OREANDA-NEWS. April 1, 2010. Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and the CIS, today announces its fourth quarter and full-year 20041 financial and operating results.

Financial Highlights

Consolidated revenues up 53% year-on-year to USD 3.9 billion

Consolidated OIBDA2 up 57% year-on-year to USD 2.1 billion

All-time high annual OIBDA margin of 54%

Consolidated net income nearly doubled year-on-year to USD 1.0 billion

Operating Highlights

Subscriber base more than doubled to 34.2 million; 17.5 million net new consolidated subscribers added during 2004

Quarterly net subscriber acquisition rate almost doubled to a record 7.5 million in the fourth quarter

Subscriber acquisition cost and churn substantially reduced year-on-year

Number one position maintained in Russia, Ukraine, Belarus and Uzbekistan

Continued strong subscriber intake since year-end with 3.9 million new customers added since the beginning of the year; total subscriber base of 38.1 million as of March 21, 2005

Financial Summary (Unaudited)

USUSD  million

Q4 2004

Q4 2003

Change Y-on-Y

FY 2004

FY 2003

Change Y-on-Y

 

 

 

 

 

 

 

Revenues

1,079.7

771.7

39.9%

3,887.0

2,546.2

52.7%

Net operating income

317.3

272.8

16.3%

1,463.5

922.6

58.6%

Net operating margin

29.4%

35.4%

—

37.7%

36.2%

—

Net income

209.1

152.7

36.9%

1,022.7

517.2

97.7%

OIBDA

497.9

400.6

24.3%

2,094.8

1,338.5

56.5%

OIBDA margin

46.1%

51.9%

—

53.9%

52.6%

—

 

 

 

 

 

 

 

 

Vassily Sidorov, President and CEO of MTS, commented:

“2004 was a year of record subscriber additions for MTS in all territories, which resulted in strong revenue dynamics. Our subscriber base doubled in 2004 due to strong growth throughout the year, the addition of a number of important regions and active marketing campaigns. Revenue decline in Q4 compared to Q3 was due to seasonally lower roaming revenues, as well as intensified competition with aggressively priced subscriber acquisition campaigns.

“Our focus on customer acquisition in the second half of 2004 was geared towards retention of the Company’s market leadership in the run-up to the holiday season. Our customer retention and dealer loyalty oriented initiatives led to an almost halving of the churn rate year-on-year in 2004; we have also steadily reduced our per subscriber acquisition costs.

“Our full-year operating margin expanded as we continued to drive efficiency levels, but was down in the fourth quarter due to the quarterly increase in customer acquisition-related expenses. Net income for the year doubled and the Company’s overall strong financial position at year-end provided us with sufficient support as we entered another year of rapid market growth.”

Operating Overview

Market Growth

2004 was a year of record subscriber growth for the mobile markets in Russia and Ukraine. Mobile penetration3 increased during the year from 25% to 51% in Russia and from 14% to 29% in Ukraine. This growth was fueled by continuous per capita income growth in the two countries, as well as by mobile operators’ aggressive network expansion and marketing campaigns.

The fourth quarter of 2004 was the strongest period of mobile subscriber growth in the markets where MTS operates. This growth was specifically driven by increased consumer spending before the New Year and Christmas holidays, as well as by mobile operators’ seasonal offers.

Subscriber Development

MTS was one of the main beneficiaries of the strong demand for mobile services during 2004. The Company added 17.5 million new customers during the year on a consolidated basis, of which 16.8 million were added organically. MTS’ operations in Russia accounted for 13.1 million of the subscriber intake.

MTS’ consolidated subscriber base increased by 7.5 million new subscribers in the fourth quarter alone, with the operations in Russia adding nearly 5.7 million net new subscribers.

MTS has organically added a further 3.9 million new subscribers since the beginning of this year, expanding the consolidated subscriber base to 38.1 million4.

Business Expansion

MTS focused on expanding the Company’s regional presence during 2004 by acquiring companies and launching greenfield operations in new regions. The number of MTS’ operational regions increased from 60 to 77, with 14 regions added to the operational footprint in the fourth quarter alone. MTS acquired the leading mobile operator in Uzbekistan in August 2004.

Market Share

Innovative and proactive promotions and marketing activity during 2004 and, in particular, the fourth quarter, resulted in increased market shares in each of MTS’ operating markets. MTS’ market share expanded in the fourth quarter to 35.6% in Russia, 53.4% in Ukraine, and 59% in Uzbekistan. MTS’ joint venture in Belarus became the number one operator during the second half of 2004 and obtained a market share of 49.8% by the end of the year.

Customer Segmentation

Mobile markets were primarily driven by the pre-paid customer segment during 2004. Subscriptions to MTS’ pre-paid tariff plans (Jeans in Russia, and Jeans and SIM-SIM in Ukraine) accounted for 84% of gross additions in Russia and 91% in Ukraine. By the end of 2004, 77% of MTS’ customers in Russia and 86% in Ukraine, were signed up to pre-paid tariff plans, compared to 56% and 79% respectively at the end of 2003.

Key Operating Summary

 

Q4 2004

Q3 2004

Q2 2004

Q1 2004

Q4 2003

 

 

 

 

 

 

Total consolidated subscribers, end of period (mln)

34.22

26.63

22.78

19.19

16.72

Russia (mln)

26.54

20.84

18.14

15.34

13.37

Ukraine (mln)

7.37

5.53

4.63

3.85

3.35

Uzbekistan (mln)

0.31

0.26

—

—

—

MTS Belarus5 (mln)

1.21

0.97

0.74

0.59

0.46

 

Russia

ARPU (USD )6

11.2

14.0

14.1

14.1

16.3

MOU (minutes)

164

168

160

147

140

Churn rate (%)

6.3

6.7

7.7

10.0

12.5

SAC per gross additional subscriber (USD)

19

21

21

23

24

 

Ukraine

ARPU (USD)

12.4

15.4

14.6

14.0

15.4

MOU (minutes)

127

136

127

111

114

Churn rate (%)

1.77

5.9

5.2

6.0

6.5

SAC per gross additional subscriber (USD)

15

21

18

25

26

 

 

 

 

 

 

 

Russia

Full-year revenues up 41% year-on-year to USD 3,044 million8; fourth quarter revenues up 30% year-on-year to USD 819 million9

Full-year net income increased by 75% year-on-year to USD 787 million; fourth quarter net income increased by 18% year-on-year to USD 153 million

Full-year 2004 OIBDA up 44% year-on-year to USD 1,637 million; fourth quarter OIBDA up 12% year-on-year to USD 373 million

Full-year OIBDA margin of 54%; fourth quarter OIBDA margin of 46%

Record expansion in the subscriber base during the year resulted in a further dilution of the subscriber mix by mass-market subscribers that, along with certain tariff reductions and promotions, led to a decline in the average monthly revenue per user (ARPU). During the last quarter of 2004, MTS experienced particularly accelerated subscriber growth, with 5.7 million new customers added on a net basis in Russia. However, as the bulk of these new subscriber additions took place towards the end of the quarter, the overall subscriber growth during the quarter did not contribute materially to the topline. Revenues were also negatively influenced by a significant seasonal drop in roaming revenues during the quarter.

Compared to the previous year, OIBDA margin expansion in 2004 was a result of increased economies of scale and tough cost control measures, which more than compensated for the pressure on margins from relatively high inflation levels in Russia. Pressure on profitability in the last quarter of 2004 primarily resulted from substantially increased dealer commissions on the back of accelerated subscriber growth during this period and additional operating expenditures associated with new regional launches, as well as negative quarter-on-quarter revenue dynamics.

The subscriber acquisition cost (SAC) per gross additional subscriber continued to decline in 2004, reflecting the lower cost of attracting mass-market subscribers and the increased economies of scale.

The quarterly churn rate declined to 6.3% in the fourth quarter, continuing the positive trend since the beginning of 2004. The annual churn rate of 27.5% marked a significant reduction from the 2003 level of 47.3%, and was largely due to the successful implementation of customer and dealer loyalty programs.

Ukraine

Full-year revenues10 up to USD 832 million11; fourth quarter revenues up 73% year-on-year to USD 246 million12

Full-year net income increased to USD 232 million; fourth quarter net income more than doubled year-on-year to USD 52 million

Full-year OIBDA up to USD 443 million; fourth quarter OIBDA up by 71% year-on-year to USD 115 million

Full-year OIBDA margin of 53%; fourth quarter OIBDA margin of 47%

As in Russia, the impact of mass-market subscribers on the subscriber mix and the effect of promotions resulted in a decline in ARPU in Ukraine during the year. Revenue levels in the fourth quarter were also adversely affected by the seasonal decline in roaming revenues during the period. The fourth quarter was further impacted by lower usage levels as a result of the presidential elections and the temporary imposition of certain banking restrictions.

OIBDA margins improved in 2004 as a result of increased economies of scale and cost control measures. Pressure on profitability in the fourth quarter was also partially a consequence of the increase in total subscriber acquisition costs relating to record subscriber additions, with 1.8 million subscribers added during the fourth quarter alone.

SAC per gross additional subscriber declined significantly in the fourth quarter due to the increased proportion of mass-market subscribers in the overall additions.

Uzbekistan

Since its acquisition on August 1, 2004, the Uzbek operation contributed USD 27 million to MTS’ consolidated revenues, of which USD 17 million was contributed in the fourth quarter. The operation generated USD 15 million of OIBDA, of which USD 10 million was generated in the fourth quarter, and USD 4 million to net income, of which USD 3.9 million was generated in the fourth quarter. ARPU in Uzbekistan was USD 19 in the fourth quarter.

Financial Position

Full-year cash expenditure on property, plant and equipment was in line with management guidance and amounted to USD 1,204 million, of which USD 955 million was invested in Russia, USD 246 million in Ukraine, and USD 3 million13 in Uzbekistan. MTS’ expenditure on property, plant and equipment in the fourth quarter totaled USD 507 million, of which USD 407 million was invested in Russia, USD 99 million in Ukraine, and USD 1 million in Uzbekistan.

Cash expenditure on intangible assets during the year amounted to USD 155 million (USD 119 million in Russia and USD 36 million in Ukraine). MTS spent USD 72 million on the purchase of intangible assets during the fourth quarter (USD 68 million in Russia and USD 4 million in Ukraine).

In line with the Company’s strategy to expand the geography of its operations, MTS continued to acquire regional market leaders. The Company spent USD 356 million (net of cash in acquired companies) on acquisitions during the year, comprised of USD 235 million in the regions of Russia and USD 121 million on acquiring the business in Uzbekistan. Of the total acquisition expenditures in 2004, USD 184 million was spent in the fourth quarter.

Strong operating cash-flow generation resulted in a further decrease in MTS’ relative leverage level. As of December 31, 2004, MTS’ total debt14 was at USD 1.94 billion, resulting in a ratio of total debt to OIBDA of 0.9 times, compared to 1.2 times in 2003. The Company’s cash and cash equivalents amounted to USD 274 million at the end of 2004 and net debt amounted to USD 1.59 billion.

1 Based on unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

2 See Attachment A for definitions and reconsolidation of OIBDA and OIBDA margin to their most directly comparable US GAAP financial measures.

3 The source for all market information in this press release is AC&M-Consulting.

4 As of March 21, 2005.

5 MTS owns a 49% stake in Belarus operator, Mobile TeleSystems LLC, which is not consolidated.

6 See Attachment C for definitions of ARPU, MOU, Churn and SAC.

7 The significant decrease in the quarterly churn rate to 1.7% can be largely attributed to the adoption of the churn policy used by MTS in Russia, whereby pre-paid customers are defined as churning after six months of inactivity, rather than the previous three months criteria. Annual churn for 2004 was at 15.8%. Under the previous churn calculation, quarterly churn rate in Q4 2004 was at 7.2% and annual churn was at 23.0%.

8 Excluding intercompany eliminations of USD 7.8 million.

9 Excluding intercompany eliminations of USD 0.5 million.

10 No year-on-year comparison is provided as MTS consolidated UMC, its 100%-owned subsidiary in Ukraine, only during the last 10 months of 2003.

11 Excluding intercompany eliminations of USD 8.2 million.

12 Excluding intercompany eliminations of USD 1.1 million.

13 MTS started consolidation of Uzdunrobita on August 1, 2004.

14 Total debt is comprised of the current portion of debt, current capital lease obligations, long-term debt and long-term capital lease obligations; net debt is the difference between the total debt and cash and cash equivalents and short-term investments; see Attachment B for reconciliation of net debt to our consolidated balance sheet.