Financial Results for the Third Quarter Ended September 30, 2004

23 November 2004

Moscow, Russian Federation — November 23, 2004 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and the CIS, today announces its third quarter 20041 financial and operating results, demonstrating significant revenues growth and further margin expansion.

 
MTS Management Presentation of Q3 2004 Financial and Operating Results
MTS_Management_presentation_9m_and_3Q_2004_Nov_2004.pdf (760,5 KB)

Key Highlights

  • Revenues up 50% year-on-year to $1,086.4 million, driven by significant expansion of the Company’s subscriber base; net income up 117% year-on-year to $338.3 million
  • The Company’s OIBDA margin2 expanded further to a new all-time high of 58.4%
  • MTS was free cash-flow3 positive with $260.7 million for the first nine months
  • Emphasis on introduction and promotion of value-added services helped extend contribution to 9.7% of ARPU4 in Russia and 11.3% in Ukraine
  • Increased focus on customer loyalty resulted in a significant further decline in churn rate in Russia
  • Continued strong subscriber base growth with 12.13 million new customers added since the beginning of the year, reaching 28.85 million as of November 22, 2004

Financial Highlights (Unaudited)

US$ million Q3 2004 Q2 2004 Change Q-on-Q Q3 2003 Change Y-on-Y
Revenues 1,086.4 918.2 18.3% 722.4 50.4%
Operating income 467.6 371.7 25.8% 274.8 70.2%
Operating margin 43.0% 40.5% 38.0%
Net income 338.3 267.5 26.5% 155.7 117.3%
OIBDA 634.8 521.5 21.7% 388.1 63.6%
OIBDA margin 58.4% 56.8% 53.7%

Commenting on the results, Vassily Sidorov, President and CEO of MTS, said: “This was an excellent quarter for the Company. Our focus on cost efficiency and streamlining of internal processes, coupled with seasonal effects, resulted in further margin growth. We are quite satisfied that our efforts aimed at increased customer loyalty continue to pay off, resulting in a significant drop in churn. Our strategy of selective expansion into neighboring countries, combined with a focus on strengthening our competitive positions in existing markets, remains intact.”

Subscriber Base Dynamic

Q3 2004 was the strongest quarter to date in terms of new subscriptions for the mobile markets in Russia and Ukraine. The population of mobile phone users in Russia increased by around 9.6 million5 new customers and by 2.2 million in Ukraine, to reach 59.0 million (a penetration of 40.7%) and 10.6 million (a penetration of 21.8%), respectively.

During Q3 2004 MTS accounted for around 28% of new additions in Russia and 42% in Ukraine, adding 3.6 million new customers in both markets. In addition, as reported during the quarter, MTS acquired a majority ownership in Uzdunrobita, a mobile phone operator in Uzbekistan, with approximately 0.23 million customers on the date of acquisition. As a result, MTS’ consolidated subscriber base was at 26.63 million subscribers (20.84 million in Russia, 5.53 million in Ukraine, and 0.26 million in Uzbekistan) by the end of Q3 2004.

MTS’ unconsolidated 49%-owned joint venture in Belarus added 0.23 million new customers during the quarter, accounting for around 61% of new additions to the market. Overall, the market in Belarus reached 2.0 million users (a penetration of 20%) by the end of Q3 2004.

MTS successfully retained its leading position in all four countries of the Company’s operations. At the end of Q3 2004, the Company had a leading 35% market share in Russia, 52% share in Ukraine, and 51% share in Uzbekistan. MTS’ joint venture in Belarus overtook the leading position and currently has a market share of 49%.

As of September 30, 2004, 71% 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 84% of gross additions in Russia and 90% in Ukraine during Q3 2004.

As of November 22, 2004 the Company’s consolidated subscriber base was at 28.856 million, comprised of 22.38 million in Russia, 6.19 million in Ukraine, and 0.28 million in Uzbekistan. In addition, MTS’ joint venture in Belarus provided services to 1.08 million customers.

Consolidation of Uzdunrobita

As reported on August 2, 2004, MTS acquired a majority 74% ownership in Uzdunrobita, the leading GSM operator in Uzbekistan (the third largest country in the CIS in terms of population after Russia and Ukraine with 25.2 million inhabitants). MTS began to consolidate the company into its financials effective August 1, 2004. For the two months of Q3 2004, Uzdunrobita’s revenues were $10.1 million. The company’s ARPU for the two months of Q3 2004 was $19.9.

CAPEX and Debt Position

MTS’ capital expenditures on property, plant and equipment during Q3 2004 totaled $262.1 million (of which $65.9 million was spent in Ukraine), amounting to $697.3 million for the first nine months of the year. In addition, MTS spent $42.3 million on purchases of intangible assets during Q3 2004 (of which $13.1 million was spent in Ukraine), bringing the total expenditure for the first nine months of 2004 to $82.9 million. Uzbekistan’s contribution to the third quarter CAPEX was $1.5 million.

During the first nine months of 2004, MTS’ debt position decreased. As of September 30, 2004 the Company’s total debt7 was $1.49 billion (compared to $1.66 billion at the end of 2003), and net debt was $1.24 billion (compared to $1.32 billion at the end of 2003).

Operational Highlights


Q3 2004 Q2 2004 Q1 2004 Q4 2003 Q3 2003
Total consolidated subscribers, end of period (mln) 26.63 22.78 19.19 16.72 13.89
Russia (mln) 20.84 18.14 15.34 13.37 11.34
Ukraine (mln) 5.53 4.63 3.85 3.35 2.55
Uzbekistan (mln) 0.26
MTS Belarus8 (mln) 0.97 0.74 0.59 0.46 0.31
Russia
ARPU (US$) 14.0 14.1 14.1 16.3 18.8
MOU (minutes) 168 160 147 140 159
Churn rate (%) 6.7 7.7 10.0 12.5 12.3
SAC per gross additional subscriber (US$) 21 21 23 24 23
Ukraine
ARPU (US$) 15.4 14.6 14.0 15.4 17.8
MOU (minutes) 136 127 111 114 110
Churn rate (%) 5.9 5.2 6.0 6.5 4.6
SAC per gross additional subscriber (US$) 21 18 25 26 34

MTS’ Operations in Russia

At $848.9 million9, third quarter revenues from MTS’ operations in Russia were up 16.6% compared to Q2 2004 (40.5% year-on-year). OIBDA increased by 19.1% compared to Q2 2004 (50.4% year-on-year), to $492.7 million; an OIBDA margin of 58.03%. Net income in Q3 2004 reached $259.5 million, an increase of 24.1% compared to Q2 2004 (101.0% year-on-year).

The increase in OIBDA margin in Q3 2004 to a new all-time high level is largely attributable to two factors: the gradual implementation of the new dealer commission payment scheme in Moscow; and the improved economies of scale and enhanced cost controls relating to various G&A expenses that either remained stable or decreased as a percentage of revenues during the quarter.

The average monthly minutes of usage per subscriber (MOU) further increased in Q3 2004 to 168 minutes compared to 160 minutes in Q2 2004, partially as a result of a number of usage-enhancing marketing initiatives (“Summer-Jeans” and free weekend incoming calls for a month), as well as the seasonal vacation effect. These initiatives also led to an increase in intra-network traffic (outgoing calls between MTS customers receive discounted rates) and attracted mass market subscribers, resulting in a slight decline in average monthly revenue per user (ARPU) in Russia to $14.0 compared to $14.1 in Q2 2004.

In Q3 2004 SAC per gross additional subscriber in Russia remained unchanged at $21 compared to the previous quarter as the decline in commission to dealers per new gross subscriber was offset by the increase in advertising spending per new gross subscriber.

The further decline in MTS’ quarterly churn rate to 6.7% in Q3 2004 compared to 7.7% in Q2 2004 and 12.3% in Q3 2003 was largely due to the successful implementation of customer and dealer loyalty programs.

MTS’ Operations in Ukraine

At $241.2 million10 in Q3 2004, revenues from MTS’ operations in Ukraine increased by 26.6% compared to Q2 2004 (99.2% year-on-year). OIBDA in Q3 2004 increased by 26.8% compared to Q2 2004 (125.5% year-on-year) to $136.7 million, an OIBDA margin of 56.7%. The further increase in OIBDA margin in Q3 2004 compared to the previous quarter is largely attributable to improved economies of scale. Net income in Q3 2004 reached $78.6 million, an increase of 34.6% compared to Q2 2004 (195.5% year-on-year).

Q3 2004 marked another quarter of positive development in MTS’ ARPU and MOU in Ukraine. During the quarter, the Company’s ARPU increased from $14.6 in Q2 2004 to $15.4, driven mainly by an increase in usage from 127 minutes to 136 minutes. This growth continued the overall trend of increasing usage, following the slight decline in Q1 2004 (seasonally the weakest quarter in terms of usage).

MTS’ SAC per gross additional subscriber in Ukraine grew to $21 in Q3 2004 from $18 in Q2 2004 as a result of the increased number of contract subscribers added during the quarter compared to the previous period.

The growth in the quarterly churn rate to 5.9% in Q3 2004 from 5.2% in the previous quarter was mainly due to the increase in pre-paid churn as a consequence of intensified competition.

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 reconsolidation 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

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

5

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

6

As announced on November 19, 2004, MTS won a government privatization tender for a 76% stake in a GSM mobile phone operator, Gorizont RT, operating in the Republic of Sakha (Yakutia) in the Far East of Russia with 100 thousand subscribers. However, as this acquisition has not been completed, MTS has not begun to consolidate the company’s subscriber numbers.

7

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.

8

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

9

Excluding intercompany eliminations of $6.7 million.

10

Excluding intercompany eliminations of $7.1 million.

Attachments to the Third 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 Q3 2004 Q2 2004 Q3 2003
Operating income 467.6 371.7 274.8
Add: depreciation and amortization 167.2 149.8 113.3
OIBDA 634.8 521.5 388.1

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


Q3 2004 Q2 2004 Q3 2003
Operating margin 43.0% 40.5% 38.0%
Add: depreciation and amortization as a percentage of revenue 15.4% 16.3% 15.7%
OIBDA margin 58.4% 56.8% 53.7%

Attachment B

Net debt represents total debt less cash and cash equivalents and short-term investments. Our net debt calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare our periodic and future liquidity within the wireless telecommunications industry. 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.

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

US$ million As  of September 30,  2004 As  of December 31, 2003
Current portion of debt and of capital lease obligations 383.1 710.3
Long-term debt 1,099.0 942.4
Capital lease obligations 5.1 7.6
Total debt 1,487.2 1,660.3
Less:
Cash and cash equivalents (192.5) (90.4)
Short-term investments (50.7) (245.0)
Net debt 1,244.0 1,324.9

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

US$ million For nine months ended September 30, 2004 For nine months ended September 30, 2003
Net cash provided by operating activities 1,278.3 667.8
Less
Purchase of property, plant and equipment (697.3) (560.9)
Purchase of intangible assets (82.9) (74.7)
Investments in and advances to associates (2.2) (50.3)
TAIF-Telcom call option exercise (63.0)
Acquisition of subsidiaries, net of cash acquired (172.2) (629.3)
Free cash-flow 260.7 (647.4)

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 SEPTEMBER 30, 2004 AND 2003 AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

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


Three months ended September 30, 2004   Three months ended September 30, 2003  Nine months ended September 30, 2004 Nine months ended September 30, 2003
Net operating revenue
Service revenue and connection fees $1,060,177 $706,910 $2,741,553 $1,715,749
Sales of handsets and accessories 26,185 15,453 65,785 58,748
   1,086,362 722,363 2,807,338 1,774,497
Operating expenses
Cost of services 129,794 86,022 335,480 210,199
Cost of handsets and accessories 62,432 39,357 149,272 112,996
Sales and marketing expenses 107,537 83,788 298,401 219,352
General and administrative expenses 138,071 112,053 389,164  252,861
Depreciation and amortization 167,120 113,338   450,742 288,112
Provision for doubtful accounts 5,722 5,843 17,429 28,694
Other operating expenses 8,052 7,175  20,667 12,460
Net operating income 467,634 274,787   1,146,183   649,823
Currency exchange and translation losses (gains) 349 (3,433) (2,647)  (4,841)
Other expense (income):
Interest income    (7,725) (2,920)  (18,577) (11,743)
Interest expenses, net of amounts capitalized 25,119 27,200 78,828 70,013
Other expense (income)  (5,553) 11,396 (22,006) 12,251
Total other expense (income), net 11,841 35,676 38,245 70,521
Income before provision for income taxes and minority interest 455,445 242,544 1,110,585 584,143
Provision for income taxes 106,902 64,102  269,590 160,514
Minority interest 10,259 22,694 27,372 59,139 
Net income 338,283 155,748 813,623 364,490
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 0.171 0.079 0.410 0.184

MOBILE TELESYSTEMS
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003

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

  As of September 30 2004 As of December 31 2003
CURRENT ASSETS:
Cash and cash equivalents $192,544 $90,376
Short-term investments 50,730  245,000
Trade receivables, net 140,568 99,951
Accounts receivable, related parties 27,153 3,356
Inventory, net 68,757 67,291
VAT receivable 200,887 209,629
Prepaid expenses and other current assets 151,070 124,876
Total current assets 831,709 840,479
PROPERTY, PLANT AND EQUIPMENT 2,808,573 2,256,076
INTANGIBLE ASSETS 1,066,180 1,015,780
INVESTMENTS IN AND ADVANCES TO ASSOCIATES 77,957 103,585
OTHER ASSETS 81,279 9,431
Total assets 4,865,698 4,225,351
CURRENT LIABILITIES
Accounts payable 191,895 168,039
Accrued expenses and other current liabilities 570,549  387,756
Accounts payable, related parties 13,848 31,904
Current portion of long-term debt, capital lease obligations 383,173 710,270
Total current liabilities 1,159,465 1,297,969
LONG-TERM LIABILITIES
Long-term debt 1,099,015 942,418
Capital lease obligations 5,061 7,646
Deferred income taxes 161,351 180,628
Deferred revenue and other 40,157 25,177
Total long-term liabilities 1,305,584 1,155,869

Total liabilities

2,465,049

2,453,838
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 69,020  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 September 30, 2004 and December 31, 2003, 345,244,080 of which are in the form of ADS) 50,558 50,558
Treasury stock (7,202,108 and 9,929,074 common shares at cost as of September 30, 2004 and December 31, 2003) (7,396) (10,197)
Additional paid-in capital 563,791 559,911
Unearned compensation (2,147) (869)
Shareholder receivable (21,423) (27,610)
Accumulated other comprehensive income 8,925 7,595
Retained earnings 1,739,321 1,144,522
Total shareholders’ equity 2,331,629 1,723,910
Total liabilities and shareholders’ equity 4,865,698 4,225,351

MOBILE TELESYSTEMS
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Amounts in thousands of U.S. dollars)

  Nine months ended September 30, 2004 Nine months ended September 30, 2003 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $813,623 $364,490
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 27,372 59,139
Depreciation and amortization 450,742 288,112
Amortization of deferred connection fees (36,509) (24,945)
Equity in net (income) loss of associates (17,631) 1,557
Provision for obsolete inventory 2,611 4,767
Provision for doubtful accounts 17,429 28,694
Deferred taxes (44,517) (29,094)
Non-cash expenses associated with stock bonus and stock options 533
Changes in operating assets and liabilities:
Increase in accounts receivable (80,556) (75,026)
Increase in inventory (2,396) (8,597)
(Increase) / Decrease in prepaid expenses and other current assets (19,323) 6,274
(Increase) / Decrease in VAT receivable 13,746 (39,962)
Increase in trade accounts payable, accrued liabilities and other current liabilities 153,147 92,357
Net cash provided by operating activities 1,278,271 667,766
CASH FLOWS FROM INVESTING ACTIVITIES:
TAIF-Telcom call option exercise (63,034)
Acquisition of subsidiaries, net of cash acquired (172,202) (629,306)
Purchase of property, plant and equipment (697,318) (560,927)
Purchase of intangible assets (82,894) (74,725)
Purchase of short-term investments (42,392)
Proceeds from sale of short-term investments 236,806
Investments in and advances to associates (2,237) (50,310)
Net cash used in investing activities (823,271) (1,315,268)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercise 4,049
Proceeds from notes issue 697,000
Repayment of notes (300,000)
Notes issuance/loans agreement costs (7,265) (5,884)
Capital lease obligaiton principal paid (7,656) (10,467)
Dividends paid (including applicable taxes) (166,893) (96,701)
Proceeds from loans 412,600 222,903
Loan principal paid (295,653) (52,298)
Payments from shareholders 7,008 6,146
Net cash used in financing activities (353,810) 760,699
Effect of exchange rate changes on cash and cash equivalents 979 (590)
NET INCREASE IN CASH AND CASH EQUIVALENTS: 102,168 112,607
CASH AND CASH EQUIVALENTS, at beginning of period 90,376 34,661
CASH AND CASH EQUIVALENTS, at end of period 192,544 147,268
 

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