We rate Turkcell Iletisim Hizmet ( TKC) a buy. Our recommendation is based on the company's impressive revenue growth, improved earnings, and notable return on assets and equity. These positives are further supported by increasing subscriber base, improving average revenue per user, and higher average monthly minutes of usage per subscriber. However, deteriorating margins, rising debt and slowdown in the Turkish GSM market are the downside risks to our buy rating. Here are the earnings highlights: The company's top-line growth is healthy. Turkcell's third-quarter revenue soared 19.6% to $2.06 billion from $1.72 billion, on a 7.5% appreciation of Turkish Lira (TRY) against the dollar, a 4.3% growth in subscriber base, and higher average monthly minutes of usage per subscriber. Revenue from the Fintur's operations rose 21.7% to $500.00 million, while revenue from the Astelit operations soared 68.2% to $127.80 million from $76.00 million. Earnings have improved. The company's third-quarter earnings surged 50.5% to $603.79 million, or 69 cents per share, from $401.19 million, or 46 cents per share in the third-quarter 2007. As a result, return on assets expanded 389 basis points to 20.06% from 16.17%, while return on equity widened 575 basis points to 28.87% from 23.12%. The company has a strong cash position and lower leverage levels. During the quarter under review, the company's cash position improved as reflected by a 21.0% increase in cash and cash equivalents and a quick ratio of 1.95. Moreover, a 24.4% rise in shareholders' equity outpaced 10.9% increases in the total debt, thereby improving the debt-to-equity ratio to 0.12 from 0.14.
Turkcell also made a strategic acquisition. Recently, the company acquired 80% stake in Belarusian Telecommunications Network (BeST) for $500 million, to gain access to the higher growth potential market of Ukraine and the Commonwealth of Independent States (CIS). The company is also in talks to buy a 51% stake in Datacom Solutions Pvt. Ltd.. There are a few risks to our buy rating. Although the company reported significant growth in revenue, it faces challenges from deteriorating margins and rising debt. Additionally, slowdown in the Turkish GSM market and political turmoil in Turkey may negatively impact the company's financials in the upcoming quarters. Tuckcell lletisim Hizmetleri AS's third-quarter revenue grew 19.6% to $2.06 billion from $1.72 billion in third quarter 2007. The reported revenue growth was supported by a 4.3% subscriber growth, 7.5% appreciation of Turkish Lira (TRY) against the U.S. dollar, and the partial impact of a 31.6% increase in usage combined with upward price adjustments. Looking at its international operations, revenue from the Fintur's operations -- in which TKC holds 41.5% stake -- rose 21.7% to $500 million from $411 million, attributable to 25.3% increase in the total number of subscribers to 12.4 million from 9.9 million a year ago. Revenue from the Astelit operations, which includes Tuckcell's 55% stake, grew 68.2% to $127.8 million from $76 million, fueled by a 40.8% increase in subscriber base, and 20.7% rise in Average Revenue per User (ARPU). Looking at the metrics, total subscriber base increased to 36.3 million from 34.80 million. Number of postpaid subscribers rose 14.3% to 7.2 million from 6.3 million, while prepaid subscribers inched up to 29.1 million from 28.5 million. Blended ARPU rose 13.1% to $17.30 from $15.30. Postpaid ARPU grew 6.1% to $41.90, while prepaid ARPU improved 12.0% to $11.20 from $10. Blended MOU (Average Monthly Minutes of usage per subscriber) grew 31.6% to 109.2 from 83 a year ago. Finally, the churn rate increased to 6.2% from 5.7% a year ago.
Tuckcell's gross profit margin for the latest third quarter declined 534 basis points to 60.82% from 66.16% a year ago, due to 17% increase in direct cost of revenue to $935.5 million from $799.9 million. Depreciation and amortization expenses declined 14.9% to $172 million, whereas selling and marketing expenses spiked 23.5% to $366.8 million. Similarly, administrative expenses rose 54.5% to $87.9 million from $56.9 million. Consequently, operating margin declined 68 basis points to 32.46% from 33.14% in the third-quarter of 2007. Interest expenses rose 57.2% to $19.19 million from $12.21 million, thereby deteriorating the interest coverage ratio to 34.87 from 46.81. Overall, net income surged 50.5% to $603.79 million, or 69 cents per share, from $401.19 million, or 46 cents per share, in the prior year's quarter. For the quarter ended Sep. 2008, Tuckcell's cash and cash equivalents spiked 21% to $3.21 billion from $2.66 billion. Moreover, a quick ratio of 1.95 reflects the company's strong ability to cover any short-term cash obligations. Total debt rose 10.9% year-over-year to $820.89 million from $739.95 million, whereas shareholders' equity advanced 24.4% to $6.65 billion from $5.35 billion. As a result, the company's debt-to-equity ratio improved to 0.12 from 0.14. Furthermore, return on assets escalated 389 basis points to 20.06% from 16.17%, while return on equity ascended 575 basis points to 28.87% from 23.12%. During the quarter under review, the company completed the acquisition of an 80% stake in Belarusian Telecommunications Network (BEST). The company also announced that it is in talks to buy a 51% stake in Datacom Solutions Pvt. Ltd. Furthermore, TKC signed an agreement with Apple ( AAPL) to sell the third-generation iPhone in Turkey. Recently, Turkcell Iletisim Hizmetleri A.S. announced that its wholly owned subsidiary, Turktell Bilisim Interaktif Hizmetleri A.S. (Turktell), has sold its 55% in Bilyoner Interaktif Hizmetler A.S. to Demir Toprak A.S.