Financial Results for the Third Quarter Ended September 30, 2005

23 November 2005

Moscow, Russian Federation — November 23, 2005 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and the CIS, today announces its financial and operating results for the third quarter of 20051 featuring strong financial performance and robust subscriber growth.

Third Quarter 2005 Financial and Operating Results Management Presentation
MTS_Q3_2005_Mgmt_Presentation_23_11_2005.pdf (971,1 KB)

Financial Highlights:

Strong financial performance

  • Revenues up 27% year-on-year to $1,385 million
  • OIBDA2 up 16% year-on-year to $738 million (OIBDA margin of 53%)
  • Net income up 3% year-on-year to $347 million
  • Free cash flow3 positive with $130 million for the first nine months of 2005

Operating Highlights:

Robust subscriber growth

  • Subscriber base increased by 6.29 million in Q3 2005; 19.02 million subscriber base growth year-to-date
  • 53.24 million consolidated subscribers as of November 22, 2005
  • Greenfield operations launched in four regions of Russia

Financial Summary (Unaudited)

US$ million Q3 2005 Q3 2004 Change Y-on-Y Q2 2005 Change Q-on-Q
Revenues 1,384.7 1,086.4 27.5% 1,236.6 12.0%
Net operating income 496.0 467.6 6.1% 434.7 14.1%
OIBDA 737.6 634.8 16.2% 651.6 13.2%
OIBDA margin 53.3% 58.4% -5.1pp 52.7% +0.6pp
Net income 347.4 338.3 2.7% 303.9 14.3%

Vassily Sidorov, MTS' President and CEO, said: “We are reporting a very good set of numbers today, featuring significant expansion in our subscriber base and strong growth in revenues and earnings. A strong top-line dynamic allowed us to achieve a high operating margin and increase our free cash flow, despite the negative impact on costs from the relatively high inflation in the countries of our operations.

“Our new image campaign in Russia, the launch of a new set of tariffs and the broader application of churn prediction-based CRM campaigns are all part of our plan to increase customer loyalty. Our customer retention-oriented campaigns resulted in a notable reduction in churn in Russia in the third quarter.

“As planned, we introduced i-mode in Moscow and St. Petersburg in September. This value-added service will be expanded to encompass further key regions in Russia and Ukraine in the near future. We are making progress in our discussions with RIM and the Russian regulators regarding our launch of the localized version of BlackBerry for our corporate and business customers; segments in which we are traditionally strong and dominant. We have also continued to invest into improving the level of service provided by our call centers and customer care offices.

“In Ukraine, our operations continue to grow. We are well prepared for a potential increase in competition on this market with a great team, a strong brand, and a leading position in network development. We have further expanded our presence in Russia through the launch of greenfield operations; recently we started to provide services in four more regions with a total population of over 2 million, which brings our total number of operational regions to 83.

“MTS continues to steadily expand and develop. We are in a unique position to capture substantial untapped demand for telecommunications services in countries with high market growth potential. Our management team is committed to further increasing shareholder value by focusing on revenue growth and achieving best-in-class operational efficiency.”

Operating Overview

Market Growth

MTS' principal markets — Russia and Ukraine — continue to produce significant growth in SIM card penetration, which can be partly attributed to the increase in multi-SIM card usage. In the third quarter of 2005, SIM card penetration4 increased from 67% to 77% in Russia, and from 41% to 49% in Ukraine. In Belarus, SIM card penetration was up from 32% to 36% for the same period. MTS' new markets continue to represent attractive growth prospects; mobile penetration in Uzbekistan and Turkmenistan is at approximately 3% and 1%, respectively.

Subscriber Development

MTS' subscriber base grew by 6.29 million during the third quarter of 2005. The Company maintained a good level of positive subscriber dynamics in all of its markets, with a net increase in its subscriber base of 4.78 million in Russia, 1.42 million in Ukraine, and around 89 thousand in Uzbekistan. Net additions by MTS' joint venture in Belarus5 were 240 thousand for the same period.

As part of its continuous effort to improve customer loyalty and increase customer retention, MTS launched a number of Customer Relations Management (CRM) campaigns in Russia during the third quarter of 2005. They were aimed at stimulating voice and VAS usage, as well as increasing customer loyalty by providing bonus minutes on an account recharge basis. As a result of these campaigns, as well as an overall improvement in subscriber loyalty, the Company's quarterly churn rate in Russia declined to 2.9%.

In Ukraine, churn increased compared to the prior quarter to 6.2%.

Since the end of the third quarter to November 22, 2005, MTS' subscriber net additions totaled 2.88 million, bringing MTS' consolidated subscriber base to 53.24 million.

Market Share

In Russia, MTS accounted for around 34% of new subscriber additions during the third quarter and maintained its leading position with a market share of approximately 35%. In Ukraine, the Company accounted for around 35% of new subscriber additions and showed a decline in market share to 47% at the end of the period. MTS' market share in Uzbekistan, estimated by the Company, was at 61% . In Belarus, the market share of MTS Belarus remained at 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 third quarter of 2005, 87% of MTS' customers in Russia were signed up to pre-paid tariff plans; 89% in Ukraine.

Key Operating Summary


Q3 2005 Q2 2005 Q1 2005 Q4 2004 Q3 2004
Total consolidated subscribers, end of period (mln) 50.36 44.07 38.69 34.22 26.63
Russia 38.87 34.09 30.25 26.54 20.84
Ukraine 10.94 9.52 8.08 7.37 5.53
Uzbekistan 0.49 0.40 0.35 0.31 0.26
Turkmenistan 0.06 0.06  —  —  —
MTS Belarus 1.85 1.61 1.40 1.21 0.97
Russia
ARPU (US$)6 8.9 9.3 9.1 11.2 14.0
MOU (minutes) 130 134 138 164 168
Churn rate (%) 2.9 6.8 6.7 6.3 6.7
SAC per gross additional subscriber (US$) 18.6 18.4 18.2 19.4 21.3
Ukraine
ARPU (US$) 10.8 10.8 10.0 12.4 15.4
MOU (minutes) 132 118 130 127 136
Churn rate (%) 6.2 5.7 5.1 1.77 5.9
SAC per gross additional subscriber (US$) 15.7 14.2 22.1 15.4 20.7

Russia

  • Revenues up 20% year-on-year to $1,015 million8
  • OIBDA up 10% year-on-year to $543 million (OIBDA margin of 53%)
  • Net income decreased 7.5% year-on-year to $240 million

MTS' average monthly minutes of usage per subscriber (MOU) in Russia decreased in the third quarter of 2005 from 134 minutes to 130 minutes, driven by a dilution of the subscriber mix by low usage customers. At the same time, MOU of premium9 subscribers increased from 282 minutes in the second quarter of 2005 to 309 minutes in the third quarter.

The average monthly service revenue per subscriber (ARPU) in Russia decreased sequentially to $8.9 in line with the decline in the per subscriber usage.

Subscriber acquisition cost per gross additional subscriber (SAC) in Russia increased insignificantly in Russia to $18.6 as commission to dealers declined, but the Company continued to invest into advertising its renewed image.

Ukraine

  • Revenues up 39% year-on-year to $336 million10
  • OIBDA up 23% year-on-year to $168 million (OIBDA margin of 50%)
  • Net income up 19% year-on-year to $94 million

Unlike Russia, MOU increased sequentially in Ukraine from 118 minutes to 132 minutes as a result of positive seasonal factors, including more working days during the quarter, and summer period offers to pre-paid customers (free calls within the network to four pre-selected numbers).

Third quarter 2005 ARPU in Ukraine remained unchanged at $10.8, as the bulk of usage growth was due to an increase in unbillable traffic as well as customer migration to cheaper tariff plans. At the same time, the Company saw a notable growth in post-paid ARPU from $37.4 in the second quarter to $40.2 in the third quarter of 2005, in line with seasonal expectations.

SAC in the third quarter of 2005 grew from $14.2 to $15.7 due to a larger share of post-paid contract subscribers in the new additions as well as higher advertising costs as the Company reacted to increased competition on the market.

Uzbekistan

MTS' operations in Uzbekistan contributed $23.0 million to the Company's consolidated revenues, $14.6 million to its consolidated OIBDA (OIBDA margin of 63%), and $7.5 million to its consolidated net income. Third quarter ARPU was at $18.3, up from $17.6 in the previous quarter.

Turkmenistan

MTS' operations in Turkmenistan contributed $15.8 million to the Company's consolidated revenues, $12.1 million to its consolidated OIBDA (OIBDA margin of 77%), and $5.1 million to its consolidated net income. Third quarter ARPU was at $89.0.

Financial Position

The Company's cash expenditure on property, plant and equipment — capital expenditures — in the third quarter of 2005 amounted to $500 million ($406 million in Russia; $79 million in Ukraine; $15 million in Uzbekistan). In addition, its cash expenditure on intangible assets during the quarter amounted to $107 million ($74 million in Russia; $24 million in Ukraine; $9 million in Uzbekistan). For the first nine months of 2005, MTS' total capital expenditures and cash expenditure on intangible assets amounted to $1.4 billion (approximately $85 per net subscriber addition).

MTS' cash, cash equivalents and short-term investments decreased from $728 million to $557 million at the end of the third quarter of 2005, mostly due to the Company's dividend payments for 2004 during the quarter. As of September 30, 2005, MTS' total debt11 was at $2.3 billion. Net debt amounted to $1.8 billion at the end of the quarter and the net debt to LTM OIBDA12 ratio remained at 0.7 times as at the end of 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

Attachment B for reconciliation of free cash flow to net cash provided by operating activity.The source for all market information in this press release is AC&M-Consulting; unless otherwise mentioned.

4

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

5

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

6

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 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%.

8

Excluding intercompany eliminations of $0.7 million.

9

Subscribers signed to MTS' family of tariff plans.

10

Excluding intercompany eliminations of $4.3 million.

11

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.

12

LTM OIBDA represents the last twelve months of rolling OIBDA; see Attachment B for reconciliation of the most directly comparable US GAAP financial measure.

Attachments to the Third 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 Q3 2005 Q2 2005 Q3 2004
Net operating income 496.0 434.7 467.7
Add: depreciation and amortization 241.6 216.9 167.1
OIBDA 737.6 651.6 634.8

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


Q3 2005 Q2 2005 Q3 2004
Net operating margin 35.8% 35.2% 43.0%
Add: depreciation and amortization as a percentage of revenue 17.5% 17.5% 15.4%
OIBDA margin 53.3% 52.7% 58.4%

Attachment B

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

US$ million As of September 30, 2005 As of December 31, 2004
Current portion of debt and of capital lease obligations 403.5 379.4
Long-term debt 1,905.1 1,553.8
Capital lease obligations 2.6 3.9
Total debt 2,311.2 1,937.1
Less:
Cash and cash equivalents (470.4) (274.2)
Short-term investments (87.0) (73.4)
Net debt 1,753.8 1,589.5

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, 2005 For nine months ended September 30, 2004
Net cash provided by operating activities 1,538.0 1,281.2
Less:
Purchase of property, plant and equipment (1,146.4) (697.3)
Purchase of intangible assets (226.7) (82.9)
TAIF Telcom call option exercise (63.0)
Investments in and advances to associates 2.8 (2.2)
Acquisition of subsidiaries, net of cash acquired (37.9) (172.2)
Free cash-flow 129.8 263.6

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

US$ million Three months ended December 31, 2004 Nine months ended September 30, 2005 Twelve months ended September 30, 2005
  A B C=A+B
Net operating income 272.9 1,269.4 1,542.3
Add: depreciation and amortization 225.0 656.6 881.6
OIBDA 497.9 1,926.0 2,423.9

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, or whose account does not have a negative balance for more than this period.

Average monthly service revenue per subscriber (ARPU). We calculate our ARPU 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

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


Three months ended Three months ended Nine months ended Nine months ended

September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004
Net operation revenue
Service revenue and connection fees 1 370 554 1 060 177 3 632 086 2 741 553
Sales of handsets and accessories 14 174 26 185 46 238 65 785

1 384 728 1 086 362 3 678 324 2 807 338
Operating expenses
Cost of service 216 511 129 794 534 750 335 480
Cost of handsets and accessories 52 199 62 432 171 081 149 272
Sales and marketing expenses 147 006 107 537 415 803 298 401
General and administrative expenses 194 888 138 071 552 421 389 164
Depreciation and amortization 241 576 167 120 656 641 450 742
Provision for doubtful accounts 10 663 5 722 36 318 17 429
Other operationg expenses 25 911 8 052 41 945 20 667
Net operating income 495 974 467 634 1 269 365 1 146 183
Currency exchange and translation losses (gains) (5 526) 349 (5 080) (2 647)
Other expense (income):
Interest income (7 176) (7 725) (22 101) (18 577)
Interest expenses 30 054 25 119 94 089 78 828
Other expense (income) (5 730) (5 553) (20 979) (22 006)
Total other expense (income), net 17 148 11 841 51 009 38 245
Income before provision for income taxes and minority 484 352 455 445 1 223 436 1 110 585
Provision for income taxes 129 294 106 902 319 444 269 590
Minority interest 7 642 10 259 20 233 27 372
Net income 347 416 338 283 883 759 813 623
Weighted average number of shares outstanding, in thousands 1 987 084 1 983 400 1 986 447 1 983 400
Earnings per share — basic and diluted 0.175 0.171 0.445 0.410

MOBILE TELESYSTEMS CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

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


As of September 30, 2005 As of December 31, 2004
CURRENT ASSETS:
Cash and cash equivalents $470 418 $274 150
Short-term investments 87 005 73 360
Trade receivables, net 177 372 162 525
Accounts receivable, related parties 28 743 17 768
Inventory, net 110 576 89 518
VAT receivable 330 792 272 578
Prepaid expenses and other current assets 334 727 151 056
Total current assets 1 539 633 1 040 955
PROPERTY, PLANT AND EQUIPMENT 4 081 703 3 234 318
INTANGIBLE ASSETS 1 246 245 1 208 133
INVESTMENTS IN AND ADVANCES TO ASSOCIATES 106 881 81 235
OTHER ASSETS 16 523 16 546
Total assets 6 990 985 5 581 187
CURRENT LIABLITIES
Accounts payable 269 026 242 495
Accrued expenses and other current liabilities 1 006 896 591 058
Accounts payable, related parties 87 944 17 009
Current portion of long-term debt, capital lease obligations 403 484 379 406
Total current liabilities 1 767 350 1 229 968
LONG-TERM LIABILITIES
Long-term debt 1 905 165 1 553 795
Capital lease obligations 2 623 3 947
Deferred income taxes 132 048 160 390
Deferred revenue and other 59 286 47 665
Total long-term liabilities 2 099 122 1 765 797
Total liabilities 3 866 472 2 995 765
COMMITMENTS AND CONTINGENCIES  —  —
MINORITY INTEREST 74 976 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 September 30, 2005 and December 31, 2004, 712,764,485 of which are in the form of ADS as of September 30, 2005 and 432,414,940 — as of December 31, 2004) 50 558 50 558
Treasury stock (5,400,486 common shares at cost as of September 30, 2005 and 7,202,108 — as of December 31, 2004) (5 534) (7 396)
Additional paid-in capital 568 132 564 160
Unearned compensation (1 689) (1 780)
Shareholder receivable (10 369) (18 237)
Accumulated other comprehensive income 52 344 22 444
Retained earnings 2 396 095 1 913 574
Total shareholders’ equity 3 049 537 2 523 323
Total liabilities and shareholders’ equity 6 990 985 5 581 187

MOBILE TELESYSTEMS CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


Nine months ended September 30, 2005 Nine months ended September 30, 2004
CASH FLOWS FROM OPERATIONG ACTIVITIES:
Net income $883 759 $813 623
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 20 233 20 233
Depreciation and amortization 656 641 656 641
Amortization of deffered connection fees (39 604) (36 509)
Equity in net income of associates (29 667) (17 631)
Provision for obsolete inventory 4 275 2 611
Provision for doubtful accounts 36 318 17 429
Deferred taxes (67 669) (44 517)
Non-cash expenses associated with stock bonus options 91 533
Changes in operation assets and liabilities:
Increase in accounts receivable (61 375) (80 556)
Increase in inventory (24 030) (2 396)
Increase in prepaid expenses and other current assets (146 888) (19 323)
Increase in VAT receivable (58 008) 13 746
Increase in trade accounts payable, accrued liabilities and other 363 884 156 097
Net cash provided by operationg activities 1 537 960 1 281 221
CASH FLOWS FROM INVESTING ACTIVITIES:
TAIF Telcom call option exercise (63 034)
Acquisition of subsidiaries, net of cash acquired (37 932) (172 202)
Purchase of property, plant and equipment (1 146 419) (697 318)
Purchase of intangible assets (226 691) (82 894)
Purchase of short-term investments (20 137) (42 392)
Proceeds from sale of short-term investments 6 539 236 806
Investments in and advances to associates 2 769 (2 237)
Net cash used in investing activities (1 421 871) (823 271)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes issue 5 135 4 049
Repayment of notes  — (300 000)
Notes issuance/loans agreement costs (6 784) (10 215)
Capital lease obligation principal paid (6 477) (7 656)
Dividends paid (295 818) (166 893)
Proceeds from loans 245 801 412 600
Loan principal paid (264 736) (295 653)
Payments from shareholders 9 173 7 008
Net cash provided/(used) in financinf activities 85 316 (356 760)
Effect of exchange rate changes on cash and cash equivalents (5 137) 979
NET INCREASE IN CASH AND CASH EQUIVALENTS 196 268 102 168
CASH AND CASH EQUIVALENTS, at beginning of period 274 150 90 376
CASH AND CASH EQUIVALENTS, at end of period 470 418 192 544

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