VEON Ltd (VEON) 2003 Q3 法說會逐字稿

Good day everyone and welcome to the Vimpel Communication's Q3 Financial Results Conference Call. Today's conference is being recorded. At this time for opening remarks and introduction, I'd like to turn the conference over to Mr. Chris Mittendorf of Edelman Financial. Please go ahead sir.

Good morning and welcome to VimpelCom's conference call to discuss the Company's Q3 and nine-month 2003 financial and operating results.

Before getting started I would like to remind everyone that, except for historical information, the statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties. These statements relate in part to the Company's development plans, such as national expansion and to the confirmation of the merger between VimpelCom and VimpelCom-Region. Certain factors may cause actual results to differ materially from those contained in the forward-looking statements. Including those risks detailed in the Company's press release announcing Q3 and nine-month financial and operating results, the Company's earning presentation entitled Presentation of Q3 2003 Financial and Operating Results and in the Company's Annual Report on Form 20-F for the year ended December 31, 2002, each of which are posted on the Company's website at www.vimpelcom.com.

In addition, the Company's Q3 Press Release and Form 20-F are posted on the Securities and Exchange Commission's website at www.SEC.gov.

VimpelCom disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements made on this conference call, or to make corrections to reflect future events or developments.

If you have not received a copy of the Company's Q3 Press Release, please contact Edelman Financial at 212-704-8134 and it will be forwarded to you. In addition, the Press Release, which includes reconciliation's of non-GAAP financial measures presented on this conference call and the earnings presentation can each be downloaded from the VimpelCom website.

At this time I would like to turn the call over to Jo Lunder, Chairman of the Board of Directors of Vimpel Communications.

Good morning everyone. Thank you for joining our conference call today. Let me introduce the team participating on this call. I am joined by Alexander Izosimov, Chief Executive Officer for VimpelCom, Nikolai Prianishnikov our First Vice President and Commercial Director, Elena Shmatova our Chief Financial Officer and Valery Goldin our Vice President of International Relations.

Today's conference call is special, as it opens a new phase in our development. It is the first time that I participate in the call as Chairman and it is the first conference call for Alexander, our new Chief Executive.

For the first time, we are making a live synchronized slide presentation. We hope that it will work well on the technical side and we will be waiting for your feedback on the new presentation format.

Also, today is the first time that we meet, our first Extraordinary General Meeting of Shareholders, approved the merger between VimpelCom and VimpelCom-Region. We see this merger as an important milestone in our development, which will harmonize the interest of all our shareholders, simplify our corporate structure and create a solid platform for our future growth. In essence, the decision was made by our ADR holders, because our [indiscernible] our strategic investors could not vote as interested parties on key decisions.

Let me use this opportunity to thank all of you for the tremendous support and active voting, which enabled us to pass the resolution, which required the positive vote of more than 50% of all disinterested shareholders and, in fact was approved by more than 99% of the votes cast.

Turning to business developments, I'd like to say a few words about the seller market in Russia. We always believe in the great potential of the Russian markets. We work hard to realize this potential and still the reality has always been ahead of forecast. For example, in the middle of last year, the consensus forecast for the end of 2003 in Russia was approximately 22 million mobile subscribers. Today the consensus forecast is not 22 million, but 35 million subscribers by the end of this year. Yes, Regional penetration in Russia, if we take out Moscow and St Petersburg, is only around 15%. This means that we have exciting years of growth ahead of us and that the Company can set and fulfill its most ambitious plans. One of which is to become the biggest cellular operator in Russia.

On this optimistic note, let me turn the floor over to Alexander Izosimov, Chief Executive Officer of VimpelCom. Alexander?

Thank you Jo, hello everyone. As many of you know, I have been with VimpelCom since October 1, and I have spent a significant part of that time getting familiarized with the Company's business, managers, employees, partners, competitors, shareholders and all the important stakeholders. This process of course is not over yet, as we operate in 46 regions in Russia, I plan to see much more than I have been able to do so far. I also plan to visit our shareholders and I will, in VimpelCom's tradition, be active an accessible in our relations with the investment community.

So far I have been very much pleased to see that VimpelCom is a well-structured Company with a strong management team, great history and enormous potential for future growth. The Company's performance in the past few years has been absolutely phenomenal and it is our task to find ways for further improvements in order to meet the challenges of today and tomorrow.

The Company's growth strategy has been working very well and I intend to keep it intact for the time being. It includes three main blocks, aggressive network build-out and subscriber acquisitions in the Regions. Maintaining leadership in Moscow, concentrating on profitability, subscriber retention and loyalty. The last one, but not least, introducing packaging and promoting value added services. The focus of the organization should be on the implementation of this strategy.

Let us now move to the main subject of our conference call, our Q3 results, announced earlier today.

Before we go into the numbers, let me make a short comment on definition. In line with the US SEC recommendation, we now call OIBDA, operating income before depreciation and amortization, it was previously called EBITDA. All our previous EBITDA numbers are valid because it was the same definition.

Now to the numbers, Q3 2003 has become the best quarter in the Company's history. We reported above 70% growth of net revenues, OIBDA and net income on a year-on-year basis. OIBDA margin went up to 47.1%. Both Moscow and the Regions contributed to this growth, with the Regions growing up much faster than Moscow.

If we look at our Regional performance, and VimpelCom-Region, if you view those results on a year-on-year basis, the progress would be measured in hundreds or even thousands of percentage points. The results appear more meaningful if we view them on a quarter-to-quarter basis.

For Q3 2003, VimpelCom-Region's net revenues grew by more than 40% to US$129m. Net income was US$17.8m, more than 100% growth compared with Q2 2003. OIBDA margin went up to 38.7%. This remarkable growth was achieved within only two years, after we started making significant investments in the Regions.

If we look now at our operating highlights. Our strong financial performance was the result of a number of factors. The long-term rapid subscriber growth, strict cost control, increasing utilization of economies of scale, all of them are important, but the key factor is of course subscriber growth, combined with a prudent marketing and pricing policy.

The Company has been successfully implementing its growth focus strategy and as a result today we have 10.4 million subscribers in Russia. We are the leader in net additions in Russia and in all of the Regions where we operate, except for the Northwest of the Regions.

We entered this market only recently and so far we operate in three out of ten districts, the City of St Petersburg, the surrounding Leningrad Region and the Kelingrad(ph) Region. It is worthwhile noting actually, that as of today, only seven months after the launch of our network in St Petersburg, we have signed up 260,000 subscribers and since August we are leading in net additions as well.

Turning to our overall license portfolio. We have operating licenses, which cover 73 out of 89 regions, which are administrative units of the Russian Figuration. The only area where we do not have an operating license yet, is the Far East. We currently operate in 46 regions and we plan to be operational in more than 50 regions by the year-end.

Our objective is to secure subscriber growth, both in Moscow and in the Regions. We are quite pleased with our current position in Moscow, where we keep a comfortable lead in market share, with 49% and we are again the leader in net additions since June this year.

Our market share in the Regions is steadily growing, reaching 21% from 7% just a year ago. This strong growth allowed us to improve our overall national market share, which now reaches 31%.

If we look at particular Regions, we will see a similar strong growth in most of the Regions where we operate. The development phases are different, because we started first in the centrals of the region and then moved to Volga(ph) and Siberia and more recently to the south and northwest of the regions. Based on this success, we will continue to work vigorously to capture the maximum opportunities presented by the current cellular boom in Russia.

In the process of growth, our subscriber base is changing. First the proportion of the Regional subscribers is increasing very rapidly. During the last 12-months it grew from 18% of the total customer base to 45% at the end of Q3. We expect that our Regional subscribers will constitute more than 50% of our customer base within the next few months.

Another trend is the growing share of pre-paid subscribers. It reached 84% in Q3 and it continues to grow. This reflects our strategy to address the mass-market opportunities in Russia. We are developing pre-paid platform as a full-range offering, which provides all advance features, such as APRS, MMS and automatic roaming. We believe it is an optimal mass-market strategy for Russia, given its relatively undeveloped banking and credit control systems. At the same time we work hard to attract more customers from the business and high-end user segments, many of whom still prefer post-paid tariff plans. It is one of our priorities in Moscow, and we are starting to do the same in the Regions.

Talking about our network expansion and subscriber growth, I would like to praise our technical department. It was able to organize the deployment, maintenance and operation of a large-scale efficient network in a vast geographical area. In Q3 we installed approximately 900 new base stations and the total number of base stations in the network is now more than 6,000. Our national network, when completed, will be one of the biggest in the world. It is interesting to note that our network in Moscow is already the biggest metropolitan area network in Europe.

Now I'd like to mention one of the challenges, which we are facing, this is true. Rapid subscriber growth, strong seasonal effect and fierce competition, resulted in a relatively high churn rate. This problem is particularly pronounced in Moscow, where we deal with a much more mature market, with a penetration level in excess of 60%. Although a large part of it is not loyalty driven, about one third of our churn is internal migration, it has been a negative factor and a matter of concern. I am very happy to note that in Q3 we see a lowering churn rate compared to Q2. Of course it is too early to say that we have resolved the issue, but this is an encouraging sign.

Now let me ask Elena to present our Q3 Financial Results in more detail.

Thank you Alexander. As it was already indicated, our revenue demonstrates substantial growth quarter-to-quarter, stipulated by the rapid growth of our subscriber base. Of course Q3 revenue results were helped by roaming, but from year-to-year the effects of roaming revenues is becoming less influential. Roaming revenues constituted 13% of service revenue in the third quarter of the year 2003 and changed from the second quarter, as compared to 18% of the service revenue in the first quarter of the year 2002.

Our revenue structure, meaning percentage of service revenue and handset sales in total, remains fairly stable. Gross margin is also fairly stable, in spite of the fact that these two revenue streams give quite different gross margins.

In Q3 of this year SG&A as a percentage of revenues constituted 33.5%, which is worse than a year ago 30.9%, but better than it was in the previous quarter, 35.1%. The main drivers of these changes year-to-year are sales and marketing expenses connected with the volume of sales.

Sales volumes in Q3 of this year were 2.6m and a year ago, in the same quarter, approximately 1m. Percentage overall SG&A expense revenue was stable. As a result of these factors OIBDA increased year-to-year by US$76m or 74%. Net income improved year-to-year by 78%. The large improvement in net income was mainly connected with two opposite changes, first the depreciation expense grew quicker than revenue, 96% growing year-to-year, while revenue grew 71%. Second, other expenses, mainly interest expense, grew slower, 41% year-to-year.

If we look at such operational indicators as ARPU and Minutes of Use, their variation illustrates some of the trends, which were discussed before. ARPU backed by roaming is stable for the last two quarters. What is interesting, both segments, contract and pre-paid, demonstrate growth on a quarter-to-quarter basis. The same relates to Minutes of Use, except pre-paid in Moscow, but negative quarter-to-quarter deviation is only 1 point per minute.

Subscriber acquisition costs shows this development, as we have managed growth with less spending on advertising in Q3 of 2003.

As our net income is growing, our balance-sheet strategy is improving. Not only the retained earnings line is growing. In August we also received a large tranche of Alpha(ph) Group contributions to VimpelCom-Region in the amount of US$58.5m. Both these factors led to the decrease in this equity ratio below 1(ph) in spite of the fact that our total debt has increased by approximately US$100m.

Other ratios showing our ability to service debt, such as debt OIBDA and debt interest are improving constantly, as our debt is growing slower than in previous periods, which is also a result of our operations, generating much more cash now than it was before.

I am also happy to report that today we've had a notice calling early redemption of all convertible notes issued in July 2000. We expect that this will trigger the conversion of this note period. The Treasury Shares are placed to secure this transaction. This conversion will further improve our ratios.

Talking about the operating cash flow, we can see that we are rapidly decreasing the difference between our cash generated and capital investment. If at the end of the year 2002 we needed US$287m of external cash to finance our activities, by the end of nine-months of this year we needed only US$82m. What is important to mention, we see these positive changes on the background of very extensive regional expansion through green field growth, although such a picture would be easier to expect in the case of growth through acquisitions.

Thank you Elena. Now allow me to summarize what has been said so far.

As you have seen the Company has entered Q4 2003 with excellent financial results, ongoing strong subscriber growth and a healthy market share gain, a chief predominance through green field operations. At the same time, we do have a number of issues that we need to address. The biggest challenge that we face, is to maintain and manage the current pace of growth.

Also, connected to growth, is already mentioned the churn issue, and the annual decline in ARPU. Naturally, we will continue to focus on these two issues, and we are encouraged to see some signs showing that these trends can be dealt with.

That's basically it. Thank you for your attention, and let me now open the floor for questions.

Thank you.

We will go to Neil Wedlake with Morgan Stanley.

Good afternoon. Congratulations on these numbers. I wondered if you could give us a little bit more color as to the structure of gross margin in the Moscow and the Regional businesses? I noticed that even with sequential revenue growth around 25%, your direct cost on sales as a proportion of revenues has actually increased slightly quarter-on-quarter. I wonder if you could give us some steer as to where you see that number going over the next few quarters?

You know to answer this question we should look into the structure of the service revenue. You know that in Q3 we have more roaming revenues, which have different gross margin, actually lower gross margin than the standard service voice products. Also, there is an effect of value added services, which is also on the level of gross margins, has lower gross margin, but comes through the result on the level of operating margins.

That would seem rather counter-intuitive, I certainly think that value added service revenue, if it is predominantly SMS, would be very high margin. Really, given the value added services are only 6% or 7% of revenues, unless that's increased substantially in the quarter, I wouldn't see that as necessarily being a big distortion. So I was just wondering if maybe there is some stepped variable costs related to the Regional expansion? Because certainly with the increased scale quarter-on-quarter, one would expect that the increase share of in-net calling and just higher utilization of various parts of the network would have improved the gross margin?

Yes, there is such effect of course. But it has the same write out on this stage, Regional contributions to the consolidated gross margin is approximately the same percentage. So the most appropriate answer, would be the effects of roaming.

We'll take our next question from Alex Calstagie(ph) with Renaissance Capital.

Good afternoon. Can I ask you what your plans are in terms of the new Regional additions for the year 2004? In general what are your CAPEX plans for 2004, presumably obviously we are experiencing quite a high growth in subscriber, so I was wondering what kind of guidance you might give us on the CAPEX side?

Let me take this question. It is actually two questions, right. First about our plans for the new Regions, the most part of our strategy is to become a federal operator, which covers the whole country. Therefore, we will continue our rollout plan.

Currently to talk more precisely about how many Regions will be covered next year, is probably a little bit too early, but we will continue at roughly the same pace of rollout, as we have been experiencing this year.

Now, that brings me to your second one, about the CAPEX. Again, I'll start from the strategic angle here and say the fundamental strategy, which VimpelCom has been deploying so far is to invest as we grow. This strategy has served us well, leading to a constant improvement of basically all the financial parameters. Naturally that this year subscriber based growth was faster than anybody could expect, driven by an explosive market growth. This growth has been amplified by stronger than expected market share gains by VimpelCom. Therefore, we do expect to invest more next year, to ensure our quality standards and to secure the expected level of future growth.

We are determined to build an efficient network, and we believe that's the key to our success here in Russia. We will target future investment levels below US$150 per subscriber going forward. We believe that that will be able to continue to improve. This will allow us to continue to improve our financial performance going forward and keeping all of our ratios at comfort level and improving.

We also think that we can sustain this level of investment, even with the incremental ARPUs between US$10 and US$12.

Would you have any more specific numbers, say US$800m for the next year, or something like this?

That will depend on the growth, which we'll see next year.

We'll take our next question from Vladamir(ph) Kostolovsky(ph) with Brunswick UBS.

Good afternoon ladies and gentlemen. Congratulations with good results. I have two questions if I may, the first one is on the redemption of your convertible bond. I was just wondering why you decided to call it earlier? I think it is very difficult for you to refinance debt effectively with a rate of 5%-5.5%. Does that mean that you are not planning to expand outside of Russia any time soon, or basically why did you decide to call it?

The second one is, just looking at the alteration of the statistics you provided for us. In Moscow MOU seasonally seem to have grown significantly slower than they did last year. Basically my question is, are you seeing any deterioration in your subscriber mix in Moscow? One of the things that might have led to this effect could be blue and triple SIM cards emerging on the market and basically trading actual usage between a larger number of SIM cards and that driving blended use down? Could you comment on that as well? Thanks.

Thank you Vladamir. I will answer about the convertible notes. So the question was why we haven't called the convertibles earlier?

No, no, sorry, the question is why do you call it early, why don't you wait and see when the time comes to redeem it? Because it is very cheap financing, so why call it earlier?

Vladamir unfortunately it is not very cheap financing, because all in all it carries 11.5% interest, which we don't think is cheap right now. Because right now we can get access to much cheaper resources.

Okay, I'm sorry, I thought it was 5.5% interest rate on it.

It is only cash, but we also have accrued interest [indiscernible]

Okay.

Talking about MOU, I think we have got pretty stable sedation in Moscow and both in the Regions in terms of both ARPUs and MOUs. We see some seasonally good second and third quarters and a bit weaker first and fourth quarters in our business right now. In Moscow we are pretty satisfied by our tendencies. ARPU in Moscow was even increasing from the third to fourth quarter MOU, a small decline, but very small in Regional it is more a stable tendency.

We'll take our next question from Nick Barnes with Thames River Capital.

Hi, it's Nick Barnes at Thames River. I wonder if you could update us on what you think you CAPEX would be in 2003 and possibly in 2004 as well? At the last conference call you said that you guidance for CAPEX for this year would be US$650m all in and that your guidance for next year would be US$600m. Has there been any change there at all?

Thank you, but I touched already on this portion. However, if we talk about this year, we do not intend to change the guidance for this year, so we go with US$650m. With regards to next year, obviously that growth was much faster than expected, significantly faster than expected, and therefore it will result in big investment. The scale of this investment will be determined by growth, but the reference point here that we will be targeting US$150 per subscriber or below, going forward.

Okay, thanks.

We'll take our next question from Vladamir(ph) Vokmail(ph) with Nickoil(ph).

Hi, congratulations on your excellent results. So one small question, could you tell us your vision on future MOU trends both in Moscow and the Regions? Thank you.

Minutes of Use, I'd just would like to give some factors, which we believe will influence this trend.

In the Regions we see some positive trends, actually pulling to the fact that when we start our Regional operation it kind of limits the coverage, it is only city coverage and then as soon as we expand, the coverage rolls to other important cities, we believe there is some opportunity for minutes of use to go up. That's what we have seen in Region, if we look Region by Region, so in Regions with a big coverage already provided by VimpelCom there is some increase in minutes of use.

Also, if the economical growth in Russia will continues that also could help growing minutes of use.

At the same time, of course, talking about Moscow, which is a mature market and talking about kind of regions where there is already high penetration, there are of course light users, which we are starting to take, that influence in the opposite direction. That is why, in general, we can foresee more or less stable tendencies with minutes of use.

We'll take our next question from Stephen Pettyfer with Merrill Lynch.

Hi, two questions if I could please. Firstly, just looking at the Moscow pre-paid segment, it looks like a [inaudible].

My second question relates to the [indiscernible] Region, very good growth there. Given the number of would-be competitors in that area, could you comment on what's happening with pricing there please? Thanks.

First of all about pre-paid in Moscow. With the pre-paid segments in Moscow we do believe we have a pretty good standard. For example, if we look to the ARPU, we increased ARPU from US$9.5 in the second quarter to US$10.4 in the third quarter, which kind of shows that with really huge growth, which we see in Moscow where the pre-paid segments were able to have flattening curve tendencies with ARPU. Although I have to mention that there is still some seasonal factor that in summer even though less market subscriber spend is more on cellular phones than in wintertime.

If we talk about the Volga(ph) Region, I would agree that the competitive position is one of the toughest in Russia, because that's where actual VimpelCom, Megaphone(ph) [indiscernible] with some acquisitions and also Smarts(ph) as a major player in that particular region. But I am glad to say that during the last month VimpelCom was delivering a very strong result. We are a definite leader in terms of growth in that particular region. We are right now the leader in terms of total subscriber base of all the regions and we are improving all our financial results. Revenues are growing, EBITDA, OIBDA is growing in a very good direction [indiscernible] and we're very satisfied and we have very strong competitive advantages there. We have this unified business model, where we have the license for all the small regions within Volga. Right now we have the main roads covered from Moscow to Kazan(ph), that's a very good competitive advantage. Our competition doesn't have it, they have only small networks in a few regions and that gives us a good advantage. Of course our leadership in service quality and innovations also are very important.

We'll take our next question from Olga Geleskia(ph) with Renaissance Capital.

Ladies and gentlemen I have two questions. The first one is, the ARPU of pre-paid subscribers in Moscow increased, while MOU at the same time was down. Was it due to changes in tariffs or was it just the different traffic composition?

Unfortunately we didn't increase tariff that is very difficult in our business. But that was influenced more by some roaming - mostly by roaming revenues, which our pre-paid users were having during that time - summer time.

Thank you. Can you please then provide us with the numbers for roaming revenues in Moscow and the Regions?

Roaming revenues are -13% of our total service revenues belong to roaming. In Moscow this percentage is slightly higher, it is approximately 15% and it is split in Moscow between visitors and our customers going to [indiscernible] approximately equal 50/50. In Regions more - we are receiving more from visitors than from our customers going to other networks.

We'll take our next question from Charlie Newington-Bridges(ph) with Natexis(ph).

Good afternoon, I have a question on Regional subscribers. You added, I think, 1.2 million subscribers in Q3 in the Regions and seem to have added 800,000 in the first six weeks of Q4. I just wonder whether we can extrapolate that for all of Q4 and for the full-year? I also wondered whether you could give us some guidance on where you see Regional subs and penetration in full-year '04?

First of all, yes, your comments about 1.2 million subscribers in Q3 that is simply correct. It is exactly 1,178,000 subscribers, which we added net additions in the Regions.

In terms of future trends, we believe that there is a very big potential, in general, for growth of cellular subscribers in the Regions. Still(ph) penetration as a matter, in general, in the Regions is only 15%, that's why the markets will grow.

We believe that VimpelCom is very well positioned to take that significant part of this growth and we can see that strategy is working. Of course, we can look for more or less the same trends for the nearest months.

Talking about them next year, of course we need to take into consideration that in some of the Regions competition will be a bit tougher. As an example, our main competitor is starting off the matter both in Volvin(ph) and some other regions, so it will be - it's tougher competition.

On the other hand, we have as we mentioned, will also expand our territory. That's why we are still focused on that strong growth in the Regions.

Are you prepared to quantify what you think penetration can be in the Regions in 2004 though?

Not yet. It is difference of use and different forecasts of the analysts, which I believe we can take and then we can use some consensus forecast but not to - we would prefer not to give our forecast.

We'll take our next question from Vadim(ph) Kovshov(ph) with Discovery Capital Management.

Good afternoon gentlemen and ladies. I have two questions, question number one relates to the situation with the two challenges that you mentioned. The first is the churn and the second is ARPU. If you were to give more color to what is happening in Moscow, in broader terms, not in numbers. Can you sort of characterize what this competition you [indiscernible], whether it is a reflection of the maturation that's very rapidly unfolding in Moscow?

The other thing I didn't hear I don't think, is how you are prepared to deal with those proactively.

Okay. First Moscow dynamics position and linked to that ARPU and churn level. In Moscow we have relatively strong competition. Two of our main players VimpelCom and MPS(ph) and the third relatively aggressive player, Megaphone(ph). It is more or less [indiscernible] with the network of VimpelCom and MPS in Moscow, but weaker coverage and quality of the network of Megaphone. But trying to use aggressive pricing just to get some part of that market share.

We are glad that our strategy in leading in service quality and product innovations and with our really competitive pre-paid product for the mass market is working right now. That has given us advantage against competition, that's why we have 49% of market share. What's more important, we are leading during the last month in terms of growth on the Moscow market.

We believe that we can - will keep this strong position going forward, with some competitive action, but we believe that pricing pressure, as an example, like decreasing prices, pricing wars - we don't see foresee some signs of a real price wars. That's why it will need some competitive moves, but we don't foresee very strong and aggressive price wars in Moscow.

With that, our strategy is to keep growing with the new subscribers, and especially look extensively to the loyalty and retention of our subscriber base. That is our strategic focus right now and we are actually working on launching some loyalty initiatives and some initiatives, which would give our subscribers long-term benefits to be with VimpelCom.

We'll take our next question from Nadia Kolaveva(ph) with HR Capital.

Hello ladies and gentlemen. Congratulations on your strong results. I have two questions, the first, could you give us your churn level in Moscow and also if possible, ARPU in St Petersburg?

My second question relates to the roaming revenues. On the one hand you are saying that roaming revenues did not change as a percentage of revenues in Q3 compared to Q2. On the other hand you brought roaming revenues as an argument for a different cost structure and also [indiscernible] of growth quarter-on-quarter. So I would assume that roaming revenues did change a percentage of revenues, am I missing something? Thank you.

Okay, first about ARPU in St Petersburg, we can say that ARPU with roaming in total, our Regional networks was US$11.5 and St Petersburg was more or less close to the average for our Regional subscribers. We believe that kind of the future trend figure, market potential in the St Petersburg market, but in terms of subscriber spending it will be more or less at a regional level.

Talking about roaming affects, Nadia you know that there is - well as we discussed three factors to this. Roaming, entertainment and [indiscernible] indicated the Regional portion of it, but all this says is, you know we are discussing 0.1% in all of this. So it is very, very difficult to say, which 0.1% we brought by roaming, because I am just speculating, but if you look into decimals, then maybe in Q2 it was 12.9% and in Q3 it was 13.2%. So this is the question - I am very hesitant to discuss it because it immaterially matters, because that means that we really [indiscernible] more serious problem.

We'll take our next question from Alexei(ph) Yakovinski(ph) with UFG.

Good evening ladies and gentlemen. Congratulations on the excellent numbers. I have two questions, what percentage of your start-up operating expenses in the Euro region was actually incurred in Q3?

Secondly, can you break down your subscriber acquisition costs into advertising and bill commission? I'm assuming there was no handset subsidy? Thanks.

Your second one, subscriber acquisition, in Q3 was at approximately 25% going into marketing and advertising and 75% going towards commission. Absolutely correct, no dealer, no handset subsidies. Even more we are making margin on subscriber equipment and SIM cards. In Q3 we made a margin of US$3.8m.

We'll take our next question from Bill Nord(ph) with Marvin & Palmer Associates.

Yes, we are large shareholders and are delighted in not only your performance but your transition of management leadership is reflected in this conference call. My question regards the seasonality in your business. Obviously the benefit of the vacation and all that goes with summer time, as against the slow down in activities, as in all activity I guess in the cold Russian winter Q4. Last year that difference resulted in only a very modest increase in revenues Q3 to Q4. I guess my question is, if that seasonality slippage will be there as significant this year, now that the Regions are such a large portion, or whether there might be something different in the seasonality pattern in the Regions versus Moscow as we look to this Q4?

I would say that certainly seasonality would be the case, also talking about this year. At the same time, of course, the growth is higher this year. We can see that right now, that growth during Q3 and we believe in Q4 it will be much stronger than last year. That's why it will help the growth in Q4.

It is also important to mention that if we talk about margins and income, which we receive in our business. Some part of the revenues, as an example, roaming revenues, it is not too much influencing our bottom line, for example, from them our Moscow subscriber who is going abroad to Turkey or to Europe, that's where we are making only 15% margin on that traffic use. That's why, talking about the real margins and bottom lines that we still believe that we can deliver a strong Q4 and Q1.

Yes, and you're now leaving me with the view point that the relative difference Q3 to Q4 perhaps will not be as much as last year. With the full understanding, net Q4 over Q4 last year, will be still very, very good growth.

We believe that we will have strong growth of that subscriber base in Q4. Of course it will correspond to some revenue growth, although the usage will be smaller in Q4. Then, of course, looking to expenses, that also will give you a factor. As an example right now, we're launching still a number of Regions, also Euro Regions [indiscernible] also big growth in subscriber acquisition costs during the last month of the year, Christmas campaigns etcetera. So then when you take all these trends together, then we will get to the final results.

This is Alexander, I would like to also add that probably just looking at the larger subscriber base, and more diverse, will have much less escalations from quarter to quarter, although we will have pronounced seasonality, but it will be much more [indiscernible] behavior. Therefore, yes I guess, we would expect the same strong growth in Q4, but less fluctuation between Q3 and Q4.

We'll take our next question from Anna Vasonn(ph) with CAIB.

Hello gentlemen. Congratulations again on the results. I just wondered if you could give us some talk about the subscribers in St Petersburg at the end of Q3? Just following on from the earlier question, last year there was a big growth in SG&A in Q4, which obviously was the big jump in subscriber numbers. I don't think there will be such a seasonal jump in Q4, at least that's my guess, I guess. I am just wondering if you're looking for such a big increase again in SG&A yourselves?

First of all we'll start with St Petersburg. As of today we have 260,000 subscribers in St Petersburg and the growth continues.

As long as we are planning, as in the last year, price good new-year campaigns, yes we think that our expenses on promotion and sales will increase.

But we will try to keep subscriber acquisition cost below.

Due to time constraints, we have time for one more question. We'll take our final question from Jean Charles LeMar(ph) with JP Morgan.

Yes, hello, I just had a question on your traffic trends. I'd like to know what currently is the share of your traffic that stays on net, how it is evolving and what are the implications going forward for your gross margin?

Good question. First of all there's a serious difference from - if we compare Regional traffic and Moscow traffic trends. In Moscow approximately 60% of the total traffic is mobile-to-mobile traffic. While in the Regions, depending on our size of subscriber base and penetration, their difference is from 10% of that total traffic mobile to mobile to 30% of that traffic is mobile to mobile. Of course the trends in all markets is the growth. With that, of course, we can foresee some positive trends with paying less interconnect - having less interconnect costs with more traffic growth within our networks. Even more, when it is our customer calling from one region to another and that's going through our channel, that is also a decrease in inter- [indiscernible] traffic, which [indiscernible] the costs, which usually pay to Russia(ph) Telecom or some other providers, we can say.

Okay. Of the mobile to mobile, how much is actually on your - to your own mobile subscribers?

Usually the majority of that traffic is within one operator. With our Moscow mobile-to-mobile base I can say that it is approximately 85% is within our network, 15% is with other operators.

This concludes our question and answer session. Now I'd like to turn the conference back to Alexander Izosimov for any additional or closing remarks.

Thank you very much. Thank you all for your questions, for joining us today at this conference call. Those of you who only listened but not viewed the presentation, you can visit our site and go through the entire web cast later on. Of course, if you have any follow-up questions or you want to give us some feedback on how this call went, please don't hesitate to contact us.

So have a nice day and goodbye.

This concludes today's conference. We thank you for your participation. You may disconnect at this time.