Mobile TeleSystems PJSC (MBT) 2013 Q2 法說會逐字稿

Good day and welcome to the Mobile TeleSystems second-quarter 2013 financial and operation results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Joshua Tulgan. Please go ahead, sir.

Thank you very much, and everyone, welcome. Before beginning our discussion today, I would like to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements, which may involve certain risks. These statements may relate to one of the following issues -- the strategic development of MTS's business activities, both in Russia and abroad; revenue and/or subscriber dynamics; financial indicators, such as operating income before depreciation and amortization or cash flow projections; operating indicators like average revenue per user or value-added services indicators; debt instruments and their usage; legal actions or proceedings directed at the Company or its representatives; regulatory developments and their impact on the Company's operations; technical matters as they pertain to our communications networks, including equipment, licensing, or network technologies; activities in lines of business that complement our communication networks; capital expenditures, and operating expenses, and macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available in our Annual Report or Form 20-F, which is available on our website or through the US SEC.

Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include Company press releases, earnings presentations, our Form 20-F, as well as any other public filings made by the Company with the United States Securities and Exchange Commission, all of which are available on the Company website, www.MTSGSM.com, or that of the US SEC at www.SEC.gov.

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

I'll now turn the call over to Mr. Andrei Dubovskov, President and Chief Executive Officer of MTS.

Thank you, Josh. Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and operating results of the second quarter 2013.

Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; and Vasyl Latsanych, Vice President, Chief Marketing Officer.

All around in Q2, we witnessed a continuation of the positive periods and trends we have seen over the past year. Recently, consolidation of our [basic] operations and adjustments of respectively past financial results; group revenue increased 5% year over year.

In Russia, our revenues increased 4% year over year to RUB86.5 billion. Revenue was boosted by strong performance of our mobile and fixed operations.

Mobile service revenues increased by 6% year over year to RUB66.2 billion. Key growth factors include increased data adoption and shorter monetization of data traffic and messaging revenues.

As we discussed last quarter in our disclosure call, we have a focused strategy of our retail outlets to push sales of lower-priced smartphones to drive shorter mobile Internet penetration in our subscriber base.

Overall, smartphone penetration increased to over 37% on our networks. Our decision to reduce sales of smartphones is a key reason why revenue growth slowed year over year. Quarter on quarter, sales of handsets grew slightly to RUB5.8 billion.

We continue to see market-leading growth in data traffic revenue, which grew 40% year over year. The growth was attributable to a number of factors, including the expansion of our data networks, which now have a capacity of around 42,900 2G and 29,800 3G base stations, as well as more than 2,000 LTE base stations; improved downlink speeds through the deployment of HSPA+ and dual-carrier technology; the growth and penetration of smartphones on the MTS networks; the success of new smart family of tariff plans for accessing Internet from smartphones, which enabled us to double data usage compared to other prepaid tariff plans; partnership with the vendors to offer embedded mobile Internet services for a customer purchasing certain smartphones and tablets in the MTS retail network; growth in the sales of affordable and tiered vendor platforms, priced between RUB1,800 and RUB4,600, which also already account for all but 10% of smart phone sales in the MTS retail chain; and threefold year-on-year increase in the penetration of tablet, driven by the sevenfold increase in the sales of tablets in the MTS retail chain as the increased sales of Samsung and Apple tablets and expanded our product portfolio with low-budget devices.

In Q2 2013, minutes of usage increased by 7% compared to the second quarter of the previous year. The increase is reflective of the rising share of tariffs with free on-net calling, namely Super Zero and Super MTS. Around 50% of subscriber base has already migrated to this tariff.

This translates into greater customer knowledge and in dramatic reduction in churn. During the quarter, churn rate decreased to 9.4% compared to 10.5% in Q2 2012.

For the second quarter in a row, we demonstrated single-digit level of churn, which is a level we haven't seen since 2009.

Content revenues declined by 11% year over year due to the discontinuation of promotional campaigns related to Q1 2012 and introduction of those issuers to restrict solicited SMS-based services. This has led to a strong improvement in customer experience.

This and other CRM-related activities have led to a threefold decrease in customer complaints since the first half of last year. This naturally is one factor that helped us to improve customer loyalty.

Messaging revenues again improved in Q2 2013 by 15% year over year, as migration from feature phones to smartphones leads to increase in consumption of voice, data, and messaging services. The partial decline in messaging revenues resulted from seasonal factors, similar to previous periods.

Our fixed-line operations showed strong performance in spite of sustained competitive pressures. Fixed-line revenues increased 4% year over year to RUB14.4 billion. Key growth drivers included network optimization in (inaudible). This enables us to migrate customers from [ideas sales drift to FTP] solutions. More than 85% of households based outside of Moscow are now connected via FTP technology.

We also continued to roll out our all-digital TV platform, offering up to 160 channels, including HD channels. The platform is already commercially launched in more than 80 cities out of 150 cities where we have presence in the fixed-line services.

In Moscow, we are happy to report strong progress in implementation of our GPON project. As of today, we have around 1 million households based in 4G -- 50,000 household subscribers actively using our GPON-enabled services. In our subscriber base, we see roughly 30% of households using banded fixed-line telephony and broadband Internet services.

Overall, fixed-line residential ARPU increased 5% year over year. Corporate ARPU increased 20% year over year due to two factors. We introduced new value-added services, such as VPN functionality, and have intelligent products, and we launched a number of B2G services, part of which constitutes a one-time revenue contribution from launch of projects in Moscow.

In Ukraine, we increased revenue by 5% year over year to UAH2.5 billion. The growth was driven by an increase in the subscriber base and higher usage of affiliated services. Data traffic revenue increased by 40% in spite of the absence of MTS 3G in the market.

However, this increase was partially due to a reclassification of revenues from vendors.

In Armenia, we increased revenue by 4% year over year, up to AMD19.8 billion. Drivers include our continued efforts to drive voice usage as well as the focus on promotion of data usage from smartphones and tablets. MTS retains the leadership position in the market with market share of 63.9%.

And in Turkmenistan, we delivered a sequential 30% increase in revenues up to TMT62.6 million. ARPU increased by 14% compared to Q1 2013. The growth was driven by promotion of tariffs stimulating on-net calling. Our market share remained stable during the quarter.

Going forward, we plan to ramp up investments in 2G and 3G networks, and so make additional investments in our IT services to improve customer experience.

Now, Alexey Kornya will further discuss the Group's financial stability and financial performance.

Thank you, Andrei. In second quarter 2013, Group OIBDA increased by 10% year on year, up to RUB44.4 billion. As Andrei related, we deconsolidated Uzbekistan during the second quarter and have restated historical numbers. Nevertheless, our strong OIBDA growth rate is attributable to both organic and inorganic factors.

In second quarter 2013, Group OIBDA margin increased by 1.9 percentage points year on year to 45.5%. Organically our OIBDA margin increased relative to first quarter 2013. Yet we realized about 200 basis points in improvements due to a number of one-off factors year on year, including the receipt of $125 million in relation to our global settlement of issues related to litigation surrounding our acquisition of Bitel in 2005, which impacted [ABC] in the amount of $27 million and accounted for roughly half of our inorganic OIBDA margin gain.

A positive impact from an accelerated recognition of discounts for roaming costs. Normally they annualized in the third quarter, which may lessen the positive impact from roaming we normally see in third quarter. And there was also some accrued expenses due to a new realization in costs in P&L, including inventory and other factors.

In Russia, OIBDA rose by 6% year over year to RUB39.2 billion. For the quarter, we delivered strong OIBDA margin of 45.4% compared to 44.6% margin in second quarter of 2012. We are seeing margin improvements due to rising -- raising data traffic revenues in total revenues and reduced handset sales. Our topline performance, in rising data consumption and continuous cost control initiatives continued to offset inflationary pressures, such as rising personnel costs, higher rent and network maintenance costs.

In the Ukraine, OIBDA increased by 6% year over year to UAH1.3 billion. The growth was reflective of increasing contribution of high marginal data services and total revenues and overall cost control. Overall our OIBDA margin in Ukraine continues its upward strength and reached an impressive 52.5%.

In Armenia, our OIBDA for the second quarter came in at AMD10.4 billion, which translated in a healthy margin of 52.3%. OIBDA dynamics was in line with the top-line growth. In Turkmenistan, we generated OIBDA of TMT20.7 million for a margin of 33.1%, an improvement of nearly 600 basis points from our first-quarter performance.

In second quarter, net income rose to RUB29 billion. As I explained, we realized the positive gains due to our settlement of Bitel through a reversal of provisions for the acquisition of 49% stake of Tarino Limited, the owner of Bitel in 2005, in the amount of $223 million as well as the $125 million in compensation we received in cash.

At the same time, we witnessed a non-cash FOREX loss in the amount of RUB3.1 billion due to the weakening of the ruble versus the US dollar and its impact on our debt valuation.

During the quarter, our total debt increased to RUB247 billion as MTS had local and international capital markets. In April 2013, we placed our first exchange traded ruble bond in the amount of RUB10 billion. In late 2013, we returned to the international market, successfully completing our bond offering in the amount of $500 million.

In June 2013 we repurchased our three Series A ruble-denominated bond in the amount of approximately RUB2 billion. And after the reporting period, we paid RUB20 billion [in delivered] loan facilities.

During the quarter in order to reduce exposure to currency risk on short-term loans, we also completed an early redemption of a number of (inaudible) loans in the total amount of $32.5 million. Since the beginning of the year, we have also concluded FOREX hedges on roughly $600 million of our US dollar denominated debt.

Our net debt to rough monthly OIBDA ratio came down quarter over quarter to 1.0 due to improvement in the operating performance and our success in maintaining the portfolio through early redemption of loans, repurchase of bonds, and the timing and advantages placed on those securities.

Free cash flow for the first half of the year improved to RUB45.2 billion, a 34% increase over the first half of 2012. During the quarter, we confirmed our commitment to increase shareholder return. In early August, MTS Board of Directors set the date for the Company's extraordinary general meeting of shareholders for September 30, 2013.

The Board also recommended that the extraordinary shareholder meeting approves an annual dividend of RUB5.22 per ordinary MTS share; RUB10.44 billion -- RUB10.44 per ADR, amounting to the total amount of RUB10.8 billion on the basis of the Company's first-half 2013 financial and operating results.

In the recommendation, which is approved by the Board of Directors, MTS will pay out around RUB41.0 billion in 2013 calendar year. This is in line with our new dividend policy that calls for distribution in the form of dividends of the amount equal to at least 75% of free cash flow for the relevant financial period or, if greater, RUB40 billion per year.

Regarding guidance, with the half year past we are comfortable reiterating our revenue guidance. We see growth in our core markets of 5% to 7%, factoring in the effect of the deconsolidation of our Uzbekistan subsidiary. This should imply 5% to 7% growth for the Group as well. Key factors in determining this growth remain stable voice revenues, increased adoption of data services, and sustained sales of smartphones and subscriber dynamics.

For OIBDA, we are pleased to raise our OIBDA margin guidance to over 43% for the year, considering our strong organic performance at the first half of the year, our one-off gains in Q2 related to the settlement of our Bitel legal case and other factors, seasonal factors, and continuation of the current stable competitive environment.

Over the next two to three years, we should see a comparable improvement in our margin. Over the period of 2013 to 2015, we believe that our OIBDA margin will be in the range of about 42%.

For now, we also reiterate our CapEx guidance of 20% of revenues, or approximately RUB80 billion. We continue to improve our 3G networks and will begin a broader roll-out of our 4G LTE later this year.

Towards the end of the year, prior to or during our Q3 disclosure, we revised CapEx spending. Recent M&A activity in the market will require us to examine our plans in the context of all development for 4G LTE networks. We are currently evaluating whether or not it will be necessary to further invest in our networks and accelerate our rollout of LTE. And we will report later what, if any, impact this may have on our CapEx spending in 2013 and 2014.

All around, we are successfully executing on our two key commercial goals. The first is driving data growth. Our roughly 40% growth in data revenues reflects higher usage and increasing adoption on our network. Using our Bitel network as a platform, we are focusing on the sales of lower-priced smartphones to drive greater data adoption. This is critical, because we believe that future growth in mobile service revenue will be driven by the migration of customers from feature phones to smartphones. On average, we see an increase in the customer spend on data services of over two times when someone upgrades their phone from a feature phone.

With sales of smartphones in our network now at roughly 38%, we see smartphone penetration increasing by 1% per month. This translates into sustained revenue gains.

Over the past six quarters, we have also introduced new tariff designs to both stimulate usage and monetize data services. Our Smart and Super Zero families of tariffs also bundles to leverage rising voice usage to encourage more SMS and data revenue. Year over year, we see a 3 percentage point increase in the number of customers who use data services. The data attach rate now exceeds 40% of our subscriber base and beats the market.

Network quality is also a key element of data growth. Since the end of 2011, we have expanded our 3G network by nearly 50% and launched 4G services in Moscow and elsewhere in Russia. This allows customers to use our data solutions at home, at work, and points in between, like weekend dashes.

Driving loyalty is the second element of our commercial policy. Since 2011, we have reduced our quarterly churn by nearly 3 percentage points. In addition to the improvement in sales channels -- we've had discussion before on these calls -- a core driver of our improvement is higher voice usage. As we described, voice usage creates affinity, which encourages the use of other products, but also creates a network effect.

Increased voice calling brings customers to the network by increasing the value they see from on-net calling. It also puts more people into their networks and our networks, and customers become stricter and less likely to churn.

We have also taken a wide range of initiatives to improve the customer experience. This includes mitigating the negative impact from unsolicited SMS and content services through anti-spam issuers and sticker review of services to better protect our customers. So then less than IT security systems and customer relationship management services overall has allowed us to improve our customer experience.

For example, complaints about unsolicited SMS are now three times less than they were one year ago. And we continue to improve our networks. Average downlink speeds have improved nearly three times since 2011.

Overall, our focus on data growth and the growing customer loyalty has formed the core of our commercial strategies for the past year. This has allowed us to sustain our growth while delivering greater value for both our customers and shareholders.

By the end of this year, we will present to our Board of Directors and shareholders a new strategy to better the present alignment of the development in our core markets and the financial strategies for our MTS. But until then, we continue to deliver on creating value in our markets.

Thank you for your attention. And with that, I would like to open the call to questions.

(Operator Instructions). JP Davids, Barclays.

I will start with two questions, please. The first one, in your outlook and in your CapEx section, you referred to market developments, recent market developments. Can you be a bit more specific about what you are talking about there that is causing you to review your CapEx projections?

The second question, please, is on your new Smart tariffs. Can you talk a little bit about what impact these are having on customers, particularly if you've got any anecdotes in terms of ARPU development as a customer migrates onto these tariffs -- if you are seeing a positive ARPU development on day one? Thank you.

Okay. Let me take the first question. It's Alexey Kornya. We are right now moving through the process of a revision of our strategy, which is a normal annual process. So there is nothing extraordinary. And this will be brought to the Board of Directors in September/October.

So we expect that, after this discussion, we will have more visibility towards our midterm perspectives, and that includes also the CapEx section. So far we do not expect any dramatic changes or significant changes in our CapEx guidances. However, we want to reserve ourselves room to return to this topic, specifically following market developments, which is customer adoption of data tariffs and so on, so forth.

And that includes also a recent deal between MegaFon and Scartel recently announced transaction. So again, we do not expect any significant change towards our CapEx outlook at this stage. Still, we reserve ourselves some right to return to this topic.

It's Andrei Dubovskov. I just want to add some points here. We do not understand why we need to revise dramatically our CapEx, speaking about Scartel and MegaFon deal. Because, in our opinion, each Russian region fielded only one competitor's name to MegaFon/Scartel instead of two competitors, which we have right now.

The second question will be taken by myself. This is Vasyl Latsanych. The smart tariffs are something we could equate that on, because we do believe that the people should be using much more data, and they should be not restricted in voice tariffs when they are using data, because data provides us higher marginality and better stickiness when it is used together with voice.

Regarding the anecdotal or general performance, the smart tariffs came instead of previously known maxi tariff plans, maxi tariff family. And with the introduction of smart tariffs, we have doubled the share of such tariffs -- integrated tariff plans and fully integrated tariff plans in our general share of the -- in general tariff mix.

That comes on the backdrop of some 20% decrease of the ARPU amongst the customers who are now connected to smart versus those that connected to maxi before. But at the same time, this doubling of the total number of customers connecting to this tariff gives us an uplift, because the other part comes from -- the other half comes from the tariff plans from the segments that were using cheaper tariff plans in the past. And we have more than 50% uplift versus the previously used tariff plans of mid to low segments before launching the smart.

So overall, we do have a healthy uplift in average ARPU of higher range tariffs when we talk about smarts, though it is in the segments slightly lower than it used to be before. But the segment got twice bigger.

Thank you.

Alex Kazbegi, Renaissance Capital.

Can I maybe again touch base on the CapEx side? Do you mind splitting sort of, say, roughly what amount has been spent so far -- or for the full year, actually, on GPON on pay TV? So to say, not just the fixed line, not the sort of transmission side, but mostly on the GPON and pay TV.

And if I understand correctly, also, you were planning to increase those spending on the GPON to finish the project this year. So I should be assuming that from the next year, the fixed line spending -- again, non-transmission-based spending -- probably will come down. Is that, so to say, the right understanding and expectation?

And also related to that, is it possible as well that towards the end of the year you could revise CapEx actually downwards rather than upwards, given that you have quite a task to invest quite a significant amount in the second half of the year, given how much you spend in the first half?

Secondly, just on the subscriber additions, generally the pace of subscriber additions you see on your network vis-a-vis competition, do you think there is a need again to increase the subscriber additions on your side? Are you, so to say, generally happy with the overall coverage in terms of the sales points, in terms of your subsidiary distribution channels?

And lastly, just on the dynamics of the average smartphones, I mean, you gave us the range in terms of the smartphones you sell on the network. But I was wondering if the average price is generally -- what is the tendency there? Are they raised in terms of customer spending more per smartphone, or it's actually coming down? Thank you.

Thank you for the question. Let me take the one on the CapEx. It's Alexey Kornya. So the total amount of CapEx spend in our fixed business, including GPON and GTS spend, is around about 20%. We do not expect that this size will sizably increase looking forward. At the same time, we do not expect to slow down or to decelerate our investments in GPON. So we believe that our project is going on track, and we will just continue.

We do not see any reasons for revision of our CapEx guidance for this year downwards, as well because we have normal seasonality related to build up cycle, where you have a higher CapEx spend in the second half of the year versus the first half of the year. So we are going on track with our guidance -- CapEx guidance for this year, and we are just maintaining that.

Okay.

This is Vasyl. I will try to answer for the next two questions.

The first one is about the acquisitions. Well, this thing is very seasonal, so we will definitely see an increase of acquisition numbers in the third quarter versus the second quarter. That is usually happening in third quarter due to a higher tourism season and general higher market activities. And I think that will be appropriate for every big carrier in Russia.

We will increase the number of sales, but not through the push methods, but through our normal marketing activities and sales activities in our existing channels.

We are generally happy with the existing channel strategy that we have. Whilst you may see in our reporting that we have increased number of owned stores, mono-brand stores, and slightly decreased number of franchised mono-brand stores due to higher efficiency of the owned stores. So this is rather on the safe and positive side of our distribution channels mix.

At the same time, the core thing that we put in our -- a cornerstone in our strategy is the fact that we have the lowest churn in Russia, going down to 9.4% in the second quarter of 2013, which makes us being a bit less aggressive than might need to be our competitors in the market, chasing the sales for every, any reason to compensate the higher churn figures that they are having at the moment.

So we understand that having the lowest churn in the market, continuously lowering that number, gives us a pleasure of not being extremely aggressive in the sales and not pursuing some channels where the sales might be of a lower quality.

Regarding the next question of dynamics on the smartphones, the smartphones -- with the smartphones, we are continuing our previously announced policy of selling more and more affordable smartphones to the market. And we've recently launched another most affordable smartphone in Russian market for the price of RUB1,890, and that comes with a fully functional Android core. So this smartphone is definitely affecting some customers who are not the top-spending customers. And increasing our smartphone penetration to our reported 28% in the base will definitely drag the average ARPU of the smartphone users slightly down because we are going deeper and deeper into the lower segments of our base and the market as a whole.

But we are not scared of this, because with every new smartphone connected, we have about doubling of customers' data usage, and respectively, payments to our network for the data, which is delivering us higher marginal ARPUs than the previously used voice services on the feature phones.

So we are not afraid, as I said before, to have customer switching from permanent payments into bundled and even totally free on-net bundles, like in smart tariffs, unless customers are paying for the data transmission, which is much more enabled with the smartphones than with the feature phones.

So we do see a slight decline in average smartphone user ARPU, but at the same time because of the smartphone ARPU being definitely higher than the feature phone ARPU, migration delivers us additional ARPU into the base with the same customers.

Okay. And would you say that this double the uplift on the ARPU when you moved to the smartphone also applies to the cheaper smart phones -- RUB1,890 worth phones?

Well, yes. My number is average, so we should consider that this goes from the cheaper phones to the more expensive phones. But the pattern of migration -- and by the way, I said data ARPU. It is not total ARPU doubling.

Yes, sure.

It would be lucky if the total ARPU would double, but it's data ARPU. I have to say that this is, first of all, applicable to the cheaper smartphone users, because on the higher end, we normally don't have the straight entrance from a feature phone to a smartphone. We are seeing that, for the smartphones starting with $200 and above, people are buying these smartphones after they had some previous lower range or older smartphone, whilst the lower-rate smart phones of up to $200 are those that people are migrating to from the feature phones. And this was like 90% to 10%. So if 90% of the new customers of cheaper smartphones are previously feature phone users, 90% of customers buying expensive smartphones are previously cheaper or older smartphone users.

Okay. Thank you very much.

Herve Drouet, HSBC.

My first questions will be on the margins, and especially the difference between fixed and mobile in Russia. I was wondering if you can give us the split between the two. I mean, according to the comments you gave, it looks like most of the improvement on the margins looks like to come from the mobile side with lower handset sales, for instance. And I was wondering if some of the costs, especially of the CapEx of the GPON, might be put under cost because of contractual work that may potentially put some less positive impact on the fixed line margins? Just wanted to have a picture there from your side.

My second question is regarding -- you know, as your guidance, especially after 2013, which looks relatively healthy on the OIBDA margins at the Group level of 42% -- I was wondering, are you relatively positive on the potential impact of -- limited impact of mobile number of possibilities, still; and also the impact of the Scartel deal with MegaFon, especially on the impact on the margins for you?

And the final question is regarding SMS. And I am always puzzled by the good SMS growth within Russia, especially, on your numbers. And I was wondering, are Russian subscribers not using chats -- online chats? And do you start to see any cannibalization from those online chats on SMS? Or it's still not the case? Thank you.

As for the difference between margins in fixed and mobile, it is not possible to differentiate when you have one merged business because, practically, you are using the same infrastructure transport network. Sometimes even commercial expenses are very overlapping. So we don't see any specific trends in the fixed business which would imply that there is pressure or some difference in the developments in the fixed business versus mobile.

So I think where we merged, we continued pretty much the same development in optimization of our costs, in synergetic effects when putting mobile and fixed together. However, it is not -- to sum it up, however, it is not possible to split cost differences, fixed and mobile. You can split revenues, but not costs.

So we don't see any extraordinary trends, and we cannot say whether in fixed it is lower or higher.

As for GPON project, it predominantly -- CapEx expense is in which we see right now. However, in the long or in mid-run, of course, that will help us very much in the optimization of our costs. That is including headcount, technical personnel; that is including maintenance costs. Like, through the completion of this project we will be able to, of course, optimize our costs.

However, that is not what we will see this year or the next year, when we are going through those projects.

That's basically -- on the margin, as for margin guidance, we see that the number of factors will be putting pressure including M&P commercial costs on the margins. However, we don't expect them to be that strong that we will not be able to compensate that through data revenue growth. That is why we are just guiding some slight reduction in the margin over the next couple of years. However, as we are guiding, we will see some margin reductions through the period 2013 through 2015, stating that we are guiding for this year more than 43% in margin.

Okay. On SMS --?

Yes. It's Vasyl and I will be answering the SMS question. Yes, we are aware of the issue of IP's messaging cannibalization all around the world, specifically in Europe. We believe that that comes in package with much higher smartphone and data penetration, which we have not reached yet. And at the same time, with probably a pretty expansive SMS tariff that were promoted by most of the European carriers. At the moment, we do see certain migration of high-end users into iMessaging or Vibers. But still, we do not see it as a threat. And we are trying to take some preventative measures which are also falling into the line of SMS revenue increase, which is bundling the SMS packages into the integrated tariff plans.

This is not something we created here. This was pretty widely used in Europe, and is still used in Europe as a protection mechanism for those networks where SMS is dramatically falling down. We are using it as preventative measures to sell to the people tariff plans, where SMS will be bundled and certain number of SMSes will be already allocated to the user. And respectively, the revenue would be allocated to the line.

That gives us a better preparation for the times when the IP messaging may be going out of control, like it happened in some countries. But we are still not seeing the signs of it happening in Russia.

Thank you very much for your answers. Very clear.

Alex Balakhnin, Goldman Sachs.

I have three questions, I think, if I may. The first is on your improved profitability on handset sales. I'm just wondering what is the main driver? Is it, like, better bargaining power with your suppliers, with the vendors, or just a change of the revenue mix to more profitable proprietary devices?

My second question is on the potential for the upgrades within the data bundles. You are quite efficient in selling the data bundles, but I was wondering if you see people upgrading from cheaper bundles to more expensive bundles, and if you could share any statistics here, or any anecdotal evidences preferably with numbers. That would be very helpful.

And my last question is with more -- with the bigger contribution of data to your revenue mix, do you think your service revenue profitability has a further potential for improvement, and your 42% OIBDA margin, however, may prove to be overly conservative? Thank you.

Let me just specify -- when you talk about our conservative margin guidance, to what exactly you refer?

To the 42% OIBDA margin. I mean, given that your -- well, data contribution to your revenue mix is growing with all your efforts, and data has a better gross margin. Do you think there is a potential for probably higher profitability in the medium term?

It's Andrei Dubovskov, Alex. You are absolutely right speaking about data revenue and marginality in this area. But it led us to be more conservative, because nobody knows what kind of changes we are awaiting in 2014, speaking about a lot of factors, including M&P, national roaming, some impact from the Scartel-Yota deal, some changes in the legislation area, etc. And speaking about our OIBDA in our guidance, I think it will be better for all of us to be more conservative. 42% -- it's a normal level for next -- some years, starting in 2013 until 2015.

Okay. Let me then start from the question on the handset margin. Yes, we do indeed realize some improvement on the gross margin through improvement in handset margin which is related to the fact that we have not participated aggressively into some price wars, or in some aggressive promotions for handsets in the market. So we are rather focused on profitability of our handset sales than on volumes. That basically reflected that, you see, we were not that aggressive on the volumes on the total revenue field. We were more focusing on the speed -- so promoting smartphones -- and we were more focused on the margin of our handset sales. So that basically reflected in some margin improvement from handset sales.

As for part related to bundles, I will pass over to Vasyl.

Thank you, Alexey. The first question was the main driver of higher volume and respective impact on the marginality. Alexey started to answer this question. I will just have to add that though the cheaper handsets do not represent a better marginality than the more expensive handsets, overall, decrease of the handsets sales in the ruble/dollar term in our revenue will inevitably have a positive impact on a OIBDA, because any smartphone sales in terms of OIBDA margin is lower than the service sales.

So, with lower phone sales -- devices sales -- we will see an improvement in the margin of the Company as a whole.

The next question is about the contribution of the data to revenue mix, and does mobile service revenue have plenty of room for the growth? That's for sure, yes.

And there was a question about the migration of the customers from a cheaper, smaller data plan to a higher data plan.

This is within our matrix of development, so within the matrix we have various steps. One of them is entertaining people to join the world of mobile data. And the other ones -- other steps are about taking the people from a lower bundle to a higher bundle, which usually comes with the phone upgrades or the usage upgrades.

We are trying to have both issues addressed. We have a number of activities going on with the different vendors, like Nokia and HTC, who are promoting their smartphones on our network. And we are having co-promotions when even our vendors are participating in creation of the special data bundles for our customers. And those bundles with more expensive handsets have a tendency to be bigger, for sure.

So, this is one of the ways of development of people. And the other way is when we are targeting with our specific offers -- and that's mostly a CRM job -- those customers that we see as having a potential for increase of the bundles, and we propose them to try a higher bundle and then sign up for a bigger bundle for the future periods, though this is rather for more developed usage than we have at the moment in Russia.

So our primary target is to increase the penetration as a whole. And then the secondary target is to increase the usage of those who are already penetrated. So we have this as a work stream, but it's rather a secondary job at the moment.

Understood. Thank you.

Our next question --

And the third target in this area to increase our margin, speaking about [sale implementations].

Dalibor Vavruska, Citigroup.

First, I wonder if you can make any comment about the market share trends that you see in the market. I mean, there are obviously different ways of looking at this. I think you added a little bit fewer subscribers this quarter compared to your competitors.

Also, when we calculate service revenue market share based on the reported ARPUs and the average subscriber numbers, which is not exactly consistent with the service revenues reported by the companies, but in any case, on this basis it seems that you lost a little bit to both VimpelCom and to MegaFon in the second quarter. And I'm just wondering whether this is just like a quarterly deviation, or whether something is happening, in terms of whether you are noticing your competitors, especially with VimpelCom, has come back when they are saying that as of now, they want to start gaining market share -- whether you are noticing any changes in the competitive behavior?

And also, I think if you can comment about the potential -- about your thoughts -- I think you already mentioned actually that in terms of -- for the introduction of M&P and then potential attacks of some of your competitors in the high-end of the market, and how do you see that playing out?

And my second question is -- again, I think it was already discussed to some extent. On the CapEx side, I noticed, Andrei, that in your recent institutional investor interview, you mentioned that -- when the journalist asked, what is your main worry, you kind of referred to the CapEx area. Now we saw in the presentation that you highlighted that you will maintain a dividend policy even if something happens to CapEx.

Do you think that there can be some crisis scenarios in which case you may have to raise CapEx? I know you said that you wouldn't in a base case, but are you working with some scenarios where potentially you're thinking about some upward changes in CapEx? Thank you.

Thank you for the question. This is Vasyl. That was quite a lengthy question, so my first answer, quite a short one, will be to your -- the customer number, market shares. As we were leading the customer number growth for the last four quarters, not including the second quarter of 2013, we don't see an issue with us being slightly lower in just one quarter.

And also, we believe that this is a leveling up of the market shares, which tend to be pretty stable in Russian market. So we don't see any redistribution of the market shares or the customer numbers mid- to long-term. One quarter is always one quarter. We should not be paying too much attention to one quarter's sales.

In terms of revenue, we have a very stable position year over year. We checked specifically; we did not lose any revenue market share. Yes, there is some redistribution in between the revenue market shares of our competitors, but that is not posing any threat to our dominating market share in Russia.

Dalibor, it's Andrei Dubovskov, for clarification. Speaking about CapEx, we are not waiting for the magical increasing of our capital expenditure, like I described it earlier. Because in the Russian market right now, we have only the two big projects -- GPON and LTM networks. And speaking about your question about the (inaudible), let me attract your attention to the fact that right now we have the lowest multiple, speaking about ratio of debt and OIBDA. And if market changes will lead us to increase our capital expenditure, it will be very easy for us.

Thank you so much. I don't know if you'll allow me one very quick follow-up -- it's on the Scartel situation. Clearly, MegaFon now has certain advantage in terms of ownership of these 2.5 gigahertz to 2.7 gigahertz spectrum.

I mean, do you foresee any circumstances, for example, skyrocketing traffic in the cities, in which case this could be an advantage, and in which case it could be actually a disadvantage of -- on your side, which you would have to compensate by potentially higher CapEx in density of the base stations, etc.? I think it's -- that's the kind of line of argument of your competitors. I would just like to see your view on that as well if you will allow me.

Thank you, Dalibor. We don't think that there is any short-term advantage taking this transaction in view.

Long term, we think that there are new technologies which, like LTE advanced, specifically, that will allow to accumulate spectrum from different bands that will basically allow us to be absolutely competitive in this market.

So we don't -- in that light, we don't see neither short-term nor long-term threat towards our capability to satisfy clients' demand and clients' -- provide plan services.

We don't expect, also, no significant growth in traffic. And we think that traffic is growing already at a good pace and do not expect any change.

Thank you very much.

Dalibor, we are absolutely sure that for the next five, seven years, we have enough frequency band to have enough investment flexibilities. And we have enough technology advantages to support our current level of our market share and to increase our market share in this market.

(Operator Instructions). Ivan Kim, VTB Capital.

One question on your traffic patterns -- basically, whether you see further upside from increase of contribution of on-net? And basically, related to that, whether you see the further potential in improvement in churn, or you think that the churn is probably around the levels where it should be in the prepaid market, like Russia?

And secondly, on your voice revenues dynamics, in the second quarter your voice revenue year on year has slowed to 0% growth versus 2% growth in the first quarter. It's not something extraordinary, of course, but I'm just wondering whether there is any trend behind that, or any story behind that you can tell us? Thank you.

Okay. If I can answer, I have picked up the three questions. This is Vasyl. First one -- what is happening with the on-net?

We have a pretty stable situation with a high level of on-net, possibly the highest level in Russia. And as we know from our Ukraianian experience, this first of all contributes to better stickiness of the customer. So this is one of the factors we have the lowest churn in the market, because customers are more satisfied.

And the second, that plays a very important role for attractiveness of us as the carrier for most of the customers, when people see that our minutes of use are cheaper on average than our competitors' minutes of use, and they can use more minutes of use for the same amount of money.

The ARPUs, if you take a look at the competitive ARPU situation in Russia, stays pretty comparable in between the carriers. But the minutes of use are those that differ. With our on-net traffic, the minutes of use are increasing. This is how we are making customers more loyal, and this is why we see the churn improving quarter over quarter.

If you are asking me whether it can be improved any more, if you could take a look at our reporting, our Ukrainian number is 6.0 of quarter churn in Q2 2013. That's quite a remarkable and almost never before achieved number in Ukraine.

So for Russia, even 9.4% is unheard of in terms of the lowest churn possible. But looking at Ukraine, which has very similar markets, I want to believe that there is a better chance for Russia to go even lower. But I wouldn't commit to it, because Russia still is a bit different market from the Ukraine.

I don't expect churn to be any significantly upwards from this number, unless short-term for some seasonal periods. Especially in summer, churn is usually going a bit up because of tourist season. The voice 0% growth is something we got ourselves ready quite long ago, and we realized that this will be the inevitable development of the market. And that is why we are putting such a big bet on the development of the data, which will have to replenish the absence of growth of the voice revenues.

This is why 40% of data year over year is so much important to us, and the 0% to 2% of growth of voice services is something we really expected to see in this market. So there is no surprise with this one.

Okay, thank you.

Anna Lepetukhina, Sberbank.

I have a question about one-off factors that impacted OIBDA margin in the second quarter of 2013. Can you probably explain whether you expect additional one-offs in addition to Bitel effect to have an impact in the following quarters? And also, on your revised guidance for the OIBDA margin, does it take into account the necessity to increase advertising spending ahead of M&P and kind of potential competition pressure from Ross Telecom entering the market in St. Petersburg?

Thank you for your question. We do not expect any additional factors -- any additional one-off factors in the third and fourth quarter. So we expect business going as usual in the second half of the year.

However, as I mentioned in my speech, there is an early recognition of roaming discounts, which basically skewed a bit positive effect from higher roaming season from third quarter towards second quarter. So, we realized less positive margin impact from higher roaming season in the third quarter while we recognized higher this impact on the second quarter.

But this is not a one-off effect. It is rather a redistribution.

And as for the second part of the question, whether we expect any increase in our spend, taking in anticipation of M&P and the entrance of Ross Telecom in different markets -- when we talk about M&P, everything is very much dependent on the behavior of key players in the market. So, if they will be very aggressive in a competitively high environment following the M&P, then we will probably see the reflection of that into our ABD figures.

However, we do not expect that there will be overall aggressiveness in the market, and this is included in our forecast. Entrance of Ross Telecom in any markets will not significantly impact our guidance for the margin.

So just to clarify, do you understand correctly that kind of your assumed base case scenario -- and it means that there is a downside risk for your [EBITDA] margin guidance if other players start aggressive campaign ahead of M&P introduction?

Well, we have some basic scenario, which implies some results from M&P introduction. And this basically results of -- this basis scenario is integrated in our guidance. If there would be more aggressiveness in the market, or if there would be something extra that is happening in the market, then of course that will impact our financial results. However, we do not expect that to see in the market.

Thank you.

(Operator Instructions). Anna Kurbatova, BCS Financial Group.

My question is about the Bitel networks rollout. Could you elaborate a bit on your data dynamics in Ukraine and prospects? First of all, the prospects.

So I wonder -- where do you see the limit for your data growth in the Ukraine? As far as you have no 3G there, and you develop on the base of CDMA, as far as I remember, technology only. So how many years do you think this growth would continue without 3G or any other kind of more advanced technology? Thank you.

This is Vasyl. Thank you for the question. The question about Ukraine is always nice to answer, because there are not too many of those.

But this one is especially interesting and exciting, because we see some very high numbers of the data traffic revenue growth in Ukraine -- 40%. And this is the country where we don't have any other technology than 2G and EDGE technologies for data.

That is, first of all, the result of a very low starting base, where last year and the year before, data was very, very low penetrated in markets, and the smartphones were just kicking in.

So this market got very significant uplift by itself; plus, we added some fuel by promoting the smartphones and getting our data pricing very -- to the very acceptable levels of the market.

Historically, Ukrainian data market was highly overpriced and was affordable for only top users. Now, we are making this market more and more affordable to the masses, trying to prepare ourselves for the future, potential 3G license obtaining, and development of the network and the market into the 3G data area.

This is for sure also because we have introduced more bundled tariffs, where we have not only voice, but as similar to Russia, voice and data tariff plans, where data comes as a part of the package. So this part of the revenue gets allocated towards the data in the overall accounting. And that makes the data grow even further above the penetration speeds.

But nevertheless, our focus in Ukraine for the rest of 2013 and 2014 will be on increasing of EDGE penetration and smartphone penetration in the Ukrainian market. Because we believe that Ukrainian market will inevitably follow the pattern that we see in Russia's market where the voice revenue will slowly decline or slowly -- sorry. The speed of the growth will slowly decline and will be replenished, replaced by the data increase and data revenue increase in the future.

Thank you very much.

Anna, it is Andrei Dubovskov. I just want to remind you that in Ukraine, we have none but CDMA network, in the 450 range. And of course it supports all our data revenue in Ukraine. As you know, in Ukraine, all players do not have 3G or 4G license. And right now we have approximately 400,000 client subscribers in this network, and this is only data, data network without voice usage. And of course, it's some advantages for MTS in Ukraine.

Thank you. And may I ask also a question about your future data network development in Russia? You mentioned at the beginning of your speech some numbers of -- the number of base stations you have in Russia in different technologies.

So the question is, what are approximately your medium-term plans for new 3G base stations rollout as compared to LTE? For example, are you satisfied with this almost 30,000 3G base stations? Are there plans to increase the number? Do you see this necessity to continue employing 3G?

It's Andrei Dubovskov. We are not going to increase dramatically the number of our 3G base stations. As you know, we have approximately 30,000 base stations across Russia, and it's approximately the same level of our competitors.

Speaking about our further development in this area, it can be just LTE networks, and maybe some tuning separation in 3G area.

Thank you very much.

Imari Love, Morningstar.

Just had a quick question on the recurring OIBDA margins going forward. You spoke about Q2 one-offs related to the settlement of Bitel litigation and other factors. I wanted to try to gauge how much of that margin increase for your guidance was a reflection of one-offs versus what we can expect to see on a recurring basis 2014 and beyond?

The overall impact of our one-off factors, as I mentioned in my speech, is about 2 percentage points for the quarter figures. So from that you can figure out what will be impact for the annual figures. We don't have any other one-offs for the year. And the rest of the improvement just grows from organic reasons, from organic factors, which is data growth, activation on core optimizations, and others.

Okay. Thank you.

There are no further questions in the queue at this time.

Okay. Operator, thank you; and ladies and gentlemen, thank you very much. We welcome you at any time to contact our Investor Relations department for further questions. Naturally, a webcast for this discussion will be available on our website if you wish to replay the call. In the meantime, we appreciate your interest and wish everyone a pleasant day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.