VEON Ltd (VEON) 2007 Q2 法說會逐字稿

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

Good morning, and welcome to VimpelCom's conference call to discuss the Company's second quarter and six month to 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 one, the Company's strategy and development plans in Russia and the CIS, two, market growth and the competitive environment in Russia and the CIS, three, 3G development, four, the outcome of 2G license tenders in the Far East, five, access to external funding resources and, six, projections related to the Company's capital expenditures.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including risks detailed in, one, the Company's Press Release announcing second quarter and six months 2007 financial and operating results, two, the Company's earnings presentation entitled Presentation of 2Q 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 at the Company's website at www.vimpelcom.com.

In addition, the Company's second quarter and six months 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 second quarter and six months 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 include the reconciliations of non-GAAP financial measures presented on the 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. Alexander?

Thank you, Peter. Hello everyone, and 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 Russia, Kent McNeley our Chief Marketing Officer and Alexander Boreyko, our new Director for International and Investor Relations. Today's presentation will start with a general overview of our performance in the second quarter of 2007 and after that we'll review each of the markets where we operate in more detail.

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

Second quarter results continued the positive trends which we saw in 2006. Year-on-year our revenue grew 53% and OIBDA grew almost 60%. The increasing scale of our operations and increasing margins [CIS] improved margins both in absolute terms and as a percentage of revenue. OIBDA margin in the second quarter of 2006 was 50.1% and now it is approximately two percentage points higher. The increase in net income was (inaudible) at 84% year-on-year growth.

[In this case] net income grew primarily due to slower capital expenditures first half of 2007, which limited quarter-on-quarter growth in our depreciation charges in Russia to [almost] [2%]. [Another factor] is that this quarter will also have not seen significant fluctuations (inaudible) or extraordinary tax issues.

While we are pleased with the high growth of net income, we should keep in mind enhanced volatility of this figure. Our cash generation grew while our capital investments are staying at approximately the same levels. As a result, our free cash flow on the last 12-month basis is approaching $1b. On cash generation we forecast good position to expand geographically, moving to adjacent business areas and support our dividend policy.

Based on the strong cash generation, our cash balance at the end of June climbed to $951m with (inaudible) cash to pay dividends [at] approximately $330m in July and August for this purpose. We also acquired the [Tele2] operations in [Inkud] a (inaudible) player in local mobile market for 232m (technical difficulty). While leverage ratios continued to improve, [our debt capacity] and giving up solid ground with expansion.

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

Thank you, Elena. And let's start with Russia; our largest and most developed market. Overall, the telecom market in Russia and our results continue to be very strong. We have posted almost 20% quarter-on-quarter growth of usage. Seasonal MOU growth was further stimulated by summer promotional activity, which led to a temporary decline of our average price per minute.

Nevertheless, ARPU grew by 13% and our active subscriber base increased by almost 4%. Growth in ARPU and active subscribers led to a strong good [percent sequential and 43% year-on-year increase in our revenues in Russia. Constant focus on efficiency and increasing scale of our operations led to a decrease in SG&A expenses as a percentage of revenues in its [turn], resulted in OIBDA margin increasing to 53.4%.

Our CapEx in Russia as a percentage of revenue continued to decline in the second quarter and for the first time dropped below the level of 20%. This year we have so far invested just under $400m. As our annual CapEx profile is traditionally skewed towards the second half of the year, we believe we will remain in line with our previous CapEx guidance of approximately $1b for Russia for the year 2007. Beginning from the first quarter of 2008, a substantial part of our CapEx in Russia will be directed to the development of 3G network, but it is not going to have any significant impact on this year's numbers.

Now, a couple words about the status of 3G development. Several weeks ago we launched a tender for the 3G network equipment. We expect to complete the tender process and commence construction of the network in the fourth quarter of 2007. Put into license terms, we must install approximately [3.4 thousand] 3G base stations within the three years and a total of 6,100 base stations within five years.

There is a number of uncertainties which do not allow us to be more specific about our plans in terms of timing and CapEx. These include 3G equipment has not yet been certified in Russia and the delivery of the equipment may not start until certification is granted. [Frequency cleanup] process is at an early phase and its cost and timeframe are unclear. The tender process has just started and we need to wait for its outcome to estimate the applicable pricing level.

Nevertheless, we expect to launch the 3G network in commercial operations in the second half of 2008. And naturally, we intend to meet all our license obligations. As a total CapEx for Russia going forward, we expect to remain within our long-term targeted CapEx level of 15% to 20% of revenue.

Now, about recent developments in the area of licensing and regulation. So far we have been denied 2G license in some of the regions of Far East, the total population of 5.9m. Although we now have all Russia 3G license, we can see that it is important to have a complete 2G license coverage to have the most cost effective operations of the regions. Therefore, we are persistent with getting the licenses. In July 2G frequencies in a number of Far Eastern regions have been tendered with a result that surprised everybody.

Although we won licenses for three small regions, we have challenged the tender terms and conditions. Russian Federal Anti-monopoly Committee supported our position, asking courts to review the results of the tenders. Following the controversial results of the tenders, the newly created media and telecom regulator [Vishario] can change the terms of the remaining tenders. Conditions appear to be much more fair and transparent and the new tenders will take place in October.

Before reflecting on our performance outside of Russia, I would like first to draw your attention to the growing contribution to our business from the countries of the CIS. In the second quarter, 26% of our year-on-year revenue increase and over 25% of our OIBDA growth came from the CIS. In terms of subscriber growth, almost 70% of new additions came from the CIS countries. Improving profitability of the CIS business is sliding upwards the margin of the whole Group. In the second quarter, OIBDA in the CIS was 45%, a significant improvement from 31% recorded a year ago. All of this underscores the importance of the CIS to our current performance and very good growth potential for this part of the business going forward.

Let's now move to Kazakhstan, our second-largest market. Again, as in Russia, the second quarter results were very good. [Business] grew by almost 23% compared to the first quarter, ARPU increased by more than 11% and the number of active subscribers grew by more than 10%, maintaining our leadership position. Our financial performance in Kazakhstan in the second quarter of 2007 was, again, record breaking. Our revenues increased by 25% compared with the first quarter and by more than 85% compared to the second quarter of last year.

OIBDA increased by almost 30% on the sequential, and almost 137% on a year-on-year basis. OIBDA margin reached 53.7%; a record for the Company in Kazakhstan. Margin was lifted by a surge of promotion-driven on-net traffic. However, even excluding this impact, the margin was strong reflecting the underlying strength of the Kazakhstan business.

While we are still in the network build-out phase in Kazakhstan, our CapEx as a percentage of revenue are rapidly declining. On a last 12 months' basis, CapEx fell to 37% of revenue in the second quarter of 2007 as compared with 69% recorded for the same period a year ago. We believe our strategy in Kazakhstan has been working very well and we intend to continue to strengthen our position on this market.

Now, let's move to Ukraine. We're very pleased with the good progress in this market. Our revenues almost quadrupled year-on-year and grew by 45% compared to the first quarter. At the same time our SG&A expenses grew by only 25% from the start-up level a year ago. [As it continues] to usher as a path towards positive OIBDA.

In the last 12 months we have almost quadrupled our subscribe base and our market share continued to grow, reaching 5.2% in the second quarter. We feel that we have reached the scale when we can proactively improve the quality of our base. With this, we have tightened our churn policy and rebalanced our tariffs which, in combination with the seasonal factors, led to a quarter-on-quarter [ATP] on growth of 18% and even more impressive 40% increase in ARPU. You see the Ukrainian business is getting on its feet and we are optimistic about its future.

Let's now look at Uzbekistan. All financial performance in the second quarter in Uzbekistan was good with a growth in all financial parameters. Our key priority in Uzbekistan continues to be stimulation penetration and subscriber growth in this smallest populous country in Central Asia. We have done it successfully so far and it is illustrated by our 174% year-on-year subscriber growth.

Penetration rate in Uzbekistan at the end of the second quarter was still under 15%, which means that the phase of intensive growth is yet to come. We're preparing for this by investing in increasing the number of our offices in the country, improving the quality of the network, support systems, building infrastructure and distribution channels.

Let's now move to our new markets and we'll start with Armenia. The Company continued to show healthy operational results with OIBDA margin exceeding 50% in the second quarter of 2007. Our operations in Armenia are undergoing our standard integration program where all major systems, platforms and the processes are being harmonized with the rest of VimpelCom Group. 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 NGN solution.

Entry 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 CapEx budget for Armenia is below 100m. Assessing our current traffic position, we can say that we are dissatisfied with the absolute level of our market share in Armenia and building it will be our main near-term priority. To address this issue, we have developed actions which we believe will strengthen our commercial operations and build market presence during the second half of 2007.

Now, a couple words about Georgia. We launched our operations there in the end of the first quarter. We are currently focusing our efforts on network rollout and the development of sales and distribution channels. With 14,000 subscribers who are active by the end of the second quarter, our operations there are still at the start-up phase.

On the other hand, in Tajikistan we are very pleased with our developments and in the second quarter of 2007 the Company reported 81% sequential growth in net operating revenues, [add by] 41% growth in the number of active subscribers and 16% growth in ARPU. The Company enjoyed very strong growth momentum, continuing to gain market share in the second quarter. Seeing this, we decided to increase our sales and marketing investments. At the same time we are pleased to see that, even after this increase, Tajikistan's OIBDA turned positive in the second quarter.

Now concluding our presentation, I would like to say that we had a very good first half of 2007 and continue to benefit from the economic growth in the regions where we operate. [Neglecting not] strengthening our business and improved margins in Russia, while the CIS is becoming an increasingly important source of growth.

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

Thank you. (OPERATOR INSTRUCTIONS). And we'll take Sean Gardiner from Morgan Stanley. Go ahead.

Yes, hello, thanks. Can you just run through where you are in terms of your capacity utilization on your networks in Russia at the moment? Because you keep positively surprising on the usage front, but you're operating your -- or are surprising us on the usage front, you're not raising your CapEx guidance at this stage. And also if you can address, in that same question, just your utilization of half rate; how much of your calls are going at half rate at this stage? Thanks.

Actually, as we announced earlier, we (technical difficulty) our key strategy (technical difficulty) of course some of our growth of the traffic is promotion driven. As an example, this quarter we see [two-year] growth of on-net traffic with the help of special [summer promotions] with temporarily promotion and of course balance the tariffs. We have subscription fee on these different tariff plans region by region. And the volumes then in price of this fee depends on the capacity on the network. So as soon as we have capacity, we'll make it smaller. As soon as we don't, we'll make it higher and then we continue to invest in the network.

So actually, we have the relatively balanced situation. Of course, we use the half rate broadly and we try to ensure that we have the quality networks across Russia, but very well used. We try to use all possible capacity to make sure we have the biggest.

We'll take our next question from Sergei Arsenyev of Goldman Sachs.

Hello, good afternoon, can I just follow up with a usage question and follow up with a related question? On your usage growth, the 20% sequential growth was way above seasonality and you do mention promotion campaigns. I'm just wondering if you can highlight which was the specific promotional campaigns which brought this -- the very high usage that we saw in the second quarter.

And the second question is also relating to that. With the usage growth that we're seeing, we also saw a national roaming agreement that you signed with Tele2. How does it tally with the capacity utilization rate that you've got at the moment? And also I'm just wondering whether maybe you can share some details on that, what are the monthly -- you can't disclose the pricing terms, but if you can maybe describe what it entails and whether you see this becoming a trend in Russia, that would be very helpful as well. Thank you.

First of all, we need to say that we have specific (inaudible) for campaigns. There we additional stimulated on en mass usage, for the special price subscription fee for giving some three favorite numbers with unlimited on-net calls. And this promotion, of course, increased usage but it's a temporary action. Actually, we started it in the middle of May and it will end up in August and, actually, after that the average price per minute will go up but, of course, the usage will also -- and the usage will go down. So we can see that this is temporarily a promotion which is for summer.

As for the Tele2 agreement, actually, it's very good both beneficial agreement when for certain volumes we give them certain discounts. So it will not seriously change their competitiveness because their prices should be higher than, for example, our on-net tariff for our subscribers. But still they get some discounts and we get some additional traffic. But according to our estimations, it will not influence our overall usage because their volumes are too (technical difficulty).

Right. And then what is the average discount to your retail rates, for example?

Unfortunately, we don't disclose that; it's a very commercial (technical difficulty).

Okay, thank you very much.

And we'll take our next question from Alexei Yakovitsky of Deutsche Bank.

Yes, good evening, congratulations on the strong numbers. I have two quick questions, if I may. On the [yield] per minute in Russia you described it as temporary, the decline. You described the decline as temporary and I wonder if you can elaborate on how temporary you think the decline is and whether that means that you've seen some pick up already in the third quarter. If you could comment on some third quarter trends that would be helpful and (inaudible).

On Kazakhstan, where you're posting very impressive usage growth, even more impressive than in Russia actually, I wonder if this is still [a long way after] the result of you successfully turning around the operation a couple of years ago, winning market share both subscriber-wise and obviously revenue-wise, or you could actually argue that this is -- we're seeing the beginning of the same thing as in Russia but earlier. Because the market in Kazakhstan is [open] and you're not seeing that much competition and, therefore, you're able to unlock the underlying elasticity potential, push up usage at an earlier stage of the market's development. It would be helpful if you could shed some light on that. Thank you.

I'll take your first question regarding temporary. The promotion that we ran, as Nikolai said, started in mid May and will continue until the end of August, so you will see two months of impact of that in the third quarter as well. The action is clearly one that we will reverse as the promotion ends and so beginning September the downward drop in ATPM should reverse itself. We did this overall to have an impact on [customer] loyalty in our favorite numbers but, frankly, in the second quarter it probably had a very minimal affect on the total ARPU.

And going to Kazakhstan, the nature of the promotion which we deployed there and here actually, inflate what we said the scaling up of our operations and ensuring transferability of the products between the markets. So the nature of the promotion and the execution of the promotion was very close to what's been done in Russia. However, the impact is a little bit different because the market situation in Kazakhstan is a little bit different. First, the ATPM in Kazakhstan is significantly higher and here we're talking three times higher -- sorry, double that of Russia.

And at the same time, Interconnect charges are extremely high, so everything which we do in terms of stimulating traffic to migrate on-net would generate better margins for us, as well as growing ARPUs and growing usage. So the difference is that we have much more constraint in Kazakhstan in terms of capacity than in Russia. So we have to be careful how aggressive we go with these promotions in the markets where we are more restrained. In principle, we always have a compromise on our hands, whether we run some deterioration on quality, or we invest much heavier up front in order to maintain the quality [standards].

So we actually currently chosen probably more of the first option and, therefore, we're seeing some deterioration in quality temporarily present in some of our regions. But we are very careful in monitoring our network utilization factor and a lot of investment decisions are actually driven by this.

To illustrate, we're changing allocation of the assets, so you don't see it in terms of overall CapEx number increase, but the nature of the investment changes. For example, we are prioritizing, slotting in additional TRXs into the base stations where we see surge of traffic. And this is of course much, much, much cheaper than building new base stations.

And using this as well as more intensive use of adoptive [multi] rate and so on, so all those technology [core] solutions allow us to secure and freeze actually more return from our assets.

Unfortunately, in Kazakhstan we're in a less generous position and we already squeezed as much as we could. And don't forget that in Kazakhstan we started with more, which was much lower than in Russia and, therefore, actually by dropping a little bit of price here we're bringing it to a more natural composition of ARPU.

Okay, thank you.

And we'll take our next call from Alex Kazbegi with Renaissance Capital.

Yes, good evening. On Russia, can I just get a number maybe on your (inaudible) in terms of how much is that contributing now to the revenue line and generally what are the new products we expect to see [in terms of] over the next, let's say, half a year before the 3G is launched?

You also mentioned on Ukraine that [due to] the change that you have been introducing new tariffs and, given that they were for a while below the Interconnect, I was wondering if you can give us a more precise view on where they are currently from third quarter, I guess.

And the last one is a fairly general question I guess, but I was wondering if you can tell us whether you see any merit in buying a fixed line operator in Russia.

Alex, could you please repeat your first question on Russia because the reception wasn't so good. We didn't hear it.

Yes sorry, value-added services, I was asking whether you could share with us where they are currently as a percentage of revenue, whether you see any new initiatives launched before the 3G which can increase [these as a] percentage.

I'll just comment on value-added services. The absolute revenue that we had on value-added services this quarter was an all-time record, but it actually still went down as a percentage of revenue, as it normally does in the second quarter. So there's a seasonal effect. It dropped it down to about 14% of service revenues in the second quarter.

And we do continue to launch some initiatives; we've launched a voice messaging initiative which should help the drive, we have been in various markets promoting MMS which should help the drive, and there are some other activities which I would rather not speak about for competitive reasons in the second half which should have modest affect. But certainly, there are lots more opportunities that will come into the [pool] with 3G.

I might also just comment for a second on tariff plan development in Ukraine. We did launch, as you said, a tariff which had off-net prices that were low for the Interconnect. We launched that in the first quarter actually, and we continue to maintain that and it continues to perform very well. What it does is it brings us a much higher quality subscribed and, coupled with the number of consumers that we brought on previous tariffs, now has given us a very good mix of quality and active subscribers. So we're continuing to use that as we go forward.

And I will add that this plan is profitable because we make money on the call set up because still their price per minute is a bit lower than Interconnect, but cost set-up helps us to make profit on this plan.

And as far as acquisition of the fixed line operator is concerned, it's a fairly multi-faceted question. If you would ask me whether we're interested in going full fledged [MRK] type of business, the answer is probably no.

However, really there is a lot of merit to consider an integrated operation when it goes towards corporate world, because very often these services are bought, consumed, built, designed in an integrated fashion. Also I think it goes very well together when we consider long distance, because a lot of our investments in the transport network, actually, even local transport network, the optical loops in the cities, can benefit and there is a lot of a synergy in that.

And clearly there is a lot of interesting overlaps when we talk about Broadband. Because I cannot imagine that in the modern world, with the advance of HSPA and technologies like HSPA and the capacity like this, that the mobile operators worldwide will stay away from attacking that very attractive and fast growing market opportunity. And instead of competing head on, we might explore some combined offers and so on. So from that perspective, as a purely theoretical notion, [perhaps you can construct] a composition which would be fairly synergetic and beneficial to our business.

Okay, thank you. Can I go back to Ukraine just for a second just to clarify. Because you said that the tariff situation is changed there but from the answers I understood that (inaudible) has helped you to slowly deploy and include a subscriber base but the tariffs themselves are still pretty much at the same level as they were in the first quarter. Is that correct?

The change that I was referring to, the lack of change was (technical difficulty) tariff that I specifically thought you were referring to. One thing that has changed on Simple Things, which was our original tariff that we launched in Ukraine. We had very, very low prices for on-net minutes and, as a result, we're getting very high MOU with very little revenue. We have raised those tariffs. The phasing of Simple Things, which represented at the time almost 70% of our subscriber base, has had a very positive impact on both ATPM and on ARPU.

Okay great, thank you very much.

We'll take our next question from Rhys Summerton from Citi.

Hello, good afternoon, just a quick question going back to the earlier ones on-net traffic that you've been able to capitalize on in Kazakhstan. Would you mind telling us what percentage on-net traffic is in Russia and Kazakhstan right now?

Russia, 60% of our total traffic is on-net.

And Kazakhstan?

[If you give us a second] we will come back to you on Kazakhstan with [a larger] number.

All right, thanks.

And B-line to B-line is about 70% in Kazakhstan.

All right, perfect, thanks very much.

The next question comes from Herve Drouet from HSBC.

Yes, good afternoon, my question is regarding 3G. Can you give us an update on the availability of the 3G frequency and if there are any delays? Do you foresee any issue with your license commitment but also your planning in term of bringing additional capacity in your network? Maybe, in other words, at the moment are you holding up a little bit on your CapEx in 2G before getting a bit more visibility on what may happen on 3G? Thank you.

Starting from the end of the question, we're actually rolling because of the growth in traffic as you see, [that] the capacity which is inside a network can accommodate surges of, let's say, 10 to 20%. But beyond that, it would be very difficult so, clearly, we need to expand the capacity right now; that will be happening.

Second, the 3G picture is uneven across the country and the frequency availability and complexity of [team up] would be very different. The difference it is somewhere, it's pretty straightforward, somewhere like particularly in Moscow it looks rather tricky, therefore, it's a complex agreement procedure are needed.

Basically, how it works is that in Russia, unlike in Europe, we have to co-exist with certain military users in the same frequency range. But as they use, for example, very narrow band or very directional band, we can exist around that band but cannot encroach on their territory. And all of that requires pretty meticulous analysis and work trying to squeeze out maximum of free space and then somehow develop this usage.

So that will take time and that's what we referred to during our presentation that it is unclear at the moment how, in certain spaces in certain places, how fast we can go. In any case, our commitment currently, a license commitment, is related to 39 cities and that's where we have to develop the networks in the first three years and that's effectively what we will be executing. If we see that the up-tick on the services is faster than we expected then, of course, we will reconsider the intensity of our investments and the speed with which we continue the rollout.

Okay, thank you.

And our next question will come from [Veshlav Shylan] from UBS.

Hello, this is [Richard Vashellion] from UBS, a couple of things. Can you please tell us the churn rate in your operations in Uzbekistan, in Tajikistan and Armenia, please?

Yes, the churn rate in Uzbekistan is high for the second quarter at just under 30%. The reason is that we did a good bit of cleaning of our overall subscriber base and also because, in the first quarter, CrossCom, their licenses were suspended and we picked up a number of subscribers from them and then their license was later installed and that then tended to drive the very large churn. In Tajikistan it's extremely small, only about a percent, but it's very early stage so I don't know how meaningful that is for right now. And the third country you wanted?

Armenia.

14% and all these numbers are on the annual basis, so it's a quarterly number but calculated on an annual basis. (Inaudible).

Sorry, did you say 14% in Armenia?

Yes.

Okay. And could you please give us your targets for the year-end '07 debt to OIBDA on a consolidated basis, and also sales to revenues on the consolidated basis? I'm sorry, what am I saying, CapEx to revenues.

Debt to OIBDA was the first one.

No. We still think that in terms of ratio we will be in the target levels which we normally say that debt to equity should be around one, debt to OIBDA below two. But currently we are well below that targeted level and we think that's still, until the end of the year, we may maintain the level which we have (inaudible). Currently our debt to equity is 0.6 and debt to OIBDA 0.8.

Of course, it depends on the development in our capital investment and acquisitions because we were paying previously that we need -- our funding only increased over the acquisitions. And so the level of that additional funding which will, of course, influence the debt level, and the ratio level will depend on the progress in that area.

Do you plan to complete on your [obo bond] issuance this year which you've registered with the [special] bank, or sorry, for the 15 billion that you registered?

Well actually, it's the same issue. If we will have adequate [packaged] profit for acquisition then, yes, we will proceed with this, but you know in accordance with the Russian legislation we can deal with the issuance of that Bond within a year after the registration. So we have time to see how we will really invest that money.

Okay. And the CapEx to revenues guidance -- sorry, your targets for year-end '07?

We don't target on that one because from there you could derive the revenue and we don't fall for that. So -- but in general we say that our CapEx guidance is 1.6. We'll stay with guidance for 2007. And for Russia we will probably now maintain, even including 3G investments, we will maintain the quoted of 15 to 20.

Okay, thank you.

Our next question comes from Alex Kuznetsov from Bear Stearns.

Good afternoon. Please accept my greetings on the strong results. I have a couple of questions. First of all, could you comment on 3G license allocations in Ukraine, please? I know there were many comments from several senior officials, but it looked like there is no progress in any direction.

And second, I know there is a still [slow operating Kazakhstan] and it looks like so far it has not been very active and it didn't affect the market landscape, but do you see any material risk from the (inaudible) operator in Kazakhstan, especially since you see some benefits from convergency? And this other operator is isolated with the incumbent? Thank you.

Let's start with Ukraine. We cannot really say much about 3G license because it's been -- the whole process has been suspended, effectively. There were different attempts, there were different discussions but I wouldn't expect much happening until this all has been sorted out, in terms of the government and the new elections and all this stuff. So when all of this stabilizes hen we might see the sessions reopening.

In terms of Kazakhstan and activity of the third operator, we see some presence of that operator, although it's limited itself for the main cities only. And, therefore, it's playing kind of a niche tackle right now. In terms of how dangerous is the affiliation with the incumbent, actually, the second operator is still affiliated with the incumbent and they're owned by [KAS Telecom] for the time being. We expect that this ownership structure will change (inaudible). And we don't see that they derive any significant benefit from that for the time being.

Thank you very much.

Next question comes from Stephen Pettyfer from Merrill Lynch.

Thanks, good afternoon. Can I just ask you a question, please, on your strong margin performance, particularly in Russia? I'm just wondering, looking at your general and admin costs specifically, they seem -- are we getting to a point now where that cost level is, dare I say, stabilizing, or if you can see that starting to slow, the growth there?

We would be tempted to say yes, it is stabilizing, but the thing is that a lot of costs, a lot of elements there they are still linked to expanding subscriber base, expanding network. For example, maintenance and so on, that all [keeps] there and as long as we continue to expand the operations, the cost which is supposed to be fixed, they can remain to be semi-fixed.

We keep a very close eye on it and naturally we are trying to restrain the expansion of these costs and we are launching different programs, actually have been launched, inside the Company to monitor more carefully what we do and different [CapEx] reduction and so on. So we are shifting our gun fights, you can say, slowly but surely toward paying much more intention to extracting efficiency from the cost base.

Can I say that this process has been completed and that's the level of G&A at which we're going to operate? I probably cannot yet.

As a follow-on then, can you, given your improving efficiencies there, can you see your overall margin rising going forward?

That's an endless debate, right, and our answer always was that margins don't happen to you, you make them happen to be at a certain level. And clearly we're gaining efficiency and at some point in time we will allow this efficiency to fall through to the bottom line if we don't see better application for the freed up resource.

But if we see that, for example, we can pursue new development opportunities, let's say, Broadband, Broadband will require creation of completely new sales force, effectively. It's creating something completely different in terms of operating structures. And we will probably spend some money there which will depress, to some extent, our margins. However, said all this, one can clearly say that our previous guidance we said that margins will be in the quarter between 45 and 50, now we see that it's more closer to 50. So we will be targeting margins around 50%.

Thanks very much.

Our next call comes from Olga Bystrova from Credit Suisse.

Good evening, congratulations on strong results. My question is relating to Armenia, actually. The Mobile business there has gone very well in the second quarter. There was a little bit of a pricing -- effective decline but very strong usage growth. I would really appreciate if you could talk a little bit more about the competitive dynamics of products that you have there and what do you expect going forward?

And also on the Fixed Line business, what is the, let's say, revenue behavior there, what are the regulatory issues on the tariff side and also is there any seasonality in the Fixed Line revenues in Armenia?

And a follow-up question on the one asked previously, on SG&A in general, and actually more specifically on advertising and marketing expenses and dealer commissions. In Russia it looks that this item has not been inflating that strongly and I was wondering if this -- if levels of, let's say, 4% of revenues in advertising and marketing and 4% for dealer commissions, is something sustainable for you because I think you previously were talking about close to 6% as a long-term sustainable level? Thank you very much.

I'll take the first one about SG&A regarding marketing and then go back to Armenia. In general, we try and target our marketing expenses between 4 and 5%. We set those early in the year. We will make some adjustments but if we get over-delivery of revenue as we have in the first half, that could move us to the low end of the range. So that's why over the first half it's been closer to 4%. That is a range that we would continue to expect going forward.

From a dealer commission standpoint, our dealer commissions now are based in Russia, are based entirely upon the ARPU that is generated by new customers. So it also should stay in that range of about 4% as it is today.

Regarding the Mobile business in Armenia, we are still at a very early stage with that. We are -- we're looking at different things that we can launch in the second half of '07 to help increase our overall market presence, to build our distribution, our sales network etc., and we're in very active planning of that right now. But to say much more [than our plans] on that, wouldn't be appropriate right now.

And in terms of Fixed, we're also still developing our strategy and importantly looking at how Fixed and Mobile will work together in [Armenia].

On the Fixed Line, in Armenia, by and large we currently left it untouched. We are working on fulfilling our license requirements on the digitization of the network and also liquidating the backlog which we have in terms of -- we had at some point in time almost 60,000 people [that are] waiting. So we are working on backlog of Fixed Line numbers.

The idea is that currently we'll let the Company run the Fixed network and the Company has got much more expertise in it. And we are learning more than teaching them to do it.

Meanwhile, we develop this NGN solution which we will be implementing in the course of the next 12 months. After that we will see how we can more creatively and aggressively start promoting more advanced services in Armenia.

In terms of tariffs, as a result of us surrendering, shall I say, the monopoly status, the current tariff policy being considered (inaudible) so we will be going forward with the current tariff probably.

Just, your last question on seasonality, the seasonality of the Fixed business in Armenia is fairly flat.

Okay, great. Thank you very much. And if you don't mind a follow-up question. Following your acquisition in Siberia recently, do you see any sizable opportunities in Russia going forward in the near future, or you would think you will primarily be focusing on CIS and the potential international expansion?

In our strategy we said that the new element, which we introduced about half a year ago after the discussion of strategy with the Board, was that we now open for consolidating our positions inside Russia. And if the opportunity presents itself, we certainly will be open to it. So in Russia, if we see the right target with the right price and it's open for transaction, we will talk.

Okay. But currently, does it mean that you currently do not [heed] those targets? They might come up, but currently you don't.

If there were a situation like that in the regions, in this part of the world. But it's never that you see the target you go and acquire it. It's always much more song and dance before you go into a transaction. It's a fairly lengthy and complicated process. So it's not that we don't see the targets, it's simply the targets are not open for transaction.

Okay. Thank you very much.

And our next question comes from [Nadejda Golubeva] from Aton.

Good afternoon. Two small questions. I noticed that your third-quarter's percentage of revenue went up a bit in second quarter. Could you comment on this please, and whether you think this is sustainable and, overall, whether this quarter [will be] in line with the expectations and so on.

And secondly, could you possibly tell us what were the roaming revenues in second quarter and compare them to the first quarter? Thank you.

Roaming revenues increased to 81m from previous quarter in Russia, so it was --

Sorry, could you repeat it, please, because it was --

81m --

-- compared to --

-- compared to 69.

69.

Yes. It was some growth in roaming revenues and, of course, linked to that, some growth of costs, especially because during summer you have more our subscribers going abroad with [with a series of costs associated] to that which was influencing service -- total service costs.

Okay. So (inaudible) this -- should we expect a certain cost as percentage of revenue coming down again fourth quarter probably after the seasonal increase in roaming ends?

I would say that during the summer you have the (technical difficulty) growth of roaming, especially of our subscribers going abroad and it's put additional pressure on service costs.

Okay.

Which normally you don't see during winter months.

Okay, thank you.

Next question comes from Dalibor Vavruska from ING Capital.

Hello. Good evening. Just a quick question on the MOU increase that we discussed already some questions in the first part of the call. I'm just wondering and I'm thinking of the reasons, apart from the promotions, which is a specific reason. And I'm wondering whether you can maybe comment on which of these reasons that I can list are more relevant than the others. Obviously, we can -- we see the economic growth supporting the usage.

I'm wondering whether you can comment at all whether your promotion might have left to some market share increase of B-line on the traffic in Russia.

I'm also wondering whether you can comment on whether you see the elasticity effect that you effectively reduce your prices and you get the usage up.

I'm also wondering, you mentioned that this was promotion, but it's only temporary. So I'm wondering if that boosted your revenue, why would you not leave the prices lower and enjoy the elasticity if you see it?

And finally, I'm just wondering whether maybe you have not become stricter in subscriber accounting and simply the market is growing. But what we see now is slower growth in subscribers and higher growth in MOU, but if it's essentially a continuation of the same trend. I don't mean here the change of the subscriber definition, but using the same definition of subscribers. Thank you.

Okay. Let me start and my colleague will add. First of all, we believe that the real growth of the ARPUs are mainly helped by the strong economical growth in Russia. (Technical difficulty) second quarter. You have additional growth of traffic which was linked to promotions. We believe it was just a growth of our additional traffic, which was assimilated by this unlimited promo.

It's not the fact that we were taking subscribers from competition. It's not really showing any elasticity to specific growth. It's just when you offer unlimited on-net calls for certain subscription fees, of course, people try to talk more. And actually, in some regions we have even not a normal behavior, some very big traffic growth which was influencing the numbers. We believe that it's temporarily linked to promotion. We believe after summer that will stop because we will stop these promotions.

I would just add to that one piece, that the other thing that we have talked about in previous calls is that we have had a good bit of focus over the last six months on different efforts that increased call completion. So things like our efforts on trusted payment, like call-me-back service etc., those things allow the consumer [to] (technical difficulty) complete more of the calls that they would like to make. And long term, we believe that does have also an impact on MOU.

Okay. Thank you.

Next question comes from [Anastasia Obukhova] from Deutsche Bank.

Good morning. This is Anastasia Obukhova from Deutsche Bank. In your Press Release you are giving the [fact sheet] that's broken in two companies. Could you please provide us with a consolidated [status] figure for the second quarter? Thank you.

Anastasia, we didn't quite get the question. Could you repeat it, please?

Could you please provide us with a consolidated [set figure] for the second quarter because in your Press Release you are giving the separate figures of only broken by country; Russia, Kazakhstan etc.

Yes. Consolidated number would be [94] (technical difficulty).

I would just like to add that -- we are deliberately not doing, or doing much less on the consolidated level now because it's kind of a meaningless number. It's an average temperature in a hospital because the intensity and the nature of the market stance is quite different by country. So that's why we didn't provide it on the consolidated level.

Yes, I mean in the expense, not the subscriber part, just the consolidated in the million dollars.

(Inaudible) for the marketing?

The total number.

Yes, marketing and dealer commissions, yes.

Yes. That's what we call sales and marketing expense. So the first quarter of 2007, it's approximately 117m.

117m. Okay, thank you.

(OPERATOR INSTRUCTIONS). And we'll go to Andrei Bogdanov of [Stroika Dialogue].

Good evening and congrats for the great results. I have two questions if I may, both in Russia, basically. One is with regards to Moscow. Not so long ago when the -- you had [much collaborations] it was some comment given that you're going to significantly raise the market share among corporate customers and (inaudible) individuals in Moscow and Moscow region. So are there any numbers or information can share with us in terms of performance on that front?

The second question is with regards to, actually, another company called [Skylink]. Yesterday they had a meeting with the analysts and they were extremely ambitious on their plans, saying that they were going to have 10% market share of revenues by 2011. But the most important thing was that they stressed specifically that the wireless Internet is the way to go. And that's how they're going to five-fold increase their market share. So what's your view on this particular market segment and how you position yourself with regards, not just to Skylink of course, but with regards to your other, maybe bigger competitors? Thank you.

First of all, on the corporate in Moscow, we believe we have a good progress. Actually, we developed a strong sales team in Moscow which is mainly focusing on SME sales. Our sales for the segment is growing. And we believe here we can increase -- both increase our share in this corporate segment, but also we can develop the segment because in Russia, in general, their percent of revenues from the business market is significantly lower than in many countries. That's why we will also try to develop the market.

As for Skylink, we believe that right now they have some advantages on the market in terms of speed for data and that's why they have some (technical difficulty) although it's actually small. We believe with our introduction of the 3G, we will have the same benefits and even a better opportunity to take this Broadband opportunity. And we will be much better positioned to benefit from this growth of Broadband.

And the nature of the benefit will be two-fold. One is the cost of the infrastructure and the breadth of the infrastructure. We already have quite a bit of it in the ground and, therefore, to put HSPA base stations is a relatively minor, incremental CapEx. The other side is consumer side and I suppose in terms of consumer terminals, which are much more restricted when you're talking about CDMA on this market and, therefore, much more expensive and also not at all compatible with the [mainpoint] so it's always kind of a secondary equipment.

In our case it will be (technical difficulty) and wider available. And also in terms of speed, we actually believe that what Skylink was offering so far, it wasn't a breakthrough thing. It was more closer to regional 3G propositions in Europe. We talk about true Broadband and that's what they've got actually for EV-DO into a trial operation. And we don't know yet the results because (technical difficulty) announce it. But we believe that that changes the game.

So when you move from 300k to 3 megabit, that's a completely different consumer experience and there are [tangential] indication of that if you look at Sweden and so on, how [3] sells their HSPA modems. It's a number-one sold item in their portfolio now, and so on.

And the last argument here would be that we will be fighting our subscriber base to participate in it and, therefore, it's much easier for us to reach and serve our subscriber base than for Skylink to address non-existent subscriber base for the Internet proposition. So we believe that a combination of these factors makes our chances more plausible than that of Skylink.

But if you answer the more general question, what proportion of the market going forward do you think will be given to -- for the wireless Internet in any form? Let's say, what should be voice, what should be data? Let's put it this way.

That's almost an impossible question to answer. I have to (inaudible). It's a -- I can't tell you that. We can say that how many subscribers. And again, our thinking here would be derived entirely from the Fixed Line analogies rather than looking at other operators, because it's all new in the world. Don't forget that HSPA on scale been launched only in March this year.

The first network was launched last year but, actually, the bulk of the network has been launched only this year, so we don't know yet how it works [out because] we can only make some projections. If you take a standard Fixed Line operator case, the assumption usually is that 7% of the subscribers on the Fixed Line usually take up the Broadband services almost instantaneously. Will it work in the case of Mobile; it remains to be seen.

Okay, fair enough. Thank you.

The next question comes from Sean Gardner from Morgan Stanley.

Yes, thanks. Just a final question from me. How is the take-up of some of the postpaid offerings you're launching in Russia going? Maybe you can give us an idea of some of the numbers. And also, what sort of differences you're seeing in the ARPUs from those existing customers as they go from prepaid to postpaid?

The number of consumers overall that have switched from prepaid to postpaid would still be in the tens of thousands in the -- in Russia, with still a very high percentage of that coming in Moscow. So it's been a much slower transition than we would have hoped for.

We continue to believe that the ARPUs that are created by those after they switch are positive. And we will continue to push this at sales channels. But I don't expect this to be something that will be a very short-term effort. I think it will be something that will happen over a good bit of time.

And then your surveys of the market. What would you think the main reasons are for this take-up being slow? Is it access to credit or just people unwilling to sign up to monthly bills?

Actually, our mass market is all reduced to cost control and is not willing to give up. But we believe with the economy growth and more credits on the market, banks right now is offering credits to everybody for (technical difficulty) consumer groups, etc.

We believe this culture will be developing. And VimpelCom is very well-positioned to benefit from that because of this very (technical difficulty) system offers really good postpaid. And we believe that it will be slow, but still constant growth of switches from prepaid to postpaid with a growth of ARPU.

Okay. Thank you very much.

And it appears there are no further questions at this time. I'd like to turn the conference back over to management for closing remarks.

Well, with this, I would like to thank you for your attention and, as usual, if you have more questions please do not hesitate to contact us and we will be very happy to give you all the necessary clarifications and explanations. And have a nice day and goodbye.

This concludes today's conference. We appreciate your participation. You may now disconnect.