings.

Additionally, the Law No. 7061 dated November 28, 2017 has introduced the settlement mechanism set forth in a provision of the Tax Procedural Law No. 213 for the disputes in relation to the payment of the treasury share.

r. Authorization of 3G License

In 2008, the ICTA conducted a tender process to grant four separate licenses to provide IMT 2000/UMTS services and infrastructure. We were granted the A-type license, which provides the widest frequency band, at a consideration of EUR 358 million (excluding VAT). We signed the license agreement relating to 3G authorization on April 30, 2009 and then the agreement was renewed and resigned in February 2016 with small amendments which do not change the core of the service. The license agreement has a term of 20 years.

The 3G License Agreement has provisions that are generally similar to those contained in our license agreement relating to 2G. However, with respect to dispute resolution, while our 2G license provides for arbitration for the settlement of disputes, under the 3G License Agreement, disputes arising between the parties shall ultimately be settled by the Council of State of the Republic of Turkey.

With the 3G License Agreement, we are obliged to meet certain coverage obligations. We are required to cover the population within the borders of all metropolitan municipalities within three years and all cities and municipalities within six years. We are also obliged to cover every region with a population over 5,000 within eight years and population larger than 1,000 within 10 years. Following the amendment of the Law for Metropolitan Municipalities, the number of metropolitan municipalities increased and the borders of some metropolitan municipalities were extended. After this amendment, the ICTA increased our coverage obligations, defined in our concession agreement, by its decision, based on this law amendment. We filed a lawsuit for the stay of execution and the cancellation of this decision. The Council of State accepted our stay of execution request. The ICTA objected to this decision. The objection was also rejected in favor of Turkcell. The hearing was held on November 27, 2018. The Court annulled the decision of the ICTA. The ICTA appealed the decision. Turkcell replied to the appeal request in due time. The appeal process is pending.

With the 3G License Agreement, as opposed to the 2G License Agreement, the Company assumed an obligation related to its electronic communications network investments, such as the obligation to obtain at least 40% of its electronic communications investments from suppliers that have a Research and Development Center in Turkey and the obligation to obtain at least 10% of its electronic communications investments from suppliers that are small and medium sized enterprises established in Turkey.

 

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According to the Authorization Regulation, breaches by operators resulting in the termination of the GSM concession agreement for any reason shall also result in the termination of the operator’s concession agreement signed for IMT-2000/UMTS service. Also, if the GSM concession agreement is not renewed at the end of its natural expiration, the ICTA may continue to allow the utilization of the needed infrastructure by IMT-2000/UMTS services on terms and conditions to be set by the ICTA itself.

The statutes, rules and regulations applicable to our activities and our 2G and 3G licenses are generally new, subject to change, in some cases, incomplete, and have been subject to limited governmental interpretation. Precedents for and experience with business and telecommunications regulations in Turkey are generally limited. In addition, there have been several changes to the relevant legal regime in recent years. There can be no assurance that the law or legal system will not change further, or be interpreted in a manner that could materially and adversely affect our operations.

s. Authorization of 4.5G License

In the IMT- Advanced (“4.5G”) tender held on August 26, 2015 to grant spectrum usage for 800 MHz, 900 MHz, 1800 MHz, 2100 MHz (FDD,TDD) and 2600 MHz (FDD, TDD), the Company purchased a total of 172.4 MHz, the broadest 4.5G spectrum allocation of any operator in Turkey (including widest frequency bands on 1800 MHz, 2100 MHz and 2600 MHz) for EUR 1,623.5 million (excluding VAT and interest payable on the installments).

The tender gave equal opportunity to the operators in the low frequency bands utilized for coverage while enabling competition in higher frequency bands mainly used for capacity. The Company has reached a total frequency bandwidth of 234.4 MHz and our ownership in total bandwidth in the market increased to 43% (234.4 MHz / 549.2 MHz) with the new frequencies acquired. The operators will be able to utilize the new spectrum in a technology-neutral way.

The ICTA granted Turkcell’s 4.5G License on October 27, 2015. The 4.5G License is effective for 13 years until April 30, 2029. According to the License, Turkcell started to provide 4.5G services from April 1, 2016.

The 4.5G License Agreement has provisions that are generally similar to those contained in our license agreement relating to 2G and 3G. According to the IMT License Commitments Document, the Company;

(a) must achieve population coverage of 95% of the population of Turkey and coverage of 90% of the population within the borders of all cities and all city districts within eight years,

(b) must cover 99% of highways, high speed railroads and tunnels with lengths more than one kilometers within eight years, 95% of double roads within six years and 90% of conventional railroads within ten years, and

(c) is obliged to share actively with other mobile operators, any new 3G or 4.5G site which it will decide to build within settlement areas with a population of less than 10,000 and highways, dual carriageways, tunnels, high speed railroads and conventional railroads, from the effective date of the License granted to the Company.

While building its infrastructure for 4.5G networks, Turkcell is required to purchase up to 45% of its network related hardware (i.e. base stations, switches, routers and as such) and software from local suppliers, and purchase 10% of the network equipment and software from local SMEs engaged in production in Turkey. The local network related hardware purchase requirement is defined in three periods: 30% for first year, 40% for second year and 45% for the third and subsequent years. Reporting on these requirements should be made to the ICTA on a yearly basis. In case of a projection of a failure to meet the requirement for locally produced hardware and software due to the lack of sufficient local supply and other relevant conditions, the Company shall file an application to the ICTA 6 months before the due date, and request an easing or removal of the obligation. Based on the law, we have applied for the removal of the obligation for the first four periods, which are 2015-2016, 2016-2017, 2017-2018 and 2018-2019.

In addition to the above-mentioned obligations, in the context of the 4.5G license, the Company assumed the obligation to obtain at least 40% of its electronic communications investments from suppliers with a Research and Development Center in Turkey, as well as the obligation to obtain at least 10% of its electronic communications investments from small and medium sized enterprises suppliers that are established in Turkey and manufacture local products.

 

 

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Breaches regarding the abovementioned obligations and breaches resulting in the termination of the GSM and IMT-2000/UMTS concession agreements for any reason shall also result in the termination of the Operator’s 4.5G authorization. The Company may apply to the ICTA between 18 and 12 months before the natural end of authorization (April 30, 2029) for renewal. The ICTA may renew the authorization, taking into account the current legislation.

t. Licenses and Authorizations of our Subsidiaries

In addition to the foregoing, our majority owned subsidiary, Belarusian Telecom, and wholly-owned subsidiaries lifecell and Kibris Telekom hold GSM licenses in Belarus, Ukraine and the Turkish Republic of Northern Cyprus, respectively, and all of them have obtained 3G licenses. lifecell also holds 4G licence. If lifecell, Belarusian Telecom and Kibris Telekom fail to comply with the terms and conditions of their license agreements, they may incur significant penalties, which could have a material adverse effect on our strategy for international expansion and our business and results of operations. In addition, our subsidiaries Global Tower, Turkcell Superonline, Turkcell Enerji, Paycell and Financell have licenses to perform their business. Failure to comply with the terms of such licenses may lead to significant penalties and adversely affect their, as well as our, results of operations.

Ukraine License Agreement

As of December 31, 2019 lifecell owns 11 activity licenses, for GSM 900, a technology neutral license, issued for 3G, one license for international and long-distance calls and eight PSTN licenses for eight regions in Ukraine. Starting from December 25, 2019, the Telecommunications Law was changed and the licensing obligation relating to telecommunications activity was removed. Consequently, as of December 31, 2019, lifecell performs its activities without a license. As of December 31, 2019, lifecell owned 27 frequency use licenses for IMT (LTE-2600, LTE-1800), IMT-2000 (UMTS), GSM-900, GSM-1800, CDMA-800 and microwave Radiorelay and Broadband Radio Access, which are regional and national. Additionally, lifecell holds a specific number range—three NDC codes for mobile networks, twenty two permissions on a number resource for short numbers, eleven permissions on a number resource for SS-7 codes (7 regional and 4 international), one permission on a number resource for Mobile Network Code, nine permissions on a number resource for local ranges for PSTN licenses, two permissions on service codes for alternative routing selection for international and long-distance fixed telephony, and one permission on a code for global telecommunication service “800”.

According to the licenses, lifecell must adhere to state sanitary regulations to ensure that the equipment used does not injure the population by means of harmful electromagnetic emissions. Licenses require lifecell to inform authorities of the start/end of operations within four months and changes in the incorporation address within 30 days. Also, lifecell must present all the required documents for inspection by the NCCIR by their request. The NCCIR may suspend the operations of lifecell for a limited or an unlimited period if necessary due to the expiration of the licenses, upon mutual consent, or in the case of a violation of the terms regarding the use of radio frequencies. If such a violation is determined, the Ukrainian Telecommunications Authority will notify lifecell of the violations and will set a deadline for recovery. If the deadline is not met, the licenses may be terminated.

Belarus License Agreement

Belarusian Telecom owns a license for mobile services without technological limitations (technology neutral), issued on August 28, 2008, for a period of 10 years, which was valid till August 28, 2018. However, in accordance with the Edict of the President of the Republic of Belarus dated November 26, 2015, numbered 475, the license is issued without limitation of the period of validity. Starting from March 1, 2016 the license is valid from the date of the licensing authority’s decision on its issue and for an unlimited period. Under the terms of its license, Belarusian Telecom has coverage requirements for 2G and 3G networks. Belarusian Telecom had been provided with additional time by the license authority to fulfill all 2G signal coverage requirements regarding the settlements. Management of the company is in close communication with the regulatory body regarding 2G license requirements and have applied for certain license requirement adjustments. We expect that another period extension will be provided imminently to Belarusian Telecom. 3G related license requirements have been fulfilled. There is no any coverage requirement for 4G services in the license.

Based on local legislation, 4G infrastructure can be built by JLLC Belarusian Cloud Technologies (“beCloud”) only. Belarusian Telecom uses beCloud’s infrastructure to deliver LTE services for its customers.

 

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Turkcell Superonline Authorizations

Turkcell Superonline was authorized as a Fixed Telephony Service Provider as of November 19, 2004 (for 15 years), Infrastructure Provider as of March 6, 2006 (for 25 years), Internet Service Provider as of February 15, 2005 (no duration specified), Satellite Communication Service Provider as of March 24, 2009 (no duration specified), Cable Broadcast Service Provider as of November 23, 2009 (no duration specified) and Mobile Virtual Network Operator as of July 14, 2015 (for 15 years). Upon the expiry of the term of Turkcell Superonline’s Fixed Telephony Service Provider authorization on November 19, 2019, the ICTA has extended the authorization period by one year.

The Authorization By-Law for Telecommunication Services and Infrastructure published in the Official Gazette on August 26, 2004 was abrogated with the By-Law on Authorization for Electronic Communications Sector dated May 28, 2009. According to this abrogation, Turkcell Superonline’s “Authorization” on Infrastructure Operating Service, Internet Service Provision and Satellite Communication Service have been changed to “Authority” on Infrastructure Operating Service, Internet Service Provision, Satellite Communication Service and Cable Broadcast Service. Turkcell Superonline’s “License” on Long Distance Telephony Services License has been changed to “Authorizations” relevant to the Fixed Telephony Services. Aforementioned Public Access Mobile Radio Service Provider Authorization of Turkcell Superonline was annulled as of December 31, 2015.

In accordance with the legislation issued by the ICTA in 2011, the term of the infrastructure operator authorization of Turkcell Superonline has become indefinite.

Turkcell Superonline was authorized as a Platform Operator and Infrastructure Operator, according to the Radio and Television Supreme Council’s decision numbered 24, dated March 26, 2014. Such authorizations have been provided by the Radio and Television Supreme Council, according to the rules of the Media Law and also the Radio and Television Supreme Council By-Law on Broadcasting via Cable Networks. In accordance with the Media Law and its regulations, the Platform Operator Authorization and Infrastructure Operator Authorization are provided annually. Within the scope of the Platform Operator Authorization and Infrastructure Operator Authorization, Turkcell Superonline has the right to operate the platform and infrastructure of TV services.

In 2019, the ICTA finalized “The Wholesale Central and Local Market Analysis”. By its Board decision dated December 31, 2019, the ICTA decided to designate Turk Telekom alone as the SMP for both markets. Access to fiber products, VULA (Virtual Unbundling of Local Access) access, margin squeeze obligations are also imposed on Turk Telekom in addition to its current obligations.

u. Access and Interconnection Regulation

The Access and Interconnection Regulation became effective upon issue by the ICTA on September 8, 2009, and abolished the Access and Interconnection Regulation which was published on May 23, 2003. The Regulation sets forth the rights and obligations of the operators relating to access and interconnection, and establishes rules and procedures pertaining to their performance of such obligations. The Regulation primarily sets forth applicable principles, details of access and interconnection obligations, financial provisions, and policies and procedures regarding negotiations and contracts for access and interconnection.

The Regulation is driven largely by the goal of improving the competitive environment and ensuring that users benefit from electronic communications services and infrastructure at a reasonable cost. Under the Electronic Communications Law, the ICTA may compel a telecommunications operator to accept another operator’s request for access to and use of its network. All telecommunications operators in Turkey may be required to provide access to other operators. The operators who are compelled to provide access to other operators may be obliged to provide service and information on the same terms and qualifications provided to their shareholders, subsidiaries, and affiliates by the ICTA.

In accordance with Article 7 of the aforementioned Electronic Communications Law, the ICTA may determine those operators that have significant market power in the relevant market as a result of market analysis. After determination of the operators of SMP, the ICTA may impose additional liabilities for such operators in order to protect the competitive environment. On December 15, 2005, the ICTA designated Turkcell, Vodafone, and TT Mobil as “operators holding significant market power” in the “GSM Mobile Call Termination Services Market” and designated Turkcell individually as an “operator holding significant market power” in the “Access to GSM Mobile Networks and Call Originating Markets”. According to the new Regulation published in

 

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the Official Gazette dated September 1, 2009, unless otherwise agreed, any decisions taken by the ICTA in the years 2005 and 2006 relating to market analysis were valid and effective until the end of calendar year 2009. Pursuant to its decision dated December 8, 2009, the ICTA designated Turkcell individually as an operator holding significant market power in the “Access to Mobile Networks and Call Originating Markets” and designated Turkcell, Vodafone and TT Mobil as operators holding significant market power in the “Mobile Call Termination Market”. Based on the market analysis of the ICTA for the 2012-2015 term, all three operators were declared as operators holding significant market power in the “Mobile Call Termination Market” and Turkcell is once again recognized as the only operator holding significant power in “Access to GSM Mobile Networks and Call Originating Markets”. The Mobile Access and Call Origination Market has been deregulated and Turkcell’s SMP designation was removed as of January 1, 2020.

As a result of the significant market power designation in the “GSM Mobile Call Termination Services Market”, our Company, as well as TT Mobil and Vodafone, is required to provide interconnection services on a cost basis. Consequently, according to the Electronic Telecommunications Law, the ICTA may oblige such operators to provide access and to submit their reference offers for access and interconnection to the ICTA for review, and may require amendments to the offers. Operators are obliged to make the amendments requested by the ICTA in a prescribed manner and within a prescribed period. In addition, the operators are obliged to publish their reference offers for access and interconnection, which have been approved by the ICTA, and to provide access under the conditions specified in their reference offers and interconnection, which have been approved by the ICTA. Please refer to the Interconnection table under the caption “(ii) Interconnection Rates—Turkcell, Vodafone, TT Mobil and Turk Telekom” for the approved interconnection rates as at March 20, 2020.

v. Regulation on Co-Location and Facility Sharing

The ICTA has required operators to share certain facilities with other operators under certain conditions specified in the Electronic Communications Law and to provide co-location on their premises for the equipment of other operators at a reasonable price.

Under the Regulation, operators holding significant market power are required to provide access and services to all operators on equal terms. Operators with significant market power are also required to perform unbundling of their services, which means that they have to provide separate service of, and access to, transmission, switching, and operation interfaces. Furthermore, the ICTA may establish rules applicable to the division of the costs of facilities among parties.

The ICTA published a Communique concerning “Co-Location and Facility Sharing” on December 2, 2010 (which abolished the Regulation published on December 31, 2003). According to the Communique, the ICTA should determine operators to be co-location incumbent if operators do not enable co-location, or where is a dispute against competition, or end-users. Similarly, the ICTA could set tariffs if the tariffs for co-layout are not determined on a cost basis.

The Communique defines the criteria for operators who are incumbents for facility sharing, and also states the items which must be considered for determining the Facility Sharing prices.

Subsequently, the provisions that regulate the ICTA approval of the examination fee determined by the Co-Location and Facility Sharing incumbent have been removed, opening up the Co-Location and Facility Sharing process to negotiation. In addition, the Facility Sharing incumbent’s right to allocate a facility for its own network and investment plans has been reduced to 25% of the facility.

The ICTA published a regulation concerning “Cellular System Antenna Facility Design, Set Up and Sharing” on March 18, 2011 (which abolished the Regulation published on April 16, 2008). The regulation frames antenna facilities design, set up and sharing to enable base station facility usage by multiple operators. The emission points will not be determined by operators, therefore operators will have to work cellular planning together. Operators must share every base station facility regardless of tower or building-top distinction. Antenna facilities must be set up in certain capacity that at least one more operator can benefit. Some incentives, such as exemptions on certain certification fees, will be given if sharing occurs on existing or new sites. Finally, when antenna facility set up and sharing requests are evaluated, if the owner of the facility refuses the request, the requesting operator will be informed of the reason for the refusal. This way, negotiation between parties is supported and ICTA involvement is kept at a minimum level. On December 6, 2016, the ICTA repealed the above regulation and replaced it with “The Regulation on the Procedures and Principles of Sharing of Cellular System Antenna Installations and Radio Access Networks”. According to this Regulation:

 

 

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The number of sharing types has increased. The terms and conditions of sharing on highways, railways and within tunnels is now a separate section.

 

   

In regions where the population is lower than 10,000, if an operator is unable to use the antenna installations built by another operator before the IMT licensing, the operator must notify the ICTA about the situation and the ICTA may let the operator build a new antenna installation. This operator is obliged to make an installation facilitating the sharing by all types with at least two other operators. The operator cannot turn down any sharing requests involving installations set up after IMT licensing in motorways, high speed and very high speed railways, dual carriage highways, tunnels and conventional railways, except for indoor installations.

 

   

In regions where the population is higher than 10,000 at the time of application to the Authority to build a new installation, provided that operator(s) are present and offer the new comer at least three of the possible share types, no wireless usage fee will be charged for the following year. If the antenna installation concerns towers exclusively, type 2 sharings (e.g. tower and direct sharings) will suffice. This rule will apply until December 31, 2023.

 

   

In regions where the population is lower than 10,000, except indoor installations, new antenna installations which were established between the date of the IMT authorization and the issue date of this Regulation, all settlements and motorways, high speed and very high speed railways, dual carriage highways, tunnels and conventional railways must be brought in line with the conditions set by this Regulation.

In the 4.5G Authorization Document, in provinces with a population of less than ten thousand and at sites to cover highways, dual carriageways and railroads, any new 3G or 4.5G site to be built must be shared actively by all operators within this region. In the 4.5G Authorization Document, usage of locally-produced equipment in network was obliged, with rates up to 45%. Yet if the lack of such equipment or absence in the demand for the production of such equipment is proved by mobile operators, and appealed before the end of reporting period, the ICTA may ease the conditions of the obligation or completely remove the obligation specifically for the related period. We informed the ICTA that we support any local R&D and P&D, as long as it complies with international technical and financial standards and can be sustainable. However, the 4.5G Authorization Document does not provide details on compliance with international standards. The ICTA may oblige operators to buy and use locally produced products, independent of quality standards, if a local vendor produces sufficient equipment to support the mobile operators’ demands. This may cause technical problems in our network. Should such technical problems occur, it could negatively affect our quality of service, leading to increased costs for the 4.5G infrastructure roll-out and could negatively affect our customer experience.

w. Regulation on Consumer Rights in the Electronic Communications Sector

The ICTA published a “Regulation on Consumer Rights in the Electronic Communications Sector” on July 28, 2010 (which abolished the Regulation published on December 22, 2004) and made some changes to such regulation on June 20, 2013. This regulation introduced some radical changes to the electronic communications sector. With this regulation, the ICTA determined new procedures/changes regarding: the process and timing of churn steps, the obligation of operators to keep subscribers informed of services, including, but not limited to, informing customers about amendments of the campaigns and tariffs, the consumer complaints solution mechanism, billing processes and safe internet. The Regulation on Consumer Rights in the Electronic Communications Sector, which came into force in April 2018, repealed and replaced the previous regulation. Although the new version mainly preserves the provisions of the former regulation, one of the main differences is that the first service on/off operation in a calendar year may no longer be charged in case the services were suspended/disconnected due to non-payment within due date. Moreover, the Regulation on Consumer Rights in the Electronic Communications Sector has been amended to allow subscription contracts to be made electronically as of October 28, 2017. Procedures and principles regarding the use of digital signatures are to be determined separately by the ICTA.

In addition, the ICTA may restrict the conditions under which certain mobile internet and services are provided by third parties. Moreover, the ICTA published a board decision regarding Safe Internet on August 22, 2011, and the service is now offered to subscribers free of charge. Operators must provide Safe Internet Service to subscribers, who request this service, as two separate profiles, the child profile and the family profile, each of which can restrict subscribers from accessing certain internet addresses and content. Subscribers can easily change their profiles or opt-out from the Safe Internet Service.

 

 

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The ICTA set forth the reimbursement process arising from its decisions by publishing the procedures and principles to be applied to the reimbursement of subscribers which came into force in 2018. In addition, “the Procedures and Principles Regarding the Services with Limited Amount of Use and the Applications of Upper Limits of Receipts” published on August 19, 2016 has been in force since December 1, 2017. Notifications regarding those services with limited amount of use and the applications of upper limits of receipts used to be regulated by separate documents. But with the aforementioned Procedures and Principals, the means, timing and content of the notifications regarding the services with limited amount of use and the upper limits of receipts has been consolidated under a regulation. The ICTA’s regulation of these activities could have an adverse effect on our mobile telecommunications business and we may be fined if we do not comply. Furthermore, our compliance with the ICTA’s regulations may increase the costs of doing business and could negatively impact our financial results.

An ICTA decision dated June 21, 2018 favoring subscribers with special needs, veterans, and widows/ widowers and orphans of martyrs was published and came to effect on January 1, 2019. The decision requires operators that have more than 200 thousand subscribers to offer their services to these groups that are “in need of social support” at a 25% discount. The discount is to be offered upon proof of identity and the subscriber’s special need.

x. Regulation on Data Privacy in the Electronic Communications Sector

Under Article 51 of the Electronic Communications Law, the ICTA is authorized to determine the principles and procedures related to the processing of personal data and protection of privacy. In this manner, the ICTA had published “Regulation Concerning the Processing of Personal Data and the Protection of Privacy in the Electronic Communications Sector”. With its decision rendered on April 9, 2014 and published in the Official Gazette on July 26, 2014, the Turkish Constitutional Court decided that Article 51 of the Electronic Communications Law was a violation of Article 20(3) of the Constitution, which stipulates data protection as a constitutional measure and that the measures should be regulated by laws, and therefore annulled the aforementioned provision (Article 51). Article 51 of the Electronic Communications Law, which was repealed by the Turkish Constitutional Court, was amended and came into force on April 15, 2015. In the amended Article 51, the main principles of recording and sharing subscribers’ personal data are defined in general regarding the electronic communications sector. In addition to that, the ICTA is also authorized again to determine the procedures and principles related to the processing of personal data and protection of privacy. A public consultation regarding the draft regulation has been held by the ICTA, although the new regulation has yet to be adopted.

Compliance with this regulation involves operational expenses and may require further due diligence to process personal data and provide segmented offers to our customers. Furthermore, non-compliance with this Regulation may result in the imposition of monetary fines by ICTA, which could have a negative impact on our financial condition and reputation.

y. Law on the Protection of Personal Data

Turkey, as a part of its legislative reforms to align with the EU legislations, has adopted an extensive data protection regime. The Law on the Protection of Personal Data (the “Law”), which came into force on April 7, 2016, regulates the personal data of real persons and its protection, processing and transfers.

The Law introduced several obligations for processing and transferring the personal data including but not limited to fair and lawful processing, protection of personal data, consent requirement, providing notice of processing, registration with the Registry of Data Controllers and notification to the Data Protection Authority (“DPA”) in case of a data breach. According to the Law, the DPA is authorized to impose sanctions and precautions as well as administrative fines which are determined in the Law.

The Law also determines the rights of the person whose data is processed, such as the right to apply to the data controller to learn whether the personal data has been processed, to learn if it is being used properly according to the purpose of the processing, to know the third parties to which the personal data is transferred in Turkey or abroad, to request the personal data to be erased or destroyed and the receiving third parties to be notified of that erasure or destruction.

As per Article 16 of the Law, the Regulation on the Registry of Data Controllers specifying procedures and principles regarding the Registry of Data Controllers was published on December 30, 2017 and came into force on January 1, 2018. Pursuant to this regulation, data controllers are obliged to register with the registry prior to

 

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processing personal data and the exemptions from the registration requirement is to be determined by the Data Protection Board. The Company is subject to the obligation of registration until June 30, 2020, the initial date was September 30, 2019 but due to public request, it was postponed twice by the DPA. The data controllers that are not established in Turkey also have the responsibility to register with the Registry via their representative that they will assign and data controllers are obliged to prepare a personal data processing inventory that includes the purposes for processing of personal data, data categories, data subjects, the maximum retention period of the data and measures taken regarding data security.

In addition to the aforementioned regulation, on October 28, 2017 the Regulation Regarding the Deletion, Destruction and the Anonymization of Personal Data was published and came into force on January 1, 2018. The objective of the Regulation is to set forth procedures and principles regarding the deletion, destruction or anonymization of personal data processed wholly or partly by automatic means and otherwise by automatic means which form part of a data recording system. Furthermore, the Communique on the Obligation to Provide Information and the Communique on Principles and Procedures for Application to Data Controller was published and came into force on March 10, 2018 regulating principles and procedures in relation to the obligation to inform data subjects and rules and processes for data subjects to exercise their rights regarding personal data. With respect to international data transfers, the DPA has not yet published the list of countries, which have an adequate level of protection as of the date hereof.

Failure to comply with the Law on the Protection of Personal Data may result in the imposition of certain civil, criminal and administrative sanctions. As of the date of this annual report, the Company is carrying out a compliance program with regard to compliance matters arising from the Law on the Protection of Personal Data and its secondary legislation, as well as the General Data Protection Regulation which applies to several products and services of our Company provided to data subjects who are in the European Union.

Under the General Data Protection Regulation (GDPR), Data Protection Officer (DPO) needs to be determined to represent obligated data controllers. In November 2019, Turkcell appointed its DPO based on her expert knowledge of data protection law and practices. By appointing the DPO, Turkcell aims to implement effective and focused management in the field of data protection. Such steps shows the commitment of Turkcell to adopt extensive compliance practices and best practices around the world.

z. Regulation on Electronic Commerce

Law No. 6563 on the Regulation of Electronic Commerce published in the Official Gazette on November 5, 2014, amended Article 50 of the Electronic Communications Law, providing that without the prior consent of the subscribers, unsolicited electronic communications for the purposes of direct marketing or messages with adult content is prohibited. An “opt-in” mechanism has been adopted for electronic messages; however, this provision does not apply retroactively to the databases which were established by obtaining the data subjects’ consent before the Law No. 6563 on Regulation of Electronic Commerce entered into force on May 1, 2015.

The Electronic Commerce Law and “Commercial Communications and Commercial Electronic Messages Regulation” published in accordance with this law excludes messages that are sent to the subscribers and users of the operators about their own products and services, and these messages are regulated in “The Principles and The Procedures Regarding The Communication With The Purposes Of Advertising And Marketing” published by the ICTA on July 9, 2015. According to electronic commerce legislation, sending commercial electronic messages is also subject to the prior consent of recipients. Violation of this legislation may result in an administrative fine.

aa. Registered Email Service Regulation

Registered Electronic Mail Service was started in July 2012. Mobile operators cannot provide registered electronic mail service; however, the service may create a new mobile business area with new bundled mobile products, which are able to service our subscribers.

bb. Broadcast License and Broadcast Transmission Authorization for Broadcasting and Transmission of Radio, Television or On-demand Broadcast Services on the Internet

The Regulation on the Presentation of Radio, Television and On-demand Broadcasting Services on the Internet has came into force on September 1, 2019. As per this regulation, media service providers and platform operators broadcasting services on the internet must obtain a broadcasting license and broadcasting transmission authorization respectively from the Radio and Television Supreme Council (“RTUK”). In this respect, a broadcast license for fizy and a broadcasting transmission authorization for the OTT operations of TV+ must be

 

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obtained from RTUK, if no further amendments are enacted. According to the RTUK notification, dated December 26, 2019, the relevant applications (broadcast license for fizy and broadcasting transmission authorization for the OTT operations of TV+) should be made prior to June 19, 2020. We have requested an extension until December 31, 2020.

cc. Turk Telekom, Vodafone and TT Mobil Interconnection Agreements

(i) General

We have interconnection agreements with Turk Telekom, Vodafone, TT Mobil and Fixed Telephony Service Operators whereby they allow us to connect our networks with theirs to enable the transmission of calls to and from our mobile communications system.

The interconnection agreements establish understandings between the parties relating to various key operational areas, including call traffic management, and the agreements entail that we and the other parties will agree on the contents of various manuals setting forth additional specifications concerning matters that are not specifically covered in the interconnection agreement, such as quality and performance standards and other technical, operational and procedural aspects of interconnection.

The interconnection agreements specify that the parties shall comply with relevant international standards, including standards adopted by the GSM Memorandum of Understanding, the Telecommunications Standards Bureau of the International Telecommunications Union, and the European Telecommunications Standards Institute. In the absence of applicable international standards, the interconnection agreements provide that the parties will establish written standards to govern their relationship.

The interconnection agreements outline the applicable interconnection principles and provide the technical basis and rationale for technical specifications and manuals to be agreed to by the parties.

In addition, the parties agree to provide the other party with information that is necessary to enable the performance of their interconnection obligations, the provision of services, or the utilization of equipment and/or buildings as contemplated in the interconnection agreement.

(ii) Interconnection Rates—Turkcell, Vodafone, TT Mobil and Turk Telekom

In accordance with the relevant articles of the Electronic Communications Law and subsequent Access and Interconnection Ordinance, the ICTA regulates both fixed and mobile interconnection rates. In previous years, the interconnection rates have substantially decreased with the interventions of the ICTA.

Mobile interconnection rates are based on the ICTA’s decision on the Interconnection Tariffs issued in June 2013. The latest decision concerning interconnection rates was published in October 2014 and remains in force with no change in the existing rates. The MMS interconnection rates were also introduced in 2014. The evolution of interconnection rates for voice calls between Turkcell, Vodafone, TT Mobil, Turk Telekom and Alternative Fixed Line Operators is summarized in the table below.

 

     VOICE (TRY Kurus)  
                          TURK TELEKOM      Alternative
Fixed Line
Operators
 
     TURKCELL      VODAFONE      TT
Mobil
     Local      Single      Double  

01/10/2004

     15.60        15.60        15.60           4.10        5.90     

01/01/2005

     14.80        14.80        14.80           3.40        5.10     

01/10/2005

     14.00        14.00        14.00           2.00        3.70     

01/01/2007

     14.00        15.20        17.50           2.00        3.70     

01/03/2007

     13.60        14.50        16.70           1.89        3.00     

01/04/2008

     9.10        9.50        11.20           1.71        2.70     

01/05/2009

     6.55        6.75        7.75        1.39        1.71        2.70     

01/04/2010

     3.13        3.23        3.70        1.39        1.71        2.24        3.2  

01/07/2013

     2.50        2.58        2.96        1.39        1.71        2.24        3.2  

31/10/2014

     2.50        2.58        2.96        1.39        1.71        2.24        3.2  

 

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Effective from July 2013, Turkcell is paid TRY 0.0043 per SMS for SMS termination on its network. Respective rates for Vodafone are TRY 0.0043 per SMS and for TT Mobil TRY 0.0047.

 

     SMS (TRY Kurus)  
     TURKCELL      VODAFONE      TT
MOBIL
     TURK
TELEKOM
 

01/04/2010

     1.70        1.73        1.87        1.70  

01/07/2013

     0.43        0.43        0.47        1.70  

31/10/2014

     0.43        0.43        0.47        1.70  

Effective from October 2014, Turkcell is paid TRY 0.0086 per MMS for MMS termination on its network. Respective rates for Vodafone are TRY 0.0086 per SMS and for TT Mobil TRY 0.0094.

 

     MMS (TRY Kurus)  
     TURKCELL        VODAFONE        TT MOBIL  

31/10/2014

     0.86        0.86        0.94  

dd. Agreements Concluded with the Fixed Telecommunication Services Operators

(i) Interconnection/Call Termination Agreements

Turkcell, as an “operator holding significant market power”, entered into interconnection/call termination agreements with fixed telecommunication service operators that applied to Turkcell for an agreement. Interconnection rates are regulated by the ICTA. Turkcell pays fixed-line operators TRY 0.0320 per minute and fixed-line operators pay Turkcell TRY 0.0250 per minute for national voice call traffic.

(ii) International Transit Traffic Services Agreements

Turkcell entered into International Traffic Carrying Services Agreements with operators who applied to Turkcell for an agreement. Under these Agreements, we may carry calls to these operators’ switches for onward transmission to their destinations and these operators should provide the termination of these calls on the relevant network. These operators charge us at various prices identified within the scope of the agreement for calls directed to numerous networks around the globe.

(iii) SMS Termination Agreements

During 2011, Turkcell entered into SMS Termination Agreements with alternative operators who applied to Turkcell for an agreement. In accordance with the ICTA regulations on SMS Termination Rates on Turkcell’s network, Fixed Telephony Service Operators pay Turkcell TRY 0.0043 per SMS.

ee. MVNO Services

The ICTA designated Turkcell as the operator having significant market power in the mobile access and call origination markets, which had implications such as mandatory MVNO access and cost-oriented call origination and termination rates.

The ICTA decision dated April 12, 2017, stating that an ex-ante regulation was no longer needed for Mobile Access Call Origination Market, and that Turkcell’s SMP designation was to be lifted after a period of one year, has been cancelled following the ICTA’s new decision dated April 4, 2018 stating that the transition period had been extended for an additional year until April 12, 2019. A new ICTA decision taken on April 3, 2019 has for the last time extended the transition period until December 31, 2019. Accordingly, Mobile Access and Call Origination Market will be deregulated and Turkcell’s SMP designation is lifted as of January 1, 2020.

ff. Agreements Concluded with Directory Service Providers

Turkcell entered into agreements relating to the provision of directory services with 11 Directory Service Providers, which are licensed by the ICTA to provide directory services. These agreements determine the principles and procedures related to the access of companies to the Turkcell database, the provision of directory services to subscribers and the clearing procedure of the parties. Such agreements are valid and binding for a term of one year. However, if neither party notifies the other party one month before the expiration of the agreement of its request to terminate, the agreement will automatically be renewed for another one-year term.

 

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gg. Agreements Concluded with Operators Licensed to Provide Satellite Services

We have an agreement with Teknomobil Uydu Haberlesme A.S., an operator licensed to provide satellite services. The scope of this agreement is the interconnection between the networks of the parties and the determination of the principles and procedures of the methods of network operation and clearance.

hh. Other regulations affecting our Company

(i) Recent Amendments to the Turkish Insolvency and Restructuring Regime

The Enforcement and Bankruptcy Law No. 2004 prevents a contractual arrangement by which a contractual event of default clause is stipulated to be triggered in case of any application is made by a Turkish company for debt restructuring upon settlement within the scope of Turkish Enforcement and Bankruptcy Law No. 2004. In addition to this, on March 15, 2018, changes were introduced to the Turkish Enforcement and Bankruptcy Law No. 2004. Among other changes, one of them states that the contractual termination, default and acceleration clauses of an agreement cannot be triggered in case the debtor makes a concordat application and such application does not constitute a breach of such agreement.

(ii) Communiqués on Management and Audit of Information Systems

The Capital Markets Board’s Communiqué on Information Systems Management numbered VII-128.9 and Communiqué on Independent Audit of Information Systems numbered III-62.2, which entered into force on 5 January 2018, introduced new obligations with regards to information systems for certain legal persons, including our Company.

The Communiqué on Information Systems Management defines the technical procedures for sustainability and secure operation of information systems in a very detailed way. Notably, with regards to data protection; specific measures are to be taken as precautions to protect the secrecy of the data received, processed and stored with regard to information system operations. This Communiqué sets out various methods to be used for physical and environmental safety, network security, identity verification, limited access through authorized persons, data integrity, preserving the confidentiality of the data stored in information systems.

The Communiqué on Independent Audit of Information Systems provides the rules, policies and principles on the independent audit of the information systems. The Communiqué provides that CMB certified independent auditor companies shall audit and report to the entities whether the audited entity is in line with the information system management principles in terms of its operations, equipment and software pursuant to the Communiqué. Frequency of the audits to be conducted by CMB certified independent auditors varies for each entity subject to CMB regulations. The Communiqué on Independent Audit of Information Systems is expected to be applicable to publicly listed companies, such as Turkcell, in 2021.

Although the Communiqués do not include specific penalties in the event of non-compliance, Article 103 (General Principles) of the Capital Markets Law will apply.

ii. Major regulations affecting our Subsidiaries

Financell

Financell is a finance company and is thereby subject to the the Financial Leasing, Factoring, and Financial Institutions Law No. 6361. The objective of this law is to regulate the establishment and operating principles of financial leasing, factoring and financing companies operating as financial institutions as well as the principles and procedures relating to financial leasing, factoring and financing contracts.

The Regulation on the Financial Leasing, Factoring, and Financing Companies Establishment and Operation Principle also regulates the duration of the loan and other financing principles. Although Financell has to abide by the Banking Regulatory and Supervisory Agency’s regulations due to its financing operations, it also has to abide by the Ministry of Trade’s regulations on the Consumer Credit Contract with its contents and essentials for its contracts with consumers.

Turkcell Sigorta Aracılık Hizmetleri A.S.

Turkcell Sigorta is regulated by many regulations pertaining to the insurance sector including the Insurance Law. However, since Turkcell Sigorta A.S. is an insurance agent, it is mainly regulated by the Regulations on Insurance Agents consisting of the specifications of the operations, establishment, structure, authorizations, and responsibilities of the individuals and the corporate entities which are willing to be insurance agents.

 

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Turkcell Energy

The operations of Turkcell Energy are concentrated in the electricity market, which is heavily regulated in Turkey. The governing law is the Electricity Market Law, and the Energy Market Regulatory Authority (“EMRA”) is the central regulatory body issuing licenses, setting tariffs and quality standards. Electricity market activities in Turkey subject to the EMRA licensing regime include power generation, power supply, system operation (at both transmission and distribution level) and market operations for which each activity requires the issuance of a separate license.

Turkcell Energy holds a power supply license issued by EMRA on May 11, 2017 that is valid for 20 years. Its license allows Turkcell Energy to buy and sell electricity capacity and energy in both wholesale and retail markets at unregulated prices.

Paycell

With the enactment of Payment Systems Law No. 6493 in August 2016, Paycell has acquired a Payment Service Provider License from the Banking Regulatory Authority (BRSA). After Paycell was awarded an electronic money payment license in July 2017, it launched prepaid card and utility bill payments through its application and at Turkcell shops. On November 12, 2019, the BRSA’s regulatory powers in this regard were transferred to the Turkish Central Bank and new licenses enabling “open banking” have been introduced. Open banking regulations will enable Paycell to access customer information of banks with direct integration. Thus, Paycell will be able to execute payment transactions and act as a single interface to monitor all banking accounts of customers.

4.C Organizational Structure

The following chart lists each of our key subsidiaries and our proportionate direct and indirect ownership interest as of March 20, 2020.

LOGO

 

(1)

On January 9, 2019, the legal title of the company Turkcell Satis ve Dagitim Hizmetleri A.S. was changed to Turkcell Satis ve Dijital Is Servisleri A.S.

(2)

On January 11, 2019, the sale of Azerinteltek QSC shares was completed.

(3)

On April 2, 2019, the transfer of our shares in Fintur Holdings B.V., in which Turkcell held 41.45% stake, to Sonera Holding, the other shareholder of Fintur, was completed.

(4)

On May 14, 2019, the acquisition of NTENT Netherlands B.V. was completed and the legal title of the company was changed to Yaani Digital B.V.

(5)

On February 28, 2020, Lifecell Dijital Servisler ve Cozumler A.S. was incorporated.

For information on the country of incorporation of our key subsidiaries, see “Item 4.B. Business Overview”.

 

 

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4.D Property, Plant and Equipment

As of December 31, 2019, we operated 78 facilities including network data centers, of which 56 were located in Turkey, the rest in the Turkish Republic of Northern Cyprus, Belarus and Ukraine.

We have our own and leased buildings in Istanbul, including our headquarters, mobile switching centers, network data centers, customer service offices and warehouses. Our buildings in Turkey and outside of Turkey are used for the purposes of administration, sales and other service centers, as well as marketing and operation of mobile switching centers and network data centers.

As of December 31, 2019 we also had 152 owned and 1,200 leased vehicles, used for operational purposes and provided as benefits to a number of our employees in Turkey.

a. Core Network Infrastructure

Our core network consists of three site Geographically Redundant Next Generation Home Location Register Home Subscriber Server (“NG HLR”/“HSS”), a combined Number Portability Switch Relay Function (“SRF”) and Number Portability Database and Signal Transfer Point (“STP”), Diameter Routing Agent (DRA). The Core Network is common for 2G, 3G, 4.5G radio networks and carries voice over IP, with combined Mobile Switch Centers/Visitor Location Registers (“MSC/VLR”), Media Gateways (“MGW”), Charging Control Node (“CCN”) and Virtual Private Network (“VPN”).

We have an IMS based VOLTE (Voice over LTE) network. We are planning to converge Core Voice and IMS Networks. With convergence of the networks, the telco based fixed and mobile services and (OTT based) application services will be delivered easier and faster.

Our core packet switching network combined of SGSNS/MME’S (Serving GPRS Support Node, Mobility Management Entity) and GGSNs/SGW/PGWs (Gateway GPRS Support Node, Serving and PDN Gateway) providing GPRS/EDGE, and HSPA/HSPA+ (High Speed Packet Access) capability for mobile packet traffic and also Policy and Charging Rules Function (“PCRF”) for subscriber policies. In addition, we have already deployed Data Optimization equipment for enhanced customer experience.

We have switches in Istanbul, Ankara, Izmir, Adana, Bursa, Diyarbakir, Erzurum, Gaziantep, Hatay, Kayseri, Kocaeli, Malatya, Mersin, Mugla, Samsun, Trabzon, and Van.

In addition, we own switch buildings in different cities in Turkey, such as Istanbul (Mahmutbey, Kartal, Maltepe), Mugla, Izmit, Diyarbakir, and Erzurum. Switch buildings are where the network switching equipment, such as MSC, MGW, BSC and RNC, is located.

b. Access Network Infrastructure

Access Network infrastructure includes (but not limited to) 2G BTSs, 3G NodeBs and 4.5G e-NodeBs which are located on rooftops and towers, Base Station Controllers (“BSC”) and Radio Network Controllers (“RNC”) at Network Data Centers (“NDC”). Since 2014, we refer to our OMCs (Operation Maintenance Centers) as NDCs (Network Data Centers). BTSs, NodeBs and e-NodeBs consist of fixed transmitter/receiver equipment and the antennas to actualize the coverage area for voice and data connections. 2G BTSs and 3G NodeBs are connected to and controlled by BSC or RNC, respectively. 4.5G e-NodeBs have an important difference in that they are directly connected to the 4.5G Core Network. In addition to macro sites that serve large areas, there are sites using small base stations called small cells, which serve certain specific and limited areas. We have been adding small cells to densify our network and meet certain performance objectives (enhanced user experience, higher speeds, higher capacity, improved coverage, etc.). Depending on the suitability and cost-effectiveness of the candidate solution, we are using small cell systems, repeaters or relay systems to augment our service quality.

In 2009, the ICTA resolved that operators may transfer the right of use of their towers to third parties. In accordance with this resolution, we transferred the rights of certain towers to Global Tower.

c. Transmission Network Infrastructure

Turkcell’s mobile backhaul utilizes various transport technologies to provide for an efficient, resilient and cost effective transmission network. Connectivity between sites is provided using Microwave Radio Links and Ethernet over DWDM where appropriate. In cell sites, site connectivity is mostly served by point-to-point

 

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microwave radio links owned and managed by Turkcell, make up 76% of our network. Also 93% of our fiber connectivity to our cell sites is currently provided by our subsidiary, Turkcell Superonline.

The rest of the leased lines are provided by Turk Telekom and Vodafone. As a result the overall infrastructure capacity usage is fully optimized and a high grade of availability is achieved through topology resiliency and packet base IP mobile backhaul network infrastructure.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis of our management with regard to our financial condition and the results of our operations should be read together with the Consolidated Financial Statements included in this annual report. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Item 3.D. Risk Factors” and elsewhere in this annual report.

I. Overview of the Turkish and International Economy

In 2019, global growth decelerated substantially in the weakened trade and investment environment due to the import tariff dispute between the U.S. and China, Brexit related political uncertainty in Europe and geopolitical tension in the Middle East. For a significant part of 2019, global manufacturing activity slowed markedly and global trade in goods contracted, while business and investor sentiment deteriorated notably. Further, as a result of weak demand, commodity prices decreased. In the second half of the year, global recession worries triggered monetary policy easing by major central banks, and in the subdued inflation environment, emerging countries cut policy rates to support waned growth. At the end of 2019, along with the alleviation of Brexit uncertainty and diminished trade tension, financial market sentiment improved notably and global financing conditions eased significantly. Despite weak global investor sentiment, emerging markets’ borrowing costs decreased and debt issues rose.

In the US, due to global recession worries, low levels of inflation and a diminishing contribution of tax cuts and public spending, the Fed cut its policy rate by 75 bps in 2019. In Europe, economic activity decreased significantly as a result of diminished global demand, hampered auto sector production, resulting from new emission standards, as well as Brexit uncertainty. The ECB decreased its policy rate to negative levels and restarted quantitative easing. In China, economic growth slowed due to the trade dispute with the U.S., country specific economic transformation and weak domestic demand, resulting in monetary and fiscal policies becoming more accommodative.

In Turkey, following a strong rebalancing period with 2.3% and 1.6% year-on-year contractions in the first two quarters of 2019, the Turkish economy grew 0.9% year-on-year in 2019, particularly with the help of household and government spending and inventory contribution. The business confidence index, capacity utilization rate, consumer loan growth, manufacturing PMI and retail sales growth have returned to pre-crisis levels. In addition, the pick-up in commercial loan growth is indicating a slow recovery in investment activity following the acceleration in consumption.

Inflation followed a downward trend throughout 2019, slowing from nearly 20.35% year-on-year in January to 11.8% in December. The improvement was driven by a more stable currency, strong base effect, favorable food prices and muted inflation expectations. The fiscal outlook deteriorated in 2019 due to higher expenditures to support the slowing economy and lower tax revenues. However, this was balanced by non-recurring revenues, most of which are in various forms of transfers from the Central Bank of the Republic of Turkey (“CBRT”). The 12-month cumulative budget deficit widened to around 2.9% and according to the national definition, the primary deficit was approximately 0.5% of GDP in December 2019.

The CBRT and the Turkish Banking Regulation and Supervision Agency (“BRSA”) enacted a series of measures and rules to ensure financial and economic stability and support the Turkish Lira. In 2019, the CBRT cut its policy rate by 1200 basis points and started to fund banks via swap facilities instead of the existing one-week repo channel and changed banks’ reserve requirement regulations to encourage them to grow their Lira loan books. Further, the CBRT made a commitment to grow its’ holding of government bonds from about TRY 20 billion currently to at least TRY 32 billion over the course of 2020.

 

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The recent global outbreak of the Coronavirus (“COVID-19”) has caused and may cause additional slowdown in the global economy, as is evidenced by the ongoing sharp fall in investments, exports and industrial production. On March 27, 2019, the International Monetery Fund officially declared that the global economy has entered recession as a result of the spread of COVID-19. As COVID-19 spreads globally, financial markets are factoring in higher risk in their prices and experiencing historical levels of volatility and selloffs. Turkey has been and will continue to be affected. A series of measures have been announced in Turkey to combat the effects of COVID-19, such as the Central Bank of Turkey’s targeted additional liquidity facilities to banks aimed at securing uninterrupted credit flow to the corporate sector, tax cuts and primary debt and interest payments deferments. However, we cannot predict the impact, if any, of these measures on the Turkish economy. In addition, these measures will be costly and will thus add to Turkey’s state debt and may eventually result in additional pressure on the value of the TRY relative to other currencies.

II. Taxation Issues in the Telecommunications Sector and Other Sectors in which the Company Operates

Under current Turkish tax laws, there are several taxes imposed on the services provided by telecommunications operators in Turkey and other sectors in which the Company operates. With regard to the taxes specific to the telecommunications sector, these taxes are charged to subscribers by mobile operators and remitted to the relevant tax authorities. They may be charged upon subscription, on an annual basis or on an ad valorem basis on the service fees charged to subscribers.

The following are the most significant taxes imposed on our telecommunications services and on other sectors where we operate:

a. Special Communications Tax

The Turkish government imposed a 25% special communications tax (“SCT”) on mobile telephone services as part of a series of new taxes levied to finance public works required to respond to the earthquakes that struck Turkey’s Marmara region in 1999. Starting in August 2004, other telecom services (i.e., fixed lines and TV/radio transmission) are also included within the scope of the SCT.

As of March 1, 2009, the SCT rate for wireless and mobile internet service providers was set to 5% (previously such tax was 25% on mobile and 15% on fixed lines). Other than mobile broadband services, all mobile telecommunication services were subject to 25% and other telecommunication services (i.e., fixed lines and TV/ radio transmission) were subject to a 15% SCT up until December 31, 2017. As of January 1, 2018, the SCT rate for all services within the scope of the tax has been set to 7.5%. Since January 1, 2018, only the mark-up amount on subscribers’ invoices for roaming services is subject to the SCT.

Under Law No. 6322, effective July 1, 2012, new mobile subscriptions for Machine to Machine (“M2M”) SIM cards are not subject to the SCT levied upon new subscriptions.

The SCT on new mobile subscriptions was TRY 65, TRY 53 and TRY 47 in 2019, 2018 and 2017, respectively. As of January 1, 2020, this has been increased to TRY 79. The tax has had a correlative negative impact on mobile usage.

As of January 1, 2018, the SCT is calculated for TRY and bundle package sales and also calling cards sales by including the margin of the distributor or/and retailer and these amounts. Mobile electronic telecommunication operators and authorized fixed telecommunication operators are responsible for the calculation and self-reporting to the tax authorities of the SCT amount on these pre-paid sales.

The tax collected from subscribers in one calendar month is remitted to the tax authorities within the first 15 days of the following month.

b. Value Added Tax (“VAT”)

Like all services in Turkey, services provided by GSM operators are subject to VAT. The general VAT rate for telecom services is 18% (1% rate for digital publishing was set at 18% for 2019 and subsequent years). We declare VAT to the Ministry of Treasury and Finance within 26 days and remit VAT paid by our subscribers within the first 26 days of the month following which the tax was incurred, after the offset of input VAT incurred by us.

 

 

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VAT for roaming services was, until November 3, 2009, calculated solely on the mark-up amount on subscribers’ invoices for roaming services. Following the Ministry of Treasury and Finance’s declaration of a change in its position regarding roaming charges, we began imposing VAT and the special communications tax on the entire amount of roaming charges, starting from November 3, 2009, to comply with this change in position. As of January 1, 2018, the VAT mechanism on roaming charges prior to November 3, 2009 was restored, and since then only the mark-up amount on subscribers’ invoices for roaming services is subject to VAT.

As of January 1, 2018, reverse charge VAT exemption is applied on the invoices which are related to roaming services issued by foreign GSM operators.

Additionally, as of January 1, 2018, if a non-resident e-service provider performs e-services from abroad to real persons who are located in Turkey, the service provider must be a VAT tax payer in Turkey. E-service providers have to declare VAT over the sales amount of e-services, with a VAT return within 26 days and pay within the first 26 days of the following month. Further, service providers can consider as deductible VAT which they have paid as a VAT amount to the Turkish entities related to these e-services.

As of January 1, 2018, VAT is calculated for TRY and bundle package sales and also calling card sales by including the margin of the distributor and/or retailer and these amounts. Mobile electronic telecommunication operators and authorized fixed telecommunication operators are responsible for the calculation and self-reporting to the tax authorities of the VAT amount on these pre-paid sales.

c. License and Annual Utilization Fees

According to Article No. 46 of the Electronic Communications Law, subscribers registered in the system are subject to both license and annual utilization fees. GSM operators are charged with the duty of collecting these fees. The license fee is paid once on the subscription per subscriber. The license fee was TRY 27.86, TRY 22.52 and TRY 19.68 in 2019, 2018 and 2017, respectively. As of January 1, 2020, the license fee is TRY 34.15. Since January 1, 2018, subscriptions for machine to machine (M2M) SIM cards are not subject to license and annual utilization fees.

The payment of the annual utilization fee to the government depends on whether a subscriber is postpaid or prepaid. For postpaid subscribers, the monthly utilization fee was TRY 2.32, TRY 1.88 and TRY 1.64 in 2019, 2018 and 2017, respectively, and is charged to subscribers monthly. As of January 1, 2020, the monthly utilization fee is TRY 2.85. For prepaid subscribers, the annual utilization fee is calculated by multiplying the number of registered prepaid subscribers at the previous year end with the annual utilization fee, and the calculated bulk annual utilization fee is paid by mobile operators the following year on the last business day in February. Since June 2011, we have collected utilization fees from most of our prepaid subscribers.

Other than subscribers’ license and annual utilization fees, operators must pay license and annual utilization fees for wireless equipment to the ICTA. Prior to January 1, 2018, such fee amount to be paid was calculated with respect to the amount per unit of wireless equipment (TRx); however, following a legislative change, since January 1, 2018 the fee is being calculated as 5% of the monthly net sales amount, and is to be paid within the last working day of the following month.

d. Special Consumption Tax

The Special Consumption Tax (“SCT”) is a tax on prescribed goods, which includes mobile phones. The Special Consumption Tax is charged on mobile phones (mobile phones are legally defined as “transmitter/receiver cellular phones”) either when they are imported or when they are sold by Turkish manufacturers. As of May 1, 2019, the SCT rates are set as provided in the table below and cannot be less than TRY 160 per cellular phone device.

 

     SCT Tax
rate
 
Cellular wireless phone devices with a receiver       

- With SCT base up to TRY640

     25

- With SCT base between TRY 640 and TRY 1,500

     40

- With SCT base above TRY 1,500

     50

 

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e. Digital Services Tax

On March 1, 2020, the Digital Services Tax (“DST”) to be paid through certain digital services, particularly all advertising services delivered in the digital environment, was introduced. The tax is to be paid at a rate of 7.5% per month over the revenues generated from the following digital services performed in Turkey:

 

   

Digital advertising services (including services such as advertisement control and performance measurement services, services for data transmission and management of users, and technical services related to the presentation of advertisements),

 

   

Sales of any audio, visual or digital content in a digital environment, and services provided in a digital environment for listening, watching, playing or recording or using such content (including computer programs, applications, music, video, games, in-game applications, etc. Under the draft Communique provisions, cloud service revenues are not subject to DST.),

 

   

Services relating to the providing and operating of a digital environment in which users may interact with each other (including platforms enabling the sale of goods or services among users), and

 

   

Intermediary services provided by digital service providers in the digital environment relating to the services listed above.

Tax payers exceeding a revenue threshold of €750 million in global revenues (under the draft Communique provisions, local revenues are also considered under global revenues) and TRY 20 million in local revenues are subject to DST.

DST returns must be declared through monthly basis payments, and made by the end of the following month. No deductions are allowed and taxpayers may not separately disclose DST on invoices. The DST amount which is paid by taxpayers is deductible from the income or corporate tax base.

The President has the authority to reduce the rate to a minimum of 1%, or increase it to a maximum of 7.5%, based on service type, separately or collectively.

Digital service taxpayers are defined as digital service providers. Their state of being fully liable, or not, as per the Income Tax Law No. 193 and the Corporation Tax Law No. 5520, under limited liability status, does not affect the tax liability for digital services. Neither does the question of whether they are performing with the related activities through a place of business or through permanent representatives in Turkey which affects the digital service tax liability.

In cases where the taxpayer has no residency, legal entity and/or business center in Turkey and other cases where it is deemed appropriate, the Ministry of Treasury and Finance may determine the taxpayer to be the parties to the transaction which is subject to taxation or the ones who mediate the transaction and payment.

Revenues generated from the provision of the following services are exempt from DST:

 

   

Services that are subject to “treasury share” paid in accordance with the Telegram and Telephone Law,

 

   

Services that are subject to the SCT,

 

   

Services performed to carry out banking transactions within the scope of Article 4 of the Banking Law No. 5411,

 

   

Payment services within the scope of Article 12 of the Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions, and

 

   

Sales of products and services provided exclusively through these products developed as a result of research and development (“R&D”) activities in R&D centers that are defined under Article 2 of the Law on Supporting Research, Development and Design Activities dated No. 5746.

Revenues generated from some services provided by Turkcell Group are subject to DST; however, the total of those revenues do not exceed the stated thresholds as at March 20, 2020. We will continue to monitor such revenues and any updates in the related legislation.

f. Turkish Radio and Television (“TRT”) Association Banderol Fee

According to Article No. 4 of the Law on TRT Revenues, mobile phones are subject to the TRT banderol fee over (i) VAT base (excluding SCT) related to the sales amount for produced products (ii) VAT base (excluding SCT) of the customs declaration amount for import products. Since June 2016, the following rates

 

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have been applied for this purpose: (i) 7% for mobile phones which can receive radio or television broadcasts via integrated tuner, and (ii) 6% for mobile phones which can receive radio or television broadcasts via internet connection. As of July 2017, all mobile phones which have 8517.12.00.00.11 customs tariff statistics status, are subject to a TRT banderol fee at the rate of 10%.

g. Treasury Share, Universal Service Fund Contribution

Due to our licenses (2G and 3G) and Authorization Certificate (4.5G), we are required to pay a treasury share equal to 15% of our gross revenue including some exemptions. 10% of the treasury share is paid as a universal service fund contribution. In addition, we must pay annual contributions in an amount equal to 0.35% of our net revenue towards the ICTA’s expenses.

Since 2005, we are required to pay 90% of the treasury share to the Turkish Treasury and 10% to the Ministry of Transport and Infrastructure as a universal service fund contribution as mentioned above. As of January 1, 2018, all of our treasury share is paid to the ICTA, which then transfers it to the Turkish Treasury and the Ministry of Transport and Infrastructure as detailed above. The calculation method for the treasury share has also been revised and accordingly, the following are not to be considered in the calculation of the treasury share: (i) overdue interests which are accrued to the subscribers for any unpaid balance, (ii) accrual amounts for the purpose of reporting, (iii) reflecting the installation and maintenance costs of the mobile radio stations to other mobile operators and finally and (iv) amounts for the purpose of correction accounting records which occur in the same year due to errors (such as customer information, type of business, amount and price).

Also, we are required to pay a Universal Service Fund Contribution equal to 1% of net sales revenue for Turkcell Superonline, Global Tower and Rehberlik Hizmetleri Servisi A.S. (“Rehberlik Hizmetleri”). These amounts are paid annually within the month of June of each following year.

In addition, we must pay annual contributions in an amount equal to 0.35% of our net revenue to the ICTA’s expenses for all companies.

h. Other Tax Legislations

Amendments to the tax laws and the latest taxes introduced through the Law No. 7194 published in the Official Gazette dated December, 7, 2019 are summarized as follows:

 

   

As per the new bracket added to the income tax tariff for the income exceeding TRY 500,000 (including wages), these incomes will be taxed at a rate of 40%. On the other hand, the wages which are received from a single employer, exceeding the amount TRY 500,000 in the fourth bracket of the income tax tariff, will be submitted by the employer (TRY 500,000 has been increased to TRY 600,000 for the year 2020).

 

   

The rate for the banking and insurance transaction tax applied as 1 per thousand relating to foreign exchange transactions since May 15, 2019 has increased to 2 per thousand.

 

   

On December 7, 2019, Article 376 of the Tax Procedural Law regulating the deduction of tax penalties was amended, and the discount rate set at 50%.

 

   

An article titled “abandonment of legal remedy” was added to the Tax Procedure Law in order to resolve the tax disputes between the taxpayer and the administration.

As of January 1, 2019, the VAT rate is set as 18% for the sale of newspapers, magazines, electronic books and similar publications within the electronic environment.

The late fee rate was set at 2.5% per month for the period of July 1, 2019 and October 1, 2019, and then set at 2% per month from October 1, 2019 onwards.

Through adding foreign exchange differences to the components included in VAT base, in deliveries and services performed based on foreign currency domestically as in imports, a legal basis for the VAT subjection of exchange differences arising when the price is fully or partially collected afterwards is ensured.

Pursuant to the section within the Act of Fees Tariff No. 8 “Passenger phone usage fee”, the utilization permit for cellular wireless phone devices with a receiver brought by passengers for self-usage with non-commercial purpose is subject to a fee. The amount of the fee applied for 2019 was set at TRY 618.60. This amount was then increased to TRY 1,500 for 2019 and stands at TRY 1,838 for 2020.

 

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The Cultural Fund for mobile phones (imported or manufactured mobile phones which have voice recording qualifications) will be paid as of March 19, 2020. The Cultural Fund is set at 1% over, (i) the custom value for imported devices and (ii) the production value for the devices which are manufactured in Turkey. This fund will be considered as a cost of goods item and will not be reflected directly as a tax to the customers on the invoices.

i. Tax disputes

Changes in the Ministry of Treasury and Finance’s interpretation of the taxation codes, especially changes regarding consumption taxes (VAT and SCT), may adversely affect consumer prices. In addition to the prospective financial impact of such changes, unanticipated tax liabilities and fines may also be levied against our financial results in prior years, since companies’ operations in the previous five years may be subject to financial investigation. Regulations that became effective from July 1, 2010, however, have strengthened our rights with regards to this risk, particularly with regards to the following:

 

   

Tax inspectors shall not issue tax audit reports that contradict Decrees, Public Acts, Statutory Rules, General Communiques and Circulars promulgated;

 

   

In the event that the tax authority differentiates previous interpretations of the taxation codes via promulgated General Communiques and Circulars, the new interpretation shall not be applied to previous transactions; and

 

   

Transactions that are compliant with rulings taken from the Tax Office are relieved from both tax penalties and overdue interests. Such relief is valid only for taxpayers that have applied for the ruling.

For a description of various tax related disputes to which we are party, see “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings”.

III. Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with IFRS as issued by the IASB. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments on the carrying values of assets and liabilities, and are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies are disclosed in Note 2 (Basis of preparation and summary of significant accounting policies) to our Consolidated Financial Statements in this annual report on Form 20-F.

IV. Reportable Segments and Reporting Currency

Our operations are aggregated under two main reportable segments, Turkcell Turkey and Turkcell International:

 

   

The Turkcell Turkey segment comprises mainly our telecommunication and technology services activities in Turkey and includes the operations of Turkcell, Turkcell Superonline, Turkcell Satis, group call center operations of Turkcell Global Bilgi, Turktell, Turkcell Teknoloji, Global Tower, Rehberlik Hizmetleri and Turkcell Gayrimenkul.

 

   

The Turkcell International segment comprises mainly our telecommunication and technology services activities beyond Turkey and includes the operations of lifecell, Belarusian Telecom, Kibris Telekom, Eastasia, Lifecell Ventures, Beltel, UkrTower, Global LLC, Turkcell Europe, Lifetech, Beltower and Lifecell Digital.

Our “Other” reportable segment is comprised mainly of information and entertainment services in: (i) Turkey and Azerbaijan, (ii) non-group call center operations of Turkcell Global Bilgi, (iii) consumer financing service operations of Financell, Turkcell Odeme, Paycell LLC and TOFAS, (iv) electricity energy trade operations of Turkcell Enerji, (v) insurance agency activities of Turkcell Sigorta as well as (vi) the development and production of electric passenger cars and (vii) the carrying out of trading activities of Turkiye’nin Otomobili and Sofra. The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies.

 

 

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The Group has transferred its total shareholding in Azerinteltek, controlled by Inteltek, to another shareholder of Azerinteltek, Baltech. The share purchase agreement was signed on November 15, 2018 and the transfer of proceeds to Inteltek was completed on December 27, 2018. The Group lost control over the subsidiary unconditionally on December 27, 2018 following the transfer of money. The transfer of shares to Baltech was completed subsequently on January 11, 2019.

Starting from October 1, 2016, Fintur was classified as held for sale and reported as discontinued operations. The Group signed the definitive agreement on December 12, 2018 to transfer its total shareholding in Fintur to another shareholder of Fintur, Sonera Holding. The transfer to Sonera Holding was completed on April 2, 2019 for a final value of EUR 352.9 million. See Note 16 to our audited Consolidated Financial Statements included in “Item 18. Financial Statements” of this annual report on Form 20-F.

Our financial statements are presented in TRY only, the currency in which we recognize the majority of our revenues and expenses.

5.A Operating Results

Our audited Consolidated Financial Statements as of December 31, 2019 and December 31, 2018 and for each of the years in the three-year period ended December 31, 2019 included in this annual report have been prepared in accordance with IFRS as issued by the IASB.

I. Overview of Business

Turkcell, a joint stock company organized and existing under the laws of the Republic of Turkey, was incorporated in 1993 and commenced its operations in 1994. We operate under a 25-year GSM license (the “2G License”) and a 20-year GSM license (the “3G License”). We were granted the 2G License in April 1998 upon payment of an upfront license fee of $500 million. On April 30, 2009, we signed a license agreement with the ICTA, which provides authorization for providing IMT 2000/UMTS services and infrastructure. We acquired the A-type license providing the widest frequency band for a consideration of EUR 358 million (excluding VAT). The 3G License is effective for 20 years starting from April 30, 2009. Pursuant to the agreement, we started to provide IMT 2000/UMTS services as of July 30, 2009.

In the 4.5G auction held on August 26, 2015, we were awarded a total frequency band of technology agnostic 172.4 MHz, the largest amount of spectrum of any operator in Turkey. We commenced offering 4.5G services from April 1, 2016. The 4.5G license is effective for 13 years until April 30, 2029. The total fee of EUR 1,623.5 million (excluding VAT and interest payable on the installments) was paid in four installments.

Our services portfolio includes high-quality mobile and fixed voice, data, TV and digital services over our network. We continue to focus on our customer-oriented approach and our ability to provide quick and differentiated solutions to meet our customers’ needs through lifestyle segments and usage habits.

Our subscriber base has grown substantially since we began operations in 1994. At year-end 1994, we had 63,500 subscribers, and by year-end 2019, that number for the Group had grown to 46.7 million including subscribers of subsidiaries.

In the mobile segment, we increased our postpaid subscriber base from 56% in 2018 to 62% in 2019 due to our focus on value. As of December 31, 2019, we had approximately 12.4 million prepaid subscribers and 20.4 million postpaid subscribers, compared to approximately 14.9 million prepaid subscribers and 18.8 million postpaid subscribers as of December 31, 2018.

Our average minutes of usage (MoU) in Turkey increased 16% to 415 minutes in 2019 from 359.5 minutes in 2018 as a result of high bundle packages utilization. Our mobile ARPU in Turkey increased to TRY 39.8 in 2019 compared to TRY 33.9 in 2018 mainly driven by our upsell strategy, favorable change in customer mix, increasing data consumption and price adjustments.

Churn rate is the percentage calculated by dividing the total number of subscriber disconnections during a period by the average number of subscribers for the same period. For these purposes, we define the “average number of subscribers” as the number of subscribers at the beginning of the period plus one half of the total number of gross subscribers acquired during the period. Churn refers to subscribers that are both voluntarily and involuntarily disconnected from our network. For a more detailed discussion, please see “Item 4.B. Business Overview – V. Churn”.

 

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In the fixed segment, our subscriber base was at 2.3 million for the year ended December 31, 2019. 1.5 million of this base are fiber customers.

We booked an impairment provision for contract assets, other assets and receivables from financial services in our Consolidated Financial Statements at the amount of TRY 795.8 million and TRY 938.5 million as of December 31, 2019 and 2018 respectively, which we believe to be adequate. The main reasons for the change in impairment losses include collections made in 2019 amounting to TRY 283.7 million and a write-off of overdue receivables amounting to TRY 493.1 million which was netted of with an impairment loss recognized amounting to TRY 622.6 million.

II. International and Other Domestic Operations

In addition to our businesses in Turkey, we have telecommunications operations in Ukraine, the Turkish Republic of Northern Cyprus, Belarus and Germany. For a description of, and additional information regarding, our international and other domestic operations, see “Item 4.B. Business Overview”.

III. Revenues

Revenues include telecommunication services, equipment revenues, revenue and commission fees on betting business, call center revenues and revenues from financial services. Telecommunication service revenues mainly include voice, data, messaging, digital services and solutions, interconnect, roaming, and wholesale.

IV. Operating Costs

a. Cost of Revenues

Cost of revenues includes payments for our treasury share and universal service fund, transmission fees, radio costs, billing and archiving costs, cost of goods sold, depreciation and amortization charges, cost of revenues from financial services, roaming charges paid to international operators for calls made by our subscribers while outside Turkey, interconnection and termination fees mainly paid to Turk Telekom and Vodafone, employee benefit expenses for technical personnel and frequency fee.

b. Administrative Expenses

Administrative expenses consist of employee benefit expenses for non-technical, non-marketing, and non-sales employees’ maintenance and repair expenses, travel and entertainment expenses, consultancy expenses, collection expenses, and other overhead charges.

c. Selling and Marketing Expenses

Selling and marketing expenses consist of dealer and distributor commissions, advertising, employee benefit expenses of sales and marketing related employees, and other expenses, including travel expenses, office expenses, insurance, and training and communication expenses.

d. Net Impairment Losses on Financial and Contract Assets

Net impairment losses on financial and contract assets consist of impairment losses incurred through assessment of the Group at the end of each reporting period to consider whether there is objective evidence that a financial asset or group of financial assets was impaired. A financial asset or a group of financial assets was impaired and impairment losses were incurred only if there was objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event had an impact on the estimated future cash flows of the financial asset or group of financial assets that could be reliably estimated. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost was considered an indicator that the assets were impaired.

 

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e. Results of Operations

The following table shows information concerning our consolidated statements of operations for the years indicated:

 

     For the years ended December 31,  
     2019     2018     2017  
     (in TRY) millions  

Revenue

     23,996.3       20,173.4       16,917.1  

Revenue from financial services

     1,140.9       1,119.1       715.0  

Total revenue

     25,137.1       21,292.5       17,632.1  

Cost of revenue

     (16,816.7     (13,751.2     (11,058.3

Cost of revenue from financial services

     (266.8     (394.8     (291.8

Total cost of revenue

     (17,083.5     (14,146.0     (11,350.2

Gross profit

     8,053.7       7,146.5       6,281.9