Mobile TeleSystems PJSC (MBT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Mobile TeleSystems third quarter 2007 financial and operating results conference call on Tuesday, the 20th of November, 2007. (OPERATOR INSTRUCTIONS)

I will now hand the conference over to Mr. Andrei Terebenin.

Please go ahead, sir.

Good day, ladies and gentlemen, and welcome to MTS's conference call to discuss the Company's third quarter 2007 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.

These statements may relate to one of the following issues -- the strategic development of MTS's business activities, both in Russia and abroad; revenue and/or subscriber growth; syndicated loans facilities and their usage; legal actions or proceedings directed at the Company or its representatives; regulatory changes and the impact on the Company's operation in the markets in which we operate; financial indicators such as operating income before depreciation and amortization, average revenue per user, cash flow projections and/or return on invested capital; technical matters as they pertain to our mobile communication networks, 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 presentations, MTS annual report on 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 or on the U.S. Securities and Exchange Commission website.

MTS disavows any obligation to update any previously made forward-looking statements uttered on this conference call or make any adjustment to previously made statements to reflect changes in risks. Copies of the presentation materials used in references in this conference call are available on our Company website.

I will now turn the call over to Leonid Melamed, President and Chief Executive Officer of MTS Group.

Thank you, Andrei.

Ladies and gentlemen, thank you for joining our 2007 third quarter conference call. Joining me today are my dear colleagues, Mr. Vsevolod Rozanov, Chief Financial Officer; Mr. Mikhail Shamolin, Head of Business Unit MTS Russia; and Mr. Pavel Pavlovsky, Head of Business Unit MTS Ukraine.

For the period, we have continued to execute on our 3+2 strategy, which we explained to you over our last call. Judging by our results, I am pleased to say that we continued to fulfill the commitments that we have made to, first, capture growth in our core markets; second, create value in developing markets; third, develop mobile broadband in our markets of operations, while at the same time, and the fourth, maintaining cost efficiency and further developing our group.

We again generated strong profitable growth in each of our operating regions. We also welcomed an additional market to MTS Group. For the first time, MTS exceeded the $2 billion mark for revenue in the quarter. Group revenue reached $2.2 billion, a 13% rise over Q2 and a nearly 23% rise from Q3 of 2006.

In our core markets, our Russian operations continued to drive the group in absolute growth, as Russian revenue rose to $1.6 billion, a 13% increase Q-on-Q, and a 26% jump from the same period in 2006.

Contributing to the growth has been a sustained increase in voice usage, the introduction of tariff plans like Super Pervyi and campaigns like our triple bonus promotion, continued the trends we have long been seeing. Our Russian customers will talk more, assuming they are presented with the right value proposition.

An added bonus has been the recent increase of over 1.7 million net subscribers for the period, perhaps an indication that there is still some subscriber growth available in our market. Seasonal drivers, too, like roaming and a greater number of calendar days, also factored into the growth.

In the Ukraine, revenues rose 12% quarter-on-quarter to $439 million. Seasonal factors such as roaming largely contributed to this rise. As we have stated numerous times on this call, we are moving forward with a long-term strategy to leverage different value triggers in the market.

As part of this overall effort, we initiated our rebranding in the beginning of July. Now, its success will be measured further down the road. The initial responses to our rebranding were positive. Our brand values resonate well in both areas where we have a strong market presence and those where we are building share. At the same time, we have seen across-the-board improvements in perceptions about the quality of our network and scope of our products and service.

The result has been higher-than-expected connections, which were only offset by a high amount of churn stemming from our last year's holiday period. On a related note, we introduced BlackBerry service in the Ukraine, the first operator to do so in the CIS. So now we are offering enterprise solutions to our customer clients, and we are evaluating the market for Internet solutions for individual customers.

While it is too early to comment on any trends, we are so far pleased with the pace of adoption. We also launched our CDMA for 150 high-speed data network in October in Kiev and Kharkov. This will be another value driver that will fuel and support future growth.

In Uzbekistan and Turkmenistan, our less-developed markets, we continued to roll out our networks and strengthen our customer bases. Revenues from Uzbekistan rose 15% Q-on-Q and subscribers reached nearly 2.3 million.

Our introduction of tariff plan RED, leveraging the same drivers that made it successful in Russia last year, has been one factor that has driven customer growth. Penetration in the market remains low, at less than 16%.

In Turkmenistan, which remains roughly 6% penetrated, revenues grew 10% Q-on-Q, as more subscribers joined our network.

Now, Vsevolod will discuss our financial position.

Thank you, Leonid. I am pleased to report that the Company is in as strong a financial position as it has ever been. For the period, OIBDA for the group rose 15% quarter-on-quarter, again outpacing our strong growth in revenue, and 22% year-over-year. This resulted in a 53% OIBDA margin for the group.

Growth in Russia was again a key driver, as our improvements were made last year and our efficiency continued to enhance overall profitability. Though seasonality Q3 provides the highest margins, spending in the Ukraine related to our rebranding resulted in a slight decrease in our margin. Regardless, we still realized a 50% margin in this challenging competitive environment.

Our operations in Uzbekistan and Turkmenistan continued to show high levels of profitability, with OIBDA margins exceeding 60%.

On the bottom line, we see continued growth. Net income rose 29% quarter-on-quarter, to nearly $655 million, yielding a 29.5% margin.

Those small gains were realized through, for example, our Uzdunrobita consolidation and the slight decline in interest payments relative to our revenue growth. The growth can be more or less attributed to the growth in OIBDA for the group and continued financial control and management.

In addition, ruble appreciation versus the U.S. dollar of approximately 3.4% in Q3 positively impacted our net income by around $80 million.

Moving on to the balance sheet. I would like to make a few remarks on the Company's liquidity and use of cash during the past quarter.

Our net debt to OIBDA ratio increased in Q3 to 0.6 from 0.5 at the end of the Q2. This is primarily driven by the decrease in our cash position by $330 million. As of today, we have practically finished paying out dividends in the amount of $741 million, approved by our shareholders for the fiscal year 2006.

We also continued with ADR repurchase program within Q3. We spent approximately $81 million to acquire our ADRs from the market. Having said this, the Company in our view remains underleveraged, particularly if you consider that free cash flow for the year-to-date has remained positive and reached $1 billion.

This hypothetically could allow us to increase our borrowings in the event that it should be necessary. Regardless, the Company is in a strong position to meet its future capital needs and ready to meet any operational challenge our markets may present.

Now I would like to pass the word back to Leonid.

Thank you, Vsevolod. As I mentioned before, we welcomed a new market to the MTS Group. In September, we acquired an 80% stake in K-Telecom, Armenia's leading mobile operator. Operating under the VivaCell brand, K-Telecom now boasts over 1 million subscribers and commands a 67% market share. Launched service in 2005, it now possesses nearly full population coverage of a market that is roughly 50% penetrated.

As part of our arrangement with K-Telecom shareholders, we will continue to benefit from their involvement in running MTS operations in the market. Local management has agreed to remain in place, as the team has proven it knows how to build a winner in this environment.

In the meanwhile, we will collectively work to integrate Armenia into the group operations, leveraging group synergies to, for example, introduce new and exciting projects, and leverage our scale to bring better roaming rates to our Armenian customers.

Because the acquisition was made late in the quarter, we won't be too many reviewing financial and operational indicators until Q4 results. However, the Armenian market affords MTS the same advantages we seek to exploit in our other markets -- one, a strong market leader in a solid asset base; two, a sustained revenue growth in a rapidly developing economy; and, three, profitability at levels similar to other markets throughout the group.

As part of our commitment to mobile broadband in the CIS, we are moving forward with our deployment plans both in Russia and abroad. As we have announced publicly, we have selected Nokia, Siemens and Ericsson as global equipment vendors for Russia. Planning continues on a country-by-country basis.

In Russia, our deployment is ongoing. We are moving forward with site selection and enhancement to our core network. In the fall, at InfoCom, a leading trade show here in Moscow, we demonstrated our 3G capabilities on the live network, video conferencing and data transfer at three megabits per second HSDPA transfer speed. This was a truly exciting moment and a sure sign of the technology's future potential.

However, we continue to encounter barriers in terms of spectrum clearance in Moscow and other regions. Nevertheless, we still aim for a commercial launch of key areas of Russia over the course of the next year.

In Uzbekistan, we are evaluating vendor options and beginning our 3G planning. Likewise, in Armenia, we received the necessary radio frequencies to begin offering 3G services. Planning and evaluation should begin in Q1 2008.

Ladies and gentlemen, thank you for your time, and I'm happy to open the call for your questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from Leila Govi.

Please state your company name, followed by your question.

Hi, this is Leila Govi from Egerton. I have a couple of questions. The first one is if you could just please reiterate again what CapEx you're looking for, for the full year this year and also next year? So this year if it's still around $2 billion?

The second question is on page 14 of your presentation, you refer to the proportion of lower ARPU customers as a percentage of your total subscriber base. Could you tell us what they represent in terms of your total revenues for Russia?

The third question I have is you refer to a Ukraine margin hit from the introduction of the CDMA-450 network rollout. Can you just say how much that hurt your margins by this quarter? And, sorry, if I could ask one last question, which is just in terms of the ARPU growth in Russia that we saw this quarter, looking on a year-on-year basis, is it fair to say that this represents a more underlying like-for-like trend, or is there still contribution from things like call setup, because it was only introduced partially in Q3 last year?

Thank you.

Thank you, Leila. So let me -- let me answer the first question. We are not in the position now to change our guidance on CapEx expenditures for the year 2007, and we keep on our forecast on $2 billion expenditures, including expenditures for 3G.

For 2008, we are unfortunately not in the position to give guidance, at least for the time being.

To answer the second question, we have -- there are two issues. One issue issue is our low-ARPU customers, one can now say the customers in our prepaid segment. Our prepaid segment share in Russia among the customers is up to -- customer base, is up to 90% for the time being. So there is a significant difference in ARPU between postpaid and prepaid, and that's what you see from the documents that have -- from the presentation that has been distributed. So the ARPU for prepaid is almost five times lower than the ARPU for the postpaid.

CDMA-450 in Ukraine, we have just launched the services in Q3. That's why it has had no impact on our margin in Ukraine in Q3.

And on the fourth question, I would ask, perhaps, Mikhail to comment.

This is Mikhail Shamolin, hello. If you can just repeat what ARPU trend you are interested in?

The Russian ARPU growth that we see year-on-year, because we're now reaching the anniversary for many of the measures that were introduced from Q3 last year. I was just wondering if you look at this growth as a real underlying growth for the business, or is it still affected by some of the measures that were introduced after calling party pays came into place in Q3 last year?

Well, I think the purest ARPU growth, the fact you will see in Q4, because Q4 would be almost 100% comparable with the full CPP effect accounted for. But Q3 I think is also a pretty good approximation, given that CPP has been introduced as of July 1, 2006. So when you look at the difference between $8.5 and $10, I think that pretty much reflects the trend that has been established.

Okay, sorry, and just a follow-up regarding the Ukraine question about the CDMA. The reason I asked is because on page 30 of the presentation, you say there was an impact on the EBITDA from this introduction, and since the sales and marketing spend in Ukraine, as a percentage of sales, was roughly similar to what we saw last quarter, then it does make me think that there's something in the pre-SAC costs, i.e., this CDMA issue, which affected the margins.

But you're saying, in fact, there's really no impact. Is that right?

That is right, exactly.

Okay and, sorry, one last thing was just again on that page 14. My question was actually where you show that these customers are 66% of your total customer base, can you say what they represent of your total revenues? The customers who have ARPU up to $10?

We are not prepared to give you that right now, but I believe it could be available later. We only comment on the postpaid and prepaid ARPU of our customers.

Okay, thank you very much.

Our next question comes from Mr. Alex Kazbegi.

Please state your company name, followed by your question.

Yes, good evening. It's Alex from Renaissance. The first question I had was about your debt breakdown by currency, because obviously there was quite a large impact from the ruble appreciation. I was wondering if you can give us the breakdown by currency which exists now.

Secondly, on Ukraine, again, clearly a very good trend on the ARPU and underlying tariffs. I was wondering if you see any differences with the introduction of the Ukrtelecom in the market, and whether you can comment generally on the trends currently in the Q4, specifically, in Ukraine, and Russia, as well?

And lastly just wanted also to clarify on 3G. As far as I remember, the launch in Moscow and St. Petersburg was scheduled for the first half of the year. Is that still the case? Or due to this frequency cleanup it's going to be probably postponed towards the second half of the year? Thank you.

Well, first question will be taken by myself, Vsevolod. The breakdown of debt by currencies is fairly simple. At this stage, we have more than 98% of the debt in U.S. dollars. We have a remaining portion in various currencies, but mostly euro, also some currencies of the manufacturers, producers, but it's almost -- more than 98% is dollars.

Yes, Alex, this is Pavel Pavlovsky, the Head of MTS Ukraine. Thanks for the question. So we so far, we haven't seen any impact of Utel. There's no advertising on TV, and their pricing offers we didn't find very aggressive. So basically, we don't feel any impact.

Talking about ARPU and usage trends in general -- you know, all the tariffs we introduced under the rebranding the new tariff system is aimed at stimulating the usage, because we have so-called regressive tariffs that consequent minutes are lower priced than the previous one, and going down to three Ukrainian kopiykas, which is a good price.

So we saw in September that this has basically had a positive impact on our ARPU, and basically for the lower price the usage is growing, and we are right now promoting immigrations. We see a usage pickup, or it's a bit slow, but yet the trend is positive. Thank you.

Thank you.

Alex, on Russia, I believe you had the same question about the market competitive dynamics and the APPM, right?

No, no--

No, on the Russia.

Alex, in Russian markets, the competitive dynamics in the fourth quarter, we are not seeing that they are changing significantly compared to the third quarter, and the competition is mostly around the dealer channel and the sales push, rather than the price competition.

Thank you.

And also on the 3G in Russia, in Moscow, the frequency issue is very much a serious one, and right now there is no clarity as to when the frequency spectrum is going to be cleared, because it has to do with the physical removal of certain military sites to another location. And in St. Petersburg, yes, we do expect 3G to appear in the first half of 2008.

Okay, perfect, thank you very much.

Our next question comes from Mr. William Kirby.

Please state your company name, followed by your question.

William Kirby, Nevsky Capital. I have two questions. Firstly, on the competitive environment in Russia, how long are you planning to continue running your existing promotions, and are you concerned at all about retaliation from the competition? Secondly, we saw a low effective tax rate in Q3. What should we be expecting for the rest of 2007 and future years? Thank you.

Okay. This is Mikhail Shamolin answering. On the first one, we do have some promotions, but we do not see those promotions as being super aggressive, as they are related to the overall APPM level in the market. Mostly, they are focused around a decreasing price and promoting price points to stimulate usage, and mostly it's in the third and other minutes. And therefore, we regulate the APPM level with the price of first minutes if we are talking about tariff plan Super Pervyi and other marketing initiatives are basically within this line. So we are trying to segment the offers and make them user-specific, but hold the APPM within the levels which we have established for ourselves.

We actually do have a pretty strict price control, and we manage both APPM and the MOU sides of business. So the answer to your question is, no, we don't see any major retaliation from the activities that we currently have.

Okay. Thank you.

And on the second question, we think that the effective tax rate which we saw in the Q3 is the one which we can use as a proxy for the remainder of the year, given that it was net of any one-off effects which we saw in the Q2.

Okay. Thank you.

Our next question comes from Mr. Sergei Arsenyev.

Please state your company name followed by your question.

Good evening, this is Sergei Arsenyev from Goldman Sachs. I just actually have just one question. Given that inflation in Russia has been rising far higher than the expectations, especially if you compare it to the beginning of the year, I am just wondering what kind of impact you are seeing on your business, both on revenues and on cost, and especially to your -- to the budgeting exercise you were doing in the beginning of the year? And what's the outlook for 2008 given this macro trend in the market?

Thank you, Sergei. The inflation in Russia that is really a bit higher than expected definitely rises pressure on our expenses side. So we have serious pressure coming from the media, where the prices grew this year compared to the year 2006 more than 30%, and we anticipate for the next year the growth of more than 40% for the media in Russia.

We also have inflation that demands to increase the salaries and let's say some other kinds of expenses related to personnel. And so that's actually kind of an impact we have on the expense side.

On the revenue side, we have some benefits based on the appreciation of ruble, of course, and they are already -- and you see them also as a part of our numbers that are presented today.

So going forward, especially on the revenue side, do you think it will be possible for you to increase tariffs to reflect inflation, obviously not fully, or maybe fully? But if your tariff policy next year for you and for the market overall could follow the inflation trend?

Sergei, I don't think that's going to be the marketing strategy of MTS for Russia, neither for the fourth quarter of this year, nor for the next year. We believe we will not be, due to the competition we have, in the position to increase our APPM almost in all of the segments of our operations. So we have to rely on elasticity, that is, to slightly go ahead decreasing the APPM by stimulating the usage to end up with a growth of our ARPU. This is our target.

Great. Thank you very much.

Thank you.

Our next question comes from Mr. Herve Drouet.

Please state your company name followed by your question.

Herve Drouet from HSBC. My first question is regarding Q4. Do you expect to put any special offer in Russia or in Ukraine for Q4, compared with what you currently are proposing?

And my second question is regarding ARPU, and specifically ARPU in 3G. Maybe you have done some analysis in the Russian markets. I don't know if you can share with us any insight you may have in terms of what you may expect to get in terms of 3G ARPU when you will launch 3G services in Russia?

Thank you, Herve. So Q4 promotions, yes, Q4 and especially December is the high season in our industry in our part of the world. So there will be, I believe, the set of promotions done by the competing companies, and MTS would be of course in the position to operate adequately to this challenge. But, once again, I don't believe we will somehow go for something that would change our well-declared and announced marketing strategy and that would really hamper the markets where we operate.

Regarding ARPU on 3G, we've -- on the presentation we made on the previous call, I believe, we've introduced a slide, saying that we believe until the year 2011, our ARPU -- incremental ARPU on 3G services will rise to the level of $1.40, and that is our target and that's what has been reflected in the business case.

And that's based on which assumptions in terms of 3G consumer versus 2G consumer?

This is the incremental ARPU that would, let's see --

Just for the 3G users, you are saying, so it's an incremental $1.40?

No, I believe this number is the number that would increase our all-in-all total ARPU we will face in the year 2011 for the blended ARPU.

For the blended ARPU. And your assumptions by 2011 will be how much of 3G users you think you will have out of the total subscriber base?

Up to 11 million 3G users in the year 2011.

All right, thank you.

Thank you.

Our next question comes from Ms. Nadejda Golubeva.

Please go ahead with your question.

Good afternoon. This is Nadejda Golubeva from Aton. My first question is about margins in Ukraine. Could you please specify how much of the rebranding cost was incurred in the third quarter, and do I correctly understand that this expense won't be in fourth quarter? And could you also elaborate whether there will be some one-offs in fourth quarter in Ukraine, for example, connected with the CDMA launch, which could negatively affect margins?

And possibly if you could give again some more color on the EBITDA margin in Ukraine, one-off in third quarter and possible other kinds of one-offs in the fourth quarter?

And my second question was about bonuses. What is the normal practice for MTS? Do you really reflect bonuses for the year in fourth quarter, or they would be spread, or they probably already will have partial operators [in all] incurred? So, in other words, in which quarter bonuses will be reflected, in fourth quarter, in the first quarter -- or in the first quarter 2008?

And finally, if possible, could you please specify the interconnect revenue in Russia, and if possible also break down the costs in Russia for sales and marketing, G&A and other expenses? Thank you.

So let me answer the -- Nadejda, hello. Let me answer the first question. The margins in Ukraine -- yes, they've been impacted a bit by the rebranding expenses to the level of I would say less than 1% on the margin in general for the Q3. Speaking about Q4, I would say -- and let's say the ongoing perspective, I wouldn't say that CDMA-450 has as a project a significant -- will have a significant impact on the margin in Ukraine. What can make an impact is the competitive situation, when we meet with the quite serious competition by the competitors who for the time being show very low margins.

So this is a bigger challenge for us, either than the effect of CDMA-450 business plan.

Regarding the bonuses, I will ask Vsevolod to answer. Please.

Thank you, Leonid. Hello, Nadejda. We account for bonuses on the accrual basis, so basically they are accrued quarterly and we do not expect any one-offs related to the bonuses in the Q4. At this stage, we do not expect any one-offs as -- getting back to your another question -- any one-offs are not expected for the Q4 anyway.

Okay, thank you. And the last question?

On the interconnect -- this is Mikhail Shamolin speaking. We are not really breaking down the interconnect revenues. Of course, the only thing I can tell you is that the revenue of interconnect in the third quarter roughly equaled the cost, and both were around $190 million.

Okay, thank you very much.

Our next question comes from Ms. Olga Bystrova.

Please state your company name followed by your question.

Good evening, Olga Bystrova from Credit Suisse. A few questions for me. First of all, on the cost side, the advertising expenses in Russia seem to be very benign, so to speak, in the third quarter. Do you expect that to normalize in the fourth quarter? And also, dealership costs in the Ukraine, is there anything that has been going on, particularly that you mentioned I think that some of the competition is happening not on prices, but on distribution and advertising, let's say.

The second question is on data contribution to ARPU. In 3Q, in Russia, this proportion of data ARPU or value-added services ARPU has increased, together with the growth in ARPU in general. What specifically -- what services have been growing faster than the other, let's say, so what kind of -- is that the GPRS or is that SMS, et cetera.?

And finally, CIS expansion. Could you update me on the progress with Kazakhstan and Belarus and maybe some other markets that you're currently considering? How likely we could see some expansion in the short term? Thank you very much.

Well, the first question is probably to myself. This is Mikhail Shamolin. We have seen some absolute increase in the advertising expenses in Q3. That was according with our marketing plan, because we had more activities in Q3 than we had in Q4. But if you look at the subscriber acquisition costs within advertising and marketing, you would see that that actually went down as compared to Q2 because of the increased number of subscribers that we have picked up in this period.

And in Q4, we are also planning to maintain pretty high advertising activities, so we don't expect the advertising cost to go down in Q4 as compared to Q3, but we are also hoping to get a decent SAC number, similar to Q3 because of also a bigger number of growth in subscribers.

Okay, on the second question, this is Pavel Pavlovsky, MTS Ukraine. On the second question about the dealer commissions in Ukraine, I have to say that this is -- the environment is highly dynamic. We have to remember that the prepaid is sold without [ID] in Ukraine, and therefore basically the prepaid is sold through up to 14,000 to 15,000 points of sale. Therefore, it's pretty much the pool situation, and the market is dominated by distributors rather than the specialized shops. And this determines the dynamics of the competition on the dealer commission side.

So basically in Q3, we have seen some improvements due to our efforts before the rebranding to reduce the dealer commissions a little bit, right. But of course for Q4, we plan some more aggressive activities.

But you also have to remember, these activities are of three levels. First of all, we stimulate the distributors [that sell], but we also have a special program, we used to be a pioneer of this program, stimulating the actual staff in the points of sales to sell our products, and we have a quite innovative program stimulating the staff in points of sales to sell our products. Thank you.

Okay. Thank you very much.

And in terms of VAT, we had a pretty healthy value-added services revenue growth in the third quarter as compared to second. In the prepaid segment, it has increased by 6% roughly; in the postpaid by 22%. In the postpaid, it was mainly driven by a vast consumption in roaming, because it is more beneficial from the revenue side, and then in the mass or prepaid segment, it was driven mainly by increase in GPRS and SMS usage.

Okay. Look, maybe just a follow-up here on roaming, because I don't know if that's a mistake in the presentation, but I think your ARPU total and ex roaming ARPU is the same in Russia. Is this a mistake or something that maybe you should explain what is happening with roaming revenues?

I think this is just a mistake.

Just a mistake, okay, great.

Our next question comes from Ms. Lyudmila Kan.

Please state your company name followed by your question.

Ms. Kan, your line is now open.

Operator, please move on to the next question.

Thank you. Our next question comes from Mr. Andrei Bogdanov.

Please state your company name, followed by your question.

This is Andrei Bogdanov from Troika Dialog. Two questions, if I may, one with regards to future performance of and your view on usage and ARPU. Am I right that it was hit, I think it was in Bloomberg, that you expect 400 minutes of usage by end of the '09? If that is right, given the current level of average price per minute, about $0.60 in Russia, that actually implies about $24 ARPU in two years time from now. So do you expect to see a substantial reduction on APPM in Russia? Because it seems like you are not really targeting $24 ARPU in such a short period of time. Or your usage guideline is probably too aggressive at this stage?

Second question is with regards to your buyback program of your shares. If I understand correctly, you bought from the beginning of the program roughly 2% of outstanding ADRs; are you supposed to continue this program, and, if yes, how much you would expect to buy from the market and at what period of time? Thank you.

Thank you, Andrei. Yes, it was stated today in the press conference that we anticipate the growth of usage in Russia to the level of 400 minutes in the period from 2009 to the year 2011. And these forecasts are based on our understanding that currently our postpaid usage is already at the level of 580 minutes, and our corporate customers already have the usage over 400 minutes, from one hand. From another hand, our experience we have in Uzbekistan, where our customers already speak at the level of -- use like 550 minutes a month. And in Belorussia, where the usage is significantly higher than 400 minutes, we can anticipate that the blended ARPU in Russia would also -- blended MOU in Russia would also grow to these levels, and we really believe that it will happen next coming, let's say, three to four years.

I do anticipate that APPM will slowly go down in Russia as well. I wouldn't say right now, I would say, to what exactly level, because we are not in the position to give such a forecast. But last year, we gave our forecast on ARPU in Russia to grow by the year 2012 to the level of $14, and it seems right now that it was, let's say, at minimum realistic forecast, I would say.

Regarding the buyback, we bought more than -- we bought for the time being [2.76%] of our stock on the market from the beginning of the buyback program, saying from Q4 2006 until now. Last quarter, we bought 0.85%, and in July the Board of Directors of MTS had approved the prolongation of this program for additional 12 months. And we are in the position to, let's say, act in accordance with the decision of the Board of Directors.

But of course I am not in the position to give you, let's say, complete guidance on the levels of purchase we now would be oriented -- we will be oriented in. Thank you.

Okay, thank you.

Our next question comes from Mr. Stephen Pettyfer.

Please state your company name followed by your question.

Yes. Hi, it's Stephen Pettyfer from Merrill Lynch. Two questions, please. Firstly, considering just on the subject of usage and CapEx, given your success in stimulating further usage growth and your recent comments about that 400 minutes, is it possible we could actually see CapEx in Russia increasing next year to support those implied revenue targets?

And secondly, on a related issue, I just see on Bloomberg, you've made some comments concerning expansion outside CIS, specifically Africa and Asia. Could you give us some more color on your thoughts there, please?

Thank you. In terms of the first question, I would say that yes, based on the traffic increase trends that we see right now, we will have to ask the Board of Directors of the Company to oversee some increase in cap expenditures in 2G and 3G for the next coming year at least. And it total it corresponds with the 3+2 strategy of MTS, where it's said that we have to offer the first-class services to our customers quality-wise, everywhere where we operate. But we don't anticipate significant changes in the CapEx on sales coefficient. We've announced that we would like to follow the trend of a reduction in the CapEx on sales coefficient, and we look for keeping on this path, actually.

Regarding the expansion outside CIS, as a part of our 3+2 strategy, it said that we have to explore the opportunities outside our whole market. This is CIS. Once again, on the top of our minds, this is our expansion inside CIS, so we try to look for all possible opportunities to enter the new markets, same as to grow organically and in a non-organic way other markets where we are already present. Since we understand we have -- we do have an understanding of those markets, and we can in an excellent way use the synergies that are obvious on, like, the markets where we already operate and other CIS markets.

Different story about the markets outside CIS. What we have to be concerned now is how keep on the path of offering our shareholders the ROIC over 25% at the period after 2012. Because last year's strategy, 3+1, stated that we are oriented to provide 25% ROIC in the next coming five years. And we also were oriented on double-digit revenue growth for the same period. So the challenge for the management for the time being is to manage to expand the period of double-digit top line growth accompanied with a serious, let's say, bottom-line results for the period over 2012. And that's what we understand can be achieved mostly once we can, let's say, develop our operations to the new markets.

Go to the new markets means to understand exactly how you can make value out of that. And that's why in MTS, we are right now in the kind of an assessment process to understand better whether we have the value that we can bring to those markets, whether the entrance to those markets wouldn't be too expensive for us at the time being. And as we promised before, we will somehow announce our views on that in a more concrete way on the disclosure of Q1 results of the year 2008. For the time being, we are in assessment phase.

Okay, thank you.

Our next question comes from Mr. Alexander Vassiouk.

Please state your company name followed by your question.

Yes, hi, it's Alexander Vassiouk from Morgan Stanley. Just wanted to follow-up on your answers to the previous questions regarding usage in Russia. And are you taking any active steps to introduce the postpaid credit-based tariffs in the mass market, and, if so, what's the progress on that? And what pickup rates are you seeing from your subscribers for these tariffs?

Yes, this is Mikhail Shamolin once again. Yes, of course we do. I mean, one note that should be made is that the classical definition of postpaid and prepaid in Russia is slightly different from what you typically see in the West, because we don't have heavy phone subsidies in the market. Our so-called postpaid customers are also in most cases prepaid; therefore, they keep the balance in their account. And at the same token, our prepaid customers do have access to credit.

We have launched mass credit offers in May this year, and we heavily promoted them during May-June. Essentially, all of our prepaid subscribers now have access to credit, depending on their usage numbers, their loyalty to the Company and their credit history. But essentially credit is available to everybody and we're actively promoting it, especially in our heavy customer segment, where we actively offer to customers to minimize revenue loss when customers are in roaming, for instance, and having difficulties in filling their accounts. So the credit side is actively pursued by us, and we see it as another potential to further increase usage and ARPU.

Sorry, can you just specify how many subscribers have you signed up for these tariffs, in percentage terms or in numeric terms?

I wouldn't be able to give you an exact number, but I would tell you that approximately 70% of our postpaid subscribers have credit as a standard feature in their account. And with the prepaid segment, this number is around 15% to 20%.

So they have access to those tariffs, but they not necessarily have taken them up, is that correct?

In the postpaid, out of the 70%, I'd say almost all of them actually do use credit. In the postpaid, it is less, approximately half, but the trend is increasing in terms of credit attractiveness. So we see the positive dynamic in them expanding the credit usage.

Okay, thank you very much.

Our next question comes from Mr. Alex Kuznetsov.

Please state your company name followed by your question.

Good evening. It's Alex Kuznetsov from Bear Stearns. First of all, let me congratulate you on delivering another quarter of strong results. I would like to ask a couple of questions. First of all, I noticed a 7% increase in effective tariff in Ukraine. Is it primarily due to strong roaming revenue or cancellation of some discounts?

Secondly, I would like to ask for the reason for such a strong increase in Russian churn. And, finally, you touched upon this question, but still it's quite interesting to elaborate it further. I noticed that your subscriber acquisition costs in Ukraine significantly declined by about 20% quarter-over-quarter. What are the reasons for this trend? Thank you.

Okay. This is Pavel Pavlovsky, MTS Ukraine, answering the first question. Yes, you are absolutely right. The increase is to some extent due to roaming, to a different [share] for the roaming, because it's a high season in Ukraine. And yes, we did some adjustments in the tariffs, for minor [catching] of some free time for friends and family and so on, which had a positive impact on our APPM. Thanks.

Yes. With regard to churn, it's actually quite seasonal. We have a seasonal increase in churn in Q3. We also had it in 2006 and this is mainly due to the fact that the New Year promotions and the heavy season is typically churned six months later, which is Q3.

Thank you.

Yes, the reduction in SAC is mostly -- I already touched upon it before, is related mostly to our work with distributors and dealers before the rebranding, because the rebranding created enough of a pool effect, right? So we had the luxury to reduce the dealers' commissions, especially in postpaid, where we used to pay more for the heavy postpaid, but the light postpaid was introduced despite a different compensation scheme, right, and some other cost optimizing measures resulted in the lower SAC. Thank you.

Thank you very much. Just one follow-up question, if I may. When you reduced promotions in Ukraine, have you noticed change in MOU or people continued using about the same -- continued generating about the same traffic in spite of reduction in promotions?

Well, I mean, during the rebranding, we never reduced the promotions in Ukraine, if I understand you correctly, right? But we see a positive trend in MOU, which is resulting, I guess, first of all from our new tariff scheme where, as I said, we use a regressive scheme, offering the lower cost for the longer calls. That's been effective. We saw it in September-October. That's a bit slow, but yes, we see a positive trend.

Thank you very much.

Our next question comes from Mr. Taras Shumelda.

Please state your company name followed by your question

Hi, this is Taras Shumelda, American Century. My question is on BlackBerry in Ukraine. And I am switching between two conference calls, so I apologize if I am asking something that's been asked. My current understanding is that it is illegal to offer BlackBerry service in Russia, and a lot of Russian businessmen get their BlackBerries in UK or in other countries.

So obviously my question is, one, is it indeed so? In other words, this service cannot be offered in Russia? And second, what is the price differential between the service that you plan to offer in Ukraine and what Russians can get outside of Ukraine? And what are your expectations in terms of -- maybe you could provide either in customer growth or margin on the product, or basically any guidance which you can offer in this respect. Thank you.

Let me comment on this situation in Russia and just want to certify that, yes, it's illegal for the time being to sell and use BlackBerry in the Russian Federation. We are looking for some changes, but for the time being it is forbidden. And in Ukraine, we're mostly oriented with operations on the local market. And we don't (inaudible) business case based on the, let's say, switchers from the international networks to our Ukrainian BlackBerry solution, though our prices in Ukraine are relatively cheaper than one can get in Western Europe for the same services. I would indicate like 15% cheaper.

Can I ask a follow-up question here?

Please.

When have you launched the services and can you -- I realize it may be way too early to ask this, but I'm trying to get some sort of a feeling for, one, whether Ukrainian customers are responding positively to this, and, if so, to what extent? And two, are you seeing increase from your Russian customers, and is this service going to be advertised in Russia in any way at all, whether in a big way or maybe just some sort of a small line on the bill the next time your customers get their statements? Thank you.

Pavel, please.

Yes, I mean, the response was overwhelming, and as we know, the RIM production capacity is limited. So the terminals, which have been Russified, into Cyrillics, it's been already sold out, and customers signing up for BlackBerry terminals in Ukraine.

How about the advertising?

Yes, sorry. We introduced the service. There had been a PR campaign, but we do not advertise the BlackBerry in Russia.

Okay. So is it safe to assume that you do not subsidize BlackBerries in Russia at all -- in Ukraine at all?

Not for the time being.

Thank you.

Our next question comes from Sam Voloshin. Please state your company name followed by your question.

Yes, hi, this is Sam Voloshin from Voloshin Capital. I have two questions concerning local MTS service, and please forgive me if I am repeating somebody else's question, because I signed in a little late.

Question number one, you have paid the dividends for the past year. I think you declared them in May or June on both MTS local shares and ADRs. ADR dividends have been received, but for some reason local shares have not been received. So I am trying to understand whether the problem is at your level or at the agent level?

This is Vsevolod. As I mentioned in my speech, the dividends were almost paid, almost all amount has been paid already. And true, they were paid to ADR holders. Speaking about the local shareholders, I believe that there shouldn't be an issue on our front, because what is remaining is a few payments to local individuals. But as the payment was done a few days ago only, the last payments to the Russian shareholders, it might be under way. We will follow up anyway on your particular issue.

Okay, please. And on the second question, relating to the local shares again, they continue to trade at 26% discount as of right now, let's say. And there is really no fundamental reason for that discount to exist. On your last call, you were talking about trying to sort of speak to Russian investors and to other people, trying to narrow the gap that way. But apparently it's not working. So I wanted to come back and ask you the question about the buyback again. Does it makes sense to be buying shares for your program when there is really no difference for your needs, whether it's local shares or ADRs, and paying 26% more for them?

In accordance with what we have promised, we have undertaken certain activities to introduce ourselves somehow in a better way to the local investors for local shares. Though it was, actually, we realized that actually the level of information those investors have is quite significant already. That's why -- I mean, it hardly can be very effective for the time being to rely on some specific increase of interest to the investors in the local shares different to ADRs, for example.

But, as we promised, we have undertaken these activities, and we will proceed with them in the future.

As we once already commented, the Board of Directors of MTS have revised the issue of buyback on the local market, and as long as the analysis told us that the main problem for the -- or the main reason for this gap in prices for local shares different to the ADRs is the liquidity issue. By buying, let's say, out the stocks from local market, we would only worsen the liquidity issue, and by that would even probably increase the gap instead of closing the one. That's why it's been decided for, at least for the next coming 12 months, for MTS not to undertake activities on buyback on the local market. Thank you.

Okay. Let me just follow up on this a little bit. Again, the gap still remains, and it's a really sort of a gap in your capital structure, because it effectively undervalues your company due to this discount. Is the other option -- by the way, I really think that actually the gap will narrow if you were to have a buyback rather than widen, but it's a matter of opinion. But as another option, is increasing of ADR capacity facility something that you have considered, or is that completely out of the question because of the Russian law limitations?

We've already reached the level of maximum possible free float on the international market in accordance to the Russian law, where 40% is the maximum level. That's why unfortunately we cannot undertake any new, let's say, free float with our ADRs. That's why we cannot convert by that the local shares to those ADRs, if that's what you mean.

And there is no exception that you can apply for?

Unfortunately not, unfortunately.

Okay. Thank you.

Our next question comes from Mr. Will Milner.

Please state your company name, followed by your question.

Thanks. It's Will Milner from Arete Research. Couple of probably related questions. Firstly, there appears to be a significant disconnect between the recent sort of comments around 400 minutes of usage by 2009 to 2011, a slight decline in APPM, $14 ARPUs by 2012. I guess either pricing is going to decline far faster than people expect, or ARPUs are going to be, as many have speculated, quite a lot higher. When do you expect you might be able to address that sort of disconnect in the long-term guidance?

Secondly, obviously you've had a lot of success in Russia growing the usage levels. So, if I could just focus on pricing, if I very simply divide ARPU by usage, I come to the conclusion that prices have fallen sort of 6% year-over-year. Yet, on slide 16, you seem to be saying prices have risen. So, I guess the question really is, what am I missing? Because it does seem that average prices have fallen around 6% at a time when you have inflation and consumer prices increasing nearly 10%. So, I guess the question is going forward, what is the expectation for APPM?

Well, I hardly can add something to the previous statement regarding the ARPU trends based on the usage. So, I really would like to avoid any, let's say, more dynamic forecasts, either the ones that we gave last year. But we are optimistic, I would say, with the trends on usage, and we have all of the reasons, ones that I already mentioned to forecast that the usage will grow quite aggressively.

And we also understand that it would be accompanied with some decrease in APPM, but I don't believe it's really in the interests of the company to undertake some specific actions to significantly and in a steep way to reduce the prices to, let's say, to affect significant and the quick reduction of APPM to be compensated by MOU growth. It would be step-by-step case, but I would like to avoid any future guidance on the real size of ARPU, and I would say that there are already more optimistic forecasts done by analysis on the market, and actually we are very attentively reading and taking into consideration these kinds of statements.

Okay. And then maybe if I can just quickly phrase it a different way -- to get to the 400 minutes of usage in that timeframe, you seem to be implying an acceleration in the rate of usage growth from the current level, which I think is around 24%. Is that something you expect to happen?

We anticipate, yes, that the trend of growth in MOU will be in the future years higher than we have anticipated, let's say, in the year 2007 compared to the year 2006. It was quite high, actually. 24% is quite an achievement, but we do think there is a big potential to grow this number in the future. For example, because there are a lot of new customers who joined the company in prepaid segment last year with significantly lower MOUs, but the time they stay in the networks, the usage grows, and we really anticipate that this customer base, with growth of usage, with growth of its ARPU will generate the main reason for the growth of revenue for the company in the future.

I can just add one thing -- this is Mikhail Shamolin speaking -- to your question. I mean, basically we are quite confident that the MOU is going to grow and is going to grow pretty quickly. I think the key question that you are trying to get to is what will be the pricing dynamics?

Yes.

And the answer to that, I mean, very honestly, we don't know. And it would be sort of not appropriate of us to be giving those kinds of estimates, because it really depends on the competitive behavior in the market. If the competitive behavior continues to be rational, then we would see MOU growth, with the APPM being stable or slightly decreasing given the regional competition that we have got. If the competition really intensifies between the major players, then we may see APPM going down. Of course we are interested in the first scenario rather than the second, but with the income growth that we see in Russia and with the sort of habit of using mobile phone increasing among the mass segment, we don't really see the current level of APPM being a strong limitation to the usage growth.

Okay, that's pretty helpful. Could I just have one follow-up? Just on a sort of technical question on the definition of a subscriber in Russia. I mean, obviously adding 1.7 million customers is a sign of penetration well in excess of 110%. I mean, that kind of implies a lot of multiple SIM ownership or high level of inactivity. Can you just confirm what is your disconnection policy, what do you consider to be a customer? And if you moved, I guess, to a more standard definition of a customer, having made or received a call at least once in the last three months, how many of the 54 million customers in Russia would no longer be, I guess, a registered customer?

Yes, I mean, our churn policy has not changed since, I think, it was published, really. And it is that we clean out subscribers from our customer base after six months of inactivity if their balance is zero or negative. And if the customer's balance is positive, I think we clean them out within sort of one year. That's pretty much what we do.

Okay. And you obviously don't track the number of customers I guess in the way that VimpelCom might do, that have made or received a call or text in the last three months?

We track customers in all kinds of possible ways, but it's a question of what we disclose and what we don't disclose.

Fair enough. Thanks.

Our next question comes from Mr. Alexei Yakovitsky.

Please go ahead with your question.

Yes, good evening, gentlemen. It's Alexei Yakovitsky from Deutsche Bank. Congratulations on the strong numbers, first of all.

I'd like to go back to the Ukrainian market, if I could. You obviously posted very strong performance in the quarter in Ukraine, and I think I appreciate that. Things are probably going to be a little bit more intense in the fourth quarter for seasonal reasons, but still, would you say that the competitive environment has stabilized a bit, as I think you hoped it would? Are things improving? Should we expect a little bit more stable fourth quarter, or a bit more stable first quarter of '07 compared to the previous fourth and first quarters, which I think were a little bit disastrous? And if the answer is yes, what are you deriving from the competitive landscape point of view? Is that you, VimpelCom are still it? Have things become a little more stable? Thank you.

Thank you, Alex. We would like to state that we see the positive trends in the Ukrainian competitive situation. Definitely it's much different from was anticipated by a lot of people around when we disclosed our Q4 and Q1 results of this year. We do a lot ourselves, as MTS, to somehow stabilize the situation, and we don't undertake, let's say, extremely aggressive steps in order to, let's say, help the market to grow, since there were significant reasons the market will just move to the negative development numbers.

And this is the path we want keep in the future, but the situation is very much dependent on the behavior of our competitors. Since the two, three of them have once again a very, let's say, limited, I would say, margins for the time being and still proceed the investments. That's why we have to anticipate the kind of activity from their side, and we believe we'll be able to somehow maintain the situation.

But I would really proceed watching very precisely on the development, since the situation is different, I would say, from what we see in the other markets of our operations. It we say that we anticipate until the year 2012 the overall revenue growth on the CIS market by 137%, and in Russia as a part of this market by 130%, with accumulated aggregated growth rate for Russia at the level of 15%, and as the other markets, including Russia, where we operate almost 17%. So in Ukraine, we really forecast in this period of time the accumulated growth rate in one-digit area. And this forecast is, let's say, kind of a reflection of this special competitive environment we have over there.

Okay, thank you.

Our next question comes from Ms. Lyudmila Kan. Please state your company name followed by your question.

Hi, hello, hello?

Yes, hello.

Hi, can you hear me? Hi, sorry. I did try to ask a question before, but I couldn't be heard. I wonder if you can please outline your debt repayment in the next 12 months, please. Thank you.

Thank you, Lyudmila. We will be repaying our bonds, euro bonds, which are due at the end of January next year. And until the end of the next year, there won't be any other large debt repayment -- debt repayments.

So, no other big loans, syndicated or bilateral?

No.

Okay. And do you have any plans to continue to shift into ruble bonds, ruble -- generally ruble debt financing, away from dollar?

Yes, we do have plans, and we announced these plans a few months ago. And at this stage, we are proceeding according to the schedule. We submitted the documents to federal service on the financial markets. We expect to receive approval or an answer from the federal service at the beginning of December. And, as you are probably aware, the documents -- the prospectus registration will be valid for one year. And according to the corporate news, according to the timing of the appearance of the corporate news, we will be raising the financing if needed.

And how big is this shelf registration is going to be?

The registration is for RUB30 billion, which is approximately $1.2 billion.

Okay. And would that mean that you might be replacing some of the euro bonds with ruble financing?

At this stage, we are not aiming at such an exercise.

Okay. All right, thank you.

Thank you.

We have a follow-up question from Ms. Olga Bystrova. Please go ahead with your question.

Good evening again. I think my question on the CIS expansion was unanswered. If possible, of course, you can update us on how likely we could see some expansion in the short-term, given potential talks about interests in Kazakhstan and consolidation in Belorussia.

And also, another question is, you are talking about, let's say, longer-term ARPU and usage potential in Russia. Have you already thought how it could look in the Ukraine, for example, longer term or medium term, even if it's hypothetical at this stage, sort of preliminary analysis? That will be great. Thanks.

Olga, I am sorry that we have not answered your question regarding CIS expansion, but I think I have touched it, actually, when I have been answering the other questions.

Actually, there is no new information I can give to you. We tried to develop ourselves in the CIS market, and as I said, it is at the top of our mind, but really, for the sake of a lot of reasons, we withdraw any forecast on the timings and let's say the deals in countries, et cetera. That's actually it.

For the development of the usage in Ukraine, we really believe the usage in Ukraine would be also in the high, let's say, numbers, over -- much higher than 200 minutes, because I don't see any reason why Ukrainians would -- Ukrainian consumption behavior would be different from Belarusian behavior, for example, or Russian behavior. But we don't give -- we are not prepared for the time being to give a more concrete, let's say, public forecast. And in of course our business plan that is oriented to the year 2010, we have some forecasts and use them as assumptions to create our business cases.

Okay, great. And if you don't mind, I will ask another question on the seasonality in Russia. Obviously, given that you expect usage and ARPU to grow quite well going forward, do you think that will be accompanied by increased seasonality or smoother seasonality going forward? And I am particularly interested, let's say, in the fourth quarter? Do you think we could see something we saw last year, or we could see, let's say, stronger ongoing usage and ARPU growth in the fourth quarter? And, for the next year, what you feel the market could look like in that respect?

Yes, this is Mikhail Shamolin. With regards to seasonality, with usage growth in the mass segment, we expect seasonality to be smoothening out, because in the past few years our seasonality was mainly explained by high growth in roaming revenues in the heavy customer segment, and because historically MTS has been a leader in customer segment and corporate segment, that of course affected the seasonality quite a lot.

As we pick up more customers in the mass segment, and as the usage grows in the mass segment, of course we would see less of an impact happening. I wouldn't give you an exact guidance of how it would look like, but, overall, we expect it to smoothen out.

Even in the fourth quarter this year?

To some extent.

To some extent. Okay, great. Thank you so much.

Our next question comes from Mr. Alex Kuznetsov. Please go ahead with your question.

Good evening. I have one more follow-up question. I noticed explosive growth in your Armenian subscriber base last month. Could you comment on the reasons for such a strong subscriber acquisition in October, please?

Well, October, for obvious reasons, not the month when the effect of synergies with MTS Group can become evident. So we are just right now in the process of the adoption of the corporate strategy for our Armenian daughter company and adopting the business plan for them, and with them.

So, there is a normal -- I mean, the trend we see now in Armenia is just a continuation of the developments that took place in this country, let's say, from the beginning of this year. And they are actually developing in accordance with our forecast. We have a special option program with the minority partner, with the current minority partner. So they can earn out, as we announced before based on -- and get additional payments from us for the shares they've sold to us, based on the performance parameters of the Company.

And I would say that, yes, the company operates right now in the way that these earn-outs that is divided into two parts, one to happen at the beginning of the next year, based on the results of the year 2007, and the second one based on the results of the year 2008. So for the time being, the Company results are driving us to the situation when this earnout is going to happen. That means it drives us to the forecasted numbers and the anticipated numbers.

Does it mean that you anticipated such a big 27% jump in one month?

I have to look more thoroughly maybe at the number. I have not seen the 27% jump ourselves. So we can comment on that later.

Thank you very much.

(OPERATOR INSTRUCTIONS)

Okay. Seems like there is no more questions left. Thank you very much, ladies and gentlemen, for your participation. We welcome you at any time to contact our investor relations department if you have any further questions. A webcast of the discussion will be available on our website if you wish to replay the call. In the meantime, we appreciate your interest and wish you a very pleasant day. Thank you again.

This concludes the third quarter 2007 financial and operating results conference call. Thank you for your participation, and have a great day.