VEON Ltd (VEON) 2004 Q3 法說會逐字稿

Good day, and welcome everyone to the VimpelCom third quarter 2004 financial and operating results conference call. Today’s call is being recorded. At this time, I would like to turn the call over to John Dillard from Edelmann Financial. Mr. Dillard, you may begin.

Good morning, and welcome to VimpelCom’s conference call to discuss the Company’s third quarter and 9-month 2004 financial and operating results. Before getting started, I’d like to remind everyone that except for historical information, statements made on this conference call may constitute forward looking statements that involve certain risks and uncertainties. These statements relate in part to 1) the Company’s strategy and development plans, such as national and CIS expansion, 2) the confirmation of the merger between VimpelCom and each of VimpelCom Region and KB Impuls, and 3) expected growth in subscribers and penetration.

Certain factors may cause actual results to differ materially from those contained in the forward looking statements. Including those detailed in 1, the Company’s press release announcing third quarter and 9 month 2004 financial and operating results, 2, the Company’s earning presentation, entitled “Presentation of 3Q 2004 Financial and Operating Results,” 3, the Company’s annual report on Form 20-F for the year ended December 31, 2003, and 4, other public filings made by the Company with the United States Security and Exchange Commission, each of which are posted on the Company’s website at www.vimpelcom.com.

In addition, the Company’s third quarter and 9-month 2004 financial and operating results 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 third quarter and 9 month 2004 financial and operating results press release, please contact Edelmann Financial at 212-704-8134 and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented on this conference call, can each be downloaded from the VimpelCom website.

At this time, I’d like to turn the call over to Alexander Izosimov, Chief Executive Officer of Vimpel Communications. Go ahead, sir.

Thank you. Good morning everyone, and thank you for joining our conference call today. Let me introduce our team participating on this call. Here with me are Nikolai Pryanishnikov and Jere Calmes, our Executive Vice Presidents who are in charge of Regional and Moscow operations respectively, Elena Shmatova, our Chief Financial Officer, and Valery Goldin, our Vice President of International Relations.

Today we will cover the following issues. First, we will talk about VimpelCom’s development strategy as the Russian wireless market is getting more mature. Second, we will cover our third quarter financial and operating results, and finally, we’ll talk about our corporate activities.

Subscriber growth in Russia has been extremely strong this year. It seems that the industry will meet actually some of the most aggressive analysts’ forecasts, and will exceed a 47% penetration rate nationwide by year end. It would mean that roughly speaking, Russia’s mobile subscribers would double every year since the year 2000. We’ll discuss a bit later VimpelCom’s contribution to this remarkable achievement, but now a few words about how it affects our strategy and our vision of the future development of the business.

Each month this year, Russian mobile operators added approximately 3 million subscribers. If this pace continues, Russia will be over 70% penetrated at the year end of 2005. Even if this rate of growth slows down, it’s clear that that saturation level is no longer far beyond the horizon.

In this situation, we have defined three primary strategic directions. First, to maximize the growth of our customer base during the remaining period of rapid subscriber growth in Russia. Second, to expand into the CIS countries which is a natural area for continued growth. And third, to extract maximum value from existing operations.

In doing so, we are also preparing the Company for a forthcoming new phase in mobile telephony in Russia. One of the key factors of success will be continued improvement in quality of services, product innovation, emphasis on strong brands, customer loyalty and retention.

If you take this into consideration, our third quarter results, we believe, we made very good progress in attaining our goals. We gained another percentage point in our national market share in Russia, and our subscriber net additions in the third quarter set a new record. We made an acquisition in Kazakhstan and the consolidated numbers we report today, inter-phrasing (ph) these from KaR-Tel, starting from September 3, the day we closed the deal.

As of today, VimpelCom’s operates in 72 regions of Russia. We continue to lead the market in this criterion, which has also helped us to keep leadership and net additions in Russia for the past 8 months. In the third quarter, we continued to expand our network in the regions of Russia. We installed almost 1,300 new base stations. So actually, as of today, we have more than 10,000 base stations across the country, with more than half of them installed in the past 18 months.

Among other notable achievements, I would like to mention our roaming capabilities. We are 1 of the 3 leading world operators, in terms of coverage by roaming agreements, both in conventional Voice roaming, and in more sophisticated GPRS data roaming. We have also become one of the leaders in implementing advanced technology which allows real-time billing for roamers, which is particularly convenient for prepaid subscribers.

At this pace of market development, increasing the subscriber base is still the most critical factor for VimpelCom. This growth comes primarily from the regions, and it is the success of our regional development model that enables us to steadily gain market share on a national level.

We were the leaders in regional growth, and we increased our overall market share in the regions from 21% a year ago to 30% at the end of September this year. As already mentioned, our national market share grew from 31% to 34% during the same period. On the other hand, our market share in Moscow reduced from 49% in September 2003 to 45% September this year. In part it is out of increased competition, although more recently, it was primarily due to the acute shortage of telephone numbering capacity, which hit Moscow harder than other regions.

In order to handle this issue, in the beginning of June we reduced the termination period for inactive subscribers. Now, when this matter has been basically resolved, a couple of days ago we returned from 4 months to our regular 6 month termination period in Moscow. Earlier, we did the same in the regions.

Now, moving to churn rate, we should say that the third quarter number of 7.2% looks very encouraging. It shows that churn reducing measures introduced earlier this year have had their effect. However, it would be incorrect to believe that the problem has been resolved.

First of all, a quarterly churn of 7.2% is still a high number. Moreover, it was achieved in the background of a record subscriber growth which means that churn may rise again when our growth slows down. The analysis is further complicated due to changes in our disconnect policy during the past 5 months, which had a direct effect on churn.

We continue to consider churn as a serious issue that the Company will have to deal with and which does not have an easy solution. One of the important measures to combat churn is our Customer Relationship Management program. We are the first in Russia to introduce an integrated billing and CRM platform, on a national scale. We hope that it will help us to improve quality of our service and create a more loyal subscriber base.

Now, let me move to Kazakhstan, and give you our first impressions and plans for the future. As expected, Kazakhstan’s contribution to our third quarter results has been modest. Kazakhstan brought us 676,000 subscribers as of September 30, $10.8m of operating revenues and $2.3m of net income were reported for September only.

ARPU was at $16.3 and minutes of use at 72 minutes. Subscriber acquisition was at $25.2. We see that the ARPU numbers are good, and the low MOU suggests a very good growth potential. The income margin is also good, so we can expect a healthy future supplement to our financial figures.

The most attractive features of the Kazakh market are first, good and rapidly growing GDP per capita, second, very low penetration rate and third, relatively low competition. So a combination of these 3 factors presents a great opportunity which we intend to take advantage of.

Currently, we are working to upgrade the network, increasing capacity and improving quality. Early next year, when this work is done, we will launch our Bee-line brand and we will attack the market more aggressively. We will introduce our advanced prepaid products and other solutions which we successfully implemented in Russia.

Moving back to our third quarter numbers, they show very good progress, which resulted from our ongoing rapid subscriber growth, very efficient cost control, enhanced by economies of scale. Let’s compare it with the third quarter of 2003 – we reported revenue growth of approximately 59%, OIBDA growth of 66% and net income growth of 42%.

OIBDA margin was 49.1%, which is a bit less than in the previous quarter, reflecting a seasonal increase in lower margin roaming revenues and high expenses connected with the launch of new branch offices. So, now let me ask Elena to present our third quarter financial results in more detail. Elena.

Thank you, Alexander. As it was already said, our main achievement during the first quarter was continuous rapid growth in the regions, and first acquisition outside of Russia. This resulted in sound growth of revenue which even accelerated in the third quarter compared to the second quarter.

During the third quarter, our revenue increased by $111m, or approximately 23%, while second quarter growth compared to the first quarter was only $73m, or 18%. Of course, partly it can be attributed to the summer season, which usually makes our customers more active, but it also shows the success of our strategy of accelerated expansion.

Otherwise, of the report for the third quarter compared to the second quarter, it showed the following dynamics. Gross margin was 0.9 percentage points, 81.8% versus 82.7%. This deterioration compared to the second quarter also has seasonal effects, as roaming revenue, which proportion is high in the first quarter, is less profitable.

This decrease in gross margin affected OIBDA margin as well, so OIBDA margin is 0.7 percentage points worse than in the second quarter. On the other hand, OIBDA margin was helped by better performance of SG&A expense. SG&A, as a percentage of revenue, decreased to 32.0% from 32.3% a quarter ago, and was much better than a year ago when it was 33.5%. As a result, OIBDA was $296m, and demonstrated growth year-to-year close to 66%, and quarter-to-quarter close to 21%.

Net income improvement was less pronounced, as it was largely influenced by growing minority interests, which were $32m this quarter compared to $18m last quarter, and interest expense increased by $12m, quarter-to-quarter, due to additional debt acquired in the summer.

Following our growth focus, our capital investments were quite intensive in the third quarter, $346m, and total capital investment within 9 months grew to $776m.

Operational indicators in the reported quarter didn’t bring any surprises as they followed the seasonal effects which we have seen in the past. As usual, the usage per subscriber, or MOU, is increasing in the summertime, which normally drives ARPU up, what exactly happened in Moscow, both for prepaid and postpaid segments.

Outside of Moscow, active penetration in the regions, we have launched operations in 8 new branches, linked with promotion campaigns, and have changed the features so that increasing ARPU is insignificant. On a consolidated basis, we see a small decrease in ARPU due to a larger proportion of regional subscribers in the total customer base.

Our subscriber acquisition costs were practically stable, $14.2. It is only at 0.7% higher than in the second quarter and still very modest, which helps maintain our OIBDA margin on quite a high level.

As long as the volume of our operations is growing, our asset base is growing as well, quite rapidly. As of September 30, the total assets were $3.6b, which is 57% higher than at the end of last year. The funding sources for the growth were cash from operations and external financing.

In the second quarter, we have placed 260 million Eurobonds which we tapped (ph) for another 200 million in July. So our total debt increased by approximately $700m, compared to the beginning of the year, while our assets increased by $1.3b.

Our OIBDA for the 9 months of this year was $743m, while during the whole of last year, we earned $613m in OIBDA. So in spite of debt growth, our OIBDA interest ratio is improving.

On the last 12 months basis, our own cash generation covers approximately 70% of our capital investment needs, which we can see that has a good coverage, taking into account the size of our investments and the speed of expansion. We are looking for a good leverage, combining debt and operating cash, to achieve a better return for shareholders and provide reliability to lenders.

Thank you, Elena. Let me now move to our corporate issues, first, the numbering capacity. As you know, in August we received approximately 5.6 million telephone numbers out of 10 million in the Federal 906 code. A few weeks ago, we have received all additional numbers.

Recently, the government and the legislators introduced necessary amendments so that the procedure to allocating new numbers has been fully set up. We have applied for three additional Federal codes, 907, 908 and 909, and a positive decision on this application should effectively remove the numbering capacity issue altogether.

Moving now to other issues –- we think we are on track to complete the merger of VimpelCom-Region into VimpelCom by December 9, 2004. We published the separate press release on this merger earlier today. We positively interpret our conference with the Ministry of Information, Technology and Communications on this issue, and we believe that the process will proceed smoothly. We also hope that our merger with KB Impuls will follow suit, using procedures tested during our merger of VimpelCom-Region.

The last thing I would like to mention is the change of ratio between ADRs and common shares. At our IPO 8 years ago, our ADR to common share ratio was set at 4:3, that is 4 ADRs for 3 common shares, and the ADR price was $20.5 back then. Since that time, the ADR price exceeded $100 and became too high compared with the average ADR prices on the New York Stock Exchange.

We believe that the change in ADR to common share ratio to 4:1, will increase liquidity and attract more retail investors. Tomorrow, all ADR holders, on record, will receive 2 additional ADRs per each ADR they hold. On Monday, November 22, we’ll start with the new ratio and the new range of ADR prices.

Well, in completing our presentation I would like to say that the company is successfully implementing its plans for 2004. We are increasing our national market share, leading the race for regional subscribers and improving our financial results. We have started our expansion into the CIS and our entry into Kazakhstan has become the first step in transforming VimpelCom into an international company.

Thank you for your attention, and let me now open the floor for questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from Olga Gmoskjer (ph) from Renaissance Capital.

Good evening, ladies and gentlemen. This is Olga Gmoskjer from Renaissance Capital. I have two questions if I may. The first one is, the subscriber acquisition costs in Moscow increased in the third quarter. Why was that? Was that due to the one-off marketing and operational initiative, and how do you see the trends going forward?

And my second question is, what were your roaming revenues and the revenues from value added services in the second and third quarter in Moscow and the regions? Thank you very much.

Okay, good evening, Olga. The subscriber acquisition cost in Moscow was due to the change in the [billed] commission structure that we announced in the last quarter. We basically put some of the commission, we knew it would come at the end of the third quarter. That has happened, and this is nothing unexpected, so the second quarter had a slight reduction with the third quarter coming back in line with what we expected.

And in regards to roaming revenues, roaming revenues increased substantially. For the country, we ran -- 15% of our service revenues are with roaming in the third quarter. Likewise, for value added services, 13.7% of our revenues are represented to value added services.

The next question comes from Isvan Madato (ph) from CSFB.

Good evening, gentlemen. Could you please tell me what your estimate is for capital expenditures for total investment coming in Kazakhstan for the next few years, and what you plan to spend in capital expenditure in 2005?

As usual, we don’t give precise guidance on the capital expenditure because we find that it’s actually a bit of a futile exercise in the conditions of a very rapidly growing market. The way we handle it, in general, in Russia, we will be handling in the same way in Kazakhstan. We set up expectations, or set up a target for ourselves how much we were willing to spend for incremental subscribers. Last year we communicated $150, and we’ve been outperforming this number by a large margin. Therefore we reduced this number as a boom target for ourselves down to $120.

So then we take this number and try to project the growth we expect for a couple of years, trying to understand what will be the MBG (ph). If you look at Kazakhstan, and try to estimate the penetration, which country is going to achieve this in the space of the next 24 to 36 months, and project market share, we are looking at something between 3 million and 3.5 million subscriber base in Kazakhstan, and we will be scaling our investments to that. So it means that we are talking anywhere between $350m and $400m in the space of time depending on how fast the market will grow, right, and we’ll try to develop capability in Kazakhstan to be able to either speed it up or slow it down, depending on how successful we are at developing the market.

Very helpful, thank you very much.

Your next question comes from Nadia Bullovava (ph) from [Kadam].

Good afternoon. Congratulations on good results. So my question relates to your planned merger with VimpelCom-R, so in particular, what is the reason that VimpelCom was not permitted to continue [operations] before [indiscernible] are registered to VimpelCom? And so can you clarify, are there any legal documents in this regard or are there any written clarifications from the Minister for Communications or do you have any oral promises from them? Thank you.

Right, well, our understanding is that we actually don’t see any basis to not receive the reissued license. We have detailed the process for issuance of the license with the Ministry and are hopeful that they will process our application quickly and in accordance with the procedures they have outlined. Yes, we received a number of verbal confirmations of this process, but also a written letter which explains how the process will be handled.

Okay, but in particular I’m interested in the transition period, because as I understand, you still have to acquire licenses after VimpelCom are in shutdown, so is there any promise on this transition period that you will be able to continue operations because formally, VimpelCom-R will have no license any more, whilst VimpelCom will not get it yet.

Correct. That was the key concern and that has been addressed, and on the basis of the discussions we had with the Minister, we understand that the reissued license – and that we have in writing, actually, from them – will have the same term of validity as the old license, and therefore, it will be covering the 30 day period.

No, I see, thank you.

The next question comes from Mr. Tom Burda (ph) with Citigroup.

Good afternoon, just two questions, firstly on Kazakhstan, I was wondering if you could tell us what the EBITDA for the business was in the one month, the September month that you reported, or at least, what you expect the EBITDA margin to be for that business?

And secondly, just on your subscriber dynamic in the regions, you have been adding quite – about 300,000 new contract customers a month in the regions. That has slowed in the third quarter – I’m sorry, per quarter, 300,000. That slowed in the third quarter to about 100,000 new contract customers. Do you expect this slowdown in new regional contract customers to continue? Is that the dynamic that you see going forward?

And maybe if I could just ask a last question on CapEx, if we are to assume a lower amount of new subscribers onto the network next year, should we also then assume a lower CapEx for 2005?

Well, let me take your last question first. So that would be the logical conclusion, to say that if the growth slows down, we obviously are going to adjust our CapEx strength. However, if you look at historically, the last two years, what we’ve invested, and how many people we brought on our network, you will see certain lags in terms of our investment. You could say [$120] as a target. We’ve been investing much less, and therefore, certain catching up is needed to bring networks to the appropriate capacity and quality, so that would be our idea on how we move forward.

Now, over to Nikolai on the regional portion.

Talking about subscribers in the regions, our strategy is the following. We’re going to take the majority of our subscribers, new subscribers in the regions with our very advanced, for our prepaid products for the mass market. We believe that’s the best product. We give the customer cost control. It gives us good control over their bad debts for this particular customer, and also our advanced product is with all [indiscernible]. So we can benefit from different types of [indiscernible] even including roaming, international roaming, etc.

With the postpaid system, we are offering only for the wealthy individual, for mainly corporate subscribers. That’s why in the regions, that’s a relatively small part of the market, and we believe that’s our best strategy to move forward.

Is it safe to assume that you are getting a less amount of corporate new subscribers in the regions there? Have you got a fewer amount of corporate new subscribers in the third quarter as opposed to the second and first quarter?

I think that the first and the second quarters, this growth in contract subscribers was due to acquisition of the companies which where they have advanced payment system customers. They are not really postpaid. We call them contract, but it’s advanced paying customers. Their proportion of postpaid subscribers was approximately the same during this quarter.

And if I could just chime in here, the focus on the corporate segment is a key activity for the company going forward and improving the customer mix, so we set up a very large and powerful key accounts group that’s running across the country and the contract customers – another reason why they may be going down in some of the acquired companies that we’ve integrated, we’ve launched our prepaid services in those regions, and customers are choosing that product over the former contract or system that they had previously. So it’s not just a corporate issue.

Thanks. This is the last question on Kazakh, the EBITDA margin?

And talking about OIBDA margin, you know, Kazakhstan is a segment in our consolidated reporting, and for segments, we are not disclosing OIBDA, but taking into account that their net income, as a percentage to revenue is in line with all the consolidated figures, you can assume that OIBDA is [run].

Your next question comes from Rizwan Ali with Bear Stearns.

Yes, I have two questions. I was under the impression that in Kazakhstan you are looking for another partner, a [mobile] partner, and I just wanted to know what is the [news] on that front. And the second thing is, it appears that your margins in the Regions are higher than in Moscow. Could you just confirm that?

Right, let us start with Kazakh’s partner. It’s correct. We believe that that would be the optimal set-up for us, to get accustomed to Kazakh’s market and mitigate actual possible, operational, political and financial risks. So we intend to introduce a local partner, and we are currently negotiating, continue to negotiate. We have identified one. We are negotiating with them, and we hope to complete this process by year end.

And as for the margins in Moscow, this is due to two main reasons. There are a few factors behind that, but Moscow carries currently the debts for the entire Group, so we have higher interest expense, and likewise, inside of Moscow, we have our centralized infrastructure, including our transport network and our IT which creates some additional centralized depreciation.

Actually, I was really looking more at the EBITDA margin.

But again, Moscow is a segment, and we are not disclosing [OIBDA] by segment. You can only see there a consolidated OIBDA margin, and as also we are attaching VimpelCom-Region as a legal entity to the press release and so there you can see OIBDA margin on VimpelCom-Region as a legal entity, but not as a segment [inaudible].

Right, thank you very much.

Your next question comes from Sergei Arsenyez (ph) with Goldman Sachs.

Hi, good afternoon, just a couple of follow-up questions on Kazakhstan please. Firstly, what is your current market share in Kazakhstan? Secondly, your subscriber base is dominated by contracts in Kazakhstan. I’m just wondering whether they are contracts in the [western] sense of the word, i.e. whether you lock them into 12, 18, 24 months, or whatever it may be, and as a consequence, do you subsidize handsets in Kazakhstan?

And just finally on Kazakhstan, you say that you will be pushing prepaid products in Kazakhstan, so are we to assume that your ARPUs in Kazakhstan will drop substantially next year?

Okay, I’ll try to capture this kind of multiple question. First, market share in Kazakhstan. There is unfortunately a lack of reliable statistics as we have in Russia, and therefore we give you our, to the best of our knowledge, let’s say, estimate on the market share, which is currently 31%, and the rest, the [ones still incumbent], operating under the brand name [KaR-Tel]. So our strategy going forward is to increase market share both to drive penetration at a faster rate, which we see that with significant marketing investment, that should be achievable, but also to increase the market share.

With regards to contract subscribers and the subsidies, we do not subsidize handsets in Kazakhstan either, and the balance of contract and prepaid in Kazakhstan creates an opportunity for us because we have great products, well understood, inside a company how to operate actually sophisticated prepaid products, and we can offer very advanced services. We can offer very advanced services on the basis of that. Therefore, we believe that attacking with these products will speed up the growth on the market.

With regards to ARPU and what effect it will have, actually, we can assume that ARPUs will be not dissimilar to those in the regions in Russia, so yes, on the blended basis, we are probably going to see a deterioration of ARPUs going forward, but we will hope to compensate, actually, the pricing effect by an increase in traffic which we will stimulate.

Thank you very much.

Your next question comes from Alexei Yakovitski (ph) with UFG.

Yes, good evening. I have a question on churn. As I understand, you have reported a churn figure of 7.2%. Does that include additional disconnections that you had to make in July and August to address the number incapacity campaigns in the Moscow market specifically? If that’s the case, can you give us an adjusted churn figure excluding the one-off disconnects for the third quarter?

Alexei, why, it’s a very difficult answer. The third quarter, of course, as well as the second quarter has somewhat of a different trend in reported churn. The numbers are a bit distorted because we reduced the time for [bad] customers from 6 months down to 4 months at various times during these quarters. So it’s almost impossible to give you the numbers today. I think at the end of the year we can take a look at the entire churn picture, and we will see how the company did.

All we can say is that it continues to be a key focus for us. We are seeing some improvement as a result of the activities that we implemented earlier this year, for example, the [Dior] Commission Scheme that we’ve changed resulted in new customers that formed part of our churn being reduced by almost 50%, so we do have some good results but by the same token, we’re going to have to wait till the end of the year and see our additional activities to see how churn will be managed going forward.

Okay, well I guess the reason I asked is because you reported 9.6% in the previous quarter, of which 1.4% was attributed to the June disconnects, and I wonder whether you’re also reporting any churns now down to 5.5% or 6%? [But I guess] you’re not able to answer that question probably. Anyway, thanks.

The next question comes from Nick Barnes with Thames River Capital.

Yes, hi, I’ve got a question on your service costs. Your service costs were up $25m, quarter-over-quarter, Q2 and Q3, and obviously rose quite a lot as a percentage of your revenues. Could you give us a bit of color on why that was? Was there a one-off or is it something we can expect to see going forward? Thanks.

The service cost was mainly affected by our roaming revenues which are connected, of course, with the calls and you know that when our subscribers are struggling, their margin on this revenue is only 15% and so on the basis of P&L you see it as certain expenses proportional increase in costs which affect the gross margin.

So we think that going further, as long as, for example, in the fourth quarter, roaming revenue will be less as a percentage in the total service costs, the gross margin will slightly go up, but also, we should forget about factors that normally are connected with the service costs, that potentially there will be some additional pressure from local operators with their prices and so on, because it has multiple influences on gross margin. But on average, as we have seen during previous periods, our gross margin is always around 81%, 82%.

Okay, that’s great, thanks.

The next question comes from Regina Bynestock (ph) from JP Morgan.

Hello, I have a follow-up question just on roaming revenues. You said that in the 3Q it was 15% of revenues. I just wanted to know what the comparable figure was for the 2Q and for the year ago 3Q? Also I wanted to know how that was distributed between Moscow and the regions. What was the contribution to regional ARPU from roaming? Was it greater than in Moscow?

And then just a second question, what were your incremental ARPUs this quarter in Moscow and in the regions?

I will start with the growth of the –- in absolute numbers, growth of the roaming revenues was 29% in the third quarter compared to the second. If you look to the proportion of total revenues in Moscow and in the regions, you can see that in Moscow, the proportion of roaming revenues was higher. It was approximately 16% of revenues and in the regions it was approximately 11% of the regions.

And if you look to the split, in Moscow it was 50-50 guests and our subscribers going to different networks, and in the regions, the majority was more guests than our subscribers going out to different networks.

And moving to your question on incremental ARPUs in the third quarter, the average ARPU for a customer joining VimpelCom in the last three months is about $13, $13.5.

And do you have a break-out between regions and Moscow?

If you look to the regional ARPU, you can see during the whole year, our ARPU was very stable. We have $8.6 in the first quarter, $8.3 in the second, and $8.4 in the third quarter, which means that our incremental ARPU is very close to the average revenue per user.

At the same time, I would add that in the regions, we’re in a very big growth stage right now, and it’s clear that those regions were those which we were just launching. We’re getting only low user subscribers. At the same time, when it’s a region with an already good network, and all our products and focus are coming more on their business segments of the market, there is higher ARPU in this region.

Thank you.

The next question comes from Elena Ragovana (ph) with UBS.

Good evening, it’s Elena Ragovana from [Branska TPS]. I’ve got two questions if I may. The first one is what is the reason for [G&A] quarter-on-quarter growth by 20%? And the second one is why Moscow’s net income went down by 19% quarter-on-quarter. Thank you.

Well, the G&A growth was [approximately] in line with the top-line growth and as we have already mentioned today, we have launched 8 new branches, and this also of course influenced our general and admin expenses. Talking about the net income, the main, of course, influence to this was due to minority interests, which are growing, quarter-to-quarter, and so in the third quarter, minority interests were equal to $32m while in the second quarter it was $18m, so definitely the net income was impacted by this.

And also, due to the quite substantial issuance of the new debt during the summer periods, so it added approximately $450m in debt both in June and July, and of course, our interest expense has increased, and in the second quarter, we had total interest expense close to $25m as our financial statement attached to the press release.

Nikolai PryanishnikovI would just add that the third quarter was a record quarter in terms of growth, and we added 1 million more customers if we look to gross adds compared to the second quarter, and even having very low subscriber acquisition costs for us in dollars, still, in absolute amounts it’s a big expense.

Okay, thank you.

The next question comes from Anna Basson with BAIB.

Yes, hello. I just wanted to ask about the launches. You had 8 launches in the third quarter. What are you actually planning for the fourth quarter, and what might we expect in 2005? And secondly, can you say a little bit about competition at the moment in the regions? You’ve been doing extraordinarily well over the last 6 months. Do you still see yourself leading in terms of net adds in the regions in the fourth quarter?

First of all, about expansion. Right now, we’re glad to report that we are leading in a number of regions in Russia. We started our region expansion not long ago, only three years ago, and right now, we are in the majority of regions of Russia. Right now, we’re operating in 72 regions of Russia.

Our target is, of course, to become absolutely national operators, and to operate in all parts of Russia. To do that, we will launch additional two actually relatively small networks this year in the north of Russia, in Siberia, and in Ural. We have two regions where we can start operations but we don’t have permission – we have license but don’t have permission. It’s in [Butrate] in Chechnya in the [indiscernible] and then we have a last region in our portfolio, [indiscernible] which we will start at the beginning of next year. We want to start there a good network with a switch and it’s some time to prepare this final launch.

After that, we will have only a few regions in the Far East where we don’t have licenses left, and with these regions, we’re looking for some potential acquisitions in this area, or still where we are working on getting the licenses to cover the whole territory.

And in terms of growth results, we are glad to report that our strategy is working. Our strategy of this unified model of regional operations with one brand, one set of tariffs and products, branches which give us a very good management opportunity to a good control and management of these operations is working, and we are going to continue to work even harder with this strategy, and we’re looking for continuous leadership and growth. Although I have to say that competition increases, but we are ready for that.

Lovely, thank you.

[OPERATOR INSTRUCTIONS]. The next question comes from Alex Kuzansta (ph) from Bear Stearns.

Good afternoon. I have just a couple of questions. Those are, I was interested in EBITDA margin in the third quarter of 2004. How high can it go? And the second question, do you expect higher competition from [indiscernible] income bands in the future, especially after privatization?

Let me pick up the second question first. It’s difficult to forecast how the new owner of [set investor] will deal with the mobile assets. But if you look objectively on the composition of [indiscernible], it’s dominantly regional players and we see a particularly strong regional player in the Urals, [indiscernible], and second large player would be Volga Telecom.

So other than that, it goes dramatically down in size. And it’s difficult actually, for the regional players to offer comprehensive services which our company and I would say that our competitors can do. Therefore, my guess here would be that you won’t see massive change in the competition coming from [indiscernible] after the privatization. I think it’s not a new trend.

And maybe I will add that our biggest advantage right now is this economy of scale – one brand, one national is a [requirement] which we would put to the national TV and reach all 8 regions of Russia and see them buy our products. These economies of scale when we purchase equipment, and we purchase base stations by thousand sets of course. It’s our biggest discount, it’s the same about platforms, and new solutions, new products, etc.

Our local competitors would not have that, and I would forecast that that would be our biggest advantage. That’s why we could have better economic opportunities to also decrease tariffs but have a very healthy margin.

Thank you.

The next question comes from Nadia Bullovava with Kadam.

Hello, one follow-up on the Kazakh side. Could you tell us, please, what is the [maintenance] CapEx for the Kazakh subscriber we should be looking for in the longer-term, and possibly you could tell us what the breakdown was in Moscow for the maintenance CapEx and expansion CapEx? Thank you.

Nadia, we’re looking at Moscow next year to have CapEx somewhere around 10% to 15% of revenues in terms of maintenance CapEx, and inside of maintenance CapEx we include all of our minor adjustments in terms of growth. For example, we’ll be putting another 50 metro sites in Moscow live next year. That would be included in that number.

And does it mean that we should be looking for the same levels for the regions in the longer-term?

I think in the longer-term, maintenance CapEx will fall between the 10% and 15% level, yes.

Right, thank you.

The next question, again, from Mr. Nick Barnes with Thames River Capital.

Yes, hi, I’ve got a question on your SG&A costs. Historically, in the fourth quarter, you’ve always had a large pick-up in your SG&A costs, presumably due to year-end advertising campaigns, etc. Can we expect to see a similar thing this year, and also, what’s the outlook going forward for that cost line?

In terms of growth of the number of subscribers, and sales, gross adds, yes, that’s correct. We’re looking for some strong, especially December sales results, and we say a December growth on the number of subscribers. That would bring some growth of total subscriber acquisitions costs.

At the same time, what’s important to, and what you can see from our results is that the average subscriber cost is very low, so we are adding $11 ARPU subscribers and paying only $14 for that, which give us a good point of profitability in terms of paying costs for these expenses.

In terms of other expenses, if you look to the previous years, we were launching a lot of matters. As an example, last year, it was a number of new networks started just in the end of the year. We will see this tendency this year, because the majority of the networks, the majority of the new operations were started in the first, second and third quarters.

Okay, that’s great, thanks.

And there are currently no more questions in the queue. Gentlemen, you may continue with your closing comments.

Thank you, and thank you all for your questions, for joining us today at this conference call. Those of who only listen but not view the presentation, that’s why I repeated so many numbers, actually, can visit our site and go through the entire webcast presentation. If you have any follow-up questions, please don’t hesitate and contact us. Have a nice day, and goodbye.