Mobile TeleSystems' (MBT) CEO Andrei Dubovskov on Q3 2016 Results - Earnings Call Transcript

| About: Mobile TeleSystems (MBT)

Mobile TeleSystems (NYSE:MBT)

Q3 2016 Earnings Conference Call

November 17, 2016 10:00 AM ET

Executives

Joshua Tulgan – Director, Corporate Finance and Investor Relations

Andrei Dubovskov – President and Chief Executive Officer

Vasyl Latsanych – Vice President Strategy and Marketing

Alexey Kornya – Vice President Finance, Investments and M&A

Kirill Dmitriev – Vice President-Sales and Service

Analysts

Roman Arbuzov – UBS

Ivan Kim – VTB Capital

Dalibor Vavruska – Citi

Ksenia Mishankina – UBS

Alex Balakhnin – Goldman Sachs

Igor Semenov – Deutsche Bank

Alex Kazbegi – Renaissance Capital

Alexander Vengranovich – Otkritie Capital

Sergey Libin – Raiffeisen Bank

Operator

Good day and welcome to the Mobile TeleSystems Third Quarter 2016 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joshua Tulgan. Please go ahead.

Joshua Tulgan

Thank you very much and everyone welcome to our conference call to discuss the Company's third quarter 2016 financial and operating results. As always, I need to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements, which may involve certain risks.

These statements may relate to any of the following issues, the strategic development of MTS' business activities in Russia and abroad, subscriber dynamics, common use financial indicators to operating indicators frequently used by telecommunications companies, debt instruments and their usage, legal actions or proceedings directed at the Company or its representatives, regulatory developments and their impact on the Company's operations, technical matters as they pertain to our communications networks including equipment licensing or network technologies, activities in lines of business that complement our core communication networks, capital expenditures and operating expenses, and of course, macroeconomic developments within our markets of operation.

A comprehensive overview these issues is available in our annual report on Form 20-F, which is available on our website or through the U.S. SEC. Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include Company press releases, earnings presentations, our Form 20-F as well as any other public filing made by the Company with the U.S. SEC, all of which are available on the Company website www.mtsgsm.com or that of the U.S. SEC at www.sec.gov.

MTS disavows any obligation to update previously made forward-looking statements spoken on this conference call or make any adjustments to previously made statements to reflect changes in risks. Copies of the materials used and referenced in our conference call today are available on our website. I'll now turn the call over to Mr. Andrei Dubovskov, President and Chief Executive Officer of MTS.

Andrei Dubovskov

Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and operating results for the third quarter 2016. Joining me today are Kirill Dmitriev, Vice President Sales and Services; Alexey Kornya, Vice President Finance, Investments and M&A; and Vasyl Latsanych, Vice President Strategy & Marketing.

Firstly, I need to remind everyone that in August, we disposed of our Uzbekistan business. According to IFRS rules, results of this continued integration shall be excluded from the results of continuing integrations and present them separately as a single amount in the statement of comprehensive income. For the period, we saw a slight revenue decline of 1.3% year-over-year to RUB112.2 billion. Factors that have enabled us to sustain our market share in competitive markets include stable usage of core voice products and strong data usage growth, strong retail activities as we effectively manage active competitive behavior, growth in B2C home internet and pay-TV market despite continued declines in our fixed voice revenue segment, and subscriber and revenue growth in Ukraine through the steady adoption of 3G data services.

Macroeconomic factors and competitive issues continue to impact our performance in many ways, in particular, voice and message and usage and roaming, but in general, our revenue trends have shown relative stability in comparison to our peers throughout our markets of operations.

Adjusted OIBDA declined 5.1% year-over-year to RUB45.7 billion. In Q2, we warned of weaker adjusted OIBDA performance when we lowered our guidance for the year and factors we see remain the same. Competitive factors throughout our markets and ongoing distribution issues in Russia reduced usage of roaming and other services sensitive to microeconomic factors throughout our markets and less adjusted OIBDA contribution from our foreign subsidiaries due to ruble appreciation during the period.

As I mentioned earlier, retail competition impacted both the gross margin and adjusted OIBDA directly, but it also has a sustained impact on effective pricing. These factors combined with the continued macroeconomic volatility throughout our markets weakened our performance for the period. Now, I will turn the call over to Vasyl, who will further elaborate on our revenue performance within our business units.

Vasyl Latsanych

Good day, ladies and gentlemen. For the period, we want to highlight a number of very healthy and important trends in our Russia business. We saw stronger data usage due to both the growth of customer usage and migration to data plans as smartphone penetration reached nearly 52%. We realized a 2.8% growth in subscribers as we focus more on sales through our proprietary retail channels. Sales of goods increased by 8% for the period.

We continue to implement our strategy of upgrading existing feature phone users as well as attracting new voice and data users. Overall, handset sales did decline by 1.9%, but the average price was higher. Growth in sales of goods was also impacted by higher sales of software packages to B2B clients as we begin to coordinate activities with our IT services business more closely. Overall, total revenue in Russia declined slightly by 0.8% to RUB103.1 billion.

The key negative factor was roaming as mobile services revenue declined by 2.7% during that period. With fewer people traveling and certain markets like Turkey and Egypt cut off to group tours and charter flights, we saw reduction of usage in roaming within many client segments. In our fixed line business, revenue increased by 0.1% to RUB15.1 billion. We see continuous growth from our B2C broadband and pay-TV markets as market shares in Moscow in both home Internet and pay-TV improved. However, B2B and B2G spending were falling due to macroeconomical reasons.

In Russia, we continue to defend market share by executing on our strategy of expanding our own retail footprint and promoting lower price smartphones. We are now operating close to 6,000 stores, but we do not expect this number to increase materially in the coming months. We still believe that it will be clearly in the best interest of the market to work to reduce overall SIM card sales and focus sales through operator-controlled monobrand channels. This would reduce pricing pressure and improve profitability of all operations.

In Ukraine, revenue for the period increased by 11.2% to nearly UAH2.9 billion. Key drivers include a 2.7% increase in subscribers and data consumption, which is rising as we have rolled out our 3G network to major population centers throughout Ukraine. Among our foreign subsidiaries, revenue in Armenia and Turkmenistan in line with the previous quarters. Both markets remain exposed to macroeconomic trends which continue to weaken voice and data usage. I'll now hand over to Alexey Kornya, who will discuss the Group's profitability and financial performance in more details.

Alexey Kornya

Thank you, Vasyl. As Andrei noted, we witnessed a decline in year-over-year Group adjusted OBIDA of 5.1% to RUB45.7 billion. Our updated guidance in second quarter strongly indicated that adjusted OIBDA weakness would be evident in third quarter and we expected this decline. However, our quarter-on-quarter adjusted OIBDA gain of 12.4% was nearly 1 percentage point stronger than in 2015. So we believe that we saw the lowest point of our adjusted OIBDA year-on-year dynamic in third quarter.

We saw relative strength in our Russian operations as Russia OIBDA declined nearly 3% year-over-year. As indicated by our Group adjusted OIBDA performance, Russia showed a relative improvement in OIBDA quarter-on-quarter as well, 8.8% versus 8% sharp growth in 2015. Like in second quarter 2016, however, two factors continued to impact our OIBDA, roaming usage and its impact on overall revenues and our retail expansion and efforts to manage the increased competition within the marketplace.

Through nine months 2016, we increased our store count to close to 6,000 stores. Our large retail footprint combined with our strong long-standing pricing policies on handsets negatively impact our operating efficiency. Whereas the ruble was relatively stronger this quarter compared to previous quarters, lower roaming usage in the year's strongest roaming period reduced the EBITDA contribution from this higher-margin revenue segment.

In Ukraine, adjusted OIBDA improved year-over-year to nearly UAH1.1 billion. Unfortunately, the relative weakness of hryvnia to the ruble meant that in ruble terms, we saw a 10.2% decline in adjusted OIBDA contribution from Ukraine year-over-year. Naturally, this was a significant factor in our Group adjusted OIBDA performance. However, we continue to see improvement in efficiency as we realize the scale benefits in our 3G investments in the market through rising subscriber levels and growing revenues from voice and data products. We believe trends in Armenia and Turkmenistan reflect revenue trends as we see customer re-usage impacted by the weakness economy through a reduction in international dialing and roaming.

Group net profit for the period decreased slightly year-over-year to RUB12.6 billion. Excluding RUB2.7 billion loss on disposal of UMS, we would have seen a gain year-over-year. Key factors in our net income dynamic include OIBDA dynamics, increase in total cash forex loss from appreciation of the ruble, stronger ruble in relation to Group currencies and key non-ruble expenses, and loss of RUB2.7 billion on disposal of UMS.

Free cash flow to date amounted to RUB48.9 billion, an increase of 67.2% year-over-year through the first nine months. Lower CapEx spending of RUB58 billion through nine months is a key factor and we expect more moderate CapEx spending to continue and be in line with our guidance of RUB85 billion. Spending is lower in each of our markets as we focus on incremental investments in our more developed data markets and have completed our launch of our core 3G network in Ukraine.

In keeping with our new dividend policy, we recently paid out dividends of RUB24 billion or RUB11.99 per share. This raises the total dividend payout for the calendar year 2016 to RUB52 billion, which translates to RUB26 per share. In April 2016, MTS disclosed in its dividend policy that it would consider spending up to RUB30 billion over the next three years to complement its dividend payout with other ways to generate shareholder return. As part of this consideration, we have recently launched through wholly-owned subsidiary of MTS, that auction tender to acquire up to RUB4.9 billion worth of shares and at the same time we have entered into a binding agreement with Sistema to acquire a proportional number of shares at the price set by the market once the transaction is completed.

By the end of the period, total debt stood at RUB268 billion, net of leases and debt issuance costs which is trending lower due to our ongoing debt repayment as well as financial policies. Our net debt-to-last 12 months adjusted OIBDA remains stable at a manageable 1.1 multiple, a comfortable level for the Company and very low in relation to our peers. Over 90% of our entire non-ruble debt position is currently covered by combination of hedges, short-term deposits, and stable long-terms deposits denominated mostly in U.S. dollars. We did issue a RUB10 billion denominated bond, but overall, we reduced our debt through the redemption of earlier bonds as well as amortized debt repayments. We remain focused on sustaining a strong balance sheet and identifying further ways to optimize our debt portfolio.

Andrei Dubovskov

Thank you Alexey, it's Andrei Dubovskov. While our quarterly performance was below past performance, we believe that MTS is well positioned for the future. In our key markets, we've seen the effects of macroeconomic weakness impact our results disproportionately to our competitors especially in segments like roaming and small business. Despite these challenges, we have been successful in sustaining our market share.

Overall, we saw subscriber growth in our key markets in Russia and Ukraine. We often talk of the importance of leadership and here, we see the value in a scale business like our own large active subscriber base established foundation for growth and efficiency.

We completed our core network build and we now offer LTE in every region of Russia and 3G services throughout Ukraine. In Moscow, our market share in Internet and pay-TV is increasing. We also increased our commitment to digital services. In addition to the integrated services, we are now offering business through our acquisition of NVision. We have been steadily increasing our efforts to focus products on the digital future. Over millions of subscribers use proprietary apps like byMTS, MTS TV and MTS Connect. The recent launch of our Innovation Center ensures that we do come faster to market with new services for both customers and partners and we continue to employ Big Data solutions to support our business efforts.

At the same time, we are expanding possibilities for mobile payments and financial tools for our customer. We have issued more than 3.2 million MTS Money cards. The merging of our retail network with that of MTS Bank gives us a platform to expand usage network further. All the while, our balance sheet remains the strongest in the business. We've sustained the current net debt/adjusted OIBDA levels for many quarters and generate sufficient free cash flow to make a healthy return to shareholders. In time, competitive pressure in areas like retail will pass and we feel confident that this advantage will allow us to return to growth in the near future and significantly improve the sector profitability.

With that, we'd like to open the call to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will now take our first question from Roman Arbuzov from UBS. Please go ahead.

Roman Arbuzov

I have two, please. The first one is on CapEx. You have previously communicated that you are aiming to reduce CapEx by RUB5 billion a year. I was wondering whether you could comment on whether you think this is still achievable? And also, listening to some of your competitors, they've been communicating perhaps lower capital intensity going forward specifically MegaFon and also if you look at the level of investments of VimpelCom this year, the capital spend of the industry overall is coming down. So, could you please provide us additional color on how you view medium-term CapEx? Thank you. That's the first one.

And then the second one is on buybacks. Could you please provide us just a little bit more color on your logic around buybacks and also bearing in mind that you've got a total mandate of RUB30 billion for the buybacks? How should we think about the potential buybacks going forwards and what would be the key decision drivers for potential future buybacks? Thank you very much.

Andrei Dubovskov

Roman, thank you, it's Andrei Dubovskov. Talking about the CapEx guidance, you're absolutely right, we're going to reduce our capital expenditure approximately by RUB5 billion every next year till 2020 at least because we think that in that period 5G will come and we will faced on the new problems how we need to increase our capacity, how we need to increase the speed in our network and it lead us to back on track in our previous CapEx trend, but talking about the nearest two, three years, that's true, we are going to reduce our capital expenditure

And at the same time, let me remind you that in 2015, we have finalized our just one problem in Moscow, talking about the 4G network right now, it's totally enough for our subscriber base, because now the current 4G penetration in our subscriber base, it's not so high. And I mentioned it’s really that for example, RUB75 billion for all our countries, not in Russia, but in Ukraine and Belarus, it will be totally enough for our current situation. Thank you.

Alexey Kornya

Speaking of about buyback, Roman, it's Alexey. Since why in the tender process, we are limited in what we can say about this specific tender, I can just reiterate that this tender is a part of our longer-term view of additional return to shareholders in the form of RUB30 billion. However, each year we'll take a separate decision related to whether we do anything and what form we do and this specific tender offer relates only to this year.

Roman Arbuzov

Right. Can you just quickly follow-up on CapEx please? Given your sort of renewed confidence in that CapEx will be coming down, is it more boosted by the fact that your competitors are talking about CapEx coming down or is it just simply the fact that you don't see that much demand and also you're quite confident in the quality of your current network?

Alexey Kornya

I think that both technological cyclicality as well as overall market situation, competitive market situation allows us to have the view in the position on the CapEX, which Andrei has just described.

Operator

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

Ivan Kim

My both questions are on retail. Firstly, your number of stores increased quite a bit year-on-year by about probably 1,000 stores or so, but at the same time, retail development contributed only RUB600 million to OIBDA decline as you show in the presentation. It looks a fairly low number compared to session retail footprint increase. So, can you clarify what are the dynamics behind that and maybe some of the costs are capitalized, I don't know. And secondly, on the retail gross margin. So it improved by more than 4 percentage points year-on-year, can you please elaborate on the reason behind that? Thank you.

Kirill Dmitriev

Excuse me, could you please repeat the second question? Thank you.

Ivan Kim

Yes, in the retail business, the gross margin improved from about 10 percentage points to like 14 percentage points year-on-year. I was just wondering what has been driving that upwards because I guess you were still selling your smartphones fairly aggressively. Thank you.

Kirill Dmitriev

Well, this is Kirill Dmitriev. Let me start with answering the second question. Well, it's pretty obvious reason, this year we have launched less zero margin activities than year before. It's both because of the market situations and because of the scale effect we are enduring this year. And answering your first question, what's the logic behind this difference in the figures, actually partly, I have answered this question beforehand. And the second reason for that is actually again the scale.

Yes, we have quite significantly increased the number for our stores across whole Russia and by the way, I'd like to mention that we don't see any growth beyond this figure. We consider this number and this level of market footprint as a sufficient one to serve our customer base and to keep a quite significant market share in the handset market. And another reason for that is actually we are working hardly with the efficiency of our network and we are trying to find some additional economies actually in trying and expanding the range of the products we are selling and in cooperation with our key handsets partners as something for example.

Ivan Kim

Okay, so does it mean that let's say all your 1,000 additional stores are all profitable or – because I would think that for the first, I don't know, six to 12 months, the stores are loss making, probably there are certain rollout costs associated with new stores, let's say RUB1 million, maybe RUB1.5 million, how does it work?

Alexey Kornya

Ivan, its Alexey, not it does not mean, I think what we are seeing is that increased marginality of our sales in gross margin contributed to less negative impact having from increased footprint of our distribution network. So if you calculate the absolute amount of our gross margin, this year it would be higher than last year and that compensates for the cost associated with the big retail network. Still, we would note that it does have a negative impact, even the growing gross margin and even the growing positive contribution from growth in marginality.

Operator

We will now move to Dalibor Vavruska from Citi. Please go ahead.

Dalibor Vavruska

Just two questions if I may have, on the service revenue you mentioned roaming as the main source of weakness, obviously the drop from the positive territory to minus 3 is quite significant on quarter on quarter.Can you just elaborate a little bit, I mean maybe how much of that drop in the annual growth rate is due to roaming or how the voice and data and other components played out, just to get a little clarity what happened in the second quarter and what do you think may happen, sorry in the third quarter and what may happen in the fourth quarter for that to improve.

And my second question if I may is whether you could perhaps highlight your R&D spending on the apps, on the digital services, on these sort of non-core services. Just roughly to get a feel, how much you're spending and also in line with your competitor announcing a potential combination with a major Internet company, I'm just wondering if you have any views on synergies in this area between the telecom service and the Internet companies? Thank you.

Vasyl Latsanych

Dalibor, this is Vasyl. I will try to answer the questions. First one concerns the revenue of the service revenue, total mobile and their roaming impact from it. As we have highlighted in the speech and in the numbers, the roaming played a very, very prominent role in the overall dynamics of the service revenues and that was the result of a general, as we call it a perfect storm that hit the roaming in 2015 and specifically in 2016 because we have seen closure of our best in terms of the volume of the travelers destinations like Turkey and Egypt and some other South African destinations as well as a decline in travels to Europe into United States from Russia.

So our own customers unfortunately traveled less this year than the previous years and that had a pretty hard effect on the roaming as such specifically on the voice roaming and SMS roaming. That's what we especially put in the comments and in the numbers.

Meanwhile, there is an increase in data roaming, but we have to understand that, that comes from a very low base point because data roaming was still a very luxury thing in recent years and it's just beginning to pick up and we are trying to develop that area as much as we can because we see that as a good substitution for the voice roaming revenue fall out and since we cannot send more people abroad, we are trying to leverage the existing roamers to use more services and to spend more money with us and to make those services more possible for different sizes of pockets of our customers. So the data roaming which was used just mostly by most affluent part of our customer base is being spread downwards now and is being made more and more affordable for different and lower segments of our traveling customers.

Meanwhile, the third quarter was the quarter that had previously benefited most from the roaming revenues, in past where we were commanding a superior market share in the roaming revenues across the country compared to the other carriers. So we were hit the most unfortunately by this storm and in third quarter, it was the peak time for us not getting enough revenue from the roaming, which is reflected in our numbers. In the fourth quarter, we expect the situation to improve since the roaming in fourth quarter plays much smaller role than it had to play in the third quarter and that means that in our opinion, the most difficult part of this path is over and we should stabilize our roaming revenues starting Q4 and onwards. And maybe, in develop if we have success with our newest roaming office which are due to come literally next weeks which will promote as I said data roaming for all segments of our customer base

Now the second question was on R&D spendings. We are not allocating specific budgets to R&D as such that would be not be contributing to our business. There is a lot of things that we do not call R&D but they are development of different services on the backbone of mobile or fixed networks and these are being conducted as normal operations business without a special R&D allocation. There are certain things that we call new things in our business like Big Data development but it is still mostly building the infrastructure and research behind it which is mostly hiring appropriate people and giving them new tasks than just allocation of R&D funds behind their activities.

So there is nothing that I would attribute as R&D as such in our P&L sheet, it is more a question of how we develop different types of our activities with partnerships or importantly inside of the business and whatever costs behind it, they are not material to our overall P&L for the moment. Thank you.

Andrei Dubovskov

Dalibor, its Andrei and talking about your third question. Of course, I hope you understand that we have no possibility to make a comment about the deal between MegaFon and Mail.ru but talking about our behavior, I just want to say that we prefer to grow organically because you know for example right now maybe we have no possibility to say about MTS that its Internet company but at the same time, talking about the application, our current services about our subscriber activities especially in Fintech where we are Internet company and again, organic way for us, its more profitable and we have much more information about our subscriber base, about their behavior, then for example, if you will merge to independent layer.

Dalibor Vavruska

Thank you very much for this. Can I just ask a very quick follow-up on the first question. Is it possible to say that excluding this international roaming, your mobile service revenue was in positive territory year-on-year or is it too much of a – ask to disclose

Vasyl Latsanych

No, no, we can talk about that for sure, we know these numbers and the mobile service revenue year-over-year are flat with the roaming playing unfortunately adverse role and knocking them down to the negatives.

Dalibor Vavruska

So this entire 3% or 2.9% is due to roaming and otherwise would be flat?

Vasyl Latsanych

Pretty much, yes.

Operator

We will take our next question from Ksenia Mishankina from UBS. Please go ahead.

Ksenia Mishankina

Could you please comment what is your optimal net leverage ratio and do you plan to refinance any portion of your short-term debt? Thank you.

Alexey Kornya

Well, I think the question about optimal level of leverage is very much about whether you have optimal investment opportunities and ideas. As far as our financial policy concerned, we are seeing that up to two times debt-to-OIBDA that is comfortable level for us. However, this does not mean that we are targeting to achieve this level. It just says that within this range where we see it right now, we see it being a comfortable level.

And as far as refinancing, we do have some debt which is maturing and we'll be paying out this debt and where free cash flow is not sufficient, we'll refinance. We don't have any specific plans for refinancing.

Operator

We will now move to Alex Balakhnin from Goldman Sachs. Please go ahead.

Alex Balakhnin

Two questions from me, one is on your distribution, the question is a bit twofold. Do you know what's the market share of MTS devices in Russia because I came across some analysis and the number was ridiculously low. So if you have something to share, I would appreciate and just broadly speaking, I'm sure you have that, like out of the devices that are on MTS network, how many of those were sold by your own distribution network, do you know? So that's one.

And second, just want to follow up on Dalibor's question, given this drive of telecom operators for the content and media/Internet assets, still like, what are your thoughts about the potential combination with the companies that have so much time spent like customer-facing, I would say, like do you think it's unnecessary given still you provide all the essential data and access capabilities or there is a sense in a potential infrastructure quantum tie-up for you and what's your thinking on that? Thank you.

Kirill Dmitriev

This is Kirill Dmitriev, let me answer the first of your questions actually regarding the market share and our estimation of the MTS market share in the handset market. Well, revenue-wise, we estimate our revenue share around 15% to 16%. It depends on the week we are looking at and in units in handsets precisely, it's slightly above 13%, something like that. It's growing. Now, the last couple of months, it's relatively flat, but we consider that as a sufficient level actually to have leverage on this market actually because we have some channels of distribution associated with our own retail network like federal players like, I don't know, DNS for example or Media Markt, which are not directly managed by us, but we can influence the market share as well. So did I answer your question, hopefully?

Alex Balakhnin

I was wondering this 15%, 16% or 13%, is this out of overall market, right or only within.

Kirill Dmitriev

Yes, pretty much.

Alex Balakhnin

Okay, but my question was on the MTS branded devices, is this what you talk about?

Kirill Dmitriev

No, no, no. I'm talking about – this is our general market share. Talking about the branded devices, yes, it is not at this level of figures. It is significantly lower, definitely. I don't provide you the precise figures nowadays, but I think it's less than I don't know, 3% maybe or 2% something like that.

Andrei Dubovskov

From Sasha, there was a question on the telecom media and what are our thoughts on potential combination of the companies that have more experience – customer-facing experience in data. So Sasha, we are more than welcoming any kind of cooperation here. We are already cooperating with most of these companies that work with data. In the Russian markets, we cooperate with Google, with Yandex. We look forward to cooperation with Facebook, with Contrxi and the other big players as well as we have a number of initiatives and even pilots run with the smaller players in the area of Internet advertising and customer handling. And that is all in the sphere of, which we call digital area without any M&A's necessary.

We think that in this market, things turn very quickly. You have big hits which might last quite short and it is important for us to support those and to work with them in a time when they are on the top. Meanwhile, we see many of these companies going down the market or not performing long-term and our business is an establishment, so we need a long-term performance. And therefore, we are not looking into acquiring or going into any kind of M&A on the current peak valuation of any of such companies, but rather to cooperate with such companies for the projects and products which might be beneficial for our customers, for ourselves as the Company or for our development.

And there are many of such cooperations, which we just don't trumpet it in every corner, but we believe that some of those are either helping our internal business or helping us to produce the products, which we can put on the markets and which can be competitive. Of those, you can see our recent launches, which are from the digital area and which are successful. Things like MTS Music was a very successful application targeted at selling and broadcasting the music to our customers and it was in form of an application, which is used by way more than 100,000 customers right now and those customers are paying us for usage and we can compare that with the best examples of such services in the country and even globally.

And we did not actually spend money for acquiring any companies for that, we just entered a very successful partnership, which seems to be one of the best music applications launched in the country so far. Besides that, we have a pipeline of launches that would be, we believe very successful in the areas of customer services of other non-telecom services, which we can either contribute to or enhance or promote and we think that this is much better way than acquiring and putting bets on some early birds that might not actually fly. Thank you.

Operator

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

Igor Semenov

I have a question on your – on the growth of data usage. It's remarkably strong in Q3 and yet you say that service revenues even adjusting for roaming is just about flat. So just wanted to ask you about the data monetization strategy going forward and also if you could, as a request, provide a bit more detail on a regular basis on these kind of applications like you do or you used to do for the MTS Dengi project. So that would be quite interesting to track this kind of success. Thank you.

Vasyl Latsanych

Thank you, Igor. Yes, well spotted. We do have a very strong growth in the data consumption though we do not attribute any specific revenue to data anymore because we believe that our general trend of revenue reflects well the position of the business of the mixture of the voice and data and messaging which we mostly sell in packages right now. So it is probably rightly said that for most of the carriers at the moment, if you see a number and if it's positive, it probably means that the data is growing at a very high level. Meanwhile, the voice is most likely on a downward trend. If it is, as I said before, if you extract roaming from it, it's quite flat.

It is right to say that in general, voice is not growing anymore and even may decline, but the data is compensating for it in terms of the usage and it drives the revenue back upwards to the flat numbers. That is generally said. If we're talking about the data as such, we are for years already working hard on development of data and it reaches penetration of more than 40% in our base, still not reached actually the penetration of the smartphones. If you remember, we have talked about the numbers in the previous disclosures that the smartphone penetration is materially higher than the data penetration and that is the lag that we want to compensate for and we want to be better in penetrating with the services those customers that already have handsets.

In fact, this number, this gap is narrowing. So the number becomes healthier thanks to our initiatives of up-selling to the existing customers and selling the packages together with the smartphones and enabling customers to use them immediately. This program will continue on and we hope that we will be having even higher penetration of data service to our customers and that will continue to at least compensate for the falling out voice revenue, but in future hopefully even drive the revenue as more customers adopt the 4G handsets and connect to our superior LTE network.

We have different plans to develop that because we see that the customers who connect to LTE bring us more money, are more effectively using the services, and are actually putting less load on the network. So there is a cumulative effect which is very positive for the carrier and we have plans to develop that effect throughout our base offering more and more discounted or promoted LTE handsets to our customers.

I mean, in future, we see that there will be a time when we'll only be selling 4G handsets in our stores as we did previously with the smartphones pretty much discontinuing promotion and sales of the feature phones in the past. Speaking about the other revenues, you mentioned the MTS Money and other services, they contribute quite healthy to our overall revenue. Here, we're talking about billions of rubles per year and those are the commission revenues that come on top of any data, voice or messaging usage and we think that this is one of those trends that we have to support and in the future bring more money from the satellite services or other the services that we promote the base and sell under the MTS name and that will be, if not helping us to grow, then at least compensating for the overall weakness of let's say roaming or voice services on the network. Thank you.

Operator

[Operator Instructions] We will take our next question from Alex Kazbegi from Renaissance Capital. Please go ahead.

Alex Kazbegi

My first question would be about on your retail. Just to understand what is the proportion of sales, you know, it could be handsets, but mostly contract itself, which now you achieve through your own retail network and whatever that proportion is, is that basically the goal which you wanted to achieve? Is that something which you will see still growing as the retail presence is in the key locations mature? How do you see the sales progression if you look back at some of the retail, stores which opened some time ago, do you see traffic generally increasing and so to say are you managing to lure more customers to the stores away from the third-party dealers and if so, do you see generally that this number might be still in need to be optimized sometime in the future what should happen for that to look at the possibility of reducing the number of point of sales just because the efficiency maybe of all of them is not necessarily that high. So that's the first one.

The second one, I appreciate Vasyl's answer to the previous question in general, but maybe a bit more so to say, if you wish, your views about general pricing situation now in the market because we've seen some of the prices being adjusted upwards look by yourself actually have been putting some new prices at the same time. So generally, the healthiness of the pricing in the market and in terms of the trends as well. The trend was basically to move from the individual tariffs to mostly bundled. That has been largely done so to say, so what do you see next happening? Do you see narrowing of the bundled proposals? Do you see kind of an attrition of some of the tariff funds, which are maybe too excessive in terms of the offers given and kind of trimming it from one side or the other side, how do you see that progressing here? Thank you.

Kirill Dmitriev

Alex, this is Kirill speaking. Well let me start answering your first bunch of the questions actually. The first one was about the proportions you currently observe in terms of number of contacts or SIM cards versus number of handsets. Actually, let me indicate this is one of the key leverages we are currently using to optimize the quality of the SIM cards sold throughout our own network.

Nowadays, this proportion is about three on average. In some regions with the stronger market positioning of our sales, it may reach up to four, sometimes five but on average, Russia-wise it's about three. Coming further and answering your next question about…

Alex Kazbegi

What is three? Is it three times the other?

Kirill Dmitriev

This is the proportion of SIM cards sold through our own network divided by the number of handsets sold for the same period of time.

Alex Kazbegi

Okay, but in terms of the proportion vis-a-vis the other methods of sales so to say, compared to the other so to say third-party dealer?

Kirill Dmitriev

Well, this is the high proportion at least compared to what we observed last year for example. I cannot provide the exact figures on our competitors. I think looking at the net outcome we are currently observing in the Q3, I think this proportion for us, this is my guess, kind of that – this proportion should be higher to us. And we see that mid-term, I mean looking at the past, four to five months this ratio is going up. Well, let me continue actually and proceed to answer your second question about the current share of our own network and distribution.

Our sales – let me start with the statement that the number of SIM cards sold in the Russian market nowadays and we estimate this at the level of above 100 million SIM cards in 2016, to be precise 120 million. We asses it as a kind of – yes, it's way excessive – for the market, you can compare it with the number of the figures of population of Russia which is approximately the same.

This is one of the reasons for the optimizing of our OpEx and to optimizing for our distribution. The positive side of this development is actually and lies actually in the area of the control over the distribution channels because in some regions, in some big regions as well, we sell up to 90% of our contracts via proprietary channel of us, but on average it's about twofold something like that, and the healthiest scenario for us will be I think when we will reach that 75% of our contracts have been sold through our controlled monobranded network. Let me now pass over to Vasyl I think to continue to answer.

Vasyl Latsanych

Thank you, Kirill. Alex, the pricing question is a very broad question because we are not alone in the market. And let me assure you that whenever we see the opportunity for improvement of our pricing position, we are working hard to catch the opportunity. In terms of the bundles, yes, the first time of the bundle introduction, we have seen some of the optimization of our customers spendings namely those very high ARPU customers optimizing their spendings and migrating through the bundled tariffs, which were claiming lower ARPU for a specific segment, but those were their first months effect, which were long over and now we are talking about the customers generally connecting to the bundled services which ensure the minimal revenue, the minimal ARPU level above the normal pay-as-you-go minimal ARPU levels seen by us before.

At the same time, our continued efforts to increase the content of the bundle is mostly targeted at – reasoning the potential higher prices of the bundles that we are introducing to the market. So if you look at our general development, the bundles in the recent years introduced to the market are higher than the average lower and medium-level bundles sold before, but they do contain more services like more minutes and especially more megabytes. We see that as quite natural trends of giving more to the customers especially on the megabyte side when the LTE network gets rolled out and is ready to be used.

We are not kind of jealous to give more people, more services or we want to charge a bit higher prices for those bigger packages. At the same time, we have piloted the initiatives to cut off the lowest tariff plans in certain regions and see how people react to migration to a higher tariff plan, which is the entry tariff plan for most of the new connections. That has mixed results as some of the regions were impacted by the competition and some were having better results as competition was softer. So we think whenever we see a possibility of a softer competition, we will be getting rid of those cheapest offers now in the market without actually allowing the competition to take over and have more customers connected. So I'd say we are very cautious, and very flexible, but quite determined that the ARPU levels have to sustain and grow and we utilize different techniques to implement that strategy.

Operator

[Operator Instructions] We will now take our next question from Alexander Vengranovich from Otkritie Capital.

Alexander Vengranovich

Yes, hi, I have a follow-up on the previous data question. So as I see from your clarification in the presentation, majority of the growth in data in the third quarter was attributable to your unlimited data tariff plans [indiscernible] what's your view on the unlimited data tariff plans going forward? I think it was just a temporary initiative and you plan to cut it off in the future and aren't you afraid that there will be some position if your higher ARPU customers – such tariff plans and we shall have a negative impact to our revenue. Thank you.

Kirill Dmitriev

Alexander, thank you very much. That's the bingo question for today. Really [indiscernible] or tariff plans which feature unlimited data access are in general utilized on our network from time to time. We have a long-term trend to avoid such tariff plans on our network for big customer segments, but are using that as a tool for market fights and as you have noticed before, there were several competitive activities taking place in our market mainly the entrance of Teletutto Moscow region, the increase of the competition in several other Russian regions, the unlimited offers from Yota, MegaFon subsidiary throughout Russia and we believe that we have to counter it. So better leadership was there as a fighting tool, as a tactical tool, but not as a strategy for our Company.

We do think that the unlimited services might have a place in the market, but with very, very high prices and guaranteed ARPU or in specific conditions like let's say night unlimited when the network is vacant and when we can offer higher speeds and more traffic and would like to secure some additional incremental revenues, but as a general pricing policy, unlimited is not on our plan definitely for the long-term. So when we see the potential for the market to withdraw from unlimited tariff plans, we will definitely do so and we are taking steps to ensure that might happen as soon as possible.

Operator

We will take our next question from Sergey Libin from Raiffeisen Bank. Please go ahead.

Sergey Libin

Actually I also have a follow-up on unlimited tariffs. Do you plan to continue promoting now quite heavily as you did this summer? And when you say about when you see the opportunity to cut it off, what do you mean? Do you maybe plan to be the first to cut off the unlimited or you're going to follow the markets in this way? And secondly, I was just wondering if you could provide any update on data storage flow, just how is it evolving or just anything you could share about that please? Thank you.

Kirill Dmitriev

Sergey, thank you for the questions. I will continue the answer. The unlimited tariffs, we do promote, otherwise there was no point launching them and they are very, very successful in the market. In terms of the customer pick up, we have seen very healthy customer number growth. We have seen ourselves growing better than our competitors and not to the last it is – thanks to the tariff plans in this promotion. Again, we are not in a hunt to have as many unlimited customers as possible and we are totally conscious of the impact on the network that it may produce.

So we are not planning long-term to continue with tariff planning systems and promotion, but as I said before, this is a tactical tool and as soon as we see the potential to avoid unlimited tariff plans in the market, we will do so very quickly. It doesn't really matter who does it first, it is when we see the readiness of the market to generally abolish the unlimited tariffs, we will either follow or pioneer, it doesn't matter. It matters that we are sure that you as our shareholders and our Company will benefit from such move and at the same time, cutting off means for sure not force migrating the customers. We have liabilities to our customers and we'll continue service the customers, but we will not sell the new ones.

We will either slow down or stop promotion and slow down or stop sales. We have done that in the past, that's quite normal behavior for a carrier to promote something, to put another shelf and then to gradually stop selling the product, but migration or cutting off the customers is not a good practice of the carriers. So we are not planning this.

Vasyl Latsanych

Sergey, talking about your second question about data storage flow. Fortunately or unfortunately, we have no news in this area and you know finally all our behavior depends on the exact numbers, exact data or exact conditions which our government must implement into our markets and of course we are going to do it as soon as possible because this flow will start to 2018, if I remember correctly and we need to prepare some storage, we need to prepare some transport equipment et cetera, but right now, we have no news from this year-end and no new information.

Operator

[Operator Instructions] It appears there are no further questions at this time.

Joshua Tulgan

Elaine, thank you very much. Everyone, thank you very much for joining us tonight. We welcome any feedback any – you're welcome at any time to contact our investor relations department for any questions. A webcast of this discussion is available on our website and if you wish to replay the call. In the meantime, we appreciate everyone's interest and wish everyone a pleasant day and evening.

Operator

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

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