Financial Results for the Fourth Quarter and Full-Year Ended December 31, 2003

30 March 2004

Moscow, Russian Federation — March 30, 2004 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and Ukraine, today announces its financial and operating results for the fourth quarter and full-year ended December 31, 20031.

 

Highlights

  • Revenues up 87% year-on-year to $2.55 billion
  • Net income increased by 87% year-on-year to $517.2 million
  • MTS’ consolidated subscriber base2 is over 19.12 million customers, of which 15.28 million are in Russia and 3.84 million in Ukraine

Revenues for the year ended December 31, 2003 were $2.55 billion, a year-on-year increase of 87.0%. Fourth quarter revenues were $771.7 million, an 88.5% increase on the same quarter in 2002 and a 6.8% increase on the previous quarter.

Net income for the full year 2003 was $517.2 million, up 86.6% on the previous year. Fourth quarter net income was $152.7 million, a 79.3% increase on the same quarter in 2002 and down 1.9% compared to the previous quarter.

In 2003, OIBDA3 was up 98.6% compared to the previous year to $1.34 billion, giving an OIBDA margin of 52.6%. Fourth quarter OIBDA was $400.6 million, a 119.2% increase on the same quarter in 2002 and a 3.2% increase on the previous quarter. OIBDA margin in the fourth quarter was 51.9% and 52.6% for the full-year 2003.

Financial Highlights (Unaudited)

US$ million Q4 2003 Q3 2003 Change Q-on-Q FY 2003 FY 2002 Change Y-on-Y
Revenues 771.7 722.4 6.8% 2 546.2 1 361.8 87.0%
Operating income 272.8 274.8 -0.7% 922.6 464.4 98.7%
Operating margin 35.3% 38.0%  —  36.2% 34.1%  — 
Net income 152.7 155.7 -1.9% 517.2 277.1 86.6%
OIBDA 400.6 388.1 3.2% 1 338.5 674.1 98.6%
OIBDA margin 51.9% 53.7%  —  52.6% 49.5%  — 

As of December 31, 2003, MTS’ consolidated subscriber base was approximately 16.72 million. During 2003, the subscriber base increased by approximately 10.08 million, of which 7.71 million were added through the organic growth of the Company’s business, 1.82 million through the acquisition of UMC in Ukraine and approximately 553,000 through the acquisitions of a number of local mobile operators in Russia. In addition, MTS’ unconsolidated subsidiaries in Russia serviced 123,115 subscribers4 and Mobile TeleSystems LLC, a mobile operator in Belarus in which MTS has a 49.0% stake, serviced approximately 464,783 subscribers.

As of March 28, 2004, MTS’ consolidated subscriber base was comprised of approximately 19.12 million customers, of which 15.28 million were in Russia and 3.84 million were in Ukraine. In addition, MTS’ unconsolidated subsidiaries in Russia serviced 160,900 subscribers and Mobile TeleSystems LLC serviced 588,170 subscribers in Belarus.

The significant year-on-year increase in MTS’ revenues was driven by strong organic growth as well as by 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 52.6% for 2003, an increase from 49.5% in 2002.

MTS’ capital expenditures on property, plant and equipment during the fourth quarter of 2003 totaled $278.2 million (of which $78.6 million was spent in Ukraine5), bringing its total capital expenditures on property, plant and equipment for 2003 to $839.2 million ($651.6 million in Russia and $187.6 million in Ukraine). In addition, MTS spent $44.9 million on purchases of intangible assets during the fourth quarter of 2003 (of which $37.3 million was spent in Ukraine), bringing its total expenditures on intangible assets during 2003 to $119.6 million (of which $58.7 million was spent in Ukraine).

During 2003, MTS spent $702.2 million, net of cash acquired, on acquisitions of other mobile phone operators, including $330.6 million for UMC in Ukraine6, $156.0 million for acquisitions of controlling interests in other mobile operators in Russia, $180.6 million on acquiring additional stakes in certain existing MTS subsidiaries in Russia and $35.0 million on the acquisition of non-controlling stakes in mobile operators in Russia.

MTS made additional advances of $6.9 million in the fourth quarter of 2003 to its unconsolidated subsidiary in Belarus, Mobile TeleSystems LLC, bringing its total net investment in Mobile TeleSystems LLC in 2003 to $24.9 million, including MTS’ equity in net losses of Mobile TeleSysems LLC of $1.5 million.

MTS’ total debt7 at the end of 2003 was $1.66 billion, while its net debt8 was at $1.32 billion.

Operational Highlights

  Q1 2003 Q2 2003 Q3 2003 Q4 2003 FY 2003 FY 2002
Total subscribers, end of period (mln) 9.42 11.34 13.89 16.72 16.72 6.64
Russia (mln) 7.60 9.32 11.34 13.37 13.37 6.64
Ukraine (mln) 1.82 2.02 2.55 3.35 3.35  — 
Unconsolidated subsidiaries in Russia9  —   —  114,372 123,115 123,115  — 
MTS Belarus10 83,200 170,200 308,916 464,783 464,783 42,525
Russia
ARPU (US$) $18.5 $18.7 $18.8 $16.3 $17.1 $22.9
MOU (minutes) 148 162 159 140 144 159
Churn rate (%) 11.6 11.0 12.3 12.5 47.3 33.9
SAC per gross additional subscriber (US$) $30 $27 $23 $24 $26 $35
Ukraine
ARPU (US$) $15.9 $17.2 $17.8 $15.4 $15.1  — 
MOU (minutes) 87 97 110 114 97  — 
Churn rate (%) 8.9 5.5 4.6 6.5 23.8  — 
SAC per gross additional subscriber (US$) $51 $37 $34 $26 $32  — 
Notes: All information on Ukraine is for ten months of 2003, from March 1 to December 31, excluding the churn rate, which is for the full-year 2003. See Attachment C for definitions of ARPU, MOU, Churn and SAC.

MTS’ Operations in Russia

As of December 31, 2003, MTS’ consolidated subscriber base in Russia was approximately 13.37 million, of which 5.88 million were enrolled in the Company’s pre-paid Jeans tariff plans. According to AC & M-Consulting, an independent market research company, MTS retained its leading market share of 37% of the mobile communication market in Russia in 2003.

Revenues and net income from MTS’ operations in Russia during the fourth quarter of 2003 were $630.5 million11 and $129.7 million, respectively, compared to $604.0 million12 and $129.1 million in the third quarter of 2003.

The Company’s average monthly revenue per user (ARPU) in Russia decreased in the fourth quarter of 2003 to $16.3 compared to $18.8 in the third quarter of 2003. Average monthly minutes of usage per subscriber (MOU) in the fourth quarter of 2003 were 140 minutes compared to 159 minutes in the third quarter of 2003. The decline in usage could be mainly attributed to the increased share of mass-market subscribers in the customer mix.

The Company’s subscriber acquisition cost (SAC) per gross additional subscriber in Russia in the fourth quarter of 2003 increased to $24 compared to $23 in the third quarter of 2003. This increase was primarily due to a number of significant advertising activities during the fourth quarter. At the same time SAC declined significantly on a year-on-year basis from $35 in 2002 to $26 in 2003, owing to the lower costs of attracting mass-market subscribers and increased economies of scale.

As reported earlier, MTS had a 47.3% churn rate in Russia in 2003. Such relatively high churn rate is mainly determined by the absence of term contracts and zero connection fees, in addition to the comparatively unique and dynamic market conditions in Russia whereby mobile operators regularly introduce new tariffs, prompting customers to migrate more frequently between providers or tariff plans. This year MTS is launching a number of nationwide subscriber retention programs aimed at increasing customer loyalty and potentially reducing churn levels.


MTS’ Operations in the Ukraine

As of December 31, 2003, MTS provided services to 3.35 million subscribers in Ukraine, of which 79.4% were enrolled in the Company’s pre-paid tariff plans. MTS is the leader in Ukraine with a market share of 51% as of December 31, 2003, according to AC & M-Consulting.

MTS’ operations in Ukraine contributed $142.5 million to the Company’s revenues and $23.0 million to net income during the fourth quarter of 2003 compared to $121.1 million and $26.6 million in the third quarter of 2003. Between March 1, 2003 to December 31, 2003 Ukrainian operations contributed $394.0 million to MTS’ revenues and $67.4 million to the net income. MTS’ ARPU in Ukraine in the fourth quarter of 2003 declined to $15.4, compared to $17.8 in the third quarter of 2003, largely due to the significant increase in the number of subscribers in December 2003. Usage was up to 114 minutes from 110 minutes in the third quarter of 2003, mainly as a result of increased affordability in services as tariffs were lowered and improvements in network coverage and quality.

MTS’ SAC per gross additional subscriber in Ukraine in the fourth quarter of 2003 was at $26, which is a decrease from $34 reported in the third 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 costs of attracting mass-market subscribers and increased economies of scale.

Commenting on the results, Vassily Sidorov, President and CEO of MTS, said: “2003, the year of MTS’ 10th anniversary, has been remarkable for the Company. We expanded into new markets, significantly increased our subscriber base and again achieved impressive financial results. MTS has been the main beneficiary of the explosive growth in all of the markets in which the Company operates, driven by a continuous improvement in economic conditions and disposable incomes, combined with the fact that mobile telephones have become an essential part of everyday life.”

1
Based on unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America.
2
As of March 28, 2004.
3
See Attachment A for definitions of OIBDA and OIBDA margin and reconciliations to operating income and operating margin, respectively.
4
MTS owns 50% stakes in Primtelefon, a local mobile operator in the Far Eastern and Siberian parts of Russia, and in Volgograd Mobile and Astrakhan Mobile, local mobile operators in the Volga part of Russia. MTS does not consolidate these companies.
5
MTS began to consolidate Ukrainian Mobile Communications (UMC), its Ukrainian subsidiary, into its financial statements from the date of acquisition, effective March 1, 2003.
6
Net of $27.5 million of notes issued and $16.8 million of cash acquired.
7
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.
8
Net debt is the difference between the total debt and cash and cash equivalents and short-term investments. See Attachment B for reconsolidation of net debt to our consolidated balance sheet.
9
MTS owns 50% stakes in Primtelefon, a local mobile operator in the Far Eastern and Siberian parts of Russia, and in Volgograd Mobile and Astrakhan Mobile, local mobile operators in the Volga part of Russia. MTS does not consolidate these companies.
10
MTS owns a 49% stake in Belarus operator Mobile TeleSystems LLC, which is not consolidated.
11
Excluding intercompany eliminations of $1.3 million.
12
Excluding intercompany eliminations of $2.7 million.

Attachments to the Fourth Quarter and Full-Year 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. Our OIBDA may not be similar to OIBDA measures of other companies; it 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 Q4 2003 FY 2002 FY 2003
Operating income 274.8 272.8 464.4 922.6
Add: depreciation and amortization 113.3 127.8 209.7 415.9
OIBDA 388.1 400.6 674.1 1338.5

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

US$ million Q3 2003 Q4 2003 FY 2002 FY 2003
Operating margin 38.0% 35.3% 34.1% 36.2%
Add: depreciation and amortization as a percentage of revenue 15.7% 16.6% 15.4% 16.4%
OIBDA margin 53.7% 51.9% 49.5% 52.6%

Attachment B

Net debt can be reconciled to our consolidated balance sheet as follows:

US$ mln December 31, 2003
Current Portion Of Long Term Debt And Capital Lease Obligations 710
Long Term Debt 942
Capital Lease Obligations 8
  1 660
Less  
Cash and Cash Equivalents (90)
Short-Term Investments (245)
Net Debt 1 325

Attachment C

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 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 December 31, 2002 and 2003 and the years ended December 31, 2002 and 2003

Amounts in thousands of U. S. dollars, execept share and per share data
  Three months ended December 31 Year ended December 31
 

2002

2003

2002

2003

OPERATING REVENUES
Service revenues, net $383 101 $744 799 $1 274 287 $2 435 717
Connection fees 6 134 4 541 24 854 29 372
Equipment sales 20 071 22 361 62 615 81 109
  409 306 771 701 1 361 756 2 546 198
OPERATING EXPENSES
Interconnection and line rental 21 374 59 988 113 052 187 270
Roaming expenses 30 847 30 921 83 393 113 838
Cost of equipment 29 781 60 075 90 227 173 071
Operating expenses 82 088 112 707 229 056 406 722
Selling expenses 62 553 107 431 171 977 326 783
Depreciation and amortization 58 930 127 804 209 680 415 916
  285 573 498 926 897 385 1 623 600
Operating income 123 733 272 775 464 371 922 598
CURRENCY EXCHANGE AND TRANSLATION LOSSES (GAINS) 1 027 4 148 3 474 (693)
OTHER EXPENSES (INCOME)
Interest income (1 500) (6 333) (8 289) (18 076)
Interest expenses, net of amounts capitalized 13 067 37 503 44 389 106 551
Other (income) expense (5 188) (8 830) (2 454) 3 420
Total other expenses, net 6 379 22 340 33 646 91 895
Income before provision for income taxes and minority interest 116 327 246 287 427 251 831 396
INCOME TAXES PROVISION 16 317 81 966 110 417 242 480
MINORITY INTEREST 14 831 11 573 39 711 71 677
NET INCOME 85 179 152 748 277 123 517 239
Weighted average number of shares outstanding, in thousands 1 983 400 1 983 400 1 983 400 1 983 400
Earnings per share — basic and diluted 0.0429 0.0770 0.1397 0.2608

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

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

December 31 2002

December 31 2003

CURRENT ASSETS
Cash and cash equivalents $34 661 $90 376
Short-term investments 30 000 245 000
Trade receivables, net 40 501 99 951
Accounts receivable, related parties 3 569 3 356
Inventory, net 41 386 67 291
VAT receivable 154 061 209 629
Prepaid expenses and other current assets 54 152 124 876
Total current assets 358 330 840 479
PROPERTY, PLANT AND EQUIPMENT 1 344 633 2 256 076
INTANGIBLE ASSETS 525 009 1 015 780
INVESTMENTS IN AND ADVANCES TO AFFILIATES 34 034 103 585
OTHER ASSETS 2 957 9 431
Total assets $2 264 963 $4 225 351
CURRENT LIABILITIES
Accounts payable $117 623 $168 039
Accrued expenses and other current liabilities 213 291 387 096
Accounts payable, related parties 4 968 31 904
Current portion of long-term debt and capital lease obligations 88 330 710 270
Total current liabilities 424 212 1 297 309
LONG-TERM LIABILITIES
Long-term debt 358 914 942 418
Capital lease obligations 7 241 7 646
Deferred income taxes 87 485 180 628
Deferred revenue and other long-term liabilities 19 694 25 177
Total long-term liabilities 473 334 1 155 869
Total liabilities 897 546 2 453 178
COMMITMENTS AND CONTINGENCIES  —   — 
MINORITY INTEREST 65 373 47 603
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 December 31, 2002 and December 31, 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 558 102 560 571
Unearned compensation (212) (869)
Shareholder receivable (34 412) (27 610)
Cumulative translation adjustment account  —  7 595
Retained earnings 738 214 1 144 522
Total shareholders’ equity 1 302 044 1 724 570
Total liabilities and shareholders’ equity 2 264 963 4 225 351

Mobile TeleSystems condensed unaudited consolidated statements of cash flows for the years ended December 31, 2002 and 2003

Amounts in thousands of U. S. dollars
 

Year ended December 31 2002

Year ended December 31 2003

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $277 123 $517 239
Adjustments to reconcile net income to net cash provided by operating activities
Minority interest 39 475 71 677
Depreciation and amortization 209 680 415 916
Amortization of deferred connection fees (24 854) (29 372)
Provision for obsolete inventory 5 614 3 307
Provision for doubtful accounts 7 047 32 633
Equity in net (income) loss of associates  —  (2 670)
Loan interest accrued 44 388 106 551
Loan interest paid (43 438) (79 824)
Deferred taxes (18 989) (43 001)
Non-cash expenses associated stock bonus and stock option plans 23 (657)
Other non-cash transactions  —  7 595
Changes in operating assets and liabilities, net of effect from acquisitions
(Increase) Decrease in accounts receivable (20 305) (64 384)
(Increase) Decrease in inventory (18 186) (14 737)
(Increase) Decrease in prepaid expenses and other current assets (74 210) (76 106)
(Decrease) Increase in accounts payable, accrued liabilities and other payables 29 404 125 617
Total adjustments 135 649 452 545
Net cash provided by operating activities 412 772 969 784
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (502 054) (839 165)
Purchase of intangible assets (72 218) (119 606)
(Increase) Decrease in short-term investments 55 304 (215 000)
Increase in investments in and advances to affiliates (35 557) (69 110)
Acquisitions of subsidiaries, net of cash acquired (143 396) (667 206)
Net cash used in investing activities (697 921) (1 910 087)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes 50 808 1 097 000
Notes issuance cost (649) (9 556)
Capital lease obligaiton principal paid (1 804) (22 646)
Dividends paid  —  (114 664)
Proceeds from loans 52 851 712 716
Loan principal paid (7 008) (677 374)
Payments from shareholders 6 619 8 269
Net cash provided by financing activities 100 817 993 745
Effect of exchange rate changes on cash and cash equivalents (636) 2 273
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (184 968) 55 715
CASH AND CASH EQUIVALENTS, at beginning of period 219 629 34 661
CASH AND CASH EQUIVALENTS, at end of period $34 661 $90 376
 

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