CTC Media Q3 2007 Earnings Call Transcript

CTC Media, Inc. (CTCM)

Q3 2007 Earnings Call

October 29, 2007 9:00 a.m. ET

Executives

Alexander Rodnyansky - CEO

Nilesh Lakhani - CFO

Vladimir Khanumyan - COO

Analysts

Sohail Ahmer - Lusight Research

Alexei Yakovitsky - Deutsche Bank

Edward Hill - Wood - Morgan Stanley

Elena Rogovina - UBS

David Ferguson - Renaissance Capital

Alexander Wisch - S&P Equity Research

Michael Sonenshine - Thaler

Evgeny Golossony - Troika

Stefan Nilsson - SEB Enskilda

Presentation

Operator

Hello ladies and gentlemen, and welcome to CTC Media's Third Quarter 2007 Conference Call. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session toward the end of this conference. During the Q&A session we ask that you please limit your questions to no more than one and one follow-up.

This conference call is being webcast and an audio version of the call will be available on the company's website for two weeks.

As a reminder, this conference is being recorded for replay purposes.

You should all have received CTC Media's third quarter earnings release that was issued today. If you have not received a release, please visit the company's website at www.ctcmedia.ru. Please refer to the earnings release for reconciliation of non-GAAP measures to the most comparable GAAP measures.

Before we begin today's call, CTC Media would like to remind everyone that this conference call may contain certain forward-looking statements relating to future events, future financial performance, strategies, expectations, competitive environments, regulations and availability of resources.  Such forward-looking statements are based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statements, based on a number of factors and other risks which are more specifically identified in CTC Media's filings with the SEC.  And now I will like to turn the call over to Mr. Alexander Rodnyansky, Chief Executive Officer of CTC Media. Please go ahead, sir. 

Alexander Rodnyansky

Thank you, operator. Good day everyone, and let me first of all apologize for our delay with the beginning of the conference call. We have got Vladimir, our Chief Operating Officer, stuck in an unbelievable Moscow traffic jam, sorry.

So anyway, welcome to CTC Media's third quarter 2007 earnings conference call. And I am joined today by Nilesh Lakhani, our Chief Financial Officer, as well as Vladimir Khanumyan, our Chief Operating Officer.

The Russian television market continues to grow at an impressive pace. Consumer purchasing power is expanding and in-term advertisers are increasingly, drawn to television as a preferred medium to reach their target audience. We are executing on our operating and strategic plan and continue to deliver the premium audiences to advertisers to strengthen our CTC and Domashny brands.  As a result, we remain well-positioned to continue to capitalize on the numerous growth opportunities in our markets.

In the third quarter, we delivered revenue of approximately $94 million, an increase of 33% versus the third quarter of 2006. Our revenue performance was driven by the strengths of our overall Russian markets, our ability to deliver targeted audience to our advertisers and helped by the appreciation of the ruble against the US dollar.  Our OIBDA was $32 million in the quarter, an improvement of 68% over third quarter last year. We also delivered a strong OIBDA margin of 34%, which is an increase of seven percentage points from the same period one year ago. This performance reflects the significant operating leverage of our business model as well as the commitment of our management team to control costs.

Turning to our CTC Network: in the third quarter, audience share was 8.7% compared to 10.1% during the same period a year ago. While this performance was lower than our internal goal, it factors in July and August, which are seasonally low for us.

We launched a record number of [premieres] this fall and, overall, delivered a solid performance across our schedule and we maintained our position as the fourth most-watched television channel in Russia in a highly competitive market.

We are pleased with the performance of such titles as Cadets, Daddy’s Girls, and School #1. At the same time, some of our prime-time products like, Thirtysomething, [CTC Life of a Superstar], and some other shows, clearly failed to meet our performance expectations. Overall, we did not benefit from any break-out successes.

We have several new premieres planned for later in the fourth quarter, including (inaudible) a drama series from the authors of our greatest hit, Born Not Pretty starring: Nelly Uvarova, who played the main character as the “not pretty girl” in that series. (Inaudible) will follow Cadets at the 8:00 pm time slot, in the second week of December.

Domashny, our second network, delivered another strong performance as a combined network and station group, and has now generated positive OIBDA for four consecutive quarters. We are very pleased with Domashny's development, growth and position in the market. Audience share in the quarter was 1.9%, a strong improvement from the 1.5% achieved in the third quarter of 2006 and this is in line with the second quarter of 2007.

This fall we will make modest adjustments to Domashny's programming schedule, essentially fine-tuning the existing lineup. The programming shown on Domashny remains highly focused on delivering to the core female audience-base. Further, the network remains on track from both an operating and strategic standpoint.

We continue to look for opportunities to expand Domashny's presence in the important regional market, and found just such an opportunity in the third quarter by acquiring the new stations, Stavropol, bringing our owned and operated stations total at Domashny to 11.

In September, we announced our expansion into Kazakhstan and Uzbekistan, two rapidly developing and primarily Russian speaking markets, with a combined population of more than 40 million people. We believe these markets offer a significant opportunity to benefit from the continued development of these economies, as they are ideally suited for CTC's existing expertise and assets.

In Kazakhstan, we entered into a definitive agreement with Channel 31 Group, one of the leading broadcasters in the country. Upon completion of this agreement, CTC will retain a 60% economic interest in the Channel 31 Group, and be poised to capture a part of Kazakhstan's 200 million plus advertising market. We expect this transaction to close by the end of 2007.

In Uzbekistan, CTC partnered with Terra Group, a leading independent Uzbek media-holding company, to register a new television company, 51% of which is owned by CTC Media. This company is expected to commence broadcasting in 2008 on Channel 30.

While the population in Uzbekistan is more than 27 million people, the television environment there has, essentially, developed with a little outside participation, and the advertising market there is still very small, less than 10 million in 2006.

We believe that this places CTC in a unique position to partake in the growth of a market in its early development stages. We are excited about the opportunities in these two markets and continue to explore a number of additional expansion opportunities.

I would like to remind everyone of the second phase of changes in the Russian TV advertising regulations, introduced back in 2006, that are to come into force starting January 1, 2008. Currently there is a 20% advertising time limit per hour, with a 15% all day limit.

Broadcasters, in an effort to maximize advertising revenue, have run the maximum 20% limit during prime-time viewing hours, and reduced advertising time during less attractive viewing periods in order to comply with a 15% daily maximum.

The new regulations will put a 15% advertising limit per hour all day, and, as such, advertising time during prime-time viewing hours will be reduced. As a result, the volume of gross rating points available on the market is expected to decrease by approximately 15% to 20%.

The advertising market has known about this change for more than a year, and it is similar to the change in the advertising law we experienced last July. We expect a smooth transition, with price increases expected to offset the reduction in prime-time inventory.

Finally, in regards to our CFO search, we have identified, and are in advanced discussions with, a potential candidate. In regards to this, we look forward to updating you shortly. And, before turning the call over to Nilesh, I would like to say that this will be his last quarterly earnings call with CTC. I would like to take this opportunity to thank him for the great job he did for the company during his tenure as CFO, and wish him well in his future endeavors.

With that, I will turn the call over to Nilesh for the financial review.

Nilesh Lakhani

Thank you, Alexander. On a personal note, I would like to say that, I really enjoyed the privilege of working with Alexander and the management team at CTC. I would also like to thank the many investors who have followed our company since our IPO. It's been a pleasure working with all of you.

Turning to our results: I will try and keep my comments fairly brief as I understand we've delayed the call and to allow as much time as possible for the Q&A.

Our third quarter results showed strong revenue and OIBDA growth. Consolidated third quarter operating revenues increased by 33% to $94 million, compared to $71 million in the third quarter of 2006. OIBDA improved by 68% and OIBDA margin improved to 34%.

As you are aware, most of our operating revenue is in rubles, and during the third quarter, the ruble strengthened against the U.S. dollar creating a positive currency impact on our revenues of approximately 5%.

The CTC Network delivered third quarter revenues of $64.9 million, compared to $49.7 million in the third quarter of last year. At CTC Network, increases in price, positive Forex, offset the decrease in inventory as our audience share declined from 10.1% to 8.7%. Also, an increase in the sublicensing revenue contributed approximately 5% to revenue growth.

At the Domashny Network, third quarter revenues increased to $7.8 million or 86% year-over-year. Domashny benefited both from price increases and the increase in audience share to 1.9% compared to 1.5% in the last third quarter.

At our CTC Television Station Group, third quarter revenues improved 27% year-over-year to $18.9 million. Third quarter revenue for the Domashny TV Station Group increased 20%, year-over-year to $3.1 million. For both the CTC and Domashny TV Station Groups, the increase was driven by the addition of new stations, lower commission rates and positive Forex.

Turning to our expenses, total operating expenses during the third quarter increased to $69.7 million, a 22% increase versus the third quarter of 2006. Overall, operating expenses were in line with our expectations.

Amortizations of programming rights, our most significant expense item, increased 21% to $36.6 million. The increase in amortization of programming rights was primarily driven by increased prices, particularly for foreign movies and Russian-produced shows.

The decrease in amortization of programming rights, as a percentage of revenue, is primarily due to a cost-efficient approach to weekend programming in the summer months, where we showed repeats of our weekday prime-time series, instead of more expensive short-running Russian series that we aired a year ago.

Our operating expenses in the third quarter included $3.5 million of stock-based compensation charges versus $3 million recorded a year ago. Operating income before depreciation and amortization, or OIBDA, increased 68% year-over-year to $32 million. Q3 OIBDA margin was 34%, a strong performance in what is typically a seasonally slow quarter for the industry.

In the three months that ended on September 30, 2007, we paid $3.3 million to acquire a new station in Stavropol. In addition, we paid the remaining $15 million for the TV stations in Kazan and Irkutsk, which we acquired at the end of Q2. CapEx in the third quarter of $1.2 million related primarily to the purchase of TV and video equipment at the stations.

Turning briefly to our balance sheet, as of September 30, 2007 we had $248.5 million in cash and cash equivalents as compared to $176.5 million at December 31, 2006.

In regards to guidance for the full year ending December 31, 2007, the company is narrowing its guidance range for the consolidated total operating revenue range to $460 million to $480 million, with a consolidated OIBDA margin in the range of 45% to 47%.

This updated guidance reflects our performance to-date and our current expectations for the performance of our programming for the remainder of the year. Although a significant portion of our costs are relatively fixed in the short run, our disciplined approach to costs control should enable us to maintain our OIBDA margin within the provided guidance range for 2007.

With that I will turn the call back over to, Alexander.

Alexander Rodnyansky

Thank you, Nilesh. Our CTC and Domashny brands remained strong and well-positioned to continue capitalizing on the growth of the Russian advertising markets. As we enter the fourth quarter, which is historically the largest for the industry, we are executing on our operating plan and continue to deliver premium demographics to our advertisers. We have made substantial progress in our growth strategy through our expansion to Kazakhstan and Uzbekistan. We are poised to reach more than 40 million additional people in Central Asia.

Our balance sheet remains strong because we continue to pursue a number of organic and acquisition growth opportunities.

With that, we will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Sohail Ahmer of Lusight Research.

Sohail Ahmer - Lusight Research

Hi. I really wanted to get an understanding of the impact on revenues of the limited advertising time in FY '08. Would it be correct to assume that, with limited advertising time, the total ads spent would be distributed so that your revenues are unaffected or do you see your revenues getting affected negatively?

Nilesh Lakhani

Hi, Sohail. I think in terms of 2008, we will see probably a 15% to 20% reduction in TV ad inventory across all the networks in Russia. And in that regard, obviously, what we expect to see, and which Video International and others have come out with an estimation of, is that the price is supposed to increase in the 50% to 60% range.  So with that, what we expect to see is, even despite the decline of the inventory, we fully expect the market to absorb the price increase which, essentially, will result in what has been forecasted as: a roughly 27% to 30% increase in the overall TV ad markets, depending on whether you look at in rubles versus dollars. Rubles being 27% may be in dollars, around 30%. So we do not expect that to negatively impact revenues in the industry.

Sohail Ahmer - Lusight Research

Are there any effects you see on your cash flows as a result of this change, or are you basically saying its going to be business as usual?

Nilesh Lakhani

No, I think it will be business as usual. And this time, as opposed to when the first impact of the ad law affected us, some of you might remember it was several months, as we were going on our Roadshow on the IDO. The market absorbed that, as we had thought, pretty well and this time we are less worried about it to the extent that the market has had a lot of time to look at the situation. And what we're also seeing is that there's tremendous strength in terms of the advertising market in general, so that we do not see any issues with that price increase being absorbed next year.

Sohail Ahmer - Lusight Research

Great, and just finally, what would be your guidance for CapEx in FY '08?

Nilesh Lakhani

We haven't specifically given our guidance, but I will tell you our CapEx, because of our business model, runs fairly low. In this past couple of years it's been around 3% or less in terms of revenue, and in the foreseeable future we don't expect that to change.

Sohail Ahmer - Lusight Research

Great, thank you very much.

Nilesh Lakhani

Welcome.

Operator

Thank you. Your next question comes from Alexei Yakovitsky, Deutsche Bank.

Alexei Yakovitsky - Deutsche Bank

Yes, good afternoon. I wonder if you can give us more color on the Kazakhstan acquisition. If you could share, at least some financial detail, on the company you're buying there. And if you could clarify the $200 million plus dollar figure that you gave for the market? Is that a total TV or total ad? Is that inclusive of the [ETO] or not? Thank you. Any detail on Kazakhstan would be appreciated. Thanks.

Vladimir Khanumyan

Hello. This is Vladimir Khanumyan. Actually, as Alex said, which of course we can give you more color on the Kazakhstan market and the acquisition we are going to close in the near future. Speaking about the advertising market, $200 million that was mentioned, this is only TV advertising market, which we think is net-net our total discounts in use in the market. So we think it's, both our-- 

Alexei Yakovitsky - Deutsche Bank

Including [VAT].

Vladimir Khanumyan

Including [VAT], of course. This number is via consensus of our internal research, TNS Gallup and Video International. Because there is no special market figures for the advertising market existing in the local industry. And on financial forecast of the company we are going to acquire, as I understand, we are not in a position to give you a forecast.

Alexei Yakovitsky - Deutsche Bank

Not so much the forecast, but the--

Vladimir Khanumyan

The only think I can I can tell you at this point is that it’s the fourth channel in the country regarding audience share. Its average audience share within the last several months was 8%, of course, having in mind the volume of the market and possible financial impact of this company to CTC Media's overall financial performance. It is easy to guess that it would be in a range of -- 

Alexander Rodnyansky

20 million.

Vladimir Khanumyan

20 million

Alexander Rodnyansky

Less than 3%.

Vladimir Khanumyan

And it's easy to calculate. At this point we are not ready to give you any more detailed financial forecast.

Alexander Rodnyansky

Let me add, Alexei; hello, it is Alexander, that we have really great news for Kazakhstan, for CTC specifically. This is the structure of the audience in Kazakhstan. The audience and the demographics, 11 to 34 counts approximately 49% in the country, in a country with around 30% for Russia. So generally, the position of the 31st channel in Kazakhstan, which is already number four, slightly below the number three network, with the demographics very favorable for CTC brand, gives us a great opportunity to look optimistically into the future in Kazakhstan.

But at the moment, of course, that at this point, the Kazakhstan will probably not add more than 20 million to our top line next year, or less than 3%. So, we are happy to start our expansion to this fast-growing economy and country, but we see this operation more in the middle or long-term than short term.

Alexei Yakovitsky - Deutsche Bank

Okay. So that’s great. Thank you.

Alexander Rodnyansky

Thank you.

Operator

Thank you. Your next question comes from Edward Hill-Wood of Morgan Stanley.

Edward Hill-Wood - Morgan Stanley

Good afternoon. I have got two questions, please. The first just relates to the advertising market in the third quarter and into the fourth quarter. I mean, you've done 30% growth at CTC Network. You mentioned sort of a 10% impact from FX and sublicensing, and you've got a hit in audience share which means the market is presumably up around 35% or so. Is that right, or is there something else? I mean, just looks quite a strong number for the market, I was just wondering--

Nilesh Lakhani

Yes, I think, Edward, on the market that seems about right. The official numbers have not been released for the quarter, but I think it's in the 35% range. On the Forex, just a correction there, we had said 5% growth being driven by Forex, not 10%.

Edward Hill-Wood - Morgan Stanley

Sure. So it is 5% plus sublicensing and Forex together?

Nilesh Lakhani

Yes, that would add close to--   

Edward Hill-Wood - Morgan Stanley

And in terms of the fourth quarter, I mean, was that something unusual going on in that rate or was that the sort of rate of growth you expect the market to be in the fourth quarter?

Nilesh Lakhani

No, I think that's correct. That's what the forecast is for the entire fourth quarter and that is in dollar terms, about 35%. So, we'd anticipated fourth quarter would also have a similar 35 percentage growth rate.

Edward Hill-Wood - Morgan Stanley

Okay, and my second question just relates to 2008 audience share. Could you just tell me, or highlight historically, has there been much of an impact or would you expect much of an impact next year from -- you've got a series of events. I mean, you've got The Summer Olympics and Euro 2008, which looks like Russia will now quality probably ahead of England, unfortunately, and the elections. Is that going to be something which impacts you, particularly, the euro, or do you think that's not really an issue?

Alexander Rodnyansky

Edward, hello. Historically, it's never been a major impact on our results. But in our forecasts, in our budget, we try to look quite conservatively and carefully on the results, considering the growth of interest of Russian audience to such a subject as sports since last, let's say, couple of years. So, in this particular period, CTC is very much focused on female, as you understand female driven TV programming trying to get some audience which is not deeply involved in the TV viewing of such major event as Europe Cup or football and Olympic games.  So, what we are going to provide to the Street in the couple of months is when we would report or where we would make -- articulate our guidance for 2008. It would definitely take into consideration the traditionally weak season of August where for CTC at any case traditionally is weak seasonal period because of the high influence of kid's and young adult’s TV viewing on CTC's performance, and additionally, Olympic games is going to happen in August.

So, all our results and all our internal expectations are going to be based on the potential impact. I don't believe it's going to be the really strong one, but anyway we consider this as an impact from the Olympic games in August next year.

Edward Hill-Wood - Morgan Stanley

Okay, that's great. Thank you. 

Alexander Rodnyansky 

Thank you.

Operator

Thank you. Your next question comes from Elena Rogovina of UBS.

Elena Rogovina - UBS

Yes, hello. Congratulations on good results, I have a couple of questions. The first one is what does $18 million of acquisitions in the third quarter stand for? The second question is what was the effect of commissions paid to Video International trends in the second quarter? And what do you expect in the fourth quarter '07 and in 2008? And the last question is what should we expect for the programming cost for the fourth quarter '07 and beyond? Thank you.

Nilesh Lakhani

Okay. What was the first question?

Alexander Rodnyansky

$18 million of acquisition.

Nilesh Lakhani

Sorry, Elena, I've got it. So, on your first question, I think as I made in my remarks earlier, the $18 million is basically, there's $3.3 million for Stavropol stations acquisition, and $15 million related to Kazan and Irkutsk, which were two stations we bought in Q2 but we made the payment out in Q3.   

Alexander Rodnyansky

And adding Irkutsk, we bought two stations actually for Domashny and CTC, so this means four station acquisitions.

 Nilesh Lakhani

So all related to stations that we've been buying.

Elena Rogovina - UBS

Okay. So no Kazakhstan here yet though, Uzbekistan-- 

Nilesh Lakhani

No, no, that's 65 million so that's -- we haven't closed the deal yet. We expect that to appear hopefully in Q4. Okay?  As far as your question regarding the effective commission rate for Video International, on a consolidated basis I think you're looking at how much you paid in Q3 versus what we expect in Q4; we don't expect a huge amount of change. For Q3, we paid 13% at CTC Network, which is the main business for most of our revenue. At the Domashny network, similar rate there. And so basically for, say, 75%, 77% of our revenues, we paid a 13% commission.

The effective rate on our stations group was obviously much, much lower because of the commission structure that we negotiated in place, as you might recall. We had, for the rest of the year, because of the transition that VI is going through in terms of regional sales; we had negotiated a variable commission structure to protect CTC's position. And in that regard, we had approximately 3% effective rate commission at CTC station group and 4% at Domashny for Q3, and we would— 

Elena Rogovina - UBS 

In Q2 and what you are going to see in Q4 and what are you going to see in 2008?

Nilesh Lakhani

Q2 was similar. It was in the sort of 3% to 5% range for the stations group and it was 13% for the networks. And for Q4 going forward, we expect to see a similar rate. Now the variable commission might fluctuate a little bit as sales might be a little bit higher in Q4 in the stations group. But again, on a blended basis, probably somewhere around 10% is what we're ending up.

Elena Rogovina - UBS 

And for the next year?

Nilesh Lakhani

For next year, again, at this point we expect VI's commission -- the networks we've already negotiated at 13% flat rate. There is no signing fee or anything that will be amortized in conjunction with that. So it's going to be roughly where we saw it this year, a little bit better, maybe. On the stations groups, we're going to revert back to the 15% fixed-rate, depending on how things go unless we end up negotiating something different. Because VI is going through a management transition as we've said on earlier calls. And we are monitoring the situation carefully to make sure that we protect ourselves in that regard.

Alexander Rodnyansky 

Yes. There was a third question of yours, right? 

Elena Rogovina - UBS 

Yes, the program question. 

Alexander Rodnyansky

Some programming changes, some premieres, in the fourth quarter, you meant, right? 

Elena Rogovina  - UBS   

Yes, and then '08.

Alexander Rodnyansky

All right, let me tell you just a few and simple words because we have plenty, as always and we try to relate our schedule on an ongoing basis to keep a strong Street control over the course and maintain our audience share and to pick up the audience share. So, we are looking forward to more premieres in this year, including most importantly, as I said a bit early earlier, [Advankida] drama series in mid-December. This series is starring Nelly Uvarova, who played the main character, the not pretty girl in our hit series ‘Born Not Pretty’. And this series is created by the same authors who have created the Born Not Pretty. We have already seen it and we are quite optimistic about this product, and we just expect to get launched this product in the mid of December.

Also in November, we would launch one of the most successful projects of the year in the world. This is the game show, “Are you Smarter than a Fifth Grader?” This is going to be the premiere of November. In early 2008, because we have plenty of premieres to start the year, the calendar year, we are planning the launch of several sitcoms like Step-by-step, Russian adaptation, The Full House, Russian adaptation, and of course the premiere series of one of the most successful shows where we have the Daddy's Girls, which we have just launched this September. We have 18 new series more for the end of this year and the first half of the next year. And except that I would mention also the historical drama, “One Night of Love”. This series is very much similar to [Poor Nastya], one of the most successful CTC series in the past, I would say, ever.   So as you see, we have quite plenty of projects. I never mentioned some others we always have in the pipeline. And we always try to relate our program schedule continuously and make the additional changes during the season to maximize our rating performance and keep the control over our costs.

Elena Rogovina - UBS

Okay, thank you.   

Operator

Thank you. Your next question comes from David Ferguson of Renaissance Capital Group. 

David Ferguson - Renaissance Capital Group 

Hi, good afternoon everyone. Just a quick question around the margin; the guidance of 45% to 47%, given where we are in the year, almost November, and the revenue visibility you must have, and given that such a large part of your cost base is fixed, it still strikes me as being quite a wide range. And I just wonder, what makes the difference between being at 45% and being at 47% over the next few months?

Nilesh Lakhani

Hi Dave. Yes, I think that the reason for that primarily is because, as you have mentioned, a significant proportion of our costs are fixed in the short run. So to the extent we have a revenue range of 460 to 480. If that is depending on the way it comes out, it basically falls right down to the bottom line and affects it. So, I think it's commensurate with the revenue range that we've provided. But in regards to visibility, I mean we have very good visibility at this point being that we have two months left in the year on our cost side. And clearly one of the things that we are counting on is the inventory side on the CTC audience share in particular, which again, we feel that the current scheduling that we have done and the programming changes that Alexander just touched upon, that we ought to be able to get into that range. But that's why the margin is quite susceptible to revenue changes.

David Ferguson - Renaissance Capital Group 

Okay, that's great. Thanks, Nilesh.

Operator

Thank you. Your next question comes from Alexander Wisch of S&P Equity Research.

Alexander Wisch - S&P Equity Research

Hi, I've got one question which is related to the acquisitions. I needed some more information in terms of margins and the impact on minorities of these acquisitions. In particular, I mean, just in the -- whether the margin guidance we've had this year will be impacted by the acquisitions going into 2008. I know you're going to give a more clearer guidance later, but at least at this stage with the information that we have on those acquisitions, Kazakhstan and Uzbekistan, to have more color on whether this will hit margins in the short term. 

Nilesh Lakhani 

Just to add some clarity, I think as Alexander said earlier, first of all, Kazakhstan is not going to be terribly significant in terms of its impact. What we are looking at is neutral to positive OIBDA in the first year of operation there under CTC at the moment. But we will get some more clarity on that. Now clearly, it might have some slightly dilutive impact from a margin perspective, but we don't expect it to be terribly significant given the amounts involved.  Uzbekistan is even smaller, because of an extremely small market, and it's more sort of way a startup situation for us where we the investment into the project as well is very, very de minimis at this point. So, from both aspects to answer your question, we do not expect significant margin dilution from those acquisitions.

Alexander Wisch - S&P Equity Research

And that then applies to minorities, as well? So, no significant impact on minorities?

Nilesh Lakhani   

Yes, same thing applies there and -- 

Alexander Wisch - S&P Equity Research

Alright, thanks.   

Nilesh Lakhani

Thank you.   

Operator   

Thank you. Your next question comes from Michael Sonenshine of Thaler.

Michael Sonenshine - Thaler

Hi, thanks for the taking the questions today. First of all, I just want to touch based on your acquisition of programming and sublicensing rights. I'm wondering if you feel that at this point your inventory is pretty sufficient given your sales base, or if we should expect to see any changes significantly in terms of the amount of money you spend building the programming library?

Second of all, I'm a little bit -- I'm curious about, how you go about selecting programming. You had a couple of shows that didn't work out in the third quarter. You posted great revenues despite that. What went wrong and why? And what are you doing to improve the programming and make sure that there's a really a good connect between the kind of programming that you select and the audience that you get?

Alexander Rodnyansky 

Let me start. This here is Alexander. I will try to respond to your second question. First of all, you are right we've got a couple of shows in the third quarter. It's actually in the second and in the first as well which went wrong much beyond our expectations. And except saying that this is in origin the nature of television, I would like to mention that we have an internal procedure here to pick up the programming.  The basic difference in international companies lies in the fact that we don't have major companies providing the variety of selections to broadcasters.

Everything we are about to launch to pick up or to broadcasts is going to be or is developed internally, produced by Russian domestic production houses and could work pretty well in line with our expectations. Sometimes cases of big success are much better and sometimes could be very unsuccessful.  What we do is, we try to first to pick up the international well-known format which is a proven format, which we’re already successful outside of Russia. Sometimes it helps, sometimes not, but definitely, we use the second, we try to get it adapted by the best local houses with the internal expertise of our team, which has a lot of knowledge on the brands of Domashny and CTC. Because CTC and Domashny are quite specific brands working with this core audience, very targeted, and they are very loyal to us. The audience which needs to be provided with the product very much suited to all brand attributes we've got developed. So, the second stage is adaptation.  If it's about a domestic product, which is king of competition in Russia, this is the internal procedure we've started approximately 1.5 years ago with the pilots. What we do, we develop an idea, we try to produce the pilot, spending much more money for the development and of course, production, then it costs for the average results of the series or sitcom, much more in terms of our pilot.

Then we have the focus groups to test the audience or groups to test the product and make the additional changes; commission or not commission the product. This is the internal procedure which has nothing different to the international broadcasters have.  Sometimes such project, like let's say, as mentioned already, CTC [Life of a Superstar], which is the show very much similar to Pop Idol or an American Idol, could work or could not work in Russia. It depends on the specific of the competition in Russia.  On the number of similar shows which have already been presented on the market, on the quality of production or on the cultural and political specifics of the period of time. Because sometimes television also -- quite often if not always -- television is very much driven by the environment. That's why we have a procedure; it's not like an emotional approach to commissioning of the product. This is the real politics and the company has a very strong expertise team. That's why, the company, they will always come up with a couple of really successful projects as we have now at [8:00 PM] our every day show, which delivers very strong results, domestically produced, domestically developed (inaudible) and we've got the first, in the history of Russian television, domestically produced successful sitcom Daddy's Girl, which was developed internally, produced the pilot for testing for the focus groups, and commissioned for the prime-time of CTC.  This is generally the scheme, and this is how we try to avoid the failures with the product and programming we have on air. But generally, as I started with, this is nature of television which very much depends on the character of the competition. And second question?

Nilesh Lakhani

Hi, Michael, It's Nilesh. I think you were also asking about whether we intend to spend a lot more on programming per se, if I'm correct. And what it is, in terms of programming costs, we don't see any dramatic increase in that sense. We are experiencing, obviously, inflation in this market. And with CTC, for example, we have 50% Russian local programming and we have 50% foreign. And we're seeing currently, most recently we've been seeing roughly about 15% year-on-year increases per hour for the Russian programming, the inflation there has obviously tapered off and improved since previous years because there is more supply there. We're not dependent upon one or two suppliers in that regard.  From the foreign side, we've seen 25% to 30% increases. And that primarily relates to us buying -- cherry picking foreign movies, blockbuster movies and so on. But I think in terms of a long-term trend, clearly over the years it's a competitive landscape. We've been operating in it for a long time. But over the years, there might be some competitive pressure. But we don't see anything in the near-term, meaning next year or two where we see any huge margin compression as a result of increased programming costs.

Michael Sonenshine - Thaler 

And one more follow-up question, if I might. I sort of go by my experience here watching in the Czech Republic. It's a dubbing market. Practically everything is dubbed. And they are incredibly, incredibly good at dubbing, and as a result, foreign television productions are quite popular here because it's an easy format for the average everyday ordinary person to watch. Are you looking at better, more user-friendly dubbing formats in your stations?

Alexander Rodnyansky

Let me tell you, it’s hard to compare the Czech television space and landscape with four major networks competing and two of them are state owned, with the 22 free-to-air television networks with the Russian content completely dominating over the international one. You would hardly find international programming in the prime-time of Russian television if you look at the schedule of six major networks. Let's say even more at the moment not even six.

International programming and CTC is only company, which tries to combine and balance domestically produced and the international programming. We've managed to cherry pick the international contents you have in our schedule, just to mention for you and to provide you an example; we've had Desperate Housewives, GREY'S ANATOMY, and the Smallville, Charmed.

We have the great variety of international movies enjoying the multi-year contract with Sony Pictures, with Disney, Universal, Paramount. So generally, CTC is trying always to combine the international program and domestic as I mentioned. But, the pace of competition in Russia is driven and so decided by the domestically produced content.

In terms of dubbing, CTC is one of the really best in terms of dubbing, but Russia dubs the mix, I mean the tradition - every country has its specifics and traditions. In Russia, the international programming could be dubbed, could be voiceovers, could be lip-sync, you know the synchronization, it depends on the product. And this is the long term tradition and no problems with that.

But this is definitely not the Central European type of competition. This is completely different space. Let’s say 250 million people living in a Russian speaking environment with just Russian continent driving the competition. This is exactly the situation.

Michael Sonenshine - Thaler

Okay, great. Thank you very much, congratulations on a good quarter.

Alexander Rodnyansky

Thank you.

Operator

Thank you. Your next question comes from Evgeny Golossony of Troika.

Evgeny Golossony - Troika

Yes, hi, good evening, everybody. Got a question, I'm looking yesterday at your historical data and the share of audience, and noticed basically, very often that your revenues and your share of audience don't move in the same direction. Well, I assume this has something to do with the media inflation probably.

But basically, my question really is about the trends you observe right now, because I looked at the TNS Gallup website and couldn’t find any data for the last couple of weeks. Sort of, am I right in assuming that taking the worst case scenario and assuming that kind of your new programming mix that you launched in September doesn't really lead to a big breakthrough in terms of audience market share.

Will that be fair to assume that the nature of the fourth quarter is such that as long as you manage to preserve at least your audience share, the advertising rush on the part of [competitor] companies will be enough to drive your revenues up to the extent that you will be able to meet your full year guidance?

And basically, by the numbers that you provide, that assumes a major probably 70% increase, quarterly increase of revenues and a very big increase in EBITDA margin

Alexander Rodnyansky

All right, let me start probably with a few responses. First of all, directly to your question, we do see, let's say, from 9% to 10% audience share at CTC in [Four Plus]. This is important to mention, Four Plus. So overall audience, target audience we always mentioned. We do see this audience share as a realistic target going forward.

Our current guidance assumed Four Plus audience share of around 9% in the remaining two markets of 2007. This is first. Second, what's important to keep in mind always, is the result of increasing competition and fragmentation in the market. All Four Plus, everybody older than four years old audience share, that everybody is focused on becomes a less relevant indicator of our performance.

For example, this fall season, we saw an increase in the affinity with our 6 to 54 target audience. This is the basis up on which we generate an inventory. So actually, our affinity slightly has grown up, and we are extremely focused on 6 to 54 audience demographics, because this provides us the improvement in our financial performance.

At the same time, I’d like to bring to your attention, is the fact that the overall audience of Four Plus is deeply impacted by the audience older than 55 years old. This is approximately one-third of the total TV viewing audience in Russia. So to be successful in Four Plus generally is necessarily we would like to achieve just like fourth competition, very high results in Four Plus. We need to be more successful within older demographics. We are not looking for too many sides.

So at the moment and generally CTC Media is very much focused on its target audience, and this is the resource of our inventory and this is the resource of our financial performance. And Nilesh, will probably go further.

Nilesh Lakhani

Yeah, I think and just to add to that to give you an example. That in Q3, for example, we had CTCs Four Plus audience share decline 14%, but actually our GRP inventory, ad inventory declined approximately 9%. The reason being as Alexander mentioned is, we sell not on a Four Plus, we sell on 6 to 54 and we had higher affinity.

So what that did is, on a 6 to 54 basis if you look at it, our Q3 decline was not 14% it was 11%. In addition to that, there’s other factors that come into play which is actually why we try and discourage you from doing a direct one-to-one correlation particularly between Four Plus share and revenues.

And obvious one being pricing, but there’s other issues like [put levels] but there is other issues like [put levels] and there are some sales that are not directly dependent on audience share performance, such as sublicensing and sponsorships and so on. So I think from that standpoint, hopefully that clarifies where there might be a slight disconnect between, correlating directly Four Plus to revenue.

Evgeny Golossony - Troika

Okay. All right. Thank you.

Operator

Thank you. Your next question comes from [Stefan Nilsson of SEB Enskilda].

Stefan Nilsson - SEB Enskilda

Hi, guys, Stefan Nilsson here. Just a follow-up on these ratings question, really, what I was wanting first to clarify is that, when you were targeting about 9% here for the remaining two months, would that be to reach the lower end of the new guidance or would it be kind of mid-range? 

Nilesh Lakhani

All right. You are very good. I think as I just mentioned that as a response to the last question that I would discourage you from doing a right mapping, because there are affinity, foot levels, and other variables that will move around, but I think not to be cagey about this clearly. What we're looking at probably is, probably say 8.5 to 9.5 sort of range. So you could say maybe at 9%, may get us to mid-point. But again, I would caution you, because it does depend on these other variables that could easily shift it several basis points one way or the other.

Stefan Nilsson - SEB Enskilda

Sure, got it. I got a little concerned when I saw you last week. I mean, it’s a very short time period time but we were below eight and I mean now you are talking about some launches during the rest of the year. Should we be expecting these kinds of lower ratings for a while until you've launched new formats or how should we look at that?

Nilesh Lakhani

I think it’s a good question. What we've done and maybe Alexander can add to this, is that, it's not just counting on the new shows which we are not sort of factoring and then being break-out successes at all to be reasonable about it. Also, what we have done since September is fine tune the schedule which is a normal part of what our programming people do. And have figured out quickly what's working, what's not.  In particular, for example, we've taken some measures to shore up our weekend audience share which we found that wasn’t working as well as we had expected.

So, I think a number of things have already been put in place fairly recently that we find is working, and therefore we have provided the ranges that we have which is 8.5% to 9.5% something in that range, where we fairly comfortable and that’s not relying upon a breakout hit with the new programming.

Alexander Rodnyansky

Actually, I'd like to discourage you from making any implications or forecasts based on weekly statistics. Weakly audience share data is not quite a good measure from a statistical point of view. But generally, what we do is, we try to keep highest affinity possible. Sometimes we have the product which delivers relatively low results in Four Plus, but with a great affinity, which makes us able to monetize it with a great efficiency. And this is not reflected in the Four Plus data, so that's exactly what Nilesh said a little bit earlier.

We've got the affinity growing, and with the process of fragmentation and competition, this became quite important, it's not the most important issue, because it's hard for you and everybody knows in international, this is just a universal trend. The fragmentation makes everybody very much focused and CTC being measured in Four Plus with the strong input of kids’ audience, you know we have like around 20% of audience share in 4 to 11 years old, but we never present it. And we are number two in 11 to 18 in the country, but we do not present it as well.

But our audience share is deeply driven by the fact of kids viewing and teens viewing. That's why what we try to do; we try to focus on the results in 6 to 54 and there were more in the results 14 to 40 to keep our loyal audience, to keep the core audience of CTC Network satisfied with our programming at the moment. And at this stage of competition when there's such fragmented landscape is placed, sometimes it's not a best way to deliver the high results in Four Plus. That’s why four -- [8] in Four Plus could be very bad for us and could be as well at the same time not the bad news at all if it’s a good affinity in terms our primetime specifically.

Stefan Nilsson - SEB Enskilda

Okay. Thanks just one last question. Could you just maybe give us some kind of hint, what is reasonable long-term rate in your target audience, given the competitive situation, but also maybe increased penetration? I don’t know, but for Domashny and for the CTC channel?

Alexander Rodnyansky

As I mentioned, probably a little bit earlier we do foresee CTC as a realistic target of audience share on 9% to 10% with an affinity of 1.25. So generally this is about -- this is a good case scenario. We had 1.22, now we have 1.25. So it means around 12% of 6 to 54. This is what we are always looking for. I don’t speak about any breakthrough, and breakout of our [net of fixed assets]. This is something which we -- what we believe is a realistic target.  If we speak about Domashny, Domashny as we mentioned we are very satisfied with the development in terms of its growth, its positioning, its grant, we never changed or let's say we've got very modest changes in the programming of Domashny this year and we've managed to deliver around 2% in Four Plus with the niche I would say thematic narrow targeted network.

But the great news about Domashny this is the affinity. We have 1.3 affinity index to our target audience female 25 to 60 years old, this is the GRPs, this is the demographics where we sell our GRPs. So see this -- we are very optimistic about Domashny and we foresee the potential of this network to achieve network to achieve, let's say, in three to four years, 3.5% of audience shares in Four Plus. It would make us delivering the very substantial, I would say it would make Domashny a substantial part of our financial performance in the future, let's say in the three years.

So we see a great potential in our second network and we will do our best in the next year to get them the program as scheduled, a little bit more aggressively, developing and we would put some new products on the air. What we never did this year and we would definitely spend some money on marketing of our second network, which is the first probably, in the history of Russian television network to be launched two and half years ago and to deliver OIBDA positive and margins for consecutive quarters one-by-one.

Stefan Nilsson - SEB Enskilda

Okay. Thanks so much.

Alexander Rodnyansky

Thank you.

Operator 

Thank you. At this time I would like to turn the call over to Alexander Rodnyansky for the closing remarks.

Alexander Rodnyansky

So, thank you very much for joining this call today and for your appreciation of the company’s result. And we will keep you updated with all the news on CTC Media. Thank you and have a good day.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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