Financial Results for the Fourth Quarter and Full-Year Ended December 31, 2004

22 March 2005

Moscow, Russian Federation — March 22, 2005 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and the CIS, today announces its fourth quarter and full-year 20041 financial and operating results.

Q4 and FY 2004 Financial and Operating Results Management Presentation
MTS_Management_presentation_FY_2004_March.pdf (312,4 KB)

Financial Highlights

  • Consolidated revenues up 53% year-on-year to $3.9 billion
  • Consolidated OIBDA2 up 57% year-on-year to $2.1 billion
  • All-time high annual OIBDA margin of 54%
  • Consolidated net income nearly doubled year-on-year to $1.0 billion

Operating Highlights

  • Subscriber base more than doubled to 34.2 million; 17.5 million net new consolidated subscribers added during 2004
  • Quarterly net subscriber acquisition rate almost doubled to a record 7.5 million in the fourth quarter
  • Subscriber acquisition cost and churn substantially reduced year-on-year
  • Number one position maintained in Russia, Ukraine, Belarus and Uzbekistan
  • Continued strong subscriber intake since year-end with 3.9 million new customers added since the beginning of the year; total subscriber base of 38.1 million as of March 21, 2005

Financial Summary (Unaudited)

US$ million Q4 2004 Q4 2003 Change Y-on-Y FY 2004 FY 2003 Change Y-on-Y
Revenues 1,079.7 771.7 39.9% 3,887.0 2,546.2 52.7%
Net operating income 317.3 272.8 16.3% 1,463.5 922.6 58.6%
Net operating margin 29.4% 35.4% 37.7% 36.2%
Net income 209.1 152.7 36.9% 1,022.7 517.2 97.7%
OIBDA 497.9 400.6 24.3% 2,094.8 1,338.5 56.5%
OIBDA margin 46.1% 51.9% 53.9% 52.6%

Vassily Sidorov, President and CEO of MTS, commented:

“2004 was a year of record subscriber additions for MTS in all territories, which resulted in strong revenue dynamics. Our subscriber base doubled in 2004 due to strong growth throughout the year, the addition of a number of important regions and active marketing campaigns. Revenue decline in Q4 compared to Q3 was due to seasonally lower roaming revenues, as well as intensified competition with aggressively priced subscriber acquisition campaigns.

“Our focus on customer acquisition in the second half of 2004 was geared towards retention of the Company’s market leadership in the run-up to the holiday season. Our customer retention and dealer loyalty oriented initiatives led to an almost halving of the churn rate year-on-year in 2004; we have also steadily reduced our per subscriber acquisition costs.

“Our full-year operating margin expanded as we continued to drive efficiency levels, but was down in the fourth quarter due to the quarterly increase in customer acquisition-related expenses. Net income for the year doubled and the Company’s overall strong financial position at year-end provided us with sufficient support as we entered another year of rapid market growth.”

Operating Overview

Market Growth

2004 was a year of record subscriber growth for the mobile markets in Russia and Ukraine. Mobile penetration3 increased during the year from 25% to 51% in Russia and from 14% to 29% in Ukraine. This growth was fueled by continuous per capita income growth in the two countries, as well as by mobile operators’ aggressive network expansion and marketing campaigns.

The fourth quarter of 2004 was the strongest period of mobile subscriber growth in the markets where MTS operates. This growth was specifically driven by increased consumer spending before the New Year and Christmas holidays, as well as by mobile operators’ seasonal offers.

Subscriber Development

MTS was one of the main beneficiaries of the strong demand for mobile services during 2004. The Company added 17.5 million new customers during the year on a consolidated basis, of which 16.8 million were added organically. MTS’ operations in Russia accounted for 13.1 million of the subscriber intake.

MTS’ consolidated subscriber base increased by 7.5 million new subscribers in the fourth quarter alone, with the operations in Russia adding nearly 5.7 million net new subscribers.

MTS has organically added a further 3.9 million new subscribers since the beginning of this year, expanding the consolidated subscriber base to 38.1 million4.

Business Expansion

MTS focused on expanding the Company’s regional presence during 2004 by acquiring companies and launching greenfield operations in new regions. The number of MTS’ operational regions increased from 60 to 77, with 14 regions added to the operational footprint in the fourth quarter alone. MTS acquired the leading mobile operator in Uzbekistan in August 2004.

Market Share

Innovative and proactive promotions and marketing activity during 2004 and, in particular, the fourth quarter, resulted in increased market shares in each of MTS’ operating markets. MTS’ market share expanded in the fourth quarter to 35.6% in Russia, 53.4% in Ukraine, and 59% in Uzbekistan. MTS’ joint venture in Belarus became the number one operator during the second half of 2004 and obtained a market share of 49.8% by the end of the year.

Customer Segmentation

Mobile markets were primarily driven by the pre-paid customer segment during 2004. Subscriptions to MTS’ pre-paid tariff plans (Jeans in Russia, and Jeans and SIM-SIM in Ukraine) accounted for 84% of gross additions in Russia and 91% in Ukraine. By the end of 2004, 77% of MTS’ customers in Russia and 86% in Ukraine, were signed up to pre-paid tariff plans, compared to 56% and 79% respectively at the end of 2003.

Key Operating Summary


Q4 2004 Q3 2004 Q2 2004 Q1 2004 Q4 2003
Total consolidated subscribers, end of period (mln) 34.22 26.63 22.78 19.19 16.72
Russia (mln) 26.54 20.84 18.14 15.34 13.37
Ukraine (mln) 7.37 5.53 4.63 3.85 3.35
Uzbekistan (mln) 0.31 0.26
MTS Belarus5 (mln) 1.21 0.97 0.74 0.59 0.46
Russia
ARPU (US$)6 11.2 14.0 14.1 14.1 16.3
MOU (minutes) 164 168 160 147 140
Churn rate (%) 6.3 6.7 7.7 10.0 12.5
SAC per gross additional subscriber (US$) 19 21 21 23 24
Ukraine
ARPU (US$) 12.4 15.4 14.6 14.0 15.4
MOU (minutes) 127 136 127 111 114
Churn rate (%) 1.77 5.9 5.2 6.0 6.5
SAC per gross additional subscriber (US$) 15 21 18 25 26

Russia

  • Full-year revenues up 41% year-on-year to $3,044 million8; fourth quarter revenues up 30% year-on-year to $819 million9
  • Full-year net income increased by 75% year-on-year to $787 million; fourth quarter net income increased by 18% year-on-year to $153 million
  • Full-year 2004 OIBDA up 44% year-on-year to $1,637 million; fourth quarter OIBDA up 12% year-on-year to $373 million
  • Full-year OIBDA margin of 54%; fourth quarter OIBDA margin of 46%

Record expansion in the subscriber base during the year resulted in a further dilution of the subscriber mix by mass-market subscribers that, along with certain tariff reductions and promotions, led to a decline in the average monthly revenue per user (ARPU). During the last quarter of 2004, MTS experienced particularly accelerated subscriber growth, with 5.7 million new customers added on a net basis in Russia. However, as the bulk of these new subscriber additions took place towards the end of the quarter, the overall subscriber growth during the quarter did not contribute materially to the topline. Revenues were also negatively influenced by a significant seasonal drop in roaming revenues during the quarter.

Compared to the previous year, OIBDA margin expansion in 2004 was a result of increased economies of scale and tough cost control measures, which more than compensated for the pressure on margins from relatively high inflation levels in Russia. Pressure on profitability in the last quarter of 2004 primarily resulted from substantially increased dealer commissions on the back of accelerated subscriber growth during this period and additional operating expenditures associated with new regional launches, as well as negative quarter-on-quarter revenue dynamics.

The subscriber acquisition cost (SAC) per gross additional subscriber continued to decline in 2004, reflecting the lower cost of attracting mass-market subscribers and the increased economies of scale.

The quarterly churn rate declined to 6.3% in the fourth quarter, continuing the positive trend since the beginning of 2004. The annual churn rate of 27.5% marked a significant reduction from the 2003 level of 47.3%, and was largely due to the successful implementation of customer and dealer loyalty programs.

Ukraine

  • Full-year revenues10 up to $832 million11; fourth quarter revenues up 73% year-on-year to $246 million12
  • Full-year net income increased to $232 million; fourth quarter net income more than doubled year-on-year to $52 million
  • Full-year OIBDA up to $443 million; fourth quarter OIBDA up by 71% year-on-year to $115 million
  • Full-year OIBDA margin of 53%; fourth quarter OIBDA margin of 47%

As in Russia, the impact of mass-market subscribers on the subscriber mix and the effect of promotions resulted in a decline in ARPU in Ukraine during the year. Revenue levels in the fourth quarter were also adversely affected by the seasonal decline in roaming revenues during the period. The fourth quarter was further impacted by lower usage levels as a result of the presidential elections and the temporary imposition of certain banking restrictions.

OIBDA margins improved in 2004 as a result of increased economies of scale and cost control measures. Pressure on profitability in the fourth quarter was also partially a consequence of the increase in total subscriber acquisition costs relating to record subscriber additions, with 1.8 million subscribers added during the fourth quarter alone.

SAC per gross additional subscriber declined significantly in the fourth quarter due to the increased proportion of mass-market subscribers in the overall additions.

Uzbekistan

Since its acquisition on August 1, 2004, the Uzbek operation contributed $27 million to MTS’ consolidated revenues, of which $17 million was contributed in the fourth quarter. The operation generated $15 million of OIBDA, of which $10 million was generated in the fourth quarter, and $4 million to net income, of which $3.9 million was generated in the fourth quarter. ARPU in Uzbekistan was $19 in the fourth quarter.

Financial Position

Full-year cash expenditure on property, plant and equipment was in line with management guidance and amounted to $1,204 million, of which $955 million was invested in Russia, $246 million in Ukraine, and $3 million13 in Uzbekistan. MTS’ expenditure on property, plant and equipment in the fourth quarter totaled $507 million, of which $407 million was invested in Russia, $99 million in Ukraine, and $1 million in Uzbekistan.

Cash expenditure on intangible assets during the year amounted to $155 million ($119 million in Russia and $36 million in Ukraine). MTS spent $72 million on the purchase of intangible assets during the fourth quarter ($68 million in Russia and $4 million in Ukraine).

In line with the Company’s strategy to expand the geography of its operations, MTS continued to acquire regional market leaders. The Company spent $356 million (net of cash in acquired companies) on acquisitions during the year, comprised of $235 million in the regions of Russia and $121 million on acquiring the business in Uzbekistan. Of the total acquisition expenditures in 2004, $184 million was spent in the fourth quarter.

Strong operating cash-flow generation resulted in a further decrease in MTS’ relative leverage level. As of December 31, 2004, MTS’ total debt14 was at $1.94 billion, resulting in a ratio of total debt to OIBDA of 0.9 times, compared to 1.2 times in 2003. The Company’s cash and cash equivalents amounted to $274 million at the end of 2004 and net debt amounted to $1.59 billion.

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

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

4

As of March 21, 2005.

5

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

6

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

7

The significant decrease in the quarterly churn rate to 1.7% can be largely attributed to the adoption of the churn policy used by MTS in Russia, whereby pre-paid customers are defined as churning after six months of inactivity, rather than the previous three months criteria. Annual churn for 2004 was at 15.8%. Under the previous churn calculation, quarterly churn rate in Q4 2004 was at 7.2% and annual churn was at 23.0%.

8

Excluding intercompany eliminations of $7.8 million.

9

Excluding intercompany eliminations of $0.5 million.

10

No year-on-year comparison is provided as MTS consolidated UMC, its 100%-owned subsidiary in Ukraine, only during the last 10 months of 2003.

11

Excluding intercompany eliminations of $8.2 million.

12

Excluding intercompany eliminations of $1.1 million.

13

MTS started consolidation of Uzdunrobita on August 1, 2004.

14

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.

Attachments to the Fourth Quarter and Full-Year 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 Q4 2004 Q4 2003 FY 2004 FY 2003
Operating income 317.3 272.8 1,463.5 922.6
Add: depreciation and amortization 180.6 127.8 631.3 415.9
OIBDA 497.9 400.6 2,094.8 1,338.5

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


Q4 2004 Q4 2003 FY 2004 FY 2003
Operating margin 29.4% 35.4% 37.7% 36.2%
Add: depreciation and amortization as a percentage of revenue 16.7% 16.5% 16.2% 16.4%
OIBDA margin 46.1% 51.9% 53.9% 52.6%

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 December 31, 2004 As of December 31, 2003
Current portion of debt and of capital lease obligations 379.4 710.3
Long-term debt 1,553.8 942.4
Capital lease obligations 3.9 7.6
Total debt 1,937.1 1,660.3
Less:
Cash and cash equivalents (274.2) (90.4)
Short-term investments (73.4) (245.0)
Net debt 1,589.5 1,324.9

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 December 31, 2004 and 2003 and the Years Ended December 31, 2004 and 2003

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


Three months ended Year ended

December 31, 2004 December 31, 2003 December 31, 2004 December 31, 2003
Net operating revenue
Service revenue and connection fees $1 058 718 $749 340 $3 800 271 $2 465 089
Sales of handsets and accessories 20 938 22 361 86 723 81 109

1 079 656 771 701 3 886 994 2 546 198
Operating expenses
Cost of services 145 617 90 909 481 097 301 108
Cost of handsets and accessories 69 318 60 075 218 590 173 071
Sales and marketing expenses 162 582 107 431 460 983 326 783
General and administrative expenses 186 132 99 062 575 296 351 923
Depreciation and amortization 180 523 127 804 631 265 415 916
Provision for doubtful accounts 9 030 3 939 26 459 32 633
Other operating expenses 9 110 9 706 29 777 22 166
         
Net operating income 317 344 272 775 1 463 527 922 598
         
Currency exchange and translation (gains) losses (3 882) 4 148 (6 529) (693)
Other (income) expenses:
Interest income (3 214) (6 333) (21 792) (18 076)
Interest expenses 29 128 37 503 107 956 106 551
Other (income) expenses (12 863) (8 830) (34 868) 3 420
Total other (income) expenses, net 13 051 22 340 51 296 91 895
Income before provision for income taxes and minority interest 308 175 246 287 1 418 760 831 396
Provision for income taxes 96 083 81 966 365 673 242 480
Minority interest 2 970 11 573 30 342 71 677
Net income 209 122 152 748 1 022 745 517 239
Weighted average number of shares outstanding, in thousands 1 986 102 1 983 400 1 984 497 1 983 400
Earnings per share — basic and diluted 0.105 0.077 0.515 0.261

Mobile TeleSystems
Condensed Unaudited Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003

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


As of December 31, 2004 As of December 31, 2003
Current Assets:
Cash and cash equivalents $274 150 $90 376
Short-term investments 73 360 245 000
Trade receivables, net 162 525 99 951
Accounts receivable, related parties 17 768 3 356
Inventory, net 89 518 67 291
VAT receivable 272 578 209 629
Prepaid expenses and other current assets 151 056 124 876
Total current assets 1 040 955 840 479
Property, Plant and Equipment 3 278 782 2 256 076
Intangible Assets 1 208 133 1 015 780
Investments in and Advances to Associates 82 648 103 585
Other Assets 16 546 9 431
Total assets 5 627 064 4 225 351
Current Liabilities
Accounts payable 242 495 168 039
Accrued expenses and other current liabilities 591 058 387 756
Accounts payable, related parties 17 009 31 904
Current portion of debt, capital lease obligations 379 406 710 270
Total current liabilities 1 229 968 1 297 969
Long-Term Liabilities
Long-term debt 1 553 795 942 418
Capital lease obligations 3 947 7 646
Deferred income taxes 171 400 180 628
Deferred revenue and other 47 665 25 177
Total long-term liabilities 1 776 807 1 155 869
Total liabilities 3 006 775 2 453 838
Commitments and Contingencies
Minority Interest 62 099 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, 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 December 31, 2004 and December 31, 2003) (7 396) (10 197)
Additional paid-in capital 564 160 559 911
Unearned compensation (1 780) (869)
Shareholder receivable (18 237) (27 610)
Accumulated other comprehensive income 22 444 7 595
Retained earnings 1 948 441 1 144 522
Total shareholders’ equity 2 558 190 1 723 910
Total liabilities and shareholders’ equity 5 627 064 4 225 351

Mobile TeleSystems
Condensed Unaudited Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003

(Amounts in thousands of U.S. dollars)


Year ended December 31, 2004 Year ended December 31, 2003
Cash Flows From Operating Activities:
Net income $1 022 745 $517 239
Adjustments to reconcile net income to net cash provided by operating activities:    
Minority interest 30 342 71 677
Depreciation and amortization 631 265 415 916
Amortization of deferred connection fees (46 978) (29 372)
Equity in net income of associates (25 559) (2 670)
Provision for obsolete inventory 4 610 3 307
Provision for doubtful accounts 26 459 32 633
Deferred taxes (65 013) (43 001)
Non-cash expenses associated with stock bonus and stock options 900 213
Changes in operating assets and liabilities:
Increase in accounts receivable (101 223) (64 384)
Increase in inventory (24 179) (14 737)
Increase in prepaid expenses and other current assets (18 571) (19 151)
Increase in VAT receivable (55 044) (50 230)
Increase in trade accounts payable, accrued liabilities and other current liabilities 331 835 148 544
Net cash provided by operating activities 1 711 589 965 984
Cash Flows from Investing Activities:
Acquisition of subsidiaries, net of cash acquired (355 744) (667 206)
Purchase of property, plant and equipment (1 204 400) (839 165)
Purchase of intangible assets (154 544) (119 606)
Purchase of short-term investments (114 440) (215 000)
Proceeds from sale of short-term investments 286 340
Investments in and advances to associates (413) (69 110)
Net cash used in investing activities (1 543 201) (1 910 087)
Cash Flows from Financing Activities:
Proceeds from stock options exercise 4 049
Proceeds from notes issue 1 097 000
Repayment of notes (600 000)
Notes issuance/loans agreement costs (12 039) (9 556)
Capital lease obligation principal paid (15 274) (22 646)
Dividends paid (232 662) (110 864)
Proceeds from loans 1 177 556 712 716
Loan principal paid (320 511) (677 374)
Payments from shareholders 9 654 8 269
Net cash used in financing activities 10 773 997 545
Effect of exchange rate changes on cash and cash equivalents 4 613 2 273
Net Increase in Cash and Cash Equivalents: 183 774 55 715
Cash and Cash Equivalents, at beginning of period 90 376 34 661
Cash and Cash Equivalents, at end of period 274 150 90 376

* including applicable taxes

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