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Vimpel Communications (VIP)

Q2 FY07 Earnings Call

August 30, 2007, 10:30 AM ET

Executives

Peter Schmidt - Financial Dynamics

Alexander V. Izosimov - CEO

Elena A. Shmatova - EVP, CFO

Analysts

Sean Gardiner - Morgan Stanley

Sergei Arsenyev - Goldman Sachs

Alexei Yakovitsky - Deutsche Bank

Alex Kazbegi - Renaissance Capital

Alex Kuznetsov - Bear Stearns

Stephen Pettyfer - Merrill Lynch

Olga Bystrova - Credit Suisse

Nadia Golubeva - Aton

Dalibor Vavruska - ING Capital

Presentation

Operator

Good day everyone and welcome to this conference call to discuss VimpelCom's Second Quarter 2007 Earnings Results. Today's call is being recorded. At this time I would like to turn the call over to Peter Schmidt. Please go ahead.

Peter Schmidt - Financial Dynamics

Good morning and welcome to VimpelCom's conference call to discuss the Company's second quarter and six months 2007 financial and operating results.

Before getting started, I would like to remind everyone that, except for historical information, statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties. These statements relate in part Q1, the Company's strategy and development plans in Russia and the CIS; two, market growth and the competitive environment in Russia and the CIS; three, 3G development; four, the outcome of 2G licensed tenders in the Far East; five, access to external funding resources; and six, projections related to the Company's capital expenditures.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including risks detailed in; one, the Company's press release announcing second quarter and six months 2007 financial and operating results; two, the Company's earnings presentation entitled, Presentation of 2Q 2007 Financial and Operating results; three, the Company's annual report on Form 20-F for the year ended December 31, 2006; and four, other public filings made by the Company with the United States Securities and Exchange Commission, each of which are posted at the Company's website at www.vimpelcom.com.

In addition, the Company's second quarter and six month 2007 financial and operating results press release in Form 20-F are posted on the Securities and Exchange Commission's website at www.SEC.gov. VimpelCom disclaims any obligations to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements made on this conference call or to make corrections to reflect future events or development. If you have not received a copy of the second quarter and six months 2007 financial and operating results press release, please contact Financial Dynamics at 212-850-5600 and it will be forwarded to you.

In addition, the press release and the earnings presentation each of which includes reconciliations of non-GAAP financial measures presented on the conference call can be downloaded form the VimpelCom website.

At this time, I would like to turn the call over to Alexander Izosimov, Chief Executive Officer of Vimpel-Communication. Alexander?

Alexander V. Izosimov - Chief Executive Officer

Thank you Peter. Hello everyone and thank you for joining our conference call today. Let me introduce the team participating on this call. Here with me are, Elena Shmatova our Chief Financial Officer; Nikolai Pryanishnikov, our Executive Vice President who is in charge of Operations in Russia; Kent McNeley our Chief Marketing Officer; and Alexander Boreiko, our new Director for International and Investor Relations.

Today's presentation will start with a general overview of our performance in the second quarter of 2007. And after that, we will review each of the markets where we operate in more detail.

Let me now ask Elena to present our consolidated financial results. Elena, over to you.

Elena A. Shmatova - Executive Vice President, Chief Financial Officer

Second quarter results continued the positive trends which we saw in 2006. During the year, our revenue grew 53% and OIBDA grew almost 60%. The increasing scale of our operations and increasing margins CIS, improved margins both in absolute terms and as a percentage of revenue.

OIBDA margin in the second quarter of 2006 was 50.1% and now it is approximately 2 percentage points higher. The increase in net income was [technical difficulty] with 84% year-on-year growth. In this case net income grew primarily due to slower capital expenditures first half of 2007, which limited quarter-on-quarter growth in our depreciation charges in Russia to almost 3%.

Other factor is that this quarter we'll also have not seen significant fluctuations in currency exchange [technical difficulty] U. S. dollars for extraordinary taxation. While we are pleased with the higher growth of net income, we should keep in mind in hand volatility of that figure.

Our cash generations grew while our capital investments are staying at approximately the same level. As a result, our free cash flow on the last 12-month basis is approaching U. S. $1 billion. Non-cash generation puts us in a good position to expand geographically moving to adjacencies of salaries and support our dividend policy.

Based on the strong cash generation our cash balance at the end of June climbed to U. S. $961 million. The related [technical difficulty] cash to pay dividends and approximately U. S. $330 million in July and August for this service. We also acquired the Tele2 operation [technical difficulty] this display on local mobile markets for 232 million [technical difficulty]. Our leverage ratio continues to improve our debt capacity and giving out solid grounds for the expansion.

Let me know turn the floor back to Alexander to discuss in more detail developments in our key markets.

Alexander V. Izosimov - Chief Executive Officer

Thank you Elena. And let's start with Russia, our largest and more developed market. Overall, the telecom market in Russia and our results continue to be very strong. We have posted almost 20% quarter-on-quarter growth of usage.

Seasonal MOU growth was further stimulated by summer promotional activity, which led to a temporary decline of our average price per minute. Nevertheless, ARPU grew by 13%, and our active subscriber base increased by almost 4%. Growth in ARPU and active subscribers led to a strong 40% sequential and 43% year-on-year increase in our revenues in Russia. Constant focus on efficiency and increasing scale of our operations led to a decrease in SG&A expenses as a percentage of revenues, in its churn [ph] resulted in OIBDA margin increasing to 53.4%.

Our CapEx in Russia, as a percentage of revenue continued to decline in the second quarter, and for the first time dropped below the level of 20%. This year, we had so far invested just under $400 million. As our annual CapEx profile is traditionally skewed towards the second half of the year, we believe that we will remain in line with our previous CapEx guidance of approximately $1 billion for Russia for the year 2007. Beginning from the first quarter of 2008, substantial part of our CapEx in Russia will be directed to the development of 3G network. But it is not going to have any significant impact on this year's numbers.

Now, a couple of words about the status of 3G development, 12 weeks ago, we launched a tender for the 3G network equipment. We expect to complete the tender process and commence construction of the network in the fourth quarter of 2007. Putting to license terms, we must install approximately 3,400 3G based stations within the three years, and a total of 6,100 base stations within five years. These are a number of uncertainties, which do not allow us to be more specific about our plans in terms of timing and CapEx. This includes, 3G equipment has not yet been certified in Russia and the delivery of the equipment will not start until certification is granted.

Frequency clean up process is at an early stage and its cost and timeframe aren't clear. Tender process has just started and we need to wait for its outcome to estimate the applicable pricing level. Nevertheless, we expect to launch the 3G network in commercial operations in the second half of 2008 and naturally we intend to meet all our license obligations. In terms of total CapEx for Russia going forward; we expect to remain within our long-term targeted CapEx level of 15% to 20% of revenue.

Now, about the recent development in the area of licensing and regulations; so far we have been denied 2G license in some of the regions of Far East, the total population of 5.9 million. Although, we now have all Russia 3G license, we consider it as important to have a complete 2G license coverage to have the most cost effective operations in all the regions. Therefore, we are persistent with getting the licenses.

In July, 2G frequencies in a number of Far Eastern regions have been tendered, with the result has surprised everybody, although we won licenses for three small regions we have challenged the tender terms and conditions. Russian Federal Anti-Monopoly Committee supported our position, asking courts to renew the results of the tenders. Following the controversial results of the tenders, the newly created Media and Telecom Regulator rescheduled and changed the terms of the remaining tenders. These conditions appear to be much more fair and transparent and the new tenders will take place in October.

Before reflecting on our performance outside of Russia, I would like first to draw your attention to the growing contribution to our business from the countries of the CIS. In the second quarter, 26% of our year-on-year revenue increase and over 25% of our OIBDA growth came from the CIS. In terms of subscriber growth, almost 70% of new additions came from the CIS countries. Improving profitability of the CIS business is driving upward the margin of the whole group. In the second quarter, OIBDA in the CIS was 45%, significant improvement from 31% recorded a year ago. All this underscores the importance of the CIS to our current performance and very good growth potential for this part of the business going forward.

Let's now move to Kazakhstan, our second largest market. Again as in Russia, the second quarter results were very good. Usage grew by almost 23%, compared to the first quarter. ARPU increased by more than 11% and the number of active subscribers grew by more than 10% maintaining our leadership position. Our financial performance in Kazakhstan in the second quarter of 2007 was again record breaking. Our revenues increased by 25%, compared with the first quarter and by more than 85%, compared to the second quarter of last year.

OIBDA increased by almost 30% on a sequential... on the sequential and almost 137% on a year-on-year basis. OIBDA margin reached 53.7%, a record for the Company in Kazakhstan. Margin was lifted by a surge of promotion driven on-net traffic. However, even excluding this impact, the margin was strong, reflecting the underlying strength of the Kazakhstan business.

Although we are still in the network build out phase in Kazakhstan, our CapEx as a percentage of revenue are rapidly declining. In the last 12 months basis, CapEx fell to 37% of revenue in the second quarter of 2007, as compared with 69% recorded for the same period a year ago. We believe our strategy in Kazakhstan has been working very well and we intend to continue to strengthen our position on this market.

Now let's move to Ukraine. We are very pleased with good progress in this market. Our revenues almost quadrupled year-on-year and grew by 45%, compared to the first quarter. At the same time, our G&A expenses grew by only 25% from the start up level a year ago which have continued I am sure [ph] is a pass towards positive OIBDA.

In the last 12 months, we have almost quadrupled our subscriber base. Now our market share continue to grow reaching 5.2% in the second quarter. We feel that we have reached this scale when we can proactively improve the quality of our base. This, we have tightened our term policy and rebalanced our tariffs which in combination with the seasonal factors led to a quarter-on-quarter APPM growth of 18% even more impressive 40% increase in ARPU. Ukrainian business is getting on its feet and we are optimistic about its future.

Let's now look at Uzbekistan. All financial performance in the second quarter in Uzbekistan was good with the growth in all financial parameters. Our key priority in Uzbekistan continues to be stimulating penetration and subscriber growth in this smallest populous country in Central Asia. We have done it successfully so far and is illustrated by our 174% year-on-year subscriber growth. Penetration rate in Uzbekistan, at the end of the second quarter was still under 15%, which means that the phase of intensive growth is yet to come. We are preparing for this by investing and increasing the number of our offices in the country, improving the quality of the network, support systems, building infrastructure and distribution channels.

Let's now move to our newer markets and we'll start with Armenia. Company continue to show healthy operational results with OIBDA margin exceeding 50% in the second quarter of 2007. Our operations in Armenia and the going our expended integration program, where all major systems, platforms and the processes are being harmonized with the rest of VimpelCom group. We also intend to take a full advantage of our unique position in Armenia and to develop a converged environment. So therein, we have initiated a major overhaul of the network, aiming and developing a state-of-the art NGM solution. Entry scale and willingness of the vendors to be part of that development, should allow us to achieve it with a modest CapEx commitment. The overall 2007 CapEx budget for Armenia is below $100 million.

Affecting our current market position, we can say that we are dissatisfied with the absolute level of our market share in Armenia and building it will be our main near-term priority. To address this issue, we have developed actions, which we believe will strengthen our commercial operations and build market presence during the second half of 2007.

Now a couple of words about Georgia. We launched our operations there in the end of the first quarter. We are currently focusing our efforts on network rollout and the development of sales and distribution channel. These 14,000 subscribers were active at the end of the second quarter, our operations there is still at a start up phase. On the other hand in Kazakhstan, we are very pleased with our developments and in the second quarter of 2007, the Company reported 81% sequential growth in net operating revenues, led by 41% growth in the number of active subscribers and 16% growth in ARPU. Company enjoyed very strong growth momentum, continued to gain market share in the second quarter. Same as we decided to increase our sales and marketing investments. At the same time, we are pleased to see that even after this increase, Kazakhstan's OIBDA turned positive in the second quarter.

Now, concluding our presentation, I would like to say that, we had a very good first half of 2007. It continued to benefit from the economic growth in the regions where we operate. I am glad to note strengthening our business and improved margins in Russia, while the CIS is becoming increasingly important source of growth.

Now, thank you for your attention and let me now open the call for questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. And we will take Sean Gardiner from Morgan Stanley. Go ahead.

Sean Gardiner - Morgan Stanley

Yes. Hi, thanks. Can you just run through where you are in terms of your capacity utilization on your networks in Russia at the moment, because you keep positively surprising on the usage front, but you are not raising your or probably surprising us on the usage point. You are not raising your CapEx guidance at this stage. And also, now if you can address in that same question, just your utilization of half rate. How much of your calls are going at half rate at this stage? Thanks.

Unidentified Company Representative

Actually as we announced earlier, we our key strategy [technical difficulty], of course some of our growth of that traffic is promotion driven. As an example, this quarter we see clear growth of on-net traffic with the help of special some of them. So we temporarily promotion and of course balance the tariffs, we have subscription fee on this different tariff plans region by region and the volumes, the price of this fee depends on their capacity on the networks. So as soon as we have capacity, we will make it smaller. As soon as we don't, we will make it higher and then continue to invest in the network. So actually, we have that relatively balanced situation, of course we use half rate broadly and we try to ensure that we have the quality networks across Russia, but very well used. And we try to use all possible capacity to make sure we have the biggest. [technical difficulty]

Operator

We'll take our next question from Sergei Arsenyev with Goldman Sachs.

Sergei Arsenyev - Goldman Sachs

Hi, good afternoon. Can I just follow up with the usage question and follow up with a related question. On your usage growth the 20% sequential growth was way above seasonality and you do mention promotional campaigns. I am just wondering if you can highlight which were specific promotional campaigns which brought this very high usage that we saw in the second quarter. And the second question is also relating to that. With the usage growth that we are seeing, we also saw a national roaming agreement that you signed with Tele2, how does it tally with the capacity utilization rate that you have got at the moment and also I am just wondering whether... maybe you can share some details on that, what are the... I am sure you can't disclose the pricing terms, but if you can maybe describe what it entails and whether you see this becoming a trend in Russia, that will be very helpful as well. Thank You

Unidentified Company Representative

First of all, we need to say that we had specific [technical difficulty] where we additionally stimulated on that... for that special price subscription or giving some three favorites numbers with unlimited on-net calls. And this promotion of course increased usage but its temporary action, actually we started it in the middle of May and it will end up in August and actually after that the average price per minute will go up but of course the usage will also... and the usage will go down. So we can see that this is a temporarily promotion which is for summer. As for the Tele2 agreement, actually it's very good both beneficial agreement when for certain volumes we give them certain discounts. So it will not seriously change their competitiveness because it's their prices should be higher than for example our on-net sort of smaller subscribers, but still they get some discounts and we get some additional traffic. But according to our estimations it will not influence our usage, overall usage because there will [technical difficulty].

Sergei Arsenyev - Goldman Sachs

Right. And then what is the average discount to your retail rates for example?

Unidentified Company Representative

Unfortunately, we don't disclose that. It is very commercial confidential.

Sergei Arsenyev - Goldman Sachs

Okay. Thank you very much.

Operator

And we will take our next question form Alexei Yakovitsky with Deutsche Bank.

Alexei Yakovitsky - Deutsche Bank

Yes good afternoon, good evening. Congratulations on the strong numbers. I have two quick questions if I may. On the yield per minute in Russia you described it as temporary, the decline. You described the decline as temporary and I wonder if you can elaborate on how temporary you think the decline is and whether that means that you have seen some pick up already in the third quarter. If you could comment on some third quarter trends, that will be helpful, and to the extent that you can. On Kazakhstan, where you are posting very impressive usage growth, even more impressive than in Russia, actually. I wonder if this is still a long way after the result of you successfully turning around the operation a couple of years ago, winning market share both subscriber wise, and obviously revenue wise or you could actually argue that this is that we have seen in the beginning of the same thing as in Russia, but earlier, because the market in Kazakhstan is duopoly you are not seeing that much competition, and therefore you are able to unlock the underlying elasticity potential push up usage at an earlier stage of the market's development. It would be helpful if you could shed some light on that. Thank you.

Unidentified Company Representative

I will take your first question regarding temporary. The promotion that we ran, as Nikolai said, started in mid-May, and will continue till the end of August. So you will see two months of impact of that in the third quarter as well. The action is clearly one that we will reverse as the promotion ends. And so beginning September the downward drop in APPM should reverse itself. We did this overall to have an impact on the royalty and our favorite numbers, but frankly in the second quarter it probably had a very minimal effect on the total ARPU.

Alexander V. Izosimov - Chief Executive Officer

And going to Kazakhstan the nature of the promotion, which we deployed there and here actually in play what was at the scaling up of our operations and securing... ensuring, since our ability of the products between the markets. So, the nature of the promotion and execution of the promotion was very close to what's been done in Russia. However, the impact is a little bit different because the market situation in Kazakhstan is a little bit different. First the APPM in Kazakhstan is significantly higher and here we are talking right on three times higher, sorry double that of Russia and at the same time interconnect charges are extremely high. So everything which we do in terms of stimulating traffics to migrate on-net would generate better margins for us as well as growing ARPUs and growing usage.

So the difference is that we have much more constraints in Kazakhstan in terms of capacity than in Russia. So we have to be careful how aggressive we go with these promotions in the markets where we more to strength. In principle, we always have a compromise in our hands whether we run some deterioration on quality or reinvest much heavier upfront in order to maintain the quality standards. So, we actually currently choosing probably more of the first option and therefore we are seeing some deterioration in quality temporarily present in some of our regions but we are very careful in monitoring network utilization factor and a lot of our investment decisions are actually driven by that.

To illustrate, we... changing allocation of the assets so you don't see it in terms of overall CapEx number increase but the nature of the investment changes. For example we have still revising clarifying working in additional to their access [ph] into the base stations where we see surge of traffic and this is of course much, much, much cheaper than building new base stations and using this as well as more intensive use of adaptive multi-rate and so on. So, all those technological solutions allow us to secure and squeeze after a more returns of MOU assets. Unfortunately in Kazakhstan, we are less generous position and we have already squeezed as much as we could. And don't forget that in Kazakhstan we started with MOU which was much lower than in Russia. And therefore actually by dropping little bit of price here we are bringing it to more natural composition of our ARPU.

Alexei Yakovitsky - Deutsche Bank

Thank you.

Operator

And we will take our next call from Alex Kazbegi from Renaissance Capital.

Alex Kazbegi - Renaissance Capital

Yes, good evening. On Russia, can I just get an update maybe on your [technical difficulty] in terms of how much is that contributing now to the revenue line and generally what are the new products that you expect [technical difficulty] may change over the next half year before the 3G is launched? You also mentioned on the Ukraine that these [technical difficulty] there have changed and you have been introducing new tariffs and even that they lure for a while below the interconnect that was the one that maybe you can give us a more precise view on where they are sort of currently from the third quarter I guess? And the last one is a fairly general question, I guess but I wonder if you can tell us whether you see any merit in buying the fixed line operator in Russia?

Alexander V. Izosimov - Chief Executive Officer

Alex could you please repeat your first question on Russia because the question wasn't so good? Didn't hear you?

Alex Kazbegi - Renaissance Capital

Yeah sorry. Value-added services. I was asking whether you could share with us where they are currently as a percentage of revenue, whether you see any new initiatives to launch before the 3G which can increase this percentage?

Unidentified Company Representative

I am here to comment on value-added services, the absolute revenue that we had from value-added services this year or this quarter was an all time record. But it actually still went down as a percentage of revenue as it normally does in the second quarter. So there is a seasonal effect. It dropped it down to about 14% of service revenues in the second quarter. And we do continue to launch some initiatives. We have launched voice messaging initiative which should help to drive. We have been in various markets promoting MMS which will help to drive and there are some other activities which I would rather not speak about for competitive reasons in the second half, which should have modest effect, but certainly there are a lot more opportunities that will come into the pool with 3G.

I might also just comment for a second on tariff plan development in Ukraine. We did launch as you said a tariff which had off-net prices that were lower than interconnect. We launched that in the first quarter actually and we continue to maintain that and it continues to perform very well. What it does is that it brings us a much higher quality subscriber and coupled with the number of consumers that we brought on previous tariff now has given us a very good mix of quality and active subscribers. So, we are continuing to use that as we go forward.

Unidentified Company Representative

And I will add that this plan is profitable, because we make money on the whole set up because still their price per minute is a bit lower than interconnect, but calls at top sales that we make profit on this plan.

Alexander V. Izosimov - Chief Executive Officer

And as far as acquisition of the fixed line operator is concerned it is a fairly multi-faceted question. If you would ask me whether we are interested in going full fledged sort of MR cut [ph] type business, the answer is probably no. However, clearly there is a lot of merit to consider an integrated operation when it goes towards corporate world, as very often these services are both consumed, build, designed in an integrated fashion.

Also I think it goes very well together when we consider long distance as a lot of our investment in the transport network actually even local transport network the optical loops in the regions can benefit. There is a lot of synergy in that. And clearly, there is a lot of interesting overlaps when we talk about broadband. Because I cannot imagine that in the modern world with advanced ultra HSPA [ph] and technologies like HSPA and the capacity like this that the mobile operators worldwide will stay away from attacking that's very attractive and fast growing market opportunity. And instead of competing head on, we might explore some combined offers and so on. So from that perspective, as a purely theoretical notion, that you can construct a composition which would be fairly synergetic and beneficial to our business.

Alex Kazbegi - Renaissance Capital

Okay. Can I go back to Ukraine just for a second, because you said that the tariff situation has changed there? But from the answers I understood that it actually has bit of helped to you to sort of solidify and improve the subscriber base. But the tariffs themselves are still pretty much at the same level as they were in the first quarter. Is that correct?

Unidentified Company Representative

The change that I was referring to... the lack of change was tariff that I specifically thought you are referring to, one thing that has changed is on simple things which is with our original tariff that we launched in Ukraine, we had very, very low prices for on-net minutes and as a result we're getting very high MOU with very little revenue. We have raised those tariffs basing of simple things which represented at that time almost 70% of our subscriber base has had a very positive impact on both APPM and on ARPU.

Alex Kazbegi - Renaissance Capital

Okay. Thank you very much.

Operator

We'll take our next question from Reith Summerton from Citi [ph].

Unidentified Analyst

Hi. Good afternoon. Just a quick question, coming back to the earlier ones on on-net traffic that you've been able to capitalize on in Kazakhstan, would you mind telling us what percentage on that traffic is in Russia and Kazakhstan right now?

Unidentified Company Representative

Russia, 60% of our total traffic is on-net.

Unidentified Analyst

And Kazakhstan?

Alexander V. Izosimov - Chief Executive Officer

Give us a second and we'll come to you on Kazakhstan, we'll simply pull out the numbers.

Unidentified Analyst

All right. Thanks.

Unidentified Company Representative

And Beeline, Beeline to Beeline is about 70% in Kazakhstan.

Unidentified Analyst

All right. Thanks very much.

Operator

Next question that comes from Hur Brut from HSBC [ph].

Unidentified Analyst

Yes. Good afternoon. My question is regarding 3G. Can you give us an update on the availability of the 3G frequency and if there are any delays, do you foresee any issue with your license commitment but also you're planning to bringing additional capacity in your network. Maybe in another words at the moment are you holding out a little bit on your CapEx in 2G before getting a bit visibility on what may happen on 3G. Thank you?

Alexander V. Izosimov - Chief Executive Officer

Starting from the end of the question, we are actually rolling because of the growth in traffic, as you see. The capacity which is inside the network can accommodate surges of let's say 10% to 20%. But beyond that it would be very difficult, so clearly we need to expand capacity right now. That will be happening. Second, 3G picture is uneven across the country, and the frequency availability and the complexity of clean up would be very different to different cities. Somewhere it's pretty straightforward, somewhere like particularly in Moscow, it looks rather tricky. Therefore it's a complex agreement procedures are needed.

Basically how it works that in Russia unlike in Europe, we have to co-exist with certain military users in the same frequency range. But as the use for example a very narrow band, or a very directional band, we can exist around that band, but cannot encroach on their territory, and all of that requires pretty meticulous analysis and work trying to squeeze out maximum of free space and then somehow develop this usage. So that will take time, and that's what we referred to during our presentation that it is unclear at the moment, how in certain spaces, in certain places how fast we can go. In any case, our commitment currently, license commitment is related to 39 cities and that's where we have to develop networks in the first three years and that is effectively what we will be executing. If we see that the uptake on the services is faster than we expected then of course we will reconsider the intensity of our investments and the speed with which we continue the roll out.

Unidentified Analyst

Okay. Thank you

Operator

And our next question will come from Svetlav Shailin [ph] from UBS.

Unidentified Analyst

Hi this Richard Faxulin [ph] from UBS. Couple of things, can you please tell us the churn rate in your operations in Uzbekistan, in Tajikistan and Armenia, please?

Unidentified Company Representative

Yes. The churn rate in Uzbekistan is high for the second quarter at just under 30%. The reason is that we did a good bit of cleaning of our overall subscriber base and also because in the first quarter Coscom was... their licenses were suspended and we picked up a number of subscribers from them and then their license was later installed and that tended to drive the very large churn. In Tajikistan, it is extremely small, only about 1% and it is very early stage so I don't know how meaningful that is for right now and the third country you wanted?

Unidentified Analyst

Armenia.

Unidentified Company Representative

14% and all these numbers are on the annual basis, so it is a quarterly number but calculated on an annual basis.

Unidentified Analyst

Sorry, did you say 14% in Armenia?

Unidentified Company Representative

Yes.

Unidentified Analyst

Okay. And could you please give us your targets for the year-end '07, debt-to-OIBDA on the consolidated basis and also sales to revenues on a consolidated basis, I am sorry, what am I saying, CapEx to revenues?

Elena A. Shmatova - Executive Vice President, Chief Financial Officer

No we still think that in terms of the ratio we will be in the ratio of the target levels, which we normally say that, debt-to-equity should be around one definitely we got below two, but currently we are well below that targeted level and we think that's still till the end of the year we may be maintain the level which we have current plans, currently our and equities 0.6 and debt to OIBDA 0.8. Of course it depends on the development in our capital investment and acquisitions because we are saying previously that we need little funding only in case of the acquisitions and so the level of that additional funding which will of course influence the debt level and the ratio level will depend on the progress in that area.

Unidentified Analyst

Do you plan to complete on your overall bond issuance this year which you have registered with the special bank or sorry for the $15 billion that you registered?

Elena A. Shmatova - Executive Vice President, Chief Financial Officer

Well actually it's the same issue; if we will have adequate target for acquisitions then yes we will proceed with this. But you know in a conference [ph] with the Russian legislation we can go with the issuance of that bond within a year after the registration. So we have time and to see how we will really invest that money.

Unidentified Analyst

Okay. And CapEx to revenues guidance for your targets for year end '07?

Alexander V. Izosimov - Chief Executive Officer

We don't target on that one because from there you could derive the revenue and we don't fall for that.

Unidentified Analyst

Okay.

Alexander V. Izosimov - Chief Executive Officer

So, but in general we say that, our CapEx guidance is 1.6. We will stay with this guidance for 2007 and for Russia, we will probably now maintain even including 3G, investments, we will maintain the quarter to 15 to 20.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Alex Kuznetsov from Bear Stearns.

Alex Kuznetsov - Bear Stearns

Good afternoon. Please accept my greetings on the strong results. I have a couple of questions. First of all, could you comment on 3G license allocation in Ukraine please? I know there were many comments from several senior officials, but it looks like there is no progress in any direction? And second, I know there is a field operating in Kazakhstan and that looks like so far it has not been very active and it didn't affect the market landscape. But do you see any material rise from the source [ph] and wireless operating in Kazakhstan especially since you see some benefits from convergency and this is affiliated with the incumbent? Thank you.

Alexander V. Izosimov - Chief Executive Officer

Let's start with Ukraine. We cannot really say much about 3G license because it's been, the whole process has been suspended effectively. There were different attempts; there were different discussions, but I wouldn't expect much happening until they sort themselves out in terms of the government and new elections and all that stuff. So when all of this stabilizing, then we might see questions re-opening. In terms of Kazakhstan and exhibit of the third operator we see some presence of that operator although it limited itself to the main cities only. And therefore explain kind of niche tackle right now. So this is how dangerous is affiliation with the incumbent, actually the second operator is still affiliated with incumbent and their own by cost telecom and being all we expect that this ownership structure will change. And we don't see that they derive any significant benefit from that for time being.

Alex Kuznetsov - Bear Stearns

Thank you very much.

Operator

Next question comes from Stephen Pettyfer from Merrill Lynch.

Stephen Pettyfer - Merrill Lynch

Thanks and good afternoon. All right, can I just ask a question please on you strong margin performance particularly in Russia? I was just wondering looking at your general and admin cost specifically, they seemed... are we getting to a point now where that cost level is do I say stabilizing or you can see that starting to slow the growth there?

Alexander V. Izosimov - Chief Executive Officer

We have attempted to say yes, it is stabilizing. But, the thing is that a lot of costs and lot of elements there they still link to expanding subscriber base and expanding network. For example; maintenance and so on that's all keeps there and as long as we continue to expand our operations the cost which supposed to be fixed, kind of remain to be semi-fixed. We keep very close eye on it and naturally we are trying to restrain the expansion of this cost and we are launching different programs, actually have been launched inside a company, to monitor more carefully what we do and different topics reduction and so on. So we are shifting our gun size you can say slowly but surely towards paying much more attention to extracting efficiency from the cost base. Can I say that this process has been completed and that's the level of G&A in which we are going to operate probably we cannot yet.

Stephen Pettyfer - Merrill Lynch

As a follow on can you given your improving efficiency there, can you see your overall margin rising going forward?

Alexander V. Izosimov - Chief Executive Officer

That's an endless debate right I mean and our answer always was that margins don't happen to you. You make them happen to be at a certain level and clearly we are gaining efficiency and at some point in time, we will allow this efficiency to fall through to the bottom line if we don't see better application for the freed up resource. But if we see that, for example, we can pursue new development opportunities. Let's say broadband. Broadband will require creation of completely new sales force effectively, but it's creating something completely different in terms of operating structures and we will probably spend some money there which will depress to some extent our margins. However, settle this one can clearly say that our previous guidance we said that margins will be in the quarter to be between 45 and 50. Now we see that as more closer to 50. So, we will be targeting margins around 50%.

Stephen Pettyfer - Merrill Lynch

Thanks very much.

Operator

Our next call comes from Olga Bystrova from Credit Suisse.

Olga Bystrova - Credit Suisse

Good evening. Congratulations on strong results. My question is relating to Armenia actually. Mobile business there has done very well in the second quarter. There was a little bit of a pricing, effective pricing decline but there is strong usage growth. I would really appreciate if you could talk a little bit more about the competitive dynamics products that you have there and what do you expect to going forward? And also on the fixed line business, what is the let's say revenue behavior there without the regulatory issues on the tariff side and also is there any seasonality in the fixed land revenues in Armenia?

And a follow-up question on the one asked previously on SG&A in general and actually most specific on advertising and marketing expenses and dual commissions, in Russia it looks that this item has not been inflating that strongly and I was wondering if this if levels of let's say 4% of revenues from advertising and marketing and 4% for dual commissions is something sustainable for you because I think you previously were talking about close to 6% as a long-term sustainable level? Thank you very much.

Unidentified Company Representative

Okay. I'll take the first one about SG&A regarding marketing and then I go back to Armenia. In general, we try and target our marketing expenses in 4% and 5%. Now we set those early in the year. We will make some adjustments. But if we get over delivery of revenues we have in the first half that can move us to the low-end of the range. So that's why over the first half it's been closer to 4%. That is the range that we would continue to expect going forward.

From a dealer commission standpoint, our dealer commissions now are based in Russia, are based entirely upon the ARPU that's generated by new customers. So, it also should stay in that range of about 4% as it is today. Regarding the Mobile business in Armenia, we are still at a very early stage with that. We are looking at different things that we can launch in the second half of '07 to help increase our overall market presence, to build our distribution; our sales network etcetera and we are in very active planning of that right now. But to say much more than our plans that wouldn't be appropriate right now.

And in terms of fixed, we are also still developing our strategy and importantly looking at how fixed and mobile will work together in [technical difficulty].

Alexander V. Izosimov - Chief Executive Officer

On the fixed line in Armenia by and large, we currently left it untouched. We are working on fulfilling our license requirements on the digitization of the network and also liquidating the backlog which we had in terms of, we had at some point in time almost 60,000 people waiting. So we are working on that backlog of fixed line numbers. The idea is that currently we let the Company run the fixed network and the Company has got much more expertise in it and we are learning more than teaching them to do it. Meanwhile, we develop this NGM solution which we will be implementing in the course of next 12 months. And after that we will see how we can more creatively and aggressively start promoting more advanced services in Armenia.

In terms of tariffs, as a result of surrendering shall I say the monopoly status the current tariff policy being considered valid where we will be going forward with the current tariff policy.

Unidentified Company Representative

Just to your last question on seasonality. The seasonality of the fixed business in Armenia is fairly flat.

Olga Bystrova - Credit Suisse

Okay great. Thank you very much. And if you don't mind, a follow up question. Following your acquisition in Siberia recently, do you see any sizable opportunities in Russia going forward in the near future, or you would think you primarily will be focusing on CIS and the potential international expansion?

Alexander V. Izosimov - Chief Executive Officer

In our strategy we said that the new element which we introduced about half a year ago after discussing the strategy with the Board was that we are now open for consolidating acquisitions inside Russia. And if the opportunity presents itself, we certainly will be open to it. So in Russia, if we see the right target with the right price, and it is open for a transaction we will talk.

Olga Bystrova - Credit Suisse

Okay. But currently... does it mean that you currently do not see those targets, let's say, right they might come up but currently you don't?

Alexander V. Izosimov - Chief Executive Officer

If you see the situation like that in the regions, I mean in this part of the world, but it's never that you see the target you go and acquire. It's always much more song and dance before you go into a transaction. It's fairly lengthy and complicated process. So it's not that we don't see the target, it's simply the targets are not open for transactions.

Olga Bystrova - Credit Suisse

Okay great. Thank you very much.

Operator

Your next question comes from Nadia Golubeva with Aton.

Nadia Golubeva - Aton

Good afternoon. Two small questions, just to I notice that your quarter's percentage of revenue went up a bit in second quarter. Could you comment on this please, and or whether it seems this is sustainable and overall or whether this cost has a relative current in line with your expectations so on. And secondly could you possibly tell us what were the roaming revenues second quarter and compare them to the first quarter? Thank you.

Unidentified Company Representative

Roaming revenues increased to $81 million approximately, previous quarter in Russia so...

Nadia Golubeva - Aton

Could you repeat that please because yes...

Unidentified Company Representative

$81 million --

Nadia Golubeva - Aton

Compared to?

Unidentified Company Representative

Compared to $69 million.

Nadia Golubeva - Aton

69, okay.

Unidentified Company Representative

Yes it was some growth in roaming revenues and of course link to that some growth of cost especially because during summer you have more our subscribers going abroad with a cost associated to that which was influencing total service costs.

Nadia Golubeva - Aton

Okay. So, should we expect service cost as a percentage of revenue or coming down in the fourth quarter probably after the little increase in roaming ends?

Unidentified Company Representative

I would say that during the summer you have the growth of roaming especially of our subscribers going abroad and it puts additional pressure on service cost.

Nadia Golubeva - Aton

Okay.

Unidentified Company Representative

Which normally you don't see during winter months.

Nadia Golubeva - Aton

Okay. Thank you.

Operator

Next question comes from Dalibor Vavruska from ING Capital.

Dalibor Vavruska - ING Capital

Hello, good evening. Just a quick question on the MOU increase that we discussed already some questions in the first part of the call, I am just wondering I am thinking of the reasons apart from the promotions which is a specific reason and I'm wondering whether you can maybe comment on which of these reasons that can list are more relevant than the others? Obviously we can... we see the economic growth supporting the usage and I'm wondering whether you can comment at all whether your promotion might have led to some market share increase of Beeline on the traffic in Russia.

I'm also wondering whether you can comment on whether you see the elasticity effect, effectively reduce your prices and you got the usage up. I'm also wondering you mentioned that, this was promotion that it is only temporary. So I'm wondering if that boosted your revenue, why would you not leave the prices lower and enjoy the elasticity if you see it? And finally, I'm just wondering whether maybe you have not become strict in subscriber accounting and simply the market is growing but what we see now is slower growth in subscribers and higher growth in MOU. But this... it is essentially continuation of the same trend. I don't mean here the change of the subscriber definition but using the same definition of subscribers. Thank you.

Unidentified Company Representative

Okay. Let me start and then Nikolai [ph] will add. First of all we believe that the real growth of the ARPUs were mainly helped by the strong economical growth in Russia [technical difficulty] second quarter. We had additional growth of traffic which was linked to promotion. We believe it was just a cost of our additional traffic which was stimulated but this unlimited promo. Its not that the fact that we were taking subscribers from competition its not real showing any elasticity to specific growth, it is just when you offer unlimited on-net calls for certain subscription fee, of course people try to talk more and actually in some regions we had even not a normal behavior. So very big traffic growth which was influencing the numbers. We believe it's temporarily linked to promotion. We believe after some of that will stop because we will stop this promotion.

Unidentified Company Representative

I would just add to that one piece, that the other thing that we have talked about in previous calls is that we have had a little bit of focus over the last six months on different efforts that increased call completion. So things like our efforts on trusted payments like Call Me Back service etcetera. Those things allow the consumers to complete more of the calls that they would like to make and long-term we believe that does have also an impact on MOU.

Dalibor Vavruska - ING Capital

Okay. Thank you.

Operator

Next question comes from Anastasia Abokobu [ph] from Deutsche Bank.

Unidentified Analyst

Good evening. This is Anastasia Abokobu [ph] from Deutsche Bank. In your press release you are giving the subsidies broken into countries. Could you please provide us with a consolidated subsidy for the second quarter? Thank you.

Alexander V. Izosimov - Chief Executive Officer

Anastasia we didn't quite get the question. Could you repeat it please?

Unidentified Analyst

Could you please provide us with a consolidated sector for the second quarter because in your press release you had given the separate figures only broken by countries, Russia, Kazakhstan etcetera?

Unidentified Company Representative

Consolidated number would be 19.

[technical difficulty]

Alexander V. Izosimov - Chief Executive Officer

We are deliberately not doing or doing much less on the consolidated level now because it's kind of a minimalist number. Its average temperature in the hospital because the intensity and the nature of the markets spend is quite different by countries so that's why we didn't provide it on the consolidated level.

Unidentified Company Representative

Yeah and if they had spent not the subscriber but it's just they are consolidated in the million dollars.

Unidentified Company Representative

Total number, marketing further yes...

Unidentified Analyst

Marketing and they were commissioned, yes.

Unidentified Company Representative

Yes, that's what we fulfilled from marketing expense. So the first quarter of 2007 is approximately $170 million.

Unidentified Analyst

$170 million, okay. Thank you.

Operator

[Operator Instructions]. And we will go to Andrea Brodtmann of Dialog [ph].

Unidentified Analyst

Good evening and congrats for the great results. I have two questions if I may, both on Russia basically. One is with regards to Moscow; not so long ago when the you had the Moscow operations towards some promise given that you are going to... to basically raise your market share among corporate customers and high net-worth individuals in Moscow and most regions. So are there any numbers or some information you can share with us in terms of performance on that front? And second question is with regards to actually the Company... yesterday they had a meeting with the analysts and they were extremely ambitious on their plans saying that they were going to have 10% market share of revenues by 2011, but the most important thing was that they stressed specifically that the wireless internet is the way to go and that's how they are going to five-fold increase their market share. So what's your view on this particular market segment and how you position yourself with regards not just with Sky Link of course but with regards to your other maybe bigger competitors? Thank you.

Unidentified Company Representative

First of all on that corporate in Moscow, we believe we have a god progress. Actually we developed a strong sales team in Moscow which is mainly focusing on SME sales. Our sales for this segment is growing. And we believe here we can increase both, increase our share in this corporate segment but also we can develop the segment because in Russia in general the percent of revenues from the business market is significantly lower than many countries. That is why we will also try to develop the market. As for Sky Link we believe that right now they have some advantages on the markets in terms of speed of data and that is why they have some, although it is actually small. We believe with our introduction of the 3G we will have the same benefits and even better opportunity to take this broadband opportunity and we will much better positioned to benefit from this growth of broadband.

Alexander V. Izosimov - Chief Executive Officer

And the nature of the benefit would be two-fold. One is the cost of the infrastructure and the breadth of the infrastructure. We already have quite a bit of it in the ground and therefore to put HSPA base stations is relatively minor incremental CapEx. The other side is consumer side and it is bullish in terms of consumer terminals which are much more restricted when you are talking about CDMA on this market and therefore much more expensive and also not at all compatible with the main point, so it is always kind of a secondary equipment. In our case, it will be compatible and wider available. And also in terms of speed, we actually believe that with what Sky Link was offering so far, it wasn't a breakthrough thing, it was more closer to regional 3G propositions in Europe.

Then we talk about true broadband, and that's what they have got actually for EBITDA into a trial operation, and we don't know yet the results because don't announce it. But we believe that that the changes the game. So, when you move from 300 K to 3 megabits that's completely different consumer experience, and there are tangential indications of that if you look at Sweden, and so on how three cells the HSPA modems is a number one sold item, their portfolio now and so on, so on and so on.

And the last argument here would be that we will be... I think our subscriber base to participate in it, and therefore it's much easier for us to reach and serve subscriber base than for Sky Link address non-existent subscriber base with the internet propositions. We believe that the combination of these factors makes our chances more plausible than that of Sky Link.

Unidentified Analyst

But if asked with a more general question. What proportion of the margin going forward do you think will be given to the wireless internet in any form? Let's say what should be voice, what should be data, let's put in this way?

Alexander V. Izosimov - Chief Executive Officer

That's almost impossible question to answer. How to break it right? It's... I can't tell you that. We can say that how many subscribers and again I mean our thinking here would be derived entirely from the fixed line analogies rather than looking at other operators because it's whole new in the world. Don't forget that HSPA on scale being launched only March this year. First Network was launched last year, but actually the bulk of the network has been launched only this year. So, we don't know yet, how it works or how it behaves. We can only sort of make some projections. If you take standard fixed line operator case, the assumption usually is that 7% of the subscribers on the fixed line usually take up the broadband services almost instantaneously, but little work in the case of mobile remains to be seen.

Unidentified Analyst

Okay. Fair enough. Thank you.

Operator

Next question comes from Sean Gardiner from Morgan Stanley.

Sean Gardiner - Morgan Stanley

Yes thanks. Just a final question from me, how is the tick up of some of the postpaid offerings you are launching in Russia? Maybe you can give us ideas of the numbers and also what sort of difference are you seeing in the ARPUs from those existing customers that goes from prepaid to postpaid?

Unidentified Company Representative

The number of consumers overall that have switched from prepaid to postpaid would still in the tens of thousands in the Russia. We are still a very high percentage of that coming in Moscow. So it's been a much slower transition than we would have hoped for. We continue to believe that the ARPUs that are created by those after they switched are positive and we will continue to push this as sales channel. But I don't expect this to be something that will be a very short-term effort. I think it will be something that will happen over a good bit of time.

Sean Gardiner - Morgan Stanley

And then sort of your surveys of the market. What do you think the main reasons are for this tick up being slow, is it access to credit or just people unwilling to sign up to monthly bills?

Unidentified Company Representative

Actually our market is already used to cost control and is not willing to give up. But we believe with the economy growth and more credits on the market things are right now we are offering credits to everybody and were [technical difficulty] etcetera. We believe this culture will be developing and we will form a very well position to benefit from that because of this various [technical difficulty] system offers really good postpaid and we believe that it will be slow but still constant growth of switches from prepaid to postpaid with the growth of ARPUs.

Sean Gardiner - Morgan Stanley

Okay. Thank you very much.

Operator

And it appears there are no further questions at this time. I would like to turn the conference back over to management for closing remarks.

Alexander V. Izosimov - Chief Executive Officer

Well. With this I would like to thank you for your attention and as usual if you have more questions please do not hesitate to contact us, and we will be very happy to give you all necessary clarifications and explanations. And have a nice day and good bye.

Operator

This concludes today's conference. We appreciate your participation. You may now disconnect.

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Source: Vimpel Communications F2Q07 (Qtr End 6/30/07) Earnings Call Transcript
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