Mobile TeleSystems PJSC (MBT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Mobile TeleSystems second quarter 2010 Financial and Operating Results Conference Call on the 26th of August 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 Andrei Terebenin. Please go ahead, sir.

Thank you and hello, ladies and gentlemen. Welcome to MTS conference call to discuss the Company's second 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.

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 operation in the market in which we operate.

Financial indicators such as OIBDA, ARPU, cash flow projection and/or return on investment 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 [often] wholly or partially owned subsidiaries, and macroeconomic developments within our market of operation.

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

MTS dissolves any obligation to update any previously made forward-looking statements either during this conference call or make any adjustment to previously made statements to reflect changes and risks. Copies of the presentation and materials used in references in this conference call are available on our Company website. And now I'll turn the call over to Mikhail Shamolin, President and Chief Executive Officer of MTS Group.

Ladies and gentlemen, thank you for joining us today on our conference call to discuss the Company's financial and operating results of the second quarter of 2010. Additionally, joining me on the call are Aleksey Kornya, our Chief Financial Officer and -- Chief Financial Officer of MTS Group and Mark Burden, Finance Director, Business Unit Ukraine.

We demonstrated solid growth during the quarter as we continue to execute on our 3i strategy. We saw strong seasonal drivers improve our quarterly results. For the Group, revenue in the second quarter increased more than 17% year-over-year, to reach US$2.8 billion. We see good trends in rising voice and data usage that helps contribution from the sales of handsets and consumption of high-valued products like voice and data roaming and long distance.

In Russia, our top line grew 11% year-over-year to RUB69.5 billion. This was driven by a seasonal pickup in voice usage, and improvement in roaming and long distance calling. Revenue from the sale of handsets and accessories exceeded US$130 million with the total number of handsets sold increasing 6% quarter-over-quarter as we sold more than one million units. We continue to see strong demand for our data products as we roll out our 3G with over 497,000 USB modems sold during the quarter.

Value-added service grew 27% year-over-year, with data traffic assuming a large share in the mix and growing by 67% during the same period. The proliferation of more affordable data devices and wider access to the internet through fixed and mobile networks will translate into additional growth in the years ahead.

Our fixed business demonstrated revenue growth of over 9% year-over-year to RUB12.8 billion on the back of growing domestic and international long distance traffic, upselling of broadband internet services to regional pay-TV customers, and the upward price adjustments in the most proceeded telephone networks, regulatory ruble prices, residential and corporate voice services introduced in February 2010.

As part of our 3i strategy, we recently acquired Multiregion. The company boasts broadband and cable TV [efforts] in 37 cities in Russia with around 1.8 billion households [passed] as well as 700,000 cable TV, and 260,000 broadband subscribers. We believe the acquisition allows us to significantly strengthen our competitive position and to expand our service portfolio. Multiregion's results will appear in our Q3 accounts.

Our fiber build-out continues. We have also recently established a separate business unit to oversee the development of our backbone network on the basis of the previously acquired Uratel. We have around 35,000 kilometers of fiber in the ground with plans to have 40,000 by year's end. If you count the leased lines, we currently boast over 125,000 kilometers of fiber in Russia.

In Ukraine, revenues grew by 9% year-over-year to reach UAH2.5 billion on the back of a positive seasonal impact from high roaming with the start of the summer vacation period. We continue to build on the potential strengthening of the MTS brand and our network quality during the past few quarters as we add more active subscribers by offering high-quality service in voice and data products at affordable prices.

In Uzbekistan, our revenues grew 17% year-over-year to over US$113 million. The market remains competitive as we continue to see aggressive pricing from our smaller rivals, but with the largest subscriber based networks, we continue to lead the market. At the end of July, we became the first operator in the CIS to commercially launch a fully operational 4G LTE network with a rollout in Tashkent, the capital of Uzbekistan.

We can provide MTS subscribers with data transfer speed of up to 100 megabytes per second. The low fixed broadband penetration provides us with an opportunity to capture additional growth in the market. The unique experience that we stand to gain from the launch will allow us to use it to our advantage in other markets in the coming periods.

In Turkmenistan, our revenues increased 42% year-over-year to over TMM152 million. We continue to maintain a dominant position in the market with an 83% share on the back of a stable competitive environment, sold subscriber additions -- solid subscriber additions, and an attractive service portfolio.

In Armenia, revenues rose sequentially by 8% to AMD19.3 billion. Despite the increased competition following the entry of a third operator, we will continue to maintain our leading position in the market, given our extensive service portfolio, close ties to our customers, and a strong management team. And now Aleksey Kornya will further discuss the Group's profitability and financial performance. Please, Aleksey.

Thank you, Mikhail. For the period, Group OIBDA grew close to 12% year-over-year to reach US$1.23 billion, driven by top-line growth. On a yearly basis, the Group's OIBDA margin declined two percentage points, but improved 0.4 percentage points quarter-over-quarter as we witnessed a positive seasonal effect from roaming and higher usage.

In Russia, our mobile OIBDA margin, excluding repairs, remained unchanged quarter-over-quarter, at an impressive 51.1%, supported by the revenue performance and operating efficiencies. Though we continue to see downward margin pressure from our retail operations, we are making good progress in developing our distribution channels and our retail business will reach our goal of zero OIBDA by the year end.

Our fixed business delivered a healthy OIBDA margin of 40.1%. This is an improvement when compared to the previous quarter's margin of 39.7% when adjusted for the reversal of the previously accrued phantom option expenses at Comstar. In Ukraine, our OIBDA margin showed improvement of 3.3 percentage points quarter-over-quarter to reach 46.8%, driven by healthy revenue growth and continued cost control.

In Uzbekistan, our OIBDA margin reached 58.1% in the second quarter as a result of top-line growth with relative stability in the competitive environment in subscriber-based growth. The OIBDA margin in Armenia improved sequentially to 53.5%. In Turkmenistan, we maintained a margin of over 60% with 62% margin.

Net income reached close to US$354 million at the end of the second quarter as top line and OIBDA improvements positively impacted our bottom line. However, the appreciation of the US dollar did have a negative effect as we suffered a currency exchange loss of US$57 million as opposed to US$77 million gain in the previous quarter. We also were required to realize US$26 million of added interest expense due to unamortized debt issuance cost as we amended and improved a significant number of debt instruments during the period.

Starting from the second quarter, we have retrospectively adjusted our historical figures to reflect the acquisition of majority stake in TS retail. Previously, our minority stake was accounted for under the equity method, but our majority ownership necessitates that we recognize TS retail under the common control methodology. The effect from the consolidation in the financial statements is minimal.

Our total debt stood at US$7.3 billion with US$4.4 billion in net debt. This translates to a net debt to OIBDA multiple of 0.9. We continue to execute on our financial strategy during the quarter as we successfully raised additional capital and lowered our debt servicing costs through negotiation with some of our major lenders.

In June we placed 10-year unsecured US denominated Eurobonds in the amount of US$750 million with an annual interest rate of 8.625%. Our ability to raise long-term financing is supportive of our goal to optimize the Company's debt portfolio. The high demand levels of the Eurobond placement in the face of significant volatility prevalent at the time indicated the markets are indicative of our financial strength.

As part of our efforts to lower interest expenses in April, we repaid RUB6 billion out of RUB12 billion facilities to Sberbank and reduced the rate on the remaining parts from 9.75% to 8.75%. We have also reduced interest rates on the other Sberbank facility of RUB47 billion from 10.65% to 9.25%. In June, we negotiated the rates on RUB22 billion credit facilities with Bank of Moscow by decreasing the interest rate from 10.25% to 9%. And recently, we were successful in lowering the interest rates on Gazprom facility of RUB6.5 billion.

Our operations continue to generate healthy cash flows with free cash flow for the six months 2010 reaching US$1 billion. Cash and cash equivalents at the end of the quarter exceeded US$2.2 billion. At first half of 2010, Group CapEx amounted to almost US$566 million. We expect the figure to increase in the second half of the year in line with the guidance for the full-year as we build out our 3G and fixed networks to accommodate to the growing demand for data products.

Thank you, Aleksey. This is back to Mikhail Shamolin. As you are aware, at the end of the second quarter, we initiated the process of consolidating the remaining stake in Comstar-UTS, following the receipt of approvals from the board of directors of MTS and Comstar on the full statutory merger of the two companies and the consolidation of the minority shareholders in Comstar. The rationale for the full integration of Comstar is clearly in line with our stated 3i strategy.

We aim to achieve our strategic goal of realizing growth through increasing customer values by providing our customers with an integrated offering of mobile and fixed license telephony, high speed internet access and Pay TV with a broad and innovative range of content and services.

We believe that the full consolidation of Comstar into MTS is strategically important. We see growth opportunities in fixed broadband and convergence services and the full statutory merger is the process and the most efficient means of achieving these objectives.

The full merger will create the largest integrated telecommunications provider in Russia and the CIS. It will facilitate the full integration of the MTS and Comstar customer base. It will also streamline our common business processes and further optimize operating capital expenditure. Overall, the merger is therefore expected to create additional synergies and cost savings across the combined entity and ultimately strengthen our competitive position.

As part of the process, we also launched a parallel voluntary tender offer for up to 9% of Comstar stock that will expire on September 21st. For GDR holders, Comstar's depository bank has set a deadline of 5.00 pm Eastern Standard Time, September 8th for the tender offer where we will -- the combined structure of merger and tender offer provides Comstar minority shareholders with the optimal mix of cash and stock while also ensuring at MTS retains the financial resources and flexibility to invest in the development of the combined entity moving forward, particularly in key areas such as broadband network development.

MTS and Comstar expect to convene EGMs at the end of September for shareholders to vote on the proposed merger. The full merger is expected to be completed in the second quarter of 2011.

Now I would like to say a few words regarding our guidance for the full-year. Including our last disclosure, we forecast growth this year in the mid to high single-digit range. While we were confident that seasonal factors and better economic indicators would translate into more of gains, we have been cautious given the changes in our business model, the development of our retail business, and the overall economic environment.

Given our growth in the first half of 2010 and more positive economic sentiment, we feel confident to raise our guidance for MTS Group to roughly 10% for 2010. This is predicted on the basis of continued macroeconomic improvement, the impact of retail on our top-line revenue growth, sustained increases in usage across all product lines and segments in our Russian business (technical difficulty), and the further development of our networks in the our foreign subsidiaries.

Our guidance on Group OIBDA margin of 43% to 45% and CapEx to sales guidance of 22% to 24% remains unchanged. Thank you for your time and now I'm happy to open the call to your questions.

Thank you sir. (Operator Instructions). Our first question comes from Cesar Tiron from Morgan Stanley. Please go ahead with your question.

Yes, hi. I have two questions, if I may. First, on your increased guidance, can you please explain if you're -- if the increased level of comfort you have in the Russian mobile market comes more from the retail or from the corporate segment? And also, I would like to understand if the 10% revenue growth guidance includes the retail business or not. And another question would be if you can explain one more time the exceptionals at the OIBDA level, please, for the quarter. Thank you very much.

Okay. Thank you for your question. 10% guidance includes retail. This is the guidance for business overall. And it's high confidence mostly on retail, even though the corporate segment still -- is also performing better. But mostly it is based on higher than expected growth in retail voice and revenues from voice. And Aleksey Kornya will explain the exceptions at the OIBDA level.

Thank you.

Yes, the OIBDA level would have been one percentage point higher or US$25 million higher if it were not for contingent considerations for acquisition of Telefon.Ru in Eldorado, which was the part of [SPA] agreement and due to accounting standards had to be recorded at OIBDA.

Okay, and --.

Basically, when we acquired those assets, the agreement stated that we would pay an extra amount of money if certain tax risks would not materialize. And since those risks did not materialize, we had to pay what -- we had to pay according to the contract. And the reason it went into OIBDA and not out of CapEx is because it's been more than a year since the timed agreement was signed.

Okay. Thank you very much. And you don't expect to incur such charges in the next quarters, right? That was just for this particular quarter.

No, we will not incur those charges.

Thank you very much.

Thank you. Our next question comes from Herve Drouet from HSBC. Please go ahead with your question.

Yes. Good afternoon. Just a few questions. The first one is on data content revenue. It looks like voice revenue did well, especially if you compare Q2 versus Q1. But data content revenue did less well quarter-on-quarter both in Russia and in Ukraine. I was wondering if you can expand on that. I think you point out some antifraud measure. I don't know if you can give us a bit more indications. And also in Ukraine, also, what makes plain the quarter on quarter decline we saw in data content.

And the second question is regarding the acceptance of the Comstar cash offer. I don't know if you can already tell us so -- at the present time, what percentage of shareholder have accepted the Comstar cash offer. Thank you.

On the content, that clearly was a continuation of our fight against the content fraud, which became very aggressive at the end of 2009 and beginning of 2010. And most of the measures that we implemented was aimed at improving our customer experience because customer experience, customer satisfaction stays at the very center of our strategy.

And what's been happening with content in Russia lately was causing a lot of customer dissatisfaction and churn. Therefore, we had to do what we had to do. But we do expect that we basically reached the bottom and the content revenues will not -- will be no longer falling. And from now on we will see them going up.

Would it be the same for Ukraine?

On Ukraine, I will let Mark Burden to comment.

In Ukraine, basically, if you'd look at last year, there was a very small increase from Q2 over Q1. Q1 was extremely weak. So overall, we have just a slight -- it's a seasonal decline, but we would expect to see that growing. And if you look at overall, in terms of data traffic, we have, for the first half of the year, 23% growth in -- and for data content, 112% growth. So we obviously have a very positive dynamic. It's just a certain amount of seasonality in what's going on in our market. We would expect that the pattern of growth would continue in the future quarters.

And on the VTO, obviously, we cannot legally disclose the percentage that accepted the offer -- the offer so far. The only thing I can say that there is significant interest and there are people who have accepted the offer already, at this point.

Okay. Thank you very much.

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

Yes, hi. I was just wondering, first of all, in July, August, due to the drought and the fires in Russia, have you see any abnormal traffic sort of patterns on your network and how would that affect, supposedly, your third quarter numbers?

Secondly, you mentioned that there is an improvement on the corporate side. Again, I was wondering, do you see that through the renegotiation of the contracts? Do you see just the growth in the usage or do you see sort of general possibility also to raise prices with the corporate users as well? Where does this growth come from? Thank you.

Thank you, Alex. No, we did not have -- we did not see any abnormalities in July or August, due to fires. Our infrastructure had enough robustness to withstand the fires and the abnormalities. So we did just fine. There is, yes, an improvement in corporate spending.

We see it mostly in roaming, due to the increase in overall business [spending]. As far as renegotiating the contracts, no, we will not be renegotiating any contracts this year. But I do believe that we will get our contracts extended for 2011 as we enter the negotiation process towards the end of this year.

On a non-changed basis, basically.

I'm sorry?

Thank you. On a non-changed basis.

Yes. Yes.

Thank you.

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

Thanks. Yes, sorry, my question has already been answered.

Thank you very much. The next question comes from [Ivan Kim] from Renaissance Capital. Please go ahead with your question.

Good afternoon. Two questions, please. The first one is the -- on mobile margin in Russia excluding retail. It was at the level for the first quarter and usually there is the seasonal pickup in the second quarter. And basically, what was the reason for this? And the second, the capacity situation in Russia, and probably broken down into data and voice in the regions, what's happening with data (technical difficulty) these megaphone pushing data [excluding] pricing it lower? And what's Tele2's up in the regions? Thank you.

I'm not sure we got your question about the retail right. If you could just repeat what was the question about the margin on retail.

Yes, yes, sure. It wasn't actually not on retail margin, but on the Q1 mobile margin, excluding retail. So it was at the level of the first quarter, at the 51% in Russia. So basically, the question was that it usually improves as -- due to seasonality in the second quarter and it didn't this time. What was the reason for this? Thank you.

So that's Aleksey Kornya. Yes, we do see improved margin on the back of seasonality in purely mobile business if we exclude the retail. And if this was your question.

But actually, it was at the level of the first quarter. It was 51% on second quarter and 51% on the first quarter.

Yes, but if we exclude one-off effect, which we described earlier during this call, then we would clearly see more than one percentage point improvement in our margin mobile business.

Okay.

And our competitive situation on voice -- on voice and data markets. On the data markets, obviously, we do have quite a bit of competition going on as players are trying to acquire as many data customers as possible to catch up on the sort of early penetration game that is happening with the 3G. I don't think that anyone is really winning this game at this point from all big three players.

Megaphone is being the most aggressive with the build out of 3G networks and also on pricing on mobile internet. But that, I believe, we are doing pretty much in line with Megaphone in terms of revenue and the amount of data customers investing at this point less in 3G networks. We are planning to increase the level of our investments to catch up with some of the Megaphone aggression.

So I believe we are in a fairly good position there. And as far as voice pricing goes, Tele2 remains to be aggressive and we are responding in some regions. In some regions we are not, depending on our market position. But I wouldn't say that overall the competitive pressure from Tele2 in a significant way, will negatively impact the Russian market overall.

Okay. Thank you.

Thank you. Our next question comes from Tatiana Boroditskaya from UBS. Please go ahead with your question.

Good afternoon. Tatiana Boroditskaya from UBS. Several questions, if I may. Can you please comment on any plans you might have at the moment for debt issuance, both on domestic and Eurobond markets? And second question, can you please comment on your dividend payout expected for 2010?

Well, the first question you are asking what are the costs of our credit Eurobonds and ruble bonds, which we are issuing in domestic and Eurobond markets. Am I right?

No, actually, I wanted to know about your plans to issue any additional Eurobonds or any local bonds in the future, towards the end of this year and in 2011.

We -- right now we are not lending any materials issuance of the debts. In particular, no raising of financing in hard currencies this year for sure. So there might be some minimal amount raised in local currency, in local markets. The amount might be high if we do some portfolio restructuring. Did I answer your question?

Yes. Thank you.

Thank you. Our next question comes from [Alexander Pachsik] from [Deo Reporter]. Please go ahead with your question.

Hi. I have two minor questions. First of all would be could you please comment on the Austrian media reports about MTS being potentially interested in the acquisition of Telecom Austria or at least a stake in the company. And the second question would be what are generally the company's plans for foreign development, especially in countries where MTS does not have presence at the moment? Thank you.

I was answering similar questions in the previous conference calls and our position to them have not changed. We are constantly monitoring international markets for expansions opportunities, but we do have one clear criteria, which is whatever acquisition we make, if we make it, has to generate value for MTS and not have a goal of just increasing a company's size. And so it needs to have a clear -- either a clear synergy or a clear validating potential. And so far we haven't found targets that would do just that. Therefore, we don't have any immediate international expansion plan.

Yes, thank you. That answers my question.

The next question comes from Alex Wright from UBS. Please go ahead with your question.

Yes, thank you. I have three quick questions, please. First of all, on the subscriber acquisition costs, they've been moving up over the last couple of quarters, especially the dealer commissions. If you can comment on the dynamics there, please.

Second question is, in the cash flow statement, there's a line where you've acquired some notes receivable from Sistema Telecom. Could you just explain what that relates to? And then the third one is if you can provide any new insights on the potential LTE spectrum awards, other than what we've been seeing in the press in recent weeks. Thank you.

Okay. I will answer question number one and question number three and Aleksey Kornya will comment on question number two. On the subscriber acquisition costs, we had a slight increase in Q2 as compared to Q1. And this is majorly attributed to increase in quality of our subscriber base that we attract on a monthly basis and a decrease in churn. Because we pay our dealers mostly on the basis of ARPU that -- the SIM card that dealers subscribe to as earned.

So once we increase in a new -- once we have an increase in new acquisitions ARPU, we increase our dealer commission. So that's a reflection of that. Plus we subscribe less customers with higher quality, with stable marketing spend, which divided by the number of customers also increased this far.

And number three. Insights on LTE spectrum issues in Russia. It is a fairly complex subject and we don't have a clear answer yet as to how the decision will be made on the spectrum allocation in Russia. You've been probably following the discussion on that topic in the press.

We made our position very clear at the regulator and we've addressed various lines of authority in Russia, including the Prime Minister and the President that we believe that the LTE frequencies should be distributed in a clear and transparent way through a stand-up process or an auction process. And we are just awaiting on the regulated decision on finally how that is going to be done.

And when do you expect that decision, please?

And on the cash flow, Aleksey Kornya.

Yes, as for voluntary notes from [key sell], this was a continuation in the contingent part of our Comstar acquisition. Those notes were on Comstar when we were acquiring Comstar. So this was part of -- part of the transaction. They were moved up to MTS levels.

Okay. Thank you.

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

Good afternoon. First of all, I wanted to ensure that -- about your revenue, do I understand you correctly. Just to ensure we are talking about the same thing here, I think about 10% growth in 2010. And looking at your first half top line, it yields 19% year-on-year. So what could happen in the second half to yield 10% or maybe we are talking about like addition to revenues. This is the first question.

And secondly, a similar question on OIBDA. Looking at OIBDA margin for the first half, it was 45% when adjusted for the one-off you talked about. And so third quarter is normally stronger in terms of margin -- well, there should be some decrease in the fourth quarter, presumably. But I'm just trying to understand whether you want to be overly conservative or there are some serious risks to the margin in the second half of the year, which you see. Could you please share them then? Thank you.

I will comment on the top line and Aleksey Kornya will comment on the margin. Then when we are talking about 10%, we are talking about national currencies. We don't account for the dollar -- for the ruble appreciation effect. So that is the key answer to this. And on the margin, Aleksey.

Yes. For the first half of 2010, our Group margin is 44.3%. So we do not feel right now in the position to raise our guidance for the full-year above 45%.

Okay. I'm sorry, but when talking about revenue, yes, 19% -- this is if we like just apply a ruble rate to -- average ruble rate quarterly, yes, to your consolidated top line. So I understand that national currency, the -- could be different. But as a -- first of all, like a very rough estimate, I think this is good. So if I just multiply your dollar-based revenue on the ruble exchange rate for the first half in 2010 and 2009, I have 19% growth. So am I looking at like wrong numbers or --?

No, I'll continue answering on this question. You are looking at the right figures, but 19%, as was mentioned, includes exchange rate effect, which is coming from a strengthening of different currencies towards the ruble, comparatively to 2009 -- to dollars, sorry, comparatively to 2009. So if we take just national currency growth, then we feel the growth is about 10% for the year. And this is where the growth is right now.

Okay. Thank you.

Thank you. Our next question comes from Viktor Klimovich from VTB Capital. Please go ahead with your question.

Thank you. Good evening. I have the same question as probably last quarter regarding your CapEx guidance. So you are comfortable with this 22%, 24% as CapEx to revenue ratio, but Megaphone, they continue to increase their CapEx and we saw latest interviews of their top managers and they are very aggressive in the infrastructure building, both in radio part and in transport network. Can you please comment on this?

Yes, of course, Viktor. We clearly -- our strategy clearly is to remain a market leader. And we believe that, to a certain extent -- no, not to a certain -- we believe 3G investments will generate sufficient returns. But we also believe we have to be smart about 3G investments because people who use data networks at places and at the rate that they can consume those services.

Because not everyone in Russia is using mobile internet and penetration of these services is still low. Therefore, we have to be smart about how we do the 3G investments. So this year, we have increased internally already our estimates of the CapEx spent and we had the range of 22% to 24% in our estimate not by chance, but because we're watching what competition is doing and we wanted to leave ourselves room.

So we will do whatever we can do this year. But because we calculate our CapEx based on cash, there is a certain amount of cash that we can spend this year and we will not exceed it. We haven't given CapEx for next year yet, but clearly, one thing I can say -- we will not let Megaphone to be a leader in 3G in Russia. And to be a leader in data networks in Russia overall.

It doesn't mean that we exactly have to deal with the same amount of base stations and spend exactly the same amount of money, but clearly we are not positioned to loose in this important battle, if that's what your question is about.

Yes, but for now, unfortunately, you are losing -- you together with your -- with VimpelCom, you are losing to Megaphone. This is clearly a trend. And we kind of worry about this.

Not at this point. I think it is not in any way a dramatic situation. I think it is -- it can be easily fixed within six months.

Okay. Because what we can see now from Megaphone is that they want to shift, kind of long-term CapEx to this year and next year to build out the whole network -- 3G network within these two years. Then probably they will have much lower CapEx and you think that you will spread out this CapEx within maybe, I don't know, four, five years for 3G.

So probably at some point of time, customers will really see a difference in quality between Megaphone and you. Of course, not everywhere, as you said, you will smarter, probably. But if they will spend twice much as you spend and probably it will be visible for customers. That's my question.

It's the 80%-20% dilemma. We are trying to achieve 80% of results with a 20% of effort. The same formula that you spend 20% effort to achieve 80% of result. And then we spend 80% of the effort and money to achieve 20% of the results. So we want to gain the 80% of the results first with the reasonable investment that we believe we are making. And then slowly get the other 20%.

And spreading investments in time probably makes more sense because the equipment becomes cheaper year-over-year with the increased competition among the equipment manufactures and also newer versions of software each year and the speed of 3G network also improved.

So basically, you've got to build the network in such a way that you can get the most out of it. And it does not necessarily -- it is not a necessity that we have to build a 3G base station on every 2G station that we have. Because, for instance, that in road coverage with 3G will not make sense for quite some time.

And also some of the small towns and some of the parts of bigger towns are also not very relevant for 3G usage at this point. So we are monitoring the quality perception of the customer base very carefully and we are spreading our CapEx strategy according to that. So we are not, in any way, planning to lose on the quality of customer perception. And as I said, the customer experience is key and central to our strategy.

But do we understand you correctly that you may increase your CapEx in 3G next year, for example?

Viktor, there are many ways how you can accelerate CapEx without increasing buildup or network rollout without increasing your CapEx cash spend necessarily this year.

Okay. Okay, probably. I'll have to discuss separately with you. Thank you very much. Thank you.

Thank you. Our next question comes from Alex Balakhnin from Goldman Sachs. Please go ahead with your question.

Yes, hi. Two questions from me, if I may. First is you mentioned that your current subscribers are spending more on roaming. And do you see the similar usage patterns from your retail subscribers? So basically, do they travel more than last year in this year, basically? You can judge on July, August numbers.

And my second question was, on the previous call, you mentioned that Megaphone is quite aggressive and that's probably the main risk for the mobile market. Do you feel, three months on, that Megaphone activities probably more a risk or less a risk for you? Thank you.

On the roaming question, yes we do see a pickup in mark-to-market roaming use as well. Overall, I should say that the grow in revenues in the second quarter from mark-to-market revenues overall exceeded the normal seasonality by about 5%. So the growth was 5% higher than we would have expected just given the seasonality. And in roaming, it was even higher than that. It's exceeded sort of 10%. So we do see signs of recovery in the market and, yes, people do travel more.

On the aggression of Megaphone -- it is hard to tell what will happen and how will Megaphone behave in the future. One thing I can say, I believe that the aggression of Megaphone will not stop until we demonstrate that we are not willing to put up with this aggression and simply let our market share go, which we are fully intending to do. So I overall agree that the market will remain rational in Russia. But I do believe we have to work hard and compete to sustain and improve our market share in this market.

Understood. Thank you.

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

Yes. Hi. Thank you very much. First question, just to follow-up on the recent seasonal extreme weather conditions. You said there was no particular impact on your networks. Can you comment whether it's made any impact on your costs because I think that, when it's hot, your equipment needs to be -- the air conditioning spend is probably more intensive.

So can you comment whether it made any noticeable impact on your utility bills that we may see in the third quarter? And also, can you provide a breakdown of your margins between voice and non-voice revenues and recent trends in these two segments?

Okay. I will comment first on the weather. It did not impact costs in any material way. And yes, we might have had some increase in the electricity costs to air conditioning, but this is really not material, given the size of our business. And there were no other material effects, given that the areas impacted by fires are not the areas where our base stations are mostly located. Like the forest and the swamps and so forth. And on the margins on voice and non-voice, Aleksey Kornya will comment.

Okay. Definitely margins depend on what service we are talking about. So if we talk about voice service, the margins are about the level where they are overall for the business. If we talk about data services, the margins are really high because they do not include interconnect costs in data services. If we talk about content services, then margins are relatively lower to the level where, for the overall business margins are. So this is, in nutshell, how the distribution of margins is among the services.

To give you a couple of figures, just for your reference, the margins in the voice are around 50%. The margins on data are about 60% to 70%. And the margins on content are around 40%.

Great. Thank you very much.

Thank you. Our next question comes from [Keral Bactin] from URALSIB Capital. Please go ahead with your question.

Hello. I have just one very short question. Could you repeat, what is the deadline for tendering Comstar GDRs for the voluntary turnover?

It's September 21st, I believe.

For Comstar GDRs, you mentioned that you have the depository bank receipts with funds.

Yes, I think it's -- for GDR holders, I'm sorry, I think it's the 8th of September, end of the --.

Thank you. Great.

Thank you. The next question comes from Anna Lepetukhina from Troika Dialog. Please go ahead with your question.

Yes, hello. I have a question about CapEx. In the first half of 2010, CapEx stood at just about US$600 million. Whereas you guide to 22% to 24% for the whole year as a percentage of sales. If we use your guidance, it implies more than US$2 billion. Should we expect, in the second half of the year, CapEx to pick up significantly and what causes such seasonality? Or you think that it might be that you are to revise your CapEx guidance downwards?

No, we will not be revising the CapEx guidance and the CapEx will increase on the second half of 2010. And this is mainly due to how the contracts are structured with the different manufacturers and the construction companies. Because we account for CapEx on the basis of cash saved. So we will pay more cash for already projects completed in the first half of 2010 in the second half of 2010. So the CapEx payment distribution throughout the year is not necessarily reflective of the actual physical amount of size being built.

Okay. But in the previous year, there wasn't such seasonality. What has changed this year?

Well, the seasonality was there in previous years. If you look, not necessarily last year since there was a catch up and build up from the post-crisis 2008, when we made twice in the amount of investments in the first half of 2009. However, if you look at the previous few years -- and this will be the case in this year -- the CapEx spend accelerates to the second half of the year.

Okay. Thank you. And if I may, can I ask the second question. You posted quite an improvement in Ukraine. Just to understand, did you make any special initiatives that improved the performance or is it just a competitive environment is improving in Ukraine? And in the following quarters, should we expect similar performance?

Well, I should say that overall this is the result of our strategy working in the Ukraine. And in more detail, Mark Burden will comment.

Okay. Thank you for the question. Basically, as we've said, one -- we see an improving top line picking up from the crisis and the uncertainty surrounding the political situation. The business is starting to pick up and get going again. We have a number of exercises to improve the OIBDA margin, which are coming through.

And the effect of changes in interconnect generally are having a positive effect on our margin as well. We would expect that the pattern going forward would follow the similar seasonal pattern that you've seen in the past. There are some threats. We could have performed a little better without the significant increase in radio frequency. And obviously we have to see what further impacts the government, as they roll out their program, may have on our margin. Thank you.

Thank you.

Thank you. You have a follow-up question from Cesar Tiron from Morgan Stanley. Please go ahead with your question.

Yes, I just wanted to follow up on the questions that have been asked on the subscriber acquisition costs. So is it try to understand that the increase that has happened is -- this quarter is not a new trend, right? Is -- if I look at -- if I look at your OIBDA margin guidance for the year, I shouldn't think that that's the case. Am I correct in thinking that or --?

Well, basically, what we decided at the end of 2009 was that the quality of new subscriptions that we have was not satisfactory because the market penetration is very high and all three competitors continue to switch on and then churn out vast majority -- vast amounts of SIM cards.

And therefore, we took certain measures to improve the quality of sales. Therefore, decrease some quantity of the SIM cards sold. And because, again, we pay our dealers on the basis of quality and we pay them a share with what we earn from our customers, the overall absolute amount per customer increased. To which extent it is a trend for this year or not will depend on how Q3 and Q4 will fall out.

And it's also going to be the result of competitive developments with Megaphone because Megaphone continues to press on with a significant amount of gross adds. And we'll have to give and see how our reaction to that will materialize in the numbers. So I cannot, at this point, tell you whether it's a long-term trend or not. I think we'll be more clear on that after the third quarter results.

And do you think, if I just ask a short follow-up, do you think Megaphone is more successful in improving the quality of the subscriber it attracts?

Well, it's very difficult for me to comment on the Megaphone numbers because they -- I do not believe they published them yet for the second quarter. So once we see those numbers, then we are going to be able to discuss them.

Overall, the way the sales model works in Russia -- because most of the dealers -- so-called independent dealers which remained in the market after the acquisition of Euroset and the collapse of all the other federal distributors, so this model basically has a name of who from the operators will pay more in absolute terms to a dealer for the maximum amount of SIM cards sold and for the biggest amount of market share.

So whoever of the three operators offers the dealer the best deal gets the vast majority of SIM cards, both good SIM cards and not so good SIM cards. Because the dealers don't have a sophisticated system of separating good customers from not good customers and mostly dealers are involved in what is called giveaways when they make promotions and they just give away SIM cards in big amounts, which will never basically be used, just to create a report for the operators and collect their dealer commission.

So basically, right now in Russia, whoever sells most gets also the most of junk SIM cards. And this has not changed simply because of how the dealer market is structured. And that is exactly the reason why we decided to invest in building our monobrand network. Because in our monobrand network, we can clearly control the quality of the SIM cards we sell. And this will help, I think, overall, in midterm improve the market here and the quality of the SIM cards.

Okay. Thank you very much. That was very clear.

Thank you. We have a question from Elena Mills from Alfa Bank. Please go ahead with your question.

Good afternoon, everybody. Just a quick question on the retail network profitability guidance. You mentioned on the call that you're still very confident that you can reach breakeven by the end of this year. And if I just look at your operating result at that level, you seem to have widened the loss by around 43% year-on-year in the second quarter.

So what I'm interested in is what specifically gives you confidence that you can get to a breakeven position by the end of the year? Is it the sort of lapping a number of store opening and prelaunch costs? Because I noticed that you opened 48 new stores in the quarter and seven flagship stores in Moscow. Or is it predicated on some sort of improvement in your volume and your turnover through the stores? Thank you.

I will answer the question. I have to say that right now we are already close to achieving our target on breakeven and zero OIBDA for our retail. If we are to exclude our commissions, which will pay for our partners in the buildup of our retail network, then we are reaching our target and we are pretty confident that we will reach them by the year.

I'm not sure what US$43 million increase on loss you --?

No, I said -- it was 43%, Mikhail, not US$43 million.

43% of the margin?

No, no. Year-over-year widening of the operating result.

Yes, but the difference comes from the size of retail operations. So over the year --.

I appreciate that.

-- they increase in size and since they have low margins, then they have -- they put more pressure on our margins so they decrease our Group margins more than they did at a year ago when the size of the retail operations was relatively less. So that does not necessarily relate to profitability -- the retail operations themselves.

Yes. To give you a --.

Am I mistaken that you had an operating loss on that business in the second quarter? On my calculations, you actually had an operating loss.

No, no, no. We do not have operating loss. We do have, yes, a slightly negative OIBDA. But we are about to reach already our target of zero OIBDA by the year end.

I think on a previous call you had mentioned that you were making some payments to your retail partners commissions and that you thought those would fall away. But is that the main driver of the result improving or, once again, are you predicating your assumption on the expectation of higher turnover in the stores? Or is it really that your lapping some of these store opening costs because you're going to be slowing the pace of store openings into the second half of the year?

Well, let me give you a very simple explanation. We have two temporary cost items that will be removed in 2011. And those are payments to our partners, which have been agreed up front before we started the core business and we believe they're absolutely justified because we have no experience in building retail business. And it's really worthwhile to get people how to know -- who know how to do this thing and get the business built successfully.

So those payments will go away. And also we have payments for rebranding and refurbishing the networks which we acquired into MTS. And those costs are also begun. If you today were to subtract those two cost items out of the P&L of retail business, it would be zero OIBDA [of course] making already today.

Thank you. That's exactly the answer to my question and that's very helpful. If I could just clarify, those costs you mentioned will be gone in 2011, but will they continue into the second half of this year?

They will be gone in 2011. I will not tell you exactly which month they will be gone, but they will be gone in 2011.

So we should see them then in the second half of this year.

Yes.

Thank you. That's very helpful.

Thank you. The next question comes from Josephine Shea from Hartford Investment Management. Please go ahead with your question.

Good morning from me here in the US. I have a very quick question on working capital. I'm trying to reconcile your free cash number and your working capital since your official cash flow statement you don't give a breakdown. Could you give a little bit more color on the working capital movement? I have a source of cash there and that obviously wasn't the case. So thanks.

I'll answer the question. So what we have that our cash from operating activities this year, this quarter increased. So we had a positive movement in the working capital. So I don't know what exactly is I might add to this? We have a positive working capital movement this year. And that reflected now operating cash flow.

How much was it during the quarter, the positive working capital movement?

Well, I would not answer you exactly right now. Let us address it with the full of question (inaudible).

Okay. Thank you.

We have a follow-up from Igor Semenov from Deutsche Bank. Please go ahead with your question.

Yes, thanks. Would you be able to provide a separate revenue guidance for Russian mobile segment?

Not at this point, Igor, unfortunately.

Okay. And the second question was -- I'm sorry. That's all right. Thank you.

Out of questions. If Igor is out of question, I think we should wait for another question, please. It's the last one.

Okay. The next question comes from Liam Hines from [Liam Hines] from [Okram]. Please go ahead with your question.

Hi. Out of the 22% to 24 percentage revenue spent on CapEx, can you give me a breakdown of where that CapEx is going to go? Is it going to go into fixed line? Is it going to go into mobile? Could you just give me a breakdown of that, please? Thank you.

Well, roughly 70% of that is going to go to 3G in Russia. And the 3G investment is split sort of 50%-50% -- 50% transport networks and underlying infrastructure and 50% would be ready network. And the remaining 30% will go for 2G maintenance in Russia and 2G in other countries such as Ukraine, Uzbekistan, Turkmenistan, Armenia, and so forth. The build-out of 2G in Russia, the new 2G coverage in Russia also exists, but at a very minimum level.

Okay. Thank you.

Thank you very much, ladies and gentlemen. We welcome you, at any time, to contact our IR department if you have any further questions. A webcast of the discussion will be available on our website as usual. And in the meantime, we very much appreciate the interest and wish you a pleasant day. Good-bye.

Thank you. This does conclude the Mobile TeleSystems second quarter 2010 financial and operating results. Thank you for your participation and you may now disconnect.