Financial Results for the First Quarter Ended March 31, 2004

16 June 2004

Moscow, Russian Federation — June 16, 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 first quarter ended March 31, 20041.

Second Quarter 2005 Financial and Operating Results Management Presentation
presentation_q1_2004.pdf (780 KB)

Highlights

  • Revenues up 81% year-on-year to $808.7 million
  • Net income increased by 159% year-on-year to $207.8 million
  • OIBDA margin was at 54.5%
  • MTS’ consolidated subscriber base increased by 5.21 million since the beginning of the year to reach 21.93 million2

Revenues for the first quarter of 2004 were $808.7 million, a year-on-year increase of 81.3%3, and a 4.8% increase on the previous quarter.

First quarter net income was $207.8 million, a 159.1% increase on the same quarter in 2003, and a 36.1% increase compared to the previous quarter.

First quarter OIBDA3 was $440.7 million, a 96.0% increase on the same quarter in 2003, and a 10.0% increase on the previous quarter. OIBDA margin in the first quarter was 54.5% compared to 51.9% in the fourth quarter of 2003 and 50.4% in the first quarter of 2003.

Financial Highlights (Unaudited)

US$ million Q1 2004 Q4 2003 Change Q-on-Q Q1 2003 Change Y-on-Y
Revenues 808.7 771.7 4.8% 446.1 81.3%
Operating income 306.8 272.8 12.5% 149.6 105.1%
Operating margin 37.9% 35.3%  —  33.5%  — 
Net income 207.8 152.7 36.1% 80.2 159.1%
OIBDA 440.7 400.6 10.0% 224.8 96.0%
OIBDA margin 54.5% 51.9%  —  50.4%  — 

As of March 31, 2004, MTS’ consolidated subscriber base was approximately 19.19 million. During the first quarter of 2004, the Company’s subscriber base increased by approximately 2.47 million, all of which were added through the organic growth of the Company’s business. In addition, MTS’ unconsolidated subsidiaries5 in Russia serviced 163,837 subscribers and Mobile TeleSystems LLC, a mobile operator in Belarus in which MTS has a 49.0% stake, serviced approximately 592,600 subscribers.

Since the beginning of 2004, MTS has added 5.21 million new subscribers and, as of June 15, 2004, MTS’ consolidated subscriber base was comprised of approximately 21.93 million customers, of which 17.43 million were in Russia and 4.50 million were in Ukraine. In addition, MTS’ unconsolidated subsidiaries in Russia serviced 212,250 customers and Mobile TeleSystems LLC serviced 714,930 customers in Belarus.

The increase in MTS’ revenues in the first quarter of 2004 compared to the fourth quarter of 2003 was driven by a continued growth in subscribers in all the markets in which the Company operates. Benefits derived from additional economies of scale resulted in a growth in the Company’s OIBDA margin to 54.5%, compared to 51.9% in the previous quarter and 50.4% in the first quarter of 2003. The increase in the Company’s net income margin to 25.7% in the first quarter of 2004 compared to 19.8% in the previous quarter can be attributed to growth in revenues and decrease in related expenses incurred by the Company during the period (e.g. sales and marketing expenses, taxes other than income tax, interest expenses).

MTS’ capital expenditures on property, plant and equipment during the first quarter of 2004 totaled $213.4 million (of which $31.6 million was spent in Ukraine). In addition, MTS spent $18.8 million on purchases of intangible assets during the first quarter of 2004 (of which $6.5 million was spent in Ukraine).

MTS’ total debt6 at the end of the first quarter of 2004 was $1.62 billion compared to $1.66 billion at the end of 2003. The Company’s net debt7 was $1.26 billion at the end of the first quarter compared to $1.32 billion at the end of 2003.

Commenting on the results, Vassily Sidorov, President and CEO of MTS, said: “The first quarter of 2004 was successful for the Company. We achieved significant expansion in our customer base in all the markets we operate in. MTS’ growth in net income and improved profitability were largely driven by increased economies of scale. Our management team will continue its efforts to improve the operational efficiency and strengthen the market position of the Company.”

Operational Highlights

  Q1 2004 Q4 2003 Q3 2003 Q2 2003 Q1 2003
Total subscribers, end of period (mln) 19.19 16.72 13.89 11.34 9.42
Russia (mln) 15.34 13.37 11.34 9.32 7.60
Ukraine (mln) 3.85 3.35 2.55 2.02 1.82
Unconsolidated subsidiaries in Russia7 163,837 123,115 114,372  —   — 
MTS Belarus9 592,579 464,783 308,916 170,200 83,200
Russia
ARPU (US$)10 14.7 16.3 18.8 18.7 18.5
MOU (minutes) 147 140 159 162 148
Churn rate (%) 10.0 12.5 12.3 11.0 11.6
SAC per gross additional subscriber (US$) 23 24 23 27 30
Ukraine
ARPU (US$) 14.0 15.4 17.8 17.2 15.9
MOU (minutes) 111 114 110 97 87
Churn rate (%) 6.0 6.5 4.6 5.5 8.9
SAC per gross additional subscriber (US$) 25 26 34 37 51

MTS’ Operations in Russia

As of March 31, 2004, MTS’ consolidated subscriber base in Russia was approximately 15.34 million, of which 8.68 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 the first quarter of 2004.

Revenues and net income from MTS’ operations in Russia during the first quarter of 2004 were $654.2 million11 and $165.0 million respectively, compared to $630.5 million12 and $129.7 million in the fourth quarter of 2003.

The Company’s average monthly revenue per user (ARPU) in Russia decreased in the first quarter of 2004 to $14.7 compared to $16.3 in the fourth quarter of 2003. This decrease is largely due to the increase of pre-paid Jeans subscribers in the customer mix. The average monthly minutes of usage per subscriber (MOU) in the first quarter of 2004 were 147 minutes compared to 140 minutes in the fourth quarter of 2003. This increase in usage can be mainly attributed to the increase in the number of calls within the network, as well as to the increase of regional pre-paid Jeans customers in the customer mix (regional Jeans customers generally talk more than Jeans customers in Moscow, as the regional per-minute tariffs are lower).

Churn rate was 10.0% in the first quarter of 2004, down from 12.5% in the previous quarter, mainly because of MTS’ increased focus on subscriber loyalty and new relationships with the Company’s dealers, whereby commissions are aligned with revenues from the customers.

The Company’s subscriber acquisition cost (SAC) per gross additional subscriber in Russia in the first quarter of 2004 decreased to $23 compared to $24 in the previous quarter. This decrease was primarily due to the lower costs of attracting mass-market subscribers and increased economies of scale.


MTS’ Operations in Ukraine

As of March 31, 2004, MTS provided its services to 3.85 million subscribers in Ukraine, of which 81.2% were enrolled in the Company’s pre-paid tariff plans. MTS is the leader in Ukraine with a market share of 53% as of March 31, 2004, according to AC&M-Consulting.

MTS’ operations in Ukraine contributed $154.8 million to the Company’s revenues and $42.8 million to its net income during the first quarter of 2004 compared to $142.5 million and $23.0 million respectively in the fourth quarter of 2003. MTS’ ARPU in Ukraine in the first quarter of 2004 declined to $14.0 compared to $15.4 in the fourth quarter of 2003. This decline is a result of a change in customer mix towards more pre-paid subscribers and a reduction in tariffs in 2003. Usage was down to 111 minutes from 114 minutes in the fourth quarter of 2003, mainly as a result of this change in the customer mix.

MTS’ SAC per gross additional subscriber in Ukraine in the first quarter of 2004 was at $25, a decrease from $26 reported in the fourth quarter of 2003. Similar to the trends experienced by MTS in Russia, the SAC decrease in Ukraine was largely attributable to the lower costs of attracting mass-market subscribers and increased economies of scale.

MTS’ churn rate was at 6.0% in Ukraine in the first quarter of 2004, a decline from 6.5% in the fourth quarter of 2003.

1
Based on unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
2
As of June 15, 2004.
3
MTS began consolidating its Ukrainian subsidiary, Ukrainian Mobile Communications (UMC), into its financial statements from the date of acquisition, effective March 1, 2003.
5
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.
6
Total debt is comprised of the current portion of long-term debt, current capital lease obligations, long-term debt, and long-term capital lease obligations.
7
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.
9
MTS owns 50% stakes in Primtelefon, a local mobile operator in Far Eastern and Siberian parts of Russia, and in Volgograd Mobile and Astrakhan Mobile, local mobile operators in Volga part of Russia. MTS does not consolidate these companies. MTS owns a 49% stake in Belarus operator Mobile TeleSystems LLC, which is not consolidated.
10
See Attachment C for definitions of ARPU, MOU, Churn and SAC.
11
Excluding intercompany eliminations of $0.3 million.
12
Excluding intercompany eliminations of $1.3 million.
See Attachment A for definitions of OIBDA and OIBDA margin and reconciliations to operating income and operating margin, respectively.


Attachments to the First Quarter 2004 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; 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 Q1 2004 Q4 2003 Q1 2003
Operating income 306.8 272.8 149.6
Add: depreciation and amortization 133.9 127.8 75.2
OIBDA 440.7 400.6 224.8

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

  Q1 2004 Q4 2003 Q1 2003
Operating margin 37.9% 35.3% 33.5%
Add: depreciation and amortization as a percentage of revenue 16.6% 16.6% 16.9%
OIBDA margin 54.5% 51.9% 50.4%

Attachment B

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

US$ million As of March 31, 2004 As of December 31, 2003
Current portion of long-term debt and of capital lease obligations 682 710
Long-term debt 933 942
Capital lease obligations 8 8
Total debt 1,623 1,660
Less:
Cash and cash equivalents (279) (90)
Short-term investments (80) (245)
Net debt 1,264 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 March 31, 2004 and 2003

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

  Three months ended March 31, 2004 Three months ended March 31, 2003
Net operating revenue    
Service revenue and connection Fees $780 907 $428 612
Sales of handsets and accessories 27 778 17 483
  808 685 446 095
Operating expenses    
Cost of services 96 543 54 943
Cost of handsets and accessories 49 267 27 885
Sales and marketing expenses 91 821 57 736
General and administrative expenses 116 942 64 173
Depreciation and amortization 133 852 75 190
Provision for doubtful accounts 6 805 14 563
Other operating expenses 6 608 1 989
Net operating income 306 847 149 616
Currency exchange and translation gains (8 195) (742)
Other expense (income):    
Interest income (6 023) (3 232)
Interest expenses, net of amounts capitalized 27 600 18 812
Other expense (income) (10 101) 250
Total other expense (income), net 11 476 15 830
Income before provision for income taxes and minority interest 303 566 134 528
Provision for income taxes 88 115 40 469
Minority interest 7 630 13 841
Net income 207 821 80 218
Weighted average number of shares outstanding, in thousands 1 983 400 1 983 400
Earnings per share — basic and diluted 0.105 0.040

Mobile TeleSystems

Condensed unaudited consolidated balance sheets at March 31, 2004 and December 31, 2003Amounts in thousands of U.S. dollars, except share amounts

  As of March 31 2004 As of December 31, 2003
CURRENT ASSETS:    
Cash and cash equivalents $278 885 $90 376
Short-term investments 80 000 245 000
Trade receivables, net 110 806 99 951
Accounts receivable, related parties 2 295 3 356
Inventory, net 79 062 67 291
VAT receivable 222 758 209 629
Prepaid expenses and other current assets 148 568 124 876
Total current assets 922 374 840 479
PROPERTY, PLANT AND EQUIPMENT 2 409 395 2 256 076
INTANGIBLE ASSETS 973 223 1 015 780
INVESTMENTS IN AND ADVANCES TO ASSOCIATES 108 148 103 585
OTHER ASSETS 8 317 9 431
Total assets 4 421 457 4 225 351
CURRENT LIABILITIES    
Accounts payable 204 110 168 039
Accrued expenses and other current liabilities 402 039 387 756
Accounts payable, related parties 9 374 31 904
Current portion of long-term debt, capital lease obligations 681 835 710 270
Total current liabilities 1 297 358 1 297 969
LONG-TERM LIABILITIES    
Long-term debt 933 193 942 418
Capital lease obligations 7 848 7 646
Deferred income taxes 170 396 180 628
Deferred revenue and other 23 553 25 177
Total long-term liabilities 1 134 990 1 155 869
Total liabilities 2 432 348 2 453 838
COMMITMENTS AND CONTINGENCIES  —   — 
MINORITY INTEREST 49 530 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 March 31, 2004 and December 31, 2003, 345,244,080 of which are in the form of ADS) 50 558 50 558
Treasury stock (9,929,074 common shares at cost as of March 31, 2004 and December 31, 2003) (10 197) (10 197)
Additional paid-in capital 560 207 559 911
Unearned compensation (710) (869)
Shareholder receivable (25 936) (27 610)
Accumulated other comprehensive income 13 314 7 595
Retained earnings 1 352 343 1 144 522
Total shareholders’ equity 1 939 579 1 723 910
Total liabilities and shareholders’ equity 4 421 457 4 225 351

Mobile TeleSystems

Condensed unaudited consolidated statements of cash flows for three months ended March 31, 2004 and 2003

  Three months ended, March 31, 2004 Three months ended, March 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income (loss) $207 821 $80 218
Adjustments to reconcile net income to net cash provided by operating activities:    
Minority interest 7 630 13 841
Depreciation and amortization 133 852 75 190
Amortization of deferred connection fees (19 391) (7 314)
Equity in net income (loss) of associates (5 806)  — 
Provision for obsolete inventory 1 095 2 378
Provision for doubtful accounts 6 805 14 563
Deferred taxes (10 114) (2 758)
Non-cash expenses associated stock bonus and stock options 159  — 
Changes in operating assets and liabilities:    
(Increase) Decrease in accounts receivable (16 599) (19 973)
(Increase) Decrease in inventory (12 866) (2 736)
Increase in prepaid expenses and other current assets (24 789) (9 170)
Increase in VAT receivable (13 129) (11 057)
Increase in trade accounts payable, accrued liabilities and other current liabilities 48 363 (5 239)
Net cash provided by operating activities 303 031 127 943
CASH FLOWS FROM INVESTING ACTIVITIES:    
Acquisition of subsidiaries, net of cash acquired (8 500) (151 327)
Purchase of property, plant and equipment (213 436) (98 621)
Purchase of intangible assets (18 794) (14 276)
Purchase of short-term investments (36 507) (167 239)
Proceeds from sale of short-term investments 200 000  — 
Investments in and advances to associates (430) (9 961)
Net cash used in investing activities (77 667) (441 424)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from notes issue  —  400 000
Notes issuance cost  —  (3 929)
Capital lease obligation principal paid (3 805) (5 048)
Proceeds from loans 3 657 9 795
Loan principal paid (41 045) (5 460)
Payments from AFK Sistema 1 969  — 
Net cash used in financing activities (39 224) 395 358
Effect of exchange rate changes on cash and cash equivalents 2 369 172
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS: 188 509 82 049
CASH AND CASH EQUIVALENTS, at beginning of period 90 376 34 661
CASH AND CASH EQUIVALENTS, at end of period 278 885 116 710

Contact investor relations:

+ 7 495 223 20 25 ir@mts.ru

MTS Investor Relations
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