Financial Results for the Second Quarter Ended June 30, 2005

30 August 2005

Moscow, Russian Federation — August 30, 2005 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and the CIS, today announces excellent financial and operating results for the second quarter of 20051 featuring strong financial performance, robust subscriber growth and ARPU increase.

Second Quarter 2005 Financial and Operating Results Management Presentation
MTS_Management_presentation_Q2_2005__30_08_2005.pdf (220,4 KB)

Financial Highlights:

Strong financial performance

  • Revenues up 35% year-on-year to $1,237 million
  • OIBDA2 up 25% year-on-year to $652 million (OIBDA margin of 53%)
  • Net income up 14% year-on-year to $304 million
  • Free cash-flow3 positive with $63 million for H1 2005

Operating Highlights:

Robust subscriber growth and ARPU increase

  • ARPU4 growth in all markets
  • Q2 2005 subscriber additions of 5.38 million; 14.1 million year-to-date
  • Acquisition in Turkmenistan increased license coverage footprint by 6.6 million inhabitants
  • 48.23 million consolidated subscribers as of August 29, 2005

Financial Summary (Unaudited)

US$ million Q2 2005 Q2 2004 Change Y-on-Y Q1 2005 Change Q-on-Q
Revenues 1,236.6 918.2 34.7% 1,057.0 17.0%
Net operating income 434.7 371.7 16.9% 338.7 28.3%
OIBDA 651.6 521.5 24.9% 536.9 21.4%
OIBDA margin 52.7% 56.8% -4.1pp 50.8% 1.9pp
Net income 303.9 267.5 13.6% 232.5 30.7%

Vassily Sidorov, MTS’ President and CEO, stated: “We are presenting strong results today that demonstrate a continued growth in our customer base and a robust increase in our revenues and net earnings. Our consolidated subscriber base now totals 48.2 million. Looking ahead, we expect to surpass a milestone of 50 million in the next couple of months, which would propel us to one of the top ten largest mobile phone operators in the world in terms of subscribers.

“As part of our efforts to deliver a more rewarding experience to our customers, we will be launching i-mode services in Moscow and St Petersburg in mid-September. We continue to see i-mode as pivotal in providing a platform for future revenue growth from value-added services, and as a strong differentiator for our business in various markets.

“In Ukraine, where the business climate has improved following a stabilization in the political process, MTS remains the leading operator despite an increasingly competitive environment. In Uzbekistan, the market is expanding, underlining our belief that new CIS markets represent attractive growth opportunities. We continue to lead the market in Uzbekistan with a market share of 57%, and see strong subscriber additions in Belarus, where our market share rose further to 51%.

“At the end of the second quarter we completed an acquisition in Turkmenistan, extending our license portfolio by 6.6 million people and providing us with the leading position on this market. With just over 1% mobile penetration, this market is expected to grow on the back of an untapped demand for telecommunications services.

“Overall, our business continues to perform very well and we are on track for 25+% top line growth for this year. There are no changes to our guidance of low-50% for our OIBDA margin for the year. On CAPEX, we are spending not more than $100 per new subscriber, and our total should not exceed $2 billion for the year.”

Operating Overview

Market Growth

MTS’ principal markets — Russia and Ukraine — continue to demonstrate significant growth. In the second quarter of 2005 mobile penetration5 in Russia increased from 59% to 67%, and from 34% to 41% in Ukraine. This growth is a result of new users joining mobile networks as disposable income in both countries continues to rise, coupled with the growth in multi-SIM card ownership. In Belarus, mobile penetration increased from 28% to 32% for the same period.

MTS’ new markets are showing impressive progress and continue to represent attractive growth prospects. Mobile penetration in Uzbekistan increased from 2.3% to 3.0% during the second quarter. Mobile penetration in Turkmenistan, where MTS acquired the leading mobile phone operator, is at around 1%.

Subscriber Development

MTS’ net subscriber additions in the second quarter of 2005 were at 5.38 million, all of which were added organically with the exception of 59 thousand subscribers added through the acquisition in Turkmenistan. In all of its markets, MTS continued to show positive subscriber dynamics, with net additions amounting to 3.84 million in Russia, 1.44 million in Ukraine, and around 46 thousand in Uzbekistan. Net additions by MTS’ joint venture in Belarus6 were 210 thousand for the same period.

Due to MTS’ improved focus on customer loyalty and subscriber retention, and the implementation of a number of CRM campaigns, the Company’s second quarter 2005 churn rate in Russia substantially declined compared to the same period in the prior year to 6.8%. In Ukraine, churn increased insignificantly compared to the prior year to 5.7%.

Since the end of the second quarter to August 29, 2005, MTS’ subscriber net additions were 4.2 million, expanding its consolidated subscriber base to 48.23 million.

Market Share

In Russia, MTS accounted for around 32% of new subscriber additions during the second quarter and maintained its leading position with a market share of approximately 35%. In Ukraine, the Company accounted for around 44% of new subscriber additions and showed a slight decline in market share to 49% at the end of the period. MTS’ market share in Uzbekistan, estimated by the Company, was at 57%7. In Belarus, the market share of MTS Belarus increased by 1% during the quarter to reach 51%.

Customer Segmentation

Subscriptions to MTS’ pre-paid tariff plans (Jeans in Russia, and Jeans and SIM-SIM in Ukraine) accounted for 92% of gross additions in Russia and 95% in Ukraine. By the end of the second quarter of 2005, 83% of MTS’ customers in Russia were signed up to pre-paid tariff plans; 88% in Ukraine.

Key Operating Summary


Q2 2005 Q1 2005 Q4 2004 Q3 2004 Q2 2004
Total consolidated subscribers, end of period (mln) 44.07 38.69 34.22 26.63 22.78
Russia 34.09 30.25 26.54 20.84 18.14
Ukraine 9.52 8.08 7.37 5.53 4.63
Uzbekistan 0.40 0.35 0.31 0.26
Turkmenistan 0.06
MTS Belarus 1.61 1.40 1.21 0.97 0.74
Russia
ARPU (US$)8 9.3 9.1 11.2 14.0 14.1
MOU (minutes) 134 138 164 168 160
Churn rate (%) 6.8 6.7 6.3 6.7 7.7
SAC per gross additional subscriber (US$) 18 18 19 21 21
Ukraine
ARPU (US$) 10.8 10.0 12.4 15.4 14.6
MOU (minutes) 118 130 127 136 127
Churn rate (%) 5.7 5.1 1.79 5.9 5.2
SAC per gross additional subscriber (US$) 14 22 15 21 18

Russia

  • Revenues up 28% year-on-year to $928 million10
  • OIBDA up 19% year-on-year to $491 million (OIBDA margin of 53%)
  • Net income increased 0.1% year-on-year to $209 million

MTS’ average monthly minutes of usage per subscriber (MOU) in Russia decreased in the second quarter of 2005. The decline was driven by a dilution of the subscriber mix by low usage customers and the discontinuation of free minute promotions during the quarter. However, MOU of premium11 subscribers increased to 282 minutes from 247 minutes.

The average monthly service revenue per subscriber (ARPU) in Russia increased as a result of discontinued promotions, seasonally higher roaming revenues, and increased usage of post-paid subscribers.

Subscriber acquisition cost per gross additional subscriber (SAC) in Russia remained unchanged at $18.

MTS accrued a contribution to the Universal Service Fund equal to 1.2% of its service revenues in Russia for two months of the second quarter of 2005, amounting to a total of approximately $8 million.

Ukraine

  • Revenues up 52% year-on-year to $290 million12
  • OIBDA up 37% year-on-year to $148 million (OIBDA margin of 51%)
  • Net income up 52% year-on-year to $89 million

Similar to Russia, decline in MOU in Ukraine was due to the discontinuation of free minute promotions and changes in the customer mix toward more pre-paid customers. At the same time, usage of contract subscribers increased to 354 minutes in the second quarter versus 299 minutes in the previous quarter.

Second quarter 2005 ARPU in Ukraine was $10.8, up from $10.0 in the first quarter. This growth was a result of discontinued promotions and higher usage of contract subscribers, as well the Ukrainian currency appreciation during the quarter (around 4.3%).

SAC in the second quarter of 2005 was significantly down to $14 from $22 in the first quarter due to the reduction in handset subsidies and dealer commissions.

MTS continued to reserve for a potential VAT liability on mobile operators’ contributions to the Ukrainian State Pension Fund13; the amount reserved in the second quarter of 2005 was $2.5 million and in total stands at $4.7 million. The Company, along with other participants in the market, has received notice from the tax authorities claiming back taxes, however, the applicability of VAT on the Pension Fund levy is still contested, and the matter is yet to be finally clarified.

Uzbekistan

MTS’ operations in Uzbekistan contributed $20.4 million to the Company’s consolidated revenues, $12.6 million to its consolidated OIBDA (OIBDA margin of 62%), and $6 million to its consolidated net income. Second quarter ARPU was $17.6, up from $16.8 in the previous quarter.

Turkmenistan

At the end of June 2005, MTS acquired a 51% controlling stake in BCTI, a U.S.-registered company that is the leading mobile phone operator in the Republic of Turkmenistan, for $28 million, with an agreement to increase its ownership to 100% by the end of February 2006, subject to certain conditions. The company serviced 59 thousand subscribers at the end of the second quarter. This acquisition was made at the very end of the quarter and did not affect MTS’ consolidated income statement for the period.

Financial Position

The Company’s cash expenditure on property, plant and equipment — capital expenditures — in the second quarter of 2005 amounted to $315 million ($187 million in Russia; $118 million in Ukraine; $10 million in Uzbekistan). In addition, its cash expenditure on intangible assets during the quarter amounted to $21 million ($3 million in Russia; $15 million in Ukraine; $3 million in Uzbekistan). MTS’ capital expenditures totaled $767 million for the first half of 2005 (approximately $78 per net addition).

The Company’s cash, cash equivalents and short-term investments increased to $728 million at the end of the second quarter of 2005. As of June 30, 2005, MTS’ total debt14 was at $2.4 billion. Net debt amounted to $1.6 billion at the end of the quarter and the net debt to LTM OIBDA15 ratio decreased to 0.7 times, compared to 0.8 times at the end of 2004.

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 net cash provided by operating activity.

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 unless otherwise mentioned.

6

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

7

No independent information source is available.

8

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

9

The significant decrease in the quarterly churn rate to 1.7% can be largely attributed to the adoption in Ukraine 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 month criteria. Under the previous churn calculation, quarterly churn rate in Q4 2004 was at 7.2%.

10

Excluding intercompany eliminations of $0.6 million.

11

Subscribers signed to MTS family of tariff plans.

12

Excluding intercompany eliminations of $1.8 million.

13

From July 1999 to July 2005, 6% of mobile service charges were added to subscribers’ bills as a contribution to the Ukrainian State Pension Fund, introduced as an additional tax levied on mobile services, to be incurred by the subscriber. VAT has not been applied to subscribers’ contribution to the Ukrainian State Pension Fund since the establishment of the levy in 1999. From August 1, 2005 the levy was increased to 7.5%.

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 Second Quarter 2005 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 Q2 2005 Q1 2005 Q2 2004
Net operating income 434.7 338.7 371.7
Add: depreciation and amortization 216.9 198.2 149.8
OIBDA 651.6 536.9 521.5

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


Q2 2005 Q1 2005 Q2 2004
Net operating margin 35.2% 32.0% 40.5%
Add: depreciation and amortization as a percentage of revenue 17.5% 18.8% 16.3%
OIBDA margin 52.7% 50.8% 56.8%

Attachment B

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

US$ million As of June 30, 2005 As of December 31, 2004
Current portion of debt and of capital lease obligations 406.1 379.4
Long-term debt 1,951.5 1,553.8
Capital lease obligations 2.0 3.9
Total debt 2,359.6 1,937.1
Less:
Cash and cash equivalents (637.2) (274.2)
Short-term investments (91.2) (73.4)
Net debt 1,631.2 1,589.5

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, 2005
For six months ended
June 30, 2004
Net cash provided by operating activities 866.6 790.8
Less:
Purchase of property, plant and equipment (646.7) (435.2)
Purchase of intangible assets (120.1) (40.6)
Investments in and advances to associates 1.0 (1.1)
Acquisition of subsidiaries, net of cash acquired (37.9) (20.8)
Free cash-flow 62.9 293.1

Last twelve months (LTM) OIBDA can be reconciled to our consolidated statements of operations as follows:

US$ million Six months ended December 31, 2004 Six months ended June 30, 2005 Twelve months ended June 30, 2005
  A B C=A+B
Net operating income 740.5 773.4 1513.9
Add: depreciation and amortization 392.2 415.1 807.3
OIBDA 1,132.7 1,188.5 2,321.2

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’ss 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 and Six Months Ended June 30, 2005 and 2004

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


Three months ended Three months ended Six months ended Six months ended

June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
Net operation revenue
Service revenue and connection fees $1 222 597 $900 469 $2 261 532 $1 681 376
Sales of handsets and accessories 13 971 17 772 32 064 39 599

1 236 568 918 241 2 293 596 1 720 975
Operating expenses
Cost of service 175 624 109 143 318 239 205 686
Cost of handsets and accessories 58 709 43 524 118 882 86 840
Sales and marketing expenses 141 367 99 043 268 797 190 864
General and administrative expenses 188 454 134 151 357 533 251 093
Depreciation and amortization 216 897 149 770 415 065 283 622
Provision for doubtful accounts 11 344 4 902 25 655 11 707
Other operationg expenses 9 500 6 007 16 034 12 615
Net operating income 434 673 371 701 773 391 678 548
Currency exchange and translation losses (gains) 1 046 5 199 446 (2 996)
Other expense (income):
Interest income (9 831) (4 829) (14 925) (10 852)
Interest expenses 33 598 26 109 64 035 53 709
Other expense (income) (7 806) (6 352) (15 248) (16 453)
Total other expense (income), net 15 961 14 928 33 862 26 404
Income before provision for income taxes and minority 417 666 351 574 739 083 655 140
Provision for income taxes 106 252 74 573 190 150 162 688
Minority interest 7 547 9 482 12 591 17 112
Net income 303 867 267 519 536 342 475 340
Weighted average number of shares outstanding, in thousands 1 986 124 1 983 400 1 986 124 1 983 400
Earnings per share — basic and diluted 0,153 0,135 0,270 0,240

Mobile TeleSystems
Condensed Unaudited Consolidated balance sheets as of June 30, 2005 and December 31, 2004

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


As of June 30, 2005 As of December 31, 2004
CURRENT ASSETS:
Cash and cash equivalents $637 219 $274 150
Short-term investments 91 234 73 360
Trade receivables, net 148 533 162 525
Accounts receivable, related parties 50 588 17 768
Inventory, net 109 923 89 518
VAT receivable 300 759 272 578
Prepaid expenses and other current assets 253 570 151 056
Total current assets 1 591 826 1 040 955
PROPERTY, PLANT AND EQUIPMENT 3 737 512 3 234 318
INTANGIBLE ASSETS 1 243 525 1 208 133
INVESTMENTS IN AND ADVANCES TO ASSOCIATES 98 244 81 235
OTHER ASSETS 18 688 16 546
Total assets 6 689 795 5 581 187
CURRENT LIABLITIES
Accounts payable 281 412 242 495
Accrued expenses and other current liabilities 1 025 325 591 058
Accounts payable, related parties 57 034 17 009
Current portion of long-term debt, capital lease obligations 406 086 379 406
Total current liabilities 1 769 857 1 229 968
LONG-TERM LIABILITIES
Long-term debt 1 951 471 1 553 795
Capital lease obligations 2 038 3 947
Deferred income taxes 154 237 160 390
Deferred revenue and other 60 901 47 665
Total long-term liabilities 2 168 647 1 765 797
Total liabilities 3 938 504 2 995 765
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 67 197 62 099
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, 2005 and December 31, 2004, 695,103,805 of which are in the form of ADS as of June 30, 2005 and 432,414,940 as of December 31, 2004) 50 558 50 558
Treasury stock (7,202,108 common shares at cost as of June 30, 2005 and December 31, 2004) (7 396) (7 396)
Additional paid-in capital 564 589 564 160
Unearned compensation (1 046) (1 780)
Shareholder receivable (13 572) (18 237)
Accumulated other comprehensive income 42 282 22 444
Retained earnings 2 048 679 1 913 574
Total shareholders’ equity 2 684 094 2 523 323
Total liabilities and shareholders’ equity 6 689 795 5 581 187

Mobile TeleSystems
Condensed Unaudited Consolidated Statements of Cash Flows for the Six months ended June 30, 2005 and 2004

(Amounts in thousands of U.S. dollars)


Six months ended June 30, 2005 Six months ended June 30, 2004
CASH FLOWS FROM OPERATIONG ACTIVITIES:
Net income $536 342 $475 340
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 12 591 17 112
Depreciation and amortization 415 065 283 622
Amortization of deffered connection fees (23 668) (27 067)
Equity in net income of associates (18 016) (11 687)
Provision for obsolete inventory 1 752 6 456
Provision for doubtful accounts 25 655 11 707
Deferred taxes (36 629) (21 372)
Non-cash expenses associated with stock bonus options 734 318
Changes in operation assets and liabilities:
Increase in accounts receivable (43 916) (52 916)
Increase in inventory (20 854) (4 832)
Increase in prepaid expenses and other current assets (79 257) (10 424)
Increase in VAT receivable (27 975) 26 337
Increase in trade accounts payable, accrued liabilities and other 124 731 98 231
Net cash provided by operationg activities 866 555 790 825
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (37 931) (20 848)
Purchase of property, plant and equipment (646 733) (435 223)
Purchase of intangible assets (120 106) (40 634)
Purchase of short-term investments (18 021) (45 365)
Proceeds from sale of short-term investments 194 230 000
Investments in and advances to associates 1 007 (1 114)
Net cash used in investing activities (821 590) (313 184)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes issue 400 000
Repayment of notes (300 000)
Notes issuance/loans agreement costs (6 784)
Capital lease obligation principal paid (4 655) (5 480)
Dividends paid (100 023) (6 795)
Proceeds from loans 225 038 205 544
Loan principal paid (195 855) (177 498)
Payments from shareholders 5 095 4 496
Net cash provided/(used) in financinf activities 322 816 (279 733)
Effect of exchange rate changes on cash and cash equivalents (4 712) 1 601
NET INCREASE IN CASH AND CASH EQUIVALENTS 363 069 199 509
CASH AND CASH EQUIVALENTS, at beginning of period 274 150 90 376
CASH AND CASH EQUIVALENTS, at end of period 637 219 289 885

Contact investor relations:

+ 7 495 223 20 25 ir@mts.ru

MTS Investor Relations
App for iPad