Mobile TeleSystems PJSC (MBT) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the MTS First Quarter 2008 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Tuesday, May 20th of 2008.

I would now like to turn the conference over to Mr. Andrei Terebenin. Please go ahead, sir.

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

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 loan facilities and their usage, legal actions or proceedings directed at the Company or its representatives, regulatory changes and the impacts of the Company's operations 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, earnings presentations and [personnel] 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 www.mtsgsm.com or that of the U.S. Securities and Exchange Commission at www.sec.gov.

MTS disavows any obligations 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 the risks. Copies of the presentations and materials used and 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.

Ladies and gentlemen, thank you for joining our 2008 first quarter conference call. Joining me today are Vsevolod Rozanov, Chief Financial Officer; Mikhail Shamolin, head of business unit, MTS Russia; and Andrei Dubovskov, head of business unit, MTS Ukraine.

About a month ago, we reported strong full-year results that served as a clear indication of our ability to capture growth in our core markets, create value in developing markets, develop mobile broadband in our markets of operation, while at the same time maintaining cost efficiency and further developing our Group. I am pleased to say that the strong growth drivers we saw in the second half of last year have been sustained through the first quarter.

In what has historically been a seasonally slow revenue period, revenues rose 2.3% to nearly $2.4 billion, a nearly 37% increase on 2007, as we generated strong profitable growth in each of our markets of operation from a combination of subscriber growth and rising usage.

In our core markets, our Russian operation continue to showcase positive momentum. For the quarter, revenue rose to nearly $1.8 billion, a 4% rise from Q4 and a 35% rise from the same period in 2007. As you saw in the past, a sustained rise in voice usage is giving us momentum in the marketplace, while the addition of 2.5 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. The result is visible in our stable ARPU from Q3 2007 through Q1 2008 despite adding 7.2 million net subscribers.

Likewise, a key ingredient to our growth has been the adoption of our contract plan. This is critically important in a predominantly prepaid market. By locking in postpaid subscribers now, we anticipate churn reduction, which actually fell in Q1, as well as later adoption of high margin data products as we look ahead to the imminent launch of our HSPA networks.

In Ukraine, revenues came in at over $408 million. Growth in voice and data usage, both a result of our stimulation efforts, contributed to a 16.5% rise in revenue over the same period in 2007. In February, we welcomed Andrei Dubovskov as CEO of MTS Ukraine. Andrei has previously run our macro-region Ural in MTS Russia, and we believe his experience in that region will help the Ukrainian business unit navigate what is still a highly competitive market.

For now, we are satisfied with the KPIs we see in the market and anticipate that the combination of brand development and improvements in quality and execution will enhance our performance down the road.

In our other CIS markets, we continue to roll out our networks and strengthen our leadership in this rapidly growing market. Revenues from Uzbekistan rose over 60% year-on-year as our subscriber count reached 3.5 million. We retain over 50% subscriber share of this dynamic market.

In Turkmenistan, we continue to focus on network deployment and subscriber development. For the period, revenue was $44 million, a 24% increase from the same period in 2006.

In Armenia, we are pleased to now offer you some visibility of the growing market. Armenia contributed about $55 million to the top line, a slight drop from Q4 due to seasonality. Our subscriber share remains stable at around 73%, as penetration rose to 60%.

Now, Vsevolod will discuss our financial position.

Thank you, Leonid. The financial position of MTS continues to improve, as OIBDA grew over 4% from Q4 to over $1.1 billion. We are pleased with the year-over-year growth dynamics of 30% and the strong seasonal margin of 49.4%.

In comparison to the [spot] period, Q1 2007 was an exceptionally low first quarter as we suspended many markets and initiatives. In 2008, the rise in subscriber additions, both in Russia and elsewhere, necessitated higher dealer payments though our other commercial expenses remained flat or fell due to seasonality.

For the current period, we witnessed pressure on the OIBDA margin from rising interconnect costs, though effective execution and growth of revenues allowed us to realize a strong Group margin. Given this performance, we are confident in reiterating our guidance, over 50% will be the margin for the year. This growth in the OIBDA also helped us deliver strong earnings for the period.

Net income for the period rose strongly to $610 million for a margin of nearly 26%. Barring any further acquisitions or changes to our asset base, our current D&A levels seem to be normalized looking ahead. Likewise, return on investment capital was 47.8% for the last 12 months, another sign of the value we are creating through our business.

Such diligent financial management and our continued focus on the total shareholder return are key factors that allowed us to today propose a dividend of $1.2 billion or $3.12 per ADR for the financial year of 2007. The dividend will be voted upon at the AGM on June 27th and then payment will be made in accordance with the past years' payment schedules from July to December, with one month of notice from our depositors.

The business continues to generate rising cash flows. Net operating cash flow was close to $1 billion for the period, while we realized the free cash flow of $632 million. For the period, CapEx spending for the Group was roughly $294 million. Given the weather, Q1 was a seasonally low spend period and we remain on track for the $2.5 billion in CapEx spending we guided last month.

In Q1, we continued our share repurchase program, acquiring an additional 5.8 million ADRs. Since the program's inception, we have acquired slightly less than 10.8 million ADRs.

Our financial position remains strong. Total debt was $3.1 billion at the end of the period and our net debt to EBITDA remains stable at 0.7. This provides MTS with ample resources at our disposal in the event an opportunity arises to both expand and grow our business.

Now, I'll pass the word back to Leonid.

Thank you, Vsevolod. This past April, MTS was afforded a great honor by being named the first Russian company to the BRANDZ Top 100 Most Powerful Brands as chosen by the consulting firm Millwood Brown and the Financial Times. MTS ranked 89 overall and scored a perfect 10 in the category Brand Momentum. This is an indication of our past performance versus our growth prospects in the short and medium term.

Obviously, this momentum is a strong sign of the affinity that is developing for the MTS brand in our market; and the recognition of the brand by distinguished international bodies is validation of the efforts we have made in attracting new subscribers into our networks, stimulating voice usage and other services and extending the brand into new markets.

The result of this effort has been the development of a strong relationship with our customer, something that is increasingly important as our markets become fully penetrated. Likewise, a strong brand increasingly differentiates our market leading products and services from those of our competitors throughout our markets of operation.

Coupled with our strong execution, this momentum will be a key factor for sustaining the growth that we see today. Both brand and our customer relationship are critical to the broadband services we will soon be deploying. As a mobile operator, it only makes sense that MTS continues to follow its mobile-centric approach to serving its customers. Already, we have launched mobile broadband in Ukraine in major cities with a variety of tariff plans through our MTS Connect [offer].

Soon, we will commercially launch HSPA networks, first in St. Petersburg, then quickly followed by Sochi, Yekaterinburg, and Kazan. By year's end, we anticipate 10 cities with full coverage and eventually up to 34 cities throughout Russia.

In addition, in early 2009, we will launch 3G services in Uzbekistan as well. Since April 2007, we have been aggressive in promoting broadband as our future and our strategy is designed to best serve our customers, our shareholders and all of our stakeholders.

Thank you for your time and now I'm happy to open the call for your questions.

Thank you, sir. We will now being the question-and-answer session. Ladies and gentlemen, in the interest of facilitating an open dialogue with all call participants, we kindly ask that you limit yourselves to one question plus one follow-up question and then please re-queue for any additional questions. (OPERATOR INSTRUCTIONS).

And our first question is from the line of Alex Wright. Please go ahead.

Yes, good afternoon, gentlemen. You've already highlighted both today and in the last quarter the reasons behind the decline in gross margin, i.e. the high-end connection costs, but the decline in this quarter has obviously been sharper than we've seen in previous quarters. Is there anything else that is going on there behind that decline in the gross margin? Or could you explain in a little more detail why you've seen such a step change in that margin and how you expect that to develop going forward, please?

And my follow-up question is regarding the tax rate, if you could just talk us through the reason for the low effective tax rate in the quarter, please.

Thank you, Alex, this is Vsevolod Rozanov. Thinking about the first question, the key factor which is affecting our gross margin is interconnect expenses in all countries of our presence, and we continue to see increased pressure of interconnect costs on the gross margin.

However, a slight decrease in the pace of the decline was not as sharp because we have a somewhat lower share of handsets and accessories sold in Q1, so that's the reason it was partially offset.

The key reason for the tax drivers, thinking about the second question, is that basically the additional deferred tax assets which we accrued in our Ukrainian business, and the amount of that deferred tax asset was approximately $25 million. And if you add this up, you will see the normalized monthly or quarterly effective tax rate.

Okay, thank you. Just following up on the first part of the question, you've obviously highlighted the interconnection cost increasing as a percent to revenue for some time now. But yes, there was a steady decline in the gross service margin in Q4, which has accelerated in this quarter. So, has there just been a significant change in the traffic mix in this quarter? Or is there any other reason why there's been such a sudden move in that cost item, please?

There wasn't any significant change in the traffic mix, however, there was overall growth of the traffic, specifically in our Russian business.

And you'd expect that trend to continue over the rest of the year?

We continue this trend to continue towards the rest of the year, however, we are very confident that we will be able to manage our gross margins. As you know, we don't guide to specific parts of our D&A, so I think this is the answer to your question.

Okay. Thanks very much.

Thank you. Our next question comes from the line of Alex Kazbegi, please go ahead.

Yes, good evening. Sorry to drill on that, but can I go back to the gross margin question still? The Q4, you are saying that obviously overall usage has grown, especially in Russia. But Q4, for instance, saw about a 12% increase quarter-on-quarter of the usage and that was accompanied by about 1.2 percentage point reduction in the gross margin. Now in Q1, you had only 3% growth in the usage overall, and yet the margin fell by 2 percentage point.

So, I appreciate your explanation overall, but still somehow the numbers, I don't want to say don't add up, but they're a bit strange. So if you can give us a bit more color on this would be very helpful.

And the second question was the dealer commissions, again overall the marketing spend came back to the normalized level as a percentage of revenues, but the SAC essentially grew across the board everywhere and in Russia specifically. And I understand that that was based on -- obviously connected to the quite a good growth and intake of subscribers, but I expected that SAC already grew in Q4, because I think you were running this program already from the second half of the year.

So, I was a bit surprised to see such a big increase in Q1, so I was wondering is it now over, so to say? Do we see this normalizing? Do we see this coming back to the normalized levels in Q2, Q3 going forward? Or are we going to see again quite a large increase in the overall acquisition cost? Thank you.

Alex, I will take the first question. Frankly speaking, the reason for, again, I just can only reiterate that the reason for the gross margin decline was the rise in interconnect costs. Of course there are some other minor [points], such as certain growth of roaming expenses for example as a percentage of revenues. But the key reason for the change or for the decline of the gross margin in Q1 over Q4 was the growth of our interconnect expenses.

But if your traffic didn't grow much, why did the interconnect expenses grow? Was there a change in the interconnect rate? I am not aware of that.

No. There wasn't a change in the interconnect rate, but the growth of interconnect was a little bit higher than revenue growth, but there was a slight change in the traffic structures. As we said, we don't guide to specific -- we haven't seen any major change in the traffic structure, but there are some seasonal fluctuations.

Okay, can I ask this differently? Do you see this -- you said that you don't guide (inaudible), but this is becoming a bit of a worrisome trend and that's why, I guess, we are trying to get to the bottom of it. You are confident this is not going to have a runaway impact, so to say; we're not going to see continued decline of the gross margin going forward?

Well, we always said that we should expect certain pressure on the gross margin and this was always our view on the way the business is developing. However, we only reiterate in our 50% OIBDA margin for the full year 2008.

Okay. And --

On the stock question -- this is Mikhail Shamolin here, hello. We have increased the aggressiveness of our marketing and sale activity in partially Q3 and especially Q4 and Q1. And we have launched a number of very effective dealer motivation programs and dealer promotions, which have resulted in the significant increase in the number of net additions as you have seen, and has contributed to overall growth of the business in Q4 and Q1. As you see in Russia, the Q1 revenue has grown by 4% as opposed to Q4, which is first time ever, because historically the revenue was always down in the Q1 versus Q4. That is the answer to the increase in dealer commission.

Also, the reason dealer commission in Q1 was a bit higher than in Q4 per subscriber is because of the way we share revenues with our dealers for subscribers, because we share, we use the revenue sharing principle. And subscribers which we switched on in the Q4, we are now paying the subsequent revenue to our dealers' revenue share in Q1. And since we had more subscribers switched on in Q4 than in Q1, therefore, if you mathematically divide what's been paid per subscriber switched on in Q1, you will receive higher amount.

Thank you. Our next question is from the line of Vladimir Postolovsky, please go ahead.

Good afternoon, gentlemen. Congratulations with great results. I think particularly impressive, obviously, is the revenue line. So, my question I guess is on to the -- the relative performance versus Wimpelcom. Obviously, we'll have to wait and see what they show, but based on conversations with them I don't think they expect to see much of a change from the seasonal trends, i.e., flat to falling revenues in Q1.

Obviously, you in Russia showed about 4%-ish growth quarter-on-quarter. It seems to be the second quarter in a row when you are outperforming Wimpelcom, based on this brilliant (inaudible) considerations in terms of revenue growth within Russia, and the trend seems to be accelerating. Can you do it quite as well?

We obviously have seen you having significantly higher subscriber numbers, but many people, myself included, thought that might be kind of in the past. The subscriber growth is growing at the expense of -- subscriber means dilution, it doesn't seem to be the key. So my question is what is it you are doing better lately? Why are you able to compete with Wimpelcom much more successfully over the last couple of quarters?

Well, I think that question goes back to a number of issues which we have to work with very thoroughly in the last few years, 2005, 2006. You know that we had a number of issues with our IT systems, with our brands and so forth, which we took time to fix and I think we fixed them now.

And if you look at, for instance, our brand results, you will see that we are now as Leonid has stated, part of the 100 companies which were rated as best brands in the world. And eventually it's a combination of successful marketing activities, successful sales activities, being aggressive in both attracting new subscribers and developing the usage of existing subscribers, and reducing churn.

Also, there will be questions about pricing and APPM. And I can say that we basically are within the market in terms of our price, and we offer our customers good value because MTS is perceived in the Russian market as a company which delivers the best quality and yet we are able to deliver the best quality at the market price and maintain a very healthy profitability doing that. So, that's basically our recipe for success.

All right. Maybe as a follow-up, obviously your guidance for the year until now has been 25% revenue growth. In Q1 as you said, you showed 37%. So even, taking into [account] the effect of the leap year and Armenia fading away in terms of contributions to growth later in the year, it seems to me like the growth rate has to slow down massively for you to come close to 25% guidance you had.

Do you expect a significant slowdown on the growth rate later in the year, or you think 25% on guidance at this stage looks very conservative?

Hello, this is Leonid Melamed. Unfortunately, the line is not excellent. Do I understand correctly the question is about whether we reiterate our forecast on top line for the year 2008?

Well, do you think that it's now looking very conservative on (technical difficulty)?

Yes, so the line is not great. But let me say that yes, we believe that we are not currently in the position to change our forecast. Also, take into consideration the statement we made last call when we made this forecast that we anticipate 25% growth without the influence of the ruble appreciation.

Thank you. Our next question comes from the line of (inaudible). Please go ahead.

Yes, good afternoon. My first question is regarding mobile broadband in Ukraine. Can you give us a little bit more information on how that is picking up in terms of CDMA (inaudible) usage? Has it contributed an increase (technical difficulty) as well per capita usage or are there not any other reasons why usage has increased (technical difficulty) in Q1 in Ukraine (technical difficulty) dynamics in Ukraine?

And the second question is regarding the [capital] expenditure. I was wondering if you can tell us if you are currently [spending] money as well as (technical difficulty) --

Operator, you'll have to dial us back, we're having trouble hearing on this end as we had expressed earlier. The line has definitely deteriorated. Can you please call us back?

Can you hear me?

Please call us back, [Vince], okay?

Okay.

Our next question comes from the line of Sergei Arsenyev with Goldman Sachs, please go ahead.

Good afternoon. I actually think that we are experiencing technical difficulties with this call. Every single caller for the last three calls have had problems. Maybe it's an issue for an operator.

Operator, can you hear me?

Yes, I can hear you.

Could you please (inaudible)?

(technical difficulty) sounding like this.

Vince, operator, we're going to disconnect now, can you please call us back?

Ladies and gentlemen, please continue to stand by. We are having some technical difficulties. We're going to get the speakers back online. Please do not disconnect.

Thank you for standing by, ladies and gentlemen, we do have the speakers back online. (OPERATOR INSTRUCTIONS).

Thank you. And our first question comes from the line of Alex Kazbegi. Please go ahead with your question.

Got lucky twice, thanks. Then, I will continue with mine; one question also is on the depreciation side. Your depreciation fell quarter-on-quarter and I was just wondering is that because of some impairment charges, some writeoff of the assets which you took in the last quarter of the previous year? And do we expect from now on more customer increase in depreciation charge quarter-on-quarter or is it going to be actually a declining trend?

And the second thing, I just wanted to if you could talk a bit more on the value-added services, especially less on the revenue side, which was quite impressive actually, but also on the type of the margins you're also getting there. For instance, especially on your content revenues which grew quite considerably, and data revenues. What is the roughly sort of split between what actually stays with MTS on what goes to the content providers? Thank you.

First question will be tackled by myself, so thank you, Alex, for this one. The amortization level we see at the moment is something which we (inaudible). We don't have any oneoff effects at this level of the amortization; and going forward, we expect this level slightly going up. Actually we suggest that you look at this as a percentage of sales, and as a percentage of sales this number is possibly higher in the quarter, in the year.

Okay.

On the (technical difficulty) question, we use a model when we do outsource most of our content aggregation. We do have a quite successful Web portal on which this content is sold, but we find it very effective to actually work with the third-party content aggregators as it allow us to have the best variety of content on the market; and we're leaders in the content sales in Russia.

The marginality of the content business varies between 40% to 60% depending on the relationships with the content providers. So we do give some margin to the content providers, but we believe it is fully reasonable given the rate of growth that we receive in exchange.

Okay, and on the data side, the margins are equally high?

Yes, on the data side, the margins are also high.

Okay, thank you very much.

Thank you. Our next question is from the line of Sam Voloshin. Please go ahead.

Yes, hello. I keep asking you the same question every quarter, and I know the answer; but as a sort of frustrated holder of your local shares, I'm still trying to understand if there's anything that we can do about it. As we speak today, the discount is already 33%, which doesn't make any fundamental sense. Yet last time, you said that you're not buying back these shares because your board told you that they are going to be less liquid.

But frankly, we don't care whether they're going to be less liquid or not. People who want liquidity can buy ADRs. So, again, the question that I have for you, doesn't it make sense for you to be buying back local shares instead of ADRs? And if not, what else can you do about it?

Unfortunately, we cannot answer any differently today from for example Q4 disclosure call. But we will try to better answer this topic and come back to you on that. Frankly speaking the reasons we are not doing that are still there and they are remaining the same.

Thank you. (OPERATOR INSTRUCTIONS).

And our next question is from the line of Olga Bystrova. Please go ahead.

Good evening. Olga Bystrova from Credit Suisse. First question is on the Ukraine. I think in the presentation you were mentioning that you are pursuing a strategy, a marketing focus on higher-value subscribers in the Ukraine, and it seems to be somewhat different from what we're seeing in your strategy in Russia.

In this light, can you explain why you're doing that in the Ukraine? What are the factors that make you think this will be a successful strategy? And what exactly are you trying to achieve in terms of revenue growth, margins, revenue market share, your position relative to the competitors?

And the second question, given that you are launching HSDPA now and given that you've signed, I think if I remember correctly, the agreement with Microsoft, can you maybe elaborate a little bit more how you are thinking about products, particularly in light of this Microsoft agreement? How the product could look like, what the pricing could potentially be, even if it's just sort of very conceptual terms at the moment? Thank you very much.

It's Leonid Melamed. Let me start answering the first question. So, I would want to stress that in Russia we also look for customers with high usage. Like, the incremental RPU of the new subscribers that we acquired through the last quarter, for example, was almost 95% of the average RPU for the database. So, I would just reiterate the statement that we are looking for active users in all the markets of our presence, especially on the highly penetrated markets like Russia and Ukraine.

We are definitely driven by the strategy of 3 + 2 of MTS on all of the markets, including Ukraine. So our targets are to protect our market share on revenues and subscribers to the level when it will be possible to balance the growth on top line in Ukraine and the proper bottom line for the Company, taking into consideration the competitive situation in Ukraine that we have.

So we [pretend] to grow revenues, we pretend to grow the amount of active subscribers, and we already have seen this quarter quite a significant growth in usage. And we would like to follow this path.

So the approach with Microsoft, it's a bit early to give a complete commercial description of our product. We plan this summer to launch the project with the cheap laptop with the HSPA SIM cards inside for the mass market in Russia. And based on the results we will think how to proceed with this in the other countries of our presence.

Okay, maybe follow-up questions on both of these. Basically, what I think what I was trying to get an answer from you on the Ukraine is that dynamics in the Ukraine, despite the fact that the market is, let's say from the penetration point of view is, I would call it in a similar position to Russia. Obviously, we have different market structure, but there still is a sort of -- I would like to see maybe some change in the development strategy of MTS, right?

And what are you seeing in the market currently that does not allow you to increase your revenue market share relative to your main competitor, Kyivstar? And will it happen? Or you would think it is likely more like you will be losing revenue market share, normalizing it at a certain level which you think is sustainable? And then, I will ask follow-up questions on the HSDPA.

Okay, so the difference in our market position in Ukraine is that the competition is not that benign and favorable as we have it in Russia. And there's definitely two players who significantly offer lower prices than Kyivstar and MTS. And that somewhat influences some changes in our marketing strategy, so we have to be more active protecting our customer base.

And from other hand our brand is quite new in Ukraine and though the trust is quite, is increasing, it is still a bit lower than the trust of the Kyivstar brand. So, we are somewhere in between the small players who are really dumping and Kyivstar who has the dominant position from the quality perception viewpoint.

And that influences some differences in our strategy, compared to Russia where -- and actually all the other countries of our presence, where the competitive situation and the positioning of our brand is significantly different.

We are not commenting our plans on increasing or decreasing market share. In general terms, we would like to keep ourselves flexible in order to create profitable growth and create sustainable ROIC for our shareholders. And dependent on the situation we will find ourselves in, any market, including Ukraine, we will react in accordance to create good returns on the investments, instead of being fixed to some promises on keeping the market share higher than today or lower than today.

Okay, great. Thank you very much. And on HSDPA, I just wanted to know, because I think you were talking about launching a project with Microsoft already in June, and we haven't heard anything about it, so I was wondering if this is on time or there could be delays or not?

And also maybe if you could elaborate a little bit on the structure of your relationship in this project with Microsoft; how the cost and marketing expenses will be allocated, et cetera? Thank you very much.

Thank you, we plan to start the project late June, beginning of July. It's totally in accordance with our plan. We, together with Microsoft, don't disclose the commercial conditions of our cooperation, so that's it.

Okay, great. Thank you very much.

Thank you. Our next question is from the line of Sergei Arsenyev. Please go ahead.

Good afternoon. Two questions, please if I may as well. Firstly, on the promotions of the last quarter, I'm wondering whether you've kept these promotions, and I'm specifically referring to the promotions with unlimited usage. So I'm wondering if these promotions were kept in the first quarter and whether you are still keeping them in the second quarter of 2008 as well, or whether the focus of your promotional activity has changed somewhat given that the number of minutes for contract subscribers has been stable, more or less, between the quarters.

So I'm just wondering if you can comment on that. Or if you are discontinuing them, are you putting some usage stops on very high users? So any light on that will be appreciated.

And the second question is much more general. Just on your pricing policy, I'm wondering to what extent you can pass on the rising inflation in Russia into your outgoing or retail rates, and whether this is something that you are thinking about and think that you can implement in 2008 when inflation can probably rise to 14% or if not more than that. Thank you.

Yes, this is Mikhail Shamolin again. On market tariffs and similar tariff plans, I can say that within the normal range of usage, those tariff plans are absolutely justified and are actually quite profitable.

We have had cases of abuse, increasing abuse in the fourth quarter in particular, when those tariff plans have been used by all kinds of various shady firms which used them to create so-called portals to put traffic, IT traffic, international IT traffic onto the local customers, MTS customers and others using those unlimited tariffs. And we have put a certain fair usage limit on them, and therefore, we have limited this sort of fraud, which helped the profitability.

But overall, the ideology of giving our heavy customers the fair amount of minutes for a fair price is still with us, and we continue to see strong sales in the white collar segment.

And answer to the second question about the pricing policy. Overall, as you know, the price is defined by the market. We're not alone in the market and even though we call the pricing environment in Russia benign, it is not that benign because you still see lots of new subscribers, subscriptions in the market. And you do see competition from three players, and also from local players, so it's there and we're fighting a tough game.

So basically we have to be with the market. But at the same time, we do believe that the inflation that we're seeing in Russia should be reflected in the market, in the pricing as well, and this is our ideology.

Right. And just for example, in your revenue guidance policy, for instance, when you're talking about 25% revenue growth in 2008, does this assume some form of [policy] pricing action? Or some compensation of inflation in your pricing rates or not?

The 25% gross is based on our business plan and our financial plan which is based on our marketing plan and sort of the actions, so I can't say that it depends on one factor or another, it's rather a combination of all various factors.

All right. Thank you very much.

Thank you. Our next question is from the line of Igor Semenov, please go ahead.

Yes, hi. I have a couple of questions, please. Firstly, on broadband, can you talk about the, in general terms, there were remarks that you were also considering launching fixed line broadband services. Can you give us any update on whether we should expect you launching some sort of fixed services in cooperation with Comstar or as you said some of the regional incumbents? What is the progress on that?

And also related, the launch of broadband HSPA services in Moscow, is the timing still end of 2009? Or do you think that maybe with the new regulator on board you would hope that some things could be pushed forward a little bit?

And also, I also would like to ask a question on the (inaudible) inflationary pressures. Are you comfortable that the rising inflation would still be offset by productivity gains, so you'd be able to maintain your healthy EBITDA margins? So you still stand by the 50% EBITDA margin? Thank you.

Okay, thank you, Igor. MTS take into consideration the [rent] positioning and the attention to the way our customers position us, and take into consideration our belief in the quality of the modern technologies in mobile telephony and broadband. We are and we will stay, and this is reflected in our 3 + 2 strategy, we will stay as mobile centric company. It means, it's not a part of our plan to go into any expensive acquisition in the fixed line nor in telephony nor for the broadband services.

And we really believe that the bulk of our future income is in the mobile sector, including mobile voice, mobile data, in 2, 3G and in the long perspective in [LT].

So, but there is also an opportunity for us at some stages to offer our customers fixed services. And we are mainly oriented in convergence to (inaudible) to deliver the combined service together with Comstar, together with the Siemens, and others [non-systemic] owned fixed-line operators, once it would be useful for our customers and profitable for all sides who -- or all of the operators who can come into this kind of unified and convergent proposal.

We already offer some of those convergent services together with Comstar. We already offer in Ukraine, the combined mobile and fixed solution to our corporate customers, and the list of these services will increase seriously until the end of this year. And we'll also grow [with the] WiMAX platforms in the year 2009 and in the future years.

So, in HSPA, the station in Moscow has not significantly changed from the time of our last call. And we can only say that there are positive developments on the regulatory level that could result in an early launch of HSDPA network in Moscow than the time we have mentioned.

So we from our side do our best to construct a network in Moscow, and we are in the process of construction of the network. So, in case we will be given the green light by the regulator, we could immediately switch on operations and start to service our customers.

And it is clear we cannot lose any momentum in Moscow on the mobile broadband at the time it will be available. There have been signs that we could get the allowance earlier, but it is not linked with the changes in the administrator. It is currently I would say, it would be too premature to comment on that, on the influences of those changes in general terms and on this particular project in detail.

I can just reiterate that we expect that we will be able to fulfill the guidance which we discussed during the Q4 earnings call. And we do think that with our initiatives on both stimulating the revenue and increasing productivity, as you specifically mentioned, we will be able to achieve this target.

Just to give you an example, I just wanted to add, if you look at the number of personnel that we have in the Company, and you compare it with the increase in business over the last two-and-a-half years, you will see that the business has increased very dramatically and the amount of personnel actually decreased.

Thank you. Our next question is from the line of Evgeny Golossnoy. Please go ahead.

Yes, good evening, everybody. Got a question on APPM and the minutes of use and the impact on RPU. If you look at the statistics across different markets you're operating in -- Russia, Ukraine, Uzbekistan, Turkmenistan -- and blended APPM, it's basically falling in dollar terms all since, well first quarter last year. From $0.055 roughly to $0.047 in this quarter. The question really is do you basically [hear] in APPM, basically falling, taking the market? Is that something that affects you?

And the competition may be pressing you to effectively reduce the APPM. And if that's the case, how far, how deep the average price per minute can drop total? What can be your view where it may end up by the end of the year?

Because I mean, if it continues to fall like that and it reaches $0.04 and then goes down to probably $0.03, it may well be on par with what people pay to alternative operators when they make fixed-line calls, like the calls using Golden Telecom fixed lines in Moscow. That's my first question.

It's Melamed. So, first of all, I'd have to say that the APPM development is due to the concrete competitive situation in each and every market; and there is no one concrete policy of MTS like on what should be an ideal APPM in the end of 2008 for all the markets of our presence. So it is relevant to the competition and our marketing strategy in each country and even the region, if you talk about Russia, of our presence.

Secondly, I have to say that looking at the Russian numbers, the level of decrease of APPM in Q1 has been significantly slower than it was in Q4 compared to Q3 of the last year. And taking into consideration the seasonality, when we don't have the extensive roaming calls at a big scale in the Q1, I would definitely say that it is quite a positive development of APPM in Russia.

When we think about APPM, we take into consideration various reasons. Of course, we take into consideration the [elasticity], we take into consideration the competitive situation, and we also take into consideration the requirements of the Company to provide serious bottom line and significant returns on the investments of the shareholders.

So, it has always been MTS is very much oriented on profitable growth and bottom line is always a concern for us. And especially since we have significant capital investment this year, we have to be even more attentive to the bottom line and what we have delivered. This exactly reflects our marketing strategy, and pricing is a part of our marketing strategy.

Okay, thank you. And my second question, if I may, completely different note. Do you have any plans to go beyond the FSU countries in which you are already operating, or are these the projects that potentially may be taken out by Sistema only?

I'm hinting at other markets like probably Africa or the Indian project that Sistema is doing. Can there be a role for you in these projects? Can there be threats top line and cost-wise to you as a company if there is any role for you in those projects?

Thank you. We have to stress that MTS is very much CIS-oriented company. And there are a lot of prospects for us in CIS since the networks of the mobile operators will join another [50] million customers for the next coming four years, and there is a huge broadband market, especially mobile broadband market in all of the countries of our presence to be, [to work]. So, there's a lot of room for a quite big growth in CIS.

But part of our 3 + 2 strategy is that we should be prepared to expand into the markets outside CIS in case there would be clear reasons, financial reason to do that. And we understand that there are some special prerequisites for telecom companies where scale is actually the key to the profitability to whether we should enter those markets or we should not.

So, we have our own views on different location and regions and our prospectives in development in there. There is no kind of a clear agreement that this is our shareholder who goes into the external-to-CIS markets and MTS only operates in CIS. So we are actually open to some options in our development and we don't want to limit ourselves by closing these opportunities from a strategic viewpoint. But once again, I have to stress that MTS is the CIS, is very much concentrated on CIS, and this is a total priority for us.

Currently, the Indian project of Sistema is totally managed and run by Sistema, and there is no business correlation between the project of Sistema in India and MTS.

Thank you. Our next question is from the line of Stephen Pettyfer. Please go ahead.

Thank you. Two questions, please. Firstly on -- back to the issue of dealer commissions. I just wondered, given your increased focus on the post-paid segment, I wondered if you have seen any of your principal competitors following suit on that strategy.

And secondly, just in terms of the share buyback, having spent $420-odd-million buying back shares in the first quarter, I wondered again, if you had any plans to cancel that or if you could explain the purpose of that expenditure. Thanks.

Yes. On the post-paid, this is Mikhail Shamolin, second question I think will be tackled by Vsevolod. On the first question, of course in this market everyone is competing for the white collar segment, because post-paid is mostly that.

And as MTS in our brand DNA and in our [cash] and in our current strategy, we are the operator of choice for the white collar as we are perceived to be the most quality operator in the market, and I think we are being quite successful in pursuing this strategy. Of course, everyone else is trying to do the same, but I think we are just getting our fair share of success.

Speaking about the share buyback, I would not surprise you by mentioning three key reasons for share buyback as we mentioned earlier. The key reason is -- the reason the ADR is bought back for M&A purposes, specifically due currency.

The other reason is potential reason of financing. And the third reason, which is a minor one, is the potential use in the option program. At this stage, we do not aim at canceling the ADRs given the complexity of the process and the financial consequences.

Thank you. Our next question is from the line of Vladimir Postolovsky. Please go ahead.

Hi, I'm sorry to go back to the previous question, but it's because of the line. I didn't get a proper line in. I was on the previous conference call; I wasn't aware that your guidance is effectively in rubles. So, if we -- year-to-date, I think appreciation of ruble against dollar was about 9%. So if we assume that the same pace of appreciation stays throughout the year, and let's say appreciation of the ruble was about 10% on average for the year, would you guide your revenue growth at 35%?

Vladimir, I wouldn't change right now the guidance, and I wouldn't, if I may, follow this line further, because we believe we've been quite explicit with our guidance. Thank you.

Thank you. Our next question is from the line of Jean-Charles Lemardeley. Please go ahead.

Yes, good afternoon. Just going back to the issues on traffic mix and so on and so forth. Could you actually give us an update on where your traffic mix stands? Particularly I would like to see what off-net to mobile is, off-net to fixed, and then incoming from fixed, and incoming from other mobile.

And if you could give us a sense on traffic and on revenue contributions from these, how the revenue contribution might have changed. You are saying the traffic contribution is not changing, but I guess APPM is going down, whereas interconnect is flat, so the revenue mix might change.

And also, if there's an imbalance at this point between what you're receiving and paying in terms of interconnect, both to fixed and to the mobile operators.

Yes. This is Mikhail Shamolin. In terms of detailed traffic mix, as it goes to the share of mobile to mobile, mobile to fixed, and so forth, we have not seen any big changes since the middle of last year. And I will not give you specific numbers now, but you will be able to get them from our IR department to the extent of what we disclose.

Overall, we -- after the CPT effects have taken place last year, we're not seeing a lot of changes in traffic patterns. And the greatest share of our interconnect traffic comes from the local outgoing traffic clearly. And we are trying to manage the interconnect cost with the structure of our tariff plans so we stay within the profitability targets that we set first for ourselves. That's pretty much all I can comment.

But are you a net payer or a net receiver of interconnect with the other mobile operators? And how does it work with fixed? (multiple speakers)

The number, actually, the situation fluctuates month-by-month; and certain months we are net payer and certain months we can be a net receiver. But overall, it's a little bit positive balance.

Okay, I'll follow up with IR, I guess. Thank you.

Thank you. Our next question's from the line of Anna Kurbatova. Please go ahead.

Good afternoon, my question is regarding Kyrgyzstan, given the recent messages in media about Bitel has registered as [new] telecom, are you planning and will you be able to claim this new company's assets, like they expect a new GSM license? So, if you win, for example, in the future the legal dispute, probably you will potentially get two licenses in Kyrgyzstan.

Thank you. We currently are not looking for the possibilities for operations in Kyrgyzstan, since we have to invest a lot of our efforts into the legal approach to going around Bitel; and that's [the situation].

So, excuse me, but you continue to your legal disputes, your efforts. And does it mean that just you are targeting nothing if you don't want to establish operations in Kyrgyzstan in the future?

We don't want to establish new operations in Kyrgyzstan, but we would like to protect the property that we believe has been properly purchased by us in the autumn of 2005.

Thanks.

Thank you. And our next questions from the line of Will Millner. Please go ahead.

Thanks. I've just got a question on Russia and CapEx. I'm just looking at this as total minutes going over the Russian network, just multiplying average subs by minutes of use. And the growth rate, it looks like it's around 65% year-over-year, which actually looks to be increasing every quarter. So I guess, two questions really.

Do you think the $1.65 billion of CapEx for 2008 as guidance is sufficient? And secondly, looking into 2009, and assuming given the revenue growth that you have at the moment, that that level of growth continues in terms of minutes of use going over the network, do you expect CapEx in 2009 to be higher or lower than in 2008? Thanks.

At this stage we are comfortable, and as we mentioned in our speeches, we are reiterating our guidance, full Group guidance of $2.5 billion for year 2008. Having said that, we are comfortable with the levels of capital expenditures in our Russian business and the number we discussed was carefully planned.

Moving forward, we definitely can reiterate that the CapEx-to-sales level is not going to be higher than this year, but at this stage, we're not giving out the absolute number guidance.

Okay, thanks. And my follow-up, if I can just ask on the share-based employee remuneration program that you talked about or the press release out recently. Can you give any kind of stair as to what the incremental costs might be of that program, assuming I guess a theoretical total shareholder return, and also what level of equity dilution there might be associated with that program? Thanks.

Well, this is Vsevolod again. Starting with the equity dilution, there would be actually none because the program is almost exclusively designed in the form of phantom shares.

Speaking about the effect on the OIBDA margin, again as it is fully dependent on the growth of capitalization, it would be very inappropriate for us to discuss the potential growth of the market cap of the business. However, again I can only reiterate that we are confident that the effect of the option program costs will allow us to achieve the target of 50% OIBDA margin.

Okay, thanks a lot.

Thank you, and there are no further questions at this time, gentlemen. I'll turn it back to you for any closing remarks.

Thank you, ladies and gentlemen. We want to stress that the Webcast of this discussion will be available on our website if you wish to replay the call. We'll welcome you at any time to contact our investor relation department for further questions. In the meantime, we appreciate your interest and wish you all a very pleasant day. Thank you.

Thank you, ladies and gentlemen, that does conclude our conference for today. We'd like to thank you for your participation and for using AT&T. You may now disconnect.