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Mobile TeleSystems (MBT)

Q4 2006 Earnings Call

March 21, 2007 11:00 pm ET

Executives:

Andrei Terebenin - IR

Leonid Melamed - President and Chief Executive Officer

Vsevolod Rozanov - Chief Financial Officer

Mikhail Shamolin - Vice President, Head of MTS Russia

Mark Burdn – Finance Director, Ukraine

Analysts:

Anna Kupriyanova – Renaissance Capital

Sean Gardiner – Morgan Stanley

Rizwan Ali – Bear Stearns

Alexei Yakovitski – Deutsche Bank

Sergei Arsenyev – Goldman Sachs

Herve Drouet – HSBC

Vladimir Postolovsky - Brunswick UBS

Ben Joseph – Thames River Capital

Alex Kuznetsov – Bear Stearns

Unidentified Analyst

Olga Bystrova - Credit Suisse

Dalibor Vavruska – ING

Anna Kurbatova - Aton Capital

Presentation:

Operator

Welcome to Mobile TeleSystems fourth quarter and full year 2006 financial and operating results call. Throughout today’s presentation, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. If anyone has difficulty hearing the presentation, please press the star followed by the zero on your telephone. I will now hand the conference over to Mr. Andrei Terebenin. Thank you sir, please go ahead.

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Andrei Terebenin

Good day ladies and gentlemen and welcome to MTS conference call to discuss the company’s fourth quarter and full year of 2006 financial operating results. Before beginning our discussion, I would like to remind everyone that except for historical information, comments made during this call may consist of 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 syndicated long facilities and their usage, legal actions to proceeding directed to the company or its representatives, regulatory changes and the impact in companies operations in which they operate, financial indicators such as operating income before depreciation opportunization, average revenue per user, cash flow projections, and/or return on invest capital and capital expenses and operating expenses.

Important factors could cause actual results to differ materially from those containing our projections or forward looking statements. These statements may include company press releases, earning presentation and MTS report, and form 20F as well as other public filings made by the company with the United States security and exchange commission, all of which is available on the company’s website. Our website www1.mbts.com or that of the United States security and exchange commission at www.sec.gov.

That dissolves any obligations to update any previously forward looking statements or articles in this conference call to previously made statements to reflect changes in risks. Portions of this presentation and materials used in preference to this conference call are available on our company’s website.

Participating in this call are Leonid Melamed, CEO and President, Vsevolod Rozanov, Chief Financial Officer, Mikhail Shamolin, head of the business unit in Russia, and Mark Burdn, Finance Director in Ukraine.

Now I will pass the call to Leonid Melamed, President and Chief Executive Officer of MTS.

Leonid Melamed

Ladies and gentlemen, thank you for joining us. 2006 began with a great deal of uncertainty but turned out to be one of the best years in MTS history. Revenue rose to nearly $6.4 billion and year to year gain of 27%. We reached our GTA target with 50.6% margin and we finished the year free cash flow positive at $646 million, our first year of frequent cash flow positive for MTS.

Critical to our success was our ability to better understand and adapt to our changing markets. As early as last year, our colleagues and shareholders turned to market and transition and wanted things to change beginning both on valuation of our company internally and externally.

By the beginning of 2006, we were fast at work devising our new brand and marketing policies while at the same time, we began looking at our self in comparison to other operators throughout the world throughout our benchmarking program.

The outcome was organizational transformation. We implemented a new brand to bring great value to our customers, a new three plus one strategy to guide our organization, and new management structure to deliver on our golden objective.

Throughout the group, we see evidence of the successful execution of our three plus one strategy. In Russia we saw revenues increase 26% year end year at a time when Russia witnessed the introduction of the calling buddy paid principle.

Based with the loss of incoming call revenue and regulating mandated interconnect regimes, we took the initiative and fundamentally revised our tariff policies to affect the affordable pricing and bring new services and products to market that encourages greater financier and usage.

Likewise with transition to our new organizational structure in Russia with more decision making power in the hand of local managers, increasing the accountability and in studying a greater focus to the customers through the organization, two key elements for the future growth in the maturing markets.

In Ukraine, we not only delivered 25% revenue growth in the year on year end basis but we did some more profitability. For the year, we finished in Ukraine with an (inaudible) margin at 51.3%, a 2.6 advantage point improvement for the year.

While Ukraine is increasingly becoming more competitive, we managed to make significant improvements in our network capacity, as well as distribution channels. Now we can come to the market with even more compelling products and services as we plan the launch of the MTS brand in Q2 of this year.

In addition, we are making the first investments in convergence products. We will begin rolling out our CD mail 450 project and leveraging our fiber optic network, which has already allowed us to reduce our payment for six operators and save on our operating costs, both of the subjects of personal opposition in the market as we expand services to our customers.

Now other markets who continue to roll out our networks as we set the pace of leadership in each market, our market share increased three advantage points to 58% in Uzbekistan, as we continue to lead this market growth that brought us over $130 million in revenue for 2006. Most notably, we introduced our group brand in the second quarter and our subscriber base exceeded one million customers.

In Uzbekistan, we continue to dominate this market as we increased our market share nearly ten advantage points to 83%. Now together, Turkmenistan and Uzbekistan only constitute 4% of our group revenues. We have every reason to believe each market is an important opportunity for us to level our group scales and to take advantage of those synergies of our group structure made present in the coming days.

The right structure is only effective with the right people and in this way, MTS has changed dramatically. Mutually, the entire leadership of MTS has turned over within the past 12-16 months. Our new team brings much needed diversity to our company with their collective experience in telecommunications both in emerging and developed markets. We believe it will be a great advantage to our organization going forward.

Now Vsevolod Rozanov will take you through the numbers.

Vsevolod Rozanov

Thank you Leonid.

The change of the past year was clearly evident in the structure of our cost and expenses. Just as the new environment has delivered very new front termination charges, we see similar interconnection costs. The result was a 5% advantage point loss in the gross margin year on year as our costs of services increased. At the same time however, we are pleased to report a positive interconnect balance of $16 million for the fourth quarter. Something we feel will continue as we have to see a constant contribution of incoming fixed client calls.

Our deliverance of an OBIDA margin of greater than 50% is related to both the improvement of group revenues and our cost optimization initiatives. The initiatives brought significant saving to our sales and marketing and expenses such as our organization of dealer commission programs in the Russian regions.

In spite of quickly rising advertising and the media costs, our marketing expenses remain level while we realize a 2.6 percentage points improvement in relation to revenue. That’s achieving 27% more revenue for roughly the same group marketing expense. Likewise, economizing on administrative services and in related areas, allowed us to lower our G&A expense as a percentage of revenue by nearly half a percentage point, despite the rise in ruble base cost due to the currency appreciation and inflation.

In the future, these types of costs rent, media costs, and interconnect, will continue to pressure our margins, but we intend to maintain this 50% target.

As for the bottom line, net income rose 11% in spite of our recently announced $150 million right of detail. Without detail, we would have seen a rise of nearly 22 advantage points year end year. Without the board of directors who will ultimately make this decision, we see no reason why our performance would in any way limit this year’s shareholders returns.

As announced in August, we have executed on our ADR reparse program. By the end of the year, we purchased over 2.2 million ADRs at a total price of $100 million. As for the future purchases, the program was next set for one year and it will continue to make purchases as our corporate needs dictates. Our budget still remains strong as that remains stable to $14 million.

As Leonid mentioned we were frequently deposited for the amount of $646 million as both our free cash flow increased and CapEx flow decreased for the year. Now I would like to pass the call over to Leonid.

Leonid Melamed

Thank you Vsevolod. With the M&A front we were fairly quiet in 2006, however we are taking reasonable efforts to increase our footprint profitably by gaining entry to developing original markets within or near to our home base in CIS. Likewise we began undertaking a series of initiatives in the second half of last year to examine ways in which we can use our relationship with Sistema Telecom to bring convergence products to market with optimized costs.

Leveraging value from convergent touch points to single number services for corporate clients allows us to explore synergies in areas like customer service. At the same time such co-operation will give us foundations from which we can pursue medium and long term goals of joint infrastructure projects, perhaps introduce bundle products, or even uniting call centers and sales networks.

Looking back, 2006 was a year for building foundations but 2007should offer great opportunities in each of our markets that demonstrate our commitment to further growth. In Russia we aim to stimulate greater usage and elevate customer satisfaction to the forefront of our marketing efforts. With the licenses being awarded in April, we have opportunities to bring even more compelling products and services to market.

In Ukraine, increased capacity and coverage will allow us to target more segments while still guarding our leadership in the (inaudible) segment. Our introduction of MTS branch in the second quarter should provide a catalyst to energize this market. And in other markets we will continue to roll out our network and grow profitably, leveraging our existing leadership position. Now I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions)

The first question comes from Miss Anna Kupriano. Please state your company name followed by your question.

Anna Kupriyanova – Renaissance Capital

Good evening, it’s Anna Kupriyanova from Renaissance Capital. I have two questions. The first one is regarding your share program. Could you please give us an update as to what is the current status of the program, and in particular what percentage of your extension shares has as of today?

And the second question is regarding (inaudible) of your pool. Could you please tell us the composition of the exchange quarter (inaudible) fourth quarter 2006 and including the impact from items received from mobile usages and other sectors?

And in addition could you please comment on the dynamics of your fixed mobile for the fourth quarter 2006 and probably give a breakdown of your traffic 60&6 mobile, mobile 26 and mobile to mobile calls? Thank you.

Leonid Melamed

Let me start with the first question regarding the share buyback and afterwards Mikhail Shamolin. The current status of the program is that it is up and running as it was approved by our board of directors this December.

Let me remind the key effects about that program. The approval was for buying back up to 10% of the issued shares or ADRs within one year. Currently, as we have said, we have purchased approximately 2 million ADRs which constitutes as of December 31, approximately 0.5%. Half a percent of the old shares issued. Now I’ll pass you over to Mikhail.

Mikhail Shamolin

Anna, could you please repeat your question on the ARPU?

Anna Kupriyanova – Renaissance Capital

I just asked if you could comment regarding the change of the Rushmore to quarter, and the different composition of the change. I mean the impact from $0.1 or $0.4 included introductions of connections, changes and growth in mobile usage, and also probably you can comment on fixed mobile trust direction in fourth quarter and give us distribution for the classic between 6th mobile, mobile 26, and mobile to mobile calls.

Mikhail Shamolin

Yeah, OK. Fine. As far as the ARPU dynamic goes, two major factors are driving this. One factor driving the up or down was the decrease in the roaming because as you know this is near to the fact that we have quite a heavy customer base in the summer, who therefore spend less in the fourth quarter, so that was a decreasing factor.

The increase we received from both the increase in usage and the increase in fixed incoming. And the fixed incoming we had nearly doubled as compared to, for instance July and August when fixed mobile was about 6% of overall annual use and it rose to sort of 18% in the other months which was a near 77% increase and we also saw that in the fourth quarter, so that has driven the ARPU up.

So the combination of decrease in roaming and increase in the usage and incoming calls you see the result, moving from 8.6% to 8.5%, which is nearly the same.

Anna Kupriyanova – Renaissance Capital

Could you please comment how much came in ARPU change from fixed to mobile and total mobile usage growth, in percentage points if possible?

Mikhail Shamolin

I can tell you that roughly…yeah I think the seasonality was compensated by 70-75% with the increase in usage and the remaining 20-25% was the result of the other.

Anna Kupriyanova – Renaissance Capital

OK. Thanks. And the fixed mobile and how much came from mobile to fixed calls?

Mikhail Shamolin

I believe that we are not disclosing this type of information. I’m sorry.

Anna Kupriyanova – Renaissance Capital

OK. Thank you very much.

Operator

Thank you. The next question comes from Mr. Sean Gardner. Please state your company name followed by your question.

Sean Gardiner – Morgan Stanley

Yeah. The company name is Morgan Stanley. Maybe just following on from the last question, I suppose the obvious next question is seasonality for first quarter. Have you continued to see better usage going into the first quarter? So should we expect the usual seasonal drop in your first quarter usage?

And then secondly in terms of your subscribers, you give us on slide nine of your presentation a great update for the premium and the red package, could you update us where you are at the end of February or maybe halfway during March on those subscriber packages in terms of numbers?

Mikhail Shamolin

OK. This is Mikhail Shamolin here again. As far as seasonality is concerned, in the first quarter you also see seasonality because of very slow days and also you see February being, just from calendar wise, shorter than the other months so that obviously has an impact.

As far as the second part of the question is concerned and the specific guidance for the first quarter, we are not at this point prepared to give any guidance.

Sean Gardiner – Morgan Stanley

Sorry, on the (inaudible) described as up to February for your Red 12 package and the first package. Do you have an update we could have from that?

Mikhail Shamolin

I can say that the Red 12 is doing quite successfully and we have a new offer on the market now which builds and extends the Red package, it is called Red Text and it promotes cheap SMS for users and so far we are totally satisfied with the results.

Sean Gardiner – Morgan Stanley

Just coming back to the answer of the first question.

Can management just give an update as to where we are in the guidance for $8 RP for 2007? If the first quarter didn’t show much seasonality, are you still comfortable with that guidance for your Russian business?

Mikhail Shamolin

I would like to basically stick to the guidance we gave out during our presentation today and at this stage we are not correcting any numbers or guidance we gave out in late January.

Sean Gardiner – Morgan Stanley

Thank you

Operator

Thank you.

The next question comes from Mr. Rizwan Ali.

Please state your company name followed by your question.

Rizwan Ali - Bear Stearns

My question is regarding Ukraine, my impression is almost as I have in Russia, do you see similar dual usage of SIM cards in Ukraine as in Russia?

My second question is regarding convergence. Are you planning to have convergence projects with NDTS such as a single handset which can by used as a phone in the house and a mobile phone outside?

Leonid Melamed

Thank you for the question.

In Ukraine we understand there is dual SIM card usage over there. We are not prepared now to justify what is the percentage of the users in the Ukraine who have two or more SIM cards, but there is definitely some room for extensive growth in Ukraine as well and this year will still be like Russia. The year will be slow relative to the previous years until there will be some growth in the amount of subscribers.

Of course there will be some reasonable churn in the Ukraine as well, the same as seen in the process going on in Russia once Russia achieves the 100% market penetration level.

To answer about the convergence project, we first of all looked at the opportunities to operate with Comstar mostly in the Moscow region.

We also have opportunities to cooperate with the general massed media and services Russia wide. There are 10 projects going on now. The project of the single handset to be used in the house and outside is not for the time being, one of those projects but maybe at a later stage once we fulfill our first initiatives, we can pass to this project as well.

Now we are concentrating more on the creation of bundle products and on creating the unified customer service facilities to improve the quality of service, increase the amount of subscribers, and reduce costs.

Rizwan Ali - Bear Stearns

Thank you very much.

Operator

Thank you.

The next question comes from Mr Alexei Yakovitski. Please state your company name followed by your question.

Alexei Yakovitski – Deutsche Bank

Alexi Yakovitsky from Deutsche Bank.

I have two questions.

If I may offer congratulations on very strong numbers and delivering on your promises.

The first question is on income tax. It does look high if you look at historical effective tax rates Can you state the reasons or is it just a one off? Is it continual? I hope not.

The second question is on the advertising cost going forward. Do you see scope for reducing the amount of ad inventory minutes of airtime that you consume in 2007?

And maybe in future years will you still be consuming the same inventory adjusted for the regulation changes?

And of course, should we still expect your ad course (inaudible) to continue to grow more or less in line with the ad market or should we see some slow down because the market is more saturated?

Thank you.

Leonid Melamed

Thank you Alexi and thank you for the congratulations.

I will deal with the first question.

There are two major groups of reasons for higher than average income tax and we believe most of the increases are of a one off nature.

First of all for the regular items we saw the strengthening of the ruble, which was left in during Q3.

The second part consisted of two major factors. First of all, the (inaudible) which brings us deductable expenses of exactly $36 million. Secondly we also have some huge losses in Turkmenistan related to the main equipment, the capital expenditures.

Vsevolod Rozanov

Thank you for the congratulations on the good results.

We are getting the expenses for advertising. We witnessed this year 40% growth in the cost for advertisements on the market on average and this creates a strong pressure on our expense side.

From another angle, we don’t anticipate a significant increase of our costs in Russia figures for the advertising compared with the expenses we had in 2006. We have on the one hand an initial desire to reduce the percentage of marketing costs inside our revenues that we have achieved in 2006 compared with 2005.

Our marketing costs reduced by 2.6% compared to 2005.

But in absolute numbers as long as our revenue grows we still generate the next two numbers in the budget in Russia similar to the one we had in the previous year because of two factors.

One factor is we wanted to increase usage. That is why we have to offer more reasons for our existing customers to use our services. From the other hand we have significant pressure from our competitors and we cannot dramatically reduce our share of use of advertising media.

So our desire is to reduce those costs. We will work very hard on looking for the particular reasons for that. There is some pressure now that will prevent us getting a dramatic reduction in those costs in 2007 in Russia.

In the other countries, the growth of our expenses for marketing would be in correlation with the growth of our revenues over there especially in Turkmenistan and Uzbekistan where we still have big opportunities for extensive growth.

Alexei Yakovitski – Deutsche Bank

Thank you

Operator

Thank you.

The next question comes from Mr Sergei Arsenyev. Please state your company name followed by your question.

Sergei Arsenyev – Goldman Sachs

This is Sergey Arsenyev from Goldman Sachs.

Two questions from me as well please.

If I may can I follow on from the previous guidance question.

If you look at your very positive trend in the fourth quarter, you reported 52% EBITDA in the fourth quarter, and then if you compare that with the full year guidance of 50%, I am just wondering what kind of cost expansion, on which particular cost items can result in an overall reduction in EBITDA margin during 2007 especially given some of the comments you just made on advertising costs that you expected to be similar to the last year. So I am wondering if you are still being overly conservative with the guidance that you gave us about a month ago.

My second question is on subscriber development in Russia, especially in the first two months of this year, you know we saw especially in January, we saw a decline in subscriber numbers. I’m just wondering whether this is the overall cleanup in the subscriber base that you’re undertaking that can result in afterwards being on par with the fourth quarter of 2006 and effectively this can be potentially something that compensates for the weak seasonality in the first quarter. Thank you very much.

Vsevolod Rozanov

This is Vsevolod, and I will start with the first question. Speaking about specific cost items which will have pressure on the margin, we believe that there are still the same costs which are somewhat over control for the management. We still believe that there would be significant pressure from the interconnect costs during the first two quarters which we haven’t seen during the previous years first two quarters.

Also the costs related to (inaudible) as we see the general market increase. Also we aim to manage these costs. There are certain costs which we mentioned here during the previous calls which are related to the costs of line rental and other costs of services again which are related to Rubles and have a tendency to increase every year as told by the government for example. So we believe that there would be further pressure in Russia on the margin.

Also one factor I would like to mention is fierce competition in Ukraine which is also likely to pose further pressure on our margins as well as we significantly increase our network and network related OpEx it is very likely that we will see that we will see some pressure on the costs there as well. Thank you and I will pass you now to Mikhail.

Mikhail Shamolin

Yes, on the subscribers, our official churn policy states that we churn our customers up to six months of inactivity if their balance is zero or negative. If the customers are inactive but have a positive balance we churn them after one year, so what you’ve seen in January was the churn of customers that we had acquired at the end of 2005 where we had some massive promotion efforts and therefore the churn in those two months, January and February, was quite high which compensated the gross sales that we had in those two months, and therefore the results from the net additions that you have seen. But I can assure the gross ad figures were good and according to plan so there are no major changes in the subscriber acquisitions as far as we can see.

Sergei Arsenyev – Goldman Sachs

Right, and do you believe that this is something that compensate, given that this, you know the people that you’re churning off, you know were dead subscribers anyway, is it a fair assumption that the seasonality impact in the first quarter could be somewhat massaged by the number of people that you’ve churned off?

Mikhail Shamolin

Again, we are not giving the specific guidance for the first quarter but of course the seasonality has its affect and there are counter measures as well.

Sergei Arsenyev – Goldman Sachs

Thank you very much.

Operator

Thank you. The next question comes from (name audible). Please state your company name followed by your question.

Herve Drouet - HSBC

Yes, good afternoon. It is (inaudible) from HSBC. Two questions as well on my side. The first one on subscriber acquisition cost. Can you share with us a bit more light, why subscriber acquisition cost in Ukraine went down, when usually especially after a relatively good pick up of subscribers…I was quite surprised. I was expecting subscriber acquisition cost to increase like in Russia as well for the first quarter.

And in your break down you…I think in your appendix it looks like not only marketing went down but also the commissions you pay to dealers. So I was wondering if that would change in the percentage of commissions you pay to the dealers that may explain this change in subscriber acquisition cost pattern in Q4 for Ukraine.

And the second question is regarding capital expenditure and I notice for instance in Uzbekistan your CapEx figures looks to be pretty low for Q4. I just wanted to know if there are any particular reasons for that.

Mark Burdn

Basically, there are a number of elements at play in each of the nine items that make up SAC. In terms of dealers commissions we have been working and have a project running whereby we get better efficiency out of our dealer commission system so that is one element.

Overall we should say about SAC in Q4, is that generally it would be a relatively low level because the volume of subscribers taken on…we had a record number of subscribers overall taken on in the fourth quarter so that always overall drives mathematically down the SAC per new subscriber.

In terms of overall then, the comment which still would apply to the advertising and marketing if you look at handset subsidy as we previously disclosed from the first of July last year, we had a new policy in place and that is clearly coming through with regard to handset subsidies. Generally SIM card and voucher costs remains for the year at pretty much a level that we would expect.

Herve Drouet - HSBC

OK. And for the second question on CapEx for Uzbekistan?

Vsevolod Rozanov

This is Vsevolod Rozanov. There are not any…this is not a trend but basically a specific regulations of the currency, which in Uzbekistan, we were not able to convert the necessary amount for payment during that quarter. So basically this is quite a characteristic situation for the specific quarter in Uzbekistan but for the full year results I think this is the number one should be looking for.

Herve Drouet - HSBC

OK. Thank you very much.

Operator

Thank you. The next question comes from Mr. Vladimir Postolovsky. Please state your company name followed by your question.

Vladimir Postolovsky - Brunswick UBS

The company is UBS. Good afternoon. Once again, congratulations on great results.

Three questions from me if I may. The first one is, to go back to your share buyback program. I just want to understand a little bit, how aggressive you’re going to be, because obviously you announced half a year ago and if I’m not mistaken the results showed at the end of September ’07, so halfway through are you going to accelerate the program or not? I mean if we can just understand a bit better, what is your strategy? Are you just using a spare cash flow that are just left after OB Dividends and CapEx, or would you be prepared, for example, to leverage up now that you’ve grown on your business quite considerably this year, and so be more aggressive with the buyback?

And kind of related, I actually wasn’t aware until recently that you have started buying something. When you do you buy those points from (inaudible) ADRs? Was it during Q1 or still in development six? So that’s the first question on buy back.

The second one, you just mentioned that service (inaudible) to the percentage of revenues you would expect them to go up. Could you just expand on that a little bit. I’m not quite sure why that should be the case. I was under the impression that you’re building out your backbone network in Russia. Obviously you have a long distance license so you’re in a position to save quite a bit on the long distance traffic, but in the past you’ve had to through somebody else. Are you not going to be utilizing all this potential cost saving and what are the other pressures. I mean, I saw that the interconnect phase that you mentioned that they’re stable, in Rubles so your costs are also in Rubles so there shouldn’t be pressure on margin because of that, anyway, if you could expand on this, about pressure on margins coming from service costs?

And the final question, it’s kind of a bit generic. I mean I guess the recent history in all of your markets show the key value driver at this point and time is probably pricing. Usage doesn’t seem to be particularly price elastic so what are your pricing policies in your key markets and what are the competitive disciplined outlooks?

Looking at the numbers, Ukraine in particular took many hits making it weak at this quarter in terms of pricing. Do you see some major pressure on those projects or do you think that might change going forward or is it just a massive decline in the level of pricing?

Thank you.

Leonid Melamed

Thank you Vladimir

With my answer for the question about buyback and about the pricing policy, so regarding the buyback, all of the ADR’s were bought through the Q4 and that’s what we report on today. There seems to…probably you recall we received the permission to enter monopoly service of Russian federation only in late September so we were able practically to start the program in Q4 so the numbers you see are the numbers from the Q4 .

We have three main options our board of directors will decide to use on the shares we required so the option is to use them for MRA cases, to use them for the optimization of the option program, for the management, and also to cancel them.

For the time being there is no particular decision made, but cancellation is not something that I believe is of main interest. It’s not something that is being discussed for the time being.

Vladimir Postolovsky - Brunswick UBS

And you agree to come more aggressive going forward buying back shares, to leverage up and buy significantly more?

Leonid Melamed

We simply cannot disclose this policy and we cannot do that legally, about the pricing.

So we are witnessing significant improvement in pricing discipline in the Russian Federation through the year 2006 and that to a good extent allowed us to show the positive trends in growth of our ARPU and we understand that as a company we should try to keep APPM stable or to allow it to decrease a little bit, but only to be compensated with the increase of LOU and an increase of usage of valuated services.

So as long as positivity is the star of our strategy, we will try to balance being on one hand competitive on the market since we cannot allow ourselves special premier pricing positions since it showed to be ineffective in the years 2004 and 2005. But on the other hand we should try by our marketing efforts to stimulate usage and by that to proceed to keeping our ARPU stable or even to stimulate one digit growth in our ARPU in Russia through the year 2007.

In Ukraine the situation looks more aggressive, I would say, and MTS used to keep this kind of a special premier position regarding the prices over there and now we've realized that there are some opportunities for us in a more aggressive competition with new solutions, like we've launched the new special Ecotel brand and special low APTM product over there in Ukraine.

And by that our main target is to give a message to the competition that price wars will be of no success to anyone, and as long as we all realize the gains of the price discipline in Russia, we really believe that our message will be well accepted in Ukraine as well.

Anyway we will keep our eye on that as I already mentioned, and we believe that we have the reasonable marketing efforts to achieve the necessary margins from one hand and to keep our market share regarding the customers and revenues in proper order.

And now I pass the word to Vsevolod regarding the second question of yours.

Vsevolod Rozanov

Thank you.

So speaking about the increase of share of cost of services as a percentage of revenue, I would still insist that with the overall revenues, our interconnect costs will also follow more or less the same trend, thus increasing the share of the interconnect costs in the percentage of revenue.

Also as we said there is a constant increase of cost related to line rentals. Another important factor is the increase of costs related to the frequency locations and other costs we are paying to various specific regions or regulators. These are the three key factors.

Operator

Thank you. The next question comes from Mr. Ben Joseph. Just state your company name followed by your question.

Ben Joseph – Thames River Capital

Hi, it's Thames River Capital. Just going back to the sales and marketing costs. Can I ask for just a little more explanation as to why the year on year growth decline was so substantial in Q4? And looking forward, I think you mentioned that advertising costs within Russia should remain flat. What about the rest of the sales and marketing costs? Perhaps you could even give us a percentage of those costs that relate to Russian advertising.

Then my second question is on the other income and expenses, in other words if I strip out the $150 million Buytel loss and the balance released to Belarus. And if so that would imply loss, is my math right there? What other components are there within that line please?

Leonid Melamed

Yes. If you can just repeat the first question, because I think you said that there was a significant decrease. Am I correct?

Ben Joseph – Thames River Capital

Yeah, in the sales and marketing costs year-over-year in Q4.

Leonid Melamed

In the Q4 we actually had an increase, not a decrease, as compared to Q3.

Ben Joseph – Thames River Capital

Year over year those are decreases, yeah?

Leonid Melamed

Yes.

Ben Joseph – Thames River Capital

Because usually one would expect it to rise in Q4 as a percentage of sales, and that didn't occur.

Leonid Melamed

Yes. The decrease in the marketing costs we have seen because we have optimized our advertising campaign to a large extent in the second half of 2006 and we've used the minutes that we have more wisely and also saved around $80 million on dealer commissions. And as we have been saying in our answers to previous questions, we are committed to also using the marketing and income spent in 2007 effectively.

Ben Joseph – Thames River Capital

So does that imply roughly flat or small increase in sales and marketing costs overall in those streams versus '06?

Leonid Melamed

We don't see an increase in the cost, despite the median inflation we're seeing.

Ben Joseph – Thames River Capital

OK, thank you. So, no increase in sales and marketing for '07? And that's for the group, I assume?

Leonid Melamed

Well, the (inaudible) for the marketing from country to country is different because we operate in different business environments and the market penetration situation, like in Ukraine and Russia is much different from Uzbekistan and Turkmenistan, and so I would just say that in general terms we don't anticipate a significant increase in marketing and sales.

Expense is on the group level. But from country to country it would depend on the concrete situation over there.

Ben Joseph – Thames River Capital

OK, thank you. And my other question was just on the other expenses line. What are the components of that? As far as I see it there's $150 million relating to Buytel, then there's a loss as the balancing item. Is that a loss at Belarus or are there other costs being involved in there? Can you just give a little bit more color there please?

Vsevolod Rozanov

Yes, sure. As I mentioned, except for Buytel, there were also certain (inaudible) the currency in Turkmenistan and for those we had income, of course, still knowing the rest of the developments of the business have been quite worrying. We had basically a regular typical pick up from previous quarters.

Ben Joseph – Thames River Capital

OK, thank you very much.

Operator

The next question comes from Mr Alex Kuznetsov. Please state your company name followed by your question.

Alex Kuznetsov – Bear Stearns

Good afternoon, Alex Kuznetsov from Bear Stearns.

First of all let me congratulate you on very strong fourth quarter results.

I have a couple of questions.

Could you lot us know a little bit about your 3G license allocation. Could you tell us what impact on revenue EBITDA and what CapEx should we expect due to allocation of 3G licenses this year?

Also should we expect increase in the dividend payout ratio given improved cash generation last year?

Leonid Melamed

Thank you Alex

Commenting on 3G, we anticipate the results of the agenda at the end of April and in case we will be granted a license we will try to deploy the network in the next coming three to four years.

We will agree the initial ratio of 2.5 years will be the remaining investment in this area. We release prospectuses in certain territories of the Russian Federation on investments in technology.

We understand that for a lot of technical and legal reasons, we have to clean up the frequency ranges and we have to ask the vendors for the supply of the technology equipment. For other obvious reasons, we will not be able to make the significant investments this year, so we can anticipate the main years of investments in 2008 and 2009.

We really look forward to the opportunity to participate.

We understand that with our 10% of the subscriber base, we will have the main requests for usage of 3G services on the market and we should definitely catch up this opportunity ourselves.

As we have one of the oldest networks in the country we should also use the opportunity of improvement of this network by using 3G technology. This is not only for internet access, but also to improve our capacity in voice services that seems to be cheaper and more reasonable that what it is now with UTS technology rather than with 2G technology.

So we will give much more concrete numbers on our capital expenditures for 2007 for the project in the same way we already inform the analysts and investors of the disclosure of the Q1 results.

The second question is about the dividend payout. It is a question to be decided by the Board of Directors and the shareholder’s meeting. It has not yet been decided and we anticipate the decision to take place in April or May of this year.

It was mentioned several times that we don’t forecast the decrease of part of the dividends in our net income for 2006. The rest should be decided by the shareholders based on the understanding of our prospects in all the areas of our activity that require capital investments.

Alex Kuznetsov – Bear Stearns

Thank you very much.

Based upon your answer I have a follow-up question on 3G.

It might have been that the tender will get almost (inaudible) charge though there will be some expenses associated with the cleaning of the frequencies. Do you have the estimates of how much the costs might be?

Leonid Melamed

Alex, you are absolutely right, there will be such types of expenses and we will comment on them when we disclose the numbers of capital investments for 2007 on 3G projects on the disclosure session of Q1

Alex Kuznetsov – Bear Stearns

Thank you very much.

Operator

Thank you.

The next question comes from (inaudible). Please state your company name followed by your question.

Unidentified Analyst

Hi, this is Leila from (inaudible).

I just got a couple of questions.

The first one is really for Mark on Ukraine.

Mark, if you could just say a few more words on what are some of the trends are in the Ukraine. If you could talk for example on cannibalization from this new youth brand, the Equitel brand that you are launching, and a little bit about the outlook. We have seen a very volatile performance of margins in that market so I am wondering what you’re hoping for during 2007? So that is the first question.

The second question is on Q1 if you guys could say a little bit on the Q1 trend. Are you seeing the same kind of pricing discipline going into the start of this year given that it is near the end of March? Just some general comments you could say on the trends that would be helpful.

The third question is the step up in fixed to mobiles incoming calls that you talked about which I think the increase was 70% in Q4. Has the step up continued into the start of this year?

The last question is on Russia and margins. Basically Q4 is typically the worst margin quarter of any quarter in the year. We saw 52% margin in Russia and I am wondering why for 2007 it would be below that. It may not be, but I am wondering why?

You did talk a lot about some cost pressures that would dilute margins but at the same time at the overall group guidance level, you talked about cost savings that would largely offset those.

Thank you.

Mark Burdn

I will answer the first two questions on Ukraine.

So getting Equitel and the risk of cannibalization of existing base, the special mechanism introduced for the Equitel brand to prevent this kind of cannibalization.

This is a typical (inaudible) product, so there are little free services, and with the necessity if you want to switch from the existing third plan to Equitel, you have to change your number. This really limits the amount of people who move from one third plan to Equitel but it doesn’t prevent high churn on (inaudible) products for the sake of the competitor’s proposal.

So we believe the protection instruments are in order with Equitel third plan.

To the operations of the Ukraine market for this year, we still see in Q1 the continuation of the aggressive price plans offered by the competition, and Equitel as already mentioned, was our first find that we prepared with the high quality of the network to compete on the marketing stage even to compete on the situation where lower PPM charges to customers and simulates their usage.

But we really believe that at some great stage in 2007 the price will come back to the Ukrainian market and there would be reasonable pricing policies offered by the competition.

The example of Russia and of 2005 and of Q1 of 2006 must be meaningful and we really would like to stimulate this reasonable approach on the market for pricing, but Q1 is definitely the quarter of the fight. But we are quite optimistic both on the ability to keep our bottom line in Ukraine in order and to protect the major level of market share over there.

Are the margins we saw more in the second half, well, are the Q4 margins a good run rate going forward, I mean we saw a ten point sling in margins during 2006, so it’s hard to get a sense of what type of profitability should be in this market still with this pricing aggression.

Vsevolod Rozanov

Year on year there’s been significant increase of the margin. You will see it like 31% of the growth and on the percent of margins, 2.6% grows in year on year.

Yes, in Q4 there’s been some decrease on the margin in Ukraine. That was the result of both of the competition and the seasonal effect as well. We are pretty sure we’ll be able to protect the high level of margins over there but our internal policy is not to disclose the country to country, not to give the country to country forecasts so we give them on the group level.

Unidentified Analyst

OK.

Mark Burdn

Yes, now as far as fixed or mobile is concerned we have seen this increase, as I was saying on a previous conference call in September. Of 60% that accrues to about 70% and remains stable for the fourth quarter, we are seeing it continue in the first quarter and don’t expect any further significant increases. We believe that market sort of reached its natural situation with that respect.

Unidentified Analyst

And then just regarding the Russia margin, the run rate I was talking about from Q4 which is usually the lowest margin quarter, why would it be less than that next year or this year, 2007?

Vsevolod Rozanov

This is Vsevolod again. We believe that the overall trend in terms of seasonalities is likely to continue into the year 2007. In Q4 we had higher margin due to the less fierce competition during the last Q4 comparing to Q4 ’05. We believe that the same seasonality which has happened this year is likely to appear next year and I would like on that to mention that all the key cost pressure items were discussed during the call such as increase on cost of services mostly and certain eye items in the general administrative costs which are of limited control to the management.

Unidentified Analyst

OK and the last question I had, well it was in my second question was just about Q1 trends. In Russia have you seen the pricing discipline into the start of this year? Is there any general comment you can make about the first quarter?

Vsevolod Rozanov

Yes, we have seen the pricing discipline continue, but Russia is not a homogeneous market at this point. You have regions and you have different levels of competition in different regions like you have (inaudible) for instance which is still a regional player but is pressing aggressively on the low cost operator strategy and in these regions we see quite a strong competition on the price, but overall on the market I’d say there are no structural shifts in the pricing discipline.

Unidentified Analyst

Thank you very much.

Operator

Thank you. The next question comes from Miss Olga Bystrova. Please state your company name followed by your question.

Olga Bystrova - Credit Suisse

Good evening. This is Olga Bystrova from Credit Suisse. A few questions from me as well. First one, when you were talking in the beginning about potential acquisitions, could you maybe talk about what you see the most likely ones I guess this year – what countries, is that fixed or mobile primarily, are you looking abroad or you still using it as a less priority strategy currently?

The second question is on 3G again. You must have an idea sort of what kind of, at least this year for example and 2008, in how many cities you’re planning to roll out a network for example. And which cities, etc. to give us maybe some color on absolute 3G CapEx or maybe incremental 3G CapEx.

And finally a clarification question. When you were talking in the beginning about usage, increased usage, I mean it might be my misunderstanding something but I see that for example, MOU in Russia has declined, so maybe could you talk about what kind, I guess maybe certain segments that have seen increased usage in addition to fixed mobile increase for example in the fourth quarter. Thank you very much.

Leonid Melamed

Olga, thank you very much for your questions. So potential acquisitions, we’re very much concentrated on CIS market. We are looking for targets for our external growth almost in all countries in CIS where we’re not present yet and to some extent the countries where we are present. Yes, we are interested both in mobile assets and fixed assets and we would still prefer to be conservative and very disciplined regarding the prices we can pay for those efforts as long as we still keep an eye on the profitability of our operations.

Now our achievements, I would say and our marketing policy and our cost management policies and our new structure, give us the reasons to believe that we can use much more synergies than maybe a year ago in any asset that we can acquire on the territory of CIS, and this optimism probably makes us a little bit more positive regarding the potential prices we can have for those efforts with still would keep on very conservative and disciplined view on the volition of the potential efforts.

But we still understand that our footprints should increase and as long as we believe in the scale of size effect in our business, we need to grow not only organically but also back to know (inaudible) mechanisms.

And our efforts in convergence areas, they give us the understanding that we can also do some positive achievements, both in cost cutting and attracting more customers by proper management of the convergence project including the fixed line operations. So they’re both, mobile and fixed on our research and investigation.

Regarding 3G, I would try to be very general here because there is of course the competition that presses us over the year and we should keep our commercial information protected and our costs, we’re talking this year about limited amount of areas where we can switch on the network, if any, and the year 2008 will in the end of the year will be able to give significant proposal almost to all of the customers in Russia the areas where there would be let’s say the projected high level of requests for those services.

So speaking about the Russian operations now whether we can prove that we’re stimulating the usage, I would address you to slide 18 of our presentation where we demonstrate the increased minutes of use...123 minutes in Q4 2005, going up to 153 minutes in Q4 to 2006, and this is quite a significant growth. But if we say that on an annual basis, a year-to-year basis, the growth was not as significant, we should address ourselves to the situation, to the newly acquired subscribers.

In 2006, they had very low usage and low output, so they dilute the growth of the output that we have with the existing customers, the customer base that we have from the previous years, and that have joined us at the beginning of the year 2006.

So we see the trend of the increase in usage, and we have even more detailed data that we usually don't normally disclose that will be on the way.

Olga Bystrova - Credit Suisse

OK, well thank you very much. I just thought you were talking about a quarter over quarter basis and thought I may have missed something.

Just one clarification question, do you see any further consolidation opportunities, let's say imminent opportunities, in Russia, maybe that you can share with us? And also, is there any significant discussion of pressure for you to look for bigger assets outside of the CIS currently?

Leonid Melamed

Well, in the Russian territory, we don't see big opportunities for further consolidation. Of course, we would be very interested in what will go on with Система [Sistema] to mobile assets, once our controlling shareholder, would participate in the privatization of Sistema. For the time being, as you know, they have the blocking stake in Sistema, and by public announcement they've already shown their interest in going more aggressively once the privatization will take place.

So there's about 10 million subscribers united by the mobile daughter company Sistema, and of course once we will try to increase that stake in Sistema, we'll be much more interested in much closer cooperation and consolidation with all of our mobile efforts of Sistema.

But from the other hand, if I understood your question correctly, we don't have any special pressure on ourselves to go for main acquisitions abroad of CIS, and actually it's not right now a topic of discussion among the board of directors of the company.

Olga Bystrova - Credit Suisse

OK, that's great. Thank you so much indeed.

Leonid Melamed

Thank you.

Operator

Thank you. The next question comes from Mr. Dalibor Vavruska. Please state your company name followed by your full name.

Dalibor Vavruska – ING

Oh, hello, good evening, this is Dalibor Vavruska from ING speaking. I have actually just one question regarding interconnect. I appreciate your showing in the presentation the developments of the share of interconnect on the share of revenue in Russia. And I'm just wondering whether you can give us any hint how much this can continue growing next year. It seems there was increase from 9.3% to 11.3% from the third quarter to the fourth quarter.

Also, maybe missed that earlier, but I'm interested also in terms of the minute breakdown, how did it change in the last quarter in terms of fixed-to-mobile, and mobile-to-mobile? That's basically the main question I have.

Actually, one more, if I can. You mentioned that interconnect cost is going to increase in the first quarter or second quarter next year because of increase in interconnect revenue. I'm just not sure that I understand whether you were talking about additional increase in interconnect revenue next year, and therefore increase in interconnect costs, or whether you were talking about increase of interconnect cost in the last quarters, implying some increase in cost next year, which I wouldn't understand fully. Thank you.

Mikhail Shamolin

Ok, as far as interconnect revenues and costs are concerned, this is Mikhail Shamolin, next year interconnect will develop according to the overall traffic of all the operators. Because interconnect costs essentially the costs of subscribers of different operators calling each other, and therefore because we expect the consumption, and therefore the usage and the minutes and traffic to go up, therefore the interconnect revenues will of course go up. The marginality of this business is, of course lower, much lower than the marginality of the core business, and that's why, as we have been saying, as interconnect business will put the pressure on our OIBDA margin, which we'll have to work on.

As far as the fixed-to-mobile and mobile-to-mobile traffic is concerned, the only thing I can say at this point is that in the fourth quarter we have seen a 70% increase in the incoming fixed calls to mobile, which was the result of CPP, and that remained flat over the fourth quarter and continued into the first quarter.

Dalibor Vavruska – ING

OK, thank you.

Operator

We have a follow-up question from Mr. Alexei Yakovitski. Please go ahead with your question, sir.

Alexei Yakovitski – Deutsche Bank

Yes, thank you. Actually, my question has been answered, so thanks.

Operator

Thank you. We have another follow-up question from Mr. Sean Gardiner. Please go ahead sir.

Sean Gardiner – Morgan Stanley

Yes, thank you. It's a bit historic, but I just want to understand, the ARPU guidance you gave for the fourth quarter was $8, and you gave that at the end of November. And you ended up with $8.50 for the fourth quarter. Could you just help us understand where you were positively surprised, given that you're so far into the quarter? Thank you.

Leonid Melamed

This is Leonid Melamed, thank you for the question. So as far as I recall, we gave the forecast for the year, and the year was, like in Russia, for example, we showed the number $7.90, and this is more or less in accordance with the forecast. We also said we would have around $8 in Q4 in Russia, and as long as a good part of the growth, minus the seasonal effect of the gross ARPU, a good part of that was due to the interconnect charges we received for incoming calls on six lines. And as long as that is a brand new asset we receive from that newly introduced to the CPP in the country.

So we can say that we were, to a certain extent, harvesting out of this (inaudible). Especially as long as interconnect charges are marginally profitable for us.

Sean Gardiner – Morgan Stanley

So, just to understand, you are basically saying that you are not trying to extrapolate the September fixed-to-mobile traffic too soon, because you weren't sure how it would develop?

Leonid Melamed

Exactly.

Sean Gardiner – Morgan Stanley

OK. That's great, thank you.

Operator

Thank you. The next question comes from Anna Korbatov. Please state your company name, followed by your question.

Anna Kurbatova - Aton Capital

Good evening. This is Anna Kurbatova from Aton Capital. First question, could you elaborate on the topic with capital expenditures of cellular operators you shared with the market recently? So the figure of roughly $15 billion, did it include the estimate for big three companies, or for all operators? And additionally, you said this figure is for the next five years starting 2007, or next year, 2008?

Leonid Melamed

Thank you, Anna, for the question. So, what exactly was said in the minutes of the meeting of the teleconference was that in the next coming five years, starting in the year 2007, all of the mobile operators in Russia would invest up to $15 billion as capital investments into the development of all kinds of services. Mobile services we would now like to offer to the customers, out of which about 40-50% would go for UNTF, and the rest for the other kinds of services.

Anna Kurbatova - Aton Capital

Thank you, and let me ask a last question. Where do you see your Uzbekistan operation OIBDA margin in the long term? Is it currently the most profitable business, and is it sustainable above 60% OIBDA margins?

Leonid Melamed

Well, right now our margin is higher than 60% in Uzbekistan, so there is still big room for us to use the profitability of operations over there to achieve a 50% level, and we're not, of course, in a hurry to do that.

We have, on one hand, to investigate the elasticity, and we're always keeping our eye on the elasticity of the market, from one hand, and for the competition on another hand. And if there would be opportunities and/or necessities to go for lower APPM that we would probably have to undertake, but keeping an eye on the AOIC of the investments and our eyes on the investments are done over there.

So it's a traditional trend that the more penetrated a market is, the lower the margin becomes. But we really believe we have good control on the trend over there.

Anna Kurbatova - Aton Capital

Thank you very much.

Operator

Thank you. We have a follow-up question from (inaudible). Please go ahead with your question.

Unidentified Analyst

Yes, I just had two follow-up questions. The first one, are there any interconnect agreements you have left to sign in Russia, or are all the agreements signed as of the end of Q4, whether they're from smaller operators or missed termination minutes that you haven't captured yet? So that's the first question.

The second question is, just in Ukraine, do you think in one or two years from now, life will still be there... i.e. Life, the operator?

Mikhail Shamolin

This is Mikhail Shamolin. On the interconnect question, I can say that all the agreements have been signed and enforced.

Mark Burdn

For Ukraine, I just want to say that our traditional PR and (inaudible) policy doesn't allow us to comment on competitors.

Unidentified Analyst

Are you seeing more struggling by some of your smaller competitors, or no real difference in their behavior?

Leonid Melamed

I really beg your pardon. Let me not comment on any of our competitors.

Unidentified Analyst

OK, thank you.

Operator

Thank you. Now for another follow-up question from Mr. Vladimir Postolovsky. Please go ahead, sir.

Vladimir Postolovsky – Brunswick UBS

Hi. I just wanted to go back to one of the questions that I forgot to press the answer for. But Turkmenistan, what's happening there? They seem to have had significant deterioration on many financial indicators in Q4. Is there something market-specific, or you're having some problems?

Leonid Melamed

Turkmenistan is definitely market-specific and the statistics of this market is that our market share is 83%. So what can easily justify that we are the dominate force over there with growing market share. So, that attracts more attention from the regulators to our company. A regulator tries to influence the margins we have in Turkmenistan, by offering services to the citizens of the country.

So these are the specifics of the situation, and that takes us to the situation when our OIBDA margin over there is relatively smaller than it should be in the market with this kind of penetration. But our numbers are more-or-less consistent in Turkmenistan, and we understand we have a growing and profitable business over there, but with the special market situation that I mentioned.

Vladimir Postolovsky – Brunswick UBS

I'm just looking at the revenue more than anything else. The ARPU was reasonably stable for the last five quarters that you reported. Then, this quarter it collapsed by 30%. So that seems to be quite a significant development. So was there anything specific in Q4? I mean, I understand the seasonality, but last year I think it was minus 1% year on year…OK, subscriber growth was a bit slower, but still.

Leonid Melamed

Well, we don't see any specific reasons for keeping the trend of decrease of the ARPU like in the next coming quarters. We really think that the situation over there is more due to the seasonality effect, so that's actually it. So the (inaudible) goes a little bit down from Q3 to Q4, and as long as we use the opportunity and increase our market share, we subscribe low user clientèle, and that in the end reflects in some decrease on average, and decrease in ARPU. And still, the numbers look quite healthy there.

Vladimir Postolovsky – Brunswick UBS

OK, thank you.

Operator

Thank you. As a reminder, if you would like to ask a question, please press the *, followed by the 1, on your telephone.

Gentlemen, there appears to be no further questions at this time.

Andrei Terebenin

Thank you very much ladies and gentlemen. We welcome you at any time to contact our Investor Relations department with any questions. Broadcasts of this discussion will be available on our website, if you wish to replay the call. And in the meantime, we appreciate your interest, and wish you a very pleasant day. Thank you again.

Operator

Thank you, ladies and gentlemen. This concludes the Mobile TeleSystems Fourth-Quarter and Full-Year 2006 financial and operating results. Thank you for participating. You may now disconnect.

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