Mobile TeleSystems PJSC (MBT) 2010 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Mobile TeleSystems First Quarter 2010 Financial and Operating Results Conference Call on the 8th of June 2010. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Mr. Andrei Terebenin. Please go ahead, sir.

Hello, ladies and gentlemen, and welcome to MTS conference call to discuss the Company's first quarter 2010 financial operating results. Before beginning our discussion, I would like to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks.

The statements may relate to one of the following issues. The strategic development from MTS business activities, both in Russia and abroad, revenue 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 alterations in the markets in which we operate, financial indicators such as OIBDA, ARPU, 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, capital expenditures and operating expenses, issues related to the management of MTS wholly or partially-owned subsidiaries, and macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available in MTS and our report in Form 20-F, which is available on our website or through US Securities and Exchange Commission. 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 MTS Form 20-F as well as other public filings made by the Company with United States Securities and Exchange Commission, all of which are available on the Company website at www.mtsgsm.com or that of the United States Securities and Exchange Commission.

MTS dissolves any obligation to update any previously made forward-looking statements offered on this conference call or make any adjustments to previously made statements to reflect changes in risks. All [piece] of the presentation and materials used in references 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.

Thank you, Andrei. Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and operating results for the first quarter of 2010. Joining me today are Aleksey Kornya, Vice President and Chief Financial Officer, freshly appointed, and Mark Burden, Finance Director of Business Unit Ukraine.

First of all, I would like to congratulate Aleksey on his recent official appointment as vice president and chief financial officer of MTS. Having served for nearly two years in the capacity of acting vice president for finance and investments and the Company's chief financial officer. Aleksey is familiar to all of you.

He joined MTS in 2004 and has gained valuable insight into our operations, first as the CEO -- CFO of one of our marketing regions, then eventually in his role as our financial controller. Since assuming leadership in our finance team, Aleksey has effectively supported our implementation of our 3i Strategy. We all congratulate Aleksey on his permanent appointment.

Turning to the business, little time has passed on the financial calendar since our last disclosure, but we hope that we can use this time to give you a sense of the progress we are making in our markets by moving towards our strategic goals. MTS Group revenue, in the first quarter increased more than 23% year-over-year to reach US$2.6 billion.

Currency depreciation naturally was a strong driver of growth, but we are seeing positive growth in each of our markets of operation. Overall, increasing usage, greater adoption of data products, subscriber additions, and our extension into new products and services continues to support our growth. While we do not yet see a distance impact on our business from the improving economic environment, we continue to outperform our peers in our markets of operations and believe strongly that we can benefit most from an uptick in regional economic activities.

In Russia, our revenue grew almost 14% year-over-year to RUB65.3 billion on the back of stable voice usage and increasing contributions from value-added services, handset sales, and fixed services. Seasonally, voice usage was in line with expectations, but we continue to see healthy demand for our data products and services. We sold around 478,000 USB modems and data tariff plans during the period and in May the Company fulfilled requirements for its 3G license. And now boasts coverage in all regions of Russia.

The fixed business revenue that includes Comstar and Eurotel grew 10.3% year-over-year due to growth in traffic, ruble tariff increases for corporate and residential MGTS subscribers and upselling of higher value services to the existing customer base. In Ukraine, our revenues improved by 3% year-over-year to roughly UAH1.9 billion. Further growth was mitigated by the revisions to our interconnect terms with Ukrtelecom, which we are pleased with the sustained usage increases and incremental active subscriber as well as high adoption rates for value-added services.

We continue to outperform our peers in the market and, as the local economy improves, we believe that our strong price value proposition will translate into further positive developments. In Uzbekistan, we increased our revenue year-over-year by almost 2% to over US$103 million. We continue to maintain the leading position in the country with a 45% market share in terms of subscribers as we added more than 300,000 new customers during the first quarter. In Turkmenistan, our revenues grew 49% year-over-year to reach TMM138 million. The absence of new players, a benign corporate environment, and the relatively stable economic conditions have meant that we were able to maintain our dominant position in an attractive market with an 84% share.

In Armenia, our revenue performance was stable over year with AMD17.8 billion. We expect competition to increase over the coming periods following the entry of a new player and as the market matures, SIM card penetration reached 91% of the quarter. However, given the local management team's impressive track record vis-a-vis competition, we feel that MTS will continue to dominate the market in the foreseeable future. And now Aleksey Kornya will further discuss the Group's profitability and financial performance. Please, Aleksey.

Thank you, Mikhail. For the period, OIBDA grew over 20% year-over-year to US$1.15 billion, driven by growth in our markets of operation and the appreciation of our core currencies versus the US dollar. While our group margin fell one percentage point year-over-year, this decline masked the improvements we have made in our core network business considering the impact of rising handset sales on our margin.

In Russia, excluding our retail reports, our mobile OIBDA margin improved 2.5 percentage points on better top-line performance and improved operating efficiencies. Our fixed business delivered an overall OIBDA margin of 44.2% aided by the high profitability of our transfer network and wholesale business as well as the reversal of previously accrued expenses for the now cancelled phantom stock option program with Comstar.

In Ukraine, our OIBDA margin improved by one percentage point, partially due to revision in termination rates that [shows] our top-line growth. In other markets, the overall competitive situation remains stable. The slight year-over-year decline in Armenia is seasonally in line with our expectations, though we are seeing increased marketing activities from the short entrance into the market.

On the other hand, our strong margin of 55% in Uzbekistan is a sign that the competitiveness in the market we saw in 2009 has stabilized. And in Turkmenistan, our OIBDA margin of 64% reflects our strong position in this 44% in [rated] market. For the period, we generated US$380 million in earnings. In comparison with previous periods, the quarter was less volatile and more predictable, which allows us to realized a slight currency gain and avoid any one-off factors.

The earning expenses increased year-over-year on the back of network enhancements. Interest expenses took a [us] (inaudible) [horizon] and our debt levels have increased due to our acquisition of Comstar and other corporate activities. However, as we have previously discussed, we are actively engaged in lowering the cost of our debt as well as increasing the [tenure]. In total, we have lowered the cost of six facilities from one to 5.3 percentage points. And total debt equaled US$7.7 billion at the end of the period.

At the end of the period, we held approximately US$2.3 billion in cash. Since then we have repaid close to US$1.2 billion in debt including EBRD financing as well as US$450 million worth of ruble bonds, financed partially by cash on hand as well as our existing credit lines. Overall, we retain a great deal of flexibility in the management of our debt portfolio, considering the extra frugal market and the relative attractiveness of MTS's board as well as the occasional opportunity to tap external debt markets.

As has been reported in the press, we have prepared the necessary materials for potential Eurobond offering. We can use the process for third optimization of our debt portfolio, including our fourth quarter Eurobond repayment. However, at this time, we continue to watch the market and within next two weeks, we will determine our next steps. In May, we announced our recommended dividend of RUB15.4 per ordinary MTS share or approximately US$1 per ADR based on the exchange rate on our record debt for financial year 2009.

This amounts to RUB30.7 billion or close to US$1 billion. As the payout ratio of this effectively is 75% of our net income when adjusted for various non-cash and one-offs we had in 2009. We believe that our cash flows in the second half of 2010 can easily support this payout amount. As we have done in previous years, the dividend will be voted on at the AGM in June and paid out in the second half of 2010.

CapEx for quarter was a manageable US$250 million, less than we normally spend seasonally, but on target, considering the high amount of spending we accelerated in the fourth quarter of 2009. We should see this spending pick up later in the year and at this time we have no reason to amend our strategic guidance of CapEx to sales, 22, 24 percentage points. Thank you, Mikhail.

Thank you. Since the end of the quarter, we continue to move forward with our strategic objectives. Integration with Comstar is continuing to move forward. In May we initiated the rebranding process by which we will put out a full range of mobile and six telecommunication services throughout Russia through the MTS brand for business and consumers. We will retain the MTS brand for fixed line services in Moscow, region as MGTS remains one of the most respected brands in Moscow and can be used effectively to appeal to value-conscious consumers.

Most impressively, less than nine months after the acquisition of Comstar, we have also brought to market the first truly conversion product. The service provides customers in Moscow and the Moscow region with fixed and mobile internet access through a home hookup and a USB modem. Launched in May, the mass market product offers enhancements to speed in capacity, while allowing the client to earn points for both mobile and fixed line usage in our successful MTS bonus program.

We are also focused on the enhancements of our networks. In May we launched 3G services in Belarus, our minority-owned affiliate on the HSB plus standard. We are also activity developing our 3G network in Moscow where it was unveiled last year. We have already installed over 500 3G base stations in Moscow and expect to at least double the number by the end of the year. Our 3G network in Moscow already covers 67% of city territory to be increased to 95% by the end of the year. At the same time, we are implementing a technical upgrade that will increase the maximum download speed on the network from the initial 3.6 megabits per second to 14.4 megabits per second by the end of the year.

On the retail side of the business, with over 2,000 stores wholly owned and additional franchisees, we remain focused on improving the quality of our network. Recently, we opened five flagship stores in Moscow and additional locations in the regions. We are also seeing how a full line of home internet services provided by Comstar and marketed under the MTS -- we are also selling under the MTS brand.

In sum, little time has passed on the financial calendar since our last conference call, but we continue to execute on our 3i strategy, realizing goals in our integration with Comstar, developing networks to support universal internet access and seizing growth opportunities by bringing to market innovative products and services. Thank you for your time and now I am happy to open the call to your questions.

Thank you, sir. (Operator Instructions). The first question comes from Sean Gardiner from Morgan Stanley. Please go ahead.

Yes, thank you. Just on your outlook, you're talking about the fact that the uptick in the economic activities still isn't coming through. And I think a few weeks ago there were some comments from yourselves that you were seeing an improvement in usage in the second quarter. Is that improvement in the second quarter just in line with seasonality or is there any signs that it could actually be better than seasonality or worse than seasonality? That's the first question, thanks. In Russia, thanks.

Yes, thank you, Sean. I don't think that we are prepared to give any guidance on the second quarter at this point. The only thing I can say is that the roaming revenues of the second quarter and the roaming revenues of the third quarter will be a good indication of how our customers respond to the economic pickup. And if we do see the uptick in the roaming revenues, which were significantly down last year, then that would be a good sign of a recovery. And indirectly, we see that the number of tourists and travelers have increased significantly, so we have a reason to believe that we may have some good news in our roaming revenues as well.

Okay. Thanks. And the second question is just on the margin in Russia. You talk about some of the operating efficiencies. Can you just describe some of the key ones that you thought made the difference in the first quarter about the operating efficiency put to that business.

There are a few things. One, we acquired Eurotel, which is a long distance backbone carrier at the end of 2009. And by integrating Eurotel with our existing fiber network and Comstar network, we were able to deliver some savings in the interconnect costs because we transfer most of the traffic now through our own channels. That was one.

The second one was a slight reduction in the volume of sales because sales last year, the quality of those sales was really not satisfactory to us and we implemented a number of activities directed at increasing the quality of the sales that we do. The lifespan of the consumer, the activity of the consumer, and that, of course, helped us save some subscriber acquisition costs. Those were the two. And also we optimized part of the marketing costs. Plus our ongoing program in personnel reduction like last year, I think we reduced the total amount of personnel by about 1,000 FTs.

Okay. Thank you very much.

Thank you. The next question comes from Igor Semenov, Deutsche Bank. Please go ahead, sir.

Yes, hi. Thank you. First of all, on the dividend. So you recommended paying pretty much 100% of net income as reported or is it adjusted 75% payout ratio. Whereas your dividend policy is over 50%. I just wanted to check whether this 75% is sort of a new level going forward.

And a second question -- Mikhail, you just kind of touched on that. You're talking about the tariff -- sorry, traffic -- tourist traffic picking up significantly. Does it mean that if you look closely at your APPM in Russia, which was stable, but the tourist traffic is increasing significantly, does it mean that the price per local minute is declining quite substantially?

Okay. On the dividend policy, our dividend policy remains unchanged. It still stays as it was and as it is, which is we are distributing at least 50% or more of our net income in dividends. The 75% level is not a new level. We are not changing our dividend policy and we are not saying that from now on we are going to be paying 75% or more. So this is not a change, clearly.

In terms of pricing, tourist roaming and so forth, we don't see the local pricing at a local APPM going down. We don't see this competition increasing in the market. We don't yet see an increase in customer usage, which one would expect to see given the economic recovery. But maybe this is just lagging behind and it will come once people start spending more. We do see that people have released their spending slightly, definitely as compared to a couple of quarters ago. And we'll just have to see how sustainable that is and how quickly the recovery is.

Okay. Thank you.

Thank you. The next question comes from Herve Drouet, HSBC. Please go ahead.

Yes, thank you. My first question is regarding the competitive landscape. Just want to confirm that you don't see any change of the competitive landscape in Russia that will affect average price per minutes. And if it is the case, then should we assume an increased ARPU looking forward? And the second thing is regarding your CapEx level. Historically, usually in Q1 you add higher CapEx spending and this year it looks like this CapEx spending has been lower. Are you planning to change your guidance on CapEx for the full-year? Thank you.

Thank you. Competitive landscape, as far as pricing is concerned, continues to be fairly benign in Russia. Where competition has actually stiffened up is on the retail side and on the subscriber acquisition side. And in this area, Megaphone has been the most active competitor, selling roughly three million SIM cards a month, which is way over what the real market is. So there is a lot of -- at least from our point of view -- so there is a lot of low quality subs in those sales and that sort of drives, obviously, a competitive response, including ourselves, which basically means that we all -- the whole market is spending a lot of money on subscriber acquisition, more than it is economically justified.

And this is where the main competitive threat, I believe, comes from. And that puts a pressure on the margin. And if it continues like that throughout the year, it will continue to put a significant pressure on the margin because the market -- if one of the players behaves like that, the market cannot stand still and watch Megaphone overtake the rest of us in customer numbers. Because typically the overpass in customer numbers in few months down the road, turns into the overpass in revenues, which is not what any of the competitors wants. So I would consider this to be the main factor that we have to watch after.

Okay.

And as far as CapEx, we had lower CapEx in Q1, primarily due to some advances that we paid in Q4 of 2009 because of the discounts that we wanted to get from our suppliers. And this effectively lowered the Q1 CapEx because we count CapEx, as you all know, by cash --

Yes.

-- not by commitments. And therefore, we expect CapEx to resume to normal levels in Q2, Q3, and Q4, and overall we are not yet changing our CapEx guidance for the year.

Okay. Thank you. Just maybe -- just a follow-up question on a sack on the impact on the margins. If we claim from the retail -- from the retail side on the handsets, could -- do you think margins could go below 50% in Russia?

Could margins go below 50%?

Yes. Claim from retail -- from handset retail.

If you look at Megaphone margin, which -- and Megaphone does not have much of the retail business. So their margin is actually a mobile margin.

Yes.

And the first quarter it was like 44.5% --

Yes.

-- I think, right?

Yes.

So if one of the players has a margin of 44.5% and spending this margin to acquire customers --

Yes.

-- in the market by overpaying dealers, then one has to wonder what will happen with the margins of the other two players if the situation doesn't change. So I'm not going to make any prognosis, but the only thing I'm saying is that we have the watch the situation very carefully and think about an appropriate response.

Okay. Thank you very much.

Thank you. The next question comes from William Kirby, Nevsky Capital. Please go ahead.

Thanks, yes. Sales and marketing spending seems to have declined quite a lot year-on-year in ruble terms. How should we think about your full year spending here or how do you look at it as a percentage of revenues, please?

Well, our -- well, what we are trying to do is lower this number down because we believe that last year those expenses were above what is economically justified, given the value of customers in the market. But again, this is very much competitive driven. And that's exactly the discussion that we just had about the competitive behavior on the cost side. Our intention is to increase the efficiency of our marketing and sales spend. One of the key drivers in that strategy is our retail business because that's exactly why we build it so we can attract better customers, cheaper.

Okay, great. Thank you.

Thank you. The next question comes from Alexi Soroca, BNP Paribas. Please go ahead.

Yes, good afternoon, gentlemen. First question is with regards to your potential Eurobonds. Did I understand you correctly that you'll take a decision on it during the next couple of weeks, i.e. is it by some particular date? Is it this week or next week? And then those details aside, if you don't like the environment, what's the plan B? That's my first question.

Thank you, Alexi. Yes, you get it right. We'll take a decision within the next two weeks. And still we have available, plan B for us would be available market in ruble facilities including ruble bonds placement, including bilateral loan facilities with the Russian banks as well as bilateral loan facilities with some Western banks if we talk about currency -- long term currency facilities. So there is a full range of options which we can say there is a plan B and there is no exact one.

Right. And I mean, what are you waiting for specifically? Is the current environment you clearly do not like enough, is that right?

Well, right now we decided that we disclose our first quarter results and we'll see how the market -- how the market is and where we can price our potential Eurobonds issue. So that's purely subject to pricing and market situation.

Right. Okay. A couple housekeeping questions then. Remind me, if you don't mind, what the CapEx target is for this year. And also, coming back to your -- well, to the previous question, rather, on dividends and dividend policy, sorry, I missed that nuance. Did you say that you're not changing it, i.e. it's more than 50% or is it likely to be close to 100% going forward? What was the answer?

This is Mikhail Shamolin. Our CapEx guidance for the year was 24% -- 22% to 24% of sales. That does not change.

Yes.

Again, on dividends, we are not changing the policy. It still remains 50% or above. It does not change to 75% or above. We cannot tell you what the dividends in 2011 for 2010 are going to be. But the policy remains unchanged.

Right. And in terms of Ukrainian mobile market, how do you see things going forwards because it seems to be underperformance that maintain -- just any qualitative color along the lines you've given for the Russian one.

Well, we do have a positive outlook on the Ukrainian market. Our business there is performing well, relative to competitors. And the overall Ukrainian economy, to a very large extent, just like the Russian economy, depends on the commodity prices. And commodity prices recovery particularly in the iron ore, steel, and steel products and that will drive the Ukrainian economy forward.

Also the latest developments between -- in relations between Russia and Ukraine, I think, gives better chances for Ukrainian economy to recover. So we are now heading on with the strategy to increase our customer base, increase the loyalty of our customers, and prepare, basically for recovery and future growth. We're not investing pretty much any CapEx in Ukraine. I mean, very small, only maintenance CapEx. So for us it's -- we can only have positive surprises there.

All right. Okay. Thank you very much.

Thank you. The next question comes from Ivan Karen, Renaissance Capital. Please go ahead.

Hello. A couple of questions from our side. The one is on the corporate market. So basically what kind of trends do you see there? I understand that roaming -- which hasn't -- I mean, you were speaking about the tourist traffic and the tourist roaming which were probably something more tangible on the corporate side of things. And secondly, on the competitive situations from the regions, what's basically we see there from the smaller regional players like Tele2, not [big fall, big] (inaudible) sorry. Thank you.

Okay. Thank you. Corporate developments. We do see uptake in business activity in business activity in corporate segments, both in Russia and Ukraine. It has yet to translate itself in the increase of corporate revenues, simply because corporate revenues, to a large extent, are a fact of a budget which corporations set aside for mobile telephony and related services. And those budgets were dramatically reduced in 2008 and 2009. And they are not going to quickly recover in 2010. So it's a bit of a slow process, unfortunately, but we believe we will get there sometime in sort of 2011 because there is natural need to increase spend for mobile telephony.

As I was saying before, we haven't lost any of our corporate customers. In fact, we have increased our corporate customer base mainly working in the small business -- small and medium size business arenas in the regions, again, both in Russia and Ukraine. But the improvement in this sector, I think, we will see in 2011.

As far as [full] operators -- Tele2 and others are concerned, basically, Tele2 is the most successful regional competitor. The other regional operators are not growing. Most of them are either stagnating or losing market share. Tele2 is the only one which is growing. And this is because of the pretty clear market offer that Tele2 has which is always cheaper and no frills. Kind of low-cost operator. And in most of the regions, Tele2 pricing is 25% to 30% below our pricing.

And our response to Tele2 depends on the market situation in the particular region that we are in. If we have a small market share, similar to Tele2 market share we immediately respond. If we have a large market share, let's say 30%, 40%, we cannot respond with a 25% to 30% price decline because that would immediately mean the loss of the revenues on the remaining 30% market share because people migrate from all tariffs to new tariffs very quickly now. And being price conscious, still affected by the crisis. So it's a combination of pricing initiatives, sales events, marketing events. So we're trying to slow Tele2 down as much as we can.

And in the regions where Tele2 has big significant market share, their pricing is not that much different from our pricing. So the answer to your question, there is some growth on the Tele2 side. But I think it's a controllable growth. I don't think that it represents a major sort of threat to the big three operators. They're taking sort of their niche and they will continue to do so probably in the next couple of years. But I don't see a dramatic change in the competitive landscape because of it.

Okay. Thank you.

Thank you. The next question comes from Alex Wright, UBS. Please go ahead.

Yes, thank you. I just have one question, please, if you could update us on the overall impact on margins of the retail build out and then obviously provide the splits there of the margins. But I'm just wondering, going forward from here, if you look at the ongoing increase in general and admin costs resulting from that retail build out, yet offset partly by the reduction in sales and marketing costs, how much further negative impact overall on the margin would you expect to see from that retail build out, excluding the effects of handset sales? Thank you.

Well, there are two things, right? One is the purely mathematical impact of low margin or zero margin retail business on the overall business. And because if you mathematically add US$1 billion on top of our revenues with the zero margin, you will get a margin decrease. And as long as retail business remains to be a significantly lower margin business than our main business, it will mathematically drive the percentage margin down.

As far is the profitability of retail business itself is concerned, the retail business is already breaking even except for two factors. One factor is the compensation that we are paying to our partners, which is and the [Svesnoy] Group and the managers from Svesnoy for managing. And the retail business for their services as part of our agreement. We're not disclosing the amount, but they are there. And they are included in the cost of retail business. And secondly, we still continue to invest the money in refurbishing our shops and changing locations because some of the locations are not satisfactory to us.

And this ongoing cost -- ongoing cost cannot be fully capitalized due to the Russian legislation. Therefore, part of this cost becomes operating expense and reduces the marginality. But once those two lines of expense are over, and they will be over in the not-so-distant future, we will, I hope, have the sort of zero-margin in the retail business, generating value on the MTS side with the increased loyalty of our customers and better quality of sales.

Okay. Thank you very much.

Thank you. The next question comes from Viktor Klimovich, VTB Capital. Please go ahead.

Good evening. I have two questions. First question is a follow-up on Ukraine. Do you see any signs of improvement in pricing environment? This is the first question. Thank you.

Yes, we see that the APPM stopped declining and we do see -- well, let's put it this way -- the APPM for the marketed tariffs have stopped the decline and there are even some increases. So basically, the pricing competition that we saw in Ukraine for the last couple of years, I think is behind us, I hope. Whether the price increase is possible in Ukraine, I think future will show. That will depend a lot on the Ukrainian economic recovery.

Yes, thank you. And my question is rather technical. Aleksey, can you please provide us the breakdown in cash between Russia and other countries, in cash position? Thank you.

Well, we are not disclosing the details of our distribution of cash position. But it is majorly in -- sitting in Russia. And it is distributed among hard currencies and rubles positions.

Ukraine is cash, positive if that's what you're asking.

Not really, Mikhail. But Aleksey answered my question. Thank you very much. Thank you.

Thank you. The next question comes from Nadezhda Golubeva from UniCredit. Please go ahead.

Good afternoon. Congratulations on good results. And first, I would like to come back to the sack issue. In here last time, you talked to the fourth quarter results. You mentioned irrational push of SIM cards as a major risk to margins this year. So could you possibly tell us whether, in your view, since that time the risk has increased or decreased? This is my first question. And secondly, I wanted to ask you about whether we should expect any headcount and a salary increase in the remainder of the year compared to the first quarter which should -- which could push up marginally. Thanks.

Nadezhda, thank you for your question. Yes, when we were talking about the fourth quarter, I was talking about our hopes that the sales market -- the volume of sales -- SIM card sales in the market will rationalize this year and will be substantially less than what we saw in 2009. So far it did not materialize. We do see some decline, but we also see -- again, I have to mention Megaphone -- a very sort of forceful push in the sales area. And that that makes the reduction of overall sales volume in the market unlikely, at least at this point.

And your second question was about headcount. Yes, there is no headcount increase, obviously, for this year plan. There may be a slight reduction. I don't have the numbers in front of me. There are some further -- well, it's not a reduction. Let's put it this way. It's increasing the efficiency of the business, it's streamlining the organizational structures sort of continuing the work like we are centralizing our accounting centers. We are building one accounting center in [Inshney Mogret] and we're doing a number of things just to rationalize how we manage the business. It's not sort of a headcount reduction in the classical sense of it.

And as far as salary increases, we are not planning an overall sort of -- all throughout salary increase, but we will have to make some increases in some individual cases just to bring us closer to the market in the areas and professions where we ended up below the market because of the salary decrease that we had over the last year and a half.

So -- and basically, this increase did not take place in first quarter, yes, or it has to materialize in the remainder of the year?

Yes, there will not be a -- there will not be a significant increase in salaries this year. There will be slight increases, starting summer.

Okay. Thank you very much.

You're welcome.

Thank you. The next question comes from Elena Mills, Alfa Bank. Please go ahead.

Yes, thank you. My question is actually on your data content revenue development in Russia. I'm just wondering if you can comment on the quarter-on-quarter trend and whether there was anything specific that might have affected that. Thank you.

Yes, I would say that what you saw in Q1 versus Q4 in content revenue is not a trend. It's rather a one-off event which was our, basically, campaign against fraud with the content because we had an increase in content fraud over the 2009, especially towards the end of 2009. And in Q1 we implemented a number of measures like informing all the customers every time before they download the content on the cost of this content and the number of others, and that almost killed the fraud, but also reduced the content revenue. We do see an increase in content revenue in Q2 versus Q1 after that. So we don't believe that the trends for decrease of content revenue will continue.

Thank you. That's very helpful. And if I could just ask one follow-up question on your retail operations. You mentioned earlier that there were a couple of factors that are weighing on margins and you said that they would be over in the near future. I'm wondering if you could be a little bit more specific about when you think some of the refurb and other expenses that you're incurring currently to upgrade just physically the network might moderate. And also, if you could comment on what proportion of SIM cards that you're selling are currently through your own stores versus external channels that would be very helpful as well. Thanks.

The portion of the SIM cards we are selling through our network at this point is around 35%. But the quality of those SIM cards is much higher than the overall quality of the SIM cards we sell on the market. But basically, relatively, we get more value from our own chain than we get from the rest of the market. And the investments which we consider to be extra costs, we are planning to be done with them by the end of this year.

Okay. Thank you very much.

Thank you. The next question comes form Evgeny Golossnoy from Troika Dialog. Please go ahead.

Yes. Good evening, everybody. I've got a question on mobile subscribers, mobile internet subscribers. What's the number you currently have? Or rather, what's the number you had at the end of the first quarter? What's that as a percentage of total -- of addressable customer base and how do you see that changing going forward? That is, what's possibly your target for the end of 2010 and 2011 and what's the best way to model that? The technical penetration or rather an increase in the mobile internet subscribers?

I'm not sure I understand your question correctly. Is it about what is the overall penetration in the market or --?

No, no. Just you as a Company? You've got like one million or two million of mobile internet subscribers. That may change to -- that is a percentage of your total addressable customer base. I think that's your current mobile subscriber base. How that can change towards the end of the year. In other words, how many of your mobile subscribers can become your mobile internet subscribers towards the end of the year?

Well, I mean, it depends on several factors. One of the key factors is penetration of PCs and laptop computers in the market and that is about 27% to 30% now in Russia. And I think this is very much reflective of our customer base. So I'd say that around 30% of our customer base clearly is an addressable segment for our data products. And the level of PC modem sales continues to be very healthy.

And with the increase in 3G network penetration, we see this demand sort of continuing to move into the future. I mean, like we are covering small towns with 3G now. And in those small towns, in most cases you don't have any internet providers at all. So basically you're opening up completely new markets. But at this point, I would say 30% of our customer base is addressable customers, would be a safe bet.

Is that over a one-year period or a two-year horizon?

Well, 30% is now. So basically now we can address 30%. How quickly can we penetrate this customer base is a question of efficiency of our sales, our pricing policy, our marketing and competition. And over time, I think, this will increase -- I would not be surprised if in a couple of years, the vast majority of our customer base will be addressable for internet products because of the growing internet and computer penetration in the country overall.

Okay. Thank you.

Thank you. The next question comes from Jean-Charles Lemardeley from JPMorgan. Please go ahead.

Yes, just four questions again, on revenue trends. In the corporate market, are you seeing signs of positive activity, but it's not transferring into revenues. Are you still seeing a drag from corporate revenues? Are they still having a negative impact on a year-over-year basis? That would be the first question. And then the second question is -- in the Ukraine, can you quantify the impact of the interconnection and term revision on revenues in the first quarter and how that affected the year-over-year comparison?

And then the last question would be, I guess -- last two questions. Are the SMS -- you had a nice pick up in growth in SMS, so can you talk about the sustainability of that? And then the last question is in Moscow, how much -- given the limitations you have in terms of spectrum, how much headway do you have for growth in Moscow in broadband?

Okay. I will take all the questions except Ukraine and Mark Burden will comment on the interconnect division. On the corporate markets, we're actually seeing increase in revenues in usage, a slight increase. And we're planning to increase revenues from our corporate segment this year in our internal plans. I will not give you specific numbers, but we do have an increase planned with all the bonuses and everything around it, so people are working hard to see this through. And I think this is quite realistic.

And was it already visible in the first quarter or not quite yet, just to seize this?

Yes, yes. As compared to us here, yes.

Okay. Yes.

In Moscow, on the spectrum issues, we actually have made significant progress because we got permission for, I think at this point, around 1,000 base stations in Moscow. And almost no power limitations, which means that the quality of our 3G network in Moscow is going to be much higher than we originally expected. And of course, we don't have too much spectrum. No one does in Russia, given the military limitations and how the spectrum is divided. But we believe that we have sufficient amount of spectrum to deliver at least 14.4 megabit per second in Moscow. And I will not raise hopes higher than that, but we're looking at ways how we can increase it further. And we believe that this should be possible.

In terms of efficiency of that, compared to, let's say, countries in Western Europe with more widely available spectrum, do you have a sense of how efficiently you can grow in terms of CapEx? Will you have a higher CapEx requirement in that area as well, or how do you benchmark yourself given the constraints you're mentioning for Russia with the military spectrum position?

Well, it depends -- at least my current view for Russia is that LTE which is a technology that utilizes the spectrum in a much more efficient way than 3G is going to come to Russia in a big way only when LTE Advance technology is available. The difference between existing LTE and LTE Advance is that existing LTE technology needs a very wide spectrum in one spectrum segment. Let's say you need like 80 megahertz in a 2.5, 2.7 band to deliver really fast connection. And in Russia, no one will have this 80 megahertz just by definition because it doesn't exist.

Now what LTE Advance does differently from LTE is that LTE Advance takes pieces of a spectrum like five megahertz from 900, ten megahertz from 1,800, 20 megahertz from 2,100, and then combines it in a wide band, in such a way that you can deliver very high speeds. Right now, up to one gigabit per second. So basically, this is an entirely different customer experience. But it will be possible only when the technology becomes commercially available. Right now it's not commercially available yet.

I believe the scenario of Russia is that all three major operators are going to be investing in 3G expansion and getting as much speed out of 3G as possible, given the spectrum and the technology. And then evolutionary migration into LTE Advance, using existing frequencies and reforming existing frequencies, moving voice out of some of the frequencies that are currently being used by voice, including 900 and 1,800. And hopefully getting additional frequency resource in the digital dividend area and the government is currently talking about cleaning up the digital dividend. And also the 2.5, 2.7, which the pieces of that spectrum are available and have been placed in a number of WiMax and some other assets which still needs to be gathered and consolidated on the market.

Okay. So when do you see the event of LTE Advance? What's the -- for commercial use?

Well, let's put it this way. The -- if we are talking about, let's say, 25 megahertz spectrum, in this kind of band, 3G plus what we call with the mimo USB plus, whatever words technicians use, we are talking about 85 megabit per second top speed. LTE, with the same frequency band, will deliver you 100 megahertz, potentially 120. So not a big difference. Now LTE Advance, on the spectrum of, let's say, 80 megahertz, will deliver you up to one gigabit per second, which is a huge difference between 85 and one giga. And commercially, we believe it will become available in 2012, 2013.

Okay. Thank you.

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

Yes, thank you. Mikhail, you just mentioned that people are migrating to new tariffs more quickly these days. Could you possibly say that -- I know recently you've started to introduce unlimited tariffs in Russia or options, rather, for unlimited calls on net. How much progress have you made in this terms and has it led to an overall increase in ARPU? Can you quantify the impact?

We don't really have any unlimited. Like unlimited doesn't really exist.

I think you, on maxi-plus tariffs you offer, depending on the region, between RUB200 to RUB250 per month fee for unlimited calls to MTS numbers.

Maybe I don't have all the details and there is no -- and Mikhail Gerchuk, our chief commercial officer in the room, but I believe that most of the so-called unlimited offers still have the fair usage policy on them.

Okay.

And it's on net.

Yes, of course. I was just curious what sort of response you've seen so far since you started rolling out these tariffs and whether it helps you grow ARPUs.

I will prepare myself for the next quarterly call to give you this information. Unfortunately I (inaudible).

Okay. Thank you.

But I can tell you, no -- there are no major changes, otherwise I would know about them.

Sure. Thank you.

Thank you. We have another follow-up question from Viktor Klimovich. Please go ahead.

Yes, another question regarding 3G data. Can you please estimate what is the split between -- in revenues between 3G data revenues and other data revenues -- GPRS, Edge and so on? Thank you.

Aleksey Kornya will answer this.

Well, Viktor, basically, it's impossible because there is some packaged propositions with the subscription fees for some traffic. And then if you don't have 3G then you fall into GPRS/Edge, which just picks up in the areas where is there is a weak connection. So to do the exact split between 3G and GPRS/Edge revenues is virtually impossible.

Oh, I see. And is it possible to estimate --

Based on the fact that there is some subscription for the -- data for the certain data packages.

Yes, and is it possible to estimate the number of active 3G modem users?

Yes, this number is well above one million.

But as far as I remember, you sold around 1.3 million modems. So do I understand it correctly that some of them are inactive?

Some of them are, but that's why I said it's about one million. I didn't say exactly 1.3 million. I can't give you a specific number. I don't have it with me, but it's about one million for sure. The activity rate is pretty high.

Yes, okay. Thank you.

Much higher than on the regular SIM cards.

Yes, okay. Thank you.

Thank you. The next question comes from Karen Arthur. Please go ahead.

Yes, two questions, if I may, please. The first is whether you had any comment on the probability or the time line for a possible buyout of Comstar minorities and the second is -- apologies if I missed this earlier, whether you have full year top-line growth guidance for Russia and for -- and overall. Top-line growth in margins. Thank you.

On Comstar, no comments. Simply not to mislead market in any way. And on the full year top-line margin guidance, we're not changing the guidance that we've given so far.

Okay. Thank you.

Thank you. The next question comes from Elena Mills, Alfa Bank. Please go ahead.

Yes, thanks again. I just didn't hear the answer to the earlier question about the interconnect regime change in the Ukraine, how much that affected your top line. Have you answered that question or are you --

Thank you, Elena. We missed that one, sorry. Mark Burden will answer this now.

Thank you for the question, Elena. Basically, the impact of the changes in interconnect, we gave up between about 1.5% and 2% of growth year-over-year.

Thank you very much.

Thank you. The next follow-up question comes from Jean-Charles Lemardeley. Please go ahead.

Yes. Hello. I just wanted to follow up on SMS as well. And in the sustainability of growth, you had a nice pick up in Russia and the Ukraine and also going back on the issue of fraud in data content, could you explain exactly how that fraud worked, how it affected you? I mean, did you have to take -- did you have to take a bad debt expense write-off or things like that -- how it affected, basically, profitability?

SMS revenue growth was mostly due to expansion in our SMS offer. We have a number of SMS products which we introduced in 2009, which basically expand SMS usage, all kinds of SMS attachments. And I'm just not going to go into details on this. So this increase is sustainable. Whether it's going to continue to grow in the future, we don't know, but the trend is pretty positive. We'll have to see how the customers react. We are offering also all the SMS packages which we have not been able to offer before due to our billing issues. Now what else --?

Billing issues -- yes.

(inaudible).

No, the next question -- the other question was on fraud. Exactly -- well, can you describe that fraud and, did you have to write off some bad debt for that? Just to understand what fraud you're referring to.

Yes, Aleksey will comment on the bad debt, but I will comment on the substance of the fraud.

Yes.

What actually we mean by fraud is that there are many content providers because we don't own and we don't generate our content. We do sell some of the content that we consolidate ourselves, but the majority of the content comes from third-party providers who also consolidate and market this content.

So the customer would, let's say, get an SMS from such a content provider, our customer, and this SMS will say -- would say respond to this SMS and you will learn how to be happy in life. So the person responds to an SMS and he gets a picture of, I don't know, a girl. And then RUB250 gets debited or credited from his -- debited from his account. And therefore, the customer experienced, so the customer basically pays like US$10 for something he didn't need. And the money is taken off, so the customer experience is completely ruined, the customer is calling our call-center and starts asking questions why he is an MTS customer and some content provider just took off his money. And this is what I mainly call fraud.

And this is what we fought off pretty hard because we just don't want this kind of business to be happening on our networks because even though we get a share of this revenue, we don't want this share simply because it spoils customer experience so badly that the eventual result is not going to be positive. And since customer experience is at the very core of everything that we do, including our strategy and brand positioning, it's vitally important that we fight off those kinds of things. So it's not that much about fraud. It's about customer satisfaction.

So you're now, essentially, filtering the content that goes through your network more?

Exactly.

Okay. And there's nothing -- there's no net -- you charge to your requirement in Russia that would prevent you from doing that at this point, I guess?

There are no legal restrictions and the regulator looks on that on the case-by-case basis. There have been some criminal proceedings initiated against some lottery holders and so forth, but it's not a market standard yet in any way.

Okay. But you're saying data content is growing again after the first quarter?

In second quarter, yes.

Yes.

And I don't know whether it's -- it's still a valid question on the bad debt allowances, so you've got all the answer. But I will comment that we have a policy on bad debt provisions and it relates both to content revenues and to voice revenues. So if you the services are not paid by subscribers for a certain period of time, then we create provisions based on our policies and relate both to content services and to -- as to any others.

And the last question, please.

Thank you. The last question comes from Tatiana Boroditskaya, UBS. Please go ahead.

Good afternoon. One question, if I may. You just mentioned that your full-year top-line growth and margins guidance remains unchanged. Can you please confirm this guidance?

Could you repeat the question, please?

You just mentioned that full-year top-line growth and margin guidance remains unchanged. Can you please confirm this guidance, just the numbers? Thank you.

We said mid to high single digits in national currency.

Can you repeat that? Sorry, I just missed it.

It's mid to high single digit growth in local currency.

Thank you.

And it would be the margin guidance was 43% to 45% including retail.

Thank you.

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

This does conclude today's conference call. Thank you for participating. You may now disconnect.