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Mobile TeleSystems (NYSE:MBT)

Q3 2012 Earnings Call

November 14, 2012 10:00 AM ET

Executives

Joshua Tulgan – Director, IR

Andrei Dubovskov – President and CEO

Alexey Kornya – VP and CFO

Michael Hecker – VP, Strategy and Corporate Development

Aleksander Popovskiy – VP and COO

Analysts

JP Davids – Barclays

Ivan Kim – VTB Capital

Anna Kurbatova – BCF

Igor Semenov – Deutsche Bank

Max Loginov – Goldman Sachs

Dalibor Vavruska – Citigroup

Anna Lepetukhina – Sberbank

Operator

Good day and welcome to the Mobile TeleSystems Third Quarter 2012 Financial and Operating Results Conference Call. Today’s conference is being recorded.

At this time, I’d like to turn the conference over to your host today, Mr. Joshua Tulgan. Please go ahead, sir.

Joshua Tulgan

Thank you very much. Welcome to MTS’s conference call to discuss the company’s third quarter 2012 financial and operating results. Before beginning our discussion, I would like to remind everyone that, except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks.

These statements may relate to one of the following issues: the strategic development of MTS’s business activities both in Russia and abroad; revenue and/or subscriber growth; debt instruments and their usage; legal actions or proceedings directed against the company or its representatives; regulatory developments and their impact on the company’s operations in the markets in which we operate; financial indicators such as operating income before depreciation and amortization, average revenue per user, cash flow projections; technical matters as they pertain to our mobile communications networks including equipment, licensing and network technologies; capital expenditures and operating expenses; and macroeconomic developments within our markets of operation. A comprehensive overview of these issues is available in MTS’s Annual Report and Form 20-F, which is available on our website or through the U.S. Securities and Exchange Commission.

Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include company press releases, earnings presentations, MTS’s Form 20-F, as well as other public filings made by the company with the United States Securities and Exchange Commission, all of which are available on the company website, www.mtsgsm.com, or that of the U.S. SEC at www.sec.gov. MTS disavows any obligation to update any previously made forward-looking statements uttered on this conference call or make any adjustments to previously made statements to reflect changes and risks. Copies of the presentations and materials used and referenced in this conference call are available on our company website.

I’ll now turn the call over to Mr. Andrei Dubovskov, President and Chief Executive Officer of MTS.

Andrei Dubovskov

Ladies and gentlemen, thank you for joining us on today’s conference call to discuss the company’s financial and operating results, on the third quarter 2012. Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; Aleksander Popovskiy, Vice President, Chief Operating Officer; Vasyl Latsanych, Vice President, Chief Marketing Officer, Oleg Raspopov Vice President Foreign Subsidiaries., and Michael Hecker Vice President-Strategy, Corporate Development and M&A.

We’re pleased to report another strong set of results for MTS group for this year. Group revenue for the quarter was stable quarter-on-quarter, at just over US$3.1 billion in spite of a significant weakening of our core currencies versus the U.S. dollar. Group revenue was also weakened by the loss of Uzbekistan revenue due to the suspension of our Uzdunrobita license in July. Excluding Uzbekistan, group revenue increased 3.9% quarter-on-quarter.

We continue to see sustained growth from usage of voice and data products in each of our markets of operation as well as subscriber growth. We also see signs of continued stability and moderate competitive pressures in our markets of operation. For the period, total revenue in Russia increased in ruble terms by 8% year-over-year to RUB88.3 billion. Key drivers included steady voice usage, growth in our active subscriber base, and the strong increase in handset sales including sales of high value smartphones.

Year-over-year, our mobile business grew by 8% to RUB74.7 billion. As we predicted, we continue to see benefits in our mobile business through a combination of strong tariff plan, prudent sales strategies and continued investments in our network.

We see strength in increasing customer value and more now in mass market subscribers by market and better voice plans as ARPU and grew by 9% and 14% year over year respectively. We also are attracting better subscribers through our own retail and partner channels. Newer subscribers contributed to the rise in ARPU and continue to demonstrate more loyalty.

For the period, churn dropped from 11.9% to 10.3% year-over-year, which marks the third straight quarter of weakness and reduction in churn. Messaging revenue continues to increase plus 12% year-over-year as lower value customer develop more affinity for their devices. Data usage continues to be a strong driver of growth. Revenue grew 31% year over year as we continue to build out our 3G network which reached 26,000 space stations at the end of Q3.

Both USB modems and increasingly smartphones account for revenue growth. In fact, sales of handsets and the customers increased 25% quarter-on-quarter in Russia to RUB8.1 billion. Two factors I quote here, factor and increased use of point of sales credit, a key benefit of our MTS project and our partnership with MTS Uzbekistan, which my colleague, Michael Hecker will discuss later.

Our fixed line revenue increased year-over-year by 5% largely due to M&A as our efforts to modernize regional networks. Residential ARPUs decreased slightly due to seasonal factor, larger decrease was device as well as one year ago, which was improving business. Corporate ARPU rose due to higher business activities in September. We remain focused on network improvement mostly in Moscow and the regions. This work being done – doing great to full fiber in our networks. We are confident that better networks will allow us to the growth in this business and increase customer awareness.

In Ukraine, our business continue to grow at a strong phase despite high level of penetration. Revenue increased by 7% year-over-year to over RUB2.6 billion. Trends in the market continue to favor us. Growth in ARPU despite a flat mode. Our strong customer value proposition enabled us to raise minimum rate in our unlimited or plans, which allows us to increase customer revenue. Data traffic contributed to 12% growth year-over-year which is strong given the fact that there is no 3G yet in the market.

In Armenia, the market is improving as revenue increased by 5% year-over-year to RUB21.8 million. The market continues to trend to our favor as we improve churn and subscribers increased their calling and data usage. In Uzbekistan, we did operate our network for two weeks, which yield approximately $26 million in revenue. And as we mentioned previously, we have launched our Turkmenistan operations in late August, where exactly we exceeded our expectations as there is an our 400,000 sim cards were activated in our network. But by the end of this year, we could boast 800,000 active subscribers and realized over $1 million in revenues.

Given this sort of performance throughout the Group, we feel comfortable adjusting our guidance for the year to 7% revenue growth for 2012 in local currency. Despite the loss of our Uzbekistan asset for the second part of the year, we see enough momentum in the other markets to justify the high end of our previous guidance and considering a more optimistic outlook in our markets.

Now, Alexey Kornya will further discuss the Group’s profitability and financial performance.

Alexey Kornya

Thank you, Andrei. In the third quarter, group OIBDA rose slightly to nearly $1.38 billion which was in line with our revenue performance. Again, the loss of our Uzbekistan contribution to our financials and currency fluctuations slowed what has been strong underlying performance in OIBDA and margin improvements throughout our markets.

Our adjusted OIBDA margin for the period reached 44%, stable relative to our second quarter. Overall, we are seeing success in our efforts to increase profitability in our business and realize great efficiencies across the Group. In Russia, OIBDA rose 9% year-over-year to RUB40.1 billion. For the year-to-date OIBDA continues to grow faster than revenue, inside of our goal of optimizing our durations to extract more value in our core market.

Our OIBDA margin increased from 44.6% in second quarter to 45.4% in the third quarter, an improvement which reflects seasonal trend and cost efficiencies despite significantly higher EPO costs. As we have one certain cost continue to pressure our margin including labor cost have increased 60 basis points year-over-year as a percentage of revenue which reflects higher payroll taxes. Rent also has similarly increased year-over-year which simply reflects the expansion of our network. Once again we have been able to realize the reduction of SG&A expenses that allowed us to offset these pressures and sustain and our high profitability.

We continue to see benefits from the optimization of our commercial policy while reducing subsidies for modems has allowed us to maintain previous levels of profitability on handset sales. Our OIBDA trends in our CIS markets were in line with the seasonal dynamics and are reflective of the top line performance and competitive factors.

In Ukraine, OIBDA growth continues its torrid pace reached over UAH1.4 billion to a margin of 53.1%. Price increases for unlimited on-net tariff plans have translated to increase profitability which helped us offset the loss of our high margin business in Uzbekistan to overall sustained group OIBDA levels.

In Armenia our OIBDA margin improved sequentially by 26% to AMD12.5 billion as the competitive environment continues to improve. With six weeks left in the year, we are comfortable raising our OIBDA margin guidance to above 42% for the year. We continue to see margin pressure from inflationary related costs including increased labor costs based on new laws regarding social taxes, continuously rising rent and maintenance cost as we expand our mobile in fixed network, through the expansion of our retail footprint in particular the build out of additional 60 flagship stores and opening of new stores in the population centers with as few as 20,000 inhabitants increasing sales of handset.

However, the competitive environment remains efficiently moderate to see our improvement trends continue. For certain fourth quarter margins will be seasonally weaker and they’ll also follow Uzbek unit will have additional pressure but better performance in Russia. Russia retail on the Ukrainian business will help us to offset those losses.

The net income for the period reached $630 million, this includes $100 million gain on forex but we also saw improvements for lower interest expense. Overall, our total debt remains stable at $7.3 billion. We had no principle repayments during the quarter but currency fluctuations and the repurchase of Ruble bond in the amount of RUB13.2 billion translated in the slight increase now on net debt to OIBDA ratio at 1.2 multiple.

We will continue to pursue opportunities to fully optimize our portfolio through the year. During the quarter we paid out our full financial year 2011 revisions in the amount of RUB14.751 per ordinary MTS share or RUB30.4 billion in total. This explains the fluctuations in the cash-on-hand and now our balance sheet. Free cash flow for the year-to-date is over $1.5 billion which is 8% improvement year-over-year despite a significantly weaker Ruble. Year-to-date CapEx exceeded $1.8 billion, investments allegedly being focused on expanding our 3G network and preparing for our 4G rollout, identifying new sites, connecting base stations to fiber and practicing with the implementation of our GPON project in Moscow.

Overall however we feel it’s prudent to raise our CapEx guidance for the year from 20% to 22% of sales to 23% to 24% of sales or roughly about 2.9 billion for the year. This increase is due to the effect of currency and the cost of equipment and services since we first guided at the beginning of the year as opposed to any change in our investment plan. Naturally our strong balance sheet and high cash flow generation will mitigate this some and how it relates to the financial health of the company.

Now I am passing over to Michael Hecker.

Michael Hecker

Thank you, Alexey. Recently we announced our intent to acquire a 25% stake in MCX Bank. As part of our 3i strategy we seek values to leverage our core asset including our telecommunications network and especially the distribution capabilities, brand and customer base. In order to enhance our customer experience and to increase the customer value and improve the loyalty. We feel that financial services operate unique and valuable opportunity to leverage the assets and drive future earnings growth. We began offering SMS payment services in 2010. However, as we see and believe that Russia remains underserviced by banking and financial products, we expanded this initiative and launched MTS Money, MTS Dengi in April 2011 as a pilot programs to evaluate the market for basic financial services to our customers.

As strong interest in this product grew, it became apparent for us that we needed to strengthen our relationship with a financial institution to ensure our customers have the best experience and realize the maximum benefit from a commercial relationship with the bank.

To bring MTS Dengi further to the market, we conducted discussions with other banks about cooperation. These commercial discussions however yielders know significantly strong basis for cooperation as we could not agree on key issues and compensation revenue sharing shared resources.

At the same time, issues like customer service, call center usage, other operational factors were almost impossible to resolve on the basis of a commercial agreement alone. Therefore, we quickly came to the conclusion that a project with a scope and perspective of MTS Dengi in the Russian market required much deeper cooperation between us and the partner bank.

To-date, we have witnessed almost a million customers for MTS Dengi. We benefit from a MasterCard plastic credit or debit card tie to their mobile account. More than a quarter of a million customers who use point of sale credit on average around about RUB10,000 to purchase smartphones and an increasing number of transactions enabled by near field communication NFC technology. This sort of growth puts a considerable strain on the banks capital cushion, so we collectively arrived at the current deal structure, which we feel benefits all party.

MTS pays into MTS Bank and BRD capital RUB5.09 billion for a newly issued 25.095 stake, which implies the valuation of roughly round about RUB15 billion pre-money pre-transaction. All funds go to the bank’s capital cushion to accommodate the demand for the MTS Dengi project. The Sistema and MTS agreed that in the event that future funding becomes necessary, it will be done commensurate with the stakes held by the shareholders.

The bank rebrands to MTS to leverage our market leading brand and assures that customers have a common high quality experience across these different properties. We extended a subordinated loan in the amount of RUB2.1 billion to enhance the retail operation. And most importantly, MTS and MTS Bank agreed a split net proceeds from the MTS Money project with a 70% share of net proceeds coming to MTS. This last point 70% of net proceeds coming to MTS is key to the transaction between us and the bank as we will conclude a separate agreement to manage and promote the project.

All proceeds from the credit payments, transactions, other projects and services will flow into the project while both the bank and MTS will allocate their costs for its data centers, call centers and the other expense. And the net proceeds will then flow from the company back to MTS and to MTS Bank as a contribution to net income for MTS with 70% of net proceeds. And we believe that this share also ensures that the bulk of the customer value which is our key objective in rolling out this project remains with MTS. This value is key as for example by the end of the year the loan portfolio will most probably exceed already RUB10 billion and we believe by 2017 the project can contribute at least 5% of group net income.

Overall when considered in the context of our recent investments in fixed line, media and retail, this field reinforces our view that Russia provides the best opportunity for profitable growth. Considering the size of the investment and the potential upside for MTS, we feel that the structure offers sufficient transparency and safeguards to ensure that our shareholders benefit from this unique opportunity.

Andrei Anatolyevich Dubovskov, President, CEO & Executive Director

Thank you Michael for your explanation of what we are going to do in this area but over the past quarter it has been clear in our net income all the current stations related to our debt composition and other one-time factor. This has, including developments in our Central Asian markets and ruble-dollar swing.

In this difficult currency environment this has come to the conclusion that the net income is not the best metric to use as a basis for the calculation of our dividend, instead free cash flow constitutes a clearer, more transparent basis for shareholder. Our philosophy remains to payout the remuneration based upon operational performance. We do also factor current and future investment need as well as strategic issues. In determine, our dividend payouts we expect that our Board of Directors who will continue to consider a variety of factors including capital expenditure requirement, cash flow from operations, opportunities for inorganic growth as well as the company’s overall debt position.

We are currently in a new policy cost from the dividend amount to be calculated from a portion of free cash flow. And they expect to propose it to our Board of Directors to the final determination of our fiscal year 2012 dividend. Decisions on dividends are ultimately, however, proposed by the Board of Director and thereafter at annual general meeting or shareholder in the first half of the year.

On our last call, in light of developments in Uzbekistan, we clearly committed to sustaining our dividend. At the third quarter end, we had a clear perspective on how market changes are impacting our durations and better view on immediate investment plan. We will submit our proposed dividend policy to the Board of Directors later.

For now, we can assure the investor community that our goal is to increase our cumulative dividend payout over the next three years by at least 25% in relation to the roughly at RUB91 billion fiscal year 2009. This implies a total cumulative dividend of at least RUB114 billion for the fiscal year 2012 to 2014, or a payout per share of at least RUB18.70. We believe that this level which should constitute a sizable portion of our free cash flow will allow us over the next three years to meet our investment needs, maintain our related debt level and demonstrate our commitment to shareholder.

Thank you for your time ladies and gentlemen. Now, I’ll open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from JP Davids from Barclays. Please go ahead.

JP Davids – Barclays

Hi there, good afternoon. Two questions please, the first question is just, actually both of them are related to MTS Bank. The first question is just on e-commerce as you described in the charts and the exciting possibility there. Is there any intention on your part whether organically or inorganically to increase your exposure to e-commerce, mobile e-commerce and try building a whole ecosystem around this bank, that will be question one.

Question two, you said about the net proceed, 70% of the net proceed is very clearly, just interested in how the sort of costs are divided up. I guess 70% guarantee would imply somewhere along the line you base more costs just, if you could clarify that will be helpful? Thank you very much.

Andrei Dubovskov

Thank you for the question. Look, the transaction with the bank is not viewed from us in the context of e-commerce. This is not the ecosystem that we specifically build around the transaction. The ecosystem in which the transaction takes place are classical mobile transactional services payments, mobile commerce platform of course in the sense of payment platforms and of course financial product. But if you define e-commerce in the way of selling goods via the Internet or via platform, this is not kind of the intention we have. What we have is product like classical financial product, the payment product and point of sale loans, all kinds of new technology with regard to payments, a virtual card, gift cards and so on but not classical e-commerce in the sense of I don’t know Amazon would do that, maybe that is on question number one.

Question number two, on the 70% net proceeds, indeed we have the 70% to 30% split on the net proceeds. On the cost allocation, I’m not able to comment at the moment, that is subject to the ongoing negotiations of the final agreement that we have with the banks, but it is totally clear from our side that we are bringing in their very substantially our every asset that we especially the 4,200, more than 4,200 shops, the value of that brand is the most trusted consumer brand in Russia which is of course also connected with cost. So those assets will be brought in the best way in order to protect the shareholders interests.

JP Davids – Barclays

Thank you. Very clear.

Andrei Dubovskov

So to add a little bit on that on the cost side to bit more clear that our all costs that be in the cumulated within the P&L of this project. So what we’ll share, we’ll share the income from and the prices from the project while all cause is being integrated into the project. So, there is no split per se of course other than those which are in the project.

JP Davids – Barclays

Yeah, I guess the – sort of the follow-up there would be I guess who’s going to pay for the call center staff and so on. One would imagine to keep it simple for the customer the call center remains with MTS, rather than MTS Bank?

Andrei Dubovskov

Well, all costs are being part of P&L for this project and for example usage of power, repayment work is being compensated on the market basis. The same with call centers costs they are being compensated – they are indeed on MTS side, but they are compensated by the price from the P&L of this project. So, all costs go into P&L of this project.

Alexey Kornya

I probably have to add a little bit on the first question of MTS. The mobile e-commerce is a very big definition, so as we would like to say what exactly we’re going to do with the project, that’s actually within the presentation that we deliver. First of all, there is around a million cards already issued under MTS Bank name and those were distributed through MTS outlets and those carry the brand and carry the relations to MTS in which we benefit of the profits from. Also we want to increase that number quite significantly because we see an extension in the credit card business market in Russia quite significantly in the next couple of years.

Second is the mobile payments from the subscriber accounts, that’s something we are not able to do right now extensively because of absence of the banking license, but with the help of the bank and with the association between us, we can do the joint accounts of the bank accounts and the subscriber accounts and arrange payments to any merchants through their mobile phones without actually using any intermediates like credit cards or anything else.

The third one would be NFC. We want to develop NFC and benefit on the mobile operators side from developing this as this service. Meanwhile the processing, the acquiring and the merchants management should be on the bank side, but we should also be able to control that. We want to have quite significant control of all NFC expansion in this market through the view with our bank.

And the last one but not the least one is PoS credit, there is more than a quarter of all phones and devices that are being sold in our retail network. They are sold on the credit terms. The credit terms are delivered by the banks. Recently we switched predominantly MTS Bank given how the credits in our outlets, and we want to also have a benefit out of this activities and find – and actually come with the depreciation when all credit purchases in our shops will be financed by the joint venture of ourselves and MTS Bank.

Alexey Kornya

Thank you.

Operator

We’ll take our next question from Ivan Kim from VTB Capital. Please go ahead.

Ivan Kim – VTB Capital

Yes, hi. Two questions if I may, please, one on MTS Bank as well. So, basically when do you think the bank will need another capital injection and also is it possible in the future that MTS, gets a controlling stake in the bank. And secondly on your usage, basically were some comments that the management thinks that, the change of what was a shareholding of your usage may result in operators chasing subscribers again. So, why do you think this may happen, and do you think that the new shareholders of your usage would be interested in sort of various rationalization of the market again? Thank you.

Andrei Dubovskov

Yes, I can answer on the first question. Please understand that as we have no reason to comment at the moment on any future capital infusion and we cannot comment on that. On the question whether we will take a controlling stake, we will, we do at the current point of time, not exclude that, we’re going to – at a certain later point of time down the road which we cannot define, but we cannot exclude that – somewhere down the road, that we would like to take control in order to grab the full value of the project.

This is something that we do not envisage with going in there in a minority stake that we will stay there with a minority stake until the end of the days and we do have the midst to long-term understanding to take control and to fully consolidate the net profits from this undertaking, but we cannot give any kind of time forecast on that at the moment. But it is our strategic understanding that we want to go into the deal at a certain point of time later down the roads when we’ve gained more experience and when the business is developing strong.

If I may let me be more clear on the first part of this question. There are no plans for any additional capital infusion into the bank. I mean that means that we believe that there will be sufficient funding through the deal into demand, which allow us development of our products into foreseeable future. Of course, there is no visibility on the like indefinite perspective, but no plans in the foreseeable future.

Unidentified Analyst

It’s (inaudible) and thank you for your decision is very clear for us as you know the current level of attractions in this market were stable and we are afraid that if somebody like one who follow our competitor go into get more subscribers in this market. It means that he is going to get the channel and that means that in the other channels like in local dealer, the situation can be unstable and it might be – no, it’s not a disaster for other players like MTS for example, as you know we have the biggest mono-brand network across the Russia. Operators network – but it, we don’t know is it first and it can be more unstable for this market if the behavior of our competitor will be more irrational then in current level. Thank you.

Thank you. And sorry just a quick follow-up and you say about local dealers and sort of unstable situation you mean that say you may require higher dealer commissions?

Andrei Dubovskov

No. We’re not going to increase dealer commissions in this channels, but it means that we need to implement some deals for compensate this impact nor growth of dealer commissions, but for example, we can increase the numbers of our mono-brand shops or other deal.

Unidentified Analyst

Okay. It’s clear. Thank you very much.

Operator

We’ll take our next question from Anna Kurbatova from BCF. Please go ahead.

Anna Kurbatova – BCF

Good evening. I have two questions. First of all could you share with us your view and the general understanding of the situation with domestic roaming rate. So as – I think you know that the discussion over consolidation of domestic roaming rate has accelerated recently. So, I wonder how much of your top line in Russia of mobile revenue you generate from this type of services and what potential impact you could see from consolidation of these special rates? Thank you. Hello.

Andrei Dubovskov

Yes, yes. We are answering. I was trying to dig out the number with my hands like how big is the inter country roaming, is that the question if I understand...

Anna Kurbatova – BCF

National roaming in Russia?

Andrei Dubovskov

National roaming exactly national roaming. So national roaming is a business that’s we don’t see at risk at this moment because there is no clear guidance to anyhow demolish that business by the regulators or other authorities. There are continuous conversations and sometimes speculations about the future of this business, but it has been for quite a long while and we have managed to sustain that business pretty steadily over time. Nevertheless, it does represent certain percent of our revenue somewhere up to 5%, but we don’t have this number at hands.

So, this is quite educated guess which yes we are considering to be endangered if the regulations come in place, but since we have enough time to prepare ourselves we are doing a lot of different preparations to mitigate this risk including those that we have done this year when we have launched certain activities in roaming – in national roaming – let’s say national roaming tariffing activities where we have the tariffs this year when people did not pay extras for the national roaming, but they have certain commitments to the minutes of use and the volume of use.

That actually brought us very successful results this year, which are supporting our top line. So we think that we have enough of opportunities beside different models and we have the instruments at hand to mitigate the risk if it comes to play. Though just to make it clear we don’t see that risk as come increase soon, not this year and even if next year that will still take numerous iterations at the regulator level and with all operators involvement, which is not happening right now.

Andrei Dubovskov

Just to throw some information on I think it’s the non-iteration on the table right now, because it will be a long hard way in legislation area in this issue.

Anna Kurbatova – BCF

Thank you very much. And let me ask my second question. Well, basically evolves mobile data market in Ukraine. So as far as I understand, there is only one 3G license until now in Ukraine, which is held by Ukrtelecom. And you provide mobile data services on the base of CDMA technology. And I wonder, is there any progress in Ukraine to distribute new 3G licenses to market players. And how do you pursue ensuring all the situation, because mobile data is very important for future revenue growth? Thank you.

Andrei Dubovskov

This is Vasyl, I will try to answer that question as well. Yes, you’ve rightly noticed, we don’t have the 3G license in the classical terms, we don’t have the UMTS license in Ukraine. Nevertheless we have achieved 12% growth of the data business in Ukraine year-over-year, which we believe is quite specifically good in the absence of the modern technology using the old edge technology in the country. What is sale kind of fare on that side, that it’s only Ukraine Telecom who has the UMTS license and Ukraine Telecom with their very tiny local operator with only UMTS license without the GSM network support is very difficult to be actively develop. So in fact ourselves, our major competitor keeps out and the third runner, like are all in equal position without the access to UMTS network.

Meanwhile, we do have an advantage because we are utilizing our CDMA network, which in terms of their revenue is relatively insignificant, it’s not big there. It’s really a couple of percentage points, but at the same time, it does help those customers who want to use this high-speed mobile data on their big screen devices as the modem’s connection.

Those are easily chosen CDMA with the best coverage in country and with 3G level speeds. Just that this technology is not seamless to integrated and cannot be seamlessly integrated into GSM technologies. It’s an obstacle for the development into the integrated voice and data business. Nevertheless, we feel this positively add possibilities to develop our edge business as you can see we have made it 12%. We are looking into the further development of maybe even higher growth rates in the future couple of quarters. Thank you.

Anna Kurbatova – BCF

Sorry, my put a follow-up question. Why do you think that the Ukrainian government does not distribute new 3G licenses to develop the market? Thank you.

Andrei Dubovskov

It’s not that we think this that way. This has been for a long, long time that we are awaiting the license distribution in Ukraine and it’s not happening, so this is a very good idea to make any projections about it for the nearest or for this future.

Anna Kurbatova – BCF

Thank you.

Operator

We will take our next question from (inaudible) from UBS. Please go ahead.

Unidentified Analyst

Hi, thanks very much for the presentation. Two questions from my side, firstly given the performance you’ve seen in the last quarter and fourth quarter your Turkmenistan unit, how do you expect to see that unit performing next year? And also my second question regarding debt maturing next year, what your intentions regarding repaying or refinancing this debt and on the international market? Thanks.

Andrei Dubovskov

Good evening. Thank you for the question regarding Turkmenistan. Yeah, we do expect them – we do plan to develop this operation pretty successfully as to the figures, initial figures has promised earlier to you. We spent for CapEx to restart durations and we don’t plan to spend anything till the end of this year and as the CapEx required for us for three coming years. They will not exceed RUB40 million to provide good return of our investment in this country.

As of today, we do have you should know was in the subscribers, active subscribers and we do plan to – till the end of this year to have 31 million. As to the revenues you see we can promise that revenues till the end of 2012 little more better than $2 million per month. And so we have started pretty successfully, October to have really good results and plan that you see till the end of this year you can some up this year. We will earn not less than say $7 million something pretty conservative forecast. This is and you show figures we are in the process for business training for coming years and for budget for 2013 and as I believe you see somewhere in December we are ready to discuss this figures. Thank you.

Unidentified Analyst

Okay. Thank you. And regarding the debt...

Andrei Dubovskov

As far your second question, it’s to your second question I’ll be short. We have very limited demand for the financing in the next year. At this time we keep different options open. We don’t have any plans set for the next year for refinancing. We have open some credit facilities including those in rubles we have generally access to is the bank financing and some are the instruments available for us and we will take decisions through the year depending on the market situation, generally we have inclination usually towards ruble financing because that’s naturally hedged against our cash flow.

Unidentified Analyst

Thank you.

Operator

We’ll take our next question from Igor Semenov from Deutsche Bank. Please go ahead.

Igor Semenov – Deutsche Bank

Yes, hi. Thanks very much. Just wanted to go back to your situation, don’t you think that when this dealer becomes fully controlled by mobile operators they will actually reduce the level of dealer commissions quite substantially. And don’t you think that this would potentially benefit you as well as it’ll be possible to extrapolate this new level of dealer commissions on to other players?

My second question is on retail sales, it was quite strong growth this quarter, I just wanted to understand that this is fully related to the new stores openings and the shift in the sales mix towards more expensive smartphones and that there’s no impact from wholesale or some other stuff?

And finally on Uzbekistan, what – this question is trying to understand what’s the status for now and what is your preference as not an management, would you rather keep it or if there’s an opportunity or it’s gone for good? Thank you.

Andrei Dubovskov

Thank you for the question. This is Vasyl. I’ll answer them. The second question is the easiest one, so let me grab that first. The sales increase of the devices of the telephones in our network has nothing to do with the wholesale, we are not pumping up the volumes for the wholesale, low margin sales, you can see it by our resulting, top line margin. This is just the seasonal increase of the sales plus the increase of the sales of the smartphones which we conduct quite extensively and we draw a lot of attention by advertising and promotions for the smartphones in our network. And the third one is that we are selling quite a significant amount of their phones on credit terms, which has mentioned before together with MTS Bank to increase the sales volumes, but not to lose the margin.

The first question on the EuroSet perspective as I understood that EuroSet inside the EuroSet an agreements between MegaFon and VimpelCom are not known to us. They might be discussing some lowered commissions or might otherwise be discussing even higher commissions because if we pull out of EuroSet business or if we get degraded in the EuroSet business, our share of the – the share of the revenues from MTS has to be compensated by the other players mainly by MegaFon and VimpelCom.

So, we expect that if we get pulled out of that business MegaFon and VimpelCom may face even increase in their commissions to EuroSet to sustain the business of EuroSet on their service. Meanwhile, they might be also trying to leverage their existence at EuroSet and thus increase their share and decrease MTS share which we’ll have to offset by our own activities in our own network and then third party dealership, which may mean that the commissions would grow as the total, but would probably not grow as the fraction. So we don’t expect the commissions outside of EuroSet to grow, but we may presume that inside of EuroSet commissions may increase due to our pull out of that business if that happens.

Michael Hecker

Yeah this is Michael Hecker. Let me take the third question on Uzbekistan. Please understand that given the fact that we are in the middle of legal proceedings, several legal proceedings in Uzbekistan, that we have to refrain from further commenting on these matters except for the fact that MTS management is doing everything with regard to the matter to protect the shareholders benefits and shareholders interest.

Igor Semenov – Deutsche Bank

Okay. Thank you.

Operator

And we’ll take our next question from Max Loginov from Goldman Sachs. Please go ahead.

Max Loginov – Goldman Sachs

Yes hi, two questions if I may. The first is on your EBITDA margin guidance, don’t you find it a little bit conservative and the minimum level of profitability could be a little bit higher for the year. I’m just trying to reconcile your EBITDA margin in first quarter and assuming the same level of profitability in the quarter you had last year, I’m actually getting to around 23% for the full year or probably you expect some ramp-up in constant first quarter and if this is the case what would be the key drivers of cost increase?

And the second question somewhat related to the first one, is on sales and marketing expenses that you showed quite noticeable reduction in third quarter, were there any one-off things or just your own distribution and dealers compensation, rationalization that will come in through and the effect is going to be sustainable? Thanks.

Andrei Dubovskov

Max, you’re really right. Speaking about OIBDA margin, it’s – speaking about OIBDA margin guidance, it can be much better, but we need to take into account the following issues. First of all, the continuously rising brands and maintenance cost as we expand our mobile and fix networks. And of course the total expansion of our retail footprints, speaking about real-estate issue events in Uzbekistan as we mentioned earlier. And to add, increased labor cost based on new laws regarding social taxes. It means that we need to be more conservative that we can allow us. And next question about margin expansion?

Alexey Kornya

Well, I think that, two comments here. First, we don’t think that marketing expenses were unreasonably low or unexpectedly low. We think that we’ll sustain, if you talk about annualized level of marketing expenses where we stand right now somewhat on this level with the some seasonal hike in the fourth quarter. So I think that that’s the trend, which we expect. And as for our guidance for the fourth quarter naturally, seasonally, it’s going to be lower. Still the guidance which we give refers to the minimum level, which means that any figure above that level is possible. In this extend, you can consider that to be conservative.

Max Loginov – Goldman Sachs

Okay, understood. Thank you.

Operator

We will take our next question from (inaudible) from Deutsche Bank. Please go ahead.

Unidentified Analyst

Yes, good afternoon everyone. I just wanted to clarify how the risk sharing is conducted if there is any one the business has done with MTS Bank. So, when MTS Bank is issuing a loan to one of its customer, is there any risk that has, is there any reports was MTS if it let’s say handset sold using a loan from MTS Bank. So, if your customer defaulting, whether there is any risk falling into MTS itself? And also sort of in line with this how – what was the share of handset sales in the third quarter that was sold using loans from MTS Bank if so there were any? Thank you.

Andrei Dubovskov

Okay. On the first question, we are getting only the risk, which relates to our participation with MTS Bank, MTS Dengi project, so, no any additional risk on sales so far of handset. And could you please repeat the second question?

Unidentified Analyst

Do I understand it correctly that there is also now – if it’s possible to buy handsets from MTS using loans from MTS Bank.

Andrei Dubovskov

Exactly, of course. And that’s what is the practice which is this long time, and about quarter of our handsets being sold are sold on credit and big chunk of that goes through credit from MTS Bank.

Unidentified Analyst

Is this part of the MTS Money project or not?

Andrei Dubovskov

Yes, it is.

Unidentified Analyst

And what happens when the customer defaults, do you get the handset back or there is no recourse to MTS at all?

Andrei Dubovskov

There is no recourse to MTS.

Unidentified Analyst

Okay. Thank you so much.

Operator

We’ll take our next question from Dalibor Vavruska from Citigroup. Please go ahead.

Dalibor Vavruska – Citigroup

Hello. Just a quick question if I may. On the – it’s more on the business trends, if you can comment a little bit more on the non-voice services in mobile, we saw some decline in some of the year-on-year trends. I was just wondering if you have any visibility, where do you expect mobile data and the content for example, growth in the next year or the next couple of quarters and also I’m just looking at the fixed line business and there’s some volatility in the year-on-year trends but I’m just wondering if you can comment what is happening in the fixed line business. If I’m looking at the correct numbers there’s some improvement in the trend, in the revenue but I did not see much improvement with KPI. So if, just if you can comment on that?

Andrei Dubovskov

This is Vasyl, I’ll answer your first question. Yes indeed we see the voice business stagnating and we project that if no rapids base growth may continue into future. That is pretty standard for our industry actually Europe-wide and worldwide. So we’re not hearing this trend, especially knowing that since we have almost finished building the 3G and/or building LT network quite extensively. This speculations should compensated by the data business. You’re right in pointing out that the data business is the stake everybody is – everybody is put into stake. We see the growth amounting to more than 30% and projected to be at around 40% for the next quarters, next year, year-over-year. And we think that this is the – this is how we mostly will compensate possible stagnation and decline of the voice business.

The content business will not likely to be growing to be anymore, it is quite high for this market so far, we are a leader in content business of Russia and further growth might be problematic. So we don’t think that his growth will incur unless the content ARPU will increase, but the data growth will definitely be happening quarter-by-quarter quite significantly.

Dalibor Vavruska – Citigroup

And if I can ask, how do you plan to accelerate this data growth, is it largely driven by smartphones or do you have any specific plans or may be is there anything to do with pricing that now you are aggressive and you’ll be less aggressive or?

Andrei Dubovskov

Actually this is very good question because our company is not right now going through a data transformation exercise where we are recasting our tools to fit the future goals of the data and it’s actually facilitated. You have rightly pointed that the biggest perspective that we see comes from this smartphones where at this moment, the smartphone penetration in our base is relevantly low at about 20%, 21% at the year end of 2012, while the European normal penetration is somewhere above 40%. So, we believe that the higher penetration of smartphones will increase the data adoption in our base.

We are facilitating this by increasing the share of the tariffs with embedded data that we sell to the market with CRM activities and with the increasing sales of smartphones in our RTK network which I mentioned before. At this time we sell more than third of all of our sales in the area of smartphones in our RTK network, and we’re looking forward to increase even that up to even 50% in the next one or two years. So, we are the adoption of the data to benefit from the increasing usage and increasing usage and increasing ARPU of the data customers throughout our base. Thank you.

Aleksander Popovskiy

This is Aleksander Popovskiy coming to fixed line business. Yes, we see the sort of significant in ARPU and some other figures in fixed line business. It is mostly due high competitions especially from small and mid-sized players in the region. This is also driven by the fact that our network in most region used to have a pretty much outdated technology like so the competition that we face is more harmful for us and for other players a little bit, but we are continuing the big upgrade of existing networks and rolling out of new fixed line networks and this will allow us to have both new subscribers and increase ARPU and pricing for existing subscribers would bring in them new value.

This September, we’ve launched our – we’ve converted our analog cable TV network into digital and now we’re starting to distribute digital STBs supporting up to 140 HD channels and number of HD, High Definition, channels. So, we expect that this will have a positive influence ARPU and a positive influence on channel reduction and of course this will acquire and this will help us to acquire new subscribers for TV.

Dalibor Vavruska – Citigroup

Thank you so much. If I can have just on that subject one quick follow-up, I mean can we talk a little bit about the timing of this. I mean obviously you are spending significant amount of money on the GPON upgrades et cetera and as I mentioned this time we are looking at the right line. It seems that the growth rates in the fixed line business, the revenue growth rates seemed to be quite volatile. So it’s sort of hard for me to read whether something positive is happening already or whether this is just some volatility in the revenue growth rates and if so when do you expect this impact of this fixed line investment to start impacting the revenue growth rate?

Andrei Dubovskov

We have a little bit different technology and strategy in Moscow and in regions. So in regions we are more or less finishing with the modernization of our broadband networks and digitalization of our cable TV networks this year, mostly. In Moscow GPON project is longer and more ambitious project. It is a different technology. It’s a technology which will bring big future to our company to MGTS and the full modernization of our Moscow network to GPON technology will be finished in the end of 2015.

Dalibor Vavruska – Citigroup

Okay. Okay. Thank you.

Operator

(Operator Instructions) And we will take our next question from Anna Lepetukhina from Sberbank. Please go ahead.

Anna Lepetukhina – Sberbank

Yeah. Hello. I have a question about CapEx. Can you please explain what was the reason for increase in CapEx and our CapEx guidance, can you maybe breakdown where exactly your investment, what cause such an increase, whether it’s fixed line or mobile because I don’t see you speeding up the process of installing the 3G base stations, install just 1,000 base stations. So, whether you’re investing the capacity or coverage, so, where this increase is coming from, and what we should expect for 2013?

Andrei Dubovskov

Thank you for the question. Let’s say, bulk of our investments in this year go into data investment, data services. So round about 70% of our investments are linked to this type of technology or to this type of service. That includes fiberization of our network building, building backhaul, building backbone and we already assuming about 70% of our base stations transferred on IP technology. We’re also aggressively building up our fiber in fixed business and particularly in Moscow investing our GPON project, and in July we completed digitalization of our Pay-TV networks. And starting from September we expect that we can enhance our content portfolio of these products.

So, basically those are – and also we’ve been investing in LTE specifically in Moscow, and switch to HD technology which we launched in September and also we are starting preparation for LTE for the next year already right now. So, all that (inaudible).

Operator

(Operator Instructions)

Joshua Tulgan

Operator, do we have any more questions?

Operator

We currently do not have any questions in the queue.

Joshua Tulgan

In that case, I’d like to thank everyone listening in the call. We welcome you at any time to contact our Investor Relations department for further questions. A webcast of this discussion will be available on our website, if you wish to replay the call. In the meantime, we appreciate your interest and wish everyone a pleasant day and evening. Thank you very much.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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