Mobile TeleSystems (MTS) announces financial results for the second quarter and first half of 2002

28 August 2002

MTS announces significant growth in revenues, EBITDA and net income, compared to previous quarters. The Company has become the first mobile operator in Eastern Europe to have a subscriber base of over five million.

 

Moscow, Russian Federation (28 August 2002) — Mobile TeleSystems OJSC (NYSE:MBT), Russia’s largest mobile cellular operator, today announces its results for the second quarter and six months ended June 30, 2002.

  • Net revenue in the second quarter 2002 was $316.3 million, an increase of 54% from $205.9 million reported for the same period last year and an increase of 28% from $247.6 million reported for the first quarter of 2002.
  • EBITDA in the second quarter 2002 was $162.0 million, an increase of 96% from the $82.7 million reported for the same period last year and an increase of 31% from the $123.5 million in the first quarter of 2002. (Please, see an important note below regarding changes in MTS definition of EBITDA1).
  • EBITDA margin for the second quarter 2002 was 51.2% compared to 40.2% for the second quarter 2001 and 49.9% for the first quarter of 2002.
  • Net income for second quarter 2002 was $66.8 million an increase of 91% from the $35.0 million reported for the second quarter 2001 and an increase of 52% from the $43.9 million reported for the first quarter of 2002.

Financial highlights

US$ million Q2 2002 Q2 2001 Change Q1 2002 Change H1 2002 H1 2001 Change
Net revenues 316.3 205.9 54% 247.6 28% 563.9 372.2 52%
EBITDA 162.0 82.7 96% 123.5 31% 285.5 162.4 76%
EBITDA margin 51% 40%
50%
51% 44%
Net income 66.8 35.0 91% 43.9 52% 110.7 66.3 67%

Note: MTS’ EBITDA for Q2 2001 and H1 2001 was affected by one time write-off in the amount of $27.6 million of previously capitalised subscriber acquisition costs. MTS’ net income for Q2 2001 and H1 2001 was affected by the amount of $17.9 million, which represents an above mentioned write-off net of income tax. 1 MTS has changed its method of calculation of earnings before provision for income tax, interest, depreciation and amortisation (EBITDA). Previously, MTS calculated EBITDA as: net income plus provision for income tax plus interest expense minus interest income plus depreciation and amortisation. However, MTS approach appeared to be different from the common market practice. To bring MTS EBITDA calculation in line with the peer group practice, going forward MTS will define EBITDA as operating income plus depreciation and amortisation. Under the previously adopted approach, MTS EBITDA for Q2 and H1 2002 would be $155.2 million and $272.4 million, accordingly. Today MTS announces that its subscriber base has reached five million active subscribers of which approximately 2.43 million live in the regions outside the Moscow licence area. MTS has become the first mobile phone company in Eastern Europe whose subscriber base has exceeded five million users. As at June 30, 2002, MTS had 4.37 million active subscribers of which 2.02 million were in the regions outside the Moscow license area. MTS has also experienced strong operational growth in the Moscow market as a result of its successful marketing policy. During the second quarter 2002 MTS added 266,545 new customers in the Moscow licence area, which represents around 34% of the market’s net additions over the period. MTS’ ARPU decreased from $26.7 in the first quarter of 2002 to $25 in the second quarter of 2002. The decrease is primarily attributed to an expected diluting impact of Kuban GSM that reports ARPU of $13 in the second quarter of 2002 as well as MTS’ ARPU in St Petersburg of $15. The Company’s MOU increased from 142 minutes in the first quarter of 2002 to 167 minutes in the second quarter of the year. MTS’ monthly average revenue per user (ARPU) in the Moscow market increased from $29 in the first quarter 2002 to $31 in the second quarter of the year. The increase is attributed to MTS’ successful tariff policy and is also partially due to seasonal effect. Average monthly minutes of usage per user (MOU) in the Moscow market increased from 141 minutes in the first quarter of 2002 to 164 minutes in the second quarter of the year. MTS’ subscriber churn rate in the second quarter 2002 was 7.7%, a decrease from 9.8% in the first quarter of the year. The Company believes that this improvement over the last quarter was due to increased loyalty of the Company’s subscribers and implementation of a comprehensive set of measures to enhance the Company’s brand.

Operational highlights


Q4 2001 Q1 2002 Q2 2002
Total subscribers, end of period (mln) 2.65 3.53 4.37
Moscow license area, end of period (mln) 2.04 2.08 2.35
Regions, end of period (mln) 0.62 1.44 2.02
ARPU (US$) 32.0 26.7 25.0
MOU (minutes) 154 142 167
Churn rate (%) 10.6 9.8 7.7
SAC per gross addition (US$) 50 36 39

Despite incremental costs associated with expanding into regional markets, MTS maintains a superior EBITDA margin level. The increase in MTS’ interest expenses in the second quarter of 2002 compared to the same period last year is largely attributed to interest payment on MTS’ $300 million bond outstanding. MTS capital expenditures in the second quarter of 2002 amounted to approximately $107 million of which approximately $64 million were in the Moscow licence area. Regional Expansion Strategy Significant growth in MTS’ revenues in the second quarter of 2002 is attributed to a combination of strong organic growth of the Company’s business and the acquisition and consolidation of two profitable regional mobile operators, Kuban GSM and BM-Telecom. MTS’ acquisition of BM-Telecom strengthened its presence in the important Volga macro— region and also added 116,809 to MTS’ regional subscriber base. BM-Telecom was consolidated into the Company’s accounts from May 13, 2002. The newly acquired regional mobile operators, Kuban GSM and BM Telecom, contributed $19.7 million and $4.7 million respectively to MTS’ revenues in the second quarter. In July 2002 MTS also acquired Mobicom-Barnaul a GSM 900 mobile operator in the Altay region located in the southeast of Russia, thereby expanding its footprint in the Siberian part of Russia. MTS launched its network in Belarus during the second quarter 2002. The network is operational through a Belarus-Russian Joint Venture LLC “Mobile TeleSystems” (LLC MTS), of which MTS controls 49%. The launch of the network in Belarus represents a breakthrough for the Company as it is the first step that the Company has made in expanding beyond the borders of Russia. Today the joint venture provides services to approximately 10,500 subscribers. As MTS holds a non-controlling stake in the Belarus venture, its financials are not consolidated into the Company’s accounts. The launch of MTS’ network in the second largest market of the country after Moscow, St Petersburg, has also been extremely successful. After eight and a half months of operations in St Petersburg, the Company now holds a market share of approximately 29% (according to independent sources) with approximately 500,000 subscribers. MTS is pleased to report that the Company’s operations in the region have broken even at EBITDA level. During the second quarter 2002, MTS also launched operations in Perm (3.0 million inhabitants), Chelyabinsk (3.7 million), Arkhangelsk (1.5 million), Karelia (0.8 million), Tambov (1.3 million) and the Altai Republic (0.2 million). MTS is also happy to announce that the Russian Communications Ministry has recently granted the Company a licence to provide GSM 900 services in the Saratov region. The Saratov region, which has a population of 2.7 million people, is one of the key regions of the Volga area of Russia and therefore is an important addition to the Company’s licence portfolio. The mobile penetration rate in the region is only 5.3%, which provides MTS with an opportunity to benefit from the growth of the market. Commenting on the second quarter result Mikhail Smirnov, President of MTS said: “MTS’ second quarter results demonstrate that the Company has resumed revenue growth, has excellent margins and has experienced a strong subscriber growth. During this period MTS has continued its aggressive expansion into the regions while also enhancing its position in the Moscow market. We are proud of the fact that over five million people in this country have chosen MTS as its service provider.”

Mobile TeleSystems consolidated balance sheets at December 31, 2001 and June 30, 2002

Amounts in thousands of U.S. dollars, except share amounts

December 31
2001
June 30
2002
CURRENT ASSETS:
Cash and cash equivalents $219,629 $111,823
Short-term investments 85,304
Trade receivables, net 24,258 40,091
Accounts receivable, related parties 2,377 3,344
Inventory, net 26,184 31,324
Prepaid expenses 22,712 32,843
VAT receivable 82,216 136,467
Deferred tax asset 12,040 12,545
Other current assets 8,374 8,780
Total current assets 483,094 377,217
PROPERTY, PLANT AND EQUIPMENT 841,308 1,069,743
OTHER INTANGIBLE ASSETS, 83,507 81,344
LICENSES 297,490 465,326
GOODWILL 22,411 22,411
DEBT ISSUANCE COSTS 3,997 3,803
INVESTMENTS IN AND ADVANCES TO AFFILIATES 740 11,586
Total assets $1,732,547 $2,031,430

Mobile TeleSystems consolidated balance sheets at December 31, 2001 and June 30, 2002


Amounts in thousands of U.S. dollars, except share amounts

December 31
2001
June 30
2002
CURRENT LIABILITIES:
Accounts payable, related parties $6,142 $8,546
Trade accounts payable 106,068 86,767
Deferred connection fees 21,419 22,629
Subscriber prepayments and deposits 63,741 88,585
Debt, current portion 18,245 24,847
Promissory Notes, current portion 580
Short term portion of future lease payments 14,401 12,728
Income tax payable 23,078 12,108
Accrued liabilities 51,626 72,166
Other payables 3,357 5,358
Total current liabilities 308,657 333,734
LONG-TERM LIABILITIES:
Bonds payable, principal 248,976 300,261
Debt, net of current portion 30,150 69,688
Long term portion of future lease payments 7,696 10,688
Promissory notes payable 5,792
Deferred connection fees, net of current portion 26,269 24,710
Deferred taxes 72,192 116,290
Total long-term liabilities 391,075 521,637
Total liabilities 699,732 855,371
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 12,999 43,015
SHAREHOLDERS’ EQUITY:
Common stock: (2,096,975,792 shares with a par value of 0.1 rubles authorized and 1,993,326,138 shares issued as of June 30, 2001 and December 31,2000, 345,244,080 of which are in the form of ADS) 50,558 50,558
Treasury stock (9,966,631 common shares at cost) (10,206) (10,206)
Additional paid-in capital 555,794 556,686
Shareholder receivable (38,958) (36,938)
Retained earnings 462,628 572,944
Total shareholders’ equity 1,019,816 1,133,044
Total liabilities and shareholders’ equity 1,732,547 2,031,430

Mobile TeleSystems unaudited consolidated statements of operations for the three months ended June 30, 2001 and 2002

Amounts in thousands of U.S. dollars, except share and per share data

Three months ended Six months ended

June 30 June 30

2002 2001 2002 2001
NET REVENUES:
Service revenues, net $294,314 $190,869 $522,386 $345,969
Connection fees 5,687 4,968 12,228 9,115
Equipment sales 16,297 10,053 29,288 17,109

316,298 205,890 563,902 372,193
COST OF SERVICES AND PRODUCTS
Interconnection and line rental 31,366 17,449 55,081 31,864
Roaming expenses 11,597 13,616 28,713 27,113
Cost of equipment 20,001 9,794 38,119 17,093

62,964 40,859 121,913 76,070
OPERATING EXPENSES 51,826 24,536 91,672 55,120
SALES AND MARKETING EXPENSES 39,494 57,804 64,795 78,574
DEPRECIATION AND AMORTIZATION 51,776 31,261 92,784 58,565
Net operating income 110,238 51,430 192,738 103,864
CURRENCY EXCHANGE AND TRANSLATION LOSSES (141) (29) 690 595
OTHER EXPENSES (INCOME):
Interest income (2,093) (3,643) (5,497) (7,560)
Interest expenses, net of amounts capitalized 11,084 1,440 20,687 2,390
Other expense (income) 864 1,576 2,721 2,137
Total other expenses (income), net 9,855 (627) 17,911 (3,033)
Income before provision for income taxes and minority interest 100,524 52,086 174,137 106,302
PROVISION FOR INCOME TAXES 27,667 17,445 53,826 40,446
MINORITY INTEREST 6,097 (397) 9,691 (397)
NET INCOME 66,760 35,038 110,620 66,253
Weighted average number of shares outstanding 1,961,889,991 1,961,889,991 1,961,889,991 1,961,889,991

Contact investor relations:

+ 7 495 223 20 25 ir@mts.ru

MTS Investor Relations
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