Mobile TeleSystems PJSC (MBT) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Mobile TeleSystems Third Quarter 2009 Financial and Operating Results Conference Call on Friday, 13th of November, 2009. I would now like to hand the conference over to Mr. Andrei Terebenin. Please go ahead, sir.

Thank you. Good day, ladies and gentlemen, and welcome to MTS conference call to discuss the Company's third quarter 2009 financial and 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 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 impact of 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 investment capital, technical matters as they pertain to our mobile communication networks, including equipment, licensing or network technologies, strategic actions, including acquisitions and dispositions, as well as the integration and management of Comstar, capital expenditures and operating expenses and macroeconomic developments within our markets of operation.

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, MTS annual report on Form 20-F, as well as other public filings made by the Company within the United States Securities and Exchange Commission, all of which are available on the Company website at www.mtsgsm.com, or that of the US Securities and Exchange Commission at www.sec.gov.

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

And now I will turn the call over to Mikhail Shamolin, President and Chief Executive Officer of MTS Group. Please, Mikhail.

Thank you for joining us today on today's call to discuss MTS third quarter financial and operating results. Traditionally, joining me on this call are Alexey Kornya, our Chief Financial Officer, Andrei Duboskov, Head of Business Unit Ukraine, and Mark Burden, Finance Director, Business Unit Ukraine.

We had a busy quarter at MTS. As we discussed at our recent analyst and investor day, we are focusing on a number of key initiatives to realize our 3i strategy, the acquisition of 51% stake in Comstar and development of fixed-line broadband and pay TV services in our markets, the continued rollout of 3G and promotion of data and content services to our customers, the ongoing development of our retail sales channels, the launch of our online portal, Omlet.ru, activity on the local and international capital markets, plus our ongoing focus on cost effectiveness.

All of this hasn't taken away from our focus on our core business, where revenues for the Group grew 20% Q-on-Q to nearly $2.3 billion on the back of healthy subscriber additions, a seasonal increase in voice usage, increased data consumption and a growing contribution from our retail sales. The Group's OIBDA increased 11% Q-on-Q to $1.1 billion, with an overall margin of 46.9%.

Less the effect of our retail investments, the margin improved from Q2 to 50.7%. Though we see continued impact from the macroeconomic uncertainty, we realized growth Q-on-Q in our Russian operations of 10% to RUB56 billion. In addition to the seasonal dynamics of our business, we are succeeding in driving our active subscriber base and realizing 50% year-over-year growth in both data content and traffic revenues.

We also witnessed a greater contribution from handset sales, which exceeded RUB3.2 billion, or 5.7% of revenue. We also continued to be successful in our pricing schemes. We realized a 5% gain on effective pricing despite slightly weaker seasonal roaming and long-distance calling revenues.

Our 3G network rollout is on schedule, and we currently have substantial coverage in 41 cities. The news flow over the past few weeks suggested the decision to allow big three operators to launch full services of 3G in Moscow is imminent. We welcome this news, as it may provide a catalyst for greater adoption of data services and upside for MTS because of our high share of the corporate and high-value user markets.

The expansion of our 3G network, combined with the rising popularity of USB modems and the overall proliferation of 3G devices in the market will undoubtedly lead to further data revenue growth.

In Ukraine, we saw growth of 12% Q-on-Q to reach UAH2.2 billion. We attribute this growth to seasonal factors, including increased usage in roaming, as well as certain marketing initiatives that adjust limits to our unlimited tariff plans. Changes to these tariff plans are allowing us to better monetize our customer base, while we are seeing a steady improvement in our brand perception and active subscriber base.

In Uzbekistan, our revenues grew by over 4% Q-on-Q to $101 million. Despite increasing competition and the impact of economic slowdown, MTS continues to demonstrate a healthy subscriber growth, with over 262,000 additions during the third quarter.

Our Turkmenistan operations showed a top-line growth of 40% Q-on-Q to reach TMM123 million, with close to 249,000 subscriber additions. With penetration levels in the mid 30s, we see an excellent opportunity to continue capitalizing on the growth potential of the market.

In Armenia, revenues grew 9% Q-on-Q to AMD19.5 billion, in line with increasing activity levels of our subscribers, as well as positive seasonal factors. Our current products and services portfolio and the rollout of our 3G network -- we already cover around 50 municipalities -- provide us with the necessary flexibility to face the challenges in the coming periods.

And now, Alexey Kornya will discuss the Group's financial performance. Please, Alexey.

Thank you. For the third quarter, Group OIBDA increased by 11% quarter-on-quarter, to $1.1 billion. As previously discussed, the build-out of our monobrand retail and increased sales of handsets, which rose from 3.2 percentage of revenue to 4.5 percentage of revenue, puts additional pressure on our margins.

In addition, increased consumption of value-added content services and the seasonal increase in roaming led to a decrease in our OIBDA margin of over 1 percentage point. OIBDA margin for the Group totaled 46.9%. However, our core mobile services margin in Russia remains strong at 50.3%.

In Ukraine, our OIBDA margin improved to 48.2%, as we continued to increase our active subscribers and realize certain scale benefits from revenue growth that exceeded the overall market performance.

In Uzbekistan, we continued to see fall of OIBDA margin due to a greater pricing in the marketplace and the ongoing impact of the economic crisis. Though we have seen successive quarters of margin deterioration, we believe that the margin will stabilize at the Q3 level from this point onward.

In Turkmenistan, margins have normalized following one-off payments to the government of interconnect pricing in second quarter 2009.

Net income was $494 million for this quarter. Key drivers included revenue growth and strong OIBDA. Operating cash flows improved to almost $784 million for the quarter, largely a reflection of the health of the underlying business. Our cash level at the end of the period exceeded 3.8 billion, as we closed on RUB59 billion in external financing for our acquisition of 51% stake in Comstar prior to period's end. The closing of the deal and drawdown happened in October, after the quarter ended, so naturally this figure is higher than what is now on our balance sheet.

As we discussed at our analyst day, we have risen our CapEx guidance for year 2009 to $1.8 billion, due to strengthening of the ruble and additional investments in Central Asian operations. This could edge higher as the ruble appreciates. For the period, we spent $461 million. With the financing for Comstar, total debt neared $7.2 billion.

Though our net debt last 12 months ratio now equals 0.7 times, a figure that still reflects the strength of our financial position, this has risen since the beginning of Q4, due to the closure of the Comstar transaction.

We had a busy quarter in terms of fundraising. In addition to the funding raised for our Comstar acquisition at the end of June, we signed commercial finance agreements to receive three separate loans for the total amount of EUR413 million, some of which boasts a tenure of eight years.

In mid July, we extended our May 2009 syndicated loan by an additional $100 million due to the high appetite from international investors. We have also tapped local debt markets as part of our continued strategy for hedging our overall debt portfolio.

We also placed two ruble bonds since the beginning of second quarter for a total of RUB30 billion in May and July. This is part of our overall strategy to rebalance our debt portfolio towards more exposure to ruble-denominated obligations.

We also recently announced the amendments in terms of our EUR300 million, where we lowered its primary interest rate from 12% to 8%, covered a portion of it to rubles, with an interest rate of 13% and extended the terms of the facility.

With the significant debt coming in second half 2010, we will continue to look for ways to both leverage our financial strength and take advantage of improving credit markets, to ensure that the execution of our 3i business strategy and realization of our financial management practices are in no way hindered by the factors of the global credit markets.

Thank you, Alexey. During our recent days, we elaborated on a number of issues pertaining to changes in our market, our recent M&A activity and our outlook for financial year 2009 and beyond.

For 2009, we raised our revenue guidance to $8.25 billion. This reflects a stable outlook on both consumption and the exchange rate of the Russian ruble and Ukrainian hryvnia to the US dollar. This also implies single-digit ruble growth in our Russian operations and a single-digit hryvnia decline in Ukraine. This may be conservative, depending on currency movements, as well as how sales of handsets and accessories develop in the upcoming holiday period.

For 2009, we estimate the Group OIBDA margin of our core mobile service business to be in the high 40s percentage range. As we have seen in previous quarters, retail and handset sales will continue to exert downward pressure on this margin.

Alexey spoke about our CapEx for 2009, but for 2010 we estimate that our core mobile business will require spending of roughly 22%, 25% of sales. Most of this investment will go towards our build-out of our backbone network, as well as expanded 3G coverage in Russia.

In Central Asia, we will increase our network deployment as these markets grow, though in Ukraine we do anticipate a reduction in our capital expenditures.

We also shed light on the growth prospects in our market. Overall, we see growth in the Russian telecommunications market of at least 6% CAGR through 2012, provided currency and macroeconomic dynamics remain constant.

Russia is fully penetrated in terms of subscribers, and though we see significant growth potential in mobile voice, this will depend more on the economy, rather than on our marketing or pricing efforts. Data will, too, remain a key focus of ours moving forward. Content and data revenue are both up 50% year-over-year, and we are aggressively rolling out our 3G networks in our markets.

We also anticipate significant growth opportunities through our fixed-line assets, in particular broadband and pay television services in the regions of Russia. Our acquisition of Comstar provided us with both exposure to this growth market, as well as high-quality assets in Moscow and other regions in Russia.

The combination of revenue and cost synergies from this deal are expected based on our 51% ownership to have a net present value of over $200 million. However, the true value of this deal will be in delivering a complementary platform for growth in order to transform MTS into the leading integrated operator in the Russian market.

Lastly, I want to clarify some confusion in the marketplace about MTS's plans internationally. Comments were made after our analyst day that suggest that MTS is buying into the Indian market through Sistema Shyam TeleServices Limited in 2009 and 2010.

Let me put this as plainly as I can. MTS has no plans to buy into India. We are continuously looking at markets abroad, but our focus remains on developing markets in Russia and the CIS for telecommunications services. This is the very essence of our 3i strategy, and in our view the best way to maximize value for all of our shareholders.

Thank you for your time, and it would be our pleasure to take your questions.

Thank you, sir. (Operator Instructions)

Thank you. Our first question comes from Tibor Bokor from OTKRITIE. Please go ahead with your question.

Hi. Good evening. I would like to ask first question about increase in the working capital. I have seen significant increase in the third quarter in especially trade receivables. And I was wondering what part of your business this increase is coming from, and what's your view on this item going forward? What is your guidance there? Thank you.

Alexey Kornya.

Yes, the increase in trade receivables which you see on our balance sheet is mostly associated with the roaming, which is seasonally high in this season; and it has some delay in payments from our subscribers for the period they were in roaming. And the rest is associated with our monobrand investments, which require additional working capital.

If I may, a follow-up question. Also we have seen a big increase in data content, especially in Russia. Can you give us a little bit of light on this one -- this item -- revenues from data content?

Yes, this was due to a number of activities -- marketing activities, we took in the data -- sorry, in the content area, including increased sales of content, stimulated by our developments of on-net portals and basically other activities.

Is the growth sustainable, or what should we expect going forward for this item?

I don't think it is sustainable at those kinds of levels.

Thank you. Understood. Thank you.

Thank you. Our next question comes from Alex Kazbegi from Renaissance Capital. Please go ahead with your question.

Yes, good evening. I wanted just to clarify still the reasons for the usage fall in the Q3 in Russia. And you just mentioned especially with regard to the trade receivables that actually it was seasonally strong roaming, rather than what you mentioned in the presentation, it was a seasonality was behind that.

Given also that the charts which you gave us on the October 19th actually did show that fairly good stability, both in the consumer and the corporate market. So if you can maybe give us a bit more sort of clarity, what was the reason behind it and whether this is something which is getting out of trend or which is the beginning of the trend. And overall maybe you can mention something on the signs of recovery in the corporate spending.

The second question I would just wonder. Again, I'm not trying to see what the competition is doing, so to say, but I was just wondering, I mean, if you could contrast why, for instance, your performance in Ukraine was so much better than, for instance, Kyivstar's. And is there anything which we could sort of think that this can continue?

Clearly, Kyivstar's sort of ARPU came down, yours was much stronger. So I was wondering, again, if you could shed some light behind that and whether we could see this as something which would sort of continue.

And the last thing, on the data services. I believe you mentioned, Mikhail, that it was 50 regions you are up and running on the 3G at the moment. Could you maybe tell us how many SIM cards now are USB -- for the USB modems have been sold?

And, in general, what you think is the penetration curve within your subscriber base? How many of the existing subscriber base in the regions, once you are up and running on the 3G, would be actually opting to buy the SIM cards with the USB? I mean, is it 5% of subscriber base you would think over time, and over which time that would be? Thank you very much.

Okay, thank you for your questions. The first question, on MOU, I mean, first of all MOU stayed more or less stable. We had 216 minutes in Q2 and 213 minutes in Q3. So basically it's stable, but the slight decrease was mainly due to a vacation period, people traveling into roaming areas and therefore talking less in roaming than they talk typically domestically, and therefore MOU going down.

At the same time, roaming revenue of course this year was much less than roaming revenue last year, due to still suppressed consumption in the corporate segment and heavy segment.

Sorry, but didn't you just say that the trade receivables increase was because of the seasonally high roaming, which is what we would expect?

Yes, I mean, roaming in Q3 is always higher than roaming in Q2, but it's not as high as we expected it to be, as it would have been normally.

Yes, but it would be higher than Q2, for instance, so you would expect to be more minutes, I guess.

Well, more minutes in roaming, but less minutes in domestic.

Right. Okay, so more expensive minutes, but overall less minutes.

More people traveling in Q3, more people talk on roaming, therefore more roaming revenues, but less people talk domestically, so less minutes domestically.

Yes, understood.

Okay. And corporate segment still remains suppressed. We had budget cuts from our corporate customers, mobile telephony, in the end of 2008, beginning of 2009, and those budgets have not been increased yet.

So next year, if economy starts to relax and the corporates relax the mobile spend a bit, I believe we can have an additional bonus in a form of increased revenues from corporate segment, which I think is going to happen, because with increase in business activity, corporate people start to travel more and therefore generate more traffic.

Now, on performance in Ukraine better than Kyivstar, this is basically a result of our Ukraine strategy, which we announced pretty much over a year ago, and the strategy was to offer same quality of network and service as Kyivstar does and same kind of brand perception, but at a cheaper price. And essentially, this strategy is beginning to work. We still are cheaper than Kyivstar, but that is reflected also in the margin of our Ukrainian business, which is significantly lower than Kyivstar margins, but because of that we outperformed on the revenue growth.

And we are certainly hoping that this trend may continue, but of course it depends a lot on the market behavior of other players and there cannot be any guarantees there.

Data services -- we do have 50 regions covered. As far as SIM cards and USB modems, we are currently selling over 100,000 USB modems a month; this is sort of running rate. And altogether, from the beginning of the year I believe we sold around 700,000 or something like that.

As far as what percentage of the customer base will buy those modems, it is pretty difficult to say. We don't have a clear estimate, but we are hoping that the upward trend will continue, because clearly those modems are not only used in laptops; they're also used in desktops at home as a replacement for ADSL connection, which in many cases is a slower connection, or in some cases does not exist. And a USB modem is essentially a plug-and-play kind of offer, which our customers clearly like.

But would you just say for instance 10% of your subscribers you qualify as sort of high end plus corporate. I mean, would you think overall the penetration curve will be less than that, or it can actually exceed it, because it's basically a home device, as well?

Well, I would say that around 25% of our customer base clearly qualify -- 25% to 30%, I would say qualify for those modems. How many of them will want to buy those modems, I think we'll have to see. It's very difficult to make those kinds of predictions.

Of course. Okay, thank you very much.

Thank you. Our next question comes Kevin Roe of Roe Equity Research. Please go ahead with your question.

Thank you, a couple questions. First, following up on the USB modems -- what's the average ARPU for those customers?

It's over $10.

Okay. In Russia, how has October and November store traffic trended, relative to the third quarter? Have you seen any changes in promotional or pricing activity?

And, as you look forward into the holiday selling season, are you expecting similar -- a similar competitive landscape versus last year, more rational, less rational? That would be helpful. Thank you.

Well, our average traffic in our retail network is around 170 phones sold per store, which is a little less than what the leaders of the market, such as Euroset and Svyaznoy, are demonstrating; they have levels of around 200. But I believe for a monobrand, especially a startup monobrand, it's a pretty good indicator. We have no reasons to believe why we should not be able to also benefit from the holiday sales.

We have some interesting offers, including MTS-branded phones, which actually came and were accepted quite well by the market. We were able to benefit from our Vodafone partnership. Essentially, we got models that Vodafone sells in their markets at a very good rate. We branded them MTS. And we ordered in the volume of sort of tens of thousands as a first order, and we ran out of those orders pretty quickly.

So that was quite a successful campaign and we are thinking about broadening the range of such phones. So, overall, I believe, that we are pretty well on the way of making this monobrand business a success.

And a quick follow-up on smartphones. You mentioned the growth there. What percent of your gross adds in the quarter were smartphones, in Russia, for instance?

Smartphones.

Yes.

I wouldn't be able to tell. We can send you the numbers later. I just don't have this level of detail in front of me.

Okay, thank you.

It's about 10%.

10% of your handset sales are smartphones. Thank you.

Thank you. Our next question comes from Nadejda Golubeva from UniCredit. Please go ahead with your question.

Yes, good afternoon. Congratulations on good results. Just one I want to talk to you, when you said about the 6% recovery you expect over a five to seven years period, are you talking in constant prices? Does it include inflation or not? And if it does not include inflation, my question is how much in excess of inflation do you plan to grow in Russia, say? This is the first question.

And, secondly, I wanted to ask you, am I correct in understanding that you have not paid dividends to (inaudible)?

Well, 6% does not include inflation, clearly. And the inflation rates anticipated are the more or less official inflation rates I think, under 10% in 2010 and then going down to I believe around 6%, whatever the official statistic is. And on dividends, it's up to Alexey Kornya.

Yes, we are paying dividends proportionally to our shareholders, so the paid out portion of dividends was spread out among all shareholders, including (multiple speakers).

Okay. Okay, thank you very much.

Thank you. Our next question comes from William Kirby of Nevsky Capital. Please go ahead with your question.

Thank you. Yes, I have two questions, please. Firstly, what's the approximate margin of the data content business? Or, if you don't want to be that specific, how does it compare with your other businesses?

And then, secondly, given the change in your debt mix, what sort of blended interest rate should we be expecting for 2010 for example? Thank you.

The margin on data and content business ranges from 40% to 60%, depending on the type of business, but overall it closer to 40% than it is to 60%. And on the cost of debt, Alexey Kornya will cover that.

Yes, the blended cost of debt is about 11%, 12%, for 2010, as it is right now.

Okay, great, thank you.

But our debt strategy -- I just wanted to add to what Alexey has said. Our debt strategy is to keep debt roughly 50% in rubles, 50% in other currencies, such as dollar and euro, to minimize the cost on one hand and to hedge against the devaluation risk. And we are working now on reducing the interest rates in rubles, following the central bank reduction of interest rates in Russia.

And elaborate a little bit more on your question, I can say we have a program on restructuring our debt portfolio with the goal of decreasing our cost of debt. And as a first step in this direction we mentioned the restructuring of our Gazprom loan, so we will continue this direction. We are in the process of negotiation and we are looking ahead for the further reduction in the cost of debt for us.

Okay, thanks very much.

Thank you. Our next question comes from Alexander Balakhnin. Please go ahead.

Hi, that's Alexander Balakhnin from Goldman Sachs. Two questions from me. The first is on your outlook for the usage in Russia, which has stabilized in the third quarter. When do you expect we'll start seeing the usage expansion in Russia? What do you think should happen before that?

And the second question is on the sustainability of the Ukrainian top line and profitability improvement. You said that it's basically the fruits of your strategy you started a year ago, but at the same time you say that CapEx for the next year for Ukraine will be lower, so you are still quite conservative on Ukraine. Am I right?

Thank you for your question. On usage in Russia, we believe that the natural usage target for average consumer should be around 500 minutes. We see that in Ukraine, we see that in Uzbekistan, and we see that this is driven primarily by budget limitations of individual consumers. And we believe that Russia is going to be heading toward those kind of usage levels, as well.

The question of speed -- it clearly depends on the speed of recovery in Russia, because we don't have intention to cut down prices in Russia, and we certainly hope market will stay relatively rational on the pricing side. But, of course, if the economy starts to recover and consumers gain confidence in the future, because a lot of sort of constraint on the usage growth is psychological and not purely financial, because people expect the situation to worsen and not to get better.

So if the expectations change and the economy starts to recover, it may happen sooner; if not, it will happen later, but it will happen in any case. So we believe, in other words, that there is still a substantial potential for voice revenue growth in Russia over the next few years.

Sustainability of Ukraine top line -- again, it depends a lot on the market. We do have lower prices in Ukrainian market than our main competitor. Our main competitor has not yet responded to this, because presumably they have more to lose than to gain from reducing prices to our level. But, if this happens, obviously our growth will stop.

On the other hand, our strategy is also to steadily increase the pricing. In Ukraine, if you remember our discussion a year ago, we unfortunately ended up in the situation back in 2005 and 2006 where we had a reputation of an operator with not such a good quality network and the highest price in the market. And we had to work pretty hard to change this perception into a good quality operator with affordable prices.

Of course, we are interested to continue to stay with this kind of image, and of course if we are able to stabilize ARPU, and we were able to stabilize ARPU in Q3, and then increase it going forward, we will generate extra revenues. So I will not promise you that this trend is 100% sustainable, but we are certainly working hard to increase the chance of that.

Okay, thank you.

It's Andrei Duboskov, Head of Business Unit Ukraine. I am going to add some information for understandability, speaking about CapEx. Just now we have a very good national coverage, speaking about 2G in Ukraine. And we have our own backbone network and it's enough for us. That's our strategy which we successfully established earlier. Thank you.

Thank you.

Thank you. Our next question comes from [Victor Klemovich] of BTB Capital. Please go ahead with your question.

Good evening. I have a question regarding OIBDA margin of Russian mobile business. Can you please tell us like a breakdown of the effect for such a decrease of 0.6 percentage points of OIBDA margin from 50.9% to 50.3%? Thank you.

The key reason for that is increase in commercial expenses related to sales. The Russian market, if you look at 2009 and compare it to 2008, has increased the volume of SIM card sales, as a result of increased competition following the acquisition of Euroset and all the changes that took place in the market.

I don't think that the behavior of players in 2009 vis-a-vis SIM card sales was rational. And I think that the market should realize that the amount of money spent on acquiring new SIM cards -- I mean, it's hard to say that these are good quality customers given that the penetration is over 100%.

So this spend from my perspective has been excessive in 2009, and we believe that we should be able to bring it down in 2010.

And, of course, the volume of sales that we generated in Q2 and Q3 is substantially higher than in Q1. We were increasing our sales numbers to compensate obviously for Euroset factor, and that was the main driver. But Alexey will add some other information.

Obviously, also, as I mentioned in my speech, the factors, obviously there were factors which drive the margin up and there were factors which pressed the margin down. Among the factors which pressed the margin down, as I mentioned, that increased share of revenues from value-added services, which were lower than 50% of marginality. And roaming services of own subscribers, which had also relatively modest margin. So, those factors also influenced our margin.

Alexey, but may I just clarify? Mikhail, just two questions before, he said that content business margin is around 40% to 60%, so it's nearly the same as the overall OIBDA margin. So is it -- it shouldn't be -- there should be a pressure from that side, I assume, with such figures.

I said that most of the revenues from content are closer to 40% than to 60% when I was answering the previous question, and most of the additional revenue from content in Q3 was 40% and less, rather than 60%. But, again, as I said, the majority of this was due to increased cost of sales of SIM cards.

Thank you. Our next question comes from Olga Bystrova of Credit Suisse. Please go ahead with your question.

Yes, good evening. My first question, about potential sort of outlook for regulatory environment, because there was obviously some noise in the press about telecom industry looking at various changes to the regulatory framework or mobile number portability, roaming prices, et cetera. Can you talk a little bit about what do you expect to happen, why are they doing this, and how strong is your position in lobbying these potential amendments?

The second question is on mobile broadband pricing. We've seen some moves from your competitors, specifically lowering traffic prices in some regions and even offering some of the bundled USB modems in the tariff plans. If you could talk a little bit about the dynamics that you see in this particular segment for 2010.

And finally, just to come back on India, I know that you talked today again that you're not planning investments. However, recently, you've also in the press -- you've been saying that you will consider if free cash flow will be positive or EBITDA will be positive. Can you just clarify if it's definitely out of the question or you will still be looking at the business case, or monitoring the business case going forward? Thank you very much.

Okay. On regulatory environment, first of all, we do not typically comment the activity of the regulator; we can only state our position.

On MNP, we are against MNP because we believe it will cost the industry overall between $100 million to $300 million to implement MNP, and we do not believe that this investment is justified. We made our position to the regulator very clear, and I believe that the MNP issue is at least of no immediate concern to us at this point. It may come up again, but it is not a question of the near future, as I understand the situation.

On the in-country roaming and roaming within CIS, there also have been discussions, but there is no clear conclusion yet and therefore it is premature to speculate on this. We have what I believe very market sort of oriented roaming offers, market prices, and options which consumers can use to lower their roaming costs. And basically if the consumer is concerned about roaming costs, there are a number of add-ons that the customer can use to optimize the cost, which I think is pretty efficient.

On the mobile broadband pricing, as it typically happens when the new market opens up and starts developing, competition is strong, and particularly in the St. Petersburg area there has been a number of fights for unlimited pricing in broadband.

I believe that pricing will be to a very large extent a function of capacity and investment, and too-low price will generate a significant amount of traffic, which will congest the network and will not allow quality transmission. Therefore, either prices will have to be raised or additional investments will be made, which I don't think is very rational, to invest a lot of money in capacity which costs very little.

So I believe that the market will come back to rational behavior after some period of volatility, I should say.

And, finally, on India, we do have -- as we've proven in the past, we buy assets abroad and in Russia not because we want to increase the size of the business at any cost. We buy assets because we want to invest money and get return on those investments. And pretty much all the investments that we have made, besides the famous Kyrgyzstan situation, where we actually -- besides that situation, we made our money back and we have no intention of changing this kind of behavior and logic in the future.

Therefore, the same applies to India. We of course are interested in international expansion, but we are interested in international expansion to create value, and not to destroy value. Therefore, whatever assets, including India, we are looking at should fit into our financial criteria and generate the kind of investment that we are looking to get.

And that's why I'm saying that we are not buying into India, because we don't believe that in the next year or in the nearest future this asset will satisfy our criteria. It's as simple as that.

Okay, thank you very much. Just maybe a small follow-up on regulation question. You've basically answered what I've asked, but are you talking to the regulator about any other issues currently, besides MNP and roaming prices?

And the second one, if you can comment on the sort of related to mobile broadband pricing and mobile broadband business in general, value-added services ARPU in Russia declined in the third quarter. It doesn't seem to be necessarily seasonal dynamics, as a percent of revenues, sorry. It declined as a percent of revenues, as a percent of ARPU. Can you specify why is that?

On the first question, we are talking about many issues, both sort of on the cost side and the revenue side with the regulator. On the cost side, we are constantly having a dialogue about our investment cost, and the regulation which can make this investment cost smaller with all the permissions, frequency allocation rules and so on and so forth.

On the revenue side, we are discussing LTE possibilities, because we see internationally that LTE networks are coming into play, into commercial use in the United States, in Southeast Asia, in Europe, and we believe that Russia should not be an exception, and we may even leapfrog part of 3G investment and go straight into LTE. So this is a discussion we're having with the regulator, besides many others. But there is nothing specific that I can sort of announce today.

And on the VAS issue as a percent of revenue, you were talking about the first quarter? I'm not sure I understood the question correctly.

Yes, if I got the numbers right, the VAS as percent of ARPU in the third quarter is about 18% and that was 19% in the first half, let's say. Maybe not a big difference, but historically it has been continuously growing. Elsewhere in the world it's above 20% already, so I just wanted to know what's going on there. Thank you very much.

If I may, I'll answer this question. We have increased the share of value-added services in the third quarter, comparatively to the second quarter. But if we are talking about first half of the year, then usually first half of the year is like seasonally strong versus, say, fourth quarter in terms of value-added services. So we increased our share of value-added services in the first half of this year versus second half of 2008.

And, currently, since we are developing yet our 3G network, we believe that we are not yet at the level of 20% of value-added services as a percentage of revenue, but we are from year to year increasing share of value-added services as a percentage of our revenue, if I answered your question.

Yes, so there is nothing specific that is going on in the third quarter that you can highlight, right?

Well, we can say that -- we just can reiterate what Mikhail said, that due to some promotions we increased our value-added services revenues and subsequently the share of value-added services increased in our total revenues.

Okay, but they didn't. That's why I'm asking. That's okay. If you don't have an answer, that's fine.

If you look at the figures, we did.

Okay.

Thank you. Our next question comes from Yavuz Uzay from Goldman Sachs. Please go ahead with your question.

Thank you very much. Actually, two of my questions have been already answered, so I have one short question left. Which is, on page 12 on your presentation, you're mentioning synergies after the acquisition of Comstar amounting to $200 million NPV. So two questions related to this one.

A, how long do you think it will take to execute all these synergies? So in terms of cost savings or revenue uplift, when do you think that the business will reach its mature cost synergies level?

The second question is, this is the synergies to be seen at MTS level, I presume. This is not the combined synergies that will be shared by MTS and Comstar, right?

Yes, these are combined synergies. Most of them will be seen on the MTS side, the majority I would say. And cost synergies, SG&A and network, will be delivered most likely within 12 months' time; and cross-sales in consumer and corporate segment will take a little longer, because that will require building modernization and implementation of those conversion products.

Thank you very much.

Thank you. Our next question comes from Igor Semenov from Deutsche Bank. Please go ahead with your question.

Yes, hi. Thank you. I have one question, two follow-ups. One question on the share of postpaid and gross additions, it seems like there is a very significant increase in postpaid. Can you comment on that, where is this coming from? Is this mainly the USB sales that sort of come from -- with some sort of contracts?

And also the postpaid, you mean this is like advanced -- it's still advanced? It's like prepayment, only there is a monthly charge involved, or is it truly postpaid additions?

And two follow-ups is on the margin in Russia, you're saying that it's mostly related to commercial expenses, which I understand is part of like SACs, but the SACs are going down, so an you maybe explain again why is the margin decreasing?

And, finally, just come back to the revenue guidance, what Nadejda was asking. Did I understand correctly, the 6% expected growth in rubles, this is like real terms? It's not nominal, so we have to like add inflation expectations to that number? Is that a correct understanding? Thank you.

Okay. On the postpaid, I mean, basically in Russia the definition of prepaid and postpaid is slightly different than in the other markets, and this is driven by the fact that we don't have a typical phone subsidy with a two-year contract, which is considered a classical postpaid, when the customer cannot get out of the contract and the only way he can get out is to pay the full amount before getting out. This does not exist in Russia, and typically we call postpaid customers as the customers who have some form of credit from us.

So if we increase the share of our postpaid customers, typically it is an increase of customers who have credit from us, or sort of pay after they talk and not before. So when we are steadily moving our customer base from prepaid to what we call a credit form, because the credit form stimulates the usage. People simply talk more when they don't get cut off when they reach zero.

On margin in Russia, yes, SAC is going down, but the amount of gross sales is going up, and therefore the overall amount of commercial expense is going up, and therefore the margin is decreasing.

And on the revenue guidance, I will revert to Alexey Kornya.

Yes, revenue guidance, it's in nominal figures, which are inflation inclusive, so you should not adjust for 10% of inflation this year.

Right, okay, and then can I just clarify on this postpaid, this credit scheme? So it's not like people are actively subscribing for tariff plans with like these Maxi plans, for instance, that envisage a monthly payment. It's literally you're just adding or they are opting for this service to have a credit line with MTS? Is that correct?

It is both. We are selling actively the Maxi line of tariffs and obviously new customers who buy those kinds of tariffs, they receive credit together with the tariff.

But also we have a scoring model for our existing customer base. We select customers whom we believe will not generate bad debt, and we are advertising through CRM and assigning credits to those customers. And our bad debt is very well under control.

Great, thank you very much.

Thank you. Our next question comes from [Tatanya Bordnikaya] from UBS. Please go ahead with your question.

Good afternoon. Tatanya Bordnikaya from UBS. Two questions, if I may. The first one, can you please comment on the level of cash as of today?

And the second one, you mentioned that you expect debt composition by currency to be 50% in rubles and 50% in foreign currencies, so where do you see this debt composition by the end of 2009 in terms of rubles, euro and US debt? Thank you.

For the first question, we have more than $2 billion of cash available as of right now, and estimated debt as of the end of the year, it's about -- it's slightly above $7 billion.

And how much would we expect in rubles and euros, please?

We expect that the proportion will stay where it is right now, so we'll have 60% of our debt in rubles, including hedge, and 40% in hard currencies, mostly in US dollars.

Thank you.

Thank you. Our next question comes from Stephen Pettyfer of Merrill Lynch. Please go ahead with your question.

Yes, hi, thanks. Two questions, please. First, on the churn figure in Russia, could you comment on what's driven that and where you see that going over say 12 months as your monobrand policy takes effect?

Secondly, on the subject of LTE, it didn't sound like you could give much color, further to your comments already, but can you give us any idea of sort of anticipated timing on availability of spectrum and so forth? Thanks.

Yes, thank you for your question. Churn in Russia has clearly grown from Q2 to Q3. It has not grown significantly. It's 10.4% in Q3 if you look at Q3 of 2009 as compared to Q2 of 2009; but compared to Q3 of 2008, where the churn was 15.8%, it's actually less. Churn is to a very large extent a factor of sales in Russia these days.

And given that the amount of SIM card sales in 2009 was inflated, therefore it's driving churn. I'd say that 90% of our churn are sort of $1 to $3 ARPU customers in any case.

And we expect churn going down with the amount of SIM card sales going down, which I believe should be the market behavior. We cannot guarantee it, but I would say it would be logical for the market to behave in this way next year.

Do you have any numbers in mind for where you think it could be in 12, 24 months?

It would be hard to say. We definitely have an intention to decrease churn, and I cannot give you the exact figures, but I can tell you that we reduced the churn very substantially in heavy segments. And the mass, the lower mass segment, which is switching between operators and is having two, three, four sometimes SIM cards, in this segment controlling churn is extremely difficult. And the only practical way to do it is to decrease sales promotions for the market overall.

Now, on the LTE availability of spectrum in Russia, it is a complex issue at this point and there is no clear answer to this question. Theoretically, spectrum is available, so there are no hard limitations on the spectrum, but it hasn't been allocated to anyone, and even the licensing for LTE is not yet clear. For instance, WiMAX standard is working in Russia as the standard for broadband Internet, but WiMAX itself is not licensed; only the equipment is licensed.

But perhaps LTE can be done in the same kind of way, but the frequency is an issue, especially the lower band of the frequency within 700 to 800, because it is unclear yet what percent of that will go to digital television, which Russian government has an intention to develop, and which will be available for operators.

Thanks. And, as a follow-on to that, if I can ask, do you anticipate that there will be any further 2G or 3G spectrum available if some of your regional competitors want to expand their footprint?

There is not much new spectrum in both 2G and 3G. So I think it will all depend on what's going to happen to the frequency allocations and licenses which were auctioned off in previous years to various legal entities who have not built networks up to now, and I think that will depend a lot on that (inaudible) and other situations -- difficult to say. I don't expect any significant frequency allocation in the future in both 2G and 3G.

Thank you very much.

Thank you. We have a follow-up question from Nadejda Golubeva from UniCredit. Please go ahead.

Seems to me that there is some confusion on your revenue forecast, because if you are saying that this is in nominal terms and it comes to that you are growing basically below inflation, 6%, yes, which is not very encouraging from the point of view business case. You are saying that this is net of inflation, and we come to 16% revenue growth next year in ruble terms, which it seems a bit like challenging. So can you possibly elaborate on what exactly you meant?

Yes, we answered already -- I answered to this question a few minutes ago. We do mean nominal -- in our forecast, we do mean nominal growth rates, which are inclusive of inflation already.

So basically this means that you expect that your Company will be growing below inflation, yes? Because 6% for inflation, this I think it's a bit optimistic. So I think inflation is going to be a bit high on average, no?

Average over the period mentioned in the presentation, yes.

But --

You mean higher or lower? So you think that inflation is going to be lower or higher?

Yes, we will grow on average over this period lower than inflation -- at a lower growth rate than inflation.

Okay, below inflation, yes?

Yes, below inflation.

Okay, I see.

But, of course, let me clarify this. It's only sort of an academic argument, if you want, because inflation in Russia is not -- or at least has not been happening in the recent years like it typically happens in most markets.

If you look at the ruble/dollar exchange rate, we had inflation of 13%, 12% over the last three years, 2006, '07 and '08, and the dollar at the same time appreciated from RUB30 to RUB23.5 before the crisis. And the ruble rates -- interest rates, were at the level of 10%; and the dollar interest rates were at the level of, I don't remember, 3% or something like that -- 2.75%.

So how can you describe that kind of situation? Is it economically rational or not?

So if you expect this kind of behavior to develop, then I would say, okay, we can make a plan where we grow 6% in rubles, but the ruble appreciates against the dollar and we grow 15% in dollar terms, probably 12% above dollar inflation. So it all is relative.

It would be wrong for us to say that we would grow at 15% or 16% above inflation, because if you look at the real drivers in the market, the prices for mobile telephony and broadband access do not inflate like the prices for gas or electricity in Russia. It's just a fact of life, because we have a very competitive market.

So you cannot say that we are not being aggressive, because we plan or forecast growth below inflation. We can say that we forecast what realistically can happen with our pricing, given the very conservative forecast of the economic recovery, which I said; and of course, the economic recovery is quicker than the growth, is going to be much quicker.

But we prefer to stay on the conservative side, rather than over-promise. But I don't think that comparing this to inflation in Russia is fair, because inflation in Russia is not a rational thing that one can plan and take into consideration.

Okay. Thank you. I just know that from like [domestic] (inaudible) you're looking at the segments and you see MTS was going to grow at below inflation, so possibly people would opt for sectors who are like tight-linked to the overall inflation.

(Operator Instructions) Thank you, we have a follow-up question from Victor Klemovich. Please go ahead with your question.

Yes, Mikhail, just to follow-up after Nadejda, once again. You just said that you expect that normal usage should be, even in Russia, should grow up to around 500 minutes, but with the latest comments on CAGR we see that the -- and you added that you expect stable pricing, that you don't want to decrease prices.

With these figures for CAGR, we come to below 300 minutes of usage. So can you please elaborate on this?

So, basically, I do believe that MOU can reach 500 minutes. As far as 2012 estimates go, I can just say once again that we provide a very conservative growth estimate, which we can fulfill. If we grow with twice the speed, I think the market will appreciate us.

Again, it's very difficult to say when we're going to reach 500 minutes and under which conditions. All I'm saying is that people want to talk 500 minutes and if the price allows, they will talk for 500 minutes.

The question of price is very much dependent and relevant to the question of income. So, basically, if the price-income combination is right, people will move to 500 minutes quicker, rather than slower. And this is not only the question of actual income and actual price, but also the question of perception.

Like before the crisis, the consumption was growing pretty steadily. And if you look at the per-capita income in 2009, yes, we had a reduction, but this reduction was not dramatic. So a lot of slowdown in consumption was psychological, rather than financial. So, again, it's very difficult to predict the consumer behavior. I think we just have to look and see.

We know that in other countries where people are not financially constrained, there is 500 MOU. In Russia, it's different. So potentially we may go there. The question is how quickly.

So am I understanding you correctly, that you see 500 minutes like a long-term goal for the market, but in the current circumstances, with this crisis and so on, so you prefer to stay on the conservative side with this guidance which you just gave to us?

All I am saying, the oil price came to $80 a barrel all of a sudden and everyone now believes that we are out of the crisis and the future is bright. All I'm saying is that the future may not be so bright and we'd rather stay on the conservative side than on the position that the crisis is over, we're in the nice and cozy and wealthy economic situation again. If the market proves that I am wrong, I will be very happy.

All right. Thank you very much, Mikhail.

Thank you. We have a follow-up question from Igor Semenov. Please go ahead, please.

Yes, hi, can I just ask a few questions about your 3G network and your general network utilization? I mean, presumably with 3G deployment it should give you a significant boost to capacity. Can you quantify maybe where your levels of utilization on average have been in the past and where they are right now? And how quickly you see this capacity being filled up, utilized? Thank you.

The 2G network is utilized pretty effectively. I won't give you the exact figures, but our average utilization rates are sort of at the 80% and above levels, so we have some room to receive additional traffic, but also we have a chance to expand capacity if we have to.

3G network is just being built, so it has capacity, which is filling up with the sales of our modems and increasing consumption, so we don't have the congestion issue in 3G network yet. I guess we'll have to wait a year or two to understand what kind of traffic dynamics we have once it stabilizes with the 3G build-out.

But you don't see -- for example, if customers use data traffic in areas where there's 3G, it automatically goes through the 3G network, right? So there should be -- the 2G network should see it a little bit easier, yes? Is that right? There is still a capacity increase because of --?

Right now we optimize 3G network for data and 2G network for voice. So basically the way the network is configured, more cells in the 3G network are given solely to data and less to voice and in 2G vice versa. Most of it is voice and less of it is data. So basically, we can shift traffic between the two networks; and the key driving factors are the amount of PC modems in the particular region and smartphones and the share of smartphones and 3G-enabled phones in the total amount of handsets.

3G we will use in the future also for capacity, especially in the metropolitan areas where 3G capacity is utilized more effectively than 2G, but we need to have fairly high share of 3G-enabled devices in our customer base. Right now this number is still in the low teens.

Right, and also to follow-up on something you said in the beginning of this conference call, on 3G launch in Moscow, that it would drive the revenues. Is it possible to quantify that effect? For example, in St. Petersburg you launched just over a year ago; in some other areas it already has been a year.

So can you somehow quantify the impact? I know it probably is difficult because of the crisis and everything, but maybe there is a way to measure the impact of the launch of a 3G network on your revenues.

Not at this point, with all due respect. We may disclose those numbers in the future, but I don't even have them in front of me. We can only count for revenue from 3G separately from the other revenue on the USB modems that we sell.

If we count the revenues on the 3G base stations, it will be obviously a combination of voice and data, and therefore it's very difficult to separate what is specifically from 3G and what is just from a general traffic use of our customers. But I think next year we will be in a better position to specify this revenue. Right now, of course, it is not significant, as compared to our general revenue.

And the last question, please.

Thank you. Our last question comes through from Tatanya Bordnikaya. Please go ahead, please.

Good evening. One question in relation to the revenue forecast that you are providing for 2009. You provided $8.25 billion for revenues in 2009. So would that include MTS standalone performance, or MTS inclusive of Comstar performance?

No. That is just MTS. No Comstar there.

Right, thank you.

Okay, ladies and gentlemen. Thank you very much for your time and interest. We welcome you at any time to contact our investor relations department if you have further questions. A webcast of this discussion will be available on our website if you wish to replay the call. In the meantime, we again appreciate your interest and wish you a very pleasant day. Goodbye.

Ladies and gentlemen, that does conclude today's Mobile TeleSystems Third Quarter 2009 Financial and Operating Results Conference Call. Thanks for participating. You may now disconnect.