Mobile TeleSystems (MTS) Financial Results for the First Quarter Ended 31st March 2003

26 June 2003

Moscow, Russian Federation — June 26, 2003 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and Central and Eastern Europe1, today announced its financial results for the first quarter ended March 31, 2003.

 
  • MTS reports revenues of $446.1 million for Q1 2003, up 80.2% year on year.
  • EBITDA increase of 82.0% to $224.8 million year on year; EBITDA margin was 50.4%.
  • Net income rose by 87.3% to $80.2 million from prior year Q1.
  • UMC, MTS’ subsidiary in Ukraine, which MTS has consolidated from March 1, 2003, contributed $29.9 million to MTS’ revenues and $1.5 million to net income.
  • As of June 25, 2003, MTS’ consolidated subscriber base was over 11.22 million customers of which 9.23 million were in Russia and 1.99 million were in Ukraine.

 

Revenues for the first quarter of 2003 were $446.1 million, an 80.2% increase on the same quarter in 2002, and a 9.0% increase on the previous quarter.

First quarter EBITDA (see Attachment A) was $224.8 million, an 82.0% increase on the same quarter in 2002, and a 23.1% rise on the previous quarter. EBITDA margin (see Attachment A) in the first quarter was 50.4%.

First quarter net income was $80.2 million, an 87.3% increase on the same quarter in 2002, and a 5.8% decrease compared to the previous quarter.

Financial Highlights (Unaudited)

US$ million Q1 2003 Q1 2002 Change Y-on-Y Q4 2002 Change Q-on-Q
Net revenues $446.1 $247.6 80.2% $409.3 9.0%
Operating income $149.6 $81.9 82.6% $123.7 20.9%
Net income $80.2 $42.8 87.3% $85.2 –5.8%
EBITDA $224.8 $123.5 82.0% $182.7 23.1%
EBITDA margin 50.4% 49.9% 44.6%

Note: See Attachment A for definitions of EBITDA and EBITDA margin and a reconciliation of both financial measures.

As of March 31, 2003, MTS together with its subsidiaries serviced 9.42 million subscribers. During the first quarter of the year, the Company’s subscriber base increased by approximately 2.77 million subscribers, of which 956,000 users were added through organic growth of the Company’s business in Russia, and 1.82 million were added via the acquisition of UMC in Ukraine. In addition, MTS’ unconsolidated subsidiary in Belarus, Mobile TeleSystems LLC, serviced approximately 83,200 users as of March 31, 2003 compared to 43,000 users as of year-end 2002.

As of June 25, 2003, MTS’ consolidated subscriber base was comprised of 11.22 million customers, of which 9.23 million were in Russia and 1.99 million were in Ukraine. In addition, Mobile TeleSystems LLC serviced 165,000 subscribers in Belarus as of June 25, 2003.

Commenting on the results, Mikhail Smirnov, President of MTS, said: “The Company’s financial performance continues to benefit from a growing demand for cellular services in all the markets in which we operate. The first quarter of the year was also marked by an important development — consolidation of UMC, one of the leading mobile operators in Ukraine. The strengthening of our operations in the neighboring countries remains an important part of MTS’ strategy”.

Operational Highlights

  Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003
Total subscribers, end of period (mln) 3.53 4.37 5.43 6.64 9.42
Russia 3.53 4.37 5.43 6.64 7.60
Ukraine 1.70 1.82
MTS Belarus2 3 881 14 378 42 525 83 200
Russia
ARPU (US$) $26.7 $25.0 $25.2 $21.2 $18.5
MOU (minutes) 142 167 175 175 148
Churn rate (%) 9.8 7.7 6.5 10.1 11.6
SAC per gross additional sub (US$) $36 $39 $32 $34 $30
Ukraine
ARPU (US$) $15.9
MOU (minutes) 87
Churn rate (%) 8.9
SAC per gross additional sub (US$) $51

Note: See Attachment B for definitions of ARPU, MOU, Churn and SAC.

MTS Operations in Russia

As of March 31, 2003 MTS serviced 7.60 million subscribers, of which 634,618 were enrolled in the Company’s pre-paid Jeans tariff plans. The Company’s average monthly revenue per user (ARPU) was $18.5 in the first quarter of 2003, compared to $21.2 reported for the fourth quarter of 2002.

Average monthly minutes of usage per subscriber (MOU) in the first quarter of 2003 declined to 148 minutes from 175 minutes in the fourth quarter of 2002. Management believes that the decline is largely attributable to lower usage of mobile phones in Russia during the winter period as well as a long holiday period in the beginning of January.

The general market trend of growing churn that the Company experienced during 2002 continued during the first quarter of 2003. MTS’ churn rate in the first quarter of 2003 was 11.6% compared to 10.1% during the fourth quarter of 2002. Today, programs aimed at encouraging customer loyalty have become increasingly important for the Company.

The Company’s subscriber acquisition cost (SAC) per gross subscriber addition continued to decline in the first quarter of 2003 reflecting the lower cost of attracting mass-market subscribers (and, in particular, lower commissions that we pay to dealers for Jeans subscribers) and increased economies of scale. SAC for the quarter was at $30 compared to $34 in the fourth quarter of 2002.

MTS’ capital expenditures in Russia on property, plant and equipment during the first quarter of 2003 totaled $92.3 million. In addition, MTS spent $10.6 million on purchases of intangible assets during the first quarter of 2003.

In the first quarter of 2003, MTS’ provisions for doubtful accounts increased to $14.6 million compared to $2.5 million in the fourth quarter of 2002. The increase is largely attributable to increase in fraud on domestic and international long distance calls. MTS has discovered the fraud and has taken measures to prevent further fraud of this nature.

MTS’ business is organized on a geographical operations basis. Performance is measured and reported based on operating income by legal entity. Currently, MTS reports operations in Russia in two segments: MTS OJSC and Rosico (“Moscow Segment”) and all other legal entities in Russia combined. The Moscow Segment includes operations in the Moscow license area in addition to operations in Ivanovo, Kirov, Kaluga, Kostroma, Komi Republic, Kurgan, Nizhny Novgorod, Orenburg, Perm, Ryazan, Pskov, Saratov, Smolensk, Tambov, Tula, Tumen, Tver, Vladimir, Chelyabinsk, and Yaroslavl.

The second geographical segment includes all of our other Russian legal entities not included above, most notably our operation in the north-west of Russia, including St. Petersburg, and southern Russia, including Krasnodar. These regional operations contributed $18.9 million to MTS’s net income for the first quarter of 2003.

MTS Operations in Ukraine

At the beginning of March 2003 MTS acquired a 57.7% stake in Ukrainian mobile operator Ukrainian Mobile Communications (UMC) for $194.2 million and began to consolidate UMC into its financial statements effective March 1, 2003.

As of March 31, 2003 UMC provided services to 1.82 million subscribers compared to 1.70 million as of December 31, 2002. As of March 31, 2003 71% of UMC subscribers were enrolled in the company’s pre-paid tariff plan.

UMC’s net revenues for the month ended March 31, 2003 were $29.9 million, operating income was $10.8 million, EBITDA was $16.5 million, which translates into an EBITDA margin of 55% for the period, and net income amounted to $1.5 million.

UMC ARPU in Q1 2003 was $15.9, compared to $17.7 for the full-year 2002.

UMC’s capital expenditures on property, plant and equipment during March of 2003 amounted to $6.3 million. In addition, UMC spent $3.7 million on purchases of intangible assets during the month.

On June 4, 2003, MTS completed the acquisition of a 26.0% stake in UMC for $87.6 million pursuant to the terms and conditions of a call option agreement with Ukrtelecom signed on November 5, 2002. As the result of the transaction, MTS’ ownership in UMC has increased from 57.7% to 83.7%.

Capital Markets Activity

MTS also completed a $400 million Eurobond offering on January 30, 2003. The net proceeds from this offering of $396.1 million have been partially used for general corporate purposes, including the acquisition of 57.7% and 26.0% stakes in UMC in March and June 2003, respectively, and other acquisitions of mobile operators in Russia.

1

 In terms of numbers of subscribers.

2

 MTS’ unconsolidated subsidiary in Belarus, Mobile TeleSystems LLC.

Attachments to The First Quarter 2003 Earnings Press Release

Attachment A

EBITDA should not be considered in isolation as an alternative to net income, operating income, net cash provided by operating activity or any other measure of performance under U. S. GAAP. We believe that EBITDA is viewed as a relevant supplemental measure of performance in the wireless telecommunications industry and we define EBITDA as operating income excluding depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of our net revenues. We believe EBITDA and EBITDA margin to be relevant and useful information as these are one of important measurements used by our management to measure the operating profits or losses of our business. EBITDA is also one of many factors used by the credit rating agencies to determine our credit ratings. EBITDA and EBITDA margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with accounting principles generally accepted in the United States of America. EBITDA and EBITDA margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies, who may refer to EBITDA as Adjusted EBITDA. EBITDA is often calculated by adjusting net income to exclude only depreciation and amortization, income taxes and interest. If EBITDA were so calculated it would have been: $211.5 million, $116.5 million, $172.0 million for Q1 2003, Q1, 2002 and Q4 2002, respectively.

The following table provides a reconciliation of EBITDA to operating income:

US$ million (unaudited) Q1 2003 Q1 2002 Q4 2002
EBITDA $224.8 $123.5 $182.7
Less: depreciation and amortisation ($75.2) ($41.6) ($59.0)
Operating income $149.6 $81.9 $123.7

The following table provides a reconciliation of EBITDA margin to operating income as a percentage of net revenues:

As a percentage of net revenues (unaudited) Q1 2003 Q1 2002 Q4 2002
EBITDA margin 50.4% 49.9% 44.6%
Less: depreciation and amortization as a % of net revenues –16.9% –16.8% ?14.4%
Operating income as a % of net revenues 33.5% 33.1% 30.2%

If the Company were to reconcile EBITDA to net income, following would be the reconciliation:

US$ million Q1 2003 Q1 2002 Q4 2002
Net income $80.2 $42.8 $85.2
Add: depreciation and amortisation $75.2 $41.6 $59.0
Add: income taxes $40.5 $25.9 $16.3
Add: interest $15.6 $6.2 $11.6
Add: minority interest $13.8 $4.3 $14.8
Add (less): currency exchange and translation losses (gains) ($0.7) $0.8 $1.0
Add (less): Other expenses (income) $0.2 $1.9 ($5.2)
EBITDA as reported $224.8 $123.5 $182.7

Attachment B


Definitions

Subscriber. We define a “subscriber” as an individual or organization whose account does not have a negative balance for more than sixty-one days, or one hundred and eighty three days in the case of our Jeans brand tariff launched in November 2002.

Average monthly service revenue per subscriber (ARPU). We calculate our average monthly service revenue per subscriber by dividing our service revenues for a given period, including guest roaming fees, by the average number of our subscribers during that period and dividing by the number of months in that period.

Average monthly minutes of usage per subscriber (MOU). MOU is calculated by dividing the total number of minutes of usage during a given period by the average number of our subscribers during the period and dividing by the number of months in that period.

Churn. We define our “churn” as the total number of subscribers who cease to be a “subscriber” as defined above during the period (whether involuntarily due to non-payment or voluntarily, at such subscriber’s request), expressed as a percentage of the average number of our subscribers during that period.

Subscriber acquisition cost (SAC). We define SAC as total sales and marketing expenses for a given period. Sales and marketing expenses are comprised of advertising expenses, commissions to dealers, and handset subsidies. SAC per gross additional subscriber is calculated by dividing SAC during a given period by the total number of gross subscribers added by us during the period.

Unaudited consolidated statements of operations for the quarters ended March 31, 2002 & March 31, 2003

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

For the three months ended March 31, 2002 For the three months ended March 31, 2003
NET REVENUES
Service revenues, net $228,072 $421,298
Connection fees 6,541 7,314
Equipment sales 12,991 17,483
  247,604 446,095
COST OF SERVICES AND PRODUCTS
Interconnection and line rental 23,715 34,400
Roaming expenses 17,116 20,543
Cost of equipment 18,118 27,885
  58,949 82,828
OPERATING EXPENSES 39,846 80,725
SALES AND MARKETING EXPENSES 25,301 57,736
DEPRECIATION AND AMORTIZATION 41,589 75,190
Net operating income 81,919 149,616
CURRENCY EXCHANGE AND TRANSLATION LOSSES (GAINS) 831 (742)
OTHER EXPENSES (INCOME):
Interest income (3 404) (3 232)
Interest expenses, net of amounts capitalized 9 603 18 812
Other expense 1 857 250
Total other expenses, net 8 056 15 830
Income before provision for income taxes and minority 73 032 134 528
PROVISION FOR INCOME TAX 25 915 40 469
MINORITY INTEREST 4 299 13 841
NET INCOME 42 818 80 218
Weighted average number of shares outstanding 1 983 399 507 1 983 399 507
Per common share 0.022 0.040

Condenced unaudited consolidated statements of cash flows for the three months ended March 31, 2002 & March 31, 2003

Amounts in thousands of U.S. dollars, except share and per share data
  For the three months ended March 31, 2002 For the three months ended March 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $42,818 $80,218
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 4,299 13,841
Depreciation and amortization 41,589 75,190
Amortization of deferred connection fees (6,541) (7,314)
Provision for obsolete inventory 1,572 2,378
Provision for doubtful accounts 1,292 14,563
Loan interest accrued 9,401 18,812
Loan interest paid (2,198) (4,089)
Deferred taxes (267) (2,758)
Non-cash expenses associated stock bonus and stock options  
Changes in operating assets and liabilities:
Increase in accounts receivable (8,143) (19,973)
Decrease (Increase) in inventory 842 (2,736)
Increase in prepaid expenses and other current assets (21,998) (20,227)
Decrease in accounts payable, accrued liabilities and other payables (20,653) (19,962)
Total adjustments (805) 47,725
Net cash provided by operating activities 42,013 127,943
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (113,774) (98,621)
Purchase of intangible assets (5,559) (14,276)
Increase in short-term investments (79,862) (167,239)
Increase in investments in and advances to affiliates (185) (9,961)
Purchases, net of cash aquired (71,212) (151,327)
Net cash used in investing activities (270,592) (441,424)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes issue 50,808 400,000
Notes issuance cost (649) (3,929)
Capital lease obligaiton principal paid (3,546) (5,048)
Proceeds from short-term debt and other payments 9,271 9,795
Loan principal paid (450) (5,460)
Net cash used in financing activities 55,434 395,358
Effect of exchange rate changes on cash and cash equivalents (447) 172
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (173,592) 82,049
CASH AND CASH EQUIVALENTS, at beginning of period 219,629 34,661
CASH AND CASH EQUIVALENTS, at end of period $46,037 $116,710
SUPPLEMENTAL INFORMATION:
Income taxes paid $9,183 $26,699

Condensed unaudited consolidated balance sheets at December 31, 2002 and March 31, 2003

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

December 31, 2002 March 31, 2003
CURRENT ASSETS:
Cash and cash equivalents $34,661 $116,710
Short-term investments 30,000 197,239
Trade receivables, net 40,501 65,437
Accounts receivable, related parties 3,569 8,705
Inventory, net 41,386 55,308
Prepaid expenses and other current assets 208,213 260,717
Total current assets 358,330 704,116
PROPERTY, PLANT AND EQUIPMENT 1,344,633 1,649,648
INTANGIBLE ASSETS 525,009 641,391
INVESTMENTS IN AND ADVANCES TO AFFILIATES 34,034 43,995
OTHER ASSETS 21,290 27,447
Total assets $2,283,296 $3,066,597
CURRENT LIABILITIES
Accounts payable $117,623 $118,459
Accrued expenses and other 213,291 306,415
Accounts payable, related parties 4,968 5,324
Current portion of long-term debt, capital lease and finance obligations 88,330 134,259
Total current liabilities 424,212 564,457
LONG-TERM LIABILITIES
Long-term debt 358,914 773,471
Capital lease and finance obligations 7,241 5,017
Deferred income taxes 105,818 123,534
Deferred revenue and other 19,694 36,186
Total long-term liabilities 491,667 938,208
Total liabilities 915,879 1,502,665
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 65,373 179,873
STOCKHOLDERS’ 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 558,102 558,373
Unearned Compensation P&L (212) (212)
Shareholder receivable (34,412) (32,887)
Retained earnings 738,214 818,433
Total shareholders’ equity 1,302,044 1,384,059
Total liabilities and stockholders’ equity 2,283,296 3,066,597

Contact investor relations:

+ 7 495 223 20 25 ir@mts.ru

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