Mobile TeleSystems PJSC (MBT) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Mobile TeleSystems Third Quarter 2010 Financial and Operating Results Conference Call on the 18th of November 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 your host, Mr. Andrei Terebenin. Please go ahead, sir.

Thank you. Ladies and gentlemen, welcome to MTS conference call to discuss the Company's third quarter 2010 financial and operating results. Before beginning our session, I would like to remind everyone that except for historical information, comments made during this call 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, revenues and/or subscriber growth, syndicated loan facilities and their usage, legal actions and proceedings directed at the Company or its representatives, regulatory changes and the impact of the Company's operations in markets in which we operate, financial indicators such as operating income before depreciation, amortization, average revenue per user, cash flow projections and return on invested capital, technical matters as they pertain to our mobile communication networks, including equipment, licensing, co-network [stages].

Capital expenditures and operating expenses, issues related to the management to MTS wholly or partially owned subsidiaries and macroeconomic developments within our markets of operation. A copy of (inaudible) use these issues is available MTS in our reports and Form 20-F, which is available on our website also the United States Securities and Exchange Commission.

Important factors could cause actual results to differ materially from those contained in our projections and forward-looking statements, the statements mainly include company press releases, earnings presentations and MTS Form 20-F as well as other public filings made by the Company with the United States Securities and Exchange Commission, all of which are available of our company website or at the United States Securities and Exchange Commission website.

MTS [disallows] any obligation to update any previously made forward-looking statements after this conference call or make any adjustments to previously made statements to reflect changes and risks. Copies of the presentation materials used in reference in this conference call are available on our company website. Now I will turn the call to Mr. Mikhail Shamolin, President and Chief Executive Officer, MTS Group.

Ladies and gentlemen, thank you for joining us today on the conference call to discuss the Company's financial and operating results for the third quarter of 2010. Joining me on the call today are Aleksey Kornya, Vice President and Chief Financial Officer and Mikhail Gerchuk, Vice President, Chief Commercial Officer.

For the period, we delivered strong sequential and annual growth in all of our markets of operation. During the quarter we grew group's revenue by 10.8% year-over-year to a US$2.9 billion. We attributed growth to the positive seasonal dynamics, subscriber additions and the general increase in usage in our core markets, driven by the continued implementation of our 3i Strategy.

In Russia, we increased our revenue from the mobile business 8.6% year-over-year to RUB61.3 billion, due to subscriber growth and seasonally higher roaming revenues. Revenue from the sale of handsets and accessories exceeded RUB5 billion, a 27% increase quarter-on-quarter.

The increase was largely driven by higher sales of the premium handsets, including smartphones. New tariff promotions also fueled modem sales. For the period, we sold an additional 520,000 units. Our fixed line business demonstrated revenue growth of almost 13% year-over-year to RUB13.4 billion. We witnessed improving domestic and international long distance calling and were successful in up selling broadband internet services to regional pay TV customers.

The growth also reflects a regulatory price increase for NGTS, residential and corporate voice services. As we mentioned on the last call, in July we expected -- we expanded our fixed business, with the acquisition of Multiregion, a group of broadband and cable TV providers, which increased our fixed line footprint to 110 billion in Russia.

In Ukraine, revenues improved year-over-year by almost 4% to roughly UAH2.3 billion. This improvement reflects the continued strength of our value proposition to customers. Over the past year, [purchase] decreased from 10.4% to 6.6%, which showcases our efforts at strengthening the quality of our subscriber base and increased loyalty of our customers.

In Uzbekistan, we increased our revenue year-over-year by 13.6% to almost US$115 million. We continue to maintain the leading position in the country, with a 43% market share having added more than 570,000 customers during the third quarter. Revenue growth from subscriber acquisitions was partially offset by decreased usage and due to the Ramadan holiday.

In Turkmenistan, high voice usage and value-added services consumption translated into 29.7% top-line improvement year-over-year to TMM159.3 million, with penetration levels still quite low, we continue to see opportunities and strength in this market.

In November, we launched the 3G network in the center of Ashgabat, the capital of the [Turkmen]. We also launched coverage in Turk [membership] city as well as all the provincial centers in the near future.

In Armenia, our revenue performance improved 8% sequentially to AMD20.9 billion on the back of a positive seasonal factors with the greater contribution from roaming usage. And now, Aleksey Kornya will serve to discuss the group's financial profitability and performance.

Thank you, Mikhail. For the period, group OIBDA, group rose to 8.2% year-over-year to reach US$1.3 billion. This translates in the OIBDA margins decrease of 1 percentage point year-over-year, primarily driven by greater sales of handsets and accessories and growth in our fixed line business.

In Russia, our mobile OIBDA margin slightly decreased from 45.4% to 45.7%, sequentially from the second quarter. We continue to see negative impacts on our margins from the increased sales of handsets and accessories. In particular, we sold over 520 modems during the quarter. Some of the quarterly decline is also attributed to higher advertising and dealer commission [costs].

However, in third quarter 2009, the impact from retail was 560 basis points on the margins and this quarter only 330. So we are seeing significant improvements in our retail business.

Our fixed business in [OIBDA] margins improved by 0.3 percentage points year-over-year to 41.2%, largely due to the new growth. In Ukraine, EBITDA margins showed solid growth of 1.5% year-over-year to reach 49.7% and we continue to see steady improvements in the quality of our subscribers and the improved traffic mix has helped our margins.

In Uzbekistan, OIBDA margins slipped slightly due to -- slightly, due to both the influx of lower value subscribers and the seasonal impacts of the Ramadan holiday. In Turkmenistan, the OIBDA margin improved sequentially to 61.1% and in Armenia, our OIBDA margin was seasonally strong at 55.2%. Net income climbed by 34.5% quarter-on-quarter to US$475 million.

Key factors included the decrease in our interest expense throughout debt optimization for -- in the ruble appreciation, which yielded a ForEx gain of US$18.8 million. We have been very successful in our efforts aimed at optimizing our debt portfolio.

In addition to other initiatives we have discussed in this call, we reached an agreement to lower interest rates on our -- the bank facilities in the total amount of RUB53 billion. In line with our preference for ruble denominated debt, we won't repay the second and last tranche on our outstanding syndicated loan in the amount of US$161.5 million. The loan was originally signed in April 2006 and carried a five-year maturity.

At the end of the period, non-ruble debt accounted for roughly 37% of our debt portfolio, but this should decrease by the end of the year. In October, we completed the redemption of our US$400 million Eurobond. Just recently, we tapped local bond market placing series 07 and series 08 ruble-denominated bonds a five-year RUB15 billion issue with a coupon of 8.15% and a seven-year RUB10 billion issue with a coupon of 8.7%.

This makes us the first Russian corporate to solicit seven-year money from the bond market, which is a strong statement on our financial position, given the volatility we are now seeing in global capital markets.

For the start of the year, net debt decreased from US$5.7 billion to less than US$4 billion, a significant reduction for a company the size of MTS. This is attributable to total repayment of US$2.8 billion in debt for the year, which includes accelerated repayments of US$1.3 billion and the leveraging of Comstar through the repayment of RUB26 billion loans to Sberbank, ahead of schedule, following the sale of 25% stake in Svyazinvest to Rostelecom. This leaves us with a comfortable net debt OIBDA ratio of 0.8.

We have been working aggressively to renegotiate interest rates on our debt and as a result, we are seeing a drop in our cost of debt. By the end of this year, our total cost of debt will drop to roughly 8.4%, more than 100 basis points less than it was in the beginning of the year.

At the end of the quarter, we held a strong position in cash and cash equivalents amounting to US$2.2 billion in anticipation of further debt repayment in the fourth quarter, capital expenditures, fulfillment of dividend obligations and other quarterly results.

Free cash flow for the nine months of the year increased to US$2.4 billion. The increase is attributable to the sale of Svyazinvest stake, though a lower CapEx and the sustained improvement and maturation performance will lead to a year-over-year increase in free cash flow.

Group CapEx spending year-to-date amounted to almost US$1 billion. Although we are meeting our network development goals for the year, our spending will be lower than previously guided. We expect full-year CapEx to be roughly 20% of revenues. Because we are still in the process of rolling out our 3G network and enhancing our fixed line infrastructure, lower spending in 2010 may lead to slightly higher spending in 2011. Turkey --

Thank you Aleksey. As you are aware, we are moving forward with the acquisition of Comstar that creates the largest integrated telecommunications provider in Russia and with CIS. As a part of the process, we're going to have a voluntary tender offer to Comstar shareholders for up to 9% of Comstar issued share capital.

The retail was successful, which allowed us to increase our ownership stake in Comstar to 7.97% of Comstar's issued share capital, a 73.33, excluding treasury shares. The merger process is expected to be concluded by mid-April 2011, subject to the shareholders' approval of the transaction and certain regulatory steps. We will seek the approval from the shareholders of both MTS and Comstar at extraordinary general meetings on December 23rd, 2010.

In the third quarter, we achieved solid progress in integrating Comstar's operations. We rebranded Comstar retail outlets in 53 cities. With an aim to increase customer value, we introduced triple-play bundled offerings across Russia and integrated Comstar and MTS tariff plans for corporate customers. We have also begun to utilize Comstar's fiber network in Moscow by connecting our HSP-plus base stations.

We continue with development of our retail network. We currently operate more than 2,200 stores in addition to our franchise outlets. Our retail efforts have allowed us to achieve a 14.2% market share in handset sales at the end of the quarter. In addition to exclusive models, we offered, through our Vodafone partnership and bilateral agreements with manufacturers like Nokia and Samsung, we are now offering nine MTS branded models.

In the third quarter, sales of smartphones surged by 67% in terms of units sold compared to the previous quarter. We expect this trend to accelerate, given the growth of mobile internet penetration in Russia and the ever increasing affordability of smartphones. Earlier this week, we signed a non-binding indicative offer to acquire 100% of Sistema-Telecom, LLC, a non-operating subsidiary of Sistema.

Sistema-Telecom's primary assets are the distinctive egg trademarks, used by Sistema's telecommunications subsidiaries. As you may recall, in 2006, Sistema introduced the Umbrella brand to link its telecommunications assets in the eyes of its customers.

In the year since, however, the market has undergone significant changes that saw ownership of many of these assets shift to MTS. Today, we are truly operating under a unified brand to all of our customers and are continuously extending our brand to different services.

This includes large initiatives like the acquisition of networks like Multiregion and every day activities like the launch of products like MTS Easy Payment, which greatly expands the type of financial transactions we can enable from people's phones.

Given the prospects we see in our market, we feel it is only logical to acquire full control of our logos and trademarks to ensure that all shareholders benefit equally in the brands' further development. Thank you for your time. And now I'm happy to open the call to your questions.

Thank you, sir. (Operator Instructions). Thank you. And the first question comes from William Kirby. Please go ahead with your question.

Thank you. Yes, I have two questions please. Firstly, what sort of inflation rates are you seeing in the advertising markets right now? What sort of increase in sales and marketing expense are we expecting next year? And then my second question is on Sistema-Telecom. I understand the strategic rationale for buying that, but could you just take me through how you arrived at the valuation please?

Yes, Will, of course. On inflation rate for advertising, I believe it's -- it will be in the range between 15% to 20% for next year. And we are currently running a tender for TV advertising next year. We are seeing some discounts in the process, so we expect slight increase in the absolute amount of spend, but not dramatic.

On the Sistema-Telecom and the valuation, the backbone of the valuation, and Aleksey Kornya will add to this, the backbone is simply a DCF calculation of the royalty payments, which we have been making from 2006 up until now and obviously then continuing in the future from MTS and from MGTS, would be a standard walk. And basically it was confirmed by the bank, which was hired by the Committee of Independent Directors, because this decision was discussed and made by Committee of Independent Directors, who attracted the financial and legal advice. So it was more or less a straightforward calculation. I don't know whether, Aleksey, you want to add something?

Yes. I'll give more color to answer your question (inaudible) as you know is MTS and MGTS and Comstar trademark and the whole portfolio for around 22 (inaudible) than MTS (inaudible) MTS retail stakes. The methodology which was the royalty relief methodology which is this year for royalty payments based on naming new projects MTS management (inaudible).

So, the promissory note issued by MTS was taken into place value. TS retail was valued at nominal carrying value, less than RUB5 billion, and for the royalties that was just the valuation of a 15-year projections plus terminal growth rates or 3%. The [vac] was slightly lower than [compared] to estimates, which is a reflection of the lower risk of those payments than the market usually attributable into. Basically, the cash (inaudible) of the valuation.

Yes, and preempting some questions and looking already at some analyst commentary, (inaudible) I would like to say that this was an initiative which was initiated by MTS management in the summer. It was not Sistema imposing on MTS an obligations to [find] because we don't carry such obligations.

This was something that we decided, as MTS management, because when we made a decision to make an offer to minority shareholders and merge Comstar and MTS, it became clear there is no longer a sense in keeping the MTS logo ownership price with Sistema and we have to fully acquire our trademarks and form an integrated company. So, this is just a logical step in the Company integration efforts.

Okay, thank you.

And if I may, I would bet that -- we have a special committee at the Board which consists of all the members which is to approve this transaction.

Okay, thank you.

Thank you and the next question comes from Tibor Bokor. Please go ahead with your question.

Hi, sorry for follow-up on Sistema-Telecom valuation, but, I must ask this because our assumption is that you were paying 0.16% of the revenues as royalties, which comes down to less than US$20 million per year. So, I really struggle to get to the valuation. So, either if you could give us the DCF value for the royalties itself or whether there was an assumption of that the percentage for the royalties was going to increase significantly within those 15 years.

Well, this is Aleksey Kornya, again. You thought roughly right it's for total royalties we have paid. They might be slightly higher taking in that Comstar and MGTS included in this royalty agreement and implying the growth rate for MTS revenue and taking into consideration that the promissory note with the face value of about 55 million is a part of the [revenue], you will come to the valuation which was given to this (inaudible).

In other words, no assumption that the royalties would significantly [be mistaken].

Okay, that's clear. And one very quick question on Comstar's shares, when they will be converted into MTS? I understand that the deadline for that is April. The question is whether these new shares will be entitled for the dividends as MTS' new shares?

If we we're just trying to see whether we understand the question correctly. The shares, Comstar shares that will be converted into MTS next year. Those shares will obviously receive the dividend. Am I correct?

Yes, that was the question.

The answer is yes.

Absolutely clear. Thank you.

Thank you and the next question comes from Ivan Kim. Please go ahead with your question.

Good afternoon, two questions please. The first one is on the wireless service growth revenue in Russia in rubles. So, we have a slowdown in the third quarter in year-on-year growth here versus the first half. Can you please, probably, elaborate a bit on the reasons for this? And the second one is on CapEx guidance cut. So, you just rolled over to 2011 or you had some CapEx savings? Thank you.

Okay, Ivan, wireless service growth slowed down year-on-year growth rates versus the first half. This is in Russia or with rubles --?

Yes, that's for Russia.

Just give me a second here. Yes, it slowed down in Q3 versus Q2 and Q2 to Q3, wireless services --

Just year-on-year. Like, you had 5.5% revenue growth moving from the third quarter and then the first half it was more than 8%.

Can you specify, when you say wireless services, what exactly do you mean? Voice and data together?

Yes, together or just excluding retail.

So, it's growth of Q2 2009, Q3 2009 of 8% versus Q2 2010 to Q3 2010 of 6%. Is that it?

Yes.

For whatever percentage is there. Yes, it's the same for Russia revenue. Well, this is simply because in 2010, in Q2, we had a growth, relatively higher growth, Q2 to Q1 in 2010 as we had Q2 to Q1 in 2009 and therefore, growth of Q3 to Q2 was less than 2010 than in 2009 and this is because of the increase in the economic activity which started earlier, due to the, sort of, end of the crisis. That's the major explanation.

For the difference, we have just the half of 2009 to 2010 against the second half, which you are seeing right now, that's because of the higher base of the second half of 2009. Because, as you remember, first half of 2009, this was just the midst of the crisis, when we had the highest impact from the crises on macro economy and on disposable income.

Okay, that's clear. Thank you.

And on the CapEx, yes. Most of the savings of 2010 will be moved into 2011 because the change in our CapEx guidance is more of a technical nature due to change in our payment schedule because we calculate CapEx based on cash not on obligations for physical [bills].

So, should we expect the CapEx's percentage of sales in excess of 20% in 2011?

We don't give guidance for 2011 at this point, this will be done in the spring, in April traditionally, but, there are reasons believe that in absolute terms, CapEx of 2011 is going to be at least as much as 2010.

Now that's clear. Thank you.

Thank you and the next question comes from Igor Semenov. Please go ahead with your question.

Hi, thank you. First off, can you repeat on the CapEx, I have the same question. The increase for next year, you mean in absolute terms or in relative terms as a percentage of sales?

Your question is about the increase on 2011 CapEx in absolute terms as compared to 2010 --

Yes, right.

It is likely that 2011 CapEx in absolute terms will be higher than 2010. Again, we're not giving the guidance and the key reason is 3G investment. Accelerated 3G investment.

Yes, demand -- right, thank you. And then

(inaudible)

-- I have the question on the reduction or a slow down -- yes reduction of the EBITA margin in Russia, excluding retail. Do you think you would be able to improve it back to a sort of 50% or about 50% level?

The decrease in EBITA margin in Q3 is clearly the result of increased commercial expenses as a result of our competition with Megaphone. We've been conservative on our commercial expenses in the first six months of 2010, obviously, sending signals to Megaphone that it makes sense to reduce commercial spend as well, Megaphone did not do that, clearly, with the target of becoming number one and we, in third quarter, found that we can no longer be in a position of conservative on commercial costs because the leadership position in Russia, clearly, holds value to us.

But, we believe that it can absolutely come back to normal once the behavior of Megaphone changes and we believe that there are reasons to believe that will be here, will change. And, it will most likely change because we have no intention of letting Megaphone become number one in the Russian market and once Megaphone, hopefully, understands that, then the level of commercial expenses will be normalized.

Actually, our deal that we signed just recently should help that because Euroset is a more effective distribution channel than the local mom and pop distribution that we have to support before we sign the Euroset deal.

Right, it's good that you brought it up because I had a question on that return to Euroset. How do you think it impacts the foot traffic in your own shops and does it make your own investments into your own retail -- it increases the payback on that investment?

Yes, we don't believe there is a big threat to foot traffic because, obviously, the market share of our own shops is only 14% in terms of percent of sales. So, it's not a dominant play on the Russian market and people clearly visit several shops before they make their purchase decision.

I think our move to Euroset is more a threat to a local distribution which I think, and can actually be pretty good for the market, because a lot of this local distribution, which also disrupts pricing and market discipline in the terms of sales, only survive because the operator, such as us, supports them with the commission payments. Once those commission payments dry up to a certain extent, a certain number of those players will go out of the market, which will help our [brand] as well. So, I think overall the affect will be not only negative but positive.

Okay, thank you very much. And, can I also ask, finally, on the Sistema-Telecom again. How come it's not put up for shareholder votes? The value of the deal is clearly more than 2% of your balance sheet value under Russian standards.

That's because were acquiring from 100% MTS subsidiary, not from MTS subsidiary, per se.

Right, okay.

Thank you and the next question comes from Herve Drouet. Please go ahead with your question.

Good afternoon. Two questions, as well. The first one is back, again, on Sistema-Telecom. After the acquisition of Sistema-Telecom is selling the business, is of Sistema are going to pay royalties for the brand to MTS? That's my first question. And, do you think that acquisition may have an impact in terms of your potential attraction or it will be MTS interested to acquire at one stage, [selling] the business? Is my first question.

And the second question is regarding Smart Phone. I will be interested if you can share with us what sort of percentage do you think of your current users have currently a Smart Phone and what is the current percentage of Smart Phones which are sold currently as new handsets? Thank you.

(inaudible) get you to answer the Smart Phone question, I will get to the royalty. It's very simple, we are collecting royalties from Sistema now and we will be collecting royalties from Sistema for the use of our brand. But, obviously, we are collecting them also as a percentage of revenue, given the relatively small number of revenue of Sistema, this will not make any material difference to MTS balance sheet.

And answering second question (inaudible) of 18% of the Russian population has Smart Phones and this number grows significantly now, given the trend of such production in price for Smart Phones, we expect this number to accelerate and show strong double digit growth.

Okay. And do you have any percentage of figures currently of the new additions of handsets at the moment? What is the percentage which is Smart Phones, currently?

Well, what I can tell you is that currently, approximately 25% of our handset sales, handset sales in our mono-brand (inaudible).

Okay, thank you. And, in terms of the potential interest of MTS for [showing] an interest, or is it something you're not interested in at all at this stage?

With Sistema-Telecom?

Yes, [selling]

No, no interest at this point. Our position has not changed. Has nothing to do with this Sistema-Telecom transaction.

Okay. Thank you very much.

Welcome

Thank you. And the next question comes from Nadezhda Golubeva. Please go ahead with your question.

Good afternoon. Congratulations on good results. I have several questions if I may please. So first of all, could you please indicate how much revenue comps and risks, provided you've got CIS and national roaming to the levels where [FIOS] wants to see it? And also could you please give some color about what exactly roaming has got, national [PCIS] only and what is the timing because the messages in media were pretty contradicting? This is the first question.

Secondly, I wanted to ask you again, about the drop of net of retail EBITDA margin in Russia because I looked at your sales and marketing of course as a percentage of revenue so the -- you were up just 0.5% quarter-on-quarter. In the meantime your margin dropped more. So what possibly another reason for the pressure in margin in Russia?

And finally, I have a question to Mikhail Shamolin. So it's a bit regarding strategy. So with the current global telecom market landscape and thinking about just strategy in the part of possible extension to the USA, what do you think would be more attractive to look at the East or at the West and why, please? Thank you very much.

Okay, Nadezhda, thank you for your question. If I understand your question correctly about roaming, yes we will have an impact on our revenues but from the reduced right of [flight] (inaudible) after agreement with (inaudible). But partially this will be offset by elasticity in increase in demand because the intra-TIS roaming is elastic which is different from international roaming which is much less elastic. And the results number, we don't really disclose but I can tell you it is immaterial as compared to overall MTS revenue. You will not really notice it on the -- in our reports.

Sorry, on the national roaming, because I think it's a little bit bigger as a portion of revenue.

National roaming inside of Russia?

Yes.

I should explain one important details here. When we say international roaming we mean -- and that wasn't the decision that was taken, this is roaming between operators, between Megaphone, [Brintocom] and MTS, not an inter-roaming between our own regions. So inter-roaming stays exactly the same and the only thing that changes is roaming between Megaphone, [BUN] and MTS and given that the size of roaming between operators inside Russia was very small, there is virtually no impact at all.

Okay, so all in all the impact will be like negligible, yes?

Negligible, yes there will be (inaudible multiple speakers) some decline in revenues but on the overall scale you will not notice.

Okay, thank you and -- yes?

And to question number three, Aleksey Kornya will answer you about the market, I will take the number three question. When you say look East or West, you talk about potential M&As?

Yes, I'm talking about like potential M&A because the market is like pretty difficult and there are different views regarding whether it's now worth looking for the growth and expansion is let's say politically a stable market but with low penetration or possibly you think that it's time to look at mature markets because the -- might generate good free cash flows? So what's your opinion about this with the current market conditions, telecom market globally?

Yes. My preference is to look at the mature markets for very simple reason which is I believe that the new waves of growth in mobile telecom will come from data even though the industry is still trying to find an answer to the question of how to monetize this. But then, I'm sure that this answer will be found because I believe that the increase in data demand that we're seeing ahead of us is much greater than even the most aggressive sort of analyst expectation. And this growth will result in significant revenue growth.

And from that perspective mature markets and less mature markets will behave similarly. This wave of growth hasn't happened yet on the mature markets and hasn't happened yet on the emerging markets. Yet in the emerging markets, in the so-called emerging markets the growth driven by penetration usage is almost over.

And if you look at the landscape of telecom companies in 2010 and look actually at 2011, '12 and '13 you will see that this is the sort of [mean] growth compounding average growth rate is around 2% globally and for the most aggressive emerging markets it's around 9%, 10% perhaps. No one has really got them and therefore going to emerging markets just for the sake of this traditional growth we would be taking emerging market risk which is evident to everyone, political risk, currency, all the other risks.

But yet no specific upside potential, while in the more mature markets the wave of data growth may still be ahead and we don't guess the political in the currency, at least to the extent, and you get the cash flow. Of course given that there is a deal which can be attractive and we haven't found this deal so far because if we did you would have known about it. That's why we're concentrated at this point on our domestic market, but that's the best if you (inaudible) and --

(inaudible) do you think, given (inaudible) -- yes?

And Aleksey Kornya on the margin.

Thank you for sharing the answers.

Nadezhda, as far as margin concerned, as I mentioned there are two major partners affecting our margin in Russia. The first one is dealer commissions and I'm not sure that you can see from our financials specifically, Russia, without retail dealer condition dynamic. I think you looking either in the group numbers or -- not specifically in Russia, and in Russia we have about 30% growth in dealer commissions in the third quarter against second quarter.

And the second factor which I was mentioning is (inaudible) the handsets and accessory sales and also modem sales which reached more than 500,000 modem sales level. Yes, and basically there we have zero margin or even slightly subsidized.

Okay, but when I'm looking at your dealer commission in Russia it was 11, the sub, in third quarter, it was 13 in second quarter and you think about an increase? You mean -- because the number of subscribers, the number of additions went up because (inaudible). It was 13 in second quarter, 11 in third, yes -- dealer commission to subscriber, down.

I'm not quite sure where you are looking because we have the higher number of subs and we have a higher number of gross sales so --

Okay, probably because of in quarter -- it's probably because of the higher number of subs. Thanks. Yes, thank you very much.

We dramatically increased the number of gross sales in Q3 as compared to Q2 by roughly more than 1.5 million customers quarter-on-quarter.

Yes, that's clear. Thank you very much.

Thank you. And the next question comes from Keral Bactin. Please go ahead with your question.

Yes. Hi, I'm wondering about recent statements of federal -- onto monopolies, so their representatives on the second tariff on roaming. What are the chances for the implementation of the second tariff, do you see? And how may it impact your financials?

Well, I can say that the industry, the mobile industry in Russia overall has taken a very constructive approach to relationship and dialogue with the anti-monopoly regulators and this resulted, as you may see, in a fairly insignificant revenue consequences for the players in the whole industry, by the way, took very heavy fines very early on.

And I think this constructive relationship will not bring any dramatic surprises in the future. This is my point of view, of course things can be different but this is the way I see things and this is because we don't have any wrongdoing in our roaming and it is our thoughts, which is not an easy one, but still it is our thoughts to explain to the regulators the nature of the roaming markets which is not an easy market place.

As you know everywhere in the world roaming is very expensive and this is not a result of a collective action by operators, this is just the way the market of roaming works. And so far we've been successful in bringing our point and arguments to the attention of the regulator and therefore we are making changes.

We are also making change -- we need time to make them from the business perspective particular in the CIS. And the [last] initiative would be a per-second pricing, we haven't really discussed it yet, to the extent, and I think the devil there is really in the details. We are not greatly opposed to it, we are not greatly supportive of this, we just want to understand what exactly we are talking about here and how to act on this. But again, I think we have a good relationship. I think we have a constructive relationship and I don't expect any major shakeups in the future.

Got you, thanks.

Thank you. And the next question comes from Zoltan Palfi. Please go ahead with your question.

Yes, afternoon gentleman. I just have one follow-up question to what you said in the past. I was wondering what are your plans to acquire any further telecom assets from Sistema. And also more specifically, if you do plan to buy Sistema's stake in MGTS then what sort of price are you prepared to pay for that?

Well, Sistema, Sistema's stake in MGTS is an obvious one that we will be looking at and I can't give you the timing, the price. It is up for discussion. It is being discussed internally whether it makes sense to do it, at which price it makes sense to do it, at which point in time. If it will be a logical step to consolidate fully this business into an MTS business. Nothing else is currently in plans or under review. And once again, Sistema Telecom was not a transaction initiated by Sistema, it was a transaction initiated by MTS.

That's very clear Mikhail. Can I just ask whether there are variation of the MGTS stake which was RUB10 billion, as far as I remember, in the swap which Sistema done recently. Is there syndicative in your view for the value of these assets?

I'm not sure I understand the question.

Right, I think when as Sistema swaps this stake with Svyazinvest the value of the MGTS stake was established at roughly RUB10 billion by Ernst and Young, I was wondering whether this was still the valuation that is in your view about right for this asset?

Well if we are to consider the acquisition of the stake, the way we would approach it is again by setting a committee of independent directors who would then hire a bank to do a valuation and give a fairness opinion on the price. And whatever this valuation will be, whatever the price would go forth, that would be the price. At this point it's very hard for me to tell what the bank will come up with. In the Sistema Telecom deal, that was exactly the case, it was not the price which we suggested it was the price which was suggested by the bank that has done the valuation.

Right. Thanks so much.

Thank you. And the next question comes from Alexander Balakhnin. Please go ahead with your question sir.

Yes, hi. A quick follow up on the previous questions. The first is on the medium installation. It seems you are saying you expect the rates to go on by 15%, 20%. Can you probably give us your view on what will be your media activity next year, i.e. are you planning to keep it at the level of 2010 or you think it should be lower next year? Just trying to understand the impact of this dynamics on your profitability.

And second question, on the growth, year-over-year growth in the third quarter. So we see a slow down or stabilization of the growth year-over-year if you look at first, second and third quarter. Do you see the same trend in the fourth quarter, as of now, or you see that the market has started accelerating? Thanks a lot.

Yes, on the media installation as I mentioned, (technical difficulty) we will have roughly an (inaudible) absolute number of media [connects] next year (technical difficulty) but not at the max.

No decrease in media spend, simply because when we plan our media we look at the competition. We look at the share of voice because we have to have a share of voice which is [big] proportional to our market share. If we have less than that, the [fiscal leap] will have much reduction in the (technical difficulty) reasonable level and we do have obviously an insight of what the competitors are playing from the media market and therefore are planning accordingly. The slowdown in Q3, this is Aleksey Kornya, to answer your question.

Yes, as we were saying that a slowdown in the second half of 2010 is attributable mostly to the base of -- higher base of second half of 2009. And as you understand the first half of 2009 was badly affected by the crisis. So the lower growth rate in the second half of 2010 is applicable to the fourth quarter as well. So we will see basically about the same growth rate as in the third quarter or even slightly less, lower.

Understood. And just a quick follow-up, when you talk about the same presence, do you mean the same amount of dollar spend or the same amount of say minutes of [presence] et cetera, on the media space?

Can you repeat the question please, I'm not sure I understood it?

You said you will keep the same level of activity on the advertising market and do you mean you will keep spending the same amount of dollars or you will keep the same level of appearance in terms, until GRP?

I said budget will be definitely [broad].

Understood. Thanks.

Thank you. And the next question comes from Viktor Klimovich. Please go ahead with your question sir.

Good evening. Mikhail, can you please elaborate on the current competitive environment and the pricing activity because we see that on probably, in the third quarter prices started to move down. So what do you see now and of course we see that Megaphone is active VimpelCom with new management, they also probably can be a more active in the future. So what do you see your reaction and your next step here?

We are definitely not over reacting, we are behaving pretty rationally. We are not boosting what in the market is called SIM card giveaways. Where operators essentially subsidize SIM cards and this is a form of a price decrease simply reflected in the increase in dealer commissions with -- and especially with our agreement with Euroset we are trying to be as prudent as we can to increase the effectiveness of our sales.

There is a certain increase in the intensity of the competition driven by Megaphone but I don't really think it's dramatic and I also believe there is a good amount of elasticity in the voice demand still because a substantial amount of our customer base is still a very low ARPU, US$1 to US$2 and less than 100 minutes of use. Obviously, these people would like to talk more and there is liquidity in the demand.

So we will be seeing increase in traffic and we will be seeing an increase in revenues still, in voice, and of course the biggest question is to cap, how much money will we have to invest in capacity to get this traffic through? But here we will have not only the bad news but also some good news because 3G, as you know, has better capacity utilization. Given that we are building 3G networks we can offset some of the increase in demand for capacity by 3G and this will be accounted in these investments.

So I do see competition slightly intensifying because of again, Megaphone's desire to become number one. But I don't believe its dramatic and I also believe that Megaphone's shareholders are acutely aware of the margin consequences in Kazakhstan for example, for Megaphone and I do see the signs and discussions on their side that hopefully in 2011 will lead to a more rational behavior.

Of course. And can you please remind us for which period of time do you have contract with Euroset?

For the next 18 months. In 2015

Thank you. Fifteen?

Yes, 1-5, I'm sorry.

Okay, thank you.

Thank you. And the next question comes from Alexander Kazbegi. Please go ahead with your question.

Good afternoon colleagues. I would like to ask you a couple of questions about the potential acquisition of [Uker Telecom]. So the number -- the starting price for the bidding was named as US$1.3 billion. How much above that price would MTS be ready to pay? That's one question. The second question is, what would be the eventual structure of the financing should MTS win the competition for it, would MTS consider issuing bonds in order to finance the acquisition? Thank you.

Thank you Alex. We believe that the price of US$1.3 billion is already quite high. We have not made a decision that we would go for this asset, we're still in discussion. There are lots of questions and lots of complications around the asset so it's not an easy one and it is by far not guaranteed that we will even go for this. So it is premature to talk about the finances because we haven't even made our decision to participate yet.

Yes, tkay. Thank you.

Thank you and the next question comes from [Wycliffe Shinan]. Please go ahead with your question.

Good afternoon this is [Wycliffe Shinan] from Deutsche Bank. A question regarding the churn progression in Russia, progression, can you please elaborate on the quite substantial increase in the quarter-on-quarter and the year-over-year churn rates in the Russian market and what is driving it? And also, your expectation for the quarter, what is it this year?

The recent churn rate is basically this -- basically driven by increase in gross additions throughout the year and we now sell more than we sold in the beginning of the year. So this is the reason why we saw so high a churn in Q3. Just because we sold more, we had more gross additions than six months before. Generally while we sell more our churn levels will also stay kind of higher with respect to [proposed hybrids].

Sorry what's the expectation for next quarter?

Well let me, this is Mikhail Shamolin. Well let me perhaps intervene and explain a little bit how the churn works because we do get questions about churn all the time. Unfortunately in Russia the churn figures are really not indicative of anything at this point. Simply because a large percentage, roughly 40% of all the gross sales that we make never materialize in the real customers eventually. Those sort of -- that's SIM cards and this is just a competition in distribution.

The way the dealer commissions and the relationship with dealers is structured so that it incentivizes sales as much share of an operator that incentivizes the dealer with the bonuses and so on and so forth. So basically right now the way it works in the market the more you sell automatically the more churn you get. And since the volume of sales may shift quite dramatically in this competition within the three players so do the churn figures.

And so they [not currently] indicative and when we monitor churns we really look segment by segment and in the top segments of let's say US$15 sub and up the churn figures are really very small in single-digit numbers on the annual basis. So this is mainly those US$1 to US$3 subs which churn out pretty quickly they don't really make any material impact on the future of the company at this point.

Thank you.

Thank you and the next question Elena Mills. Please go ahead with your question.

Yes good afternoon everyone. My question is on the Ukraine asset results. I was just wondering if you would elaborate on your margin progression because you seemed to have done quite a good job on the OIBDA margin on the year-over-year basis which seemed more impressive given the very significant year-over-year growth in dealer commissions.

So could you talk about what exactly is driving improvement in profitability and whether this relates in any way to the large cost savings initiative that you announced about a year ago? And also if you could just update on where you are with respect to your overall cost cutting initiative within the Company I think that would be useful. Thank you.

Yes thank you Elena. Margin improvement in Ukraine is largely driven by the market behavior. This is the main factor. Of course our efforts to optimize and increase efficiency also add to that. But mainly it is market driven. And when I say market driven I mean less competition from Lite. Lite used to be a very aggressive player going for market share by reducing prices and therefore putting huge pressure on the market which drove margins of all players.

And this has stopped this year we don't see such an aggression and that allowed us to improve our margin in the Ukraine which is very positive news on the back of strong revenue growth. And if you look at the market share position for players in the Ukraine, MTS is the player which is gaining the share right now both in customers and revenues.

And also one -- another factor which is an important one a change in the connection rate there has been a reduction in the connection rate which also added to the market value. And as far as the overall cost efficiency effort is concerned I think Aleksey will say a couple of words.

Well indeed we're running a number of cost optimization initiatives through the core group which helps us to optimize in our core and sustain the market margin at the levels they are. Namely we are reducing our head count the third consecutive year in mobile business per their staff. We are establishing a special procurement unit which is focusing on savings through procurement.

And also we are running a number of structuring -- restructuring initiatives which are looking at centralization of certain functions saving on centralization and head count reduction of those (inaudible) functions. That's basically our ongoing process which we are running in the Company.

Thank you and if I could just a follow up question on Russia data content on dynamic. Can you just talk about when you expect the quarter-on-quarter growth rate to accelerate because there've been a couple -- several quarters where we've seen some -- some well, softness in terms of the overall growth rate. What you've explained very well what that's related to in the past but when do you think we'll cycle through the impact of cleaning up that content business and then starting to see some more robust growth.

Hello, Mikhail Gerchuk here. In the third quarter we saw -- we saw growth in our data content revenue after two quarters of decline. I think we announced on previous calls that this decline has been caused by our fight with fraud. Unfortunately in the end of last year there was a lot of fraudulent activity related to data content, SMS content and so on and we put measures in place to reduce and to stop these activities because they caused very significant dissatisfaction in our customer base.

Basically, for us customer satisfaction is the most important measure. We saw signs of growth in Q3. We will see more growth in next quarter and in the quarters thereafter because traditionally in Q4 and Q1 we seen increase in content -- in content consumption caused by holiday period.

(inaudible - multiple speakers). Yes that is exactly where I was going with the question. You seemed to have quite a high base actually in the fourth quarter of last year where you had over US$4.4 or US$4.5 billion of revenue from data content. So that's a significantly higher comparison then you were facing in the third quarter so my question was really aimed at whether you feel confident that you can actually show some improvement on the trend in the fourth quarter. But it sounds like you do feel confident about that.

Well, in Q4 we don't expect any dramatic improvement in our content revenues but I believe in Q1 you will see the dynamics that you've seen in previous years really starting again.

Thanks very much that's very clear.

Thanks we have a follow-up question from Igor Semenov. Please go ahead with your question.

Yes thank you very much. I just wanted to follow up on the data traffic revenues because the growth was materially below the growth in the subscriber base. So you sold over 750,000 modems a 52% increase over your installed base it seems but the traffic of revenues -- data traffic revenues only grew by 13%. I just wanted to check what was the reason, is just temporary promotions or we should expect a material decline in the growth rates from the data traffic. Thank you.

Igor let me just understand. We had a data traffic increase for 15% in Q3 versus Q2 which we believe is a relatively healthy growth and modem sales growth was in line with that. But modems are not a part of data traffic revenue it is a separate revenue item. What is your question specifically?

Oh yes I didn't realize. I thought the modem sales drive the data traffic. Of course the sales are accounted for in the handsets equipment sales but I thought they -- the users that buy them they generate data traffic and you seem to have a very healthy growth in your modem base. But both in the subscriber base that use modems is significantly less than the growth in the data traffic. So, I was just revenues -- 13% Q-on-Q is healthy yes but it's less than what one would expect looking at your very strong modem sales.

Yes Igor of course there are two things. One, the data traffic revenue that we present on page 17, I believe in presentation is of course not only coming from the modem. This is the way the logic stems, smart phones and mobile phones people using mobile data in phones therefore there is no -- there is no direct correlation in growth of data traffic revenue with the growth in modems.

And even though the growth in modems has been quite robust, we sold about 320,000 of modems in the second quarter versus 720,000 -- is actually not the right number -- it's 520,000 of modems. So 520,000 versus 320,000 so it's almost double but not yet. And of course the revenues from those modem sales also don't come immediately as those sales are done in three months and so you will see this revenue materializing in later months. And we expect to continue the data traffic revenue growth.

Okay great thank you very much.

Yes.

(Operator Instructions)

I think we are running out of questions at this time. So we have another -- last question.

The final question is a follow-up question from Elena Mills. Please go ahead with your question Madame.

Yes thanks for taking the follow-up. I really wanted to come back if I may to your comments about strategically how you're thinking about M&A opportunities and your apparent preference for looking at mature versus emerging markets.

I really wanted to give you an opportunity to clarify your view about what your priorities are in the short term because judging from the moves that some of your competitors have made I'm not sure that investors really understand and appreciate a strategy that focuses on mature markets for an operator who still's active in a market -- has a footprint in markets that are -- that have quite a bit of potential.

So maybe if you could just remind us again of what your near-term opportunities are with respect to M&A and what your criteria would be for selection of potential targets in terms of your return objectives. I think that would be quite helpful.

Yes we are -- well when I was talking about the -- let's say strategic thinking I did not say that we have an M&A strategy targeted towards mature markets and that we have used this pipeline and that M&A strategy is our strategy. Our strategy is actually not an M&A strategy. Our strategy is to invest and develop businesses in our core markets of operation because we believe in the opportunities here which we understand well and we can control and we can manage risk.

And those opportunities generate returns that we want to see. Returns to us also returns to our shareholders. And I was basically discussing on the global level of what is happening in different markets. So clearly if we go and do M&A transaction we want to do an M&A transaction we should create value beyond the simple sort of paying for the future cash flows with [need] cash. And this is exactly why we haven't really done any major M&A in the West or in the East up until now. And again we don't have anything particularly planned.

We are obviously looking around what is available. We are evaluating all kinds of opportunities. But again we need to find something which creates value and this is not an easy thing to find. Because either you should enter some sort of a distressed asset and assume the risk which the market does not want to take and then win by overcoming this risk. Or secondly, you may see an opportunity somewhere where there aren't other people don't see it.

Otherwise you're just buying basically an asset for its fair price. And we aren't too interested in buying assets for its fair value. So to be short we don't have a distinctive M&A strategy at this point targeted outside of our core markets of operation.

Thanks very much. I think that's very helpful.

Good thank you ladies and gentlemen we welcome you at any time to contact our Investor Relations department for future questions. The webcast of this session will be available on our website if you wish to replay the call. In the meantime we appreciate your interest and wish you a very pleasant day. Bye.

This concludes today's presentation. Thank you for your participation and you may now disconnect.