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Mobile Telesystems OJSC (NYSE:MBT)

Q3 2013 Earnings Call

November 19, 2013 10:00 am ET

Executives

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

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

Analysts

John-Paul Davids - Barclays Capital, Research Division

Cesar Tiron - Morgan Stanley, Research Division

Haim Israel - BofA Merrill Lynch, Research Division

Ivan Kim - VTB Capital, Research Division

Herve Drouet - HSBC, Research Division

Alexander Kazbegi - Renaissance Capital, Research Division

Alexander Balakhnin - Goldman Sachs Group Inc., Research Division

Anna Lepetukhina - Sberbank Investment Research

Igor Semenov - Deutsche Bank AG, Research Division

Evgeny Golosnoy

Operator

Good day, and welcome to the Mobile TeleSystems Third Quarter 2013 Financial and Operating Results Announcement. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Joshua Tulgan. Please go ahead, sir.

Joshua B. Tulgan

Thank you very much. Welcome to MTS' conference call to discuss the company's third 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 subscriber dynamics; financial indicators, such as operating income before depreciation and amortization or cash flow projections; operating indicators like average revenue per user, value-added service indicators, et cetera; 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; technical matters as they pertain to our communications networks, including equipment licensing or network technologies; activities and lines of business that complement our communications networks; capital expenditures and operating expenses and macroeconomic developments within our markets of operation. A comprehensive overview of these issues is available on 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 spoken on this conference call or make any adjustments to previously made statements to reflect changes in risks. Copies of the presentation 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 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 third quarter 2013. Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; and Vasyl Latsanych, Vice President, Chief Marketing Officer.

Overall in Q3, we witnessed the continuation of the positive operating trends we have seen over the past year or so. Group revenue for the period reached RUB 103.4 billion, which puts us on pace to reach our minimum 5% revenue growth for the year. Our original guidance for 2013 called for 5, 7 percent growth in our core market, but in Russia revenue growth will be impacted by strategic decisions made by the company. This includes our decision to reduce sales of high-value handsets and concentrate on handsets that drive migration from feature phones and our decision to curtail SMS-based content to improve our customer experience.

For the period, OIBDA reached RUB 46.3 billion for a margin of 44.8%. For the year, we have shown a 100 basis point improvement on OIBDA margin, and we are also on pace to realize our OIBDA guidance for the year of at least 43%.

In Russia, revenue grew 4% year-over-year to RUB 91.5 billion. Revenue was boosted by continued strong performance of our mobile and fixed operations. Mobile service revenue increased by 6% year-over-year to RUB 70.3 billion. Key growth factors include increased data adoption and further monetization of data traffic and messaging revenue.

We continue to see market-leading growth in data traffic revenue, which grew 45% year-on-year. The growth was attributable to a number of factors, including the expansion of our data networks, which now encompassed around 43,300 2G and over 33,000 4G, 3G base stations; the growing penetration of smartphones on the MTS networks; growth in the sales of affordable MTS-branded smartphones priced between RUB 60 and RUB 150, which include 3 2013, accounted for around 38% of smartphone sales in the MTS retail chain. Sustained increases in the usage of tablets driven by the steady increase in sales of tablets in the MTS retail chain, and this has increased sales of Samsung and Apple tablets and expanded our product portfolio with low-budget devices.

In Q3 2013, minutes of usage increased 8% compared to the third quarter of the previous year. The increase has led the rising share of tariffs with free on-net calling. Over 50% of the prepaid subscriber base has already migrated to this tariff. This translates into greater customer loyalty.

Churn has now dipped to close to 9.1% over 1.2 percentage point decline from Q3 2012 and part of sustained brand unique in our market.

We continue to see decline in content revenue, which fell 18% year-over-year as we rein in unsolicited SMS-based services and cut back on SMS-based promotion. However, the increased voice usage continues to drive messaging revenues reached 7% year-over-year. Our fixed line operations showed steady performance in spite of sustained competitive pressures. Fixed line revenues increased 2% year-over-year to RUB 14.2 billion.

Growth continues to be driven by modernization in the regions. This enables us to migrate customers from a DSL to FTTB solutions. More than 85% of household capacity in broadband Internet outside of Moscow are now connected via FTTB technology. We also continued to roll out our great digital TV platform, which offers up to 160 channels, including HD channels.

In Moscow, we are happy to report strong progress in implementation of our GPON project. As of today, we have around 1.6 million households basic [ph] and 650,000 household subscribers actively using our GPON-enabled services. In our subscriber base, we see roughly 30% of households using bandwidth fixed line telephone and broadband Internet services. So far, GPON has allowed us to stabilize our market share in Moscow. As more houses are connected, we see opportunities to attract new customers and reconnect our old customers.

Our decision to reduce sales of high-value handsets continues to weigh on our top line. Sales of handsets were lower by 12% year-over-year and are down 10% for the year. As we discussed previously, we have enforced our strategy to our retail outlets to push sales of low-priced smartphones to drive further mobile Internet penetration in our subscriber base. Overall smartphone penetration reached over 29% in our networks.

In Ukraine, revenues were down slightly year-over-year to UAH 2.6 billion. As we have explained before, our commercial strategies are designed to stimulate voice usage as a way of both driving growth in messaging and data as well in improving customer loyalty. We see potential in the market with growth in messaging of 5% year-over-year and rising data traffic in our networks. Data revenue grew 4% sequentially quarter-on-quarter, but the absence of any 3G MTS licenses limits our major churn perspective for growth.

Our strong OIBDA and the trends we see in the fallen churn reinforce our strong market position and highlight our market-leading value proposition to customers. We also saw [ph] debt market economic uncertainty may have some impact in our ability to grow this market in the short term. For now, we believe this market can continue to deliver single-digit growth and then above 50% of OIBDA margin.

In Armenia, we increased revenues by 3% year-over-year, up to AMD 22.5 billion. Drivers include our continued efforts to drive voice usage, as well as the focus on promotion of data usage from smartphones and tablets. We continue to sustain our market leadership, and the competitive environment remains stable.

In Turkmenistan, we delivered the quarter-on-quarter increase of 12% on revenues up to over TMT 78 million. We are still growing our subscriber base. Churn has dropped in the market as it has titled [ph] through subscribers who -- former MTS subscribers, and now we are seeing steady and stable dynamics in our subscriber base. So they invest in some coverage capacity and 3G UMTS. We are all asked to realize further growth in this market.

Now Alexey Kornya will further discuss the group's profitability and financial performance.

Alexey Valerievich Kornya

Thank you, Andrei. In third quarter 2013, group OIBDA increased by 5% year-on-year up to RUB 46.3 billion for an OIBDA margin of 44.8%. Unlike the second quarter, when one-offs increased our margin by 1.9 percentage points, our OIBDA margin was largely unaffected by the insignificant onetime gains or losses. Adjusted for this fact, our margin in third quarter was a little over 1.1 percentage points higher than second quarter margin, which is a common seasonal difference from second quarter to third quarter.

In Russia, OIBDA grew in line with revenue 4% year-over-year to RUB 41.5 billion. For the quarter, we delivered stable OIBDA margin of 45.4%. Increasing data revenue combined with stable sequential sales of handsets and accessories continued to offset inflationary pressures, such as rising personnel costs, higher rent and network maintenance costs.

In Ukraine, our OIBDA decreased by 3% year-over-year to nearly UAH 1.4 billion. Higher subscriber acquisition costs combined with the slowdown in revenue growth are largely the source of this dynamic. Overall, our OIBDA margin in Ukraine was 51.5%, which by our understanding is the highest in the market.

In Armenia, our OIBDA for the third quarter came in at AMD 12.1 billion, which translated into a healthy margin of 54.4%. Though sequentially, this represents a growth 18% quarter-on-quarter, this is lower than third quarter 2012 due to one-off recognition issue of income from equipment sales in the third quarter of 2012.

In Turkmenistan, we generated OIBDA of TMT 26.9 million for a margin of 38.3%, a 30% improvement from second quarter as we see our business there developing and scaled dimensions from subscriber expansion.

In third quarter, group net income from continuing operations registered at RUB 18.1 billion for a net income margin of 17.5%. Unlike second quarter, we saw no significant one-off effects from nonoperating activities, and overall year-on-year net income was stable as we realized a USD 100 million noncash FOREX gain for the period in 2012.

Adjusted for this effect, our net profit is stable year-over-year and should be seen as very strong for the period.

Free cash flow for the first 9 months was RUB 72.2 billion or an over 51% increase year-over-year. While we expect significant CapEx spending in fourth quarter to mitigate these improvements for the year, operating cash flow from continuing operations for the first 9 months is also nearly up nearly 17%. This reflects the continuing improvement in cash flow generation we see at MTS.

During the quarter, our total debt decreased to RUB 224 billion. As part of our ongoing effort to optimize our debt portfolio, MTS prepaid RUB 20 billion of our outstanding debt facility with Sberbank.

Our net debt last 12 months adjusted OIBDA ratio was stable quarter-over-quarter at 1 multiple -- 1x multiple due to improvement in operating performance and our success in managing debt portfolio through an early redemption of loans, as well as the ongoing repurchase of bonds and the replacement of securities.

During the quarter, we continued to demonstrate our commitment to increasing shareholder return. In September 2013 at an extraordinary meeting of shareholders, shareholders approved a semiannual dividend payment of RUB 5.22 per ordinary MTS share, RUB 10.44 per ADR, amounting to the total of RUB 10.8 billion on the basis of the company's first half 2013 financial and operating results. This means that we have paid out roughly RUB 41 billion in 2013 calendar year.

This is in line with our new dividend policy that calls for distribution in the form of dividends of an amount equal to at least 75% of free cash flow for the relevant financial period or if greater RUB 40 billion per year. A sustained increase in free cash flow could create upside to our dividend payout through 2014, but this decision will be made in spring of the next year.

Andrei A. Dubovskov

Thank you, Alexey. As we discussed before, MTS continues to execute on its strategy. Our commercial focus remains on driving growth through data and improving customer loyalty. With 6% mobile service revenue growth and churn at the markets lower 9.8, .1% [ph], we continue to see the strength into the third quarter.

We continue to focus on developing our networks to support further data adoption and provide our customers with market-leading speeds and performance. Our 3G, 4G data networks comprise nearly over 34,000 base stations. Over 96% of our 3G base stations are HSPA+ enabled, while we serve customers in more than 2,250 cities with locator [ph] technology which provides speeds of up to 42 megabytes per second. Our LTE network covers 9 regions of Russia, including Moscow.

In Moscow, our buildout of GPON continues. We have passed 1.6 million homes and serve more than 220,000 customers, with speeds that are unrivaled in the market. The deployment of GPON has enabled us to stabilize our market share in Moscow. GPON subscribers also demonstrate ARPU growth of roughly 15%, 20%. We still believe that GPON in Moscow will enable us to recapture market share and provide the competitive advantages in terms of services we can provide, such as convergent products in the future. Combined with our pricing advantage, with it comes the fixed line calling. We feel confident that we can grow our share of key customer segments like corporate and high-value users and manage any changes that happen in the market.

By now everyone should have received an invitation to our Investor Day, which we'll now be holding on February 4, 2014. We had aimed to hold this event in December, but logistics and schedules in the preholiday period created some unforeseen difficulties for all of us. At this point, we will unveil our new corporate strategy, address questions around the market development and welcome you to spend time with our senior management.

With that, I would like to open the call to questions. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from J.P. Davids of Barclays.

John-Paul Davids - Barclays Capital, Research Division

I have 2 questions, please, both on Russia. The first question is around data traffic versus data content revenues. And it's very clear from your results that you're driving very strong data revenue growth. Looking out into the medium term, do you think there'll be a role for you to increasingly sell content into that traffic stream or indeed grow that content revenue stream over time? The second question, please, is around your affordable smartphones. In the presentation pack, you highlight that these are driving ARPU increases of up to 20% relative to other smartphones. If you could provide a little bit more color around this and specifically whether this is really to do with selling bundles, integrated bundles, at the same time as selling that phone, if that's what's driving that.

Vasyl I. Latsanych

This is Vasyl Latsanych, I will answer the questions. The first one was on the content. At the moment, we are focusing on increasing the network and technical possibility, as well as adoption of the data-as-service and penetration into our base. We do believe that there is a long-term perspective of focusing on the content of this data stream to increase the usage, which is the second -- the next, say, step for -- in our strategy, though we are getting prepared for it already now. For example, we are participating in a joint venture of stream creating the video content. We are working on several music delivery services, which all will be using the data services of ours, and also we are selling their -- already the hard bundled tariff plans with the content including in it. For example, there is a tablet tariff plan, which includes the mobile TV and video-on-demand options in it already. We may say that these are the first steps for content revenue inclusion and development in our data revenue stream, but we do believe that there will be more to come. The second question regarding the smartphone, the tremendous success of MTS 970 smartphone in Russian market, which was #1 seller out of the old smartphones in this market, is for sure due to several factors. One of them is very aggressive pricing of that smartphone because we have achieved very, very low cost base and we were able to afford selling it to the customers at a very competitive rate, actually better than any other smartphone in the market at the moment. But at the same time, we did bundle it with the services, and we were selling it together with certain included data service and included convergent voice and data service for several months. And it is on the tariff plan where you will be getting both minutes and data traffic for the period of time. And also this smartphone is SIM-locked for MTS. So we for sure expect these smartphones to perform very nice in terms of stickiness and customer retention.

Andrei A. Dubovskov

I just want to add some information that is important to say about it, talking about the smartphones. As you know, we are the -- we had the cheapest proposition in the Russian market, and during the last some months, we offered to our subscriber base and new customers the cheapest smartphone, named MTS 970. And as a result, it's a best seller in the Russian market during the last some months.

Operator

And our next question comes from Cesar Tiron of Morgan Stanley.

Cesar Tiron - Morgan Stanley, Research Division

I have 2 questions, please. The first one would be on Russia, and understand if you see any revenue cannibalization from launching this Super Zero MTS tariffs across Russia without any spending obligation? And the second would be on the Ukraine, to understand, besides the macro and the lack of 3G, is there any explanation to the slowdown in the market, and if the revenues are going to reaccelerate in the next quarters. Do you see further pressure on margins in the Ukraine?

Andrei A. Dubovskov

So thank you for the question. No, it's not true. We do not seen the revenue cannibalization from the launch of Super Zero family. As we mentioned earlier, our revenue grows based on high usage, and in compare with the same period in the previous year we increased [indiscernible] usage more than 30 minutes per month. And as a result, we have more situation when we cannibalize our current subscriber base. And talking about second question, Vasyl will help me.

Vasyl I. Latsanych

Thank you for the question. Regarding Ukraine, we do believe that most of this slowdown in Ukrainian market versus the previous year third quarter is due to the fact that third quarter in Ukraine was the year of -- 2012 quarter when there were a month of very high usage, abnormal roaming usage compared to -- which has set a bar very high. And we did have this year no special events in Ukraine. So the business as usual this year compared to last year looks weaker, but in fact, it still is on a relatively healthy track to grow.

Operator

And our next question comes from Haim Israel of Bank of America.

Haim Israel - BofA Merrill Lynch, Research Division

Two questions on my side. First of all, a follow-up question just on Ukraine. As you mentioned and -- you managed to hold the fort quite well when you saw that there -- some of your competitors saw more -- bigger roles in both in top line and EBITDA, and still you managed to come out with above 50% margin. So question from my side, again, follow-up from here, is that do you guys think that this environment is stable so you can still manage to perform quite well especially when the name of the game still in other markets is data, and you've quite captive that aspect and just one of your competitors is pushing more and more into bundled products? Second question is about Russia. And the key discussion these days right now is future competition coming from your 2 other competitors, one formation or another. Just want to really pick your brain and see how you think -- see things developing in the Russian market over the next year or so.

Vasyl I. Latsanych

Thank you, Haim, for the question. I will continue. This is Vasyl on Ukraine question. We do manage to sustain the margin performance, and we do believe that this is very sustainable as our business is very well prepared for markets in whatever shape, for market growth or even for market stability where we -- our cost base is very nicely managed and we can see that this margin is a long-term margin that we have achieved in Ukraine. And we do believe that this will be relatively stable for the future periods, though for sure it is subject to macroeconomy and we cannot now judge on the macroeconomy of Ukraine for the next couple of quarters. So let's say we are well positioned for most of the scenarios that we have on our table for Ukraine. And we do believe that the performance on the bottom line will be very strong.

Andrei A. Dubovskov

Talking about the second question. We are not waiting for some changes in the Russian market in the near future or unpredictable issues or problems. We are looking for 1 digit growth in revenue. We think that according to our guidance, our profitability will be more or less flat. And of course we are going to radically increase our market chain data for revenue. And I just want to announce that third quarter DCA [ph], it's a first period when the MTS reached the top position in the Russian market, speaking about the volume of data revenue. We reached the RUB 12.4 billion which we have in this area.

Vasyl I. Latsanych

Let me add to my answer regarding Ukraine. I just noticed that there was a second part of the question, would there be a push for the bundles. We believe that the Ukrainian market is pretty much premature for the bundles yet, so we exercise a lot of pay per use and pay-as-you-go options for the tariff plans with the data included. The point is that data, there is -- though there is no 3G and CDMA is relatively small as a business there, we do believe that if there is no other options, we have to develop the usage on EDGE. And yes, it is not as brilliant as our 3G network usage experience, but we still believe that we have to develop it. The way to develop it with the bundles would be quite a difficult one just because the bundles would include very limited traffic due to the slow network as such -- EDGE network as such. So we will be pushing into the pay-per-use, pay-per-day types of usage rather than monthly bundles of voice and data. This is this sort of short mid-term strategy for Ukraine, but in a long-term strategy, specifically if the 3G network finally comes in place, there is a good potential for the bundles, as there is one for Russia already being exploited.

Operator

And our next question comes from Ivan Kim of VTB.

Ivan Kim - VTB Capital, Research Division

I have both questions on Russia, please, one on data revenue growth which accelerated quite nicely to 45% this quarter. Can you please elaborate on what is the driver behind that, especially as you kind of refer to slowing consumer demand? And then second on data content, I mean, you reiterated several times that you fight with fraud on that level. I just wanted to understand when these content revenues should stabilize because they are now falling for quite a while.

Vasyl I. Latsanych

This is Vasyl, and I will answer the first question. First, it is about the data growth. Yes, we are over 40% of data growth in Russia, and this is mostly due to several factors. One of them is for sure the big driver of smartphone penetration in our base. We are reaching 30% of smartphone penetration into our base, which was a long-term target for us till the end of this year. We do see that we will be even outperforming this targets as the performance of MTS 970 phone was beyond our expectation. So this is the driver #1 and very clear, strong driver for data penetration. The other one is the usage increase. It is because the content gets heavier, we do see good opportunity which we do exploit to upsell the bundles and upsell the usage limits we give to our customer. So we do start with some early adopter -- sorry, some entry-level options like mini bid but then we upsell customers to bids small and super bids which are the bigger options and they for sure cost more. So our data ARPU is increasing as a factor of this. The other very important factor is that we have doubled the share of sale of convergent voice and data VND tariffs within the total portfolio of our sales. It is now in high teens, and we do believe that this number will be driving more and more of penetration with the relatively high ARPU levels because these tariff plans are on a rather mid- to top-end tariff plan scale in our proposal. So these are the factors of data growth. We believe that most of them have a long-term effect and the growth will be continuing for the next quarters or maybe even years. And also as the new factors coming in, we see the LTE usage picking up and with the devices' penetration into the base, we hope to have even more increase to the sales of the data packages and data tariff -- data-included tariff plans to our customers. The second question was on the data. Let me also try to answer that one. The data, it was not really the data content that we were fighting with the fraud on. It was rather an SMS-based content, which we do see as an obsolete type of content where there were seen some fraudulent activities. We believe that this will be -- this era will be soon over with the introduction of mobile commerce and with the increase of usage of the database content. With the database content, we do not see any significant threats at this time, which we would identify as a potential fight against fraud or mitigation fraud necessarily.

Ivan Kim - VTB Capital, Research Division

I just want to follow up on that data content part. I understand that it's about the messaging-based fraud. You said that your data content frame [ph], which includes a lot of things and you, of course, do not break that down. It's falling. I'm just wondering when it's going to stabilize fully. I mean, I understand that you cannot say the exact numbers, but these revenues are kind of falling for quite a bit.

Vasyl I. Latsanych

Thank you, Ivan, for clarification. We do not expect that to fall significantly anymore as we have implemented all the necessary rules to this market already and what we see now is the effect of those rules implementation. We believe that this will be relatively stable number for the future couple of quarters -- periods and no further turmoil is expected.

Operator

And our next question comes from Herve Drouet of HSBC.

Herve Drouet - HSBC, Research Division

2 question as well on my side. The first one is, can you just remind us when you started to clean up these SMS-based services, just roughly in terms of how many months you have done that exercise? And also, I was interested in having maybe your thoughts on where do you see on the voice side in Russia, MOU going up versus basically the new tariff and promotions you have put. So we've seen a bit of average price per minute going down on the voice side but MOU going up. I'm just trying to see from your own understanding of the Russian markets, where do you see MOU still growing? And do you think elasticity is relatively close to one [ph] in your perspective?

Vasyl I. Latsanych

The first one is about the cleaning of the SMS fraud. Actually, we have spotted the issue quite a while ago, about a year ago. We didn't have to prepare ourselves for certain actions -- activities, bearing in mind the procedures and the technical capabilities. That was done about a year ago. And we can see the effect for the last 2 quarters. So the last 2 quarters were when we did see most of questionable things going away from our network, and we did see less and less customer complaints coming to our network about such services. In fact, they fell more than 10x, very, very dramatically. In terms of the MOU in Russia, this is a very, very good question because we do see ourselves at the top of the MOU scale in Russia, but we do not think that this top is where we stop. We do believe that MOU can grow up to even 400 minutes, and that will be a factor of the usage increase including the usage on that tariff plan that we have introduced in Russia and we have reinforced recently as you know. In fact, the elasticity there for sure, it is around 0. We can never judge whether it will be slightly over 1 or under 1, but the catch is that we are upselling the other products, namely, the data product, into that ARPU. So we do manage to sustain the ARPU with the increase of MOU, not necessarily by direct elasticity of APPM. It is possible also by introduction of additional services including and first of all data and also messaging service bundles and other bundled services to sustain the ARPU with the MOU increase, not increasing the APPM.

Herve Drouet - HSBC, Research Division

Just maybe a follow-up question on the data package you are selling with the MTS 970 smartphones. How long usually is the package you sell -- for how long is the period you are selling the data package to the user taking the MTS 970?

Vasyl I. Latsanych

Well, it is depending on the conditions. The normal packages are 3, 6 and 12 months, and this is not with 970 only. You have to understand that at this moment, virtually every phone, every smartphone sold in our network, is being sold with a data package included for a certain period of time, starting from 2 or 3 months and ending up with 12 months. So this is quite a common practice at MTS unlike with the other carriers in Russia where we do sell certain packages of the traffic, prepaid traffic along with the smartphones in the sale.

Herve Drouet - HSBC, Research Division

All right. Okay. On an average, do you have any figures on average, if you are taking the take-up, usually people go more for the 6 months or the 3 or the 12?

Vasyl I. Latsanych

At this moment, the 6 to 12 months comes with the top-end smartphones, but because those are smaller in share of sales, we would see more people buying within 3- to 6-months packages.

Operator

And our next question comes from Alex Kazbegi of Renaissance Capital.

Alexander Kazbegi - Renaissance Capital, Research Division

Just maybe 2 questions. One is on the Ukraine again, going back to you're saying that you need to revert of course to usage of the edge network, and again that's the reality of Ukraine. But given again that there is growth clearly on the data traffic and the data demand, what is the possibility to see quite a big hike on the CapEx? Because you'll probably run out of the capacity. So maybe you can tell us what's the capacity situation in Ukraine vis-à-vis the type of the growth you're seeing there and whether that does put actually pressure on the CapEx expectations for Ukraine. And last one maybe I think just on mobile money. You did say what you do expect in terms of net income contribution in 2017, but just to look maybe somewhere not that far away, 2014, you do have quite a good growth of the users there. But do you expect that to accelerate actually? And what would drive that? And why don't you see, so to say, stronger growth at the moment?

Alexey Valerievich Kornya

It's Alexey Kornya here. On CapEx, in Ukraine, we don't think that -- we are running big projects in Ukraine, on swapping Ukraine network. However, we do not think that this will have a sizable impact on our CapEx guidance and CapEx visibility. Right now, it is just slightly high in terms of CapEx to sales ratio than average on the group. And as for the mobile money in our guidance of net income contribution, we can say that our current net income contribution from this project or from MTS Bank into our financials for this quarter is almost of the same size as from the Russian activities. So it is already showing sort of signs of positive contribution to our net income. However, we are not in position right now to elaborate in more details over the potential impact of this project on our financial. We'll be ready to do that later in the periods.

Andrei A. Dubovskov

This is Andrei Dubovskov. I just want to remind you that we are going to have approximately 5% of net income [indiscernible] till the 2017 from our financial operations.

Alexander Kazbegi - Renaissance Capital, Research Division

Yes, I remember that number. I'm just wondering whether your current, so to say, take-up rate would not change, so to say, this estimate towards a higher number, if you wish.

Alexey Valerievich Kornya

As we said at this point of time, we are doing quite okay. So no reasons for us to change our outlook.

Operator

And the next question comes from Alex Balakhnin of Goldman Sachs.

Alexander Balakhnin - Goldman Sachs Group Inc., Research Division

I have 2 questions. First is on the fixed-line subscribers number, which is declining for a fourth consecutive quarter. And I was just wondering what is behind this trend and are you worried about this trend. And probably just wanted to hear some details of where this decline is coming from, whether it's Moscow or outside of Moscow subscribers. So probably some granularity here would be helpful. And my second question is actually also on the fixed line, in particular, on your MGTS network upgrade, where you are percentage-wise in terms of the completion of your network upgrade? What percentage of the customers are tuned for GPON technology or are GPON-ready at least? What is the uptake for the technology? And are you close to where you think you should be in terms of the capacity and the tech upgrade or you still need to make some investments? And if you still have to, can you please provide us with the details on how much needs to be spent?

Vasyl I. Latsanych

I understand that's deep down into the fixed line business. All right. Our existing fixed line business shows a healthy growth of 2% year-on-year, and we believe that this is a good factor of ourselves actually increasing the quality of our subscriber base on our existing network. As we are not increasing the network size dramatically during these periods, we are increasing the revenue just because we are migrating the customers from old technology to the new technology like in Moscow from ADSL to GPON and Russia-wide from analog to digital TV. Well, this is something that at the same time comes at cost of some of the very low-quality so-called social subscribers not migrating and thus might be turning this service off and going into the regular aerial antenna. We do see such things happening somewhere across the Russia, but we see that those customers represent much less value to us than those customers that do migrate on the new technology and we finally have a better ARPU and a better upsell possibility on a digital network. Regarding the Moscow and GPON story, at the moment, we are in about 1.6 million households, passed, with our GPON technology. Out of those, 650,000 are using GPON for telephony and 220,000 are using GPON for double services, meaning at least the broadband with the telephony. We think that this is -- we are still in a good shape to continue growing because the -- all 3 numbers can grow. We are still in a technology phase of unfolding the network, and at the same time the penetration as you can see still has a way to go on both voice telephony and specifically Internet. As we are selling Internet at the speeds much faster, at very competitive rates in Moscow right now, we believe that our proposal to Moscow market is extremely competitive and very well positioned to grow. So the share is at the moment 35%, and that's the factor of 220,000 customers using the broadband and 650,000 using the voice telephony out of 1.6 million.

Alexander Balakhnin - Goldman Sachs Group Inc., Research Division

May I just ask a quick follow-up here? So the number of households passed, at 30% of your total number of households, is it too simplistic to approach the needed CapEx by just multiplying the cumulative expense you made for the upgrade by a factor of 3, or it's not that linear?

Alexey Valerievich Kornya

No, Alexander. It's not that straightforward because technically, the readiness goes especially on the switch side, which shows them then there is an investment in the last mile. So one shouldn't just multiply the number of subscribers to be acquired and households to be passed by the CapEx already spent. Thus we say that we have yet a couple years to go on the intensive CapEx program. However, we had relatively higher CapEx per household spent rather than what we'll see in continued years.

Alexander Balakhnin - Goldman Sachs Group Inc., Research Division

May I just ask a second follow-up question to that? And is it fair to assume that at capacity the backbone, backhaul over the network is probably half of the CapEx needed and then the coverage of household passed is probably another half? Is it like a fair assumption? Or would you see it in different way?

Alexey Valerievich Kornya

Well, it is a bit too simplistic. The last mile will constitute higher than the commutation part-- the switch part.

Operator

And our next questions come from Anna Lepetukhina of Sberbank.

Anna Lepetukhina - Sberbank Investment Research

I have a follow-up question on data center prices. You mentioned that you don't see voice cannibalization, but I just want to understand while we see data traffic revenues growth accelerating and growing impressive 47%, ARPU growth is deteriorating, and in third quarter, ARPU was up only 1.8%. Therefore, I just want to understand whether you're satisfied with your pricing strategy and this is the result that you expected to achieve? And should we expect ARPU growth to accelerate going forward as you start upselling subscribers that switch to bundled tariff plans? So can you probably provide more color? And my second question is on the fixed line as well. Can you please comment in terms of what you see in competition in regions, whether do you see any changes or it's all as it was before?

Vasyl I. Latsanych

Anna, I will answer first the ARPU question and the revenue potential question. The point is that at the moment, our ARPU is growing at about 2% and quarter-over-quarter about 4%, which is we believe a healthy growth added to our growth of the base and forming out 4% to 5% overall growth year-over-year. This is for sure the factor of both data traffic and data revenue growth of the existing base and migration of the base from cheaper tariffs to more expensive VND tariffs such as Smart Plus and Smart Mini. We do not consider this as the cannibalization. We do consider this as an upsell that we do to our customers, because it mostly comes as the increase of the usage with the increase of the ARPU and the payments as well. In terms of MOU, the growth of MOU is a reflection of our relatively aggressive tariff strategy in voice business where we were able to capture the people within our network calling on that and thus having much higher loyalty than our competitors. Which is significantly more important for the upcoming periods of mobile number portability introduction in Russia to have much more loyal base, which is much more introverted than the base with a high level of churn calling outside. So we believe that this was a strategic step for us, which did decrease the APPM and increased the MOU, but we were able and successful compensating it with the data increase and with the upsell of current tariff plans into a higher-end tariff plan such as Smart. On the fixed question, I think the answer is quite simple. At the moment, we do not see an increase, rather a decrease of investments into the regional networks of our competition. So we do not think that there is an increase of competitive pressure coming from outside of Moscow or generally from Russia.

Andrei A. Dubovskov

Andrei Dubovskov, and I just want to add some information to your -- shortly, yes. We are fully satisfied our pricing strategy because we are looking for the best balance in the market between the APPM and usage. And as a result, we have the -- as Vasyl said earlier, the real healthy growth in our revenue despite of some economical problems and despite of competitive pressure, et cetera.

Operator

And our next question comes from Igor Semenov of Deutsche Bank.

Igor Semenov - Deutsche Bank AG, Research Division

I actually wanted to follow-up on ARPU dynamics. And also I think if you could help me understand if this is also a function of the subscriber growth. I mean, clearly from the 3 sets of results that we have available, it's clear that the revenues increasingly are driven by the growth in the subscriber base rather than ARPU expansion. So can you maybe comment on what do you expect in the next 2 to 4 quarters in terms of the subscriber additions and whether this is going to be putting increasing pressure on the EBITDA margin. I mean, so far, it's been good and your sales and marketing expenses have not been very high. But do you think this is going to be potentially a problem, I mean, the subscriber growth? And also again it's just -- with the level of penetration that we have, it's just difficult to understand where these additions are coming from. So maybe you could comment on the breakdown of your own gross additions, where these SIM cards are coming from in terms of the -- is it tablets, is it second, or third phones, is it something else?

Vasyl I. Latsanych

Let me answer the question starting from the second one. In the gross additions, we do see a healthy addition of the outsiders to our base, which means that we churn less customers than we add customers in terms of in between the carriers' exchange of the customers. For sure, with the high penetration we have in Russia, the customers are coming to our network, predominantly used to be the customers of other carriers or ourselves. In fact, the balance where we do catch more customers coming from other carriers than of our own customers reconnecting is very healthy balance, which allows us to grow and to create incremental revenues in the sales without actually cannibalizing ourselves or cannibalizing ourselves to a lesser extent than what we believe is the case with our competitors. In terms of the types of the connection, yes, the tablets are a driver, but it is still a single-digit percentage driver in terms of overall sales. So we cannot say that this is such an important factor that would affect the base composition at the moment. It is definitely mostly people switching from feature phones to smartphones and immediately increasing the packages that they are using, both of voice and data. And that's where the drive is coming from, including the sale and the existing base upgrades, which we also manage. So I would say that at the moment, we do see a certain potential of sale -- of profitable sale to the new customers which are effectively the customers of our competitors. And we do believe that this will create certain revenue stream, which is approximately balanced out with the same amount of growth coming from the internal transactions of upgrading of current accounts into the new tariff plans with the higher ARPUs. Regarding the first question -- well, basically, I was answering also the first question saying that this subscriber base growth is coming from the market and it is coming from other carriers as well. And this still is quite a healthy competition -- composition of both internal growth and fresh user growth in our network. We do believe that this will be the balance for the future periods as well.

Operator

[Operator Instructions] And our next question comes from Evgeny Golosnoy of Metropol.

Evgeny Golosnoy

Yes. I have got a couple of questions. The first one is the one that I ask all carriers in this market, and it's related to the forthcoming introduction of MNP in Russia. When do you think it's going to happen? What's the expected increase in the subscriber numbers you can see? Did you try to estimate that? And what's the potential, I mean, do you see any problems technically for accommodating new customers coming to your network? That's the first set of questions. And then the second one, is there any progress with getting 3G licenses in Ukraine on the regulatory side? I mean, I assume that not -- some things are beyond your control. But what's the regulator's approach -- regulator's view on 3G in Ukraine? Are other companies are possible to -- would other companies will get 3G license as well?

Vasyl I. Latsanych

The first one was on MNP. This is Vasyl answering. The technical readiness was one of the questions. We are preparing ourselves, though we may say that it is not us, but the whole market is relatively unprepared for MNP launch in the first of December. We believe that there is definitely not enough of testing and tuning was made in this market, and MNP force introduction in the first of December poses certain technical threats to the whole market with no specific situation for any of the carriers, including ourselves. In terms of the customer base migration within the MNP launch, yes, we did certain researches which showed us that the migration probability for the first year of the -- after the introduction is very low. So we would consider the possibility of the net balance of our base to change as a very, very low. And for sure we have in place the whole plan to mitigate any kind of risks of attacks of our competitors and also retain our customers. And we believe that the things that we have done in the past by introduction of our free on-net calling tariff plans, they're very appealing data tariff plans. And VND tariff plans are very good retention tools to keep our base happy and not migrating -- not pulling out of MTS. Regarding the second question with the Ukraine, this is a really, really long story that we have been commenting many, many times. And unfortunately, it did not change since our comment 1 year ago or 2 years ago. There might be some speculations, but there was no effective movement towards issuing a 3G license in Ukraine to us or to any other carriers. We also expect Ukrainian government to act very rationally and very transparently. And if there is a time when the license would be granted, it will be granted according to the law in a transparent manner where there will be no deals that would not be accessible or available to MTS in Ukraine.

Operator

[Operator Instructions] As we have no further questions at this time, I would now like to hand back to our speakers for any additional or closing remarks.

Joshua B. Tulgan

Thank you very much. Ladies and gentlemen, thank you for tuning in. We welcome at any time -- you're welcome at any time to contact our Investor Relations department for any 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 evening. Thank you.

Operator

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

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