Financial Results for the Second Quarter Ended June 30, 2006

05 September 2006

MOSCOW, RUSSIAN FEDERATION — SEPTEMBER 5, 2006 — MOBILE TELESYSTEMS OJSC («MTS» — NYSE: MBT), THE LARGEST MOBILE PHONE OPERATOR IN RUSSIA AND THE CIS, TODAY ANNOUNCES ITS SECOND QUARTER 2006 FINANCIAL AND OPERATING RESULTS.

Q2 2006 Financial and Operational Results
Q2_2006_Results_Presentation_eng.pdf (315 KB)

Financial Highlights

  • Consolidated revenues of $1,492 million
  • Consolidated OIBDA2 of $730 million (OIBDA margin of 48.9%)
  • Consolidated net income of $295 million
  • Free cash-flow3 positive with $139 million

Corporate Highlights

  • Launch of new brand
  • Dividends in the amount of $562 million approved by the AGM on June 23, 2006
  • Mr Leonid Melamed approved to the position of President and CEO
  • Mr Vsevolod Rozanov appointed Chief Financial Officer
  • BoD will recommend the creation of a management board at the EGM on October 30, 2006
  • Adoption of 3+1 strategy and new corporate group structure

Financial Summary (Unaudited)

US$ million

Q2

2006

Q2

2005

Change

Y-on-Y

Q1

2006

Change

Q-on-Q

Revenues

1,492.0  

1,236.6

20.7%

1,288.7

15.8%

Net operating income

 465.2

434.7

7.0%

334.2

39.2%

Net operating margin

31.2%

35.2%

-

25.9%

-

Net income

294.7

303.9

-3.0%

184.4 

59.8%

OIBDA

730.3

651.6

12.1%

598.6 

22.0%

OIBDA margin

48.9%

52.7%

-

46.5%

-

Leonid Melamed, President and CEO of MTS, highlighted:

“For the period, we witnessed strong top-line growth of over 20%, an improving OIBDA margin and strong balance sheet strength. The Board of Directors adopted our 3+1 strategy for growth and implemented a new corporate group structure under which MTS Group was created.

In accomplishing our promise to the shareholders, we have begun work on optimizing costs, heightened our marketing activity and made our business processes more efficient.”

Operating Overview

Market Growth

Growth in Russia and Ukraine continued with mobile penetration4 increasing from 91% to 97% in Russia and from 69% to 76% in Ukraine during the second quarter of 2006.

Mobile penetration in Uzbekistan increased from 4.4% at the beginning of the year to 5.7% at the end of the second quarter and from 1.8% to 2.2% in Turkmenistan. In Belarus, mobile penetration increased from 46% to 51% for the same period.

Subscriber Development

The Company added 3.05 million new customers during the second quarter of 2006 on a consolidated basis, all of which were added organically. MTS’ operations in Russia accounted for 2.21 million, 660,000 were added in Ukraine, approximately 152,000 in Uzbekistan and 32,000 in Turkmenistan.

In the second quarter of 2006 the Company’s churn rates in Russia decreased from 6.3% to 5.4% and in Ukraine increased from 6.1% to 7.9%.

Since the end of the second quarter to July 31, 2006, MTS has organically added a further 1.62 million, expanding its consolidated subscriber base to 65.72 million.

Market Share

In Russia, MTS had a leading market share of approximately 34%. In Ukraine, the Company’s market share was 42%. MTS’ market share5 in Uzbekistan and Turkmenistan reached 55% and 80% respectively at the end of the second quarter of 2006.

In Belarus, the market share of MTS Belarus was maintained at 52%.

Customer Segmentation

Subscriptions to MTS’ pre-paid tariff plans (Jeans in Russia, and Jeans and SIM-SIM in Ukraine) accounted for 93% of gross additions in Russia and 95% Ukraine. At end of the second quarter of 2006, 90% of MTS’ customers in Russia were signed up to pre-paid tariff plans, compared to 83% a year ago. In Ukraine, the share of customers signed to pre-paid tariff plans was 91%.

Key Operating Summary

Important Disclosrue Information

Please note that as of the reporting date for Q2 2006, MTS will change its methodology for reporting average revenue per user (ARPU) for its Russian subscribers, a common calculation used throughout the telecommunications industry as a measure of company effectiveness and performance.  Whereas previously we had excluded interconnect fees, we will now be including all network revenue in our calculation.  To assist our investors and analysts, we have included recalculated ARPU figures dating back to Q1 2005 as well as ARPU for Q2 2006 under our previous methodology.

 

Q2 2006

Q1 2006

Q4 2005

Q3 2005

Q2 2005

Q1 2005

Total consolidated subscribers, end of period (mln)

64.10

61.05

58.19

50.36

44.07

38.69

Russia

48.04

45.84

44.22

38.87

34.09

30.25

Ukraine

15.11

14.46

13.33

10.94

9.52

8.08

Uzbekistan

0.82

0.67

0.58

0.49

0.40

0.35

Turkmenistan

0.12

0.09

0.07

0.06

0.06

-

MTS Belarus6

2.58

2.34

2.13

1.85

1.61

1.40

Russia

ARPU (US$)7

7.1

6.2

7.3

8.9

9.3

9.1

ARPU (US$)recalculated8

7.5

6.6

7.4

9.0

9.4

9.1

MOU (minutes)

128

118

123

130

134

138

Churn rate (%)

5.4

6.3

5.2

2.9

6.8

6.7

SAC per gross additional subscriber (US$)

23.8

18.7

19.8

18.6

18.4

18.2

Ukraine

ARPU (US$)

8.0

7.5

9.1

10.8

10.8

10.0

MOU (minutes)

152

147

120

132

118

130

Churn rate (%)

7.9

6.1

6.0

6.2

5.7

5.1

SAC per gross additional subscriber (US$)

12.7

14.4

9.4

15.7

14.2

22.1

 


 Russia

  • Second quarter revenues up 17% year-on-year to $1,085 million9
  • Second quarter net income down 8% year-on-year to $194 million
  • Second quarter OIBDA up 4% year-on-year to $512 million (OIBDA margin of 47.2%)

MTS’ average monthly minutes of usage per subscriber (MOU) in Russia increased from 118 to 128 minutes in the second quarter of 2006 due to seasonality with increased roaming revenues and marketing initiatives aimed at increasing traffic, such as the launch of the tariff plan “Pervyi” on June 2, 2006 and the April introduction of MTS’ Unlimited Weekends, which offered free weekend calls. Post-paid subscribers’ MOU increased from 327 minutes in the previous quarter to 403 minutes.

The average monthly service revenue per subscriber (ARPU) in Russia increased from $6.6 to $7.5 (or from $6.2 to $7.1 under our previous methodology for calculating ARPU) due to seasonal factors, such as higher roaming revenues and significant increase in usage of post-paid subscribers.

Subscriber acquisition costs (SAC) in the second quarter of 2006 increased from $18.7 to $23.8 due to the increase in advertising and marketing expenses related to the Company’s aggressive marketing policy.

Ukraine

  • Second quarter revenues up 23% year-on-year to $358 million10
  • Second quarter net income down 1% year-on-year to $88 million
  • Second quarter OIBDA up 25% year-on-year to $185 million (OIBDA margin of 51.7%)

MOU slightly increased sequentially in Ukraine in the second quarter from 147 minutes to 152 minutes as a result of seasonality, new pre-paid tariffs launched in March and April 2006 and special offers to JEANS and Sim-Sim subscribers in May 2006.

ARPU in Ukraine increased from $7.5 in the first quarter to $8.0 in the second quarter due to seasonality and Company’s activities aimed at ARPU stimulation.

SAC decreased from $14.4 to $12.7 in the second quarter due to a decrease in advertising and marketing expenses.

Uzbekistan

Revenues in Uzbekistan in the second quarter contributed $27.9 million to the Company’s consolidated revenues (up 36% y-o-y), $16.0 million to its consolidated OIBDA (up 26% y-o-y) with an OIBDA margin of 57.3%, and $5.2 million to its consolidated net income (down 6% y-o-y). Second-quarter ARPU was $12.4, down from $13.4 in the previous quarter. Second quarter MOU was 475 minutes, an increase from 411 minutes in the previous quarter.

Turkmenistan

MTS’ operations in Turkmenistan contributed $23.9 million to the Company’s consolidated revenues, $16.9 million to its consolidated OIBDA (OIBDA margin of 70.7%) and $8.2 million to its consolidated net income in the second quarter of 2006. ARPU was at $74.9, a decrease from $80.5 in the previous quarter.

Financial Position

The Company’s cash expenditure on property, plant and equipment in the second quarter of 2006 amounted to $372 million, of which approximately $243 million was invested in Russia, $112 million in Ukraine, $15 million in Uzbekistan and $2 million in Turkmenistan. In addition, its cash expenditure on intangible assets during the quarter amounted to $39 million ($30 million in Russia and $9 million in Ukraine).

As of June 30, 2006, MTS’ total debt  was at $3.3 billion, resulting in a ratio of total debt to LTM OIBDA  of 1.2 times. Net debt amounted to $2.7 billion at the end of the quarter and the net debt to LTM OIBDA ratio of 1.0 times.

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 The source for all market information on Russia and Ukraine in this press release is AC&M-Consulting.
5 According to the Company’s estimates.
6 MTS owns a 49% stake in Mobile TeleSystems LLC, a mobile operator in Belarus, which is not consolidated.
7 See Attachment C for definitions of ARPU, MOU, Churn and SAC.
8 See above disclosure, as ARPU for Russia has been recalculated to include all network revenue.
9 Excluding intercompany eliminations of $0.5 million.
10 Excluding intercompany eliminations of $2.4 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 Appendix B for reconciliations to our consolidated statements.
 

Attachments to the Fourth Quarter and Full-Year 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; 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

Q1 2006

Q2 2006

Q2 2005

Operating income

334.2

465.2

434.7

Add: depreciation and amortization

264.4

265.1

216.9

OIBDA

598.6

730.3

651.6



US$ million

Q1 2006

 

Russia

Ukraine

Uzbekistan

Turkmenistan

Operating income

229.9

92.9

9.9

1.5

Add: depreciation and amortization

203.9

50.8

5.8

3.9

OIBDA

433.8

143.7

15.7

5.4

 

US$ million

Q1 2006

 

Russia

Ukraine

Uzbekistan

Turkmenistan

Operating income

316.6

126.5

9.1

13.0

Add: depreciation and amortization

195.7

58.6

6.9

3.9

OIBDA

512.4

185.1

16.0

16.9

 

US$ million

Q2 2005

 

Russia

Ukraine

Uzbekistan

Operating income

315.7

111.2

7.8

Add: depreciation and amortization

175.3

36.7

4.9

OIBDA

491.0

147.9

12.7

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

 

Q1 2006

Q2 2006

Q2 2005

Operating margin

25.9%

31.2%

35.2%

Add: depreciation and amortization as a percentage of revenue

20.6%

17.8%

17.5%

OIBDA margin

46.5%

48.9%

52.7%

Q1 2006

 

Russia

Ukraine

Uzbekistan

Turkmenistan

Operating margin

24.8%

29.3%

39.0%

7.7%

Add: depreciation and amortization as a percentage of revenue

21.9%

16.0%

22.8%

20.6%

OIBDA margin

46.7%

45.3%

61.8%

28.3%


Q2 2006

 

Russia

Ukraine

Uzbekistan

Turkmenistan

Operating margin

29.2%

35.3%

32.7%

54.3%

Add: depreciation and amortization as a percentage of revenue

18.0%

16.4%

24.6%

16.4%

OIBDA margin

47.2%

51.7%

57.3%

70.7%

 

Q2 2005

 

Russia

Ukraine

Uzbekistan

Operating margin

34.0%

38.3%

38.2%

Add: depreciation and amortization as a percentage of revenue

18.9%

12.7%

23.7%

OIBDA margin

52.9%

51.0%

61.9%


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 30 Jun 2006

As of 31 Dec 2005

Current portion of debt and of capital lease obligations

519.3

768.7

Long-term debt

2,744.1

2,079.0

Capital lease obligations

3.5

2.9

Total debt

3,266.9

2,850.6

Less:

       Cash and cash equivalents

       Short-term investments

 

(535.8)

(57.7)

 

(78.3)

(28.1)

Net debt

2,673.3

2,744.2

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

US$ million

Six months ended 31 Dec 2005

Six months ended 30 Jun 2005

Twelve months ended 30 Jun 2006

 

 

A

B

C=A-B

Net operating income

858.6

799.4

1,658.1

Add: depreciation and amortization

492.1

529.5

1,021.5

OIBDA

1,350.7

1,328.9

2,679.6

 

Free cash-flow can be reconciled to our consolidated statements of cash flow as follows:

US$ million

For six months ended 30 Jun 2006

For six months ended 30 Jun 2005

Net cash provided by operating activities

908.8

866.6

Less:

       Purchases of property, plant and equipment

       Purchases of intangible assets

       Purchases of other investments

       Investments in and advances to associates

       Acquisition of subsidiaries, net of cash acquired

 

(669.4)

(77.1)

(2.8)

3.2

(23.6)

 

(646.7)

(120.1)

-

1.0

(37.9)

Free cash-flow

139.1

62.9


Attachment C

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 interconnect and 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 SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(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, 2006 June 30, 2005 June 30, 2006 June 30, 2005
Net operation revenue
Service revenue and connection fees $1 469 080 $1 222 597 $2 719 628 $2 261 532
Sales of handsets and accessories 22 937 13 971 61 098 32 064

1 492 017 1 236 568 2 780 726 2 293 569
Operating expenses
Cost of service 282 344 175 624 521 372 318 239
Cost of handsets and accessories 51 084 58 709 113 203 118 882
Sales and marketing expenses 152 581 141 367 281 003 268 797
General and administrative expenses 240 056 188 454 445 991 357 533
Depreciation and amortization 265 058 216 897 529 485 415 065
Provision for doubtful accounts 17 105 11 344 52 833 25 655
Other operationg expenses 18 579 9 500 37 408 16 034 
Net operating income 465 210 434 673 799 431 773 391
Currency exchange and translation losses (gains) 3 867 1 046 (7 294) 446
Other (income) expense:
Interest income (4 165) (9 831) (7 912) (14 925)
Interest expenses 47 775 33 598 89 850 64 035
Other (income) expense (15 336) (7 806) 2 330 (15 248)
Total other expense, net 28 274 15 961 84 268 33 862
Income before provision for income taxes and minority interest 433 069 417 666 722 757 739 083
Provision for income taxes 136 097 106 252 239 005 190 150
Minority interest 2 331 7 547 4 367 12 591
Net income 294 661 303 867 479 085 536 342
Weighted average number of common shares outstanding, in thousands 1 987 926 1 986 124 1 987 926 1 986 124
Earnings per share — basic and diluted 0,15 0,15 0,24 0,27


MOBILE TELESYSTEMS
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2006 AND DECEMBER 31, 2005

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

 


As of June 30, 2006 As of December 31, 2005
CURRENT ASSETS:
Cash and cash equivalents $535 842 $78 284
Short-term investments 57 707 28 059
Trade receivables, net 237 184 209 320
Accounts receivable, related parties 985 7 661
Inventory and spare parts 224 725 156 660
VAT receivable 324 566 398 021
Prepaid expenses and other current assets 452 042 413 248
Total current assets 1 833 051 1 291 253
PROPERTY, PLANT AND EQUIPMENT 5 027 429 4 482 679
INTANGIBLE ASSETS 1 349 252 1 439 362
INVESTMENTS IN AND ADVANCES TO ASSOCIATES 135 295 107 959
OTHER INVESTMENTS 152 583 150 000
OTHER ASSETS 74 698 74 527
Total assets 8 572 308 7 545 780
CURRENT LIABLITIES
Accounts payable 370 798 363 723
Accrued expenses and other current liabilities 1 423 320 749 600
Accounts payable, related parties 73 500 40 829
Current portion of long-term debt, capital lease obligations 519 340 768 674
Total current liabilities 2 386 958 1 922 826
LONG-TERM LIABILITIES
Long-term debt 2 744 086 2 078 955
Capital lease obligations 3 468 2 928
Deferred income taxes 113 742 158 414
Deferred revenue and other 50 252 57 824
Total long-term liabilities 2 911 548 2 298 121
Total liabilities 5 298 506 4 220 947
COMMITMENTS AND CONTINGENCIES  —  —
MINORITY INTEREST 35 114 30 744
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, 2006 and December 31, 2005, 777,349,125 of which are in the form of ADS as of June 30, 2006 and 763,554,870 — as of December 31, 2005) 50 558 50 558
Treasury stock (5,400,486 common shares at cost as of June 30, 2006 and December 31, 2005) (5 534) (5 534)
Additional paid-in capital 568 049 568 104
Unearned compensation - (1 210)
Shareholder receivable - (7 182)
Accumulated other comprehensive income 69 422 50 614
Retained earnings 2 556 193 2 638 739
Total shareholders’ equity 3 238 688 3 294 089
Total liabilities and shareholders’ equity 8 572 308 7 545 780


MOBILE TELESYSTEMS
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Amounts in thousands of U.S. dollars)

 


Three months ended June 30, 2006 Three months ended June 30, 2005
CASH FLOWS FROM OPERATIONG ACTIVITIES:
Net income $479 085 $536 342
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 4 367 12 951
Depreciation and amortization 529 485 415 065
Amortization of deffered connection fees (22 983) (23 668)
Equity in net income of associates (30 857) (18 016)
Inventory obsolescence expense  7 322 1 752
Provision for doubtful accounts 52 833 25 655
Deferred taxes (84 291) (36 629)
Non-cash expenses associated with stock bonus and stock options 1 029 734
Changes in operation assets and liabilities:
Increase in accounts receivable (74 021) (43 916)
Increase in inventory (75 387) (20 854)
Increase in prepaid expenses and other current assets (106)  (79 257)
Increase in VAT receivable 73 455 (27 975)
Increase in trade accounts payable, accrued liabilities and other current liabilities 48 892 124 731
Net cash provided by operationg activities 908 823 866 555
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (23 618) (37 931)
Purchase of property, plant and equipment (669 429) (646 733)
Purchase of intangible assets (77 085) (120 106)
Purchase of short-term investments (56 071) (18 021)
Proceeds from sale of short-term investments 26 423 194
Proceeds of other investments (2 799) -
Investments in and advances to associates 3 174 1 007 
Net cash used in investing activities (799 405) (821 590)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes  - 400 000
Notes and debt issuance costs (14 970) (6 784)
Capital lease obligation principal paid (2 864) (4 655)
Dividents paid (56 754) (100 023)
Proceeds from loans 983 382 255 038
Loan principal paid (568 100) (195 855)
Payments from shareholders 7 308 5 095
Net cash provided in financinf activities 348 002 322 816
Effect of exchange rate changes on cash and cash equivalents 138  (4 712)
NET INCREASE IN CASH AND CASH EQUIVALENTS 457 558 363 069
CASH AND CASH EQUIVALENTS, at beginning of period 78 284 274 150
CASH AND CASH EQUIVALENTS, at end of period 535 842 637 219


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