Financial Results for the Second Quarter Ended June 30, 2004

31 August 2004

Moscow, Russian Federation — August 31, 2004 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and the CIS, today announces excellent financial and operating results demonstrated by increased revenues, net income and free cash-flow for the second quarter of 20041.

 
Management presentation
MTS_Management_presentation_Q2_2004_FINAL_31_07_2004.pdf (233 KB)

Key Highlights:

  • Revenues up 52% year-on-year to $918.2 million driven by doubled subscriber base; net income up 108% year-on-year to $267.5 million.
  • Operating income before depreciation and amortization (OIBDA)2 up 60% year-on-year to $521.5 million (an all-time high OIBDA margin of 56.8%) as a result of growth in revenues and higher efficiency partially due to increased scale and cost control.
  • MTS was free cash-flow3 positive for both Q2 and H1 2004, generating $293.0 million for the first six months of the year.
  • For H1 2004 value-added service revenues amounted to $154.4 million, representing 9.3% of total consolidated service revenues.
  • Churn rates declined in both Russia and Ukraine compared to the previous quarter due to new loyalty programs and new dealer commission payment scheme.
  • Continued strong subscriber base growth with 8.80 million new customers added since the beginning of the year to reach 25.50 million as of August 30, 2004.

Financial Highlights (Unaudited)

US$ million Q2 2004 Q1 2004 Change Q-on-Q Q2 2003 Change Y-on-Y
Revenues 918.2 802.74 14.4% 606.0 51.5%
Operating income 371.7 306.8 21.2% 225.4 64.9%
Operating margin 40.5% 38.2% - 37.2% -
Net income 267.5 207.8 28.7% 128.5 108.2%
OIBDA 521.5 440.7 18.3% 325.0 60.5%
OIBDA margin 56.8% 54.9% - 53.6% -

Commenting on the results, Vassily Sidorov, President and CEO of MTS, said: “We produced strong operating and financial results for the quarter. Our focus on cost efficiency and the increasing economies of scale in our business resulted in an additional improvement in margins. We continue to maintain MTS’ position as the leading mobile operator in Russia and the CIS through profitable organic growth and measured expansion into new markets, as well as by strengthening our brand and providing superior services to our customers.”

Subscriber Base Dynamic

The robust expansion of the mobile markets in Russia and Ukraine continued during the quarter. Around 7.2 million5 new customers signed up to mobile networks in Russia and 1.2 million in Ukraine during Q2 2004. The total mobile population in Russia increased to 49.5 million (a penetration of 34.1%) and to 8.4 million in Ukraine (a penetration of 17.4%). MTS accounted for around 36% of new organic additions in Russia and 67% in Ukraine in Q2 2004, adding 3.37 million customers organically and 0.22 million via the consolidation of its 100% ownership in Primtelefon (as reported earlier, MTS acquired the remaining 50% stake in Primtelefon on June 30, 2004).

MTS finished Q2 2004 with a consolidated subscriber base of 22.78 million subscribers (18.14 million in Russia and 4.63 million in Ukraine). The Company successfully retained its 37% leading market share in Russia and further increased its market share in Ukraine from 53% to 55%. After the end of Q2 2004, on August 10, 2004, MTS’ subscriber base in Ukraine exceeded 5 million, a milestone that underlines the strength of the Company’s competitive position in this dynamic market.

The growth of the mobile market in Belarus was similar to that in Russia and Ukraine. During Q2 2004, the number of mobile phone users in Belarus increased by 0.3 million to 1.6 million (a penetration of 16%). MTS’ unconsolidated 49%-owned joint venture accounted for around 53% of new additions, bringing the total number of its customers to 0.74 million. The joint venture’s market share continued to increase during the quarter from 44% to 46%.

As of June 30, 2004, 65% of MTS’ customers in Russia and 83% of its customers in Ukraine were signed up to pre-paid tariff plans (Jeans in Russia and Jeans and SIM-SIM in Ukraine). The Company’s pre-paid customers accounted for 81% of gross additions in Russia and 90% in Ukraine during Q2 2004.

As reported on August 2, 2004, MTS entered another sizable market in the CIS, Uzbekistan, through the acquisition of a majority ownership in the country’s leading GSM operator, Uzdunrobita. In terms of population, Uzbekistan is the third largest country in the CIS after Russia and Ukraine, with 25.2 million inhabitants. Mobile penetration in Uzbekistan is just over 1.5%, providing MTS with potentially significant growth opportunities on this market. This acquisition added 0.21 million users to MTS’ consolidated subscriber base.

As of August 30, 2004, the Company’s consolidated subscriber base was at 25.50 million, comprised of 20.00 million in Russia, 5.26 million in Ukraine and 0.25 million in Uzbekistan. In addition, MTS’ joint venture in Belarus provided services to 0.89 million customers.

CAPEX and Debt Position

MTS’ capital expenditures on property, plant and equipment during Q2 2004 totaled $221.8 million (of which $50.0 million was spent in Ukraine), amounting to $435.2 million for the first half of the year. In addition, MTS spent $21.8 million on purchases of intangible assets during Q2 2004 (of which $12.1 million was spent in Ukraine), bringing the total expenditure for the first half of 2004 to $40.6 million.

During the first half of 2004, MTS’ debt position decreased. As of June 30, 2004, the Company’s total debt6 was $1.40 billion (compared to $1.66 billion at the end of 2003), and its net debt was $1.05 billion (compared to $1.32 billion at the end of 2003).

Operational Highlights

  Q2 2004 Q1 2004 Q4 2003 Q3 2003 Q2 2003
Total consolidated subscribers, end of period (mln) 22.78 19.19 16.72 13.89 11.34
Russia (mln) 18.14 15.34 13.37 11.34 9.32
Ukraine (mln) 4.63 3.85 3.35 2.55 2.02
Unconsolidated subsidiaries in Russia7, thousands 11.5 163.8 123.1 114.4 -
MTS Belarus8, thousands 744.7 592.6 464.8 308.9 170.2
Russia
ARPU (US$)9 14.1 14.110 16.3 18.8 18.7
MOU (minutes) 160 147 140 159 162
Churn rate (%) 7.7 10.0 12.5 12.3 11.0
SAC per gross additional subscriber (US$) 21 23 24 23 27
Ukraine
ARPU (US$) 14.6 14.0 15.4 17.8 17.2
MOU (minutes) 127 111 114 110 97
Churn rate (%) 5.2 6.0 6.5 4.6 5.5
SAC per gross additional subscriber (US$) 18 25 26 34 37

MTS’ Operations in Russia

At $728.3 million11 in Q2 2004, revenues from MTS’ operations in Russia were up 12.4% compared to Q1 2004 (43.7% year-on-year). OIBDA in Q2 2004 increased by 15.8% compared to Q1 2004 (52.5% year-on-year) to $413.7 million, an OIBDA margin of 56.8%. Net income in Q2 2004 reached $209.1 million, an increase of 26.7% compared to Q1 2004 (86.3% year-on-year).

The increase in OIBDA margin in Q2 2004 compared to the previous quarter is partially due to the new dealer commission payment scheme in Moscow introduced in February 2004, whereby commissions to dealers are deferred for up to one year replacing the one-time commission payment scheme. In addition, the size of commission was lowered in certain regions. Another factor that influenced the increase in profitability during the quarter was the reduction in roaming expenses due to the increased share of intra-network roaming.

The average monthly minutes of usage per subscriber (MOU) increased in Q2 2004 to 160 minutes compared to 147 minutes in Q1 2004, partially as a result of a number of marketing initiatives aimed at encouraging customers to use their mobile phones more often. However, these initiatives also led to an increased number of calls made by customers within the network (outgoing calls between MTS customers receive discounted rates), resulting in a flat average monthly revenue per user (ARPU) in Russia compared to the previous quarter of $14.1 in Q2 2004.

The decline in MTS’ quarterly churn rate continued, reaching 7.7% in Q2 2004 compared to 10.0% in Q1 2004 and 11.0% in Q2 2003, mainly because of the launch of its new loyalty programs (in particular, discounts to subscribers signing term-contracts) and successful implementation of a new sales strategy.

MTS’ Operations in Ukraine

At $190.5 million12 in Q2 2004, revenues from MTS’ operations in Ukraine increased by 23.1% compared to Q1 2004 (89.5% year-on-year). OIBDA in Q2 2004 increased by 29.1% compared to Q1 2004 (100.4% year-on-year) to $107.8 million, an OIBDA margin of 56.6%. The further increase in OIBDA margin in Q2 2004 compared to the previous quarter was largely due to improved economies of scale and cost control. Net income in Q2 2004 reached $58.4 million, an increase of 36.4% compared to Q1 2004 (258.4% year-on-year).

Q2 2004 was marked by a positive development in MTS’ ARPU and MOU in Ukraine. During the quarter, the Company’s ARPU was up from $14.0 in Q1 2004 to $14.6, driven mainly by an increase in usage from 111 minutes to 127 minutes. This growth continues the overall trend of increasing usage, following a slight decline in Q1 2004 (seasonally the weakest quarter in terms of usage).

MTS’ SAC per gross additional subscriber in Ukraine declined to $18 in Q2 2004 from $25 in Q1 2004. Similar to the trends experienced by the Company in Russia, the SAC decrease in Ukraine was largely attributable to the increasing percentage of pre-paid subscribers in the mix of gross additions and reductions in contract subscriber acquisition costs.

Continued emphasis on loyalty during Q2 2004 helped to reduce MTS’ quarterly churn rate in Ukraine even further, to reach 5.2% compared to 6.0% in the previous quarter.

1

Based on unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

2

See Attachment A for definitions and reconciliation of OIBDA and OIBDA margin to their most directly comparable US GAAP financial measures.

3

See Attachment B for reconciliation of free cash-flow to its most directly comparable US GAAP financial measures.

4

Number revised in Q2 2004 due to the subsequent reclassification in intercompany balances with no effect on OIBDA and net income amounts.

5

The source for all market information in this press release is AC&M-Consulting.

6

Total debt is comprised of the current portion of debt, current capital lease obligations, long-term debt and long-term capital lease obligations; 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.

7

On June 30, 2004, MTS increased its stake to 100% and began to consolidate Primtelefon, a local mobile operator in the Far Eastern and Siberian parts of Russia, after its acquisition of the remaining 50% stake in the company (previously Primtelefon subscribers had been treated as unconsolidated subscribers). Since Q2 2004, MTS increased its stakes to 100% and began to consolidate Volgograd Mobile and Astrakhan Mobile, local mobile operators in the Volga part of Russia, after its acquisition of the remaining 50% stakes in both on August 24, 2004.

8

MTS owns a 49% stake in Belarus operator, Mobile TeleSystems LLC, which is not consolidated.

9

See Attachment C for definitions of ARPU, MOU, Churn and SAC.

10

Originally released as $14.7. The number was revised due to the subsequent reclassification of intercompany balance with no effect on total service revenues.

11

Excluding intercompany eliminations of $0.6 million.

12

Excluding intercompany eliminations of $0.6 million.

Attachments to the Second 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 Q2 2004 Q1 2004 Q2 2003
Operating income 371.7 306.8 225.4
Add: depreciation and amortization 149.8 133.9 99.6
OIBDA 521.5 440.7 325.0

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

  Q2 2004 Q1 2004 Q2 2003
Operating margin 40.5% 38.2% 37.2%
Add: depreciation and amortization as a percentage of revenue 16.3% 16.7% 16.4%
OIBDA margin 56.8% 54.9% 53.6%

Attachment B

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

US$ million As of June 30, 2004 As of December 31, 2003
Current portion of long-term debt and of capital lease obligations 461.5 710.3
Long-term debt 929.7 942.4
Capital lease obligations 7.1 7.6
Total debt 1 398.3 1 660.3
Less:
Cash and cash equivalents (289.9) (90.4)
Short-term investments (59.0) (245.0)
Net debt 1 049.4 1 324.9

Free cash-flow can be reconciled to our consolidated net cash provided by operating activities as follows:

US$ million For six months ended June 30, 2004
Net cash provided by operating activities 790.8
Less  
Purchase of property, plant and equipment (435.2)
Purchase of intangible assets (40.7)
Investments in and advances to associates (1.1)
Acquisition of subsidiaries, net of cash acquired (20.8)
Free cash-flow 293.0

Attachment C

Definitions

Subscriber. We define a “subscriber” as an individual or organization whose account shows chargeable activity within sixty one days, or one hundred and eighty three days in the case of our Jeans brand tariff, and whose account does not have a negative balance for more than this period.

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 June 30, 2004 and 2003 and Six Months Ended June 30, 2004 and 2003

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

  Three months ended June 30, 2004 Three months ended June 30, 2003 Six months ended June 30, 2004 Six months ended June 30, 2003
Net operating revenue
Service revenue and connection fees $900 469 $580 227 $1 681 376 $1 008 839
Sales of handsets and accessories 17 772 25 812 39 599 43 295
  918 241 606 039 1 720 975 1 052 134
Operating expenses
Cost of services 109 143 69 234 205 686 124 177
Cost of handsets and accessories 43 524 45 754 86 840 73 639
Sales and marketing expenses 99 043 77 828 190 864 135 564
General and administrative expenses 134 151 76 635 251 093 140 808
Depreciation and amortization 149 770 99 584 283 622 174 774
Provision for doubtful accounts 4 902 8 288 11 707 22 851
Other operating expenses 6 007 3 296 12 615 5 285
Net operating income 371 701 225 420 678 548 375 036
Currency exchange and translation losses (gains) 5 199 (666) (2 996) (1 408)
Other expense (income):
Interest income (4 829) (5 591) (10 852) (8 823)
Interest expenses, net of amounts capitalized 26 109 23 036 53 709 41 848
Other expense (income) (6 352) 605 (16 453) 855
Total other expense (income), net 14 927 18 050 26 404 33 880
Income before provision for income taxes and minority interest 351 574 208 036 655 140 342 564
Provision for income taxes 74 573 55 943 162 688 96 412
Minority interest 9 482 23 569 17 112 37 410
Net income 267 519 128 524 475 340 208 742
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 0.135 0.065 0.240 0.105
150 60 60 60 60

Mobile TeleSystems
Condensed Unaudited Consolidated Balance Sheets at June 30, 2004 and December 31, 2003

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

  As of June 30 2004 As of December 31 2003
CURRENT ASSETS:
Cash and cash equivalents $289 885 $90 376
Short-term investments 59 002 245 000
Trade receivables, net 130 131 99 951
Accounts receivable, related parties 15 227 3 356
Inventory, net 66 695 67 291
VAT receivable 187 332 209 629
Prepaid expenses and other current assets 132 949 124 876
Total current assets 881 221 840 479
PROPERTY, PLANT AND EQUIPMENT 2 575 119 2 256 076
INTANGIBLE ASSETS 986 142 1 015 780
INVESTMENTS IN AND ADVANCES TO ASSOCIATES 84 439 103 585
OTHER ASSETS 6 982 9 431
Total assets 4 533 903 4 225 351
CURRENT LIABILITIES
Accounts payable 210 442 168 039
Accrued expenses and other current liabilities 677 036 387 756
Accounts payable, related parties 9 495 31 904
Current portion of long-term debt, capital lease obligations 461 521 710 270
Total current liabilities 1 358 494 1 297 969
LONG-TERM LIABILITIES
Long-term debt 929 635 942 418
Capital lease obligations 7 120 7 646
Deferred income taxes 167 581 180 628
Deferred revenue and other 34 296 25 177
Total long-term liabilities 1 138 632 1 155 869
Total liabilities 2 497 126 2 453 838
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST 48 329 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 June 30, 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 June 30, 2004 and December 31, 2003) (10 197) (10 197)
Additional paid-in capital 560 475 559 911
Unearned compensation (551) (869)
Shareholder receivable (23 679) (27 610)
Accumulated other comprehensive income 10 805 7 595
Retained earnings 1 401 037 1 144 522
Total shareholders’ equity 1 988 448 1 723 910
Total liabilities and shareholders’ equity 4 533 903 4 225 351

Mobile TeleSystems
Condensed Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 30, 2003

(Amounts in thousands of U.S. dollars)

  Six months ended June 30, 2004 Six months ended June 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $475 340 $208 742
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 17 112 37 410
Depreciation and amortization 283 622 174 774
Amortization of deferred connection fees (27 067) (16 166)
Equity in net income (loss) of associates (11 687) -
Provision for obsolete inventory 6 456 3 277
Provision for doubtful accounts 11 707 22 851
Deferred taxes (21 372) (17 064)
Non-cash expenses associated with stock bonus and stock options 318 -
Changes in operating assets and liabilities:
Increase in accounts receivable (52 916) (41 732)
Increase in inventory (4 832) (4 255)
(Increase) / Decrease in prepaid expenses and other current assets (10 424) 3 783
(Increase) / Decrease in VAT receivable 26 337 (35 195)
Increase in trade accounts payable, accrued liabilities and other current liabilities 98 231 58 916
Net cash provided by operating activities 790 825 395 341
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (20 848) (301 814)
Purchase of property, plant and equipment (435 223) (325 843)
Purchase of intangible assets (40 634) (57 396)
Purchase of short-term investments (45 365) -
Proceeds from sale of short-term investments 230 000 -
Investments in and advances to associates (1 114) (17 173)
Net cash used in investing activities (313 184) (702 226)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes issue - 400 000
Repayment of notes (300 000) -
Notes issuance cost - (3 929)
Capital lease obligaiton principal paid (5 480) (6 982)
Dividends paid (6 795) -
Proceeds from loans 205 544 58 144
Loan principal paid (177 498) (61 895)
Payments from AFK Sistema 4 496 -
Net cash used in financing activities (279 733) 385 338
Effect of exchange rate changes on cash and cash equivalents 1 601 447
NET INCREASE IN CASH AND CASH EQUIVALENTS: 199 509 78 900
CASH AND CASH EQUIVALENTS, at beginning of period 90 376 34 661
CASH AND CASH EQUIVALENTS, at end of period 289 885 113 561
 

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