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Mobile Telesystems OJSC (NYSE:MBT)

Q1 2013 Earnings Call

June 07, 2013 10:00 am ET

Executives

Joshua B. Tulgan - Director of Investor Relations and Acting Director of Corporate Finance

Andrei A. Dubovskov - Chief Executive Officer, President, Member of Management Board, Director, Member of Disclosure Committee, Member of Strategy Committee and Member of Corporate Conduct & Ethics Committee

Alexey Valerievich Kornya - Chief Financial Officer, Vice President, Member of Management Board and Chairman of Disclosure Committee

Vasyl I. Latsanych - Vice President of Marketing, Member of Management Board and Member of Disclosure Committee

Michael Hecker - Vice President of Strategy, Mergers & Acquisitions & Corporate Development, Member of Management Board and Member of Disclosure Committee

Analysts

Cesar Tiron - Morgan Stanley, Research Division

John-Paul Davids - Barclays Capital, Research Division

Imari Love - Morningstar Inc., Research Division

Ivan Kim - VTB Capital, Research Division

Herve Drouet - HSBC, Research Division

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

Olga Bystrova - Crédit Suisse AG, Research Division

Anna Kurbatova - Gazprombank (Open Joint - stock Company), Research Division

Igor Semenov - Deutsche Bank AG, Research Division

Anna Lepetukhina - Sberbank Investment Research

Anna Kurbatova - BCS Financial Group., Research Division

Operator

Good day, and welcome to the Mobile TeleSystems First Quarter 2013 Financial and Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Joshua Tulgan. Please go ahead.

Joshua B. Tulgan

Ladies and gentlemen, welcome to MTS' conference call to discuss the company's first quarter 2013 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 business activities both in Russia and abroad; revenue and or subscriber growth; financial indicators such as Operating Income Before Depreciation and Amortization; average revenue per user, cash flow projections and/or debt instruments and their usage, legal actions or proceedings directed at the company or its representatives; regulatory developments and their impact on the company's operations in the markets in which we operate; technical matters as they pertain to our communications networks including equipment licensing or network technologies; activities in lines of business that complements our communications networks; capital expenditures and operating expenses; and macroeconomic developments within our markets of operation. A copy of the overview of these issues is available in MTS' annual report and Form 20-F which is available on our website or through the U.S. SEC. 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, our 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 mentioned in this conference call or make any adjustments to previously made statements to reflect changes and risks. Copies of the presentations and materials cited 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 A. Dubovskov

Ladies and gentlemen, thank you for joining us on today's conference call to discuss the company's financial and operating results of the first quarter 2013. As usual, joining me today are Alexey Kornya, Vice President, Chief Financial Officer; Vasyl Latsanych, Vice President, Chief Marketing Officer; and Michael Hecker, Vice President, Strategy Corporate Development and M&A. As was recently reported with the last set of numbers and discussed our performance during 2012. We utilized the prequarter view of the results we achieved during the first 3 months or the year. One important remark before we jump into discussion of the results. Beginning this quarter, we shall begun reporting our GAAP financial reports in Russian rubles. As Russia based the trading of the accounts for such a high portion of our revenue, we believe that reporting in rubles better represents the 2 financial and imperative dynamics of the group. We will continue to provide local currency financial and imperative indicators for our operations outside Russia and relevant U.S. dollar currency rates in our materials which we post on our website. During the course, our group revenue increased by 2% to RUB 92.9 billion. Overall growth compared to Q1 2012 was limited by the suspension of our operations in Uzbekistan. Excluding Uzbekistan, our top line grew by 6% year-over-year due to sustained growth in consumption of voice and data services in our markets. In Q1 2013, our revenues in Russia increased by 5% to RUB 82.7 billion. This was boosted by strong performance of our mobile and fixed operations. Mobile service revenues increased by 7%, evidence of our success in driving higher voice and data usage. In Q1 2013, the minutes of usage increased by 10% compared to the first quarter of our previous year which combined with data growth, drove ARPU higher by 4%. The growth reflects our success in promoting TeleSystems with free all-net calling and increase in data integration. This also translated into higher customer loyalty and enabled us to reduce churn from 11% in Q4 2012 to 9.5% in Q1 2013. Single-digit cost related churn has not been since 2009. Reduction in churn is reflective of our focus on the quality of subscriber base and can go in changes in the distribution market. In Q1 2013, we delivered a 37% increase in data traffic revenue compared to Q1 2012. This growth outpaces average growth rates in the market and as attributable to a number of factors. According to our data network, which covers compresses more than 42,300 2G and more than 29,200 3G base stations, as well as more than 2,000 base stations in the LTE network in Moscow, in the Moscow region. Capacity of MTS retail chain that enables us to boost penetration of smartphones and tablets in to our network and promote data tariff plans. Launch of tariff plans, bundling voice and data and know-how of the tariff structure aimed to improve customer experience and upsell in existing users, focus on sales of app-enabled smartphones including MTS branded devices and partnership with the vendors to offer free mobile internet for customers purchasing smartphones in the MTS retail network. In Q1 2013, we rebalanced in our retail sales portfolio. This led to a decrease in the share of premium-priced handsets in the sales mix, which in turn, led to the decrease in overall sales of handsets equipment by 6% year-over-year. We also fully exited the market for wholesale and subsales. Instead, we focused on promoting sales of low-budget smartphones including MTS branded devices which naturally had a greater impact in stimulating ARPU growth. Sales of these devices increased more than 2X year-over-year. Content to revenue declined by 12% year-over-year as we reduced promotion campaign related to Q1 2012 and in turn used for the measures to manage things in solicited SMS-based services. Messaging revenues even rose 14% year-over-year, a sign that the increase in voice and data usage is having an electric effect on messaging. Our fixed-line operations showed strong performance during the quarter. Fixed line revenues went up by 4% year-over-year to RUB 14.1 billion. The growth resulted from continued network modernization in the regions, enabling us to upsell in existing broadband and Pay-TV customers and enhance market share. More than 85% of households in the regions are now connected to via fiber to the building technology. In Moscow, we have passed more than 1 million households in GPON and connected more than 320,000 households. Around 100,000 subscribers are already accessing the Internet via GPON from MGTS. We also continued in our allowed of our digital TV platform offering up to 160 channels, including HD channels. The platform is already commercially launched in more than 70 cities out of 150 cities, where we have presence in the fixed line service. Our commercial efforts to upsell broadband and pay-TV users, as well as overall stabilization of the competitive environment allowed us to grow residential ARPU by 3% year-over-year. Quarter-over-quarter, ARPU increased by 3G and by upward revision of prices for 36 telephone in MGTS. Corporate ARPU increased by 7% year-over-year, reflective of our focus on promoting fixed broadband, as well as the introduction of value-added services such as the VPNs and cloud solutions. In Ukraine, revenue increased by 7% year-over-year to UAH 2.4 billion. This rise was attributable to the sustained growth in data services consumption, as well as part price revision in H2 2012. Data traffic revenue increased by 21% in spite of the absence of UMTS 3G in the market. Sequential decline in data traffic revenues was attributable to the reclassification of the revenues from bundles from Q1 -- Q3 2012 to Q4 2012. Overall, top-line dynamics was in line with the seasonal trends. In Armenian, we delivered 7% revenue growth up to AMD 17.8 billion. The growth was enabled by our continued efforts to attract and retain higher value customers. In these routines and leadership position in the market with market share of 63.4%. In Turkmenistan we continue to grow a subscriber base and earn back share of the market at the end of Q1 2013, we had nearly 1.9 million customers in our network which, according to our estimates, corresponds to a market share of approximately 39%. During the quarter, we generated TMM 48.3 million in revenues, and increase of 79% compared to Q4 2012. Now, Alexey Kornya will further discuss the group's stability and financial performance. Please, Alexey.

Alexey Valerievich Kornya

Thank you, Andrei. In first quarter 2013, group adjusted OIBDA increased by 3% year-over-year to RUB 39.1 billion. Excluding the Uzbekistan adjusted OIBDA grew year-over-year by 8%. This was driven by top-line growth over continuing cost pressure from our network rollout retail expansion and increase in personnel costs. On the margin basis, the group's adjusted OIBDA margin came in for first quarter 2013 at 42.1%. In Russia, OIBDA rose in line with revenue by 6% year-over-year to RUB 35.8 billion. Main drivers include growth in consumption of data and the reduction in the sales of handsets. For the quarter, we delivered a strong OIBDA margin of 43.3% which was slightly higher than the one in first quarter 2012. In spite of current conditions year-over-year due to the delayed of effects of revenue-sharing was increased inflation recourse. Compared to fourth quarter 2012, our OIBDA margin improved by 1.3 percentage points. The increase was attributable to growing consumption of data services in growth dynamics lower sales of handsets and a seasonally stable marketing expenses. In Ukraine, OIBDA increased by 16% year-over-year to 1.2 billion. Strong growth was reflected for the rising contribution of high marginal data services in total revenues improvement in interconnect revenues, as well as reduction in advertising expenses, lower sales of handsets and continued focus on the optimization of operational expenses. Overall, our OIBDA margin was 61.5% for the period, an increase of 3.7%, compared to the first quarter of the previous year. Since first quarter 2009, our OIBDA margin in Ukraine has increased steadily quarter-by-quarter over by 9 percentage points which is a strong validation of our commercial policies enforced to reduce churn and in lesson policies on the margin. In Armenia, our OIBDA for the first quarter came in at AMD 8.9 billion, OIBDA dynamics were attributable to one of the shifts from equipment swap resulting in recognition of additional AMD 3.5 billion in OIBDA of first quarter 2012. Net of the effect of our subsidiary in Armenia delivered sales OIBDA growth in line with the top-line trends. In Turkmenistan, we generated OIBDA of TMT 13.2 million and the margin of 27.2% in what is basically an early phase operation. In first quarter, net income came in at RUB 13 billion which include the foreign currency loss in the amount of RUB 1.5 billion. During the quarter, our total debt increased slightly to RUB 222 billion. Our ratio of net debt to last 12 months adjusted OIBDA improved to 1.1 due to improving operating performance and strong debt management practices. In April 2013 with local markets successfully placing on the Moscow interbond currency exchange, our first issue of ruble exchange traded bonds in the amount of RUB 10 billion. The bonds have a coupon rate of 8.25% and the maturity of 10 years with a 5-year production. In May 2013, we returned to international capital markets by successfully placing of new NDA bond offering in the amount of $500 million with a coupon rate of 5%. The placement set a number of milestones despite the incredible tight window in the markets, we were able to obtain the lowest coupon ever achieved by MTS on this year's lower international bond issue and lowest favorable coupon for us on noninvestment grade in the international bond issue. The coupon rate was also lower than the price of many private investment grade peers assessed in the market recently. The demand for our bond was exceptionally strong which permits us to priced the issue 30 basis points less than our traded debt. This, in turn, allows us to establish new benchmark rate to lower our costs funding. Operational cash flows for the 3 months of 2013 came decreased by 4% when compared to the same period last year to RUB 36.3 billion due to terminations of operations in Uzbekistan. Free cash flow for the quarter came at RUB 23.9 billion.

Andrei A. Dubovskov

Overall, we continued stability and consistency in our markets of operation. With this in mind, MTS introduced a new dividend policy in April 2013. The new policy contains a number of key points. Particular in the year, 2013, 2015, MTS intends to pay out a minimum dividend distribution equal to at least 75% of free cash flow for their 11th financial period or even greater, RUB 14 billion per year. MTS will begin to pay out dividends on a semiannual basis using interim H1 and full year financial results as foundation. In April 2013, the MTS Board of Directors recommended that AGM approved full year 2012 dividends of RUB 14.6 per ordinary MTS share. In addition, the board advised that MTS can further a semiannual dividend payout of up to RUB 11 billion on the basis of its H1 2013 financial results which should become available in 2013. Overall, the payout could increase the cumulative amount returned to the investors in 2013 by over 35% relative to 2012. In our new alignment our dividend policy with free cash flow, allows the market to better forecast our shareholder return and more clearly anticipate future performance of the company. In effect, this policy allows MTS to ensure it has sufficient flexibility to meet our investment needs, cover our financial obligations and then return extra cash to investors. To meet this commitment, we do not envision any change in our current level or require us to borrow additional funds. When our H1 2013 results become available, we will make another proposal to the Board of Directors on an interim dividend payout which we would envision being paid by the end of 2013. With that, I would like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Caesar Tiron from Morgan Stanley.

Cesar Tiron - Morgan Stanley, Research Division

Yes. Two questions, actually. So on the first on Russia, well done on the performance of your core business. I would like to ask if you can comment on the data pricing environment in Russia and why you think you're growing data revenues significantly faster than MegaFon? Second question, on the Ukraine, you continue to gain quite a substantial market share in the quarter. Can you please explain what do you think the driver is? And also, let us know if you think the margin improvement in Ukraine is sustainable?

Vasyl I. Latsanych

It's Vasyl Latsanych and I'm replying to the first part the question regarding the data pricing and data growth. The data pricing is a substantial but not far from being the only factor of growth of data revenues in 2013. We have to take into account the significance increase of our network both in terms of coverage and in terms of the throughputs and most places where data doesn't matter which is the result of very significant buildup of the data capacity in 2011 and 2012. At the same time, as we indicated, we have committed and we have executed a huge number of activities to promote the data capacity that we built and to enhance the customer experience with the data devices like smartphones and tablets. We have seen quite substantial growth of both tablets and smartphones throughout 2012 in all of our territories and especially in big cities. We believe that, that all is quite equal contributor of the overall data sales and we believe that, that is quite -- that is going to be quite a substantial -- there is going to be quite a substantial growth in 2013 as we see that our efforts are unfolding throughout the year and our plans are pretty aggressive to go after the data market and to grow to be the leader in the market quite soon.

Andrei A. Dubovskov

It's Andrei Dubovskov. I just want to talk about your second question and it's a very simple answer and it's not concerning our Ukrainian operation also but other markets, of course. In my opinion, the normal base for all results across the MTS countries, it's subscriber's loyalty. If you have good subscribers loyalty, you have very good possibility to translate it into your revenue and after that, you have very good possibility to translate that with marginality. And we are going to the same in the Russian market, of course.

Cesar Tiron - Morgan Stanley, Research Division

And so do you believe that the uplift in the OIDBA margin in the Ukraine is sustainable?

Andrei A. Dubovskov

I think it can be no less than 50% in Ukraine and maybe better. It depends on the economy in Ukraine, it depends on a lot of factors. But I think it will be no less than 50%.

Operator

We will take our next question from J. P. Davids from Barclays.

John-Paul Davids - Barclays Capital, Research Division

Two questions for me, please. The first one on Russia. Your competitive announced a ramp-up in its monobrand distribution platform. What do you think this means for the market as a whole and does it make it you relook your strategy anyway? The second question, please, is on the Ukraine. Just following up on maybe the margin outlook but slightly broader question. Do you see the change in ownership of Ukraine telecom as a very important milestone in this market? What do you think and more broadly, what do you think it means for spectrum auctions and the future for the market?

Vasyl I. Latsanych

This is Vasyl. Regarding the sales situation with the channels and Euroset, MegaFon, we don't have any pressure from the Euroset being a part of the VimpelCom and the private ownership and then being a part of VimpleCom and MegaFon. We believe that our position with a very high profile monobrand MTS Network in Russia as well as our goods relationship with other networks including those local networks in Russia are good sustainable platform for us to gain the sales that we believe are fair and that will give us the growth in the future periods. We do not think that there is a threat coming from Euroset anymore as it used to be in the end of the years 2000s.

Andrei A. Dubovskov

It's Andrey Dubovskov, speaking about the question about Turkish [ph] telecom. In my opinion, there will be more change in the Ukrainian market because during the last 5 years, with telecom had 3G license and results. Speaking about market share, revenues in the change in shareholders ownership issue, in my opinion, it no impact MTS market.

John-Paul Davids - Barclays Capital, Research Division

If I may quickly follow-up on the Russian distribution question. Specifically looking there at VimpelCom's ramp up in monobrand, in plans on increasing its Square footage by fourfold over the next 3 years. And so aside from Euroset, put that to one side, it's changed, I guess aggressive stance on monobrand. Is that going to have an impact on the way you approach the market, or do you think it actually maybe helps consolidate a part of the independent distribution channel?

Vasyl I. Latsanych

This is Vasyl answering. We have built the biggest and we believe, the best monobrand in Russia during the years of 2010, 2011. We may be seeing our competitors trying to catch up with us on that side. We don't think that this gives us any potential threats from a redistribution of the networks and of the sales in Russia as we believe that we have already done what they are trying to accomplish right now.

Operator

Our next question is from Imari Love from MorningStar.

Imari Love - Morningstar Inc., Research Division

So in fourth quarter, you made a strategic shift towards lower-priced handsets and veering away from the iPhone. I wanted to try to get a gauge of how sustainable that strategy is and what other handsets have you started to work away from given the strategy?

Vasyl I. Latsanych

This is Vasyl again. Yes, we have introduced in September 2012, our lowest price in the market handsets of below $100 per piece and it was very successful and we believe the business have very good trend that we have spotted in the market because there is much more customers coming to the bottom level of pricing range, getting from a feature phones into the smartphones and increasing their ARPUs and using Data Services immediately. We want, as we said in the previous calls, we want to fuel the growth by introducing next generations of low-level price level but still good customer experience handsets and we have a pipeline throughout 2013. We will be releasing them quite soon. This does not mean that we will be replacing the top-end smartphones with the bottom end, lower range smartphones because we believe that along with entering the data environments through the smartphone entrance, people are also increasing their demands and upgrading their devices. So we do see very high sales of top smartphones in the market like one of the top sellers in Q4 was Samsung Galaxy S3 which is quite a top smartphone because it was in a high demand and a lot of people upgraded from low and medium range smartphones to the top smartphones. So we have 2 different markets. One is the entry-level from the people with a feature phones which there is still majority in Russia and the other one, climbing up and upgrading their devices to the top ones. We will not be missing any of these markets. Both will be on our shelves and both will be on the promotion like there are numbers of promotion with Nokia, HTC and Samsung in our markets that are supported by us in both terms of advertising cool promo and additional benefits to the customers.

Operator

Our next question comes from Ivan Kim from VTB Capital.

Ivan Kim - VTB Capital, Research Division

Two questions, please. One on smartphone penetration. It seems it has slowed down actually despite the push of the budget handsets it added just a couple of percentage points in the first quarter in Russia. So can you please elaborate on the trends there? And secondly, the constant revenue was down 12% in Russia in the first quarter year-on-year. Can you provide the reasons for that, please?

Vasyl I. Latsanych

I'm answering the first question. No, we did not slow down because usually the higher sales of smartphones and basically any devices are towards the end of the year. So we usually have this lower first quarter, second quarter and then higher third and fourth quarter. So we will see the growth. And actually, from what we see today, month by month, we do increase the speeds of the smart phone penetration which now is approximately 1 percentage point per month or about that. That sale is subject to seasonality.

Unknown Executive

Can repeat your second set of questions, please?

Ivan Kim - VTB Capital, Research Division

Yes. Sure. The content revenue which is called the data content in your disclosure was down 12% year-over-year in the first quarter. I just wanted to get your views on why that happened.

Vasyl I. Latsanych

The question of the content revenue has twofolds, one but it is seasonal, usually in the first quarter it's a low season for content. The fourth quarter is the highest season so we may see a drop. The year-over-year change though is also because there is much more attention paid to the quality of content throughout Russia by even the government institution and also by ourselves or I should say first by ourselves and then even by the government institutions. We do not want to create any unnecessary content revenues that would turn, that would drive the return of the customers and unsatisfaction of customers. Russia is overall going through at a process of rethinking the content services, rethinking the mobile payment services where we want to be on a very clear clean page and we want to have only those services that are really in demand for the customers. So this is a bit of change in the market that is going on and we are quite ahead of the change.

Operator

Our next question comes from Herve Drouet from HSBC.

Herve Drouet - HSBC, Research Division

My first question is regarding your fixed line business. I mean, in the next, in the last few quarters, first your total Pay-TV subscribers have declined. I know there is some seasonality there but it looks like the decline has been more that what we've seen seasonally before. I was wondering if there are any reason for that? And also, the success rate in terms of conversion rates of the impasse of getting broadband subscribers have been reduced. I know you have a project of increasing that ratio but in Q1 compared with Q4 has been as well kind of a stabilization even a slightly lower ratio. So I was wondering how we should expect that to evolve over time? So that would be my first question. And the second question is it looks like you're still investing as well on your GPON network relatively heavily especially through your CapEx, and especially in Moscow and I was wondering, I mean, if something happened potentially there has been different rumors at different times about potential mergers with Akado. I was wondering if something happened with Akado could that change your strategy on the GPON and in your GPON investment?

Alexey Valerievich Kornya

I will take the first one. This is Alexey Kornya. Overall development of our second business, there are 2 moments. First, we are scaling down our wholesale part of this business. So we are not really growing in that field and that's somehow reflected in our growth but that improves our marginality and basically, the quality of our fixed line business. And second fold, we're focusing now investments at this point of development, mostly on modernization, upgrading our network which basically creates the basis for future healthy foundation for future development, securing our existing customer base. And we are not very aggressive in terms of CapEx other than GPON in Moscow, outside of Moscow, in terms Of greenfield buildup. We are looking more -- rather on some more organic opportunities but generally focusing in our investment activities on modernization and upgrading.

And for the second part, related to GPON in Moscow investments I'll pass it on over to Michael Hecker.

Michael Hecker

Yes. Let me make a short comment on GPON and the alleged rumors on AKADO. We usually do not comment, as you know, on any kind of M&A rumors. However, let me show you 2 things. First thing, we are not in any kind of negotiations with AKADO. And secondly, let me reassure that we are very much focused on continuing our GPON rollout. And following our GPON rollout strategy, we have over 1 million households already passed. And out of 1 million households, we have roundabout 320,000 households are already connected via MGTS to GPON. And there is no strategy change intended on that. We're continuing very successfully our rollout, and we'll continue to do that throughout this year and next year.

Andrei A. Dubovskov

It's under the Moscow, if I just want to add some information about this project. I think this situation when we invest in a lot of money sure here in Moscow for build GPON network. It means that it has very good competitive position in Moscow. And it means that if you are going to buy somebody's share here in Moscow, we can do it only with a very big discount because again, it has very good competitive position in Moscow, and it will be much more profitable for us to build our own network.

Herve Drouet - HSBC, Research Division

And I was wondering in terms of the conversion rates, how do you see that evolving over time in terms of on-pass versus broadband user being connected especially under GPON?

Vasyl I. Latsanych

Yes, I mean -- the way, as I said today, we have already converted 320,000. That is 1/3 of the just passed households to MGTS. Roundabout 100,000 already on broadband. These are numbers we can say at this very moment, and we are continuing with the conversion as we speak. It's a little bit early to give some kind of intermediate status evaluation at this point of time, but we are very successfully continuing the conversion as we have started it last year.

Operator

Our next question comes from Alexander Vengranovich from OTKRITIE Capital.

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

My first question is about your guidance. As I remember last time, you also gave us the guidance for the next 2 years, for the year of '14 and '15. So this time, I don't see it in the presentation. Do you just cancel your previous guidance regarding the future year as you see probably some changes in the market plans? Or you will still reiterate it, any guidance you have mentioned, let's say, in the presentation? That's the first question. And second question, I've seen recently a promo of some very cheap smartphone of around RUB 500 in Moscow. Are they -- I mean, is it a real price of the smartphone? Or is this device being partly subsidized?

Vasyl I. Latsanych

I'm sorry, sir. Excuse me for interrupting, but it seems that we went dead on this side all little bit. Can you please restate your question and identify yourself, please?

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

Yes. This is Alexander Vengranovich from OTKRITIE Capital. So I just start from the first question, yes?

Vasyl I. Latsanych

Yes, please.

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

Okay. So my first question is about your guidance. So last time, I think during the fourth quarter results, you gave us also the guidance for next 2 years, so for the year '14 and '15. And this time, I haven't seen this guidance in the presentation. Is it just something changed in your mind and you just give the guidance for this year? Or you still reiterate your previously used regarding the same cycle, 5% to 7% growth rate for the next 2 years, and like 41%, 42% for EBITDA margin for financial year '14 and 41% for financial year '15? Or do you think it has changes -- have changed? And second question is about your focus on cheap smartphones. So recently, I've seen a promo in Moscow, advertising a smartphone of, I think, RUB 500 price. I just want to check whether it's the real price of the smartphone or is it partly subsidized by you?

[Technical Difficulty]

Operator

Please go ahead.

Vasyl I. Latsanych

Ladies and gentlemen, we've fell off again. Alex, can you repeat your second question, please?

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

So second question is regarding your focus on cheaper smartphones. So I just recently seen an advertising of a very cheap smartphone, I think around RUB 500 price. I just want to check whether if it's a full price of the phone or you're doing a subsidy for that type of the low -- low-priced smartphones?

Vasyl I. Latsanych

This is Vasyl. Are you sure this was MTS advertising because we do not have any RUB 500 smartphones? That might have been a special CRM offer. So we do offer some subsidies, usually in form of services to our existing customers, but we would not offer on the shelf. Anything below the shelf price which is non- subsidized and the last one was below $100, but far above RUB 500 that we have done in Russia. So it might have been a mistake on something. It might have been a feature phone, but we don't advertise feature phones. Or, I don't know, it might have been Ukrainian advertising, but they have proven that there are, and it's totally different exchange rate.

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

That's okay. I will check with them. As for the first question?

Vasyl I. Latsanych

Sorry, could you please repeat the first question? We have the breakdown and I'm not sure I catch it.

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

So my first question is regarding your guidance. I remember on the last conference call, fourth quarter results, you were guiding for also the growth in the next 2 years. So financial year '14, '15.

Joshua B. Tulgan

Yes, Alex, Alex. Alex, we got this question. Probably, you didn't hear us because of the connection. We reiterate our guidance, and you can find it in our management presentation, Page 12.

Alexander Vengranovich - OTKRITIE Securities Ltd., Research Division

So, it's what? Because I've seen just for financial year '13. So it's there, yes? So nothing changes?

Alexey Valerievich Kornya

No, that's for midterm. We reiterate midterm guidance for the next 3 years, including this year as well.

Operator

Our next question will come from Olga Bystrova from Crédit Suisse.

Olga Bystrova - Crédit Suisse AG, Research Division

When you're answering question about data growth, you mentioned that you want to become a leader in the market. Can you, maybe, in light of that, sort of talk a little bit about your key 3 KPIs, whether they have changed recently and what they are specifically? And then the second question is regarding volume and average price of handset sales. Obviously, revenues have declined, but can you sort of talk a little bit about volume trends and how average prices have changed year-on-year?

Vasyl I. Latsanych

Let me ask you the first question. It's regarding KPIs for the data growth, if I got it right. The KPIs -- the things that we watch very carefully on data is first of all, the data penetration in the base, which at the moment, as far as we understand, we hold the leadership position in Russia, as well the other leaders on the numbers of customers using data in Russian market, well, first of all, due to our highest base in Russia in terms of the subscribers overall. So we believe that this is the very valid KPI for the beginning. But then, the next one would be, what is the data ARPU of the customers, split into a small-screen customer base and a large-screen customer base. While we are focused on the small-screen customer base. Working with the smartphone penetration first of all, because we believe that, that creates a double value into customers who use both voice services and data services. So for us, a data customer on small screen on the smartphone is more valuable than the data customer on the dongle or on a modem.

Olga Bystrova - Crédit Suisse AG, Research Division

I'm sorry, I think I probably asked the question wrong. I wanted to -- I wanted you to talk about management KPIs, how they have changed. Obviously, you're looking to gain or retain the #1 position in the data market and have always been talking about #1 in the overall market. Just want to see how management KPIs have changed and whether they have changed recently and what they are in the top 3?

Vasyl I. Latsanych

Well, probably, we're not in a position to talk in details about the management KPI right now, but what we should say is the data growth and data revenue is one of the top KPIs throughout the company for all levels of management. And it is split into different KPIs for all levels and different parts of our organization. So for some, it will be the smartphone penetration. For the others, it will be the percentage of the ARPU. As data ARPU for the first, it will be something else. But it will aggregate into the data revenue in the all-management KPI system throughout the company.

Olga Bystrova - Crédit Suisse AG, Research Division

Okay. And what about cash flow KPIs or any other KPIs that you have that you can talk about?

Alexey Valerievich Kornya

Well, this is Alexey Kornya. We have seen the KPIs being set for us once in the year. They are not changing through the year by the Board of Directors, if we talk about management, and then they are cascaded down the company. And they include, as Vasyl mentioned, there are some KPIs related to data and general corporate financial parameters. That being revenue, OIBDA, those type of corporate KPIs.

Operator

Our next question comes from Anna Kurbatova from CSB.

Anna Kurbatova - Gazprombank (Open Joint - stock Company), Research Division

My first question is about your Central Asian business. Basically, 2 small questions. First of all, I see that until now you record negative EBITDA in Uzbekistan. So I assume there are some costs associated with closing the operations. But anyway, it would be very great to know when you cease to show any negative EBITDA in Uzbekistan. And the second question, about Turkmenistan. You are already 2 quarters operating after the break. So what's your view on the market on the voice of all of your subscribers there? Are you in position, do you think, to regain that market share that you had before the break to return to 2-plus million subscribers? This is the first question.

Andrei A. Dubovskov

Okay, on the first question on Turkmenistan -- on Uzbekistan, sorry. We did encounter some costs in the first quarter. They did relate mostly to parting with our employees. We dismissed about 300 people and basically paid them a healthy compensation for that. So that one was paid from the local accounts and the local currency and that mostly what you see is reflected in our financial statements related to Uzbekistan. There are some minor other costs in Uzbekistan related to legal expense and so and so forth. But next quarter, further on, we see that the size of those costs will diminish and will not have significant impact on our financials.

Vasyl I. Latsanych

On the second half of question regarding Turkmenistan, for sure, it is difficult to come back to the markets and try to get -- regain the position that we had previously because the market deteriorated for us and some of the customers, unfortunately, were attracted to other networks. But we should say that the brand of MTS and its image in the market was incredibly strong. And upon our return in -- for -- during the first 24 hours of the relaunch of our operations, our base was composed of 647,000 subscribers which returned to our network just on the first day. And then, since that time, we have experienced quite high growth of people who were either reactivating their old SIM cards, which they kept throughout the time when we were -- when the network was off, or they were coming to the stores and getting the new SIM cards or reactivating their old SIM cards with the numbers that they possessed before. We believe that the current number of below 2 million customers is far away from being -- from flattening. We will still go over 2 million, we believe, and we will grow in that market. But probably, putting ourselves a target of growth back to the number we had before would be quite a stretch and at this moment, we would not like to put some unrealistic targets in front of our management, who are pretty stressed getting the business back on feet in Turkmenistan. But we see a very high exigency of the existing base, a very nice growth of MOU and ARPU in local currency, for sure. You can see that on our reports. We believe that, that we'll continue for several quarters as the business is regaining the momentum.

Anna Kurbatova - Gazprombank (Open Joint - stock Company), Research Division

My second question, basically about the cost structure. Well, the general administrative expense or also as a percentage of revenue to 23%, and I wonder whether it was mostly driven by the repair and maintenance costs, so as we understand now -- which is associated with greater network complexity or so on. Or if there were any specific factors to offer in the first quarter which drove this cost line?

Vasyl I. Latsanych

Well, we see that it's not being due to some one-offs. It's more kind of a trend in our financials, which should be related to expansion of our network and retail operations. I mean, our network -- radio network in our retail operations.

Operator

Our next question comes from Igor Semenov from Deutsche Bank.

Igor Semenov - Deutsche Bank AG, Research Division

Just a quick follow-up on something. You have mentioned in your presentation. I just wanted to verify. Can you comment on the level of dealer commissions? Are they increasing, you said, or they are actually decreasing? I mean, per subscriber, per subscriber.

Vasyl I. Latsanych

Igor, the dealer commissions in our system where we only use revenue sharing is exclusively a factor of the ARPU. So whenever the ARPU of the first month is growing, the dealer commissions will be growing unless we change the system. At the moment, we do not change the system. We are very stable. There is a slight increase in the ARPU, so you may infer that there is a slight increase in the dealer commission. There is no other factor that could be in the markets like it used to be in the old ages when you paid upfront the incentive fees or any super commissions for plan achievements in this market anymore, at least in our system. So it means that there is no unexpected movement in the dealer commissions in our plans for 2013.

Igor Semenov - Deutsche Bank AG, Research Division

But for example, this share has its increase compared to last year or it remains stable? I mean, the structure of dealer commissions, if your customer generate X, you pay a small share to dealer. If you pay or manage to attract a really high-value customer, you pay them more, right? So has this structure changed?

Vasyl I. Latsanych

Okay, the overall situation is not changing in principle, as I said. So yes, if we attract a higher-value customer, the dealer commissions will be higher automatically. But at the same time, you might see in some of our reporting the increase, which is rather a catch-up. So it's a transition phase from a fixed dealer commission to a revenue share commission, where before we paid high fixed commissions, then as we change to revenue share, that's mathematical equation, we have dropped down the commissions because we stopped paying the fixed ones, and the revenue share commissions are kicking in after a certain period of time. So you may see that increase as effect of increase of penetration of dealer commission on the revenue sharing basis. But the principle stays the same. So as soon as we achieved the -- which we actually already achieved, the balance level of the revenue share, where all the sales are only down on the revenue share basis, it's then becoming a factor of the -- on the big numbers of the ARPU only, which, if we attract the higher-value customers, it will also be reflected in the ARPU, as well as in the dealers' commissions.

Igor Semenov - Deutsche Bank AG, Research Division

And can you remind us what's the cap in terms of the amount, else in terms of the length of this agreement? I mean, you're not paying dealers forever. I mean, is it 12 months? Can you remind me?

Vasyl I. Latsanych

I'm sorry, but I don't think we should discuss that online on the caps and the months. I should only say that there is both limits on the term in terms of the months and on the amount in terms of not more than this.

Operator

We have another question from Olga Bystrova from Crédit Suisse.

Olga Bystrova - Crédit Suisse AG, Research Division

Sorry, but my second question on the breakdown of handset sales was not answered, if I may ask you to answer. So basically, we know you'd reported revenue decline, but can you talk about a specific evolving trend and also average pricing trend of handsets in your network? That would be very much appreciated.

Vasyl I. Latsanych

Yes. As the top handsets are going down on price in Russia, hence, the most expensive ones like iPhones are not being sold on our network. In our network of retail stores, we do see a certain decline in the average price of the smartphone that we sell through our network and respectively, on the network of -- in the base of our mobile subscribers. That has a couple of inputs. First of all, we do sell more of the cheap smartphones, so we are decreasing the average number -- the average price of the smartphone per base. And also, we have seen quite big handset manufacturers words last -- in the end of last year, which created some price declines on the on-shelf price of Samsung and Nokia. And that also is reflected in the lower average price that we see throughout the market right now, not only in our retail and our base. That does not mean -- being said, that does not mean that we don’t, for example, have the inflow of iPhones into our base because since the iPhones are sold in the market, and this is quite free market in terms of there is no contracts, there is no obligations, no SIM locks, we do see a significant portion of iPhones sold in Russian market, landing on our network and that, for sure, also creates certain higher-priced smartphone penetration increase in our network as well. But overall, average price for the smartphone in our network is going down in spite of average price of handsets, including smartphone and feature phone, which is going up.

Olga Bystrova - Crédit Suisse AG, Research Division

Okay. But the volume has increased or the volume has decreased? Like unit volume.

Vasyl I. Latsanych

Well, the seasonality gives us, anyway, a lower volume in the first quarter than whatever was in the fourth quarter.

Olga Bystrova - Crédit Suisse AG, Research Division

No, year-on-year?

Vasyl I. Latsanych

The overall decline in the volume year-over-year is mostly a factor of decrease of the wholesale transition trend. The wholesales of these smartphones that we use to have quite big in the -- in our RTK network.

Operator

Our next question comes from Anna Lepetukhina from Sberbank.

Anna Lepetukhina - Sberbank Investment Research

Basically, my first question is a follow-up on your strategy in data services. I mean, I just want to understand how aggressive you are prepared to be to gain or to become the leader on the data market? Are you prepared to sacrifice margins and go for more aggressive advertising campaigns or start subsidizing more aggressively handsets? And what if your competitor responds? That's my first question. And my second question is in the growth in messaging. Can you please explain what was driving this growth and why messaging in Russia increased 14% year-on-year?

Vasyl I. Latsanych

The first question regarding the data -- well, we should not be talking about the sacrifice of the margin on data because data is a very, very high-margin product. So as we move, part of our -- even mathematically, if we move part of our ARPU from voice services to data services, we already increased the margin. Being said that, we are going to be aggressive but mostly in promoting and selling for base data services, not necessarily the street prices have to be incredibly aggressive and competitive. We do believe that there is more of chance of selling the data to the existing customers where you don't have to be extremely aggressive in pricing than trying to fight for the customers in the street with a competition based on the data price. So said that, we do not think that there is a high threat of margin deterioration due to our aggressive behavior in the data markets and pricing. The second question is a very interesting one because I do understand that if you take a look at the European messaging revenues, you would rather see declines and sometimes opt us very drastic declines. That's a different situation and basically, all of our markets, you will see an increase in both Russian markets and the second most significant pocket of ours in Ukraine, which is mostly due to our packaging and our pricing models that we used for driving the revenues of the messaging in Russian market. Also, it is a factor of much lower penetration of IP messaging in Russia like iMessaging or Vibers or what's up? The penetration is here, but it's significantly lower than the penetration in the European countries. So packaging messages into the bundle tariff plans which includes voice, data and messaging. And also generally, relatively high price for SMS in Russian market that keeps the messaging revenues still growing, which is also a factor of our customer base growth.

Anna Lepetukhina - Sberbank Investment Research

Sorry, can I just clarify? So it means that it wasn't just one-off, and we should anticipate it in the following quarters as well? I mean, it might not sustain for long but nevertheless, it wasn't due to some one-off campaign?

Vasyl I. Latsanych

Well, if you could see our previous reports for the previous quarters, data -- oh, I'm sorry, messaging revenues have been growing consistently quarter through the quarter. I should not say how much it will go in the future, but I believe that it still has potential to grow, at least for this year.

Operator

We will take our next question from Anna Kurbatova from BSC.

Anna Kurbatova - BCS Financial Group., Research Division

Again, on handsets and subsidies, there was an article of the weaker investments here, saying that you decided to subsidize some smartphones for your corporate customers. Could you please elaborate on this topic? How far are you going to go with this?

Vasyl I. Latsanych

Anna, I'm sorry. We don't seem to be aware of such an article as we definitely are not considering any heavy or any even light subsidies, on-shelves subsidies in Russian market. As you know, there is no mechanism for a customer lock-in or long-term contracts in the market. So subsidies are very tricky. We are not in that market, and I don't know what information got into Vedimasi [ph]. We haven't seen it.

Andrei A. Dubovskov

Anna, additionally -- it's Andrei Dubovskov. It's very clear. It does not depend on an various news article or Russian newspapers. No subsidize in each markets. Mass markets or corporate, it doesn't matter.

Operator

There were no further questions queued at this time.

Joshua B. Tulgan

Thank you, operator. Ladies and gentlemen, then, thank you very much. We welcome you at any time to contact our Investor Relations department for any further questions. A webcast of this call will be available on our website if you wish for replay. In the meantime, we appreciate your interest and wish everyone a pleasant day or evening.

Operator

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

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