VEON Ltd (VEON) 2006 Q1 法說會逐字稿

Please stand by we are about to begin. Good day everyone and welcome to the conference call to discuss this VimpelCom's first quarter 2006 earnings results. Today's call is being recorded and at this time I would like to turn the conference over to Mr. Michael Polyviou. Please go ahead sir.

Thank you, good morning and good afternoon and welcome to VimpelCom’s conference call to discuss the Company's first quarter 2006 financial and operating results.

Before getting started I would 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 the Company’s strategy and development plans, such as national and CIS expansion, revenue and subscriber growth, OIBDA margin, ARPU and cash position goals and projections, litigation relating to the Company's acquisition of URS and Russian regulatory bodies, the financial impact of CPP communication and the Company's proposal to acquire Kyivstar.

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 2006 financial and operating results, the Company's earnings presentation entitled "Presentation of 1Q 2006 Financial and Operating Results", the Company's Annual Report on Form 20F 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.vimplecom.com. In addition the Company's first quarter 2006 financial and operating results press release and Form 20F are posted on the Securities Exchange Commission 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 first quarter 2006 financial and operating results press release please contact Financial Dynamics at 212 850 3600 and it will be forwarded to you. In addition the press release and the earnings presentation, each of which include reconciliations of non-GAAP financial measures presented on this conference call, can be downloaded from the VimpelCom website.

At this time I would like to turn the call over to Alexander Izosimov, Chief Executive Officer of Vimpel Communications.

Thank you. Good morning everyone, thank you for joining our conference call today. Let me introduce the team participating on this call. Here with me are Elena Shmatova, our Chief Financial Officer, Nikolai Pryanishnikov, our Executive Vice President who is in charge of operations in the Russian regions, Kent McNeley, our Chief Marketing Officer, and Valery Goldin, our Vice President of International Relations.

Today we will start our discussions with the market overview and the way we are adopting our strategy to the changing market conditions. Then we will cover in more detail our first quarter financial and operating results and then we will conclude with a report on our corporate activities.

Let's start with the market and the evolution of our strategy. Currently our market can be divided into two parts. Russia on the one hand and four countries of the CIS, Kazakhstan, Ukraine, Tajikistan and Uzbekistan on the other hand. Sim card penetration in Russia reached 93%. At the same time estimates of real subscriber penetration varied between 50 and 70%. We believe it is in the interval of 60 to 65%, which in our view is very close to the current addressable market.

Of course growing economy will continue to push up both the addressable market and Sim card penetration for some time but the number of real new subscribers will be relatively small compared to the existing subscriber base. Hence for all practical purposes Russia can be viewed as a saturated market.

As we reported on our previous call, we made substantial adjustments to our strategy in Russia to reflect this fundamental change in the market conditions. Our focus now is firmly placed on revenue growth through value extraction. During last two years we made good progress in developing tools and capabilities to be successful in this new game. Modern billing system coupled with CRM tools, large dataware house empowered by sophisticated data minding system. Direct marketing force and multidimensional loyalty and retention program targeted to high-end user segments.

Re-branding, which was successfully launched more than a year ago, was also an important part of this new strategic refocusing. This capability should enable us to generate good revenue growth and revenue market share gains without reverting to price-based competition.

Discussing changes in our strategy, I should also mention including focus on cost saving and efficiency. While it has always been an important issue for us, only after the phase of rapid subscriber growth in Russia is almost finished we can start addressing this issue more aggressively and in a systematic way. We are now in the process of identifying and assessing relevant opportunities, and it is our intention to incorporate them into our budget for the next year. While there is still some organic subscriber growth left in Russia, and we will certainly try to capture it, the biggest story in this respect is the CIS.

We believe that the CIS will increasingly contribute to our overall growth in the coming years. Total population of the 11 CIS countries is about 135m, quite comparable with the population of Russia which is about 145m. Our licenses cover approximately 96m in the four countries where we currently operate. Another 40m live in the remaining seven CIS countries where we do not have an associate but we are looking for entry opportunities.

Except for Ukraine, penetration in these markets is low and data presents very good growth opportunities. Later on in this presentation we will discuss our progress and the status of our business in each country where we currently operate.

Commenting on our first quarter consolidated numbers I can say that we are very pleased with the results. We are especially proud of delivering the 26th consecutive quarter of revenue growth. We were also able to achieve historic quarterly maxima on OIBDA and OIBDA margin.

Now let's look at the operation in more detail beginning with Russia. The subscriber market share didn't show any significant shifts during the first quarter. Actually it has remained fairly stable for the last five quarters and we hold the view that this situation will continue. Now we believe it is time to focus on ARPU dynamics. We expect to see ARPU in Russia bottoming out this year. Hence we hope to see ARPU growth in 2007 based on growing usage of voice and non-voice services supported by conservative price management.

These assumptions are backed up by the lowest ever decrease in ARPU in the first quarter of 2006 compared to the fourth quarter and flat year-on-year ARPU in Moscow. There is also one more change in the Russian market which is worth mentioning. The introduction of ruble tariffs by cellular operators. In April we launched our first federal ruble tariff. We also announced we are switching from floating to fixed rate for the purpose of payments related to our legacy dollars in eliminated tariffs. Effectively this move logs our Russian revenues in rubles.

In Russia we continue to see good year-on-year revenue growth of approximately 44%. This growth is being translated for the time being into the margin improvements so that our OIBDA margin for the first time in our history in Russia reached 53%. This strong margin was helped by a claw-back of dealer commissions related to the fourth quarter of last year and by seasonally moderate advertising spend.

When we look forward there is one key factor which may influence our financials. The introduction of CPP on July 1. Now we generate between 7 and 10% of our revenue by charging our subscribers for incoming calls from fixed line. Beginning July 1 we will lose this revenue and we should be at least partially compensated by interconnect payments from the fixed line operators. The price that would adequately cover our expenses is about $0.05 per minute. This is exactly that price which we established with MTS delivered through [inaudible] agreement.

Extended talks are now on the way between all interested parties and the regulator. While it is difficult to predict the exact outcome we assume that we can mitigate the effect of CPP in order not to have an immediate material negative impact on our financial position.

Our CapEx in Russia peaked in 2005 in absolute terms but as a percentage of revenue on last 12 month basis it was in decline already for some time and we see this trend continuing. On last 12 month basis, our OIBDA was approximately $300m higher than the capital investments in Russia which gives us good comfort that we will fulfill our promise to bring Russian operations to free cash flow positive position in 2006.

Now let's move to Kazakhstan. Kazakhstan market provides us with growth opportunities which we will work to capture utilizing our Russian experience. With penetration in Kazakhstan at only about 40% our main target is subscriber market share which we are gaining constantly.

Since the day of acquisition we have added 12 percentage points to our subscriber market share increasing it from 29 to 41%. Of course such rapid growth normally is accompanied with ARPU decline. The main difference between the market in Kazakhstan and the market in Russia is high prices with low MOU. Approximately half as much as in Russia so we see this as an opportunity to really develop the market in terms of substantial increase in traffic per user with modest decrease in prices.

But we are not only concentrated on subscriber growth. As we did in Russia we are looking intensively to return on our investments and thus we are happy to report not only revenue growth but profitability improvement as well. Revenue grew year on year approximately 54% and OIBDA improvement was close to 80% showing strong development in the right direction. Our CapEx as percentage of revenue is increasing in the current stage to support the 20% quarter-on-quarter subscriber base growth which we saw during the last 12 months.

It should be mentioned that launching our operations in Kazakhstan we faced some constraints in terms of frequency limitations and regulatory issues such as forbidden direct link between cell operators which delayed our development. But now these boundaries have been withdrawn and we hope for acceleration of our operations and profitable development.

We see our Kazakhstan operations as a new point of growth complementary to Russia and assume that this year our operations will reach the necessary scale leading to solid self-sustainable operations.

Our business in Ukraine, Tajikistan and Uzbekistan are at an early stage. We explained our strategy in Ukraine on numerous occasions. Regarding the URS standalone project, which is currently the only real option, I can repeat that in approximately three years we plan to have 5m subscribers, which is about 10 to 12% market share, investing $500m and working with ARPU of approximately $5 and an OIBDA margin of over 40%. This is what we were able to achieve in certain Russian regions under similar circumstances. It will be a modest self-sustainable business which will give a foothold in this important market and an opportunity for enhancing our position in Ukraine going forward.

We are now upgrading the network creating marketing and customer service departments, installing IT systems etc. After the launch of our Viewline brand in April our incremental market share reached almost 20%. I would also like to explain our position on the proposed acquisition of Kyivstar. As we stated today we do not see real progress in the discussion between Telenor and Alfa regarding our proposal. VimpelCom can not help in resolving this issue and we not see a real likelihood of progress in the near future. In these circumstances we decided to withdraw our $5m purchase proposal made in February. Such a proposal can not remain outstanding indefinitely. Of course we still hope that the acquisition can some day be completed and we will be prepared to reopen negotiations with Telenor and Alfa when they are ready.

Uzbekistan with its almost 26m is the most populous country in central Asia. We acquired two companies there including the second largest operator. We are now in the process of integrating our Uzbek assets into the VimpelCom Group and we are very optimistic about growth potential of those debt markets.

Tajikistan is interesting for our Company because besides our standard GSM 900 and 1800 license we have a 3G license as well. So we will be able to build a hybrid 2G and 3G network and acquire available experience.

With this let me now ask Elena to report on our balance sheet, cash flow and corporate developments.

Thank you Alexander. As you can see on our balance sheet as of March 31 our total assets continue to increase as we continue to invest. This investment is funded by operating cash flow and debt. During the first quarter we used credit lines available to us from a syndication agreement signed in November last year so that total debt increased by $165m. This additional debt had no negative effect on our liquidity ratios. Debt equity remains at 0.7 and this [with time] will improve dropping to 1.2 versus 1.3 as of year end. So our balance sheet is strong and we can take additional debt if needed.

Results of the first quarter improved our cash flow CapEx ratio. Our consolidated cash flow for the last 12 months cover approximately 94% of our consolidated spending for property, equipment and licenses. This ratio might slightly deteriorate in following quarters as our network construction normally accelerates in summer months compared to the first quarter. But it will still stay above the level achieved in year 2005.

For acquisition purposes we will still be looking for external funding but we believe that we are getting very close to the time when all our capital investment needs will be covered by the cash generated by our own business facilities.

Let's now turn to our corporate affairs. As you may know Telenor filed three lawsuits against VimpelCom in the beginning of year 2006. On May 15 the court rejected the first Telenor claim and confirmed the validity of the September 2005 EGM upholding the shareholders’ decision to acquire URS in Ukraine. Telenor has announced that they intend to appeal this ruling.

A hearing on the second claim was scheduled for May 25. The claim was against our Company and alleges that our CEO unlawfully completed the acquisition of URS in Ukraine. At Telenor's request the arbitration representatives for both sides were appointed. On May 25 the hearing was postponed until May 31 because the Telenor arbitration representative did not show up. Again on May 31 neither Telenor nor Telenor arbitration representative showed up. We are wondering what is the real intention of this lawsuit. Naturally VimpelCom is incurring considerable expenses and management attention in connection with this lawsuit. In spite of this, management continues to concentrate on the Company’s operational results and focus on developing the Company for the benefit of all shareholders.

Turning now to internal Russian affairs. The telecommunications regulator continues to deny us license to sell frequencies for the Far East in spite of a ruling of Federal Anti-monopoly Committee in March this year in our favor. We have tried to work with the regulator to resolve this issue in a co-operative and friendly manner. This effort has so far been unsuccessful and now it is clear that our only options is to resolve this matter in court and therefore we are considering legal actions against the regulator.

Finally our Annual Shareholders Meeting will be held on June 23. The date of record is May 5 and the cut-off date for ADR holders voting is June 20. There are nine open Board seats and 11 candidates for both positions. Given the important role that our Directors play in the management of the Company we hope our ADR holders will actively participate in the voting.

Let me now turn the floor back to Alexander for his concluding remarks.

Thank you Elena. Let me now say a few words about the outstanding AGM and the election of the new Board. As Elena mentioned there are 11 candidates for nine Board seats. Telenor and Alfa each nominated five candidates, and one candidate, our current Chairman David Haynes, was nominated by minority shareholders. This is the first time that minority shareholders nominated a candidate for our Board of Directors.

In electing the Board, the power of minority shareholders is increased due to the cumulative voting rule which allows shareholders to allocate and withhold votes, concentrating them on the preferred candidates. The election process is somewhat complicated. First complication is cumulative voting itself. Besides that you will receive three different ballots, one prepared by Alfa, the other prepared by Telenor and the third prepared by the Company. You will first have to choose the ballot that you will use for voting and it will be a part of your voting decision. Please read very carefully the instructions on the ballot and the names of the candidates. Importantly only our ballot, the Company ballot that is, will have all 11 candidates.

If you have any questions please contact us, our solicitors or your bankers or brokers. We will do everything to help you to make conscious decision that will serve your interest. We believe that truly independent members of the Board will defend the rights of minority shareholders and help management to do its job successfully without unnecessary obstruction.

Now concluding our presentation I would like to say that we feel very confident about our business. Our business is developing successfully, and management is determined to continue to deliver good results for the Company and its shareholders. We believe we have the right strategy to realize great opportunities to grow our business both in Russia and the CIS.

With this, thank you for your attention and let me now open the floor for questions.

Thank you sir. Today's question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. We will go first to Sean Gardiner from Morgan Stanley.

Yes hello, thanks. Can you just run through the details of the clawback you spoke about, Russian [marketing] distributors from the fourth quarter and the first quarter? Thanks

Actually our structure of billing commissions is appalling. We are seeing billing commission but then during a certain period of time we are looking for the quality of the subscribers and if that new subscriber doesn't bring us money, bring us money less than paid to the dealers we withdraw back some portion of the dealer’s commission. That effect usually you don't see during different quarters but in this quarter we see increased clawback because we had huge sales in the fourth quarter in December sales and right now we have increased our clawbacks.

Sorry just firming up on that, can you quantify how big the clawbacks were in the first quarter?

If I was maybe say the difference between the previous quarters was approximately $8m so that the difference between the normal levels due to that huge December sales.

So the $8m is an incremental clawback, so a net effect compared to the previous quarter?

Compared from the average quarters, yes.

Okay great thank you very much.

We'll go next to Herve Drouet with HSBC.

Yes thank you. Two questions. First one on effective tax, you mentioned a higher than expected effective tax I guess of 32%. Looking forwards can you give us some guidance? Do you think you are going to stay at that level of effective tax? I was modelising something more between the 28 and 29 so just wanted to have a bit of guidance there. And in terms -- as well in terms of investment in Ukraine in URS, can you give us a bit of what is your current plan of investment plus CapEx for 2006? Thank you.

So let me start with effective tax rate. Yes, the major impact we’ve got is connected with the ruble appreciation against the U.S. dollar. Of course it’s not so easy to predict what will be the further developments of the currency, but as long as we assume that it will be the ratio between ruble and dollar will be stable, we don’t foresee such extraordinary effects to our taxable income.

And on the Ukraine, actually, we usually don’t guide, and we do not give forward-looking information. The only comment I can make here is that out of $1.6b CapEx guidance which we give for year 2006, $1.2b goes to Russia, $150m goes to Kazakhstan, and $250m would be divided between Ukraine, Uzbekistan and Tajikistan. We haven’t disclosed yet the details on the country but we will start doing it from the next quarter.

We’ll take our next question from Vladimir Postolovsky with UBS.

Good afternoon, ladies and gentlemen. First of all congratulations for the excellent results. A couple of questions for me please. The first one is on the impact of interconnect with MTS that you negotiated a new rate on at the beginning of the year.

Frankly, we expected -- or personally, I expected a bit more of an impact, both on the revenue side and costs, and you mentioned that incremental impact on costs was about 2 percentage points of revenues but if you could give us incremental revenues and incremental costs related to the introduction of new interconnect with MTS, that would be very helpful.

That’s the first one and the second question, could you just remind me, your use per minute again fell down quite considerably, quarter-on-quarter and year-on-year. Was there anything specific in Q1 like free minutes offerings or anything that would lead to that? Thanks.

First on your question of impact of our agreement with MTS, as we stated in the press release, it’s $28m incremental revenue, $24m incremental expenses that we had, and this is the amount that has gone up from our current -- gone from our previous interconnect to the new levels, and it’s had about a 2% negative impact to the gross margin level.

Thank you.

In terms of tariffs, yes, during the first quarter we’ve had the effect of our winter promotion free nights, and that clearly was a very successful marketing promo, but of course drives minutes, especially at this night period of time, free of charge, increase of MOU, but of course drops your average price per minute. After we stopped it, we see already some increase in price per minute.

Thank you very much.

We’ll go next to Alex Kuznezov with Bear Stearns.

Oh good afternoon. I have two questions. First, could you comment on such a significant increase in depreciation expense in Russia? It appears that depreciation in Russia went up by 19% compared with the previous quarter. Were there any changes in depreciation policy? And second, what are the reasons for such a significant reduction in the Ukrainian EBITDA margin?

So let me start with depreciation. As you remember, our capital investment in the fourth quarter was very high. A major portion of it was put into operation in December and the rest in the beginning of the first quarter. So that gave rise to additional depreciation calculation, and another factor contributing to this is amortization of licenses of newly acquired companies. Yes, so those are the two major factors that contributed to the change.

As far as Ukrainian EBITDA is concerned, I don’t think that we report it, and therefore that kind of reduction is not probably the right word, but to explain why it’s deep in red, clearly that first quarter, when we were in pre-launch phase, and we’ve been incurring a lot of cost both recruiting the staff, setting up the systems and preparing for the launch of the brand.

That’s all start-up cost, which you seen in that line. And the cost probably will stay at the same level but the revenue should start gradually improving and therefore reducing the negative impact.

And do you have any guidance for Ukrainian EBITDA?

We do not guide EBITDA, period.

I see. Thank you.

We’ll go next to Sergei Arsenyev with Goldman Sachs.

Good afternoon. I’ve got two questions please. Firstly, on Kazakhstan, you have reported a significant improvement in market share, and at the same time subscriber acquisition costs went down quite dramatically in the quarter as well. Is this a sustainable trend, especially if you focus on improving market share further, or is it likely that subscriber acquisition costs will start increasing to the previous quarter’s levels?

And my second question is on the termination rates from fixed. There have been obviously a lot of numbers thrown around. I’m just wondering where the discussion is right now with regards to the termination rate?

Let me take Kazakhstan first. The logic here is exactly the same as in Russia, because we’re introducing very similar policies in terms of dealership, commissions and the very similar structures. And having sales in December and actually not very high quality of those sales resulted in a lot of clawbacks.

At the same time you divide it on heavily accelerated sales in the first quarter, and therefore you see SAC hitting such a low number. As I always advise in that sense, it’s very dangerous to take single quarter numbers. You need to trace it over a longer period of time in order to get reliable pictures going forward. So clearly the SAC, 6.1 is probably an exception and not representative for going forward numbers.

From an interchange termination standpoint, our position has been that we want to recover the costs that we have for completing the interconnect, which is about $0.05, and the major mobile operators are about in the same place, so ourselves, MTS and Megaphone have all aligned around that $0.05 numbers.

Fixed line operators have been somewhat lower and have talked about different numbers in the $0.03 to $0.035 range. This week, we went and met with the regulator and offered a compromise which would be moving to $0.041 on July 1 of this year, and then moving up to $0.05 July 1 of ’07. So in the next week and a half to two weeks, we should start to get some clarity but that’s where the range is that’s been discussed.

Right, thank you very much.

We’ll go next to Rizwan Ali with Bear Stearns.

Yes, I was wondering if your CapEx in the first quarter was significantly lower and you’re still guiding towards $1.6b in CapEx for the full year. So I’m just wondering what the reason is for the low CapEx in the first quarter, and also, now that you have started doing accounting for how many real subscribers you have, I’m wondering whether the subscribers which are not really using the network, the whole lot, you still reserve some portion of your capacity for them, or do you not take [compensation] for any in respect of others?

Okay, let me start with the capital investments in the first quarter. You know, this number, $195m which we’re showing as capital investments, it indicates our new purchases. Although really, in operations we are putting equipment which we purchased not only during this quarter but also which we purchased in the previous quarter, so we had quite a good, I would say, reserve captured in the fourth quarter to maintain the roll-out in accordance with the plan in the first quarter.

Then, and this is practically the effect which we saw in all the previous years, but in addition to this, this year we had a very cold winter, which for certain periods of January stopped some of our activities, especially in the north regions. So that’s put some delay to our operations, but we think that we will catch up and act in accordance with our projections this year.

In terms of overall investment, I would like to add that in Russia we decreased this year our investment to $1.2b which is 20% less than the previous year. That’s why we decreased our CapEx. And we, as we announced, we invest as we grow, so there is no spare capacity. We’re very attentively looking to the utilization in each particular region, particular city, and we increase capacity only when we see the growth of the real subscribers and real traffic.

Thank you.

We’ll go next to Stephen Pettyfer with Merrill Lynch.

Thank you. I wondered if you could give us a little bit more color on your comments about moving from a floating to fixed rate in pricing terms and if you’d seen any competitive reaction to that? Thank you.

Specifically what we did is, we have previously priced our plans, our tariff plans in dollars, and when some of them are going to pay, we would convert at the central bank rate plus 1%. Effective actually today, when people go in, we will convert at the six-month average central bank rate plus 1% as of the day we announced it to consumers, and therefore there is a flat RUS28.7 to dollar conversion rate that will be locked in. So henceforth, as the ruble fluctuates, we’ll have currency gains one way or another from this activity.

Okay. But in terms of competitive response, Megaphone was the first one to introduce this year a ruble tariff and they converted. They are pricing at the rate of 28.78. So now, we have effectively two operators running with the ruble operations and MTS promise that they will follow soon, whenever they can. They indicated third quarter, I think.

Thanks and just to follow up, does that effectively cover all your Russian tariffs now?

Yes, all of them today are covered other than a few in the business segment.

Thanks.

We’ll go next to Olga [Bystrova] with Credit Suisse.

Good evening. In terms of advertising and marketing expenses, given the drop in the first quarter, where do you see the sustainable level for this cost, or maybe how much you budgeted for this year in advertising?

We don’t generally disclose our precise numbers but let me just say that our strategy is to spend at a rate that’s consistent with other world class marketing companies of about 6%. The percentage that we’re planning for this year is somewhat below that, and the first quarter is really low because of the seasonality impact, and not an indication of our planned spending for the year.

Okay, great, thank you.

We’ll go next to Nadia [Golobavo] with Aton Brokers.

Good evening. My question is on tactics. Could you possibly give the breakdown on your CapEx into, say, capacity coverage and other, and also possibly you can give -- or take this question this way. So assuming that there was no subscriber growth and there was [just pressure] growth from [a list] of subscribers, is there a direct link between CapEx and traffic growth, so I guess it’s not [direct] and what about it? Thank you.

Okay, that’s a bit easier to tackle than coverage and capacity. Clearly because we’ve been building our networks, unlike in Europe, where networks have been built as a small country, network would be covering the country relatively fast, and therefore would have a lot of spare capacity, we’ve been building it in small increments.

We run a very high utilization factor on our networks and therefore naturally growth in minutes, growth in traffic, will require additional CapEx. It will be at a different rate because it’s easier for us, of course, and cheaper to add capacity sometimes. Sometimes it still takes just installation of entirely new sites, but relatively speaking, it will be cheaper. We are budgeting between $0.08 and $0.06 incremental CapEx per minute.

$0.08 and $0.06? Okay, and so --

$0.08 to $0.06, or $0.06 to $0.08, whatever, we will take --

Okay, and so for example, if there was a traffic growth by 20% what could be the additional CapEx increase?

You multiply 20% on the traffic, you will get incremental minutes, and you multiply it by $0.06 to $0.08, in that range.

Okay, thank you very much. Okay, thank you.

We’ll go next to Alex Kazbegi with Renaissance Capital.

Yes, hi, good evening. Two questions on the same sort of topic if you wish, on the upward side. One, maybe you can give us a bit more detail in terms of not only how much of the up was made up by the value added services but what were the dynamics in terms of the actual absolute numbers on the value added side, not as a proportion of the total, but just the dynamics, and what is it made up, and do you see any changes there in the redistribution of that component, ie. SMS used to be maybe 90% of that, now it’s 70% on the [inaudible] and so on, so if you could give us a bit more color on that, that would be great.

Second, I think on the same topic I was just noticing that your ARPU, your reported ARPU fell in Russia, I think it’s 5.7% sequentially quarter-on-quarter when the actual subscriber ARPU actually fell 7%. Well, first of all, why is that, and secondly, well, I guess you’d just reiterate what you said, but presumably you still expect that the inflection point on the ARPU is going to be Q1 of this year and overall, 2006? Is that right?

Okay, I’ll start with the first part, having to do with [BOS]. BOS as a percentage of total in the first quarter was a little more than 16%. About a little more than half of that, roughly 60% of that was made up from SMS. The balance is broken down into different content we sell, different infotainment that we sell, MMS, etc, and as we go forward, this quarter, the second quarter in Moscow, we started to launch a new program called GPRS For All, which in our testing has had a significant impact in raising that non-SMS portion of BOS.

That will be -- that’s available now in Moscow, and it will be rolled out through the rest of Russia in the third quarter. So we have some impact just from that. The second thing is this year we’re focusing on a number of activities that will help to provide improved content and we’ll talk about those more as they come into the market in future months and quarters.

Okay, and so the dynamics are going back, again, 60% of SMS obviously, the amount of the SMS in the total value added services has been reducing over time, is that correct?

That’s correct, primarily because the content portion has been increasing.

Okay.

In terms of ARPU, I think we clearly see there stabilizing trends, more if we look to the ARPU of registered subscribers and active subscribers, even more when we look to the active subscribers by different territories. We see that in Moscow ARPU of active subscribers compared to the first quarter last year increased, and in the regions, increased as well, but because of the increased portion of their regional subscribers in total, the average of course were going slightly down.

So we see there positive stabilizing trends, and that’s why we still believe that the first quarter of this year is that low number and then we will have some seasonal help, and then it’s an opportunity to grow the traffic there, users and to grow their [assets] from value added services.

Okay, thank you.

We’ll go next to Evgeny Golossnoy with Troika Dialog.

Yes, hi, good evening. I’ve got a question slightly off the topic but you seem to have a long distance license, and my question is really what were the costs of installing that system or is it already installed? And then, by definition, if you apply and you get and you launch a long distance network, you are likely to open this for use to other customers?

I’m not sure if that relates to end users or the operators but if that’s something which is of importance for you? And then what will be the impact of launching or of having your own long distance network on your margins, positive, negative, to what extent it’s positive or negative? Thank you.

Acquiring a long distance license for us was primarily a response to regulatory changes, which put into jeopardy our direct connection between our switches in different license areas. The installation cost for such a license is actually not that high. We’re talking $1m in single digits, but it would also secure actually quite a bit of revenue, or cost strata for us that we shouldn’t pass the traffic on to other carriers, and carry our own long distance traffic. That was the primary reason.

So we were not looking for enhancing our revenue. We’re not looking at selling it outside. If the opportunity later on will come, we’ll consider it, but that wasn’t the objective.

Okay, thanks. Alright, but going forward, what will be the effect on margins? Have you already started to provide services using your own network?

No, not yet. The network is under construction and actually construction doesn’t take that much, but to get all the permits that takes a lot of time, and that process is underway. The key objective is actually to preserve our margins and not allow it to deteriorate by the virtue of transferring traffic to the third party carriers.

I see, but do you see the cost of service to the clients declining or remaining at the same level after you commission this network?

We are not going to compete on the external market. This is primarily to carry our own traffic.

Okay, thank you.

We’ll go next to Anna Bossong with CAIB.

Yes, good afternoon, gentlemen, and ladies. I firstly wanted to ask about the first quarter’s subscriber adds. I notice the share of net adds of the smaller operators has been increasing quite a lot, Tele2 and [Smart] and Siberia Telecom, and that your share of net adds was around 26% after around 34% for the full year last year.

So my first question is, does this mean that over the rest of the year you’re planning to perhaps increase those fees or undertake other measures, more price competition to get back that incremental share of net adds, or are you happy to stay perhaps at around the level you are now? And if you could also say a few words about why perhaps these other smaller operators are doing so well on the first quarter that would be really helpful as well.

And my second question is perhaps you could give us an exact figure without the clawback or perhaps with a more normalized clawback number? That would be very helpful indeed. Thank you.

Let me start with the market share. We believe that the market share has stabilized by and large. Clearly that, quarter-on-quarter, depending on the seasonal activities, you might see some fluctuations, but we do not expect major redistribution and that’s an absolutely key premise for our strategy and our focus on the revenue market share, which will show a completely different dynamic compared to subscriber market share.

To explain why the small operators go up, I can only speculate but my suspicion is that it’s in anticipation of both [Statinvest] privatization and in the desire to increase valuations for the small operators before they would be sold to somebody or acquired by somebody. They’re trying to pump up their subscriber base numbers. It doesn’t mean that they really take the subscribers, it’s more of virtual subscribers. So the quality there is fairly questionable.

As far as clawbacks are concerned, I think Nikolai has mentioned before that it’s about 8m difference in quarter 1 to the normal level.

In terms of overall percentage of the clawbacks as a percentage of the whole commission, it’s approximately from 10 to 20% which we claw back from usually from the dealers, and this specific effect in this quarter was due to very active December sales and relatively low sales in the first quarter. That’s why we see it.

So I can take the 8m and divide it by gross adds and get the difference, that will be great. Just on your intention to stabilize your market share, though, if you are only taking one quarter of net adds and you have a market share of 32, 33% or whatever, you will need therefore to look at the rest of the year by actually increasing your share of net adds, wouldn’t you say? Therefore perhaps there could be upward pressure on your SATs, or downward on your pricing?

No, we are looking completely different now. We are saying that IMS is not the name of the game any more, because we have very little to add in terms of new subscribers, truly new subscribers coming to the market, and therefore in Russia we are focusing on quality first of all, and that’s a big strategic shift from where we were before. Before, we were running as fast as possible and bring as many as possible.

So it’s a focus on revenue market share through improved quality of the subscriber base, hence we might see some erosion of our market share on subscribers. It’s actually less of a concern.

In the CIS it’s a completely different story. In the CIS market it’s still at the growth phase and therefore, there, we need to repeat what we’ve done in Russia during the last two or three years, ie. run very, very fast, build a network and get as many subscribers as possible on our network. The game is changing when you reach the saturation point, which we have in Russia.

I understand. Thank you so much.

We’ll take a follow-up question from Vladimir Postolovsky with UBS.

Thank you, a couple more questions if I may. The first one is on the Ukraine. I’m just trying to understand, obviously it’s early days and it’s almost maybe not helpful to look at revenues but revenue growth, quarter-on-quarter was very minimal, although I thought that in Q4 you were consolidating URS only for half a quarter, and [inaudible] revenues was only for the period from mid-November, and then you were reporting 2.1m in Q1.

Could you explain why is that or your net revenue figures you provided for this quarter is significantly different from gross? Anyway, that would be interesting, because I would expect revenues to at least double, and it didn’t happen.

Okay, let me handle the first question first. I don’t think that it’s correct to look at the revenue. It’s not meaningful at all, because we’ve launched the operations and we launched the brand only April 10. So it’s a residual subscriber base which was sitting there, and we were doing nothing with that subscriber base, we were not stimulating it, we were not increasing the subscriber base in that sense. So it’s just a nominal figure. That’s why we don’t give much detail about it. Clearly operations, as such, have started only in April.

Okay, fair enough. But just to understand also your comments about how you’re going to go about Ukraine, you sounded quite cautious, and first of all your CapEx guidance for the Ukraine and to other countries is only 250m for this year, and then you also -- you’re not targeting more than 10% market share in the medium to long term, so you are going to proceed quite carefully, right, at least for the next year or so?

Absolutely correct. That’s the business case how we designed it. Clearly there is potential upside there, but we are not going to strive for market supremacy in the Ukraine. We are targeting to be good number three player, and to have a small but self-sustainable business, and the parameters, as I said, would be 5m to 6m subs, $5 ARPU which means $300 to $350m revenue per year, mid-40s margins, and we are going to achieve it with the CapEx of about $500m over the next few years. So $500m is a total CapEx which we intend to put in the Ukraine for the time being.

Thanks very much, and one last question, just going back to the fee fixing the exchange rate for dollar tariffs, so what percentage of your customer base at this point in time is still on formerly dollar based tariffs, roughly?

Over 90% would be on dollar base. We only have one ruble tariff that we’ve launched. We only launched it five weeks ago, and so virtually the vast majority are on dollars.

Thanks very much, and if you -- let me just, really a last one. Revenue based taxes again emerged on your P&L. Where from, and what is it? Thanks very much.

Yes, it’s from Uzbekistan and Tajikistan.

We’ll go next to Alexander [Boloffin] with [inaudible] Bank.

Hi, that’s Alexander Boloffin from [inaudible] bank. I have one question. You reported today that you had withdrawn a proposal of Kyivstar acquisition. Does this mean that the Company Board will approve your investments in the Ukraine? Does it mean that your shareholders -- Telenor will support your expansion in the Ukraine?

Well, that’s probably a question more towards Telenor than towards us. I think that so far we have been entangled in multiple lawsuits and debates about the validity of the acquisition and the validity of the shareholder meeting where the majority of minority shareholders supported the transaction.

So it’s unclear to me at the moment how Telenor will behave after that, but so far, what we see is that they continue to object to our expansion in the Ukraine, and that’s probably still guided by the conflict of interest and of course their attempts to preserve the value in Kyivstar which is such a crown jewel in the crown of Telenor Holdings.

Thank you.

Today’s final question comes from Sean Gardiner with Morgan Stanley.

Yes, hi, just following up on the minutes of use, the 26, 25.5% growth you had year-on-year in the first quarter, was that a positive price for yourselves or was that really pretty much in line with your business plan?

It was partially stimulated by the fact that we had a little promotion where we gave free minutes during January, and that increased the MOU. It’s also why the [APPM] was somewhat lower than we normally would have expected.

I think you also mentioned that you’ve ended that promotion. So is there a risk that you don’t see your typical seasonality in the second quarter because you’ve got such a high basis starting from the first quarter?

I think that the indications that we got from the end of the first quarter and through today would indicate that our business is continuing to develop as we expect it to develop.

Okay, and then I suppose to round it up, because if the growth rate for minutes of use continues at the level, or a little bit below where it is, I suppose there is a risk that your CapEx number is too low, and is that what you think at the moment, or do you think you’re adequately prepared on the CapEx front for 2006?

We believe that whereas we are prepared and we have a balanced business plan this year, but as we announced, we invest as we grow, and if the traffic growth and subscriber growth will still exceed our expectations, we’re ready to support that but of course, it should be balanced by their very strong revenue growth.

Yes, but so then just to clarify that, it hasn’t actually exceeded your expectations yet? Is that how we should look at it?

Well, it seems clear that it’s too early to say on the basis of one quarter. We’re certainly not ready yet to start adjusting our CapEx and so on, so we’ll see how these things develop throughout the year.

Okay, great, thank you.

And actually, we have one final follow-up from Vladimir Postolovsky with UBS.

In this game, the way you, I think, quite correctly [pose] it on volumes based budgeting, obviously pricing is becoming quite critical. What assurances can you give us that your pricing will stabilize going forward? And considering that you moved to ruble pricing, do you see a possibility of ruble tariffs going up in line with inflation? Thanks.

Vladimir, a hell of question, right? Of course we cannot give you any assurances, as our Safe Harbor statement says. But that’s our intention. That’s our intention, and that’s an integral part of our strategy, to focus on the usage growth, with the very conservative price management, and through that, extract much more value from the existing subscriber base.

We will explore different opportunities how to do that, and you can mention the whole raft of those things, and Kent probably would be better positioned in doing that.

Yes, I would just add that certainly as we look at the introduction of ruble tariffs, the first tariff we launched and follow-up tariffs that we’re about to launch, we are targeting those to higher APPM and higher ARPU levels. And I would also say, a higher percentage of our business I think would come through these federal tariffs that we’re launching. So the combination of those two things is certainly something that should help us to keep our ARPUs growing.

But you don’t look at inflation adjustment yet, do you?

Not yet. We launched the first ruble tariff, right, but we don’t have experience. We don’t know how the market will be sensitive or not sensitive to inflation adjustments. We don’t know how much we can carry through our nominal declarations versus what retail takes, and so on, so there are many complex parameters which need to be taken into account. But certainly, that’s an intention not to allow prices to erode, right? And we’ll see what we can do, and we’ll learn as we go.

Fine, thank you very much.

And that concludes the question and answer session. I’d like to turn the conference back to Mr. Izosimov for concluding remarks.

Thank you very much and to everybody, thank you very much for your intention, and your questions. If you have more questions, please do not hesitate to contact us and we’ll be happy to give you all necessary clarifications and explanations as far as business goes, and also everything regarding voting at the AGM, which is very, very important, I just want to remind you. So with this, have a nice day, and goodbye.

This concludes today’s conference call. We thank you for your participation, and you may disconnect your phone lines at this time.