VEON Ltd (VEON) 2005 Q1 法說會逐字稿

Good day everyone, and welcome to the VimpelCom first quarter 2005 conference call. Today’s conference is being recorded. At the conclusion of today’s presentation, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS]. At this time, I would like to turn the conference over to Mr. Mike Polyviou. Please go ahead sir.

Good morning, and welcome to VimpelCom’s conference to discuss the Company’s first quarter 2005 financial and operating results. Before getting started I would like to remind everyone that such forward-looking information, 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 strategy and development plans such as national CIS [indiscernible]. 2005 capital investments, [Indiscernible], the re-issue of licenses previously held by VimpelCom region and the reissuance of licenses [indiscernible] previously held KB Impuls and 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 risks detailed in the Company’s press release announcing first quarter 2005 financial and operating results, the Company’s earnings presentation entitled, Presentation of Q1 2005 Financial And Operating Results, the Company’s annual report on Form 20-F, for the year ended December 31, 2004, and other public filings made by the Company with the United States Securities And Exchange Commission, each of which are posted on the Company’s website at www.vimpelcom.com.

In addition, the Company’s first quarter 2005 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 obligations to update development of these risk factors which were announced publicly in 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 first quarter 2005 financial and operating results press release, please contact [Investor Relations] at 212 850 5600 and it will be forwarded to you. In addition, the press release and 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 VimpelCom Communications.

Thank you. Good morning everyone. Thank you for joining our conference call today. Which is 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, following our usual structure, we’ll start with market overview and developments in the telecom industry. Then we will say a few words on the situation with our expansion in the CIS and Ukraine in particular. Following this we will discuss our first quarter financial and operating results. And at the end, we will give you an update on our corporate activities.

So, let’s start with the market. Subscriber growth in Russia is still strong. On our previous conference call we noted that subscriber growth in the first quarter of 2005 was approximately 2 times higher than in 2004. In April, market growth rate was a bit slower, but nonetheless, there was 3.7m new subs against 2.1m in April last year.

The penetration rate in Russia already exceeded 60%. We expect this growth to continue, but growth rates will gradually slow down, and we expect this phase of development in mobile communications in Russia to effectively come to an end within the next 6 to 12 months.

In these circumstances, we face increasing price based competition, which includes various discounts, free minutes and cheap flat tariff plans. Operators do this in order to increase or defend their market share, or with respect to small operators, to enhance their opposition before they sell out. In certain cases we have to employ, though reluctantly, similar techniques.

All in all, we believe market conditions are going to be challenging this year, which is no surprise as we work in a highly competitive market. On the other hand, we expect to see factors which may mitigate these conditions to a certain extent, such as moves to further market consolidation, including privatization of [indiscernible] and the possible transformation of MegaFone into a public company.

With the continuing growth in the Russian economy, increasing the purchasing power of the population and improving standards of living, we remain somewhat optimistic as to the prospects and potential of the Russian cellular market. We also believe that the latest initiatives announced by the regulator, such as Calling Party Pays and Mobile Number Portability, if they are implemented, will be beneficial for the telecom industry.

Now, let’s have a look at our strategy. The main directions of our strategy remain unchanged and are focused on 3 key points. First, maximizing the growth of our customer base during the remaining period of rapid subscriber growth in Russia. Second, expanding into the CIS countries as a natural area for continued growth. Third, extracting maximum value from existing operations. In presenting this strategy, we continue balance growth and profitability, striving for our ultimate objective, to increase value for our shareholders.

Before we look at the financial results, I would like to discuss in more detail our CIS strategy. As you know, in June of 2004, our Board of Directors approved CIS expansion as part of our overall business strategy. As a result, management has started to investigate and pursue those opportunities which would offer the greatest return for our shareholders in each market within the CIS. As was the case when we were gearing up for regional expansion within Russia and deciding which regions to prioritize for development, we are focusing on markets with the greatest business potential, regardless of whether we might be the second, third or even fourth operator in the market when we enter.

In 2004, as the first step in implementing our CIS strategy, we acquired Kar-tel, the second largest mobile operator in Kazakhstan, and we are working quite successfully in this market. It is management’s strong believe that a CIS strategy for a mobile operator should include the Ukrainian component. Lately, this issue has received a lot of attention and coverage, and probably deserves a bit more detailed explanation.

Ukraine represents approximately one-half of the CIS outside Russia, regarding its population, economy and growth potential. We have looked at several different ways of entering the Ukrainian market. Naturally, a merge with Kyivstar, the second largest operator in Ukraine, would be our first choice.

As you know, our 2 strategic shareholders jointly own Kyivstar. However, to date, we have not been able to reach any agreement about a business combination with Kyivstar and, therefore, we have to start investigating other opportunities as well.

Last year we began seriously investigating the position of Ukrainian Radiosystems, known as WellCom, a Ukrainian operator with the GSM license and frequencies in 900 and 1800 megahertz bands for the entire country. They have hundreds of base stations, but only 100,000 subscribers. In other words, no market share to speak of. Based upon our strong experience in the Russian regions, we were able to deploy our high quality networks extendaly and efficiently, where we were able to achieve high margins with lower -- when we see good returns on investments, even when we were the third or fourth operator in the market, management decided to address this opportunity.

As we always do, we consulted with investment banks and consulting firms, international legal and financial advisors, and we, together with our advisors, concluded that this acquisition was an opportunity that VimpelCom should pursue. However, on April 22, our Board voted down the acquisition. While the majority of our Board, 5 out of 9 members, approved this acquisition, our charter requires 8 out of 9 Directors to approve it, and, therefore, the decision did not pass.

Since we are still operating under a strategy that includes CIS expansion, and following Board requests, management is currently investigating other options of entering Ukraine, including through a service agreement with an operator, such as WellCom.

To that end, it is our understanding that at least 1 international and reputable private equity investor is interested in the acquisition of WellCom. This interest by a potential acquirer provides an indication of the market value of the target, confirming that our own evaluation was quite reasonable. Management is also viewing this as an opportunity for VimpelCom to establish a foothold in the market. While this is a sub-optimum solution in our opinion, we do believe it provides us with an entry option, and would be a value creating opportunity for our shareholders in the long run.

We do appreciate that we have lost a lot of valuable time on internal debates and the competitive situation the key was. The penetration rate in Ukraine climbed to 34%, and that Turkcell has been actively filling the void in the market during the last couple of months. We do recognize that. But we are still certain that we will be able to enter the market, and to achieve a significant market share, generating [RR] comfortably above our normal cut off levels.

For instance, if we look at our experience in some of the Russian regions, where we fourth operator at a time when the penetration rate was already close to 40%. We see that within 12 to 18 months of operation we will achieve a sizeable market share, and good [indiscernible] levels. This experience gives us a good reason to believe that we have the necessary expertise to enter a market like Ukraine in a way that is value creative for all of our shareholders.

Now, moving back to our operating results. The first quarter, in general, developed in line with our expectations. As always, it was marred by strong seasonal effects. This time they were even more pronounced, as the result of new introduced long holiday period in the first half of January. Nonetheless, we showed substantial improvements in our financial results on a year-on-year basis, and our margin recovery, as compared with the fourth quarter of 2004, was also good. We retained leadership in net additions in the first quarter of 2004, albeit with a small margin. Our leadership in subscriber growth in Kazakhstan in the first quarter of 2005 was undisputed, with incremental market share of more than 50%.

Positive trends in churn registered in the second half of 2004 were maintained in the first quarter of 2005 when the churn rate was 5.9%. This confirms the effectiveness of all the measures introduced in 2004. Reduced churn figures are consistent with the data on active subscribers, which we made public recently. We defined active subscribers as those who, in the last 3 months, made a chargeable transaction.

We believe the figure of 80% active subscribers, as of March 31, is a good figure and shows that our subscriber base is not inflated. For comparison, the same figure for Vodafone in the U.K., on a similar definition, was 91%. Although these figures are very encouraging, we will continue working in order to increase subscriber loyalty, and stimulate usage of our services further.

Moving back to our financial results. We believe they show very good progress, due to our ongoing rapid subscriber growth, and efficient cost control, enhanced by economies of scale. As compared with the first quarter of 2004, we reported revenue growth of approximately 55%, OIBDA growth about 51%, and net income growth of 45%. These figures are good, and they confirm that we can achieve strong financial results in a low ARPU environment.

Now, let me ask Elena to present our first quarter financial results in more detail.

Thank you Alexander. As we all know, the first quarter of a year normally demonstrates bad flow dynamics in terms of revenue growth compared with the fourth quarter, and this year was no exception. Our revenue, quarter-on-quarter increased by 2.5%, but demonstrated substantial growth compared to the first quarter of year 2004.

Since January 1, of year 2005, we started accounting for certain revenue generated by value added services on that basis. For comparison, we performed the classification of early reported savings, and related figures, including those of the first quarter and the fourth quarter of the year 2004, which you can see in our presentation.

So today we are reporting $640.6m of revenue, while basing on former approach, it would be $653.2m. And revenue for the fourth quarter, which was previously reported as $635.7m, is now in terms of $624.9m. Of course, this change didn’t affect total results on OIBDA or net income level.

Our OIBDA improved substantially compared to the first quarter of year 2004, growing by 51.5%. With that, for the first quarter of year 2005 also improved in absolute terms, compared to the fourth quarter of last year, increasing by approximately 8%. OIBDA margin this quarter was much better than in the fourth quarter, but quite lower than in the first quarter of year 2004.

The explanation for those changes are largely connected with volume of sales, which was weak in the first quarter than a year ago, but less than in the fourth quarter of 2004. The volume of sales has a significant impact on total costs related to dealer commissions.

As for expenses, other than sales and marketing, our ability to control costs resulted in general and administrative expense staying flat for 2 quarters. During December last year we had some disputes with tax inspectoring regarding our tax filings for year 2001 and 2002, which resulted in additional accruals in the amount of approximately $16m in the fourth quarter.

These accruals were reflected in [line others], and thus substantially impacted our net income. During this first quarter, we didn’t have these one-time expenses and, accordingly, our net income margin returned to the level we have seen previously, approximately 17% to revenue.

With respect to operational indicators, I should address developments of minutes of use. As we can see, there was a seasonal decrease in minutes of use of approximately 11% quarter-on-quarter, which was even more pronounced this year to an extended, I would say, new year holidays in Russia this year.

In the first quarter we had 8 official Russia holidays as compared to 5 days last year in the first quarter. Our ARPU in the first quarter fell compared to the fourth quarter by 18.9%, due to the minutes of use decline, as well as strong promotional campaigns driven by competition. Our subscriber acquisition costs year-on-year decreased by 16.3%. Some increase in subscriber acquisition costs during the first quarter against the fourth quarter of year 2004 can be considered as a return to a more normal level. Subscriber acquisition costs of $12.3 reported for the fourth quarter of year 2004 can be partly attributed to an exceptionally high volume of sales in December last year.

Our total asset base is growing quite rapidly as our operations are expanding. At the end of the first quarter of year 2005, total assets were equal to $5.2b. Our cash balance was $451m, as we kept cash to be ready to repay our Euro Bonds during April in the amount of $260m.

On April 26, we paid off the Euro Bonds and, therefore, we expect that our leverage ratios at the end of the second quarter will improve, as compared with the ratios being reported today, although with respect to the first quarter results, we are still in line with our self-imposed restrictions, in terms debt equity less than 1, and debt OIBDA around 2.

Our new borrowings also improved our debt structure, moving our debt towards an increase in unsecured debt. At the end of the first quarter, percentage of secured debt was equal to 22%, compared to 42% at the end of year 2003.

Our capital investments, calculated on a last 12 months basis, were covered by own cash by approximately 66%, which is very close to the indicator of year 2004. We consider this to be a good coverage, particularly as we are at a stage of rapid market development and market construction to improve, not only capacity, but coverage as well.

This year, we estimate our capital investments in property and equipment will be approximately $1.4b, as it should fall in subscriber growth and we also want to improve our capacity on coverage in certain regions of Russia, requiring additional network construction.

Thus, although capital investment in the first quarter was $288m, which is substantially less than $451m invested during the first quarter of year 2004. We anticipate some increase in the speed of investment during the summer season, in line with the growth of our subscriber base. Our operating cash in the first quarter was $250m, and thus our first quarter cash CapEx ratio is equal to approximately 75%, which was in line with our expectations.

Thank you Elena. Let me know go through our corporate affairs. As you know, last year we merged VimpelCom-Region into VimpelCom and finally we received copies of all the regional licenses previously held by VimpelCom-Region. We expect to formally receive the related frequencies and other permissions shortly.

2 days ago, we completed the merger of KB Impuls, our wholly owned subsidiary which held the GSM license for Moscow into VimpelCom. We have submitted all the necessary documents to re-issue KB Impuls licenses to VimpelCom, and we hope that this time the re-issuance process will be much quicker.

Now I would like to say a few words about the conflict between our strategic shareholders that has been the subject of much discussion in the Press. In the management’s view, the nature of the conflict between our shareholders lies in the different approach to VimpelCom’s strategy – whether we should be more aggressive and expansionary, or more focused on extracting value from operations in Russia.

Over the last several years, VimpelCom has developed a very strong emerging market capacity and knowledge base, and an ability to operate in a low ARPU environment, in the conditions of serious competition, and still generating good margins. This capacity knowledge base and economies of scale could even be leveraged into an international expansion strategy.

Let it be clear that, even if the management sees more opportunities in following the international expansion route, we will remain committed to maximizing value for all of our shareholders, whichever strategy is selected. The most important element here is clarity of direction.

However, in order to continue to maximize value for our shareholders, we should decide very soon which path to pursue. For that, management is looking to our Board, and ultimately to all of our shareholders, including our ADR holders for guidance. Since our founding more than a decade ago, our record in corporate governance has been considered by many independent organizations as outstanding. We have received numerous awards for excellence in this area, and recently we received the highest corporate governance ranking for all Russian industries from Standard & Poor’s.

That is why, in conclusion, I would like to say a few words about our upcoming annual shareholder meeting, and the important role our ADR holders can play, in ensuring that their voice is heard, as we set our strategy going forward. Traditionally, our Board has engaged in vigorous debate and it is management belief, ultimately pursue the best path for all of our shareholders.

Today, we are at a crossroads, where we believe it is imperative for all 3 of our shareholder groups, our 2 strategic shareholders and our ADR holders to be well represented in our Board. Traditionally, our ADR holders have not been active in nominating candidates to the Board. However, in preparation for the 2005 annual meeting, several of our minority shareholders proposed independent candidates, and 1 of our strategic shareholders included certain of these independent candidates in its list of nominees to the Board.

The reason for that was that these minority shareholders were not able to accumulate the 2% of shares required by Russian law to submit nominees on their own. Therefore, this year, there is a real opportunity for our ADR holders to use their voting clout to elect strong independent Directors to the Board. It is management’s belief that this next year will be crucial in determining the strategic direction of our Company, and independent Directors can play an important role in driving these discussions, and finding the best solution. The solution that will be best for all of our shareholders.

Our annual shareholder meeting is scheduled for June 22, with the cut of date for ADR holders at June 20. The names of all of our nominees, and their CVs, are included in our shareholder materials, and are on our website, which is VimpelCom.com. In addition to officers of our strategic shareholders and our current Board members, we welcome the inclusion of 2 new independent candidates on the slate, [David Hames], former Director of Global Marketing at Vodafone, and Peter Watson, until recently President of OPIC, the U.S. overseas private investment company, a body within the U.S. government. I believe that their authority qualification and independence from VimpelCom, as well as our strategic shareholders, are worthy of your consideration.

Please carefully read the instructions on cumulative voting on your ballots. In voting for Directors, you should multiply the number of your votes by 9, and then allocate the total figure to 1 or more Directors who you support. If you have any questions about cumulative voting, you should contact your broker, who should be able to assist you to ensure your votes are properly cast, or contact our Investor Relations department, whose contact information is on our website as well.

So, completing our presentation, I would like to reiterate 3 things. First of all, the Company’s business in Russia is growing successfully, generating good financial results. This year will be very challenging, as the competitive intensity increases, but this shouldn’t jeopardize our financial performance.

Second, as the Russian market approaches saturation, we are preparing the Company for the next phase. We are gradually shifting our focus from subscriber acquisition, to increasing life time value of the existing subscriber base. We are still at the beginning of the journey, but already see some positive results on this front.

Third, our development in Kazakhstan goes well, and we hope we will be able to replicate this success story in other CIS market, leveraging our experience in rapid construction and operation of low cost, high quality cellular networks.

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

Certainly, thank you. [OPERATOR INSTRUCTIONS]. We will pause for just 1 moment. Our first question comes from Vladimir Postolovsky, UBS.

Good evening ladies and gentlemen. 2 questions if I may. The first one is on CapEx. Could you because I see you’ve given the guidance. I just want to make sure that I heard correctly, is it $1.4b? Are you retaining $1.4b guidance for this year for the consolidated business in terms of Russia?

And if that is the case, then how confident you are in this [inaudible – audio fault] keep CapEx spending low. So, what are the chances of you achieving [Inaudible – audio fault].

And the second question [Inaudible – audio fault] already as well, if on seasonality. I mean, the key argument [Inaudible – audio fault] is the result of both the ARPU erosion and minute erosion [Inaudible – audio fault]?

Okay, let me pick up CapEx first. Yes, we at the moment maintain our guidance on CapEx, and actually it’s the only thing, I guess, we are guiding on. It stays 1.4. It was mentioned as slightly above than that number, and the split will be 1.2 goes to Russia and the remainder goes to Kazakhstan.

However, I would also like to reiterate that currently we are accommodating the growth which we see on the market, and our projections are in line with this CapEx guidance. But if we see that growth for whatever reason accelerates, or decelerates, of course, we will consider how to change this number.

As I mentioned on the previous calls, so we are working more on the assumption of what would be the appropriate CapEx level per incremental sub, and then adjust our investments accordingly. So, for the time being we are not changing anything. And now Nikolai on seasonality.

In terms of seasonality, yes, there is strong seasonality in the Russian market, and it was very clear during this quarter. Usually, the first 2 months of the year, January, February, are slow. In February, 28 days, as everybody knows. But this year it was additionally on these additional holidays. 3 additional holidays we estimate decreased the MOUs and ARPUs by approximately 2% to 3% additionally, as compared to the previous year. So that’s really reflected in our numbers.

In terms of other factors, like multiple SIM cards, of course, that’s also relative in our market, and especially when there is big growth rates and launch of new territories from different operators. Of course, during some period of time customers are using different SIM cards with different promotions etc. As soon as this strong growth of the market will decrease, we believe that there will be less multiple SIM cards on the market.

Thanks very much.

Our next question comes from Jean-Charles Lemarde, JP Morgan.

[Inaudible – audio fault].

Sorry, we barely can hear you. Could you pick up? Could you please repeat the question?

Yes, my question is related to the Ukraine. Can you hear me now?

Yes.

In the Ukraine [Inaudible – audio fault] situation, market share, ARPU versus the CapEx, and that possibility. [Inaudible – audio fault].

Okay. Ukraine. Let me tackle it in a slightly different angle. When we constructed our business case, because there is no business at the moment to speak of in the case of WellCom, so we are more analyzing what will be our threshold. And the analysis roughly goes like this. That if we look at what kind of market share would be absolutely secure and relative for us to achieve, and we took it as low as 10%, 11%, usually, an aggressive number 3 operator goes into a ballpark of 20%, 20%+. So we took 10%, and this 10% eventually translates into 3.5m, 4m subscribers, and that’s the critical mass we were checking up the economics of the business case.

So, in terms of CapEx, if we assume this, we said that why it should be more expensive than we’re building in Russia. In Russia our current incremental CapEx - maybe it’s on the lower side and it will go eventually somewhat up - but currently it’s running well below this, and we took as much as $100 per sub, which is absolutely realistic. And that gives you an indication of the CapEx required, which is $350m to $400m, to put the network which is supposed to support that.

Interesting enough, that this is roughly our estimate for the Kazakhstan case because there we have a much smaller population. Only 50m in the whole country compared to 50m in Ukraine. And, therefore, with all the projections we were making they were targeting roughly the same end game, and the territory of Kazakhstan is also quite big and, therefore, we’ve done a very thorough job there analyzing actually how to construct the network.

In terms of ARPUs, we assumed ARPUs very low. Actually we are going somewhere between 6 and 7 in perpetuity. Interesting enough that we assume perpetuity flat ARPU, no increase. And we were building our case very conservatively around that. So, all of this still generates quite a good return for the case which we are having on our hands. Of course, the further we go, the less attractive it becomes, and the more expensive each market share point will be, and the case will dissolve with time passing by.

So, that’s about Ukraine in terms of our assumptions. In terms of synergy, synergy is obvious, that the most obvious 1 would be branding and the marketing expense. And we see that our competition very successfully leveraging whatever they do as GMS into Ukraine. And GMS actually is their primary vehicle to acquire a new subscriber base. And we will do the same. It’s actually -- there is quite a bid of synergy in terms of media buying, and media buying later on becomes a very expensive element, and very important element. So we could leverage that.

Naturally, product development and all the propositions could have been centralized and, therefore, this item wouldn’t be engaged in the Ukrainian operation. So, as you can see, there are quite a few structural fundamental synergies which can be extracted, which allow us actually to build operations in Ukraine much lighter than we have in Russia. But we haven’t been projecting any of this really into the margins, and we assumed just standard margins on exactly the same as we have currently in the Regions.

So, we said that Regional operation, as we develop them on our share, wouldn’t be any different. So, in many cases, we would enter as the third or even fourth operator quickly. Within a year build the critical mass, and gain good market share, and start generating this in reverse. So, that was basically a proxy for our calculations.

And now about the discount feature in Russia, I guess Nikolai will say something about Regions and then let Jere talk about Moscow.

There is definitely some pressure on tariffs on the Russian market, and we believe that especially this year, because, according to all quarters this year, could be the last year of very active growth of the market. That’s why all players are launching different initiatives etc.

In terms of different behavior, we believe that VimpelCom and MTS are showing more mature behavior. MegaFone is more aggressive and, of course, local operators are very aggressive.

On the other hand, local operators are still losing their market share, because they don’t have other advantages like national brands roaming across the whole country, and new services which all the customers need. That’s why we believe still that the biggest operators have already a very big [small bowl] of their subscribers will be able to grow faster, not only decreasing in pricing.

And, of course, I have to mention that there is still a good opportunity for us to increase revenues. We believe that there is opportunity to increase minutes of use, because we still have low minutes of use in our subscriber base. So there are opportunities, and there are opportunities to increase revenues from value added services. We’ve proven that we are successfully launching new services, increasing revenues. We have 16% of that our service revenues coming from VAS in the first quarter, but still there are more opportunities if we look forward.

And in Moscow, if we take the most penetrated market, we see 2 things. One, the intense competition from the fourth quarter and the holidays has receded a bit, as we said on our last conference call and, therefore, we see more balanced behavior between, let’s say, ourselves and MTS. Unfortunately, the third operator is in an attacking position and are being very aggressive with their tariff plans. They’ve just recently a tariff plan. It’s 3 rubles to anywhere in the world. 3 rubles equates to about 10 cents, 11 cents, depending on the exchange rate, and it’s a very aggressive stance that we are seeing from the third attacker.

Thank you very much.

Sergei Arpenyev from Goldman Sachs has a question.

Hi, good afternoon. Can I just follow up on Ukraine. The structure that you are proposing, acquiring WellCom through a private equity company has this received approval from both of your shareholders, or will there still be a vote in the June AGM on the outright acquisition of WellCom as [was listed] by Alfa before? So that’s the first question.

My second question is on subscriber acquisition costs, and I was wondering whether the SAC number for the first quarter already includes the cost of re-branding, or whether this will come in the second quarter? And I was just wondering whether you could give us an amount that is spent on re-branding?

Let me take the first question on Ukraine. No, the structure hasn’t been approved. The structure, in principle, has been discussed with the Board, and we find it at a compromised proposal here, because where we disagree with -- well look, everybody says we want to see VimpelCom in Ukraine. So good, we agreed on that. But then we disagreed on what’s the upside of going through WellCom and, therefore, the balance of reaching an upside.

And an alternative structure has been constructed actually, on the request of the Board, and we went and talked to a lot of private equity firms on that issue, but we haven’t structured any deal yet, right. So, the private equity firm which was identified has completed its own due diligence, constructed its own business case, and in general feels comfortable with the transaction.

But we haven’t discussed with the Board, or we haven’t structured anything on paper, which we need to do in the following couple of weeks. So, what would be our potential participation in it, if any, and if we participate, or don’t participate, what would be the final co-option structure and so on.

In terms of required AGM approval, I mean, you have to be aware that by Russian law, only in 2 cases, the acquisitions come to the AGM. First, when it’s a significant transaction, which is more than 20% of our asset base, and that would imply anywhere in the ballpark of $900m to $1b. And certainly WellCom is not qualified as a major transaction. And IPT, when 1 of the shareholders or Board of Directors of companies whatever sort of the debate is for IPT is, is on the other side. And then, as IPT, it has to be 2% of our asset base.

So, only in those 2 cases, the decision to make an acquisition would be moved from the Board of Directors to the shareholders, general shareholder meeting. Sometimes in the U.S. we see a practice now, when the Board of Directors calls for an opinion, where shareholders exercise their vote in order to express general opinion about the transaction, which is not legally binding, but gives a very strong steer to the Board of Directors whether the shareholders in general support or do not support the transaction.

As far as this particular case is concerned, at the moment we don’t have anything on our hands. We are not informed that any of the shareholders would call for a shareholder meeting. Therefore, I cannot speculate on that subject any more. And the next question, Nikolai.

In terms of re-branding, yes, of course, I am glad to announce that on the beginning of April, and then end of April in Kazakhstan we launched our new concept. And we are glad to say that it was positively accepted by our customers. So bright, with positive emotions, a friendly concept is well accepted.

And in terms of expenses, we estimated that all the $2m of additional expenses are directly associated with re-branding. All the rest, and that’s mainly changing our sites [indiscernible]. All the rest, we just are changing our advertising with this concept, and not increasing overall budget. So, it was nearly no impact on the first quarter, and it will be pretty small impact on the second quarter. If you look to our total subscriber acquisition costs during the quarter, $2m will just correspond to 2%, 3% of the total volumes.

Alright, thank you very much.

Moving on with [Wong Li] Bear Stearns.

Good morning. My question is regarding the threshold ARPU [inaudible – audio fault].

And the second question is it appears that 1 of your competitors is [inaudible- audio fault].

Right. Both very -- it became almost a metaphysical question actually. What is the penetration rate in Russia, and what’s the threshold ARPU? So, if I take the first 1. We really haven’t decided for ourselves where the bottom is. So what, so far, we’ve checked, and I can sort of talk you through the math, and you can be with me on that 1. But if you take quite low ARPU, which we currently see in some of our regions, and say that, okay, let’s take $5. $5 ARPU generates $60 on an annual basis. On a marginal costing, if you take, not fully allocated, but marginal profitability, we are probably seeing somewhere 55% to 60% marginal profit on the subscribers.

We also checked what their average life expectancy, and we believe that we have to re-acquire, so to speak, subscriber 1.5 times, which means that our facts should be multiplied by a factor of 1.5, in order to retain the subscriber or replace it with a new 1. And to that you can add our incremental CapEx right now, which we are running at about $65. So you will end up the investments, which are probably recovered in the ballpark of 3 to 3.5 years, and with a pay-back period, if you include both CapEx and SAC.

And we found that this is still acceptable. So we haven’t done any more sophisticated analysis than this. So we’ve run this, and we’ve checked the tolerance, and we see that, okay. Even if for a while it goes as low as this, we are still going to generate a decent return.

It doesn’t mean, by no means please interpret my words that we are striving to ditch this ARPU, or we will go in that direction in order to conquer the market. We’re just saying that most likely, this year, and here we disagree I know, with the interpretation of our competitors, but we believe that this year would be marked by quite an intensive competitive pressure. Everybody sees that. Russia is heading towards a mature phase.

We’ve done also an analysis which shows that, as you pass 20% penetration, where we probably have much dual SIM cards, so you can take it probably as a more realistic point, and then super-impose. A lot of markets, their growth curves, you will see that the steep growth part lasts for about 10 -- 8 to 10 quarters, which means that no matter what SIM penetration at the end is, you will probably penetrate the real subscriber base no longer than 8 to 10 quarters.

So, we’ve passed that magic 20% number in quarter 3, 2003, so most likely, end of this year, is the end of, by and large, rapid penetration growth. So, 80% penetration. As I said, what do you count? In terms of SIM cards, yes probably it’s okay. But then you start arguing what's the real discount rate of those SIM cards you apply on this, and that’s where the jury is out, because we don’t have any reliable statistics.

I guess you can assume that in Moscow in it’s a ballpark of 25%, 30%. In the region it could be somewhat lower. But we kind of, at the moment, gave up on trying to figure out exactly what this number is. And we are waiting for the market to stabilize a bit before we start driving again, by the penetration number and the ARPU number our economics. So, we are looking on the next level of detail usually when we make our investment decisions both in terms of geographies and how we discern the numbers. So, we are not navigating any more by average [indiscernible]. I don’t know whether it helps or not but-–

[Indiscernible]. Thank you very much.

One now from Stephen Pettifer with Merrill Lynch.

Yes, good afternoon. I wonder if you could perhaps comment on just general CapEx levels, going forward. Specifically, you talked about CapEx per incremental customers. Should we use the same sort of levels you are using now to project forward your CapEx?

I would say that currently we are trying to keep up with the growth and, of course, we are falling behind in some of the regions. In many cases, in many instances, our quality is quite good, and we dramatically improved our quality in Moscow. Anybody can confirm that. Jere might say a few words actually about it later on.

But, going forward, this year is the last year when we expect such a significant investment in Russian network, and it should go down quite significantly next year. Where exactly is our maintenance level going to be? It’s probably a bit difficult to say. And also what is uncertain here, quite a bit of uncertainty will be brought by 3G, because we do not factor it, and we actually have done different analysis and they differ quite a bit, depending on the conditions of the license and the beauty contest, and how aggressive and how much coverage will be required, how fast. So we do not take 3G into account at all.

So, if we are talking about 2.5G, then in terms of coverage, probably we’ll complete the network this year, and next year we’re moving more into capacity investment. And capacity investment is significantly cheaper than the coverage. So, we should see a reduction in CapEx going into the next year for the 2.5G network. I’m repeating this, that we do not factor in at all yet, the third generation.

I also think that it’s going to be somewhat higher, as the relationship to revenue, because we operate on much lower ARPUs, as we have the same minutes and actually, probably more intensive geographic coverage than any of the peer networks. I’m talking now about both VimpelCom, MTS and MegaFone. Our maintenance CapEx could be somewhat higher as the relationship to revenue. As the relationship to the installed base, it’s probably going to be comparable. Jere, any comments on Moscow?

Yes, just taking Moscow is a bit of a proxy because our strategy in Moscow is really to extract the maximum value. So, given the quality indicators which are currently ahead of any of the operators, we could take a look at our CapEx right now and as the oldest piece of our network, it requires a bit of modernization to move to EDGE and to move to 3G, and we’re still looking at below 20% of our revenues at Moscow for CapEx. The regions are already modernized, so it should be better, but that’s the forecast looking on Moscow.

Thank you.

And our next question will come from Olga Zhilinskaya with Renaissance Capital.

Good evening ladies and gentlemen. I just wanted to follow up the questions on ARPU. Do you expect ARPU to increase in the second and third quarter, and could we expect seasonality historical trends?

And can you please provide us, probably, with the guidance on ARPU for the full year 2005, or just give us the trends you are expecting? Like what is likely to be the decrease in ARPU you are expecting for 2005? Will it be comparable to 2004 levels, or are you expecting even higher decreases in ARPU this year? Thank you.

As we were saying previously, we don’t prefer to give any guidance, exact guidance but, of course, I would be pleased to comment on trends. So on trends we can say that it will be more or less the same seasonalities as during the previous quarters. In terms of minutes of use, it will be a weak first quarter, then it will be growth in the second quarter, and then good third quarter also because of the increased roamings, and then, of course, the same trends in the fourth quarter. So seasonality will be there.

We, as we already discussed on this conference call, we still see that this year there will be some pressure on tariffs, and that we feel. And even some temporal actions by the end of the year that will, of course, influence them and their results in terms of price per minute and then reflected in their ARPUs.

On the other hand, it will be some positive news in terms of opportunities to increase minutes of use. And still, just for your information, VimpelCom is right now still the leader on mass markets. So, we’re definitely leading in mass markets, quickly launching the networks, taking the lead in distribution and taking the biggest part of the mass market.

Still, the biggest part of that is a segment of the market are in the hands of our competitors, like MTS in some regions, local operators in some regions etc. Right now we believe there is, during this year, there will be serious opportunities to take a part of this market. And we have a special project, special programs for increasing our share in the business segment of the market.

By the way, how we unify the business model in all regions will help us. We can give core producers 1 bill. In all regions, the same set of products etc. So, this is a good opportunity for us and, of course, as I said, [indiscernible] just to increase ARPUs.

Thank you. And could you provide the numbers for incremental MOU and ARPU for the first quarter for Russia and Kazakhstan please?

Our estimation is that our new subscribers, incremental subscribers are saving $6 ARPUs.

[Indiscernible].

In Kazakhstan it’s slightly higher. But in Kazakhstan we haven’t got actually that much statistics and history. Of course, that when we [ran] a campaign, it was the first campaign for us in Kazakhstan at Christmas, and we basically tripled our monthly sales from the run rate which we had before. It is very difficult for us to understand exactly what incremental ARPUs we are taking right now. And there were, of course, quite a few people who were coming and trying and, therefore, the effect of it all seems ARPUs as a trial period. So, it’s probably too early for us to guide on incremental ARPUs in Kazakhstan.

What I can tell you, that the business in Kazakhstan – don’t be put off by the actual, this quarter’s numbers. There were more of a technical nature, the problems which we had there, and we are gradually clearing it out. We sorted out all the contracts there in terms of vendors, and we now started building out the network with our expected speed. So we are building about 60 to 70 stations a month, and we are going to accelerate that one.

We also have been sorting out the problems with the channels, which have been limited by Kaz Telecom, which didn’t allow us to take all the traffic the new subscribers were ready to generate for us. So that 1 has been cleared also from the insignificant relatively CapEx investments, when we are putting compression on the channels, but also increasing [sheer width] number of the channels.

So, all of this should lead to much better results later on. Therefore, I wouldn’t try to factor into the models the results which we are seeing in quarter 1. I think that we need a little bit more time, to really start projecting the trends on Kazakhstan. But our expectations are quite optimistic actually on that market.

And does this relate to margins also?

Sorry.

Does this relate to margins also? Because margins in Kazakhstan were significantly down.

Absolutely. We do not see any reasons that Kazak margins would be significantly lower than those of Russia.

Thank you.

Moving on, we’ll now hear from [Irna Vasson] with [CSFB].

Yes, hello. I have 2 questions. The first 1 concerns your service costs to revenue, which sell very well in the first quarter from 17.3% in 4Q, to 16.1%. Could you talk a little bit about that, and the trends you expect over the rest of the year?

And secondly, depreciation and amortization came in much lower than I expected. I’m just wondering will we see something around this first quarter figure repeated for the rest of the year, or should it grow quite sharply? Thank you.

We did understand the question about amortization and depreciation, that it looks much lower and whether this can be expected to see it going forward, but we didn’t quite get your first question. We apologize for the sound quality, but could you please repeat it?

Yes, of course. The service costs to revenue figure of 16.1% in the first quarter, after 17.3% in the fourth quarter last year. Can you talk a little bit about the trend there, which is better than I’ve seen at your competitor?

So, talking about depreciation. Right now the depreciation level we think is quite on a normal level. We assume that it should be somewhere in between 15 or 20% to revenue, and going further we assume that it will be approximately the same. So it’s growing a little bit during the last quarters, in terms of percentage to revenue, as long as we are investing quite rapidly in our network, and that’s what we have discussed recently. And again, as we’ve already mentioned, going forward, as long as capital investments will slow down in Russia, potentially this percentage share will stabilize.

Talking about the first question, if I understand you correctly, you are asking about the trends in our gross margin. So gross margin, or service gross margin we assume that will also have reached quite a good level. And right now our gross margin is approximately 83% of revenue and in this regard we’re seeing that potentially of course there will be competitive pressure on the revenue line. But on the other hand, we have some means to improve our costs. For example, decreasing our expenses connected with transport network by building our own capacities in this regard and having more favorable conditions from other operators on interconnect, which we are negotiating very actively and permanently.

And I will add that still the good opportunities to continue growing our Internet in net traffic between -- from Beeline to Beeline subscribers. Right now it’s approximately 60% of the total traffic is going within our network without any interconnect charges and this percentage is growing with that our margins is improving.

That’s great. Thanks very much.

We’ll now hear from Parah Sharmilder with American Century Investments.

Hi. This is Parah Sharmilder. I have 2 questions. 1, actually both of them relate to Ukraine. Can you please discuss a little more the need for doing going into Ukraine with a venture capital? Is this is only purely financial need or there are some other risks that are being considered? And also if you could talk about whether this potential venture capital firm is any way connected with Alfa Group or 1 of the subsidiaries with that?

And the second question is in the light of this disagreement between shareholders and now the fact that you are recommending, or at least bringing up names of 2 candidates for the Board of Directors, have you held a discussion with those candidates as to their views on the benefits of VimpelCom’s move in Ukraine independently of Telenor? Thank you.

Alright. There are a lot of interesting kind of perception about how Ukraine and the independent candidates are linked in that sense. Frankly, I haven’t discussed it with them and I do not think that it actually matters because we honestly believe from the management side that the decision more or less has been taken right. I mean the Board decided so we’re exploring certain options which are not contradicting our Charter or the Board decision. So composition of the Board, the change of it, is not going to affect the stance of the Company or the shareholders on Ukraine. And bringing 2 new people, or 1 new person on the Board is not going to change the basic, actually very good structure of the corporate governance where we have almost a consensus required for any move as long as this is not subject to any abuse or conflict of interest. I mean that structure works very well right because that allows actually to ADR holders exercise their view and that allows to either of the 2 shareholders, I mean strategic shareholders, exercise their view as long as the Directors actually acting in the best interest of the Company.

So I am not linking these 2 issues if that’s what you’ve implied. But also I would like to say that we will try to structure on the quest for many ADR holders a conference call with the new Directors early next week. Or not Directors, but [MMES]. So you would have an opportunity to test where they stand on all this. I think that would allow actually to form opinion much better about these new names.

With regards to venture capital, it’s actually not a venture capital. It’s a little bit different. I mean subtle differences, but it’s still private equity fund. No, there is no any Alfa connections there whatsoever. It’s a well known reputable international name and actually, to be more specific, it’s a syndicate which they are putting together of few well known and reputable names on the street which are [competent] in looking at this opportunity together. Because actually for many of them, Ukraine is relatively new and therefore they would like to get exposure to this market but maybe with somebody.

So why are we doing this? Of course it’s optimal financially. We believe strongly in the upside and therefore we are living as a result this upside to the private equity investor. But, from the strategic standpoint, we believe that we’re securing, we’re buying an option to enter into the Ukrainian market later on. And by going through that structure, we’re securing this entry ticket.

Even if we don’t participate as a minority shareholder there, I still believe it would be beneficial for VimpelCom if a financial investor buys that company because sooner or later it will come back to the market and it will be open for us to acquire.

As I said in my presentation, it would be much better for us and we view it as a primary. It would be our primary choice of course to merge with KevStar. Right, but this is not on the cards and given how the relationship between Alfa and Telenor is evolving, it might not ever be on the cards. And if you take this into account and if you look, for example, at our competitor MTS, if it would be similar situation, then exit of TNOR by MTS would have left MTS result there extremely important market. And in order for us to secure, and our shareholders to secure from this situation, we would like to keep this opportunity open and provide some exposure to our shareholders to Ukrainian growth story as well.

So I repeat, this is suboptimal, but we believe it keeps a strategic option for the entry into the market.

May I ask a follow on question here?

Of course.

With respect to the Board of Directors voting for entry into Ukraine, my impression from the news flow was that the Telenor faction of the Board boycotted either the meeting or the vote itself, thereby rendering either the meeting invalid or basically there were not enough votes. Apparently my understanding wasn’t correct. Can you maybe fill in the missing links here?

Yes, I would say it is quoting again song from the Beatles “It Was A Long and Winding Road”. We brought this acquisition first last October. So we’re on this road for almost 9 months and of course we lost quite a bit of attractiveness of that business case. It was very, very good in October. It was still quite good in January. I would say it was simply good. Now it’s not getting better, let's put it that way. The boycotting, or sort of discussions which were I wouldn’t use such strong words, but discussions around the reluctance to put this on the agenda was there. And therefore, the issue never been really voted until April 22.

So the earliest we managed to put it on the agenda of the Board of Directors was April 22 without being threatened that somebody wouldn’t come and therefore we wouldn’t have our budgets approved or our quarterly numbers approved, or something like that. So we had to navigate between [Elena] here and finally we managed to put it on and it was absolutely full meeting with full attendance and so the decision is legitimate.

In other words, the majority of the Board voted in favor of expansion into Ukraine?

Correct. 5 for, 2 against. Sorry, 5 for it, 3 against it and 1 abstained.

Okay. Thank you very much.

You're welcome.

Olga [Bystrova] with CS First Boston has the next question.

Good evening. This is Olga Bystrova from CSFB. A quick question on guidance. I think previously you mentioned that you're comfortable with 2005 revenues at around $3b and since then a couple of things happened. First of all I think you became more assertive over the competitive pressures and second, the classification of some revenue items. So given this, are you still comfortable with this figure excluding re-classification and what is the downside from re-classification potentially for the year?

It’s quite a creative question I would say to get a guidance out of us. But I will be firm that we do not give guidance and particularly it would be irresponsible on our side to try to guide financial markets with such a turbulent situation on the market where there are so many factors which can affect it.

What I said when I met analysts, I said that what I heard on my one-on-one meetings in London and has been confirmed by my colleagues, that general expectation was around 3.3, 3.4. And this is very, very high. That would be still my assertion and I probably would stop here.

Thank you very much.

Moving on to Lila Dachan with Edgerton Capital Limited.

Yes hi, I have 3 questions please. The first 1 is just an earlier comment regarding the seasonal impact and I just wanted to understand if you can quantify that again given that revenues were up 2.5% sequentially? Does that mean they are up about 5% when you adjust for the seasonal impact of fewer working days?

The second question is a comment you made in your opening statement which is regarding the fact that you're seeing some positive results in extracting lifetime value from customers. I was wondering if you could expand on that comment and maybe if you can give us some examples of what you mean?

And then the last question is if you could just comment generally on the trends you're seeing of the monthly revenues as we've exited the first quarter into the second quarter? Have you seen them improving month on month when compared to January and February? Thank you.

I will start with the seasonality. First of all, yes, our growth in revenues first quarter compared to the fourth was 2.5% and we’re glad that we had that because as everybody mentioned already, we believe that first quarter is that -- seasonality is very bad, especially during the first 2 months.

Secondly, we mentioned that it was additional holidays announced in Russia as compared to the situation a year ago. It was 3 additional holidays in general.

Our submission is that that corresponds, and of course we know that our traffic and revenues which you are getting during the working day and what we’re getting in the holiday. So our submission is that that corresponds to approximately 2%, 3% of decreased revenues, or minutes of use as compared to the year ago.

So that’s about it.

Is that $15m give or take?

Yes and also we need to mention that if we compare it to the situation a year ago, we have 29 days in February and this year it was 28 days in February. Which is actually very significant in our market because 1 day has very serious impact to the total revenues on the quarter. And that’s approximately 1% of the total revenues, which is very serious on a total basis.

So that would be in February? So in other words if we assumed the same number of holidays in Q1 versus last year, you would have $15m higher revenue in Q1 this year roughly?

Could have been you know, but unfortunately they were not at that pace. We would be glad to have them, but unfortunately there was holidays and less days.

It’s probably worthwhile to mention that we see anywhere between 40 to 60% reduction of traffic on the weekends and therefore every extra non-working day you can adjust ARPU for about that. Right. So it’s a significant reduction on traffic on this non-working day plus leap day year hasn’t been here. So we haven’t done actually figures taking this calculation how many millions it is. We certainly know that it affected MOU quite significantly.

Okay. Very helpful. Thank you. And the other 2 questions. 1 was about the month on month revenue trend and the other was the opening comment regarding extracting value from lifetime -- lifetime value. Extracting more from customers.

Okay, why don’t I jump in about lifetime values? Indeed, as we start to shift our strategy from kind of purely acquisition into extracting more value, we’re very focused on retention and loyalty programs including building usage of various services. Whether it’s minutes of use, or other products and services that we've brought to the market.

The biggest indicator that we have of course is our churn rate. It is at 5.9% for the quarter which is stable given the improvements that we had last year and we think this is driven primarily by a large bucket of activities. If I were to try to categorize them, the first 1 would be the change of commission structure and our incentive system on how we bring customers into our network and into our family.

But more importantly and the subsequent actions that we've taken are things like awareness campaigns for the reasons why customers churn. There is a lot of tariff activity on the market and therefore customers sometimes go to a dealer and buy a new line. We ran national campaigns to make sure that our customers can do that over their phone.

Likewise, when a customer loses a SIM, it’s very easy to have that replaced with Beeline and it is so convenient we actually will mail that SIM card to the customer. And these sorts of services customers just seem to know.

And more importantly I would say that our focus on targeted programs. So we've launched a bunch of initiatives, including a club for our highest ARPU customers. A very exclusive club that recognizes their prestige. We've launched discount programs for some of the mid segments. That offers a 15% discount if they use their phone more. And all of these initiatives we’re starting to see having impact.

So the 5.9% churn figure, although it is still high by our estimates, is very positive because if you look at the targeted segments underneath that, that we’re trying to save, we see even better -- even better results.

And in terms of the dynamics from January and February to March and April, yes we see there good growth of our traffic and we see good growth of our revenues. We believe that’s the reality of our market that we discussed with 2 weak months of the year – January and February.

Okay, thank you.

Moving on to Nick Barnes with Thames River Capital.

Yes hi. I just wanted to ask a couple of questions. Firstly, in relation to pricing. When we saw you a couple of months ago you said that pricing had stabilized. You have mentioned this is the case in Moscow. But presumably if MegaFone are offering calls anywhere in the world for 10 cents, either they're going to dramatically increase their share of net adds, or you will have to respond? That’s the first question.

The second question is you said when we met that if you didn’t have Board approval to go into Ukraine, or have approval to go live in Ukraine by the end of the second quarter, that because of the rapid penetration growth in Ukraine it was no longer going to be a value added proposition. But from what you're saying, if the venture capitalists are still getting their syndicate together, this suggests that you're not going to Ukraine until maybe the fourth quarter at the earliest. So why are you still looking to go ahead in Ukraine? Those are my 2 questions thank you.

I’ll start off with the pricing because I think it was me on the last conference call that said the pressure was receding a bit in Moscow and I reiterate that that is true. Given the fourth quarter aggressive tactics that were employed primarily by MTS that activity did recede. However, going forward, we are seeing that the action is picking up in terms of, I’ll talk just in terms of Moscow and then maybe Nikolai can talk a bit more about some of the other regions. This most recent activity by the third attacker is showing us that we can expect more pricing pressure going forward.

In response to them gaining a large market share from this, we have to take that with a grain of salt. They still have a network that is not -- that is inferior to both MTS and ourselves.

And the second thing that works against them is they require a certain amount of money per month that excludes a very large portion of the market. So I think you have to have at least $10 per month to use such plans and therefore it is not so attractive to a very large group of customers that are in between the $5 and $10 range.

And in terms of the regions, just to add that still there is pricing pressure and we believe that this year still to be on the market. But we believe that VimpelCom had a very good first of all good business model with kind of a low cost. We are building network with a low cost. We’re having a general very good economies of scale with this unified business model. That’s why we believe that we will be able to keep good profitability of our business even with them this pressing pressure on the market.

And with regards to your Ukrainian question, yes I would say that it was a straight out acquisition, probably end of quarter 2. If we don’t have anything sort of firmly squared we shouldn’t do that because we have probably a year and a half of high growth left in the market. So if we don’t have it by the mid summer, it will be difficult for us to catch up.

The reason -- actually 1 of the conditions with which we came to private equity was exactly this. That they have to come up with the money very, very rapidly. Very quickly. And perfectly understand that because actually at the end of the day their money they are putting in and we were very open with them how quickly the case can be resolved if we don’t fast enough. And it seems like they're meeting exactly this requirement. So they already have money in the barrel so to speak and we hope to arrive to a conclusion of some sort within the next few weeks.

Okay, so you would expect to able to make an announcement in the next month basically?

Yes, yes. I mean so if the end of quarter 2 still holds.

Thank you very much.

We’ll move on to our question from Alex [Kuznezov] with Bear Stearns.

Good afternoon. I have a couple of questions if I may. First, as you highlighted the transition towards the CPP base system that is currently being discussed by some Russian authorities. Do you have any estimates of the potential impact of this transition on the Company’s business and the time of the CPP system maybe implemented?

According to -- it was different announcements of the authorities. So the recent announcement, and also it was that we would probably start having it only in the end of the year. But according to our [added] to that, we believe that this factor will influence growth of mobile to mobile traffic. So we will be able to take contractors from that fixed operators.

On the other hand of course, it will also correspond to some additional costs which -- and some small influence on our margins because it will be these costs which will be paid from 1 operator to the other.

On the total level if you just look to our financials, we believe that overall the reflection would be not so significant. That’s why in terms of modeling, I think that you can have the same models and therefore be some positive and some negative effects which will be not so significant on the overall picture.

And the second question. As you highlighted, there was a considerable ARPU erosion. Could you highlight your steps how you are going to resist to ARPU erosion going forward?

We’ll try not to decrease pricing. What we see on the market is still the market don’t need further price reduction, which is I think a very positive factor in our market. So according to all of our researches there is no need for further price decreases. That’s why of course we are trying not to be -- not to initiate further price reduction, but only kind of to follow when it is very competitive pressure.

Just if you look to the recent trends, just recently during the last few months, we came out of some strong pricing temporary promotions which were the launch by us when we were launching new regions. So in euro still not directly we went out of 1 cent promotion and actually it was increase of our tariff on this market. And we believe that will have some effect when all operators will kind of partner and first launch [P rate] in their regions, some tariff increases would be on the market.

And I would add to that. Of course, we’re trying not to resist price but they have a lot of growth left in the market place where there is lower ARPU customers coming in which will have a diluted effect. But if we take a look at the second part of our strategy to extract value, we’re very focused on moving into the higher ARPU segments and we’re doing that not through price lever. We’re doing that primarily through organizational capabilities. But basically our [see arm] techniques as well as product launches. And even though whether in the first quarter in April, Beeline became the first company in Russia to offer a push email service. That is actually helping us get into our corporate account. Likewise we continue to work to bring Blackberry to this market.

So we will continue to do that to increase our ARPU as well.

And if I may, could you also tell us how EDGE technology and 2G technology may affect ARPU and revenue going forward? If you have an estimate maybe?

Well in terms of -- I would take EDGE separately and then 3G. EDGE is a relatively minor upgrade to our networks. It’s a modernization. It’s a software upgrade and we can go to EDGE relatively without much pain in terms of investment. By the same token we need more devices on the market place in order to use those EDGE services.

The main impact that will give us is probably an acceleration in our data services. Currently our bucket of value added services represents 16% of our revenues and half of that comes on data services. So access to Internet, WAP and downloads of content and so forth.

When we have EDGE we can do that much quicker. It becomes much more customer friendly and I would presume that the customer race would expand, as well as our ability to add additional services. So it should continue to help our trend, our positive trend in the development of those revenue streams.

And any ideas regarding 2G and 2.5G.

And in terms of 3G right now we view 3G as primarily as an optimization tool in terms of frequencies, except for video telephony which we haven’t seen take off in any major markets. There aren’t any services that you can do on 3G that you can't do on 2.5 or 2.75G. So we’ll continue to canvas the market, look for applications and as the licenses and the spectrum comes up, we’ll obviously go after them primarily to improve our efficiency in terms of user frequency.

To add on the strategic note that not exactly what we call heat, but we’re waiting passionately to see any success, real success stories on the revenue enhancement on 3G. I said it on numerous occasions that Russia is half a step behind and that’s the best half a step could happen to us. So that spares us from a load of unnecessary investments and certainly again repeating that our core competitive edge, or the Company’s work on this market is to be able to operate on extremely low ARPUs good margins. And all of this is hinged on extremely careful investment policies and we’re not in a game yet to start broadly experimenting with new technologies like 3G which are actually questionable in terms of how much of additional revenues you will be generating.

We’re working very carefully on the business cases and trying to understand what sort of economics, additional economic spectrum, extra spectrum would bring to us. We’re trying to understand that. Actually, further than this, I guess we will be waiting for more successes coming from the West.

Thank you very much.

And we’ll hear again from Vladimir Postolovsky with UBS.

Thanks. 2 more questions if I may? The first 1 again is on Ukraine. Can I ask you would the decision of the financial investors by any chance depend on your concerns to run the business and your willingness to participate? Basically you know, if Telenor decides to merge with -- VimpelCom with KevStar at the end of the day, do you still believe that they will go ahead with the investment, or not? Just your best guess at this stage.

And the second question back to subscriber acquisition costs. Over the years, I mean obviously ARPU has been falling but subscriber acquisition costs have been falling quite nicely in line with ARPU. In Q1 [indiscernible] went up to almost 2 months. I see it a little bit like that. Well that’s clearly a bit higher looking at historical trends. You gave a couple of explanations for that in your press release. But basically, going forward, do you see that as more of a one-off, or do you actually think that we’re right into the new levels of that to blended ARPU? Thanks.

Let me take Ukraine first. Actually, we don’t know because it will be up to the fund to decide. So far yes, we’re discussing whether we can get a service agreement but not necessarily in the direct conjunction to the acquisition. I know that there are different, particularly a virtual [indiscernible]. I mean operators would be interested in doing something like that and Virgin Mobile was actually 1 of them who was showing interest in that market and approaching different operators to set up [indiscernible].

So I don’t think it would be that tricky actually for an operator –- for the Company to try and find a virtual operator for that company. That would be bad for us because that means that chances that we will acquire eventually that company would be slimmer.

In terms of potential conflict with KevStar, I guess we have to talk about it when we get there. We’ll cross that bridge when we get to it.

In terms of subscriber acquisition costs, first of all we believe that $14 which we've shown in the first quarter was a good healthy number because it’s a) less than the competition is showing. And I think it’s a pleasure to mention that we are bringing more subscriber growing faster than the competition and paying less to their dealing spending less expenses.

And also if you look to overall ratio of $7 ARPU and $14 subscriber acquisition costs, you also can see that in general that structure is relatively healthy. So we breakeven in all the -- in 2 months. So that’s the reality of our business.

And the first, the fourth quarter of last year was of course exceptional because it was very huge volume of sales. And of course when you divide advertising expense by the very big volume of sales of course we get to the very good exceptional subscriber acquisition cost number.

If I could follow up on it. I totally agree that [inaudible – audio problems] high number ever in your history. I think historically you had the range of ARPU of 1.2 to 1.7. So I guess my question is still are you expecting it to stay at this level of 2 months, which is healthy but it is significantly higher than what you had historically, or is it just a one-off?

We believe that if we look to the trends which would be a fact of regional costs, I would say the following. In terms of dealer commission, we see that kind of stable position. We manage to decrease some new commission in a number of regions and that was kind of a reflection of the fact that we are bringing subscriber with lower revenues. The volumes are bigger. That’s why we consider that we can decrease further the overall commission. So right now in the regions, in a lot of the regions, we’re being $8, $9 commissions which we consider very efficient.

On the other hand we see that we've made inflation on the market and we've a very strong competitive pressure on the market. There is some increase of advertising expenses on our market and we believe this year it will be still be kind of 5, 4 for the market. So these 2 factors would influence subscriber acquisitions cost dynamics going forward.

Thank you.

We’ll now hear from Michelle [Kumar] with K Rose Investment Management.

Hello, thank you. My question has been answered already. Thank you.

Hello? So that’s the last question. So then everybody thank you very much. Thank you for participating in this conference call. If you have any questions left unanswered please do not hesitate to contact us [indiscernible] and she will be very happy to address them.

So with this, thank you and have a good day.

Thank you. That does conclude our conference for today. We’d like to thank everybody for their participation. Have a nice day.