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Mobile TeleSystems (NYSE:MBT)

Q1 2007 Earnings Call

May 31, 2007 10:00 am ET

Executives:

Andrei Terebenin - IR

Leonid Melamed – President & CEO

Vsevolod Rozanov – VP & CFO

Mikhail Shamolin - VP, Head of MTS Russia

Mark Burdn – Finance Director, Ukraine

Analysts:

Alexander Kazbegi – Renaissance Capital

Sean Gardiner – Morgan Stanley

Name Inaudible – American Century Investments

Sergei Arsenyev – Goldman Sachs

Unidentified Analyst

Alexei Yakovitsky – Deutsche Bank

Alex Kuznetsov – Bear Stearns

Will Milner – Arete Research

Nadejda Golubeva - Aton

Alex Wright – UBS

Ben Joseph – Thames River Capital

Olga Bystrova - Credit Suisse

Stephen Pettyfer - Merrill Lynch

Presentation

Operator

Welcome to Mobile TeleSystems first quarter 2007 financial and operating results conference 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 first quarter 2007 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-term facilities and their usage, legal actions and proceedings 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 amortization, average revenue per user, cash-flow projections, return on invest capital, and technical matters that can affect our mobile communication network, including district licensing and capital expenditures and operating expenses.

Important factors could cause actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include company press releases, earning presentations and MTS reports, and Form 20-F as well as other public filings made by the company with the United States Securities and Exchanges Commission, all of which are available on the company’s website, at www1.mtsgsm.com or that of the United States Securities and Exchanges Commission at www.sec.gov.

That dissolves any obligations to update any previously forward-looking statements offered in this conference call or to make any adjustments to previously made statements to reflect changes in risks. Portions of this presentation and materials used in reference to this conference call are available on our company 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 of MTS Ukraine.

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

Leonid Melamed

Ladies and gentlemen, thank you for joining us. I'm pleased to report another quarter of growth and profitability that continue to fuel our 3+1 Strategy.

Revenues for the group grew 35% year-on-year on the strength of our Russian operation, where further price stabilities in the marketplace enabled us to feel the full impact of the steps we took in 2006 to enhance our brand and transition to new pay structure. More important is the fact that we showed improvement with lower spending.

Q1 is normally a slow quarter due to seasonality. Having introduced eight new programs in Russia in the second half of 2006, we decided to limit our promotions to let the new programs get some traction in the marketplace. The rest of marketing expense OIBDA for the group reached 51.9%, while our Russian operations came in at 52.1%, a 5.5% year-on-year improvement.

Of course, an important topic for us is Ukraine. In general I have to say that Ukraine is quite a healthy business. In spite of increased competition in the market, revenue growth came to 11% year-on-year. The record number of subscriber additions in Q4, combined with seasonal usage trends, grew our ARPU to $5.7. However, retaining our market share has been important for us, and our subscriber share in the market held at 40%, which is great for us as it put us in a far more competitive situation than the market could expect.

As we have previously discussed, the Ukrainian market has become increasingly competitive as the entrance of two operators and the aggressive pricing of our competitors as a whole have led to slower overall growth in the market. But we have had to respond by bringing low-price products to market including our no-frills Ecotel brand.

Though the performance of Ecotel met our hopes, we don't feel our future in Ukraine lies in capturing their users. Given our strong prospects and customer subscriber base, we'll have a strong financial interest in reversing the market trends and pushing for stabilization.

In the past year, we have worked hard to increase coverage in distribution and capacity, having now achieved parity with any other network in the market. Our research indicates that we have made impressive strides in network quality, while we are now moving forward to bring mobile broadband to the market through our CD mail offering.

With those tools in place, we will be coming to market with a new approach in the coming months. While VimpelCom boasts one of the most recognized brands in the region, we believe that the launch of the MTS brand can be a catalyst in the market, a first step towards our stabilization and eventually growth. And like Russia in 2006, this will be the moment when we redefine our terrain, bringing products to market and re-energizing our employees and customers with an added emphasis on value, quality, and service.

In Uzbekistan, we continued to grow our networks and build upon our markets with a ratings share more profitable in leveraging our scales. Subscriber growth of 18% overcame the seasonal drop in usage leading to total revenues of nearly $15 million. Growth can primarily be attributed to our introduction of (inaudible), the clear validation of our transition to our group structure and the uniform approach we're employing in our markets.

A testimony of this is our OIBDA of nearly 63.7%, clear evidence of our working toward profitable growth in each of our markets of operation. Recently, we were awarded licenses in Uzbekistan for 3G frequencies. While we are not yet in position to elaborate in great detail on our plans, we do intend to begin offering mobile broadband services to take advantage of this and other opportunities to increase capacity in major urban centers.

In Turkmenistan, we continue our profitable growth in the attractive market as revenue reached $35 million. OIBDA improvement reflects our dominant position in the market as we retained our 83% share. With each of our Central Asian operations, fully branded and operating under our (inaudible), we continue to gain visibility in our group resolve and performance.

And I'll pass the floor to Vsevolod Rozanov.

Vsevolod Rozanov

Thank you Leonid.

In our results, we continue to see the benefits of our cost-optimization programs improving our operating bottom-line performance. OIBDA grew 67% in Russia from Q1 2006, outpacing our 40% growth in sales. In Ukraine, OIBDA grew 17%, a nearly 8% improvement year-over-year, while in Uzbekistan we grew nearly 6%4 with the margin, signs that our excellence and corporate organization are bearing fruit throughout our operations.

Likewise, there have been important developments in our bottom line. Unlike last year, when we were forced to recognize certain losses, our bottom-line dynamic reached effective financial management.

Our financing of debt in April 2006 has allowed us to reduce our network expenses, while with over $500 million in free cash flow. In addition, our growth and our earnings and contribution from Uzbekistan bring us to great improvement of our margin compared to the same period last year.

CapEx spending for the quarter came in at $2 million. Roughly half of this expense came in the Ukraine where we have aggressively been making competitive agreements in anticipation of our networks. Spending in Russia was turned down a bit, as we await the results of the bid held in April.

Our cash position is strong, with over $500 million on hand at the end of the quarter. As our Board of Directors has recently offered over $747 million (inaudible), we should present $1.87 (inaudible) and 69% in net income, it's safe to assume that our cash will be used to make the sale.

Mobile TeleSystems continues to focus to be one of the best companies in the corporate world and we recently introduced new provisions which were adopted by our Board of Directors.

The provision of a minimum 50% of cash allocated for payments and our own debt levels, combined with adequate cash flows by our Russian operations, provide ample financial resources to grow our business opportunities.

In Q1, we made no change for our general corporate practices. However the problem continues to be operational.

Mikhail Shamolin

For the whole of Russia, we believe the opportunity is ripe to introduce the technology to our customers. Customer experience is critical to the introduction of new technologies and here we are at an advantage. Considering our strong days of corporate and high daily users, we are often considered to be adapters of new technology products, the 3G customers, and customer experience, will enable us to provide incentives to encourage adoption, customer loyalty and generate greater approval among our customers.

With over 500 3G devices available for sale, there will be ample equipment available for customers to connect to our network. While our European and Asian peers, however, are experiencing technological buildup, offering (inaudible), jumping right to true mobile, allowing customers to get a richer, more compelling experience.

3G for MPS represents a natural evolution of our network. Worldwide, over $150 million subscribers now make connections on 3G wide network and the industry as a whole is moving to a future governed by high-speed access.

Our 2G network is now running at high utilization levels and we have the opportunity to improve our network capacity with new 3G equipment. As 3G improves capacity as comparable with 2G equipment, and the price is lower than when the 2G equipment was first launched. Things are working in our favor to allow the equipment to grow in our business.

We also feel the cost will be manageable through 2009. Capital spending could climb to near $1 billion, which includes costs for frequency clearance and our minimum license requirements for coverage and add to this an estimated throwback in 2G spending approximately $200-$250 million. However the results will be greater network abroad with efficient high-speed network covering as many as 43 of Russia’s top urban centers.

In creating such a network, we will develop a competitive advantage in bringing the market in the voice services, developing convergent products, and delivering a wide variety of communication services in the face of competing technologies.

Nevertheless, we remain true to our strategy, delivering exceptional return on invested capital. While there are ways in which we have improved our organizational abilities to deliver maximal revenue to our shareholders through our financial strategies, we remain committed to grow in our market.

As such, the results we have seen in Q1, we find it prudent to raise our guidance to a minimum of 22% of the year. The past year has allowed us to align the organization to lay the foundation needed for sustained growth, improved efficiency and profitability to the organization, and soon, new technologies for our networks.

We aim to leverage all this strength as we further develop our business. And now we will take your questions, thank you.

Question-and-Answer Session

Operator

Thank you, if any participants would like to ask a question, please press the Star followed by the One on your telephone. If you wish to cancel your request press the Star followed by the Two. Questions will be posed in the order they are received. There will be a short pause while participants register for a question.

The first question comes from Mr. Alex Kazbegi with Renaissance Capital. Please state your company name followed by your question.

Alexander Kazbegi – Renaissance Capital

Yes, good evening. Alex Kazbegi from Renaissance. I was wondering if you could give us a bit more color on Ukraine and the reasons why ARPU fell quite considerably, especially given the ARPU fell 14%, I think. I generally don’t like contrasting you. It would be very helpful if you could give us some color on that. Also, if you could tell us what the situation is currently and when do you think more price stabilization will be coming into the market? Thank you.

Andrei Terebenin

Alex, could you repeat the question regarding ARPU in the Ukraine? We didn’t hear it well enough.

Alexander Kazbegi – Renaissance Capital

Sorry, I was just trying to contrast, we have seen the ARPU falling on about 14%, and what I was wondering was given the similar subscriber bases you would have roughly the same type of performance and given that ARPU fell by 22%, I was just wondering if you could give us a bit more color on exactly the reasons for that kind of performance, and secondly, what is the situation currently ,whether the trend on the pricing pressure is continuing and when do you think there will be a reversal in the current situation?

Vsevolod Rozanov

Thank you, that was clear. Regarding the ARPU situation in Ukraine, we have witnessed relatively stable growth in APRU in Q1 combined with decrease in ARPU in pre-paid customers in Ukraine.

The reason for this is the following. Customers are usually loyal to our company and value the quality of the network that we have elaborated. They see income is growing and active usage, and actually our marketing, were not oriented to somehow retain the customer base in the Ukraine since the customer base is stable. The major marketing activities took place in the pre-paid section where we have had marketing difficulties since two years ago where the quality of the NC network fell down and it doesn’t have significant reputation among the pre-paid customers. On the one hand, their expectations are lower than would be expected. On the other hand, there are direct financial suppositions to newcomers who also don’t have, I believe, the perception of the excellent network quality, but who aggressively promote new business.

So our pre-paid segment is like between those two and we had to market aggressively to prevent huge churn and loss of our market share in the pre-paid segment. For that reason, we issued a plan with quite low prices on that.

That is why we think that our year earnings can be with all the strategies of the landings that will drive, we believe, to the higher evaluation by the customers of the quality of MTS Services.

It will allow us to change the situation through the pre-paid segment and to increase our market pollution in the force factor and that is why I think it is so logical to launch a rebranding exactly at the end of Q2. And that gives us the idea that can create significant steps in market civilization in the Ukraine and in general, and will definitely need some fair changes in the market procedures for MTS.

Alexander Kazbegi – Renaissance Capital

Does it mean that until the end of Q2 it's very unlikely that the situation will change then?

Vsevolod Rozanov

Well, currently the situation in Ukraine is stable in accordance with the results of the early term. On the levels of the beginnings of the term

Alexander Kazbegi – Renaissance Capital

OK, if I can just ask, if you can give us the post-paid and pre-paid numbers between Q4 last year and Q1, that would be very helpful.

Vsevolod Rozanov

I will let Mark Burdin provide you with the numbers.

Alexander Kazbegi – Renaissance Capital

Thank you.

Mark Burdin

Hi, Alex. OK, In terms of post-paid, they are $33.2 million in Q4 in 2006, and $30.3 million in Q1 of 2007. Pre-paid for Q4 2006 was $4.9 million and Q1 2007 was $3.7 million. That the question you were asking?

Alexander Kazbegi – Renaissance Capital

Yes, correct. Thank you very much

Operator

Thank you, the next question comes from Mr. Sean Gardiner with Morgan Stanley. Please state your company name followed by your question.

Sean Gardiner - Morgan Stanley

Yes, Morgan Stanley.

Just on the change in revenue for both 22%, can you go back to the guidance you gave at the end of January and just talk about what you see with Russia and Ukraine now that you’re seeing them?

And secondly, on the cost side, can you talk a bit about your selling and marketing costs. It came to about 6% of revenues or in that range. Are you seeing any pressure to raise that in the second quarter or in the coming quarters, or do you think that you've reached a new level with your scale?

Vsevolod Rozanov

Thanks for the question. Usually we don't give the guidance for that for the business year for the company, so we can say that in Russia, we consider it to be a level around $8.6 billion, and for Ukraine, we usually don't give the guidance.

Sean Gardiner - Morgan Stanley

I think for the gain you said you expected Ukraine to be $7 million for 2007. I'm just trying to work out where the increase is coming from, for guidance. Clearly, you're paying under pressure, so?

Vsevolod Rozanov

Right now, I would like to withdraw myself if I may to give the guidance for the Ukraine, but of course we will undertake the measures to increase the substance for MTS, and we believe the market trends will support us on this.

Sean Gardiner - Morgan Stanley

Maybe just another, on that question then, how much of that 22% revenue growth guidance, how reliant is that revenue growth on an inflection point of the Ukrainian market that you're talking about with your rebranding and new tariffs hope to improve your position there. Can you talk about that?

Vsevolod Rozanov

Well, 22% we forecast for the whole route, so the sheer of revenues in Q1 for Ukraine is reduced compared to the one we have in the previous year by 4%, so we're really increased. We really hope that at the end of the year there will be some increase of Ukraine sheer in our revenue, but I actually wouldn't give the concrete guidance to the Ukraine revenues till the end of the year. The only thing I'd like to say though, is we hope that we can share in revenue. Alright?

Sean Gardiner - Morgan Stanley

Yes, thanks.

And on the cost side, just on the trend in marketing in Russia?

Vsevolod Rozanov

Yes, on the sale of the marketing. On the deal commission we'll continue to pursue our strategy to deal a commission based on revenue share, and this is in the first quarter differential from all our competitors who pursued not only revenue share, but also one of (inaudible) which somewhat increase their deal of commission compared to ours.

And we remained sort of loyal to our quality, and the reason we've done that is because the first quarter is not the best quarter in terms of sales and excessive stimulation of our dual network which results in a very low quality of speech, which we do not consider economically beneficial to us.

The first quarter as you know is very cold in Russia and people don’t tend to go out shopping a lot. Therefore the sales are lower in that quarter, and that sort of approach reflects itself in the advertising expenses. This of course will be changing in the summer quarters because there are more active sales in the community, and therefore you will surely see a slight increase in both sales and advertising expenses.

Sean Gardiner - Morgan Stanley

OK, thank you very much.

Operator

Thank you, the next question comes from (inaudible) with American Century Investments. Please state your company name, followed by your question.

Name Inaudible – American Century Investments

Hi, this is (inaudible) from American Century.

I would like to ask a follow up question in Ukraine, and the question is as follows. If I understood you correctly, you mentioned that one of the problems in Ukraine has been the perception or the actual lack of quality of your overseas network, relative to competitors.

Can you talk a little bit more about that, exactly where you lack this quality? Is this the capacity issue, what are you doing to resolve it? When do you expect it to resolve it and how much is it going to cost?

Thank you.

Leonid Melamed

Thank you for this question.

Your understanding quite correctly that one of the problems for the marketing position of Unity Brands Ltd. is the perception of the brands that work each quality like two years ago. And this was exactly due to some news forecast of MTS of the seed of growth of presentation in the Ukrainian market.

For example, about one year and a half ago, we recapped the market and it is growing very quickly and we've realized our plans on typical investments and creation of our (inaudible).

So in the last year, we have increased our commands of play stations in Ukraine for some time. And this allows us, along with some other s, to bring our network quality to the level of the best network in the Ukraine and in general MTS group.

That's why, technically speaking, we don’t see community problems with our Ukrainian methods, as long as the amount of subscribers grows with perceived investing, and if you want to follow the capital that is invested in the Ukraine we’re 66% higher than the same period in the year 2006.

Name Inaudible – American Century Investments

Thank you, may I ask one more question?

GSN, can you talk a little about when exactly you plan to roll it out, what it is going to cost, and any other information that you can share in that respect. Thank you.

Not in GSN, in 3G, sorry.

Mikhail Shamolin

In Russia we have been granted the right about a week ago, and about a month and a half ago we were granted the license to VimpelCom. We are in position to comment as before, so if you want disclosure, we will comment on basic number development in Russia. And, on page 11 in our presentation, you find guidelines on the topic, where we underline that in the next coming three years we intend to send about $1 billion for creating the 3G network in almost 43% of the Russian Federation, and we anticipate that by the year 2011 to have up to 11 million 3G subscribers and the revenue of 3G services up to $2.5 billion.

We definitely will start operations in the main cities of the country with a population of one million, and some parts of our networks will be technically prepared for its commercial usage in the end of this year and beginning of 2008. But, the part of commercial use is very much dependent on the (inaudible) and this is where we are dependent on the other sites, and those decisions will slightly change the existing plan of the commercial usage of the network.

We will not delay the creation of this network in the cities with a population of less than one million because we can take the opportunity there to offer broadband access to the internet to the customers who simply don’t have that access.

About the biggest time, we are not in a position to comment now. We will be prepared to do that when we see closure.

Name Inaudible – American Century Investments

Thank you.

Operator

Thank you. The next question comes from Mr. Sergei Arsenyev with Goldman Sachs. State your company name followed by your question.

Sergei Arsenyev – Goldman Sachs

Good afternoon this is Sergei Arsenyev from Goldman Sachs. Can I also picture the Ukrainian…I am trying to understand what is happening with the advertising and marketing expenses, and you sort of explained that, but I am trying to think for the coming quarters. Your advertising and marketing preferred growth has basically doubled from the fourth quarter of 2006 to the first quarter of 2007. Is it the kind of level that we should expect in the coming quarters, especially given that you are not really seeing an improvement in the second quarter, and then presume that the cost of branding will come on top of that in Ukraine? If you could just talk about that dynamic, that would be great.

My second question is on the share buyback programs. Do I understand correctly that you have not repurchased any ADRs in the first quarter of 2007? Can you just give us the overall number that you have repurchased since you announced the program?

Thank you.

Leonid Melamed

The first question was addressed to Mark, please.

Mark Burdn

This is Mark. Basically what you are looking at in terms of the mathematics of that, if you look at the absolute value of money spent on advertising and marketing during Q1 is slightly under the level of Q4. So in terms of that, and having a record number of ads in the same period, I think that you then have some indicator on how the future might go in terms of advertising and marketing spent, given that we have rebranding this year.

Leonid Melamed

We would like to confirm that we have more for the course of Q1, which basically means that the number is the same as it was of December 31st, 2006. Thank you.

Sergei Arsenyev – Goldman Sachs

Can you tell whether you thought of any ideas in the second quarter, or are you not allowed to do that?

Leonid Melamed

Yes, you are definitely right. We are not allowed to discuss that.

Sergei Arsenyev – Goldman Sachs

OK. Thank you.

Operator

Thank you. The next question comes from (inaudible). Go ahead with your question sir.

Unidentified Analyst

Thank you, this is Constantine from Renaissance Capital. I have a couple of questions if I may. My first question really is to your income statement. I wondered if you could share a bit more on the income item in your income statement, which amounts to $27 million.

My second question is really to the statement of the 2006 net profit announced yesterday. I wonder if there is any chance of revision of dividends numbers that were announced earlier this year with regard to this, thank you.

Leonid Melamed

Excuse me, can you please repeat the first question.

Unidentified Analyst

It is about other income items in your income statement in this quarter, the $27 million income. Your total other expense, where does this come from?

Vsevolod Rozanov

Usually the other expenses will be the difference in the reallocations. There is no large item there to quantify over there last quarter.

Unidentified Analyst

OK, thank you.

Leonid Melamed

And the second question was?

Unidentified Analyst

And the second question was to the dividends of 2006, which was renounced by the BOD, could it be restated or not in regard to the restatement of the uniting numbers for 2006?

Leonid Melamed

Alright, we recommended at our original shareholder meeting to pay dividends, and the recommendation was approved of in excellent numbers.

Unidentified Analysts

OK, thank you.

Leonid Melamed

Thank you.

Operator

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

Alexei Yakovitsky – Deutsche Bank

Good day. This is Alexei Yakovitsky from Deutsche Bank.

You've raised your revenue forecasts for the year quite substantially without a change in the guidance for the margin. This is the second time you do it without change in the profitability guidance.

Would you agree that this is becoming an occasion to conservative guidance except for the profitability, given again that you expect, presumably an extra $400 million in consolidated revenues of share? That's the first question.

And the second question is, I'm looking at page 11 of your presentation, where you show the fancy graph with 3G Evolution. Am I reading it correctly? Is it effectively your full year 2007 plan which I think was around $1.8 billion as you previously suggested? Is it not going to change much as a result of 3G, because you're going to save $50 million in 2007 or $50 million in 2008 to the entire three-year period of 2007, 2008 and 2009? If you could clarify that, I'm assuming you've made no change to the plan, according to the news wires from your press conference, but if you could just confirm that.

Thank you very much.

Vsevolod Rozanov

OK, as you received to our current guidance for the year 2007, including our strategic expenditures is around $2 billion. But on top of $1.8 billion that we have given the guidance for 2G developments in our country at present for this year, we have $200 million itself, we have the initial investments in the creation of the new network in Russia.

To come to your first question, to comment on the guidance. You said that we understand that the competition in the market of our presence, like in Russia and in Ukraine, will probably give us to the necessity to have significant expenditures, and those expenditures can, let’s say, not fully allow us to increase our bottom line results at least on the forecasts basis, for the sake of the forecast, I wouldn't change it.

On the other hand, it's not only competition that drives us there, but there are also opportunities. We see that the market is growing in Russia, like 35% yea- on-year basis, and there is still growth, double-digit growth in the Ukraine as well, and we should do our best to stimulate the usage and to hitch all of the opportunities of the growth of the revenue from the market, and some expenditures to generate customers usage behavior would be from our (inaudible). And that's why some opportunities on one hand, and market necessities on the other hand, probably will change our guidance more for the time being.

Alexei Yakovitsky – Deutsche Bank

OK, just to clear things up on the capping issue. Your chart on Page 11 is adjusting. And again, maybe I'm reading it incorrectly, that you're going to reduce your 2G capping by $250 million. If you're going to spend for the total growth, that means you're going to spend about 40-50% of the total $1 billion on the latest for 3G in the course of 2007 and 2008. Is it the correct way of looking at it, that you're going to spend, let's say $400 million on 3G alone this year?

Vsevolod Rozanov

Well $250 million savings, we have to have for the next coming two years in the house, let’s call it three years. So it would not affect our capping this year especially taking into consideration that we see significant increase in our average growth, and we change our forecast on revenue. We need to create a proper network. We need the proper quality for the network so we don't change the result of this savings, to some extent, savings that we can achieve with the help of 3G equipment. The fact that we don't change our capping forecast for the year 2007 in the 2G area.

It's not 3G, it's the opportunity of the revenue forecast. I would give the solution to offer different for 2G, but we don't do that.

Alexei Yakovitsky – Deutsche Bank

OK, that's clear now. Thank you.

Operator

Thank you. The next question comes from Mr. Alex Kuznetsov with Bear Stearns. Please state your company name followed by your question.

Alex Kuznetsov – Bear Stearns

Good afternoon, this is Alex Kuznetsov, from Bear Stearns.

Most of my questions have been answered but I have a couple of questions.

First of all I've noticed that churn rates in Ukraine show different trends. In Russia, they increase while in Ukraine they continue declining. Could you probably comment on this trend, especially surprising in Ukraine, since increase in competition, an increase in competition usually results in higher churn rates?

Also, I recall you provided some guidance on 3G, benefits from 3G, but you are talking about benefits in a far away perspective, as far as 2011. Can you probably comment on financial revenue and EBITDA growth for the next three years, or maybe for the next year?

Mikhail Shamolin

OK, thank you very much. I would have to comment on the churn rates in Russia and for Ukraine, transfer it over to Mark.

The churn rate in Russia remains quite stable, which is out of the ordinary if we compare it to Q1 of 2006. The churn was actually lower, if you compare it to Q4 of 2006, the churn will be higher, but this is sort of a seasonal short that we see. So we don't see any inadequacies in the churn development.

Mark Burdin

This is Mark. Yeah, actually as the grade comes in for Ukraine, which is a seasonal trend, and if you take a look back over 2006 back quarters and we’ll see similar kinds of trends as last year.

Vsevolod Rozanov

Thank you. And coming to the question regarding the guidance you gave for the next three years, we unfortunately don't issue any kind of guidance or (inaudible). Now I would say that our most frequently done strategy, if I may address you to this that we have to be…high 25% a year in the next coming five years perspective and it's also a strategy that we would like to be in the next coming five years, with our margins somewhere around 60%. So with our guidance it's just a statement from that strategy that we've discussed with here.

Alexei Yakovitsky – Deutsche Bank

Thank you very much.

Operator

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

Unidentified Analyst

Good evening. First question is regarding experience in Russia, it was down for the second quarter. Do you think in the second quarter, in particular, if you comment on trends from risks?

And the second question would be, how much would interconnection in Russia be for the first quarter?

Leonid Melamed

Excuse me, you asked the first question was about the new ads, or...?

Unidentified Analyst

No, it's more about rates in Russia. In Russia it was down in the first quarter.

Leonid Melamed

Effective tax rates? I'm sorry for the...Do you want a comment on our ADPM in Russia?

Unidentified Analyst

I just mentioned that your effective rate in Russia was $0.061 in the first quarter and $0.064 in the fourth quarter. I just wanted to know if we should expect the same status level in the second quarter of this year, or do you increase in the second quarter in particular because of the introduction of your new plan. The question is, is Russia going to pick up in the second quarter?

Mikhail Shamolin

Yes. This is Mikhail Shamolin here. In answer to this question, our ADPM level in Q1 was just slightly lower than the ADPM in Q4 because we had been running a marketing campaign targeted on the retention of existing customers. There was a campaign which gave a 25% discount to existing customers who wanted to switch on to a New-Year offer. And that's because of that promotion we had a very slight ADPM decrease, and of course the decrease will be somewhat different year-over-year in the second quarter.

Unidentified Analyst

Thanks. And the second question, about how much were interconnect trading in Russia in the second quarter?

Mikhail Shamolin

The interconnect trading in Russia was just about $142 million.

Unidentified Analyst

142?

Mikhail Shamolin

Yeah.

Unidentified Analyst

Thank you very much.

Operator

Thank you. The next question comes from Mr. Will Milner with Arete Research. Please state your company name, followed by your question.

Will Milner – Arete Research

Thanks, it's Will Milner with Arete Research in London. In Russia, I'm just looking at your usage growth year-over-year, and obviously there's a very healthy trend there. I guess the question I have is really, to what extent you feel that the future growth of usage is held back by capacity constraints in Russia? And as a sort of follow-on to that, as you start to bring on 3G capacity, your existing usage level seems to have kind-of plateaued around 130-135 minutes. Internally, where are you hoping to drive usage to within Russia? So that's the first question.

And the second question, just very quickly is, internally, what assumptions are you making on inflation in Russia going forward? Thanks.

Mikhail Shamolin

Mikhail Shamolin here. I'm going to start with answering the first question on the Russian usage. Right now, the usage is not constrained by capacity per se. It is somewhat constrained by the coverage, because not all of the small towns and villages are covered. So there is the potential there to pick up new customers and give them more usage, although it would be at first definitely a low usage, because we are talking about low-income customers in most cases.

As far as the capacity is concerned, it is of course tightly connected with the price flows in the market. To give you an example, we had an average usage in March of 150 minutes, and an average usage in the market reaching south of 350 minutes. But of course the ADPM level is about $0.10. In the market reaching south it's about $0.03. So that gives you an idea of the price specifically and how the usage could grow if the prices decreased. But of course, we all calculate economics, and we try to balance our revenues in such a way that we have adequate pricing, and also the network, which is filled with traffic.

To give you a trend, I believe that the usage in Russia is going to continue to grow, and we will see sort of a double-digit ARPU growth by the year 2011-12.

Will Milner – Arete Research

Sorry, just to recap that: double-digit usage growth until 2011-2012. Is that what you're saying?

Mikhail Shamolin

No, I said double-digit ARPU growth by 2011-2012, and the usage, we believe the potential would be around 300 minutes, let's put it this way. And as to when it would happen, I would fully refrain from making assumptions.

Will Milner – Arete Research

OK, thank you.

Vsevolod Rozanov

And then the second question, we use the Ministry of Economic Development guidance about the guidance on inflation or assumptions on inflation, which offer single-digit guidance.

Will Milner – Arete Research

OK, thanks.

Operator

Thank you. The next question comes from (inaudible). Please go ahead with your question, sir.

Unidentified Analyst

Oh, hello, good evening. I have two questions, or maybe requests for clarification, if possible. First is on 3G. You mentioned there's $2.5 billion revenue target, or forecast for 2011. I'm just wondering how do you define 3G revenue, because some operators say it's difficult to distinguish what revenue is allocated to 3G, because when you're doing one call you can switch from two different networks, for example.

And maybe, on that question, I'm just wondering how much of this $2.5 billion do you allocate to data versus voice, and whether you can give some light as to how the 3G maybe not that far away from now, but maybe in the next couple of years, how is it going to affect your GSM voice business. That would be great.

And the second question is, how do you define market share? Because what appears to me right now is that the two of the three largest operators switched this three-month churn definition, so the subscriber numbers are increasingly more difficult to compare. And when I look at the revenue market share, it seems to me that essentially the two leading players are rather equal at this moment. I'm just wondering whether you rather look at the subscribers, or revenue-market share in Russia. And also, given the strategic priority for retaining the revenue leadership, I would be interested to see whether you see some reversal of the previously declining market-share trend, versus VimpelCom, for example. Thank you.

Leonid Melamed

Thank you for the question. So, when we mentioned in our presentation $2.5 billion revenues on 3G, it is important to explain we mean the Delta case. So if we would not deploy the network, or would deploy it on a minimum level, we would have incrementally $2.5 billion left to earning than with this network. That is actually the cause of the number that is mentioned in the presentation. Because I agree with you, technologically we almost cannot separate the income we would see from the 2G network and the 3G network.

Unidentified Analyst

And would it be possible for you to reveal the total revenue forecast for that year, so that we can see, in addition to the increment, what in terms of the percentage the increment means?

Leonid Melamed

Yes, we unfortunately are not in the position to give long-going statements, and actually that's not in accordance with our practice. And we're not in the position now to change it.

To get back to your second question, first of all, we have the six-month churn policy. I understand, and the advantages and disadvantages of this approach, we are not in a position to change it shortly. We will take into consideration the current trend on the market and will also take into consideration the comments by investors on this topic and probably will make a decision later, but definitely not now.

Regarding the question whether we are looking for the (inaudible) or subscriber leadership. Our strategy says that we are looking for a good bottom line and high return on investments of our shareholders, that has been our key point of our strategy and we are not in a position to change it in the upcoming years.

We understand that we need to generate revenue and we want to do that, and I believe we actually achieved this, hopefully you agree with me, during the past year. And it is very important to generate profits for the investments of our shareholders, and that is why we look for new opportunities to do that and that is why, for example, 3G project is offered for your attention today.

We are ready to give mobile operator on the (inaudible) of CIF. We observe ourselves like a group. We also look for the local market with the intentions and the necessity to generate profitable growth. We would not, by all means, drop our intentions for profitability in favor of reaching, let’s say, special tasks on the top line side.

But as soon as our bottom line has been improved and as long as we have significant improvements in the profitability of our operation and we have advantageous control in our advances, we should use this achievement and advantage to accumulate and make some expenditures that would stimulate the usage by our costumers by that to stimulate the growth of revenues.

We are concerned with the fact that our market share and revenues are growing and decreasing. Over this last year it was definitely due to the special phase the company found itself and I understand that we all know what have been the most important topics like 12 months ago for the company and they were definitely not in the area like revenue stimulation. They were mostly in the area of fixing things and stabilizing the situation.

Now, 12 months later we say, yes, we want to increase the speed of growth of the company and we want to grow not less aggressively than our competitors do. This is of a concern to us and we will try to undertake necessary steps to perform this. Thank you.

Unidentified Analyst

May I ask just a quick follow up question, if you say that you want to grow like your competitors, do you have any threshold at which point you would become more aggressive in case you don’t reverse this trend, or is it not the way you are approaching it?

Leonid Melamed

Pardon me, could you repeat the question?

Unidentified Analyst

For example, when you measure your revenue market share compared to VimpelCom, and you know, I must say the last couple of quarters you actually reduced the speed of decline of this market share, which I think is quite noticeable, nonetheless there is still some decline.

I was wondering if you had some threshold for this number which determines your marketing aggressiveness or for example if your revenue drops to say 95% of that of VimpelCom.

I don’t expect you to say the threshold, but just the way you are approaching it, is this number important for you, or rather maybe you just look at the bottom line and the market share revenue is not that important?

Leonix Melamed

To answer this question, we don’t have a concrete task that we consider a threshold on the race for revenue either in Russia or in the Ukraine or any other market that we have.

Yes, we definitely observe our market share and observe the trend and we understand that we have our tasks to achieve, but definitely our bottom line attention is a priority to us.

Unidentified Analyst

OK, thank you very much.

Leonid Melamed

We expect profitable and effective business in the long-run. That is why we don’t have any threshold to say that at a special point we will become extremely aggressive like price-wise or devices-wise but keep in mind the necessity to keep our bottom line in order, we will undertake marketing efforts and technological efforts to retain the state of growth of our market share. I really believe that we are now able to achieve this and this is something we have undertaken in the last twelve months.

Unidentified Analyst

OK, thanks again. I appreciate it.

Operator

The next question comes from Ms. Nadejda Golubeva with Aton International, Inc. Please state your company name followed by your question.

Nadejda Golubeva - Aton

Good afternoon, this is Nadejda Golubeva from Aton International, Inc. My first question is about your margin in Russia, pretty healthy, slightly below than that of VimpelCom.

Do think that you have driven some sort of seasonal fluctuation? And overall on the full-year basis you show similar margins, in other words, do you think that your cost structure is optimal already and will we see focus on the margin improvement in Russia especially given that as you are saying here they are strong in the corporate segment, which in my mind should imply high margin for you compared to VimpelCom?

Second question, is about 3G, could you possibly share with us your estimate on the cleanup cost, and also, what happens after this 1$ billion is invested, should we expect some sharp drop in 3G, or just steady decline?

Thank you.

Vsevolod Rozanov

Thank you, Nadejda.

I’d like to direct your attention on the dynamics of the margin for MTS on a continual basis. So the Q1 last year was 46.7% and Q1 2007 was 51.1%, so taking into consideration some obvious seasonal issues that we face and that of our prepaid and costumer base and our relatively big push (inaudible).

We understand that the trend is quite healthy, if I may say so. Whether the cost structure will change, there will be some changes as Mikhail stated already, in Q1, our marketing expenses were relatively low and they wouldn’t be like that at year end.

The expenses would increase, but we record that it is usually very high, marginally for us, and will somehow help us to balance the expenses we need to undertake for our marketing growth. I will just repeat that we would take very active control now, but one, we are not going to substitute it somehow in the favor of addressing steady growth, but we need to send some concrete expenses, especially marketing.

Alex Kuznetsov – Bear Stearns

And the other question?

Leonid Melamed

We don’t disclose how much in post-paid and pre-paid customer base. One can assume that with much hierarchy in post-paid segment in margins there, are much healthier than pre-paid, but to a certain extent it reflects the whole of the company since the major expense, not all of them… and we don’t have just the businesses in post-paid and pre-paid.

Alex Kuznetsov – Bear Stearns

Thank you.

Leonid Melamed

Do you have a question on whether we will be additional, like up to the up to the (inaudible) correctly, and well what it might depends on the success of the business that we wanted to form, and once we’ll really hear these promising results, we would of course try to develop the network more aggressively. That could take us to the increase but that would be compensated by soliciting.

Alex Kuznetsov – Bear Stearns

My last question is about the estimated system clean-up costs?

Leonid Melamed

We cannot actually give it out. But our forecast for the costs is sort of semi-dependent on the concrete decisions and concrete organizations and we don’t want to, somehow, alter our impact, our negotiations with them. Where we, as I understand , we will try to share this course with our competitors.

Alex Kuznetsov – Bear Stearns

Do you think about $100 million, $200 million, how much less?

Leonid Melamed

I’m sorry, I will not comment on this for commercial reasons.

Alex Kuznetsov – Bear Stearns

OK, thank you.

Operator

Thank you. The next question comes from Alex Wright with UBS. Please state your company name followed by your question.

Alex Wright – UBS

Good evening, it is Alex Wright from UBS. I have two questions. One, just further on the margins. I know you discussed the sales and market expenses already, and my question was really relating to the growth margin on your service revenues, which we can…. first quarter compared to the previous couple of quarters...could you just tell us what was behind that weakening? Was it just seasonal and would you expect that margin to pick up again in the summer quarters, or is there anything else going on there?

The second question, just following up on an earlier question regarding your income of $27 million, could you tell us how much of that is from Belarus and whether you think that is what represents its number for the full year? Thank you.

Leonid Melamed

The major reason for the certain decline of our cost of services margin was a slight decrease in the revenues if you look Q1 over Q4, but they were basically the same.

Alex Wright – UBS

So you are expected to recover a little bit in the next couple of quarters since quality has picked up again?

Leonid Melamed

We can hardly hear your question.

Alex Wright – UBS

Yes, sorry, I was saying if you would expect the growth service margin to pick up again, to increase again, in the next couple of quarters as revenue strength picks up.

Leonid Melamed

We usually do not guard the developments on the construction. The deal is that, basically, we know that the trend will likely be the oil trend, and the construction will likely be trend of the last year.

Alex Wright – UBS

OK, thank you.

Leonid Melamed

I’m trying to understand, the second question was about the change the other expense income, correct? We are struggling to hear you.

Andrei Terebenin

We are going to move on the next question, because we seem to have lost Alex.

Operator

Certainly. The next question is from Mr. Ben Joseph with Thames River Capital. Please go ahead with your question sir.

Ben Joseph – Thames River Capital

I just had one question, and I think it is actually the same question that Alex is trying to ask. On the other income line, if it is made up of different components, can you at least stick out for us the element that relates to Belarus please?

Leonid Melamed

We will not disclose the final details, but basically there was a significant improvement in the Russian situations, and there developments in the market. Besides that, we also had some certain improvement of the network in this quarter.

Ben Joseph – Thames River Capital

So you can’t disclose the element that relates to Belarus?

Leonid Melamed

We don’t disclose the financial data for the Belarus situation, and we already discuss the operational detail of Belarus, which is presented in the presentation.

Ben Joseph – Thames River Capital

OK. Can I just ask you whether or not you think that other income in sustainable in the course of the basis for the rest of the year and going forward, whether they were some of the items in there, but more cyclical in nature?

Leonid Melamed

Well, we do not focus specifically on those items, and of course we do not focus on one of the next quarters, and that item will probably the most important part of our P&L.

Ben Joseph – Thames River Capital

OK, thank you. Just another question on the sales and marketing cost, given the fact that this quarter was relatively a little bit low, and there’s going to be a little bit of rebranding costs for you in Ukraine, just general advertising spend will pick up. Are you able to provide any guidance in terms as a percentage of sales that you expect sales and marketing costs to be for the full year on a group basis?

Mikhail Shamolin

These trends are related to cost items and will remain for the next few quarters.

Ben Joseph – Thames River Capital

Thank you very much.

Operator

Thank you, the next question comes from Miss Olga Bystrova with Credit Suisse, please state your company name followed by your question.

Olga Bystrova – Credit Suisse

Good evening, a lot of my questions were answered but I just want to follow up on a few. First of all, when you were talking about longer term, I think Mr. Shamolin was talking about longer term ARPU's being double digit. Can you just clarify, does that mean above $10, or double digit growth compared to what you expect to have in 2006 of $8.6 as you were mentioned previously.

My second question is on the 3G model that you probably already have some thoughts on given the $2.5 billion revenue guidance for 2011. First of all, does it mean that you expect a basic incremental 3G ARPU of about $20 per month from your subscribers. What is it based on? Is it based on your analysis that you have seen in Europe, or is there some other analysis that has been perhaps done? The second thing is, does this revenue opportunity includes include a potential change in your business model pertaining to 3G? Meaning, are you considering 3G subsidies in there or not?

My final question, I just want to clarify on your increased guidance, I know a lot of questions were already asked on that, but does your change in revenue growth guidance include any change of your views of the exchange rate in Russia or is it based solely on the local currency? Thank you.

Vsevolod Rozanov

Double digit means around $20.

Olga Bystrova – Credit Suisse

$20?

Vsevolod Rozanov

Approximately, by 2011-2012.

Olga Bystrova – Credit Suisse

OK.

Leonid Melamed

We reviewed last year our interpretation of a strategy where we have seen ARPU in the next coming 7-8 years to grow to a level of $13. We are keeping on this track and we think it’s going to be correct long term forecast for us. So we don’t change our views on that. From one side there will be an increase in usage, but new technology is going to be introduced and that will balance for us. On the other hand, we understand that competition will still guide us to some EPM reductions and combined with the (inaudible) it will definitely drive the double digit ARPU over the next seven years, and that’s how see it.

When you ask about the ARPU for 3G, to clarify once again, when we say $2.5 billion revenues in 2010, this is what we will generate compared to when we don’t create significant 3G networks. So that’s why when you see that long term forecast, it includes the revenues we will have out of the 3G networks.

The question about inflation especially in Russia where we have global tariffs, we don’t have any specific guidance on the inflation rate, the difference accounted for by the ministry official in the government.

Olga Bystrova – Credit Suisse

OK, great, thank you very much.

Operator

Thank you the next question comes from Stephen Pettyfer with Merrill Lynch.

Stephen Pettyfer - Merrill Lynch

Hi good evening, Stephen Pettyfer for Merrill Lynch. Just a quick question on Ukraine please. Can you tell us how many customers you’ve had significant than (inaudible), and whether or not you’re seeing any internal churn in terms of that product launch.

Mark Burdn

We normally disclose that as a separate item and suffice it to say we achieved what we expected to achieve by the end of the first quarter in terms of subscriber base. And as I said, the promotion and pricing is designed to encourage a family of users within the network.

Clearly, any new offering would be an element where we believe we have differentiated it from our existing offerings for us to grow our user base in Ukraine. The cannibalization is more from our competitors than from our own base.

Stephen Pettyfer - Merrill Lynch

Great, thanks Mark.

Operator

Thank you, your next question comes from (inaudible).

Unidentified Analyst

I had a couple of questions, the first one could you please repeat the usage figures you mentioned for Moscow versus the south region along with the average price per minute figures? That’s the first question I have.

Mikhail Shamolin

The difference…I didn’t say all the market regions. I made an example of one particular case, the south, and the difference was 150 minutes in Moscow and around 350 minutes in the south.

Unidentified Analyst

350? And so which regions do you see much lower usage that takes down your blended average for Russia overall?

Mikhail Shamolin

I would not give you specific regions because we don’t disclose this information but I can give you an overall trend which is the usage is directly tied to pricing in a particular region and the amount of local wealth. When we see a combination of relatively high wealth and low price, we do see a very significant usage which demonstrates a definite unsatisfied demand for mobile voice services.

Unidentified Analyst

And the price difference was $0.10 versus $0.03 on average in those two areas you talked about?

Mikhail Shamolin

Around that. I didn’t give you exact figures but the difference is around four times essentially.

Unidentified Analyst

Do you think in other regions where usage is much lower that we could start to see…you know you mentioned in the future we could see levels maybe on average of 300 for Russia as a hypothetical figure. Do you think some of the other regions where the levels are much lower today, do you think it’s possible despite less local wealth and different pricing policies.

Mikhail Shamolin

I believe that there is clear potential for growing usage in Russia. We see as I said, we see a great demand for voice services. People would like to talk more, there are currently budget constraints, and those budget constraints are being lifted by the overall enrichment of (inaudible) over the coming years and also more use of mobile phones as an integral part of their life.

Unidentified Analyst

I’m sorry, who is this?

Mikhail Shamolin

My name is Mikhail Shamolin. I’m head of Business Unit, Russia.

Unidentified Analyst

Yes of course. And the last question I had, just a more general question, it’s just how the last couple of months have been going both in Russia and Ukraine, I think Mr. Melamed you made comment how both have been similar since early spring. Just to understand, are you basically saying that you haven’t seen any incremental price promotion activity since what we saw in the first quarter and is the benign environment still continuing over the last couple months in Russia? Thank you.

Leonid Melamed

When we mentioned in our discussion today about seasonality, it means that we have observed this in the financial data of the company. So the rest from (inaudible) both in Ukraine and in Russia, we can historically observe them and can then take some kind of focus. Of course, I cannot right now say anything more clearly about Q2.

Unidentified Analyst

I mean, just very generally, has the very aggressive behavior we saw in Q1 continued, or eased somewhat?

Leonid Melamed

If I understand your question correctly, it was related towards Ukraine, and we’ve just confirmed the situation of the market in Ukraine is relatively stable to what it was three months ago. In Russia, it’s also (inaudible) and we can’t discuss the information there.

Unidentified Analyst

OK, thank you very much.

Operator

Thank you. Once again if you would like to ask a question, please press the Star followed by the One on your touch tone telephone. If you would like to cancel, please press the Star followed by the Two. Next question comes from –

Andrei Terebenin

Thank you. Ladies and gentlemen, we encourage you at any time to contact our Investor Relations for any further queries. 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 again, and wish you a very pleasant day.

Operator

Thank you ladies and gentlemen this concludes the first quarter 2007 financial and operating results. Thank you for participating. You may now disconnect.

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