VEON Ltd (VEON) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to this conference call to discuss VimpelCom's first quarter 2007 earnings results. Today's conference is being recorded. At this time for opening remarks I'd like to turn the conference over to Peter Schmidt. Please go ahead, sir.

Thank you. Good morning and welcome to VimpelCom's conference call to discuss the Company's first quarter 2007 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 in Russia and the CIS, market growth and the competitive environment in Russia and the CIS, 3G developments and projections related to the Company's cash position, dividend payments and capital expenditures.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in, one, the Company's press release announcing the first quarter 2007 financial and operating results, two, the Company's earnings presentation entitled Presentation of 1Q 2007 Financial and Operating Results, three, the Company's annual report on Form 20-F for the year ended December 31, 2006 and, four, 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 2007 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission's website at www.sec.gov.

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

If you have not received a copy of the first quarter 2007 financial and operating results press release, please contact Financial Dynamics at 212 850 5600 and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented on this conference call, can 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. Hello, everyone. Thank you for joining our conference call today. And let me introduce the team 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 Russia, and Kent McNeley, our Chief Marketing Officer.

Today's presentation will start with a general overview of our performance in the first quarter of 2007. After that, we will discuss developments in our key markets and I will conclude with some comments on the evolution of our strategy.

Let me now ask Elena to present our consolidated financial results.

Thank you, Alexander. Our first quarter results confirm the positive trend which we saw in 2006. This quarter again demonstrated a strong year-on-year growth rate in net revenues of close to 60%. We're also happy to see a small but encouraging number, 2.5%, revenue increase compared to the previous quarter.

This quarter-on-quarter growth was ensured by our development outside of Russia, which confirms that VimpelCom is on the right track in developing new sources of growth. On the other hand, we continue to keep our focus on Russia, which demonstrated stability in revenue quarter on quarter even during the low season.

This year, our first quarter OIBDA margin came practically to the same level as in the first quarter of 2006, which in absolute terms brought us approximately US$283m in additional margins on a year-on-year basis. Our net income in the first quarter of 2007 was our best ever, $277m.

Our cash generation during the past 12 months is close to $2.3b, which gives us an opportunity to finance our business development and pay a dividend. As we have already announced, our Board of Directors has recommended paying dividends based on the 2006 result. The proposed amount constitutes approximately 40% of our consolidated net income for 2006, or approximately $1.60 per ADR.

Our balance sheet, as of March 31, demonstrated further growth in our business as our assets increased by more than US$400m and we continued to improve our financial indicators. Our OIBDA/interest ratio is above 14% and our debt as of March 31, 2007 is lower than our OIBDA for the last 12 months.

So, we are able to attract additional debt if cash will be needed for acquisitions without jeopardizing our debt service capabilities.

Let me now turn the floor back to Alexander to discuss in more detail the developments in our key markets.

Thank you, Elena. During our previous call, discussing the 2006 results, we noted that the contribution of the CIS countries to our business was growing. The first quarter results have confirmed this trend. Now, 25% of our year-on-year revenue growth comes from the CIS and it was actually 18% in 2006. And the CIS contributed just under 25% to our OIBDA growth. In terms of subscriber growth, almost 60% of new additions came from the CIS. So, going forward, we believe the countries of the CIS will play an increasingly important role in our business.

Considering the developments in the countries where we are today, let's start with Russia, our largest and most developed market. The most important question here was how resilient the Russian market would be to the traditional seasonal weakness in the first quarter after a significant increase during 2006. We believe the answer is positive. As compared with the previous quarter, which is stable minutes of use with no visible change in prices, resulting in essentially flat ARPU.

To reflect the overall growing strength of the Russian consumer market, as well as our continued efforts to improve the quality of our subscriber base, in the first quarter we tightened our definition of active subscribers by excluding those who remain in the base only due to a technical transaction. It gave some upward push to ARPU and MOU, but it left the overall ARPU trend unaffected, which is confirmed by the fact that ARPU of our registered subscribers and MOU of our registered subscribers behaved in a similar way.

Stable prices, MOU and ARPU naturally led to stable revenue, as compared with the fourth quarter of 2006. On a year-on-year basis, revenues grew by approximately 47%, keeping our growth rate in Russia at a very high level.

We also observed a good recovery in the margins following a seasonal reduction in sales and marketing expenses. Our OIBDA margin in Russia was approximately 53% and net income margin was 22%. CapEx in Russia, as a percentage of revenue, continued to decline in the first quarter, as the development of our 2G network is nearing completion.

Going forward, a substantial part of our CapEx in Russia will be directed at the development of our 3G network. The first phase of our new 3G network will include network deployment in several big cities. The order will depend on our ability to clean up frequencies. Our 3G CapEx through the end of 2008 will be in the range of $300m to $350m, part of which we would spend anyway upgrading the capacity of our 2G network.

Currently, we see two areas where 3G will undoubtedly be of great help -- one, in dealing with capacity issues, and the other is broadband Internet access, which is practically unavailable in Russia outside certain areas and big cities.

Let's now move to Kazakhstan, our second-largest market. Again, as in Russia, the first quarter results were very good. We gained another percentage point in market share, crossing the 50% benchmark, and strengthened our leadership position. Some decline in MOU and ARPU in the first quarter were expected, due to a combination of seasonal effects and dilutive pressure that always comes on the back of rapid growth. However, the decline on a percentage basis as compared with the previous quarter was less pronounced than a year ago.

Our financial performance in Kazakhstan in the first quarter of 2007 was again record breaking. Along with triple-digit year-on-year growth in revenue, OIBDA net income reached a record OIBDA margin of 59 -- 51.9%. This was due to a seasonal reduction in SG&A expenses and the absence of a significant one-time expense incurred in the previous quarter. Also, our gross margin improved due to a regulatory change in interconnect accounting, which is now subject to 10-second rounding instead of previously used per-minute rounding.

Penetration in Kazakhstan is approaching 60%, which means that there likely remains less than two years of rapid growth. Therefore, maintaining a high speed of development in Kazakhstan remains our most important objective, particularly in light of the progress that the third GSM operator has made, even though the progress has been limited so far.

Although we're still in the network build-out phase in Kazakhstan, our CapEx as a percentage of revenue is declining. On the last 12-month basis, CapEx fell to 41% of revenues in the first quarter of 2007 as compared with 81% of revenues recorded for the same figure a year ago.

We believe our strategy in Kazakhstan has been working very well and we intend to continue strengthening our leadership position even further.

Turning now to Ukraine. During the first quarter of 2007 our active subscriber base increased by approximately 28%. We were increasing our incremental market share each month to reach 44% incremental market share in March. This progress confirms our ability to grow in Ukraine. At the same time, it suggests that the market leaders have started to clean up their subscriber bases, after the uncontrolled distribution of free SIM cards in previous periods. It confirms that the declared penetration rates in Ukraine are heavily overstated. We believe that the real human penetration in Ukraine is no more than 65%, 70%, which gives us enough space and time to continue growing our subscriber base.

Regarding the general business environment in Ukraine, we see that the big operators continue to pursue their overly aggressive pricing policy. In fact, they made further price reductions in the first quarter of 2007. Frankly speaking, we fail to see how this policy can be sustainable in the long run.

Paradoxically, it looks that now we may feel less vulnerable than the big operators. Although our MOU and ARPU declined sequentially in the first quarter, we were able to increase our revenues by approximately 10% as compared with the previous quarter.

We also achieved improvements in OIBDA, although it's still negative. As we said on the previous call, we expect the more difficult conditions in the Ukrainian market to affect the timing, but not the extension of our plans.

Let's now move to our new markets, staring with Uzbekistan. It is the largest country in Central Asia, with a population of 26m. The penetration rate in Uzbekistan is less than 15%, which means that the phase of intensive growth is yet to come. We're preparing for this by improving the quality of our network and support systems, building infrastructure and distribution channels.

We experienced good subscriber growth in the first quarter, as well as growth in all financial parameters. At the same time, low prices established in this market at an earlier stage of development present an additional challenge.

Tajikistan is a much smaller country than Uzbekistan and ensures different dynamics. The size of the country and fragmented competition made our initial development phase in Tajikistan easier and enabled us to show spectacular growth in the first quarter of 2007.

The first quarter of 2007 was the first full quarter of our operations in Armenia. After we acquired the initial 90% stake last November from OTE, last quarter we purchased the remaining 10% stake from the Armenian government. As part of the transaction, we have agreed with the government on the process of de-monopolization of the fixed line business. The de-regulation process should take until the year end but a real shift in the competitive environment in Armenia probably will take even longer.

The Armenian operations are currently undergoing through our standard integration program where all major systems, platforms and processes are being harmonized with the rest of VimpelCom Group. When complete, this program will lead to a noticeable increase in the intensity of our commercial operations and market presence.

We also intend to take full advantage of our unique position in Armenia and to develop a converged environment. To that end, we have initiated a major overhaul of the network, aiming at developing a state-of-the-art NGM solution. The country's scale and willingness of the vendors to be part of the development should allow us to achieve it with a modest CapEx commitment. The overall 2007 capital budget for Armenia is below $100m.

Meanwhile, the Company continues to show very healthy operational results, with OIBDA margin exceeding [50%] in the first quarter of 2007.

And a few words about neighboring Georgia. We acquired Mobitel, a GSM 1,800 license holder, in July 2006. And we launched our operations in the middle of March 2007. We will give you some more details about our operations in Georgia when we report our second quarter results.

Now, moving to strategy. During our last conference call, we discussed our strategy in detail. In particular, we mentioned that the Board of Directors extended the scope of our strategy so that the Company could continue to expand its growth potential. Today, I would like once again to touch upon those new elements.

So, we will explore expansion into new geographical areas outside of the CIS and into adjacent business areas, such as selling extra capacity in our transport network, moving into corporate data and residential broadband businesses, mobile TV and participating in potential convergence of mobile communications, Internet and media. In addition, we will be more open for market-consolidating opportunities in Russia, which will enhance our competitive position and create a healthy business environment.

Now, a few words about our corporate matters. Our Annual General Shareholders' Meeting will be held in Moscow on June 29, 2007. All shareholder materials have been posted on our website. The distribution of hard copies and ballots will start on Monday. We call on our shareholders to actively participate in the upcoming Annual General Meeting and in the voting which has already started. The cut-off date for the ADR holders voting is June 25, 2007.

As before, we have more candidates to the Board then Board seats. We have 10 candidates for nine Board seats. Of those 10 candidates, five were nominated by Telenor, four were nominated by Altima and one, our current Chairman, David Haines, was nominated by a group of ADR holders.

According to Russian law, voting for the Board candidates is conducted on a cumulative basis, which means that the number of votes you have for the Board election is equal to the number of shares you own multiplied by nine, the number of seats on the Board. You can give all of your votes to a single candidate or distribute them between the number of candidates in any proportion. This increases the voting power of minority shareholders because they can concentrate their votes on preferred candidates.

So, concluding our presentation, I would like to say that we had a very good start to 2007 and we look forward to expanding our success through the whole year.

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

Thank you. [OPERATOR INSTRUCTIONS]. We'll go first to Sean Gardiner with Morgan Stanley.

Hi. Thank you very much. Just on Kazakhstan, with the margin in the first quarter above 50%, I think it was about five weeks ago you talked about the full-year margin being comparable to 2006 for 2007. Can you just update us where you are and where the positive surprises come from? Because you clearly should have known about the change in interconnect back at the first -- the fourth quarter conference call. Thanks.

Sean, I would be surprised if we gave such a statement because usually we never guide on the margins or on any other parts of our plans. The only guidance we give is CapEx.

But, in principle, what we're saying is that we see now the impact of change of the accounting principles on the inter-operator clearance and inter-operator traffic -- interconnect traffic which was rounded to 10 seconds. That actually, optically, reduces the revenue and the costs, which improves the margins. So, that was the first contributor. The second contributor is tenge strengthening against dollar. So, that gives you impact as well. And the third one is a seasonal reduction in SG&A. So, those three parameters define the margin.

Okay. Thanks. Can I just have a follow-up question on your provision for doubtful accounts? In the first quarter this year, it was pretty high versus first quarter 2006 and actually a bit higher than the fourth quarter. Can you just run through which country that was largely in, what the reason was for it?

On one hand, some was -- around $2m came from the new countries from CIS and -- but, of course, the major part is coming from Russia. And that is connected with our new initiative of trusted payment, when we allow the prepaid subscribers to have negative balance. And, of course, for technical reasons, we are making reserves on all this balance as long as we do not have yet the payment history and so we are taking such positions currently.

And also, we should mention that generally we are trying to move our subscriber base from prepaid to postpaid, which will also have some impact on our bad debt reserves.

So, it should continue to stay pretty high, then, during 2007?

Well, to a certain extent, yes. It depends how we'll collect the payment history and our prepaid customers will start the payment. But, generally speaking, currently, yes. So, currently we have, in the first quarter, a bad debt reserve of approximately 1% revenue, which is normal.

Okay. Thank you.

And we'll take our next question from Sergei Arsenyev with Goldman Sachs.

Good afternoon. Can I just follow up on the Kazakhstan question? Can you give us the actual one-off number in the fourth quarter that impacted your profitability, or impacted negatively your profitability in the fourth quarter?

And also, on the Kazakh margin, what was the -- can you quantify the impact from the regulatory changes, from the net impact of interconnect on your EBITDA, the actual numbers you estimated?

And if I -- that was my follow-up question. My actual question's on the usage growth in Russia and how much of this sequential increase in usage you attribute overall to the positive macro situation in the country and how much of that came from your specific campaigns?

Yes, I'll start. Okay. So, in terms of the MOU, I think it's difficult to parse apart each part of it. Certainly in the first quarter we ran a number of promotional activities which were targeted at increasing minutes of use. Elena already mentioned trusted payment. We launched another service called Call Me Back. We have additional revenues we've gotten from a balance transfer which we started in the fourth quarter. So, a number of those things are having cumulative effects and I would say that a principal driver, but certainly the overall economy has supported it as well.

And coming back to Kazakhstan, so one-time in the fourth quarter was approximately $10m. And regarding quantification of 10-second rounding, actually, as Alexander said, it was approximately the same decrease in revenue and costs and that OIBDA practically stayed on the same level. But percentage wise, as long as the same amount is divided by the high amount -- should be divided by the high amount of revenues, the OIBDA improved.

And what is the actual amount that has reduced your revenues and EBITDA?

EBITDA was not decreased in absolute numbers.

It's a very detailed question. We don't disclose the degree of rounding and impact of rounding in this case.

Okay. Thank you very much.

And we'll go next to Alex Wright with UBS.

Yes. Thank you. Good afternoon. I just had a couple of questions on the gross margins in a couple of your markets. In Russia, clearly the gross margin pretty stable, Kazakhstan improving for the reason that's already been discussed. Could you tell us, apart from seasonal effects, whether there's any reason to expect any further changes, negative or positive, in the gross margin over the course of this year?

No.

Of course it will be some seasonal effects. As an example, during summer period roamings, roaming revenues increases but also increases the costs and our margins could decline slightly. But, in general, I think that we've got already a very big volume of the total business. That's why these changes shouldn't be very significant.

And, of course, in different CIS markets the situation is very different. Especially interconnect regime is seriously affecting gross margins. In those markets where interconnect is very high, gross margin is depressed by that. But on a consolidated basis, we believe that these levels are more or less sustainable. The changes would not be very high.

Okay. Thank you. My follow-up question is a similar question on the Ukraine, really, where again gross margin has improved. And I believe at some point during the first quarter you started offering off-net calls at a level below the cost of interconnect. Could you just confirm that first of all, please, and just explain how the gross margin did improve despite that offering and whether you're still continuing with that pricing campaign?

Yes, indeed. We do continue to offer this. And the explanation is very simple, that if you do not attract traffic between the networks then you're basically locked with a subscriber base which is using phones only as a walkie-talkie on the net and bringing very, very low revenue. As we've been describing, that our productive revenue in that sense, the revenue above $0.01, before we introduced and started stimulating interoperator traffic, was actually less than 90%. And of course, that depresses our gross margins significantly, since we still have to carry quite a bit of cost on renting channels and maintaining our transport network. Therefore, improving the quality of the subscriber base and moving -- stimulating subscribers to use it in a more natural way and rebalancing the traffic helped improve the gross margin.

Right. Thank you. And you would expect that to continue going forward as you grow the subscriber base?

Correct. That's one effect. And second effect, we do negotiate now in the Ukraine in trying to lobby to change the interconnect rates. Whether we will be successful or not, particularly given what's happening now in Ukraine, it's a question of time. And we don't know exactly when it's going to happen.

Okay. Thank you very much.

And we'll go next to Alex Kuznetsov with Bear Stearns.

Good afternoon. It is Alex Kuznetsov from Bear Stearns. First of all, let me congratulate you on very strong results reported this quarter. I just wanted to clarify two questions. First of all, we noticed that your cash expenses declined by about 5% quarter over quarter, in spite of a quite significant 2.6% revenue growth. Could you probably highlight the key initiatives that helped you to curb inflation in your expenses?

And the second question is regarding the new regulatory initiative. As you might know, the Russian regulator is currently considering making local fixed to mobile calls free of charge for fixed-line subscribers on unlimited tariffs. Do you expect this initiative to result in elimination of the TPP fees for those customers? And if you do, can you probably quantify the impact on your Company? Thank you.

I will start with the regulation. First of all, we were a bit concerned about this announcement that the calls from their fixed telephones, so the mobile will be included to their subscription fee. But a later announcement and clarification I think were not that scary because actually it was discussion that it would be included to all the unlimited tariff plans and it could be priced for these plans higher. And then there is no impact.

And our recent discussions with the regulator was that they consider to the -- to this price of RUB0.95 reasonable. They don't want to increase it, unfortunately, because we are proposing to have slight increase of this tariff. But at least there were no discussions of a serious decrease. Although this area, of course, is -- has some risk going forward, but we will try to do our best to keep interconnect regime on today's level and maybe even increase it slightly in the future.

On the cash expense, frankly speaking, we are not really working it that way because naturally cash expenses would be fluctuating from quarter to quarter. And it can be explained by numerous factors, for example when you have payment terms for different contracts and so on. So, it's much more important how do we accrue and that's how we actually spend our time, management analyzing. So, it's difficult for us to answer this question. If it's important, we probably can come back to you later on that one.

Okay. Maybe I'll ask you a follow-up question on the interconnect rates. I recall that previously you and other companies operating in Russia highlighted that they want to increase interconnect rates in the second part of this year. Is it still the case? And if it is, do you have a new interconnect tariff in mind?

Yes. We -- our position is that we would prefer to increase the interconnect charges from RUB0.95, which would have to be to RUB1.1. And we think that we have a good economical rationale for that. But unfortunately we can't do it by our own because it needs to be agreed with this part -- with all our partners and of course important is the position of the regulator. So what we are going to do, we are going to talk and discuss it with all our partners and try to convince them, and also try to once again bring economical calculations to the regulator and to discuss it.

Thank you very much.

But the probability of this is very difficult to predict. That's why we have a certain probability. We think it's beneficial for the Company and for the whole market. We will work on that but it's difficult to predict on this stage when it will happen and if it happens at all.

I see. Thank you very much.

And we'll go next to Nadejda Golubeva with Aton.

Good afternoon. Congratulations on great results. My first question is on CapEx. Could you please update us on your CapEx plans for 2007? And, specifically, could you break it down into Russian [areas] and possibly tell us how much of 3G CapEx you might spend in 2007 of the $350m you guide? That's the first question.

Also, is it possible to break down the consolidated general sales and Marketing expenses for sales and marketing and general and administrative?

And just a follow up, if I may also, having seen and I think understood the regulatory environment, competition and your position in each of the markets where you are present, could you please possibly discuss just in general what kind of margin is it possible to achieve in each of the countries? I'm not looking for special guidance but just some general things about it, for example maybe you can achieve higher margins in Russia because of fixed/mobile conversions and in Georgia you probably are looking for some 30% to 40% margin. It would be very helpful. Thank you very much.

The last question to me still sounds a hell of a lot like a guidance, although spread in time. And I would feel uncomfortable doing it for a very simple reason, that, look, we were convinced that it's impossible in Kazakhstan to approximate the margin -- EBITDA margin what you have got in Russia. But currently we're reporting margin about 50%, because the regulatory changes and the way they've been implemented were very difficult to predict even eight months ago.

Also, we're looking and working now on how we can optimize our transport network and so on, and trying to take some advantage out of that and therefore improve margin even further. What can come on the back of it and what will be a third competitor change to that, it's a very difficult and also I don't think very fruitful exercise trying to predict margins in such a broad array of markets and in such broad terms. So I'd probably drop it at least for the time being.

As far as breakdown is concerned, we do provide it in the attachment. Attachment C in our press release has a breakdown for G&A and SG&A where you can see how it's done for each market. And as far as --.

I'm sorry, but possibly I didn't see the presentation but in your press release there is no breakdown at a consolidated level this time.

C, attachment C.

Okay. Okay. I'll look for it.

Where we separate, we don't break down SAC as such into elements of it, but we separate G&A from advertising, marketing and sales, on country-by-country level.

But on consolidated level you can --.

Yes, yes, yes, but in the past you also separated it at the consolidated level. I'm not looking for consolidated SAC but my question was about what was the G&A of the consolidated Company.

Okay, we will send it to you.

We will provide you with that.

Okay. Thank you very much.

And on CapEx, we're talking about $1.6b. That's our budget for this year. And the approximate breakdown is that Russia is about $1b. And I cannot specify at the moment what will be the true impact of this year -- on this year of the 3G, because we're still in the process of discussing with vendors and preparing actually a tender. So only when we get it we'll understand the speed of rollout, we will understand where geographically we'll do this rollout, because it depends also on where we can clear the frequencies and so on. So there are a lot of specific details which will affect that number. But by the virtue of the process, I don't think it will be significant deviation on this $1b. Even if it's exceeded, it's not going to be exceeded by a lot. Right? So it will be a small number.

In Kazakhstan we plan to spend about $200m, [inaudible] $130m, Armenia under $100m and the rest is $170m for the remaining countries.

Okay. So do I understand it correctly that the 3G should go on top of $1.6b and on top of $1b, but the amount should not be very significant.

Correct. And the problem here with the discussion is that, depending on what vendors we get, we might get -- I'm illustrating, right, what might happen, that if a new vendor comes and says, "We're going to swap part of your 2G network and we're going to expand part of your 2G network which is occupied by some other vendor by putting cabinets which maintain both 3G and 2G". And therefore, with the same money effectively, we invest both in 3G capacity and 2G capacity. And it might happen; it might not happen. It might happen in certain regions, it might not happen in the other regions. That's why I'm so careful to say what exact impact will be there.

$300m to $350m guidance over two years, again, we need to explain what it is. We've provided our bid to the tender commission when we bid for the license. And if we take at the current price level, which was available back then on the market, and we say that all those base stations and changes in the core network equipment, if we quantify it, that will be that size. And will it be a little more, a little bit less, will we get a better deal out of the vendors and so on, it all remains to be seen. That's why I'm being a bit elusive on what exactly the number is. We simply don't have enough data. Still, there are too many moving parts to nail it down.

Okay. Thank you very much. But, again, the $300m to $350m, it only includes the price of the equipment here at the moment, when you were outlining this here, and it doesn't include the clean-up cost?

Of course it includes part of equipment and construction and clean-up costs, as I said in a previous call, shouldn't be significant.

Yes, but it will go on top of this, correct?

Well, I can answer yes but if it's $10m it's insignificant and we are on the level of marginal error.

Okay. Thank you very much.

And we'll go next to Vladimir Postolovsky with UBS.

Good afternoon, ladies and gentleman. Congratulations for the fantastic results. Actually, most of the questions have been asked but could you comment a little bit on everything is great, obviously, but if I can pick up on a couple of things that do not look particularly great. It's the pricing dynamics in Ukraine and Uzbekistan. I guess Ukraine we know a little bit about but still if you could comment on what is driving those declines and whether you see any room to, well, any -- whether you think that this trend could be arrested in the short term or when do you think that that might stop? Because obviously we've seen in Russia it could be quite damaging to your business. Thank you.

The logic of Ukrainian pricing was discussed at length in the previous call. I think that currently the market is in some kind of a virtuous circle, right, where -- not virtuous, sorry, vicious circle, that one competitor started lowering the prices, I guess reacting on the loss of the market share. The other big competitor followed and that spiraled very aggressive pricing offers.

What it did, they initiated disproportionate prices on their own networks, and that actually undercut our ability to retain those subscribers who were hunting for okay quality and at the same time having a lower price with on-net for the closed groups and so on. So we had to match it somehow by offering actually subsidized Internet calls and that changed our both pricing and profitability.

I think that the dramatic price reduction which we saw in quarter one is, of course, on the worst side -- maybe not the worst side, but certainly on the worse side -- because it's been amplified by the seasonal weakness, absence of roaming and so on. I think that through the summer we'll see some increase. Whether it's going to be sustainable and at what level it's going to be is very hard to predict at the moment.

And at times we think of ourselves as sort of a small boat between the two large ocean liners and it's very difficult actually to navigate. And the waves which are being made, they are not actually made by us but probably by those two ocean liners.

And at some point in time I think that they have to recognize that same power game we're going to stay, and spending a lot of money at the moment burning and cannibalizing their own revenue streams is probably not justified. It's going to hurt their margins and margin contributions for the MTS and for Kyivstar and Telenor, if they consolidate the company back again, will be quite significant. While for us it's, although negative, with good cost control which we are trying to find now. I hope that within a reasonable period of time we'll get into a breakeven position on EBITDA and therefore it's become reasonably painless for us to weather that storm.

Again, timing of it depends much more on restoring more rational pricing behavior by the large competitors. I don't know, Kent, if you want to add anything on that one?

Not on Ukraine but I can add in Uzbekistan that a good bit of the reduction in ATPM has to do with price offerings that we launched in the fourth quarter in December but that have continued into the first quarter. And because you have a couple of months that those have been in, that has had a negative effect. Like our history in Russia, typically those will ease through the year as you get to the later quarters.

Yes, thanks. And, if I may, another question. Could you give us your current view on likely expansion, obviously within CIS, outside CIS more interestingly, and far east of Russia? Are you talking to Far East Telecom, for example?

I will start with the Far East. We are still focused on getting to all regions of Russia and the Far East is, of course, priority. And we believe that right now we've got more opportunities. First of all, right now we have the national license, so 3G license for the whole territory. So this -- that's a very good document, a very good decision for us. And partly we're calculating the case to build some networks in the cities for 3G and it might be that the case would be positive.

But, of course, meanwhile we are looking for any other opportunities to get to the business with 2G. So we're in discussions and we're participating in this piece of [inaudible]. So we have very active position there and think that we have one of the best -- we will offer one of the best tariffs and that's why there are opportunities there. And also we will participate in this contest for the new frequencies. So we will look for any opportunities to get there.

And as far as outside Russia is concerned, again, I guess I cannot talk about anything specific at the moment but I would probably have to reiterate our view on how we would go about it. We will be looking for emerging markets. We are not going to compete seriously in developed markets and established markets because we don't see how we can add much value there on the cellular side. That's point number one.

Point number two, geographically, we're probably not going to look at Latin America. With less likelihood we will be looking in Africa. And therefore our focus will be on the Middle East and Asia.

Third point, that's unlikely we're going to participate in open tenders where there is a lot of financial muscle being flexed because, although big, we're not that big, to participate in a game like that. We will be looking for transactions which can be done as private deals or where we would be part of the club which is spearheaded by a financial investor and we would be brought in as a technical expert and business model expert in this case who's comfortable with those countries. So that's how we think about it.

I can also tell you that currently our revenue projections and business plans and so on don't include any of the revenue stream coming from there. We view it as a potential but probably potential which will materialize at a somewhat later stage.

Thank you very much.

And we'll go next to Ben Joseph with Nevsky Capital.

[Technical difficulty].

Mr. Joseph?

[Technical difficulty].

Hello?

Your line is open. Please go ahead, sir. We'll move on to Stephen Pettyfer with Merrill Lynch.

Thanks. Good afternoon. I wonder if I could ask two follow-up questions on the strategy, please. Firstly, just as a follow up specifically to your comments there about outside Russia, given that your -- both your strategic shareholders are active or profess to be active in looking in that region, would you consider doing things with them as part of the expansion plan?

And, secondly, could you give us a little bit more color on your specific plans within Russia in the broadband segment? Thank you.

In terms of partnering with our shareholders we, of course, will be open to that partnership. But I think that probably where they spend vis-a-vis chatter would make it a little bit difficult. So partnering with one would probably eliminate the other one and so on. So we, at the moment, are not actively exploring any of those partnership deals, grow and develop together. Although, if any of them would invite us, we certainly would do that.

Currently, we're reacting -- why in general? Probably that requires one comment. Why in general are we talking about it? The reason is very simple, that from time to time we were getting invitations to consider interesting transactions which were done on a private basis, and for whatever reasons - economic, political, whatever reasons - they were done as private deals and we were invited. Until it's been agreed by the Board that it will be a part of our strategy and would be open to consider even those types of deals, we were just rejecting them.

So I would say that currently we are more on the receiving side and actually there is a kind of not very thick but there is a reasonable stream of discussions [technical difficulty]. Therefore, if we're invited we certainly will join. But there is some sensitivity there among the shareholders, clearly, as you know.

And on Russia if you --.

On the broadband, first of all, we are very glad that there is a very big potential in Russia for the broadband Internet access. What we are going to do, we will launch a 3G network and we are going to launch it with HSDP already, which gives the customer a very high speed already. And with this product we are going to compete and we believe that we're very well positioned because we've got already big subscriber base, we've got very good payment settlement system. We've got 100,000 points of sales where the customer can pay us money or buy scratch cards and we've got this managed distribution network business. We're well positioned enough to participate in this big market and that could be a very good revenue stream for us.

I would just strengthen that. Apart from a very strong presence on the market, strong brand and being capable of handling that, we also have very elaborate transport networks. In the cities we have strong optical rings and so on, which would allow us actually to start the services with the 3G provisioning quite easily. And that's what we're trying to explore right now.

Can I ask, as a follow up, would you consider partnering with anyone to --?

Absolutely. Although we have all this experience, we still lack experience on how to run this as a business, right, let's say. And we said that wholesale business, for example, for us, as part of leveraging and sweating our assets more in the fixed line territory, we clearly will be open for participation there.

Thanks very much.

We'll go next to Olga Bystrova with Credit Suisse.

Good evening. Congratulations on great results. Most of my questions were answered already but I do have a follow up on Ukraine and Uzbekistan question. What do you see so far in the second quarter in terms of market pricing environment, promotions from the competitors? And also, in Uzbekistan, you mentioned that you did some promotions there but was that your own initiative or it was, let's say, a follow up from the competitors' previous initiatives?

And my follow-up question is -- second question is on prepaid and postpaid tariff plans that you are introducing currently. Could you maybe elaborate what was the response from the subscribers that transfer to the postpaid plans? What, perhaps, were problems? What kind of usage you see in fees coming in from the same subscribers that are going from prepaid to postpaid plans? Thank you very much.

Okay. Well, first, to follow up on Ukraine and Uzbekistan, in Ukraine, since our introduction of a new tariff in the middle of the quarter and competition's in the middle of the first quarter, there really have not been any significant moves up or down in pricing so far. So there's nothing that we can point to that would say the second quarter should be better or worse from a pricing regime than what we saw in the first quarter.

In Uzbekistan, in addition to the promotion of it, we did promotional activities. So did our leading competitor there. And, frankly, with two of us having a primary share of the market and trying to garner as much of the incremental market share in the early stages, we're both going to be competing for this. So it is, at this point, something that both competitors are promoting when it makes sense and trying to drive the business that way.

On the postpaid we just launched, we launched it in May across Russia. That's why it's difficult to give some numbers at this stage. But we have serious hopes because the postpaid system is very convenient for anybody. In Russia it was not developed very much because we didn't have any credit history of the subscribers. Right now, there is credit bureaus, there is more -- we have more experience with our subscriber base and we understand who we can trust, whom we can't, at some stage.

That's why we will present it to subscribers. And we believe it could drive the usage because, when subscribers is migrating from prepaid to postpaid, they usually start to talk more and in general we have three times higher ARPU on the postpaid subscribers right now. So there is a good hope that, with the growth of income of Russia and with our good offerings, we can increase our share in the segment of the wealthy subscribers and also increase the revenues from our existing base using this new service, new offer.

Okay. Thank you very much. And, if I may, just one more small question on data ARPU. What is it currently in Russia in -- what was it in the first quarter?

The share of value-added services from total revenues was 16.7%, which is some growth from the previous quarters, partly because our good evidence which Kent was mentioning, we had an interesting new proposals on the market. And I'm glad to say that the total revenues from value-added services is a record in all times in Russia. But also we need to mention that seasonally first quarter is good because usually during wintertime people are more sending messages and using a different type of value-added services.

Okay. Great. Thank you so much.

And we'll go next to Alex Kuznetsov with Bear Stearns.

Good afternoon. I have one more follow-up question. I would like to ask you if you can give us a flavor on your 3G network deployment project. Could you share with us some key financial assumptions in your business case, such as ARPU, EBITDA margin and possibly number of subscribers you are hoping to achieve by the end of this year or by the end of 2008?

The fundamental difference and the fundamental problem with this question we have to answer would be that it -- for us, it's an incremental investment which is very heavily intertwined with our investment in 2G. Therefore, to discern 3G subscribers and 2G subscribers and actually eliminating [inaudible] there and so on, and separately calculate ARPUs and EBITDAs and so on, is very, very difficult.

We built our case predominantly on using and considering 3G as an increase of capacity to our voice, and slightly increasing portion of the data. Those were the primary drivers. Taking into account that we virtually didn't pay anything for the license, right at 40,000, it's a relatively free resource to us. And, actually, our capital commitment is also pretty thin, given that we need to meet our license requirement. Our attitude towards this project is that we will invest as we grow and we'll see how these services develop and how successful we will be migrating this, and therefore not overexposing the Company. That's how I would handle it at the moment.

Okay. And may I ask you one more follow-up question on the tax issue? I recall that there was a tax claim regarding taxes underpaid in 2004. Is there any progress regarding recovering or maybe abolishing of this tax claim?

Actually, well, the deal is going on. Today, there was a hearing which -- in the third instance which sends the case back to the first instance, so to examine more carefully all the details and facts and so on. So that gives us a hope that we will prevail. But, generally speaking, nothing we can report as of now.

Thank you.

We'll go next to Alex Wright with UBS.

Yes, hello. Just a very simple question, and apologies if I've missed this detail, but could you tell us, when you redefined your active base in January, how many active subscribers were essentially cleaned up at that time, please, just so we can see what the underlying net change was?

Actually, this tightening effect was approximate -- slightly more than 1m subscribers. And, actually, these subscribers were bringing revenues, because actually the story is very simple. They had a positive balance but they were churned. And -- but still we believe that, because they were churned, it's better to -- not to keep them as an active. And the impact was slightly more than 1m and we believe that right now we've got tight enough but made a stricter but more correct judgment of the active subscriber base.

That went into effect January 1.

Okay. Thank you. And, just a follow-up question, you've helped to -- continued to provide the subscriber and ARPU data and so forth on the old definition. Will you continue to do that going forward for some time as well?

Yes, yes. We will and you can find all of those data in the attachment. We still do believe that what we tried to achieve with this is to show and communicate with the market on the same terms as management thinks about it, because we effectively do not discuss it at our management team meetings, the registered subscriber base. If anything, we less and less discuss three months and look more into one month and one week activity, trying to steer those parameters. So we made this change to reflect more accurately how we view the market. But, of course, for the convenience purposes we will be providing the registered data as well.

That's very helpful. Thank you very much.

We'll go next to Sergei Arsenyev of Goldman Sachs.

Hi. Good afternoon. Just another question on the active subscriber base. Do you have an estimate of the markets, overall markets in Russia, on your definition, three month definition?

The answer is probably no. There are different data which is pieces of data which is floating around. And, clearly, if you take three months from us and three months from MegaFon, we are more comparable now, right, and the MegaFon data is closer to us than it was before.

The data we saw published by [inaudible], for example, and so on, suggested, if you take the interviewing people on the street and from there deriving the actual market share, we saw that market share of MTS should have been probably somewhere in the high 20s. And if you can reconfigure from there, you probably will get close. I hope that the agencies which do this analysis will start considering the active base going forward and try to get it out of MTS as well.

And, just as our estimation, we hope that our share of active subscribers is slightly higher than -- or the registered. Then that would be our further focus. So the focus of VimpelCom management is to keep strong share of active subscribers and keep and even try to grow their share of total revenues of that on all the market.

Okay. Thank you very much.

We'll go next to Alexei Yakovitsky with Deutsche Bank.

Yes. Good evening. Congratulations on very good numbers. I have -- actually my main question has been answered, so I'll ask a different one. Do you see any changes in the competitive environment in Russia in the second quarter? I'm assuming no but I'd like you to confirm that this very benign disciplined environment is still around in Russia.

And a related question, I believe on a number of occasions you suggested that you'd be comfortable projecting 10% usage growth per annum in Russia over the next couple of years. So far, I think we've seen a somewhat stronger trend in Russia. MOU in the third -- actually, in the fourth quarter went up by 19%, in the first quarter was up 18% year over year. Can you -- should we expect the same rate of increase to be sustained into the subsequent quarters? Would you now be a little bit more aggressive in your, I won't say projection, expectations for usage growth in Russia against those subsequent quarters? Year over year, I'm talking about. Thank you.

I will start with the usage. I think that there is opportunities for growth in usage. But we need to remember that the positive effect which we have was helped by the [TTP] effect, which was introduced from July 1 of last year. That helped us to drive some usage, for example from the subscribers who are right now getting a majority of the calls that are incoming calls for free. So some poor people in the villages receiving only incoming calls from their relatives living in the cities can right now afford the mobile phone and that's driving a bit usage.

Still we believe that potential in the market is serious and if there -- it will be a continuous growth of economy, and of course we will try to do our best to stimulate the traffic, there is serious opportunities.

One more addition to that. I guess the key element where we do not know where the traffic is going to grow, is going to slow down, it was the benchmark. Is our benchmark U.K. or our benchmark is France? And that's a very difficult question to answer. So, at one point in time, actually, your MOU starts flattening out. So far, we see good growth.

And also one element which I probably would also like to mention as a driver, growing above 10%, was growth of fixed to mobile traffic, which seems to be flattening out right now. It seems to be stabilizing around 7% of total traffic, where a year ago it was 3%, 4%.

In terms of business environment, no serious change in the second quarter. The only thing I would like to mention is that Tele2 is an aggressive player in a number of regions and they just recently launched in a number of markets. Of course, they're very little players. But, on the other hand, we see mature behavior from the big players. That's why, in general, I will call the overall environment as very competitive but, on the other hand, relatively healthy with the mature behavior of the big players.

Thank you. Thanks.

And we'll go next to Ben Joseph with Nevsky Capital.

Hi there. Thank you for the call. Just two questions. Can you please tell me if there were any ESOP expenses in this quarter? If so, how much and where they were accounted for?

And my second question. Can you just provide some clarity on what makes up the other expenses line, please? Thank you very much.

Actually, ESOP accrual was approximately the same this quarter as during last quarter.

And, as for other line, as long as we consider that the major lines are G&A and sales and marketing, so we provide the split in the attachment of the press release country by country. So we think that that is the level of information which we can give.

So you're not able to give us any more color on what comprises the other expense line in the accounts, the 12,991?

You mean other expense in -- below operating income?

Yes, exactly, exactly, the 12,991.

No. Actually, there are some -- there could be different things which go to that line. We can discuss and, yes, and come back to you with this. But this is a pretty standard set of numbers which are going in there and --

So can we expect similar amounts in the subsequent quarters?

No. It varies because it's not very -- a stable expense. For example, there could be some penalties or something like this in that line. So, as you can see, for example, comparing the previous year first quarter it was $4.5m. Now it's $5m. But, again, if you want details we will send it to you.

Thank you very much.

And we'll go next to Leila Govi with Egerton Capital.

Yes, can you hear me okay?

Layla, go ahead.

Okay, sorry. I'm sorry if these questions have been asked already, but it was just on -- most have been answered. It was just on Russia. I was wondering why the G&A expenses in Russia were growing faster than revenues and why your commission expense is starting to grow again. And I'm talking year on year for everything. Why did your commission expense seem like it's growing again year on year, after a decline in 2006? Maybe there was a very easy comparative last year, I'm not sure, but I was just wondering about those two things. Thanks.

First, on the dealer commission one. Our basic structure is to pay the dealer the percentage of the revenue that the subscriber brings in for several months. And as our total revenue per subscriber is increasing, and the percentage is fixed that we pay them, it would naturally go up a little bit. It's not a change in structure and, frankly, it is going to be consistent with growth that we normally have in revenues. So it's definitely a healthy dynamic.

On G&A, I would say that there is serious growth of expenses linked to revenues, which we still put to the G&A. As an example, the percentage of commissions on the payments, scratch cards, and even this telecom fund, the tax is also bringing additional revenues. But also important to mention, that ESOP expense was serious on the first quarter and nearly none a year ago. During this quarter, our share price increased more than 20%. So congratulations to all our shareholders. But, of course, this brings some revenues which are impacting P&L.

Okay. Thank you very much.

And there are no other questions at this time. I'd like to turn the conference back over to Alexander Izosimov for closing remarks.

All right. Thank you very much for your attention. As always, a lot of questions. And if you have any more questions, please do not hesitate to contact us and we will be happy to give you all necessary clarification and explanation. And, with this, have a nice day, have a nice weekend and goodbye.

Thank you, everyone. That does conclude today's conference. You may now disconnect.