Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Mobile TeleSystems OJSC (NYSE:MBT)

Q2 2008 Earnings Call Transcript

August 12, 2008 10:00 am ET

Executives

Andrei Terebenin – VP, Corporate Communications

Mikhail Shamolin – President and CEO

Vsevolod Rozanov – VP and CFO

Andrei Dubovskov – Director General of Business Unit, MTS Ukraine

Mark Burden – CFO, MTS Ukraine

Analysts

Alex Wright – Brunswick UBS

Leila Govi – Egerton

Sergei Arsenyev – Goldman Sachs

Jean-Charles Lemardeley – JPMorgan

William Kirby – Nevsky Capital

Will Milner – Arete Research

Olga Bystrova – Credit Suisse

Herve Drouet – HSBC

Anastasia Obukhova – VTB Capital

Dalibor Vavruska – ING

Stephen Pettyfer – Merrill Lynch

Igor Semenov – Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2008 Financial and Operating Results Conference Call on the 12th of August, 2008. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions)

I will now hand the conference over to Andrei Terebenin. Thank you. Please go ahead, sir.

Andrei Terebenin

Good day, ladies and gentlemen, and welcome to MTS conference call to discuss the company's second quarter 2008 financial operating results.

Before beginning our discussion, I would like to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements, which may involve certain risks. The statements are related to one of the following issues, the strategic development of MTS business activities, both in Russia and abroad, revenue and/or subscriber growth, syndicated loan facilities and their usage, legal actions or proceeding directed at the company or its representatives, regulatory changes, and the impact of the company's operations in markets in which we operate, financial indicators, such as operating income before depreciation, amortization, average revenue per user, cash flow projections, and/or return on investment capital, technical matters as they pertain to our mobile communication network, including equipment, licensing, or network technologies, and capital expenditures and operating expenses.

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

MTS reserves any obligation to update any previously made forward-looking statements uttered in this conference call or make any adjustments to previously made statements to reflect changes in risks, all based on the presentation and materials used at our press conference and references in the conference call are available in our company's website.

I'll turn now the call over to Mikhail Shamolin, President and Chief Executive Officer of MTS Group.

Mikhail Shamolin

Welcome, ladies and gentlemen. Thank you for joining our 2008 second quarter conference call.

Joining me today to discuss our financial and operating results are Vsevolod Rozanov, Chief Financial Officer; Andrei Dubovskov, Head of Business Unit MTS Ukraine; and Mark Burden, CFO of Business Unit Ukraine.

I am pleased to report to you that MTS has delivered another strong quarter of profitable growth as we continue to execute our strategy of capturing growth in our core markets, creating value in developing markets, developing mobile broadband in our markets of operation, while at the same time maintaining cost efficiency and further managing our organizational development. Overall, we see a continuation of the same growth drivers that have delivered now five quarters of successive growth.

Group revenues increased to $2.6 billion, a 33.9% rise year-on-year. Subscribers rose 2.4% to nearly 91 million for the group, with the greatest gains coming in Russia and Uzbekistan. Likewise, we managed to raise voice usage in each of our markets, while data consumption is increasing throughout the group.

In our core markets, our Russian operations continue to showcase positive momentum. For the quarter, revenue rose to $2.0 billion, a 12.4% rise from Q1 and a 36.4% rise from the same period in 2007. As we saw in the past, a sustained rise in voice usage is giving us momentum in the marketplace though the addition of 1.5 million net subscribers has made a significant contribution to our revenue growth. More and more subscribers are coming to our network with high incremental value as ARPUs rose 9% to $11. At the same time, we were able to adjust prices in April and May on some of our tariff plans and actually realize an increase in our APPM of over 1%.

In Ukraine, revenues rose over 10% year-on-year to $434 million. Q2 was a period of continued transition for MTS in Ukraine as we implemented significant marketing changes. Usage has been lagging in the market and comparatively low when considering the high amount of on-net calling in our network. Therefore, usage stimulation has been our priority. And we succeeded in raising MOU by 37% to 239 minutes when compared to Q1 of 2008. This is important as high usage encourages customer loyalty, and churn in fact improved by 3.4 percentage points over the same period in 2007.

During the quarter, we also transitioned from fixed to variable dealer commissions for prepaid as we introduced the same structures that have proven successful in our Russian markets. Attracting high-usage, high-value customers will be important in moving forward, and we see positive signs in both these and other market KPIs.

In other regions, we continue to roll out our networks and strengthen our leadership in these rapidly growing markets. Revenues from Uzbekistan rose over 63.5% year-over-year as our subscriber count rose 22% to 4.37 million during the quarter. We retained a leading subscriber share of this dynamic market. In Turkmenistan, where penetration is now 12%, we exceeded the half a million subscriber mark and now boast 570,000 subscribers. We did see a drop in revenue, but this stems from the government's decision to revalue the Turkmen currency, the manat. For the period, the underlying performance of the business remains solid, sound, exhibiting the strong growth qualities of a business in the early stages of development.

In Armenia, we witnessed good growth from both seasonal rise in usage and more subscribers coming into our network. Revenues rose to $61 million, an 11% increase from Q1. Our subscriber share was at around 70% as penetration rose to 67%.

Lastly, we recently announced the impending departure of our dear friend and colleague Vsevolod Rozanov. Vsevolod has upon his own initiative taken responsibility for the deployment for development of Shyam Telelink, Sistema's venture in India. The CFO of MTS Group since April 2006, Vsevolod's warrants significant credit for not only the improved financial performance and efficiency of MTS, but its strategic and operational development as well. He also is deserving of our gratitude for his infallible support of me and my colleagues, not to mention his friendship to both the people in this room and those listening on the call.

Now with a touch of remorse, I ask Vsevolod to report finally on the financial performance of the group. Vsevolod, please.

Vsevolod Rozanov

Thank you very much, Mikhail.

The financial position of MTS continues to improve as we saw quarter-on-quarter growth of OIBDA by 15% or $1.3 billion. I'm pleased to report a strong seasonal margin of 51.2%. Key driver for this improvement was better effective pricing of off-net calls. Our gross margin improved by 1.6 percentage points, largely through the management of interconnect traffic.

To date, we saw no negative impact from the inflationary pressures beyond our own expectations. Even now, our continued strong performance, we are reiterating our guidance of 50% OIBDA margin for the year. OIBDA improvement also helped us to deliver strong earnings for the period.

Net income for the period rose strongly to over $659 million for a margin of 25% as seasonal growth drivers offset the advantage we saw in Q1 currency appreciation and forward gains. Return on investment capital was 57.2% for the last 12 months, another sign of the value we are creating through our business.

The business continues to generate substantial cash flows. Net operating cash flow reached $1.95 billion for the six months ended June 30, 2008, and free cash flow also grew to $1.1 billion. For the period, CapEx spending for the Group was roughly $545 million. We remain on track for the $2.5 billion on CapEx spending we guided last month.

In Q2, we acquired no shares as a part of our shares repurchase program. Since the program's inception, we acquired 10.8 million ADRs representing 6.95% of the outstanding ADRs, or 2.71% of our outstanding shares. This amount currently satisfies our immediate corporate needs. The program, however, will continue in its current format.

Our financial position remains strong. Total debt was $3.3 billion at the end of the period, and our net debt to LTM OIBDA was at 0.4 times. This includes the RUB10 billion bond issue we floated in June, which was oversubscribed by 1.7 times and yielded a coupon rate of 8.7%.

In closing, I would like to extend my thanks to investors and analysts with whom I have worked over the past 2.5 years. Our thoughts at MTS is to create dialogue with investors. We always try to incorporate investor insights and ideas to the way in which we manage the business. Looking back over my time at MTS, I see many of our accomplishments as having been discussed through the shareholder meetings [ph], improving information transparency, shortening reporting periods, signing [ph] dividend policy, and so forth. Given the revenue growth and operational improvements of the organization, I sincerely hope that we have at least met your expectations.

For me, it was a great honor and unforgettable experience to be the part of the team actually leading the leading mobile operator MTS. I am sincerely thankful for the constant support I have received from shareholders, investing community, and my MTS colleagues. Looking ahead, I wish you the very best.

Mikhail Shamolin

Thank you, Vsevolod.

And on behalf of the entire organization and the 23,000 people who work at MTS, we wish you the best success in your endeavors.

In past calls, we have spoken to our commitment to 3G and mobile broadband. In May 2008, we became the first Russian operator to launch a multi-regional 3G network as we introduced HSPA in St. Petersburg, Kazan, and Sochi. And last week, we conducted the full commercial 3G launch in Yekaterinburg and Nizhny Novgorod, bringing us closer to our target of 14 cities by the end of 2008.

Coupled with our CDMA network in Ukraine and planned deployment of 3G in both Uzbekistan and Armenia late this year, MTS is fully committed to exploiting the full potential of the latest network technologies. Our goal in doing so is simple, go for the best customer experience possible. To reach this goal, it is critical that we offer a unique customer experience from the values of our brand to the variety of material available on our WAP world.

MTS holds customer relationships with over 90 million people spread around 11 time zones and across six countries. And future growth will depend upon driving demand for products and services that we bring to market in order to increase the lifetime value of these customers. Enlarging our footprint for MTS can leverage scale and scope to maximize the opportunities and possibilities with an offer to our customers. We do intend to become more aggressive on M&A within CIS, and we will more closely examine opportunities to expand abroad, bring to market innovative products and services that engages our customers, encourages connections, and overall offer a compelling Internet experience.

Naturally, we keep in mind the promises we have set forth in our 3+2 strategy. We will mind both the profitability of the business and the bottom line by continuously exploiting group synergies and aggressively exploiting technology solutions to streamline the organization. At the same time, our focus on the organization necessitates that we will focus on further empowering managers throughout the organization while simultaneously training and developing a next generation of leaders for MTS.

In sum, this is the thinking that will guide MTS for years to come, for this is what we feel is necessary to ensure that we satisfy our ultimate goal, maximize shareholder return. Thank you for your time. Now, I'm happy to open the call to your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And the first question today comes from Alex Wright. Please state your company name followed by your question.

Alex Wright – UBS

Yes. Thanks very much. Alex Wright from UBS. Had a couple of questions on Russian operations, please. In your presentation, you referred to the improvements in gross margin being driven by better management of off-net calls. And I wonder if you could just elaborate further on exactly how you've achieved that and how sustainable you believe that recovering the gross margin is. And secondly, could you just give us some further color on the increase in churn in Russia during the quarter, please? Thank you.

Mikhail Shamolin

Yes. Thank you, Alex. This is Mikhail Shamolin answering. Yes, indeed, we have done some price adjustments in the second quarter in attempt to manage the interconnect costs, which have risen in Q4 and Q1 of 2008. And we did so by simply analyzing all of our tariff plans. And we actually have quite a lot of tariff plans across the territory because each region of Russia – and we are present in 82 of those regions – basically represents in many cases a different market with different levels of competition and different pricing.

And therefore, we have quite a lot of tariffs, a mix of federal and local. And therefore, after having done this analysis, we discovered quite a number of tariffs which were either not profitable or not profitable enough up to our standards. And we reviewed pricing in those tariffs to bring them into profitability area, which helped the interconnect and overall revenue.

At the same time, we are consistently – we have been consistently implementing the cost efficiency program, which also bear fruit in the second quarter of 2008, which helps us improve the margins compared to the first quarter. As far as the increase in churn in Russia goes, that is closely correlated to increasing our gross additions, which we had in Q4 and Q1. And therefore, this is more or less a direct correlation, for us business as usual.

Alex Wright – UBS

Okay. Thank you. Just to follow up very briefly on the first question, did you see any significant change in the mix of your traffic overall between on net and off net, or it’s really just, as you say, just some adjustment in tariff plan?

Mikhail Shamolin

No immediate changes in traffic mix, no.

Alex Wright – UBS

Thanks very much.

Operator

You are ready for the next question, sir? And the next question comes from Leila Govi. Please state your company name followed by your question.

Leila Govi – Egerton

Leila Govi from Egerton. Just a question on Ukraine usage, which grew very strongly year-on-year and quarter-on-quarter, if you could just say a little bit more about what drove that. Thank you.

Mikhail Shamolin

This goes to Andrei Dubovskov.

Leila Govi – Egerton

I'm sorry.

Andrei Dubovskov

Thank you, Leila.

Leila Govi – Egerton

All right. Okay, thanks.

Andrei Dubovskov

for your question. It's Andrei Dubovskov, Head of Business Unit Ukraine. I'm going to say that during Q2, we saw a positive operational development within the business. Our core brand promoters [ph] offering the best price-value combination is better understood by the market. We saw a dramatic rise in usage. It's a key metric as it helps reduce churn, build loyalty and attract new customers better. Thinking about minutes of usage, I'm going to say that that increased by 57% year-over-year and by 37% sequentially, accounted for 52 minutes in Q2, 107 to 175 minutes and eight and to nine [ph] in Q2 (inaudible). I think that higher usage helps reduce churn, increase subscribers to the network. Thank you.

Leila Govi – Egerton

Sorry, were there – sorry. Go ahead.

Mikhail Shamolin

I just wanted to add to what Andrei has said about the usage. There are two factors. One factor, which was probably the most important is reduction of double SIM-using customers in our network. If you look at the overall customer numbers in Ukraine, you will see that there was no increase in customer numbers between Q1 and Q2. But there was a change in the quality of those customers. And we had a decrease in double SIM-using customers and increase in single SIM. In other words, we increased our share in customers' pocket, and therefore, we had a dramatic increase in usage from Q1 to Q2. And that was driven by a number of successful promotions with on and sometimes off-net minute pricing, which – and those promotions were pretty much within the market. So, it wasn't dumping in any way.

Leila Govi – Egerton

So in the second half, should we expect subscriber numbers to start growing again in Ukraine if the clean up is now done?

Mikhail Shamolin

Well, we aren't really giving guidance for third quarter at this point. But we feel fairly optimistic that our strategy in Ukraine is starting to work.

Leila Govi – Egerton

Okay. And also just another question on Ukraine, the pre-tax margins, if we exclude the sales and marketing expense, has come off quite a bit in the last few quarters, and I'm just wondering what's been going on there in terms of G&A cost, if there's anything in particular maybe on the interconnect side or some other network costs, just to understand a little bit about some – what's been driving the reduction the last few quarters. Thanks.

Mikhail Shamolin

Question goes to Mark Burden.

Mark Burden

Okay. Thank you for the question. Basically, what we're seeing is pressure coming from to some extent internet interconnect costs, as particularly roaming gets re-denominated and changes in exchange rates. And so, that has become slightly higher percentage of our costs against revenue. We see continued inflation in one or two items, rents, energy costs, and marketing expenses. And basically, I think you were also focusing on the sales costs. What we saw was an increasing cost on the sort of advertising side, particularly as an element of fact in support of the new initiatives in the second quarter. But this was mitigated by a reduction at this point in dealers' commissions as we've moved to the revenue sharing scheme on prepay that has been implemented in Russia. So, this is something where we're sharing the quality of the subscriber with the dealer going forward.

Leila Govi – Egerton

Okay. Thanks. And sorry, my very last question. It's just competitive environment in Russia, which seems like things have been stable so far and just if you've seen that continuing just more recently in the last couple months or if there's been any change that you can mention. Thanks.

Mikhail Shamolin

Well, my comment is – this is Mikhail Shamolin again – my comment is that the competitive environment in Russia is very competitive. And if anyone has any doubts or has had any doubts about the competitive environment in Russia not being competitive for the last, let's say, couple of years, I think are wrong. The environment is very competitive, and it remains competitive, and it will remain competitive. Will it become more competitive? Or will – do we believe that more players will be entering the market? At this point, we don't have any reasons to believe that competition from that perspective will be intensifying. So, it continues as it has been for the last year and a half, two years.

Leila Govi – Egerton

I'm sorry. Can I ask one follow up? I'm sorry. Hello?

Mikhail Shamolin

Yes, please.

Leila Govi – Egerton

Yes. Sorry. It's just regarding – I think there was a press release or maybe a comment in a news report – I don't remember now – about SkyLink, where I think you've not taken – you now have 100% of the business. And it was just to find out your plans for the licenses that SkyLink had purchased over the last months and what that could mean maybe to help if there's any network capacity issues in some regions, what the additional capacity would mean for you – the additional frequencies would mean for you. Thanks.

Mikhail Shamolin

I think to a large extent, this is a question to Sistema Group, who has done this transaction and definitely has a strategy related to this effect. As far as MTS is concerned, we have certain interest in broadband frequencies in CDMA spend in Moscow because Moscow, as you know, is lacking frequencies in 3G. And with the new SkyLink CDMA, Moscow has a potential at least partial replacement with regards to, for instance, laptop cards. And this interest is known to shareholders, but again this is not – this is not our transaction. This is not our story at this point.

Leila Govi – Egerton

Okay. Thank you.

Operator

And the next question comes from Sergei Arsenyev. Please state your company name followed by your question.

Sergei Arsenyev – Goldman Sachs

Good afternoon. This is Sergei Arsenyev from Goldman Sachs. Two questions for me, please. Firstly, I just wanted to continue on Ukraine and then Ukrainian CapEx has risen quite dramatically in the second quarter. I mean, clearly some of it is to accommodate the increase in traffic. But I guess my question is more broad than that. You're achieving very high usage growth. I mean, that obviously comes at the expense of margins, which are staying below 47%. And at the same time, your CapEx as a percentage of revenues is increasing above 48%. So, the returned profit of the business is deteriorating quite markedly quarter-over-quarter.

I'm just wondering what can change or maybe when you expect the situation to change and what can change it. My understanding is that promotions are continuing, aggressive promotions focused on usage are continuing in Ukraine in the third quarter. So, presumably CapEx will continue increasing. So, what can be done to improve the return profile of the Ukrainian asset? That's the first question.

And my second question is probably for Vsevolod on the buyback. I'm just wondering why, if I can ask, why you haven't bought any of your own shares in the second quarter, given the performance of the share price, given that the stock is trading – your stock is trading at absolute lows over the last several years and given that the balance sheet position of the company is incredibly strong. I'm just wondering whether you see any better investment opportunities than your own shares at the moment, and if you do, whether you can share with us what they are. Thanks.

Mikhail Shamolin

Okay. Sergei, thank you for the question. First on the CapEx in Ukraine, actually we are pretty much in line with our forecast and guidance on CapEx. It is indeed larger than CapEx in 2007. But that is due to the fact that, A, we have growing usage, and therefore we have to supply capacity as you correctly stated. And secondly, we have some targets in terms of coverage because we've been behind our main competitor in that market in terms of coverage, and we have to close the gap. And also we are implementing a CDMA high-speed data project in Ukrainian cities, which has proven also quite successful in the absence of 3G licenses in Ukraine.

Whether it comes at the expense of OIBDA, well, we don't believe so. Maybe to a certain extent given the competitive profile in the market, but at the same time, we do believe in growth in the Ukrainian market. We do believe in the market potential, and we do believe that it is worth investing in this market at this point, given the continuing usage story, given the data usage growth, which we see in Russia and in other markets, and given the prospects for Ukrainian economy overall. And as far as share buyback is concerned, I will refer the question to Vsevolod.

Vsevolod Rozanov

Thank you, Mikhail. This is Vsevolod. Well, yes, actually very true that we didn't – haven't bought any shares, any ADRs in Q2. But the key reason is basically technical and coincidental I would say. We had a very short period between our full-year results this quarter and Q1 results this quarter. And as you know, the whole process of buyback is guided by extremely severe legal constraints, I would say. So, we simply were not able to quickly alter our guidance over the close period. And it happened at almost – all the quarter was under the so-called close period of governance rules.

In general, we do believe that specifically now our ADRs are actually possessing very good investment opportunity. However, we are not eligible to comment on what's going on with the program. However, the Board of Directors reviewed the program results a few weeks ago. And the decision was to continue with the program as it was mentioned in our previous discussion.

Mikhail Shamolin

And just to add one point, in Ukraine, if you look at the revenue growth trajectory, you will see that in first half of 2008, revenues in Ukraine have grown by 13%, while in 2007 compared to 2006, revenues were growing only 9%. Therefore, we are accelerating the growth in Ukraine. And given that we are transferring some of the best practices that have proven themselves to be successful in Russia, we believe that Ukraine can be further strengthened.

Sergei Arsenyev – Goldman Sachs

Okay. Thanks very much. And, Vsevolod, best of luck in India.

Vsevolod Rozanov

Thank you.

Operator

And the next question comes from Jean-Charles Lemardeley. Please state your company name followed by your question.

Jean-Charles Lemardeley – JPMorgan

Yes. It's Jean-Charles Lemardeley from JPMorgan. Just actually going to your – the estimate for the market that you provide in your presentation, the projections to 2012, you give out some new numbers that were revised upwards I guess compared to your prior estimates. You have a number for mobile data for the market of $4.8 billion. I was wondering if you could give us a little bit more detail on your assumptions on the line, just in terms of how much you think would come from data cards for PCs, how much from more device-based access, and what kind of subscriber numbers are underpinning these estimates for the market.

The second question quickly is on, again, you're talking about attracting high-value customers and that being a significant part of your growth, just again if you could give us an estimate of incremental ARPU you see people bring in, what – and what percentage are – where are they coming from? There's actually a percentage that's coming from the new to the market and coming from other operators, and presumably they're going to different segments of usage, so wondering how many are going to post pay, how many are going to prepay?

Mikhail Shamolin

Okay. Thank you, Jean. On your first question, our focus on data is based on basically three things. Our understanding of content business today, and we are the leader in content sales in Russia, and therefore we understand the customer behavior quite well. Number two, we're looking at international experience, and we're talking to international operators to understand what they believe is going to be a story in data, and we're looking at the trends internationally.

And three, now we are looking at how economy will develop in Russia and trends in Russian content market, both sort of online content and offline content. And we are looking, for instance, at figures of CD sales and so forth being reduced and music going into Internet and video following the music, especially with the broadband, both fixed and mobile. And therefore, this projection from 0.8 billion to 5.8 billion might sound aggressive, but nevertheless we believe that this is going to happen, and maybe it's going to be even more aggressive. We are not giving, at this point, a detailed split of how this calculation was done because it would not be fair – it's a fairly detailed calculation. But it is based on a number of assumptions and a detailed understanding of the market.

And as far as the second question is concerned, I'm not sure we said anywhere that we are sort of targeting to acquire only high-value customers. I should say that bulk of our growth is coming from the mass market, and the customers that we are attracting on our network have fairly healthy MOUs and fairly healthy usage, but they are coming from the mass segment. And we do believe that also the data services, which are becoming more and more available with the technologies in 3G, will also be consumed by this mass segment. And therefore the growth in data will also come from mass segment, not only from high-value users, if I understood your question correctly.

Jean-Charles Lemardeley – JPMorgan

Yes. Just on your gross adds, what do you think the percentage is that's new to the mobile industry and how much is coming from your competitors at this point? Do you have an estimate of that?

Mikhail Shamolin

How much new and how much from competitors?

Jean-Charles Lemardeley – JPMorgan

Yes.

Mikhail Shamolin

I think around 30% is coming from the market. And the rest is – no, let's put it this – 30% is coming from internal churn, and 70% is from competitors, roughly like that.

Jean-Charles Lemardeley – JPMorgan

Okay. And just going back to mobile broadband, I think your numbers are quite credible. They don't seem to be overly aggressive. I was just wondering how much you think you can rely on, again, on data cards and how much going to be PC or laptop driven as opposed to device based in your growth. Do you have any rough idea on that at this point?

Mikhail Shamolin

Well, we believe that majority from data revenues will come not from the data cards and from the PCs but from mobile units, such as iPhone and the like, should we drive the data usage as we see from western markets. So, there is definitely going to be a market for PC cards as well, and we're quite active in promoting those PC cards. But at the end of the day, the spread of PC cards is fairly limited, because you do have Internet at home.

We do have competition from Wi-Fi and lots of hotspots in the airports and such, and therefore the particular PC segment is limited. But the segment for smart phones and iPhone-like devices I think is huge, because at this point, people don't really own those devices. And usage in data and content that we see today comes from phones and services which are not very convenient to use. Nevertheless, people do use them in quite substantial quantities. Therefore, we expect the usage to go up dramatically once the devices become more available.

Jean-Charles Lemardeley – JPMorgan

Okay. Thank you very much.

Operator

And the next question comes from William Kirby [ph]. Please state your company name followed by your question.

William Kirby – Nevsky Capital

Thank you. I'm William Kirby from Nevsky Capital. Just one question, your tax as a percentage of profit before tax has dropped significantly year-on-year. Is that just due to quarterly fluctuations or is that a trend? What should we be expecting for future years? Thank you.

Mikhail Shamolin

Well, I wouldn't say that there is a strong trend. I would say that there is a less – significantly less currency fluctuation over the period. That's why effective tax rate is significantly closer to the formal tax rate which we have in the country.

William Kirby – Nevsky Capital

Okay. Thank you.

Mikhail Shamolin

Thanks.

Operator

And the next question comes from Will Milner. Please state your company name followed by your question.

Will Milner – Arete Research

Thank you. It's Will Milner from Arete Research. Just quick question, couple of questions really. Firstly, on the revenue growth guidance for the year, I think you're talking about 25% ex-foreign exchange. I think you're probably tracking quite a bit higher than this at the moment. So, I mean, it looks like you've either built in quite a bit of comfort, or you're implying quite a slowdown in the second half of '08. Is there any real – is there any reason for this that you want to make people aware of in terms of timing of promotions, things that will change or will alter the trends in the second half?

And secondly, just again coming back to the point on mobile broadband that was asked before, the assumption behind the growth from I think 0.4 billion to 4.8 billion. I mean, obviously, one of the things that's going to contribute to this is PC's penetration and increasing PC penetration in Russia. And I just wonder if you'll disclose what is your estimate of PC penetration currently and what you're basing the 4.8 in 2012 off. Obviously, what is PC penetration likely to be in 2012? Thanks.

Mikhail Shamolin

Okay, thanks a lot. First, on the growth guidance, we are not changing the guidance at the moment as we are carefully considering all the factors pertaining the second half of 2008. We are definitely happy with the revenue growth trends we see in the first two quarters. And given the seasonal trends that you can see from the past years, we don't see that we would differ greatly from those seasonal trends, and that creates certain optimism. At the same time, you know of the recent currency fluctuations in Russia and the overall instability in markets. So, we are being careful as to reconsider the forecast. So for now, it just stays as is, but we are fairly optimistic, and you can look at the trends yourself.

As far as mobile broadband is concerned, the key assumption behind growth from 0.4 billion to 4.8 billion is not based on the increase of PC penetration. Even though PC penetration is still low in Russia, we sort of estimated around 15% to sort of 17%. And it will – there are different estimate, and it will grow. But the bulk of growth will come not from PCs, as I said, but from increased penetration in mobile smart phone-like units. And we see that as a major trend, which is already coming up in mobile retail in Russia. And with iPhone being introduced in Russia, which I hope will happen pretty soon, and also other main manufacturers, such as Nokia and Samsung coming with iPhone-like devices that will be a major driver for data growth.

If you look at the statistics of iPhone usage as compared to regular or even smart phone, which is not as convenient from the user perspective, you will see that the difference in usage is from sort of 5 to 50 times. And therefore, of course, we have all reasons to believe that the same story will take place in Russia. And we know the segmentation of our customer base pretty well. And we understand what types of customers will be willing and likely to change their handsets and therefore increase their usage. That's what the forecast is based on.

Will Milner – Arete Research

Okay. Thanks a lot. That's very helpful. Can I ask just one quick follow-up, again, building on a question that was asked before forward about your balance sheet and on the leverage and the buyback? I'm just looking at the level of leverage on the balance sheet. I mean, I guess the fear is there are fairly large deals out there that MTS could contemplate outside the CIS. Is there anything currently that you're prepared to talk about that you're looking at beyond the CIS?

Mikhail Shamolin

Yes. We have nothing to disclose at the moment in terms of potential deals, even though we are looking at a few. And obviously, we keep in mind the balance sheet question and the question of leverage. And that's why we had a decision at the Board of Directors that we will maintain our share buyback vehicle. But I think the new will have to come towards the end of the year.

Will Milner – Arete Research

Okay. Thanks a lot.

Operator

And the next question comes from Olga Bystrova. Please state your company name followed by your question.

Olga Bystrova – Credit Suisse

Yes. Good evening. Olga Bystrova, Credit Suisse. The first question is about Russian pricing dynamics, given what you have reported in the second quarter, would you elaborate? What have you seen competitors doing, meaning that if you were able to revise prices, have you seen competitors doing the same type of re-balancing one way or the other?

And the second question is regarding the plans of your parent Sistema, given that they are considering currently telecom strategy, how you see yourself participating in the telecom strategy, which if I may ask assets you might be interested in. Do you have an intention to buy Comstar? SkyLink you already commented on. Do you have an intention to participate in the Indian venture? Thank you very much.

Mikhail Shamolin

Thank you, Olga. As far as pricing is concerned, I think we're very much in line with the market pricing at the moment. Of course, prices differ from region to region, and they depend on relative market shares of competitors. And in some regions, we are priced higher than the competition. In some regions, we are priced lower, but overall I would say that we are more or less in balance. And I don't think that among three operators, there is – among three large operators – there is any definitive price leader.

There is, of course, a factor of Tele2, which is quite aggressive in some of the regions or in most of the regions where Tele2 operates. And there, we have to react carefully on one hand not to appropriate PPM and revenues, on the other hand not to move the market share. Therefore, we're competing. But as you see from the APPM figures in the second quarter does not impact our overall APPM picture.

As far as the telecom strategy of Sistema is concerned, we have our strategy of MTS. We obviously are letting our shareholders know as to what our potential interest may be. But I would refrain from further comments on the telecom strategy of Sistema at this point until the strategy is actually announced because I don't think it would be fair to talk about the strategy until it's finalized, before it's finalized. That's pretty much all I would have to say about that.

As far as Shyam Telelink is concerned, we are looking at that venture carefully. And we are building our opinion as to what the potential is and what the potential is specifically for MTS. I don't think at this point we are ready to say exactly what will be the future of Shyam within MTS or outside of MTS. At this point, this is a Sistema asset that Sistema is developing according to its own strategy.

Olga Bystrova – Credit Suisse

Okay. Great. Thank you very much. And on Comstar, do you see if there's a potential value proposition for you? And if so, in what respect? And also, maybe – well, let's do that one. And then I'll ask a follow-up question.

Mikhail Shamolin

At this point, we are not looking at Comstar.

Olga Bystrova – Credit Suisse

Okay. Great. And in terms of in general, if you look at Sistema's, let's say, coverage of the telecom sector in Russia or the IT sector in Russia in general, where do you see – which markets or sub-segments of the market do you see the most attractive? And how do you plan to participate in those?

Mikhail Shamolin

Olga, just once again, your question was about telecoms market in Russia?

Olga Bystrova – Credit Suisse

Yes. In Russia, yes.

Mikhail Shamolin

And the sectors within this market?

Olga Bystrova – Credit Suisse

Yes. Like for example, if we talk about content, we talk about pay TV, we talk about fixed-line broadband, things like that.

Mikhail Shamolin

Yes. I mean, so far, we've been pursuing a mobile-centric strategy and concentrating on mobile broadband. Within this, we believe that content market is very interesting and will be developing. And you see the forecast we believe is going to be big. And we are positioning ourselves to participate in this growth. We are making already a substantial amount of money, over $300 million in content per year. And obviously, we – because of that, we understand our customers well, we understand the need, we understand what content is desired in Russia, and therefore we hope we know how to sell it in the future.

Another market which could be quite interesting is the market for mobile advertising, and this market virtually doesn't exist today. But basically, there's a sound business reason for why mobile advertising can become a big deal. And we also see around the world that many operators are gearing up for taking part in this new market. If you look at research, you'll see that the effectiveness of mobile advertising is higher than the TV advertising, because it's individualized. And it's addressed to a consumer through a mobile handset, which is always with the consumer. Therefore, even though it's very small now, it could potentially be very, very big.

Another market which is interesting for us is a combination of markets related to home zone billing, when we offer our customers mobile at the price of fixed at his place of living, apartment or house. That could also be interesting. And of course, the continuing growth in voice usage – we've done the analysis of our customer base. And we see that even the customers who have been generating 600 minutes a month 12 months ago have grown in usage by 12% over the last 12 months. And this will be – the less usage we saw 12 months ago, the bigger the growth we experienced. So, we – given that our average growth is now at above 200 minutes, we believe that we still have room for growth there.

Olga Bystrova – Credit Suisse

Okay. Great. So, basically you – it's not – you're not saying anything about fixed-line broadband with regions. Is that for any reason or just need it because you forgot to say that?

Mikhail Shamolin

At this point, we're pursuing the mobile-centric strategy.

Olga Bystrova – Credit Suisse

Okay. Thank you very much.

Mikhail Shamolin

We are concentrating on our core business.

Olga Bystrova – Credit Suisse

Okay. Thank you very much.

Operator

Thank you. And the next question comes from Herve Drouet. Please state your company name followed by your question.

Herve Drouet – HSBC

Yes. Good afternoon. This is Herve Drouet from HSBC. My first question is regarding non-voice revenues. If we look at messaging revenue or data traffic revenue, basically the growth pattern in the second quarter has been lower than what we used to see historically and especially if you compare with first quarter. I mean, is there any seasonal or specific reason that may explain it in the second quarter? Or do you think it's a more fundamental or technical reason that may limit data usage at the moment? And my second question is I just want to get your view on how you see potential vertical integration in the Russian market versus what you've acquired, some independent retail mobile distributors. Do you think it's positive or negative for the market overall? Thank you.

Mikhail Shamolin

Okay. Thank you. So, with the value-added services revenues, there is a seasonality factor for sure. And the seasonality is actually quite high because a large number of our customers are traveling on vacation. And the value-added services usage abroad is historically much less. Obviously, we do compensate for that by increased revenue in roaming. We also had one technical factor, one major initiative, which we had in second quarter, SMS gain, which brought us substantial revenue. Accounting wise, it was recognized as an agency commission due to the way we've done it with our partners rather than revenue in the quarter. And therefore, the net effect on the revenue was smaller.

Herve Drouet – HSBC

Okay. So, you think that it's only specific regions?

Mikhail Shamolin

There's not a fundamental change in accounting.

Herve Drouet – HSBC

Okay.

Mikhail Shamolin

It's a one-off effect. And the second question was about distribution. If you can just elaborate, I'm not sure I understood your –

Herve Drouet – HSBC

Well, obviously, there's some potential talk of – in Russia, you have some independent retail distributors providing mobile services, prepaid cards, et cetera, or services for you, but also your competitors. Do you think there will be further acquisition of those distributors of services in terms of buying shops, retail shops? Or I mean, do you think – we are going into that process in terms of trying to secure the more mature markets basically, access to the end user is obviously – do you think it's a current trend we are going to see in Russia is my first question? And do you see that positive or negative in terms of the margins and overall for the telecom operators in the Russian market?

Mikhail Shamolin

Well, so far the fact that the distribution in Russia is fairly independent –

Herve Drouet – HSBC

Yes.

Mikhail Shamolin

positive factor for the market because it helps operators to maintain fairly healthy margins if you compare margins of Russian operators with the European operators. And actually with most of the operators around the globe, you will see that our margins are very high.

Herve Drouet – HSBC

Okay.

Mikhail Shamolin

And part of that is due to the fact that we don't own distribution, and we don't put on our balance sheet the cost of purchasing mobile phones and then reselling them with very small margin.

Herve Drouet – HSBC

But do you think this situation is going to remain, or do you think there could be a (inaudible) one of the players that may be tempted in changing the rules of the game that may deteriorate to include the margins by doing vertical integration?

Mikhail Shamolin

That will depend on two factors. One is the economic efficiency and sustainability of the retailers themselves because those retailers are marginally profitable. The profitability is quite low. And all of them have sufficiently high level of debt. But at the same time, there is a very high level of – how to say – there’s fragmentation in the market. There are lots of distributors, and there is definitely a case for consolidation. So, if smaller distributors are consolidated by the bigger distributors, then the economics of the retail distribution will improve, and these companies will be much more sustainable financially and therefore less likely to be acquired, absorbed by the operators. That's one reason.

Herve Drouet – HSBC

But you don't see yourself as being part of that consolidation?

Mikhail Shamolin

Pardon me?

Herve Drouet – HSBC

You don't see yourself as being part of that consolidation.

Mikhail Shamolin

Well, ideally, we would like to have certain control over our share of sales in a multi-brand distribution without necessarily taking control over it and consolidating it in the company because of the margin effect. And that's, I think – is also thinking behind other operators. And that's why the consolidation hasn't happened so far. And we'll see how the market develops. But there are some reasons for why not to consolidate, which everyone sort of understands. But at the same time, there is obviously need to, for instance, promote not only tariff plans, but also devices, particularly devices which increase data usage. But that also can be done within the existing structure of the market by operators investing in promotions, particular handsets with particular dealers, without necessarily changing the market structure. So, all of that is sustainable within the existing framework.

Herve Drouet – HSBC

Okay, all right. Thank you very much.

Mikhail Shamolin

Welcome.

Operator

And the next question comes from Anastasia Obukhova. Please state your company name followed by your question.

Anastasia Obukhova – VTB Capital

Hi. It's Anastasia Obukhova of VTB. I have two questions, first one regarding Ukrainian usage. You were referring that the spike in the second quarter on the usage in Ukraine was as a result of two things, first the elimination of double SIM cards. The second is promo campaigns. I would like to ask you, can you please estimate the impact of this one-off or one-off impact on this promo compaigns on the usage in the second quarter.

The second question relates to your marketing expense. I was wondering that usually if you look backwards on the trends in the advertising cost, you were more or less in line with the market growth, except for some explainable one-off issues. And this quarter, you boasted only 7% year-on-year growth in your – or about 7% year-on-year growth in your advertising and state prom expense. Is – what happened, or to which event or issue do you attribute it? And do you see a sustainability of this trend? Or where do you see the ad expense growth increase in Russia this year? Thank you.

Mikhail Shamolin

In Ukraine usage, most of the usage has come from double SIM elimination, as you simply see from the customer numbers Q2 to Q1. That was a result of a combination of marketing campaigns and advertising activity. I think it's quite difficult to select one or the other. It's an overall impact of our diligent policy for increasing usage and eliminating double SIM cards in Ukraine. So, it's just a natural consequence of our marketing policy. And as far as the marketing expense, is this – yes, this is for Russia. So, I'm referring this to Vsevolod, please.

Vsevolod Rozanov

Yes. For the marketing expense, I would say the full range logics is applied discussing the sales and marketing expense. We said that on average, we aim to keep sales and marketing expense within 10% of the sales. And for Q1, the total sales and marketing expenses were 9%. In this quarter, it was 8.6%. So, we experienced certain slight declines. However, dealer commission as a percent of sales remained exactly the same, and there was a slight increase in absolute terms for the advertising and marketing. However, as a percentage of sales, it didn't cope with the revenue growth I would say, so don't see any trend here. It's just reiteration of our commitment to keep sales and marketing expense under control and within 10% of the sales. Thank you.

Anastasia Obukhova – VTB Capital

Okay. Thank you.

Operator

And the next question comes from Dalibor Vavruska. Please state your company name followed by your question. Dalibor Vavruska, do you have a question?

Dalibor Vavruska – ING Group

Hello, hello. Can you hear me now?

Operator

Please go ahead.

Dalibor Vavruska – ING Group

Hello, thank you. Just a quick follow-up questions on a couple of questions that were asked before. First of all, back to this guidance, obviously, this 25% seems a little bit conservative. My quick question would be what sort of exchange rate this is based on, if you can sort of reiterate. And also, I mean, if I look at the second quarter performance, there are obviously encouraging trends in terms of pricing that we've discussed. But also looking at the subscriber acquisition costs, I think it's slightly up.

And churn is also up in Russia. And in fact, if you look at this fact, I think it looks above 30% last time five years ago. So, I'm just wondering if there is any shift in terms of competition from pricing to subscriber acquisitions and if you envisage that perhaps if you slow down the efforts in terms of subscriber acquisitions that the revenue growth could slowdown or if you think that you will continue pushing very strongly on this, in which case perhaps you might see some compressions in there of margin. Or is that an issue that you're considering with what you're taking in? Thank you.

Mikhail Shamolin

Thank you, Dalibor. I think first question, why don't we ask Vsevolod to take it? Vsevolod?

Vsevolod Rozanov

Thank you, Mikhail. I think as for the first question, we discussed that the exchange rate in the guidance was given the full year 2007 results forward, the exchange rate was around RUB24 per dollar. But we do not necessarily stick to every single much [ph] of this exchange rate. You see that clearly that there were some recent fluctuations in the exchange rate, Mikhail was previously referring to. So, we are now, of course, playing the cautious approach to the guidance in terms of revenues. Second question –

Mikhail Shamolin

And as far as subscriber acquisition cost, yes, we have been quite successful over the last year in managing distribution and stimulating distribution to increase the level of gross adds. Of course, the competition reacted. And we do have a slight increase in the premiums and commissions. But I wouldn't say that anything dramatic is going on. I believe this is sort of a natural market development. We've had that sort of competition before and sort of comes and goes. Still, if you look at the subscriber acquisition cost in the dealer channel, it is very low as compared to some of the European benchmarks. Thank you.

Dalibor Vavruska – ING Group

Okay. Thank you. Can I ask one very quick follow-up on SkyLink? Again, we discussed this already. I understand that at the moment it's a deal between – it's a Sistema issue essentially. But can you just clarify, are you going to be acquiring the company? If you are going to be acquiring the company or also what stage are you thinking of acquiring the company? Would it be most likely paid by shares or cash? Or how would that transaction be structured?

Mikhail Shamolin

At this point, this is a transaction done by Sistema Group. And as I said, we have certain interests in frequencies and licenses in Moscow for high-speed data transmission and mobile. And this interest is known to Sistema. That's all I can say at this point.

Dalibor Vavruska – ING Group

Okay. Thank you very much.

Operator

And the next question comes from Stephen Pettyfer. Please state your company name followed by your question.

Stephen Pettyfer – Merrill Lynch

Yes. Hi. It's Stephen Pettyfer from Merrill Lynch. Just a quick question, please, on Ukraine again. Given – when I look at your APPM in the prepaid segment, given where that's come down to, just wondering what you're seeing from your previously lower-priced competitors, if they're being pushed to the wall and having to respond as well? Thank you.

Andrei Dubovskov

Thank you. Pettyfer, it's Andrei Dubovskov, Head of Business Ukraine. And about APPM, I am going to say that our decline in our old network from $0.039 to $0.031it was in line with our expectation and consistent with – talking about our competitors, for example, Astelit, I am going to say that approximately they are at the same position in price, and actually it is not be a big problem for us. Our coverage, our quality, and our brand is more stronger than Analok [ph] and Astelit. Thank you.

Stephen Pettyfer – Merrill Lynch

Sorry. Just to be clear on that, so are you sensing your – that either those two competitors on the prepaid side lowering prices as well?

Mikhail Shamolin

We see – we are seeing Astelit as being fairly aggressive, but we are quite competitive on price with Astelit as well. There is a natural limitation by interconnect, which is pretty high in Ukraine. So, I don't see a real perspective for further price decline. There is certain natural limit in the market. And I think that we are pretty much around this limit at this point. So, I think it's the competition is now not about the pricing as much as it is about success in distribution network and marketing branding.

Stephen Pettyfer – Merrill Lynch

Okay. Thank you.

Operator

And the next question comes from Igor Semenov. Please state your company name followed by your question.

Igor Semenov – Deutsche Bank

Yes. Hi. This is Igor Semenov from Deutsche Bank. I have a couple of questions, first on the iPhone. You mentioned iPhone devices, and I think it's been reported that all three Russian operators are talking to Apple about bringing the iPhone to Russia. So, my question is what is your main competitive advantage versus VimpelCom and MegaFon. Why do you think you could win this deal? And is any deal with Apple, would it be exclusive? Or you think they might go with multiple operators here?

And a second question is on the potential changes in the competitive situation in Russia, in a sense that you are launching 3G networks with MegaFon and VimpelCom and some regional operators, and Tele2 do not have that network. Do you think that their response would be to lower their prices dramatically to maintain their market positions? Or you don't think that would be happening? And of course, you already have a couple months of network in a few cities. So, do you see anything of that kind happening? Do you see Tele2 lowering prices in – I don't know – in St. Petersburg, for example? Thank you.

Mikhail Shamolin

Thank you, Igor. My understanding of Apple policy is that it has changed and Apple has moved away from exclusivity of one operator at least in the market and is moving to two or three operators or even no operators in the market. As far as our competitive advantage is concerned, we have the most number of subscribers in Russia. We're talking about Russian market at this point. We have the biggest corporate customer base. We have a leading brand and a good value proposition and a good distribution network. So, basically all of the elements that the operator should have to be attractive to Apple I think we possess. So, I believe we are well positioned to get the deal, personally. It will also depend on the terms and conditions that will be set forth. But we are in discussions as well as other operators I believe are.

As far as change in competitive environment with regards to 3G, in the markets where 3G has been introduced, we don't see any aggressive pricing response from competition. And as far as local competition is concerned, such as Tele2, it is already at the bare minimum price level. And again, I don't seen these prices to be really going down. Therefore, no, I don't believe that the 3G network appearance will drive for the price aggression. I do believe that there is a market which is not necessarily addressable by 3G. And this market will remain in the hands of Tele2 and the likes.

Igor Semenov – Deutsche Bank

Okay. And on Apple, a deal that you would be discussing with them, this would be sort of group wide, including Ukraine and Uzbekistan and all the others? Or it's just about Russia?

Mikhail Shamolin

At this point, we're discussing only Russia. But I understand that there is an appetite from Apple's side to also other CIS countries, specifically Ukraine.

Igor Semenov – Deutsche Bank

Okay. And when you talked about for the other states deal, you kind of said that stronger distribution may change – may help in bringing newer devices to the market. Is there something that you basically had in mind, the deal with Apple, that it would help you to win the deal if you had a stake in the other states?

Mikhail Shamolin

Well, as I stated previously, our strategy is to acquire as much control in the distribution as we potentially can by developing whatever deals, excluding consolidation, because we believe that that would not be healthy for our margins at this point. And that's what we are thinking about there, various options on how to do this. We are pursuing several of them. And I'm sure at the point that we are ready to announce which one of those we have chosen, we will be happy to report to you the outcome of this. As far as iPhone is concerned, yes, the distribution is critical. But I believe that the product is sort of selling itself in the market. It will be desired by all distributors.

Igor Semenov – Deutsche Bank

Right. Okay. Thank you very much.

Operator

And we have a follow-up question from Alex Wright. Please go ahead, sir.

Alex Wright – UBS

Yes. Thank you. Just one question please, following Telus [ph] recent investments in Belarus of the two smaller operators in Belarus are now majority owned by foreign players, I wonder if you could just give us an update on your thoughts of the prospect of potentially being able to increase your stake in your Belarusian subsidiary or your associate currently operating there?.

Mikhail Shamolin

We – obviously, we would like to increase our share in our Belarusian assets, and this interest is well known to Belarusian authorities. But we respect their position and their decision-making process. And therefore, we basically are out there with our proposals and waiting for a decision to be taken. But while we're acting with the share that we have, we are very actively participating in managing this company and setting strategies and driving it to profitability and growth.

Alex Wright – UBS

So, does this confirm that there's no legal obstacle as such set by the Belarus government anymore? I mean, it's really just a case of negotiating on a commercial basis as to whether they were prepared to sell assets or not?

Mikhail Shamolin

Yes. No, I'm just clarifying the question with George, because the communication is not maybe – connection is not that great. There are no legal limitations, no. It's a commercial business. But also, as you understand, this 51% belongs to the state through the state-owned company. And therefore, the state has to make a decision to privatize whatever percentage that needs to be privatized in order for us to acquire control.

And this is a decision by the Belarusian government which Belarusian government needs to take. We have expressed our interest. And we have stated the financial terms and conditions, which are acceptable to us – in other words, how much we're willing to pay for getting in control, and the government is in the process of making a decision. I cannot tell you a specific timing on when the decision is going to be made.

Alex Wright – UBS

Thank you very much.

Operator

And we have a further follow-up question from Olga Bystrova. Please go ahead.

Olga Bystrova – Credit Suisse

Yes. Hi. Two more follow-up questions, one is since you've already launched 3G in St. Petersburg for a few weeks or months, what kind of subscriber intake are you seeing currently, at least roughly, and what are the consumption patterns? And the second question is – I know maybe it's a bit too early to talk about 2009, but given trends currently, given the macroeconomic environment currently, do you see any risks to potentially increase CapEx and any risk to your current sort of margin target? Thank you very much.

Mikhail Shamolin

Yes. On launch of 3G in St. Petersburg, I'm not prepared to give you specific numbers now because we only launched it in June. And therefore, not enough time has passed to make any definite conclusions. But I can tell you the trend definitely is that the 3G network is filled with traffic already, and we do have customers quite actively using data services. We have increasing sales of the PC cards. So, we have all the signs of increasing demands for 3G in St. Petersburg. We have active usage of roamers. And we will be just recently switched on the roaming for people coming to St. Petersburg from other regions of Russia for 3G, and therefore this network is being widely used. And as far as 2009 forecast, we are not guiding the 2009 at this point. It will come in due time.

Olga Bystrova – Credit Suisse

Okay. Well, thank you very much.

Operator

And we have a follow-up question from Jean-Charles Lemardeley. Please go ahead with your question.

Jean-Charles Lemardeley – JPMorgan

Yes. One question very briefly – did you say – did I understand correctly you said that for subscribers that have been in your base for a year or more, usage was up 12% year-over-year?

Mikhail Shamolin

Once again, I'm not sure I understood the question well.

Jean-Charles Lemardeley – JPMorgan

I just – you made a mention of user growth in the subscriber base that have been – who were with you for one year or more I think earlier, just wanted to clarify that, if I understood that correctly, your mention about usage going up in your existing subscribers.

Mikhail Shamolin

Yes, just a second. It's the – growth in revenues that was 12.4% from Q1. We were talking about revenues, not subscribers.

Jean-Charles Lemardeley – JPMorgan

So, it's a sequential comparison. It's quarter-to-quarter, not year-over-year.

Mikhail Shamolin

Yes. Quarter-over-quarter is 2.5% growth in Russia and 2.4% overall for the group for subscribers.

Jean-Charles Lemardeley – JPMorgan

Okay. Because I thought you had made a comment on usage, a number around 12%. But maybe I misunderstood.

Mikhail Shamolin

On usage?

Jean-Charles Lemardeley – JPMorgan

Sorry. I don't mean to – maybe I just misunderstood. I just wanted to check because I thought it was an interesting indicator of how usage and ARPU is tracking and for people that have been with you for some time.

Mikhail Shamolin

We have all of the specific numbers. I'm just flipping through the presentation. I'm sure that Josh Starglin [ph] will provide you with those specific details in the numbers.

Jean-Charles Lemardeley – JPMorgan

Okay. Then, that's fine. Thank you very much.

Operator

(Operator instructions) We have no further questions, sir.

Andrei Terebenin

Yes. We don't have any more questions. Thank you very much, ladies and gentlemen. We welcome you at any time to contact our Investor Relation Department if you have any further questions. And the webcast of this discussion will be available on our website if you wish to replay the call. In the meantime, we appreciate your interest, wish you a very pleasant day and goodbye.

Operator

Ladies and gentlemen, this concludes the second quarter 2008 financial and operating results conference call. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mobile TeleSystems OJSC Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts