CTC Media Q3 2007 Earnings Call Transcript

Oct.29.07 | About: CTC Media, (CTCM)

CTC Media, Inc. (NASDAQ: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 - MorganStanley

Elena Rogovina - UBS

David Ferguson - RenaissanceCapital

Alexander Wisch - S&P EquityResearch

Michael Sonenshine - Thaler

Evgeny Golossony - Troika

Stefan Nilsson - SEB Enskilda

Operator

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

This conference call is beingwebcast and an audio version of the call will be available on the company'swebsite for two weeks.

As a reminder, this conference isbeing recorded for replay purposes.

You should all have received CTCMedia's third quarter earnings release that was issued today. If you have notreceived a release, please visit the company's website at www.ctcmedia.ru.Please refer to the earnings release for reconciliation of non-GAAP measures tothe most comparable GAAP measures.

Before we begin today's call, CTCMedia would like to remind everyone that this conference call may containcertain forward-looking statements relating to future events, future financialperformance, strategies, expectations, competitive environments, regulationsand availability of resources.  Suchforward-looking statements are based upon current expectations that involverisks and uncertainties. Actual results may differ materially from those statedin any forward-looking statements, based on a number of factors and other riskswhich are more specifically identified in CTC Media's filings with the SEC.  And now I will like to turn the call over toMr. Alexander Rodnyansky, Chief Executive Officer of CTC Media. Please goahead, sir. 

Alexander Rodnyansky

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

So anyway, welcome to CTC Media'sthird quarter 2007 earnings conference call. And I am joined today by NileshLakhani, our Chief Financial Officer, as well as Vladimir Khanumyan, our ChiefOperating Officer.

The Russian television marketcontinues to grow at an impressive pace. Consumer purchasing power is expandingand in-term advertisers are increasingly, drawn to television as a preferredmedium to reach their target audience. We are executing on our operating and strategicplan and continue to deliver the premium audiences to advertisers to strengthenour CTC and Domashny brands.  As aresult, we remain well-positioned to continue to capitalize on the numerousgrowth opportunities in our markets.

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

Turning to our CTC Network: inthe third quarter, audience share was 8.7% compared to 10.1% during the sameperiod a year ago. While this performance was lower than our internal goal, itfactors 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 ourschedule and we maintained our position as the fourth most-watched televisionchannel in Russiain a highly competitive market.

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

We have several new premieresplanned for later in the fourth quarter, including (inaudible) a drama seriesfrom 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 verypleased 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 secondquarter of 2007.

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

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

In September, we announced ourexpansion into Kazakhstanand Uzbekistan,two rapidly developing and primarily Russian speaking markets, with a combinedpopulation of more than 40 million people. We believe these markets offer asignificant opportunity to benefit from the continued development of theseeconomies, as they are ideally suited for CTC's existing expertise and assets.

In Kazakhstan, we entered into adefinitive agreement with Channel 31 Group, one of the leading broadcasters inthe country. Upon completion of this agreement, CTC will retain a 60% economicinterest in the Channel 31 Group, and be poised to capture a part of Kazakhstan's200 million plus advertising market. We expect this transaction to close by theend of 2007.

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

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

We believe that this places CTCin a unique position to partake in the growth of a market in its earlydevelopment stages. We are excited about the opportunities in these two marketsand continue to explore a number of additional expansion opportunities.

I would like to remind everyoneof 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. Currentlythere is a 20% advertising time limit per hour, with a 15% all day limit.

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

The new regulations will put a15% advertising limit per hour all day, and, as such, advertising time duringprime-time viewing hours will be reduced. As a result, the volume of grossrating points available on the market is expected to decrease by approximately15% to 20%.

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

Finally, in regards to our CFOsearch, we have identified, and are in advanced discussions with, a potentialcandidate. 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 behis last quarterly earnings call with CTC. I would like to take thisopportunity to thank him for the great job he did for the company during histenure as CFO, and wish him well in his future endeavors.

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

Nilesh Lakhani

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

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

Our third quarter results showedstrong revenue and OIBDA growth. Consolidated third quarter operating revenuesincreased by 33% to $94 million, compared to $71 million in the third quarterof 2006. OIBDA improved by 68% and OIBDA margin improved to 34%.

As you are aware, most of ouroperating revenue is in rubles, and during the third quarter, the rublestrengthened against the U.S. dollar creating a positive currency impact on ourrevenues of approximately 5%.

The CTC Network delivered thirdquarter revenues of $64.9 million, compared to $49.7 million in the thirdquarter of last year. At CTC Network, increases in price, positive Forex,offset the decrease in inventory as our audience share declined from 10.1% to8.7%. Also, an increase in the sublicensing revenue contributed approximately5% to revenue growth.

At theDomashny Network, third quarter revenues increased to $7.8 million or86% year-over-year. Domashny benefited both fromprice increases and the increase in audience share to 1.9% compared to 1.5% inthe last third quarter.

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

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

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

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

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

In the three months that ended onSeptember 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 acquiredat the end of Q2. CapEx in the third quarter of $1.2 million related primarilyto the purchase of TV and video equipment at the stations.

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

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

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

With that I will turn the callback over to, Alexander.

Alexander Rodnyansky

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

Our balance sheet remains strongbecause we continue to pursue a number of organic and acquisition growthopportunities.

With that, we will open the callfor questions.

Question-and-AnswerSession

Operator

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

Sohail Ahmer -Lusight Research

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

Nilesh Lakhani

Hi, Sohail. I think in terms of 2008, we will see probably a15% 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 VideoInternational and others have come out with an estimation of, is that the priceis supposed to increase in the 50% to 60% range.  So with that, what we expect to see is, evendespite the decline of the inventory, we fully expect the market to absorb theprice increase which, essentially, will result in what has been forecasted as:a roughly 27% to 30% increase in the overall TV ad markets, depending onwhether you look at in rubles versus dollars. Rubles being 27% may be indollars, around 30%. So we do not expect that to negatively impact revenues inthe industry.

Sohail Ahmer -Lusight Research

Are there any effects you see on your cash flows as a resultof 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, asopposed to when the first impact of the ad law affected us, some of you mightremember 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 areless worried about it to the extent that the market has had a lot of time tolook at the situation. And what we're also seeing is that there's tremendousstrength in terms of the advertising market in general, so that we do not seeany issues with that price increase being absorbed next year.

Sohail Ahmer -Lusight Research

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

Nilesh Lakhani

We haven't specifically given our guidance, but I will tellyou our CapEx, because of our business model, runs fairly low. In this pastcouple of years it's been around 3% or less in terms of revenue, and in theforeseeable 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 coloron the Kazakhstanacquisition. If you could share, at least some financial detail, on the companyyou're buying there. And if you could clarify the $200 million plus dollar figurethat you gave for the market? Is that a total TV or total ad? Is that inclusiveof 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, whichof course we can give you more color on the Kazakhstan market and theacquisition we are going to close in the near future. Speaking about theadvertising market, $200 million that was mentioned, this is only TVadvertising market, which we think is net-net our total discounts in use in themarket. So we think it's, both our-- 

Alexei Yakovitsky -Deutsche Bank

Including [VAT].

Vladimir Khanumyan

Including [VAT], of course. This number is via consensus ofour internal research, TNS Gallup and Video International. Because there is nospecial market figures for the advertising market existing in the localindustry. And on financial forecast of the company we are going to acquire, asI 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 thatit’s the fourth channel in the country regarding audience share. Its averageaudience share within the last several months was 8%, of course, having in mindthe volume of the market and possible financial impact of this company to CTCMedia's overall financial performance. It is easy to guess that it would be ina 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 readyto give you any more detailed financial forecast.

Alexander Rodnyansky

Let me add, Alexei; hello, it is Alexander, that we havereally 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 thecountry, in a country with around 30% for Russia. So generally, the positionof the 31st channel in Kazakhstan, which is already number four, slightly belowthe number three network, with the demographics very favorable for CTC brand,gives us a great opportunity to look optimistically into the future inKazakhstan.

But at the moment, of course, that at this point, the Kazakhstanwill probably not add more than 20 million to our top line next year, or lessthan 3%. So, we are happy to start our expansion to this fast-growing economyand country, but we see this operation more in the middle or long-term thanshort 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 ofMorgan Stanley.

Edward Hill-Wood -Morgan Stanley

Good afternoon. I have got two questions, please. The firstjust relates to the advertising market in the third quarter and into the fourthquarter. I mean, you've done 30% growth at CTC Network. You mentioned sort of a10% impact from FX and sublicensing, and you've got a hit in audience sharewhich means the market is presumably up around 35% or so. Is that right, or isthere 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'sin the 35% range. On the Forex, just a correction there, we had said 5% growthbeing 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 somethingunusual going on in that rate or was that the sort of rate of growth you expectthe market to be in the fourth quarter?

Nilesh Lakhani

No, I think that's correct. That's what the forecast is forthe entire fourth quarter and that is in dollar terms, about 35%. So, we'danticipated 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 audienceshare. Could you just tell me, or highlight historically, has there been muchof an impact or would you expect much of an impact next year from -- you've gota series of events. I mean, you've got The Summer Olympics and Euro 2008, whichlooks like Russia will nowquality probably ahead of England,unfortunately, and the elections. Is that going to be something which impactsyou, particularly, the euro, or do you think that's not really an issue?

Alexander Rodnyansky

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

So, all our results and all our internal expectations aregoing to be based on the potential impact. I don't believe it's going to be thereally strong one, but anyway we consider this as an impact from the Olympicgames 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 ofUBS.

Elena Rogovina - UBS

Yes, hello. Congratulations on good results, I have a coupleof questions. The first one is what does $18 million of acquisitions in thethird quarter stand for? The second question is what was the effect ofcommissions paid to Video International trends in the second quarter? And whatdo you expect in the fourth quarter '07 and in 2008? And the last question iswhat should we expect for the programming cost for the fourth quarter '07 andbeyond? 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, Ithink 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 twostations 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 fourstation acquisitions.

 Nilesh Lakhani

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

Elena Rogovina - UBS

Okay. So no Kazakhstanhere yet though, Uzbekistan-- 

Nilesh Lakhani

No, no, that's 65 million so that's -- we haven't closed thedeal yet. We expect that to appear hopefully in Q4. Okay?  As far as your question regarding theeffective commission rate for Video International, on a consolidated basis Ithink you're looking at how much you paid in Q3 versus what we expect in Q4; wedon't expect a huge amount of change. For Q3, we paid 13% at CTC Network, whichis the main business for most of our revenue. At the Domashny network, similarrate 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, asyou might recall. We had, for the rest of the year, because of the transitionthat VI is going through in terms of regional sales; we had negotiated avariable commission structure to protect CTC's position. And in that regard, wehad approximately 3% effective rate commission at CTC station group and 4% atDomashny for Q3, and we would— 

Elena Rogovina - UBS 

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

Nilesh Lakhani

Q2 was similar. It was in the sort of 3% to 5% range for thestations group and it was 13% for the networks. And for Q4 going forward, weexpect to see a similar rate. Now the variable commission might fluctuate alittle 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'reending up.

Elena Rogovina - UBS 

And for the next year?

Nilesh Lakhani

For next year, again, at this point we expect VI'scommission -- the networks we've already negotiated at 13% flat rate. There isno signing fee or anything that will be amortized in conjunction with that. Soit'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. BecauseVI is going through a management transition as we've said on earlier calls. Andwe are monitoring the situation carefully to make sure that we protectourselves 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 fourthquarter, you meant, right? 

Elena Rogovina  - UBS   

Yes, and then '08.

Alexander Rodnyansky

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

Also in November, we would launch one of the most successfulprojects of the year in the world. This is the game show, “Are you Smarter thana 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, weare planning the launch of several sitcoms like Step-by-step, Russianadaptation, The Full House, Russian adaptation, and of course the premiereseries 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 theend of this year and the first half of the next year. And except that I wouldmention also the historical drama, “One Night of Love”. This series is verymuch similar to [Poor Nastya], one of the most successful CTC series in thepast, I would say, ever.   So as you see,we have quite plenty of projects. I never mentioned some others we always havein the pipeline. And we always try to relate our program schedule continuouslyand make the additional changes during the season to maximize our ratingperformance and keep the control over our costs.

Elena Rogovina - UBS

Okay, thank you.   

Operator

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

David Ferguson -Renaissance Capital Group 

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

Nilesh Lakhani

Hi Dave. Yes, I think that the reason for that primarily isbecause, as you have mentioned, a significant proportion of our costs are fixedin the short run. So to the extent we have a revenue range of 460 to 480. Ifthat is depending on the way it comes out, it basically falls right down to thebottom line and affects it. So, I think it's commensurate with the revenuerange that we've provided. But in regards to visibility, I mean we have verygood visibility at this point being that we have two months left in the year onour cost side. And clearly one of the things that we are counting on is theinventory side on the CTC audience share in particular, which again, we feelthat the current scheduling that we have done and the programming changes thatAlexander 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 ofS&P Equity Research.

Alexander Wisch -S&P Equity Research

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

Nilesh Lakhani 

Just to add some clarity, I think as Alexander said earlier,first of all, Kazakhstanis not going to be terribly significant in terms of its impact. What we arelooking at is neutral to positive OIBDA in the first year of operation thereunder CTC at the moment. But we will get some more clarity on that. Nowclearly, 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, becauseof an extremely small market, and it's more sort of way a startup situation forus where we the investment into the project as well is very, very de minimis atthis point. So, from both aspects to answer your question, we do not expectsignificant margin dilution from those acquisitions.

Alexander Wisch -S&P Equity Research

And that then applies to minorities, as well? So, nosignificant 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 Sonenshineof 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 sublicensingrights. I'm wondering if you feel that at this point your inventory is prettysufficient given your sales base, or if we should expect to see any changessignificantly in terms of the amount of money you spend building theprogramming library?

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

Alexander Rodnyansky 

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

Everything we are about to launch to pick up or tobroadcasts is going to be or is developed internally, produced by Russian domesticproduction houses and could work pretty well in line with our expectations. Sometimescases of big success are much better and sometimes could be very unsuccessful.  What we do is, we try to first to pick up theinternational well-known format which is a proven format, which we’re alreadysuccessful outside of Russia.Sometimes it helps, sometimes not, but definitely, we use the second, we try toget it adapted by the best local houses with the internal expertise of ourteam, which has a lot of knowledge on the brands of Domashny and CTC. BecauseCTC 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 beprovided with the product very much suited to all brand attributes we've gotdeveloped. 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 withthe 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 itcosts for the average results of the series or sitcom, much more in terms ofour pilot.

Then we have the focus groups to test the audience or groupsto test the product and make the additional changes; commission or notcommission the product. This is the internal procedure which has nothingdifferent to the international broadcasters have.  Sometimes such project, like let's say, asmentioned already, CTC [Life of a Superstar], which is the show very muchsimilar to Pop Idol or an American Idol, could work or could not work inRussia. It depends on the specific of the competition in Russia.  On the number of similar shows which havealready been presented on the market, on the quality of production or on thecultural and political specifics of the period of time. Because sometimestelevision also -- quite often if not always -- television is very much drivenby the environment. That's why we have a procedure; it's not like an emotionalapproach to commissioning of the product. This is the real politics and thecompany has a very strong expertise team. That's why, the company, they willalways 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, domesticallyproduced, domestically developed (inaudible) and we've got the first, in thehistory of Russian television, domestically produced successful sitcom Daddy'sGirl, which was developed internally, produced the pilot for testing for thefocus groups, and commissioned for the prime-time of CTC.  This is generally the scheme, and this is howwe 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 muchdepends on the character of the competition. And second question?

Nilesh Lakhani

Hi, Michael, It's Nilesh. I think you were also asking aboutwhether 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 dramaticincrease in that sense. We are experiencing, obviously, inflation in thismarket. And with CTC, for example, we have 50% Russian local programming and wehave 50% foreign. And we're seeing currently, most recently we've been seeingroughly about 15% year-on-year increases per hour for the Russian programming,the inflation there has obviously tapered off and improved since previous yearsbecause there is more supply there. We're not dependent upon one or twosuppliers in that regard.  From theforeign side, we've seen 25% to 30% increases. And that primarily relates to usbuying -- cherry picking foreign movies, blockbuster movies and so on. But Ithink in terms of a long-term trend, clearly over the years it's a competitivelandscape. 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 thenear-term, meaning next year or two where we see any huge margin compression asa result of increased programming costs.

Michael Sonenshine -Thaler 

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

Alexander Rodnyansky

Let me tell you, it’s hard to compare the Czech televisionspace and landscape with four major networks competing and two of them arestate owned, with the 22 free-to-air television networks with the Russiancontent completely dominating over the international one. You would hardly findinternational programming in the prime-time of Russian television if you lookat the schedule of six major networks. Let's say even more at the moment noteven six.

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

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

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

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

Michael Sonenshine - Thaler

Okay, great. Thank you very much, congratulations on a goodquarter.

Alexander Rodnyansky

Thank you.

Operator

Thank you. Your next question comes from Evgeny Golossony ofTroika.

Evgeny Golossony -Troika

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

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

Will that be fair to assume that the nature of the fourthquarter is such that as long as you manage to preserve at least your audienceshare, the advertising rush on the part of [competitor] companies will beenough to drive your revenues up to the extent that you will be able to meetyour full year guidance?

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

Alexander Rodnyansky

All right, let me start probably with a few responses. Firstof 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 thisaudience share as a realistic target going forward.

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

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

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

So at the moment and generally CTC Media is very muchfocused on its target audience, and this is the resource of our inventory andthis is the resource of our financial performance. And Nilesh, will probably gofurther.

Nilesh Lakhani

Yeah, I think and just to add to that to give you anexample. That in Q3, for example, we had CTCs Four Plus audience share decline14%, 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 sellon 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 otherfactors that come into play which is actually why we try and discourage youfrom doing a direct one-to-one correlation particularly between Four Plus shareand 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 somesales that are not directly dependent on audience share performance, such assublicensing 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 ofSEB Enskilda].

Stefan Nilsson - SEBEnskilda

Hi, guys, Stefan Nilsson here. Just a follow-up on theseratings question, really, what I was wanting first to clarify is that, when youwere targeting about 9% here for the remaining two months, would that be toreach 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 mentionedthat as a response to the last question that I would discourage you from doinga right mapping, because there are affinity, foot levels, and other variablesthat will move around, but I think not to be cagey about this clearly. Whatwe're looking at probably is, probably say 8.5 to 9.5 sort of range. So youcould 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 itseveral basis points one way or the other.

Stefan Nilsson - SEBEnskilda

Sure, got it. I got a little concerned when I saw you lastweek. I mean, it’s a very short time period time but we were below eight and Imean 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'velaunched new formats or how should we look at that?

Nilesh Lakhani

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

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

Alexander Rodnyansky

Actually, I'd like to discourage you from making anyimplications or forecasts based on weekly statistics. Weakly audience sharedata is not quite a good measure from a statistical point of view. Butgenerally, what we do is, we try to keep highest affinity possible. Sometimeswe have the product which delivers relatively low results in Four Plus, butwith 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 Nileshsaid a little bit earlier.

We've got the affinity growing, and with the process offragmentation and competition, this became quite important, it's not the mostimportant issue, because it's hard for you and everybody knows ininternational, this is just a universal trend. The fragmentation makeseverybody very much focused and CTC being measured in Four Plus with the stronginput of kids’ audience, you know we have like around 20% of audience share in4 to 11 years old, but we never present it. And we are number two in 11 to 18in the country, but we do not present it as well.

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

Stefan Nilsson - SEBEnskilda

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

Alexander Rodnyansky

As I mentioned, probably a little bit earlier we do foreseeCTC as a realistic target of audience share on 9% to 10% with an affinity of1.25. 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 alwayslooking for. I don’t speak about any breakthrough, and breakout of our [net offixed assets]. This is something which we -- what we believe is a realistictarget.  If we speak about Domashny,Domashny as we mentioned we are very satisfied with the development in terms ofits growth, its positioning, its grant, we never changed or let's say we've gotvery modest changes in the programming of Domashny this year and we've managedto deliver around 2% in Four Plus with the niche I would say thematic narrowtargeted network.

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

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

Stefan Nilsson - SEBEnskilda

Okay. Thanks so much.

Alexander Rodnyansky

Thank you.

Operator 

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

Alexander Rodnyansky

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

Operator

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

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