Financial Results for the Third Quarter and Nine Months Ended September 30, 2003

02 December 2003

Moscow, Russian Federation — December 2, 2003 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and Eastern Europe1, today announces its financial and operating results for the third quarter and nine months ended September 30, 20032.

 

Highlights

  • Revenues up 86% year-on-year to $722.4 million.
  • Net income increased by 85% year-on-year to $155.7 million.
  • MTS’ consolidated subscriber base is over 15.24 million customers, of which 12.44 million are in Russia and 2.80 million in Ukraine3.

Revenues for the third quarter of 2003 were $722.4 million, an 86% increase on the same quarter in 2002, and a 19% increase on the previous quarter.

Net income for the third quarter of 2003 was $155.7 million, an 85% increase on the same quarter in 2002, and a 21% increase compared to the previous quarter.

The Company’s OIBDA (see Attachment A) for the third quarter of 2003 was $388.1 million, an 88% increase on the same quarter of 2003 and a 19% increase on the previous quarter.

Financial Highlights (Unaudited)

US$ million

Q3 2003

Q3 2002

Change Y-on-Y

Q2 2003

Change Q-on-Q

Revenues $722.4 $388.5 86% $606.0 19%
Operating income $274.8 $145.8 88% $225.4 22%
Operating margin 38% 38%  —  37%  — 
Net income $155.7 $84.3 85% $128.5 21%
OIBDA $388.1 $205.9 88% $325.0 19%
OIBDA margin 54% 53%  —  54%  — 
Note: See Attachment A for definitions of OIBDA and OIBDA margin and reconciliations to operating income and operating margin, respectively.

As of September 30, 2003, MTS’ consolidated subscriber base was approximately 13.89 million. During the third quarter of 2003, the subscriber base increased by approximately 2.51 million, of which 2.20 million were added through organic growth of the Company’s business in Russia and Ukraine, and 305,000 through the acquisitions of two local mobile operators, Sibchallenge in the Krasnoyarsk region and Tomsk Cellular Communications in the Tomsk region. In addition, Mobile TeleSystems LLC, a mobile operator in Belarus in which MTS has a 49.0% stake, serviced approximately 309,000 users.

As of November 30, 2003, MTS’ consolidated subscriber base was comprised of 15.24 million customers, of which 12.44 million were in Russia and 2.80 million were in Ukraine. In addition, Mobile TeleSystems LLC serviced 405,000 subscribers in Belarus as of November 30, 2003.

A significant year-on-year increase in MTS’ revenues was driven by strong organic growth as well as the acquisitions of UMC in Ukraine and several local mobile operators in Russia.

The Company’s disciplined approach to controlling costs helped to deliver an OIBDA margin of 54% in the third quarter of 2003, consistent with the previous quarter and a slight increase year-on-year.

MTS’ capital expenditures on property, plant and equipment during the third quarter of 2003 totaled $235.1 million (of which $60.5 million was spent in Ukraine), which brings total capital expenditures for the nine months of 2003 to $560.9 million. In addition, MTS spent $17.3 million on purchases of intangible assets during the third quarter of 2003 (of which $8.4 million was spent in Ukraine), which brings total expenditures on intangible assets during the nine months of 2003 to $74.7 million.

During the third quarter of 2003 MTS spent $327.5 million on acquisitions of local mobile phone operators in Russia and on consolidation of minority ownership in its subsidiaries.

MTS made additional advances of $3.3 million to its unconsolidated subsidiary in Belarus, Mobile TeleSystems LLC, in the third quarter of 2003 and a total of $19.4 million in the nine months of 2003, which brings total investment in Mobile TeleSystems LLC to $53.1 million at September 30, 2003.

MTS’ total debt4 at the end of the third quarter of 2003 was $1.39 billion, while net debt was at $1.22 billion. Subsequent to the end of the third quarter of 2003, MTS completed a placement of a $400 million, seven-year 144A/Regulation S Eurobonds, with a coupon of 8.375% paid semi-annually.

Operational Highlights

 

Q3 2002

Q4 2002

Q1 2003

Q2 2003

Q3 2003

Total subscribers, end of period (mln) 5.43 6.64 9.42 11.34 13.89
Russia (mln) 5.43 6.64 7.60 9.32 11.34
Ukraine (mln)  —  1.70 1.82 2.02 2.55
Unconsolidated subsidiaries in Russia5  —   —   —   —  114,372
MTS Belarus6 14,378 42,525 83,200 170,200 308,916
Russia
ARPU (US$) $25.2 $21.2 $18.5 $18.7 $18.8
MOU (minutes) 175 175 148 162 159
Churn rate (%) 7.5 10.1 11.6 11.0 12.3
SAC per gross additional subscriber (US$) $32 $34 $30 $27 $23
Ukraine
ARPU (US$)  —   —  $15.9 $17.2 $17.8
MOU (minutes)  —   —  87 97 110
Churn rate (%)  —   —  8.9 5.5 4.6
SAC per gross additional subscriber (US$)  —   —  $51 $37 $34
Note: See Attachment B for definitions of ARPU, MOU, Churn and SAC.

MTS’ Operations in Russia

As of September 30, 2003, MTS’ consolidated subscriber base in Russia was 11.34 million, of which 2.81 million were enrolled in the Company s pre-paid Jeans tariff plans. According to AC & M-Consulting, an independent market research company, MTS’ share of the mobile communication market in Russia was 37%.

Revenues and net income from MTS’ operations in Russia during the third quarter of 2003 were $604.0 million7 and $129.1 million, respectively, compared to $506.9 million8 and $112.2 million, in the second quarter of 2003.

The Company’s average monthly revenue per user (ARPU) in Russia increased in the third quarter of 2003 to $18.8 compared to $18.7 in the second quarter of 2003. Average monthly minutes of usage per subscriber (MOU) in the third quarter of 2003 were 159 minutes compared to 162 minutes in the second quarter of 2003.

The Company’s subscriber acquisition cost (SAC) per gross additional subscriber in Russia in the third quarter of 2003 declined to $23 compared to $27 in the second quarter of 2003. The main reason for the decline was a cheaper cost of attracting the mass-market subscribers and increased economies of scale.


MTS’ Operations in the Ukraine

As of September 30, 2003 MTS, provided services to 2.55 million subscribers in Ukraine compared to 2.02 million as of June 30, 2003. As of September 30, 2003, 76% of MTS subscribers in Ukraine were enrolled in the Company’s pre-paid tariff plans. MTS is the leader in Ukraine with a market share of 48% as of September 30, 2003 according to an independent publication, Ukrainian News.

MTS’ operations in Ukraine contributed $121.1 million to the Company’s revenues and $26.6 million to net income during the third quarter of 20039 compared to $100.5 million and $16.3 million in the second quarter of 2003. MTS’ ARPU in Ukraine in the third quarter of 2003 grew to $17.8, compared to $17.2 in the second quarter of 2003. Usage was 110 minutes as compared to 97 minutes in the second quarter of 2003. An increase in ARPU in the third quarter of 2003 compared to the previous quarter was due to growth in minutes of usage as well as increases in guest roaming revenues from $9.5 million in the second quarter of 2003 to $15.5 million in the third quarter of 2003.

MTS’ SAC per gross additional subscriber in Ukraine in the third quarter of 2003 was at $34 which is a decrease from $37 reported in the second quarter of 2003. Similar to the trends experienced by MTS in Russia, the decrease in the subscriber acquisition costs in Ukraine was largely attributable to the lower cost of acquiring of mass market subscribers.

Commenting on the results, Vassily Sidorov, President and CEO of MTS, said: “We are very pleased with this set of results. Our strategy of further expansion into new regional markets, as well as concentration on strengthening of our position in markets in which we already operate has yielded significant results in terms of revenue and net income growth in the third quarter. Our subscriber base continues to grow and we are confident that we are able to generate further growth in shareholder returns over the long term.”

1
As of November 30, 2003.
2
In terms of number of subscribers.
3
Based on unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
4
Total debt is comprised of the current portion of long-term debt, current capital lease and finance obligations, long-term debt, and long-term capital lease and finance obligations. Net debt is the difference between total debt and cash and cash equivalents and short-term investments.
5
MTS owns 50% stakes in Primtelefon, a local mobile operator in the Far East and Siberia part of Russia, Volgograd Mobile and Astrakhan Mobile, a local mobile operators in the Volga part of Russia. MTS does not consolidate these companies.
6
MTS owns a 49% stake in Belarus operator Mobile TeleSystems LLC, which is not consolidated.
7
Excluding intercompany eliminations of $2.7 million.
8
Excluding intercompany eliminations of $1.5 million.
9
MTS began to consolidate Ukrainian Mobile Communications (UMC), its Ukrainian subsidiary, into its financial statements effective March 1, 2003.

Attachments to the Third Quarter 2003 Earnings Press Release


Attachment A

Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP.

Operating Income Before Depreciation and Amortization (OIBDA) and OIBDA margin. OIBDA represents operating income before depreciation and amortization. OIBDA margin is defined as OIBDA as a percentage of our net revenues. OIBDA may not be similar to OIBDA measures of other companies, is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of mobile operators and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our OIBDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the wireless telecommunications industry. OIBDA can be reconciled to our consolidated statements of operations as follows:

US$ million

Q3 2003

Q3 2002

Q2 2003

Operating income $274.8 $145.8 $225.4
Add: depreciation and amortization $113.3 $60.1 $99.6
OIBDA $388.1 $205.9 $325.0

OIBDA margin can be reconciled to our operating margin as follows:

US$ million

Q3 2003

Q3 2002

Q2 2003

Operating margin 38% 38% 37%
Add: depreciation and amortization as a percentage of revenue 16% 15% 17%
OIBDA margin 54% 53% 54%

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, marketing expenses, and handset subsidies for a given period. Sales and marketing expenses include advertising expenses and commissions to dealers. 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.

Mobile TeleSystems condensed unaudited consolidated statements of operations for the three months ended September 30, 2002 and 2003 and nine months ended September 30, 2002 and 2003

AMOUNTS IN THOUSANDS OF U. S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
  Three months ended September 30 Nine months ended September 30
 

2002

2003

2002

2003

OPERATING REVENUES        
Service revenues, net $368,800 $698,245 $891,186 $1,690,918
Connection fees $6,492 $8,665 $18,720 $24,831
Equipment sales 13,256 $15,453 42,544 58,748
  388,548 722,363 952,450 1,774,497
OPERATING EXPENSES        
Interconnection and line rental 36,597 $48,374 91,678 127,282
Roaming expenses 23,833 $37,648 52,546 82,917
Cost of equipment 22,327 $39,357 60,446 112,996
Operating expenses 55,296 $125,071 146,968 294,015
Selling expenses 44,629 $83,788 109,424 219,352
Depreciation and amortization 60,072 $113,338 150,750 288,112
  242,754 447,576 611,812 1,124,674
Operating income 145,794 274,787 340,638 649,823
CURRENCY EXCHANGE AND TRANSLATION LOSSES (GAINS) 1,757 (3,433) 2,447 (4,841)
OTHER EXPENSES (INCOME):        
Interest income (1,292) (2,920) (6,789) (11,743)
Interest expenses, net of amounts capitalized 10,635 27,200 31,322 70,013
Other expenses 13 11,396 2,734 12,251
Total other expenses, net 9,356 35,676 27,267 70,521
Income before provision for income taxes and minority interest 134,681 242,544 310,924 584,143
INCOME TAX PROVISION 40,146 64,102 94,100 160,514
MINORITY INTEREST 10,192 22,694 24,880 59,139
NET INCOME 84,343 155,748 191,944 364,490
Earnings per share — basic and diluted 0.043 0.079 0.097 0.184

Mobile TeleSystems condensed unaudited consolidated balance sheets at December 31, 2002 and September 30, 2003

AMOUNTS IN THOUSANDS OF U. S. DOLLARS, EXCEPT SHARE AMOUNTS
 

December 31 2002

September 30 2003

CURRENT ASSETS    
Cash and cash equivalents $34,661 $147,269
Short-term investments 30,000 30,000
Trade receivables, net 40,501 113,372
Accounts receivable, related parties 3,569 4,515
Inventory, net 41,386 59,038
VAT receivable 154,061 199,361
Prepaid expenses and other current assets 54,152 91,620
Total current assets 358,330 645,175
PROPERTY, PLANT AND EQUIPMENT 1,344,633 2,068,404
INTANGIBLE ASSETS 525,009 978,703
INVESTMENTS IN AND ADVANCES TO AFFILIATES 34,034 84,344
OTHER ASSETS 21,290 8,330
Total assets $2,283,296 $3,784,956
CURRENT LIABILITIES    
Accounts payable $117,623 $164,122
Accrued expenses and other current liabilities 102,341 207,110
Accounts payable, related parties 4,968 34,608
Subscriber prepayments 110,950 148,208
Current portion of long-term debt and capital lease obligations 88,330 589,716
Total current liabilities 424,212 1,143,764
LONG-TERM LIABILITIES    
Long-term debt 358,914 797,632
Capital lease obligations 7,241 7,065
Deferred income taxes 105,818 178,534
Deferred revenue and other long-term liabilities 19,694 49,217
Total long-term liabilities 491,667 1,032,448
Total liabilities 915,879 2,176,212
COMMITMENTS AND CONTINGENCIES  —   — 
MINORITY INTEREST 65,373 47,534
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 December 31, 2002 and September 30, 2003, 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) (10,197)
Additional paid-in capital 558,102 559,251
Unearned compensation (212) (212)
Shareholder receivable (34,412) (29,415)
Retained earnings 738,214 991,225
Total shareholders’ equity 1,302,044 1,561,210
Total liabilities and shareholders’ equity 2,283,296 3,784,956

Mobile TeleSystems condensed unaudited consolidated statements of cash flows for the nine months ended September 30, 2002 & 2003

AMOUNTS IN THOUSANDS OF U. S. DOLLARS
 

Nine months ended September 30 2002

Nine months ended September 30 2003

CASH FLOWS FROM OPERATING ACTIVITIES    
Net income $191,944 $364,490
Adjustments to reconcile net income to net cash provided by operating activities    
Minority interest 24,880 59,139
Depreciation and amortization 150,750 288,112
Amortization of deferred connection fees (18,095) (24,945)
Provision for obsolete inventory 1,572 4,767
Provision for doubtful accounts 4,535 28,694
Equity in net loss of associates  —  1,557
Loan interest accrued 31,322 70,013
Loan interest paid (21,600) (52,848)
Deferred taxes (11,212) (29,094)
Changes in operating assets and liabilities, net of effect from acquisitions    
Increase in accounts receivable (28,585) (75,026)
Increase in inventory (16,050) (8,597)
Increase in prepaid expenses and other current assets (67,732) (33,688)
Increase in accounts payable, accrued liabilities and other payables 18,079 75,192
Net cash provided by operating activities 259,808 667,766
CASH FLOWS FROM INVESTING ACTIVITIES    
Purchase of property, plant and equipment (351,925) (560,927)
Purchase of intangible assets (28,872) (74,725)
Sales of short-term investments 85,304  — 
Investments in and advances to affiliates (22,166) (50,310)
Acquisition of subsidiaries, net of cash añquired (130,874) (629,306)
Net cash used in investing activities (448,533) (1,315,268)
CASH FLOWS FROM FINANCING ACTIVITIES    
Proceeds from issuance of notes 50,808 697,000
Notes issuance cost (649) (5,884)
Capital lease obligaiton principal paid (3,524) (10,467)
Dividends paid  —  (96,701)
Proceeds from loans 31,130 222,903
Loan principal paid (5,298) (52,298)
Payments from shareholders 4,781 6,146
Net cash used in financing activities 77,248 760,699
Effect of exchange rate changes on cash and cash equivalents (527) (590)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (112,004) 112,607
CASH AND CASH EQUIVALENTS, at beginning of period 219,629 34,661
CASH AND CASH EQUIVALENTS, at end of period $107,625 $147,269
 

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