Mobile TeleSystems PJSC (MBT) 2013 Q3 法說會逐字稿

Good day. And welcome to the Mobile TeleSystems's third quarter 2013 financial and operating results announcement. Today's conference is being recorded. And at this time I would like to turn the conference over to Mr. Joshua Tulgan. Please go ahead sir.

Thank you very much. Welcome to MTS's conference call to discuss the company's third quarter for 2013 financial and operating results.

Before beginning our discussion I would like to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks. These statements may relate to one of the following issues -- the strategic development of MTS's business activities both in Russia and abroad; revenue and subscriber dynamics; financial indicators, such as operating income before depreciation and amortization or cash flow projections; operating indicators like average revenue per user, value-added service indicators, etc.; 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 communications networks; capital expenditures and operating expenses; and macroeconomic developments within our markets of operation. A comprehensive overview of these issues are -- is available on MTS's annual report and Form-20F, 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-20F, as well as 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 make 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.

Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and operating results of the third quarter 2013. Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; and Vasyl Latsanych, Vice President, Chief Marketing Officer.

Overall in Q3 we witnessed a continuation of the positive operating trends we have seen over the past year or so. Group revenue for the period reached RUB103.4b, which puts us on pace to reach our minimum 5% revenue growth for the year.

Our original guidance for 2013 called for 5% to 7% growth in our core markets. But in Russia revenue growth will be impacted by subsidiary decisions made by the Company. This includes our decision to reduce sales of high-value handsets and concentrate on handsets that drive migration from feature phones, and our decision to curtail unsolicited SMS-based content to improve our customer experience.

For the period OIBDA reached RUB46.3b for a margin of 44.8%. For the year we have shown a 100-basis-point improvement on OIBDA margin, and we are also on pace to realize our OIBDA guidance for the year of at least 43%.

In Russia revenue grew 4% year over year to RUB91.5b. Revenue was boosted by a continued strong performance of our mobile and fixed operation. Mobile service revenue increased by 6% year over year to RUB70.3b. Key growth factors include increased data adoption and further monetization of data traffic and messaging revenues.

We continue to see market-leading growth in data traffic revenue, which grew 45% year on year. The growth was attributable to a number of factors including the extension of our data networks, which now encompass around 43,300 2G and over 33,000 4G 3G base stations; the growing penetration of smartphones on the MTS networks; growth in the sales of affordable and branded smartphones priced between RUB60 and RUB150, which in Q3 2013 accounted for around 38% of smartphone sales in MTS retail chain; sustained increases in the usage of tablets, driven by the steady increase in sales of tablets in the MTS retail chain; and we had increased sales of Samsung and the Apple tablets and expanded our product portfolio with low-budget devices.

In Q3 2013 minutes of usage increased 8% compared to the third quarter of the previous year. The increase reflected the rising share of tariffs with free on-net calling. Over 50% of the prepaid subscriber base has already migrated through these tariffs. This translates into greater customer loyalty. Churn has now dipped to close to 9.1%, over 1.2 percentage points decline from Q3 2012, and part of sustained trend unique in our market.

We continue to see decline in content revenue, which fell 18% year over year, as well as in unsolicited SMS-based services and cutbacks on SMS-based promotions. However, the increased voice usage continues to drive; messaging revenues reached 7% year over year.

Our fixed line operations show a steady performance in spite of sustained competitive pressures. Fixed line revenues increased 2% year over year to RUB14.2b. Our growth continues to be driven by modernization in the regions. This enables us to migrate customers from ADSL to FTTB solutions. More than 85% of households passed with broadband internet outside of Moscow are now connected via FTTB technology. We also continue to roll out our upgrade digital TV platform which offers up to 160 channels, including HD channels.

In Moscow we are happy to report strong progress in implementation of our GPON project. As of today we have around 1.6m households and 150,000 household subscribers actively using our GPON enabled services. In our subscriber base we see roughly 30% of households using bundled fixed line telephony and broadband internet services.

So far GPON has allowed us to stabilize our market share in Moscow. As more houses are connected, we see opportunities to attract new customers and reconnect old customers.

Our decision to reduce sales of high-value handsets continues to weigh on our top line. Sales of handsets were lower by 12% year over year and are down 10% for the year. As we discussed previously, we have reversed our strategy to our retail outlets to push sales of lower priced smartphones to drive further mobile internet penetration in our subscriber base. Overall smartphone penetration reached over 29% in our networks.

In Ukraine revenues were down slightly year over year to UAH2.6b. As we have explained before, our commercial strategies are designed to stimulate voice usage as a way of both driving growth in messaging and data as well as improving customer loyalty. We see potential in the market, with growth in messaging of 5% year over year and rising data traffic in our networks. Data revenue grew 4% sequentially quarter on quarter. But the absence of any 3G MTS licenses limits our major and joint perspective for growth.

Our strong OIBDA and the trends we see in the falling churn reinforce our strong market position and highlight our market-leading value proposition to customers. We also suspect that macroeconomic uncertainty may have some impact in our ability to grow this market in the short term. For now we believe this market can continue to deliver single-digit growth and then above 50% OIBDA margin.

In Armenia we increased revenues by 3% year over year up to AMD22.5b. Drivers include our continued efforts to drive voice usage as well as the focus on promotion of data usage from smartphones and tablets. We continue to sustain our market leadership and the competitive environment remains stable.

In Turkmenistan we delivered a quarter-on-quarter increase of 12% on revenues up to over TMT70m. We are still growing our subscriber base. Churn has dropped in the market as we have cycled through subscribers who were formerly MTS subscribers, and now we are seeing steady and stable dynamics in our subscriber base. So the investments in coverage, capacity and 3G MTS will allow us to realize further growth in this market.

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

Thank you, Andrei. In third quarter 2013 Group OIBDA increased by 5% year over year up to RUB46.3b for an OIBDA margin of 44.8%. Unlike the second quarter when one-offs increased our margin by 1.9 percentage points, our OIBDA margin was largely unaffected by the insignificant one-time gains and losses.

Adjusted for this fact, our margin in the third quarter was a little over 1.1 percentage points higher than second-quarter margin, which is equivalent seasonal difference from second quarter to third quarter.

In Russia, OIBDA grew in line with revenue 4% year over year to RUB41.5b. For the quarter we delivered stable OIBDA margin of 45.4%. Increasing data revenue combined with stable sequential sales of handsets and accessories continued to offset inflationary pressures such as rising personnel costs, higher rent and network maintenance costs.

In the Ukraine OIBDA decreased by 3% year over year to nearly UAH1.4b. Higher subscriber acquisition cost combined with the slowdown in revenue growth are largely the source of this dynamic. Overall, our OIBDA margin in the Ukraine was 51.5%, which by our understanding is the highest in the market.

In Armenia, OIBDA for the third quarter came in at AMD12.12b, which translated into a healthy margin of 54.4%. Though sequentially this represented a growth of 18% quarter on quarter, this is lower than third quarter 2012 due to a one-off recognition of income from equipment sales in third quarter of 2012.

In Turkmenistan we generated an OIBDA of TMT26.9m for a margin of 38.3%, a 30% improvement from second quarter as we see our business there developing in scale (inaudible) from subscriber expansion.

In third quarter, Group net income from continuing operations registered at RUB18.1b for a net income margin of 17.5%. Unlike second quarter we saw no significant one-off effects from non-operating activities. And overall year-on-year net income was stable as we realized a $100m non-cash ForEx gain for the period in 2012. Adjusted for this effect, our net profit is stable year over year and should be seen as really strong for the period.

Free cash flow for the first nine months was RUB72.2b or an over 51% increase year over year. While we expect significant CapEx spending in fourth quarter to mitigate these improvements for the year, operating cash flow from continuing operations for the first nine months is also nearly -- up nearly 17%. This reflects the continual improvement in cash flow generation we see at MTS.

During the quarter our total debt decreased to RUB224b. As part of our ongoing effort to optimize our debt portfolio, MTS paid back RUB20b of our outstanding debt facilities held by Sberbank. Our net debt last 12 months adjusted OIBDA was stable quarter over quarter at 1 multiple -- 1 times multiple, due to improvement in the operating performance and our success in managing debt portfolio through an early redemption of loans as well as the ongoing repurchase of bonds and the placement of securities.

During the quarter we continued to demonstrate our commitment to increasing shareholders' return. In September 2013 at an extraordinary meeting of shareholders, shareholders approved a semiannual dividend payment of RUB5.22 per ordinary MTS share, RUB10.44 per ADR, amounting to the total of RUB10.8b on the basis of the Company's first-half 2013 financial and operating results.

This means that we have paid out roughly RUB41b in 2013 calendar year. This is in line with our new dividend policy that calls for a distribution in the form of dividends of an amount equal to at least 75% of free cash flow for the relevant financial period, or if greater, RUB40b per year. The same increase in free cash flow could create upside to our dividend payout through 2014, but this decision will be made in spring of next year.

Thank you, Alexey. As we discussed before, MTS continues to execute on its strategy. Our commercial focus remains on driving growth through data and improving customer loyalty. With 6% mobile service revenue growth and churn at a market low of 9.81% (Sic-see presentation slide-16 "9.1%") we continue to see this trend into the third quarter.

We continue to focus on developing our networks to support further data adoption and provide our customers with market-leading speeds and performance. Our 3G 4G data networks comprise nearly -- over 34,000 base stations. Over 96% of our 3G base stations are (inaudible) enabled, while we serve customers in more than 2,250 cities with dual-carrier technology, which provides speeds of up to 42 megabytes per second. Our LTE network covers nine regions of Russia, including Moscow.

In Moscow our build-out of GPON continues. We have passed 1.6m homes and serve more than 220,000 customers with speeds that are unrivaled in the market. The deployment of GPON has enabled us to stabilize our market share in Moscow. GPON subscribers also demonstrate ARPU growth of roughly 15%, 20%. We still believe that GPON in Moscow will enable us to recapture market share and provide competitive advantages in terms of services we can provide, such as convergent products in the future.

Combined with our pricing advantage, when it comes to fixed line calling we feel confident that we can grow our share of key customer segments, like corporates and high value users, and manage any changes that happen in the market.

By now everyone should have received an invitation to our Investor Day, which we will now be holding on February 4, 2014. We had aimed to hold this event in December, but logistical schedules in the holiday period created some unfortunate difficulties for our staff.

At this point we will unveil our new corporate strategy, address questions surrounding market development, and welcome you to spend time with our senior management.

With that, I would like to open the call to questions. Thank you very much.

(Operator Instructions). JP Davids, Barclays.

Thank you. I have two questions please, both on Russia. The first question is around data traffic versus data content revenues. And it's very clear from your results that you're driving very strong data revenue growth. Looking out into the medium term, do you think there will be a role for you to increasingly sell content into that traffic stream, or indeed grow that content revenue stream over time?

The second question, please, is around your affordable smartphones. In the presentation pack you highlighted that these are driving ARPU increases of up to 20% relative to other smartphones. If you could provide a little bit more color around this -- and specifically whether this is really to do with selling bundles, integrated bundles, at the same time as selling that phone, if that's what's driving that. Thank you.

Hi, this is Vasyl Latsanych. I will answer the questions. The first one was on the content. At the moment we are focusing on increasing the network and technical possibility, as well as adoption of the data service and penetration into our base. We do believe that there is a long-term perspective of focusing on the content of this data stream to increase the usage, which is the second -- the next, say, step for in our strategy, though we are getting prepared for it already now.

For example, we are participating in a joint venture of stream creating the video content; we are working on several music delivery services which all will be using the data services of ours. And also we are selling the -- already the hard bundle tariff plans with the content including it. For example, there is a tablet tariff plan which includes the mobile TV and video on demand options in it already. We may say that these are the first steps for content revenue inclusion and development in our data revenue stream, but we do believe that there will be more to come.

The second question regarding the smartphone -- the tremendous success of MTS 970 smartphone in Russian markets, which was number one seller out of the old smartphones in this market, is for sure due to several factors. One of them is very aggressive pricing of that Smartphone, because we have achieved very, very low cost base; and we are able to afford selling it to the customers at a very competitive rate, and actually better than any other smartphone in the market at the moment.

But at the same time we did bundle it with the services, and we were selling it together with certain included data service and included convergent voice and data service for several months. And it is on a tariff plan where you will be getting both minutes and data traffic for the period of time.

And also this smartphone is SIM locked for MTS, so we for sure expect these smartphones to perform very nice in terms of stickiness and customer retention.

And I just want to add some [encouragement] it's important to say about it, talking about the smartphones. As you know we had the cheapest proposition in the Russian market, and during last -- some months we offered to our subscriber base and new customers the cheapest smartphone, named MTS 970. And as a result, it's a best seller in the Russian markets during the last some months.

Thank you.

Cesar Tiron, Morgan Stanley.

Yes, hi. I have two questions please. The first one would be on Russia, and understand if you see any revenue cannibalization from launching these Super Zero MTS tariffs across Russia without any spending obligation.

And the second would be on the Ukraine, to understand -- besides the macro and the lack of 3G, is there any explanation to the slowdown in the markets? And if the revenues aren't going to reaccelerate in the next quarters, do you see further pressure on margins in the Ukraine? Thank you very much.

Cesar, thank you for your question. No, it's not true. We did not see the revenue cannibalization from the launch of Super Fero family. As I mentioned earlier our revenue growth based on high usage, and in compare with the same period in the previous year, we increased minutes of usage more than 30 minutes per month. And as a result this is more a situation than we cannibalize our current subscriber base.

And talking about the second question, Vasyl will help me.

Thank you for the question. Regarding Ukraine we do believe that most of this slowdown in the Ukrainian market versus the previous-year third quarter is due to the fact that the third quarter in the Ukraine will be Euro 12 -- the 2012 quarter, when there were months of very high usage, abnormal roaming usage compared to -- which has set a bar very high. And we did have this year no special events in Ukraine, so the business as usual this year compared to last year looks weaker; but in fact it still is on a relatively healthy track to grow.

Thank you very much.

Haim Israel, Bank of America.

Good afternoon. Two questions from my side. First of all, a follow-up question just on Ukraine. As you mentioned, you managed to hold the fort quite well when you saw that there was some of your competitors saw more bigger rose involving top line and EBITDA; and still you managed to come out with above 50% margin.

So question from my side -- again, a follow up from here -- is that do you guys think that this environment is stable, something you can still manage to perform quite well, especially when the name of the game still in other markets is data and you're quite capped in that aspect? And at least one of your competitors is pushing more and more into bundled products.

Second question is about Russia, and the key discussion these days right now is future competition coming from your two other competitors, one formation or another. I just want to really pick your brain and see how you see things developing in the Russian markets over the next year or so.

Thank you, Haim, for the question; I will continue. This is Vasyl on the Ukraine question. We did manage to sustain the margin performance; and we do believe that this is very sustainable, as our business is very well prepared for markets in whatever shape -- for market growth or even for market stability, where we -- our cost base is very nicely managed. And we can see that this margin is a long-term margin that we have achieved in Ukraine. And we do believe that this will be relatively stable for the future periods. Though for sure it is subject to macro economy, and we cannot now judge on the macro economy for the Ukraine for the next couple of quarters.

So let's say we are well positioned for most of the scenarios that we have and on our table for Ukraine. And we do believe that the performance on the bottom line will be very strong.

Talking about the second question, we are not waiting for some changes in the Russian market in the future unpredictable issues or problems. We are looking for a 1 digit growth in the revenue. We think that according to our guidance, our profitability will be more or less flat.

And of course we are going to radically increase our market share in data revenue. And I just want to announce that third quarter this year is the first period when MTS reached the top position in the Russian market, speaking about the volume of data revenue. We reached the RUB12.4b which we have in this area.

Haim, let me add to my answer regarding Ukraine. I just noticed that there was a second part of the question: would there be a push for the bundles? We believe the Ukrainian market is pretty much premature for the bundles yet, so we exercise a lot of pay-per-use and pay-as-you-go options for the tariff plans with the data included.

The point is that data -- there is no 3G, and CDMA is relatively small as a business there. We do believe that if there is no other options, we have to develop the usage on EDGE. And yes, it is not as brilliant as our 3G network usage experience, but we still believe that we have to develop it.

The way to develop it with the bundles would be quite a difficult one, just because the bundles would include very limited traffic due to the slow network as such, EDGE network as such. So we will be pushing into the pay-per-use use, pay-per-day types of usage rather than monthly bundles of voice and data.

This is the short, sort of short- and mid-term strategy for Ukraine. But in a long-term strategy, specifically, if the 3G network finally comes in place, there is a good potential for the bundles; and there is one for Russia already being exploited.

Thank you very much, guys.

Ivan Kim, VTB.

Yes, good afternoon. I have both questions on Russia please -- one on data revenue growth, which accelerated quite nicely to 45% this quarter. Can you please elaborate on what is the driver behind that, especially as you have referred to slowing consumer demand?

And then second, on data content, you reiterated several times that you fight with fraud on that level. I just wanted to understand when these content revenues should stabilize, because they are now falling for quite a while. Thank you.

Thank you, Ivan. This is Vasyl and I will answer the first question. First it is about the data growth; yes, we are over 40% of data growth in Russia, and this is mostly due to several factors. One of them is for sure the big driver of smartphone penetration in our base. We are reaching 30% of smartphone penetration into our base, which was a long-term target for us till the end of this year. We do see that we will be even outperforming those targets as the performance of MTS 970 phone was beyond our expectations, so this is the driver number one and very clear strong driver for data penetration.

The other one is the usage increase. Because the content gets heavier, we do see a good opportunity which we do exploit to up-sell the bundles and up-sell the usage limits that we give to our customers. So we do start with some early adopter -- sorry, some entry level options like miniBIT. But then we up-sell the customers to BITsmart and superBIT, which are the bigger options, and they for sure cost more. So our data ARPU is increasing as a factor of this.

The other very important factor is that we have doubled the share of sale of convergent voice and data, V&D tariffs, within the total portfolio of our sales. It is now in high teens. And we do believe that this number will be driving more and more of penetration with the relatively high ARPU levels, because these tariff plans are on a rather mid to top 10 tariff plan scale in our proposal.

So these are the factors of data growth. We believe that most of them have a long-term effect and the growth will be continuing for the next quarters or maybe even years. And also, as the new facts are coming in, we see the LTE usage picking up. And with the devices penetration into the base, we hope to have even more increase of the sales of the data packages and data included tariff plans to our customers.

The second question was on the data. Let me also try and answer that one. The data, it was not really data content that we were fighting with the fraud on. It was rather SMS-based content, which we do see as an obsolete type of content where there -- we're seeing some fraudulent activities.

We believe that this will be -- this era will be soon over, with the introduction of mobile commerce and with the increase of usage of the data-based content. With the data-based content, we do not see any significant threat at this time which we would identify as a potential fight against the fraud or mitigation fraud necessity.

Thank you very much for such profound answers. I just want to follow up on that data content part. I understand that it's about the messaging-based fraud. It's just that your data content revenue, which includes a lot of things -- and you, of course, do not break that down -- is falling? I'm just wondering where -- when it's going to stabilize. I understand that you cannot say the exact numbers but these revenues are kind of falling for quite a bit. Thank you.

Yes, thank you, Ivan, for clarification. We do not expect that to fall significantly anymore, as we have implemented all the necessary rules to this market already. And what we see now is the effect of those rules implementation.

We believe that this will be a relatively stable number for the future couple of quarters -- periods, and no further turmoil is expected.

Thank you.

Herve Drouet, HSBC.

Yes, good afternoon. Two question as well on my side. The first one is: can you just remind us when you've started to clean up these SMS-based services, just roughly, in term of how many month you have done that exercise?

And also I was interested in having maybe your thoughts on where do you see, on the voice side in Russia, MOU going up versus basically the new tariff and promotions you have put? So we've seen a bit of average price per minute going down on the voice side, but MOU going up. I just try to see, from your own understanding of the Russian markets, where do you see MOUs still growing? And do you think elasticity is relatively close to 1 in your perspective? Thank you.

Herve, thank you for the question. The first one is about the cleaning of the SMS fraud. Actually, we have spotted the issue quite awhile ago, about a year ago. We did have to prepare ourselves for certain actions/activities, bearing in mind the procedures and the technical capabilities. That was done about a year ago, and we can see the effect for the last two quarters.

So that's the quarters where the -- when we did see most of questionable things going away from our network. And we did see less and less customer complaints coming to our network about such services. In fact, they fell more than 10 times, very, very dramatically.

In terms of the MOU in Russia, this is a very, very good question because we do see ourselves at the top of the MOU scale in Russia. But we do not think that this stop is where we stop. We do believe that the MOU can grow up to even 400 minutes. And that will be a factor of the usage increase, including the usage on that tariff plan that we have introduced in Russia, and we have reinforced recently, as you know.

In fact, the elasticity there, for sure, it is around zero. We can never judge whether it will be slightly over 1 -- whether it will be slightly over 1 or under 1. But the catch is that we are up-selling the other products, namely the data product, into that ARPU. So we do manage to sustain the ARPU with the increase of MOU, not necessarily by direct elasticity of APPM. It is possible also by introduction of additional services, including and first of all data, and also messaging service bundles and other bundled services to sustain the ARPU with the MOU increase, not increasing the APPM.

All right. Thank you. That's very clear. Just maybe a follow-up question on the data package you are selling with the MTS970 smartphones. How long usually is the package you sell -- for how long is the period you are selling the data package to the user, taking the MTS970?

Well, it is depending on the conditions. The normal packages are 3, 6, and 12 months. And this is not with 970 only. You have to understand that at this moment, virtually every phone, every smartphone sold in our network is being sold with a data package included for a certain period of time, starting from two or three months and ending up with 12 months.

So this is quite a common practice at MTS, unlike with the other carriers in Russia, where we do sell certain packages of their traffic, prepaid traffic, along with the smartphones that they sell.

All right. Okay. On an average -- do you have any figures on average, if you are taking the take-up? Usually people go more for the 6 months, or the 3 or the 12?

No, it's -- at this moment, the 6 to 12 months comes with the top-end smartphones. But because those are smaller in share of sales, we would see more people buying within three to six months packages.

Okay. That's very clear. Thank you very much.

Thank you.

Alexander Kazbegi, Renaissance Capital.

Yes, good afternoon. Just maybe two questions. One is on the Ukraine again, going back to you saying that you need to revert of course to usage of the EDGE network. And again, that's the reality of Ukraine. But given, again, that there is growth clearly on the data traffic and the data demand, what is the possibility to see quite a big hike on the CapEx, because you will probably run out of the capacity? So maybe you can tell us, what is the capacity situation in the Ukraine, vis-a-vis the type of growth you're seeing there and whether that does put actually on -- pressure on the CapEx expectations for the Ukraine.

And last one, maybe, I think just on mobile money. You did say what you expect, in terms of net income contribution in 2017. But just to look maybe somewhere not that far away, 2014, you do have quite a good growth of the users there. But do you expect that to accelerate actually? And what would drive that, and why don't you see, so to say, stronger growth at the moment? Thank you.

Thank you, Alex. It's Alexey Kornya. On CapEx in Ukraine, we don't think that we have any big project in Ukraine, on swapping Ukraine network. However, we do not think that this will have a sizeable impact on our CapEx guidance and CapEx visibility. Right now, it is just slightly high in terms of CapEx to sales ratio than average of the Group.

And as for the mobile money and our guidance of net income contribution, we can say that our current net income contribution from this project or from MTS Bank into our financials for this quarter is almost of the same size as from Belarusian activities. So it is already showing first signs of positive contribution to our net income. However, we are not in a position right now to elaborate in more details over the potential impact of this project on our financial. We'll be ready to do that later in the periods.

Okay. That's fine. Thank you very much.

Andrei Dubovskov.

Yes.

I just want to remind you that we are going to have approximately 5% of net income in [interest] until the 2017 from our financial operations.

Yes, I remember that number. I was just wondering whether your current take-up rate would not change this estimate toward the high number, if you wish?

No. As we said, at this point of time, we are doing quite okay, so no reasons for us to change our outlook.

Okay. Thank you very much.

Alex Balakhnin, Goldman Sachs.

Yes, good afternoon. I have two questions. First is on the fixed line subscribers number, which is declined for fourth consecutive quarter. And I was just wondering what is behind this trend. And are you worried about this trend? And probably just wanted to hear some details of where this decline is coming from, whether it's Moscow or outside of Moscow subscribers, so probably some granularity here would be helpful.

And my second question is actually also on this fixed line -- in particular on your MGTS network upgrade, where you are, percentage-wise, in terms of the completion of your network upgrade. What percentage of the customers are turned for GPON technology or GPON ready at least? What is the uptake for the technology, and are you close to where you think you should be, in terms of the capacity and the tech upgrade? Or do you still need to make some investments? And if you still have to, can you please provide us with the details on how much needs to be spent? Thank you.

Alexander, thank you for the question. I understand that's deep down into the fixed line business. All right, our existing fixed line business shows a healthy growth of 2% year over year, and we believe that this is a good factor of ourselves actually increasing the quality of our subscriber base on our existing network.

As we announced, increasing the network size dramatically during this period, we are increasing the revenue, just because we are migrating the customers from old technology to the new technology, like in Moscow, from ADSL to GPON, and Russia-wide from analog to digital TV.

Well, this is something that, at the same time, comes at cost of some of the very low quality so-called social subscribers not migrating and thus might be turning this service off and going into the regular aerial antenna. We do see such things happening somewhere across Russia. But we see that those customers represent much less value to us than those customers that do migrate on the new technology. And we finally have a better ARPU and a better up-sell possibility on a digital network.

Regarding the Moscow and GPON story, at the moment we are in about 1.6m households passed with our GPON technology. Out of those, 650,000 are using GPON for telephony. And 220,000 are using GPON for double services, meaning at least the broadband with the telephony.

We think that this is -- we are still in a good shape to continue growing, because the '03 numbers can grow. We are still in a technology phase of unfolding the network. And at the same time, the penetration, as you can see, still has a way to go on both voice telephony and specifically internet.

As we are selling internet at the speeds much faster, at a very competitive rate in Moscow right now, we believe that our proposal to Moscow market is extremely competitive and very well-positioned to grow.

So the share is, at the moment, 35%. And that's the factor of 220,000 customers using the broadband and 650,000 using the voice telephony, out of 1.6m.

May I just ask a quick follow-up here? So the number of households passed are 30% of your total number of households. Is it too simplistic to approach the needed CapEx by just multiplying the cumulative expense you made for the upgrade by a factor of 3? Or it's not that linear?

No, Alexander, it's not that straightforward, because technical readiness was especially on the switch side goes first; and then there is an investment in the last mile. So one shouldn't just multiply the number of subscribers to be acquired and households to be passed by the CapEx already spent. I would say that we have yet a couple years to go on the intensive CapEx program. However, we had a relatively higher CapEx per household spent, rather than what we'll see in continued years.

Sorry for that, but might I just ask a second follow-up question to that? And is it fair to assume that, say, at capacity, the backbone, that whole of the network is probably half of the CapEx needed? And then the coverage, i.e. household passed, is probably another half? Is it like a fair assumption, or would you see it in a different way?

Well, it is a bit too simplistic. The last mile will constitute higher than the commutation part, the switch part.

Okay. Thanks a lot. Very helpful.

Anna Lepetukhina, Sberbank.

Yes, hello. I have a follow-up question on data center prices. You mentioned that you don't see voice cannibalization. But I just want to understand why we see data traffic revenues growth accelerating and growing an impressive 47%. ARPU growth is deteriorating. And in third quarter, ARPU was up only 1.8%. Therefore, I just want to understand whether you are satisfied with your pricing strategy and this is the result that you expected to achieve. And should we expect ARPU growth to accelerate going forward, as you start up-selling subscribers that switch to bundled tariff plans? So can you probably provide more color?

And my second question is on the fixed-line as well. Can you please comment in terms of what you see in competition in regions, whether you see any changes or it's all as it was before?

Thank you for the question. I will answer for the ARPU question and the revenue potential question. The point is that at the moment our ARPU is growing about 2% and quarter over quarter about 4%, which is, we believe, a healthy growth added to our growth of the base and forming our 4% to 5% overall growth year over year.

This is, for sure, the factor of both data traffic and data revenue growth of the existing base, and migration of the base from cheaper tariffs to more expensive V&D tariffs, since as Smart, Smart Plus, and Smart Mini.

We do not consider this as the cannibalization. We do consider this as an up-sell that we do to our customers, because it mostly comes as the increase of the usage with the increase of the ARPU and payments as well.

In terms of MOU, the growth of MOU is a reflection of our relatively aggressive tariff strategy in voice business, where we were able to capture the people within our network calling on net, and thus having much higher loyalty than our competitors, which is significantly more important for the upcoming period of mobile number portability introduction in Russia, to have much more loyal base, which is much more introverted than the base with the high level of churn calling outside.

So we believe that this was a strategic step for us, which did decrease the APPM, but -- and increase the MOU. But we were able and successful compensating it with the data increase and with the up-sell of current tariff plans into the higher-end tariff plans, such as Smart.

On the fixed question, I think the answer is quite simple. At the moment, we do not see an increase, rather a decrease of investments into the regional networks of our competition. So we do not think that there is an increase of competitive pressure coming from outside of Moscow or generally from Russia.

Thank you.

Andrei Dubovskov, and I just want to add some information to -- we shortly -- yes, we are fully satisfied with our pricing strategy because we are looking forward to balancing the market between the [IPPM] and usage. And the results have been, as Vasyl said earlier, the -- really helps the growth in our revenue, despite of some economical problems, in spite of competitive pressures, etc. Thank you.

Igor Semenov, Deutsche Bank.

Yes, good evening. Thank you. I actually wanted to follow up on ARPU dynamics; and also, I think, if you could help me understand if this is also a function of the subscriber growth. Clearly, from the three sets of results that we have available, it's clear that the revenues increasingly are driven by the growth in the subscriber base rather than ARPU expansion. So can you maybe comment on what do you expect in the next two to four quarters, in terms of the subscriber additions and whether this is going to be putting increasingly -- increasing pressure on the EBITDA margin?

So far it's been good. And your sales and marketing expenses have not been very high. But do you think this is going to be potentially a problem, the subscriber growth? And also, again, I was just -- with the level of penetration that we have, it's just difficult to understand where these additions are coming from. So maybe you could comment on the breakdown of your own gross additions, where the SIM cards are coming from, in terms of the -- is it tablets? Is it second or third phones? Is it something else? Thank you.

Let me answer the questions, starting from the second one. In the gross additions, we do see a healthy addition of the outsiders to our base, which means that we churned less customers than we added customers, in terms of in between the carriers' exchange of the customers. For sure, with the high penetrations we have in Russia, the customers are coming to our network predominantly used to be the customers of other carriers or ourselves.

In fact, the balance where we do catch more customers coming from other carriers than of our own customers, reconnecting is a very healthy balance which allows us to grow and to create incremental revenues in the sales, without actually cannibalizing ourselves or cannibalizing ourselves to a lesser extent than what we believe is the case with our competitors.

In terms of the types of the connection, yes, the tablets are a driver; but it is still a single-digit percentage driver, in terms of overall sales, so we cannot say that this is such an important factor that would affect the base composition at the moment. It is definitely mostly people switching from feature phones to smartphones, and immediately increasing the packages that they are using, both of voice and data. And that's where the drive is coming from, including the sale and the existing base upgrade, which we also manage.

So I would say that at the moment we do see a certain potential of sale -- of profitable sale to the new customers, which are effectively the customers of our competitors. And we do believe that this will create certain revenue stream, which is approximately balanced out with the same amount of growth coming from the internal transactions of upgrading of current accounts into the new tariff plans with the higher ARPUs.

Regarding the first question -- well basically, I was answering also the first question, saying that this subscriber base growth is coming from the market; and it is coming from other carriers as well. And this still is quite a healthy composition of both internal growth and [fresh new] growth in our network. We do believe that this will be the balance for the future periods as well.

Thank you.

(Operator Instructions). Evgeny Golosnoy, Metropol.

Yes, hi. I've got a couple of questions. The first one is the one that I ask all carriers in this market. And it's related to the forthcoming introduction of MNP in Russia. When do you think it's going to happen? What's the expected increase in the subscriber numbers you can see? Did you try to estimate that? And what's the potential? And do you see any problems technically for accommodating new customers coming to your network? That's the first set of questions.

And then the second one: is there any progress with getting 3G licenses in Ukraine on the regulatory side? I assume that not -- some things are beyond your control. What's the regulator's approach -- the regulator's view on 3G in Ukraine? Are there -- are other companies are possible to -- other companies will get 3G license as well?

Evgeny, thank you for the question. The first one was on MNP. This is Vasyl answering. The technical readiness was one of the questions. We are preparing ourselves, though we may say that it is not us but the whole market is relatively unprepared for MNP launch in the 1st of December. We believe that there is definitely not enough of testing and tuning was made in this market. And MNP forced introduction in the first of December poses a certain technical threat to the whole market, with no specific situation for any of the carriers, including ourselves.

In terms of the customer base migration within the MNP launch, yes, we did certain researches that showed us that the migration probability for the first year of the -- after the introduction is very low. So we would consider the possibility of the net balance of our base to change, as a very, very low.

And for sure we have in place the whole plan to mitigate any kind of risks of attacks of our competitors and also retain our customers. And we believe that the things that we have done in the past, by introduction of our free on-net calling tariff plans, the very appealing data tariff plans, and V&D tariff plans are very good retention tools to keep our base happy and not migrating -- not porting out of MTS.

Regarding the second question with the Ukraine, this is a really, really long story that we have been commenting many, many times. And unfortunately it did not change since our comment a year ago or two years ago. There might be some speculations, but there was no effective movement towards issuing a 3G license in Ukraine to ask also any other carriers.

We also expect Ukrainian government to act very rationally and very transparently. And if there is a time when the license would be granted, it would be granted according to the law, in a transparent manner, where there will be no deals that would not be accessible or available to MTS in Ukraine.

Thank you.

(Operator Instructions). As we have no further questions at this time, I would like to hand back to our speakers for any additional or closing remarks.

Thank you very much. Ladies and gentlemen, thank you for tuning in. We welcome at any time -- you're welcome at any time to contact our Investor Relations department for any further questions. A webcast of 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 evening. Thank you.

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