VEON Ltd (VEON) 2007 Q4 法說會逐字稿

Please stand by, we're about to begin. And welcome to VimpelCom's fourth quarter and year end release conference call. Today's conference is being recorded. Now at this time it's my pleasure to turn the conference over to Michael Polyviou with FD. Please go ahead.

Good morning and good evening and welcome to VimpelCom's conference call to discuss the fourth quarter and 12 months 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 forwards looking statements that involve certain risks and uncertainties. These statements relate in part to the Company strategy and development plans in Russia, the CIS, and outside of the CIS, market growth and the competitive environment in Russia and the CIS, the benefits of the Golden Telecom acquisition and projections relating to company's capital expenditures.

Certain factors may cause actual results to differ materially from those contained in the forward looking statements including the risks detailed in the Company's press release announcing fourth quarter and 12 month 2007 financial and operating results, the Company's earning presentation entitled Presentation of 4Q 2007 Financial and Operating Results, the Company's annual report on for 20F for the year ended December 31 2006, and other public filings made by the Company with the United Stated Securities and Exchange Commission each of which are posted on the company's website at www.VimpelCom.com.

In addition the Company's fourth quarter and 12 month 2007 financial and operating results press release and form 20F 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 which we announced 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 fourth quarter and 12 month 2007 financial and operating result press release please contract FD at 212 850 5600 and it'll be forwarded to you. In addition, the press release and the earnings presentation each of which included reconciliation of non-GAAP financial measures presented on this conference 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 and hello everyone. Thank you for joining our conference call today. Let me introduce the team participating on this call. Here with me are Elena Shmatova, our Chief Financial Officer; Nikolay Pryanishnikov, our Executive Vice President who is in charge of operations in Russia; Kent McNeley, our Chief Marketing Officer; and Alexander Boreyko, our Director of International Investor Relations.

We have also invited Jean-Pierre Vandromme, a CEO of Golden Telecom to join us today.

So this presentation will start with a general overview of our performance in 2007. After that we will review each of the markets where we operate in more detail. And we will touch upon Golden Telecom at the end of the presentation.

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

Thank you Alexander. Our major financial achievement in 2007 was strong revenue growth, 47% above a year ago, which is remarkable taking into account our size of operation. This top line growth was accompanied by stable OIBDA margin slightly above 50%.

Our capital investment as a percentage to revenue continued to decline and depreciation fell. These two facts coupled with foreign currency exchange gain mainly due to ruble appreciation, resulted in a net income of $1,463m and an increase of approximately 80% year on year. Earnings per ADS increased accordingly to $1.44 per ADS in 2007.

As expected our fourth results were impacted by seasonal factors. Some slowdown in top line growth and depressed OIBDA margin. This year however OIBDA net income was also meaningfully impacted by the increased accrual connected with stock price based compensation plan. This accrual grew to $118.7m, which is significantly higher than ever before.

This increase was caused by two factors. First the stock price grew at an extraordinary pace gaining more than 50% within one quarter. Second, the weighted average portion of option vested was higher than in the previous quarter. Excluding the impact of this accrual, our fourth quarter OIBDA margin would have been above 50%, and slightly above the fourth quarter of 2006 OIBDA margin, confirming the financial health of our business.

In 2007 $7.2b revenue with 50% OIBDA margin resulted in strong cash generation. Our free cash flow before acquisitions in 2007 was close to $1.3b, almost triple the 2006 level. Of course the main contributor to this strong cash flow was our operations in Russia. Beyond Russia we also got positive news from the CIS operation as the cash generation started to improve in these countries.

Our balance sheet continues to be strong with cash and cash equivalents over $1b at the year end. We built that cash balance in anticipation of the Golden Telecom transaction and of course our solid liquidity position allowed us to borrow $3.5b in February of 2008 to support that deal. Adding this $3.5b debt on a pro forma basis to our year end numbers we would still yield very solid ratios with debt/equity at 1.16 and debt/OIBDA at 1.74.

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

Thank you Elena. Let's start as usual with Russia. Overall, the Russian telecom market in 2007 remained very healthy as consumer spending continued to grow and competition remained fairly rational. With this backdrop, our ARPU increased throughout the year as a result of growing usage and stable pricing.

In dollar terms, ARPU growth was also supported by ruble appreciation against the U.S. dollar. Even in the seasonally weak fourth quarter usage remained resilient which further affirms our belief in the underlying strength of the Russian consumer market. Active subscriber base grew by 2.4m during 2007, an encouraging number considering the saturation level of the Russian mobile market.

The increase in ARPU and in the number of active subscribers led to a strong 33% year on year revenue growth in the fourth quarter. Our annual OIBDA margin remained about 50%, which was slightly above our targeted level.

As Elena has already mentioned, our OIBDA was negatively affected by the accruals on our stock price related compensation plans. And all of it was reflected in the Russia numbers. Without this impact our Q4 OIBDA margin would have also been about 50%.

In 2007 our CapEx in Russia was approximately $1.1b, which was within our targeted corridor for Mobile business of 15% to 20% to revenue. In 2008 our CapEx spending in Russia will increase as it needs to cover investment requirements in GSM capacity, initial 3G roll out, fixed line network and broadband development including Golden Telecom plans. We expect this total investment to be approximately $1.9b but still not much above the long term targeted corridor between 15% and 20% of revenues.

Business in the CIS is developing fast and its contribution became more pronounced over the course of 2007. Now almost one-fifth of our subscribers are based outside of Russian and they generate about 15% of our total revenue. Along with high growth, all of the CIS markets improved their margins and in the fourth quarter aggregated OIBDA margin was 46%, a significant improvement from 31% recorded a year ago.

Now let's go market by market. First Kazakhstan. Here we increased the number of active subscribers by 50% year on year. It is also important to note that even with this kind of growth we saw only a slight deterioration of ARPU. The emergence of the third GSM operator and market share losses suffered by our main rival after we entered the Kazakh market, naturally led to intensified competition. This fact and the fact that the market is approaching saturation require us to make some strategy adjustments.

In late 2007 we began to deploy a two-pronged strategy. We will continue to compete for the remaining quality subscribers while gradually focusing our efforts on revenue market share, similar to what we did in Russia. As a result, last year we gained revenue market share from the main competitor while our subscriber market share remained essentially flat.

The strategy shift was also financially rewarding. We delivered very strong revenue growth of 74% and annual OIBDA of 130%, with an impressive full year margin expansion from 40% to 52.8%. The Kazakhstan network remains one of our most loaded. To improve service quality to accommodate growing traffic and to improve coverage we will invest approximately $300m in CapEx in Kazakhstan during 2008.

Now let's move to Ukraine. Although market environments in Ukraine remains challenging we believe that generally we have been able to successfully adapt our business strategy to meet these challenges. In the fourth quarter we're pleased that in spite of a significant reduction roaming revenues and the departure and subsequent turning of seasonal tourists who purchase local SIM cards we were able to keep ARPU from falling.

We view this ability as a clear indication of the quality of our local Ukrainian customers, which has been one of the key objectives of our marketing policy. At the same time we're not satisfied with the pace of our subscriber growth and we plan to focus more on attracting new customers without compromising the quality of our subscriber base.

On the financial side we were able to more than triple our revenues during 2007, exceeding the benchmark of $100m. No less important was the fact that we reached positive territory in our annual OIBDA.

The relatively small size of our domestic subscriber base in Ukraine means that seasonal fluctuations in roaming revenues make a significant impact on our quarterly financial performance. This resulted in a 15% quarter on quarter decrease in our revenues. The magnitude of this effect should be diminished with the growth in size and improvement in the quality of our subscriber base.

The Ukrainian network already provides a good level of service overall, although with insufficient coverage in some areas. The planned 2008 CapEx of approximately $160m will help us to address this issue, further improve our value for money proposition, and develop fixed line services including Golden Telecom plans.

In Uzbekistan we believe we made great progress in 2007. We tripled our subscriber base and increased our market share by more than 10 percentage points. ARPU, after a fall in 2006 and the beginning of 2007, stabilized around $7 showing moderate seasonal fluctuations. SIM card penetration reached 22% at the end of 2007, which means that will likely continue to experience very rapid growth going forward. Driving this growth and securing sustainable ARPU will be our two key priorities in Uzbekistan.

Success on the subscriber front was translated accordingly into our financial figures. Our annual revenues in Uzbekistan grew by 94%. OIBDA grew by 71% while OIBDA margin was over 50%. Our sequential revenue growth in the fourth quarter was also very good, almost 22%. We should also note that in the fourth quarter we made additional one time payments for the numbering capacity and 3G licenses.

For 2008 we expect CapEx in Uzbekistan to remain at the relatively high level as we are in a phase of rapid subscriber growth. To accommodate this we plan to invest $180m in 2008.

As quoted in November 2006 our business in Armenia demonstrated robust margins and the highest ARPU of any country in the CIS. However our business situation in the mobile market particularly our subscriber market share remains challenging. We're actively working to extend the coverage, improve the quality of the network, and strengthen our marketing activities. This will help us to address the inherited issues of the Armenian operation and improve our competitive position.

To complete the CIS a few words about Georgia and Tajikistan. We launched operations in Georgia at the end of the first quarter. We continue to build the network and to develop our sales and distribution channels. In the fourth quarter we reached approximately 73,000 active subscribers and generated revenue of $1m.

What is also important, at the end of the fourth we received spectrum in the 900 megahertz band in addition to our existing 1,800 megahertz frequencies. This will enable us to build a dual band network, which is technically and financially the most efficient solution for GSM networks.

In Tajikistan we continue to demonstrate excellent dynamics with consistent growth of our market share from just 7% a year ago to 18% at the end of 2007. On a quarter on quarter basis the Company reported a 26% growth in the number of active subscribers to approximately 340,000. OIBDA has remained positive since the second quarter of 2007. As the current mobile penetration level in the country is only 30%, we see these dynamics as very promising for our future growth.

For Armenia, Georgia and Tajikistan combined we plan to invest approximately $150m in 2008.

Now a few words about the strategy. Looking back at our strategy, which we presented in the beginning of 2007, it would be fair to say that we have made very good progress. We delivered strong results in Russia. We've further expanded our business in the CIS. We prepared the ground in Vietnam for moving outside of the CIS and towards the end of the year we initiated the acquisition of Golden Telecom.

With this acquisition now complete we're starting an exciting process of transforming VimpelCom from a purely mobile into a, integrated telecom operator. The first of its kind in Russia and the CIS.

The combination of Golden Telecom and VimpelCom uniquely capitalizes on each company's respective strength and places us at the forefront of the global trend in fixed/mobile convergence. The transaction combines VimpelCom's transport network with Golden Telecom's nationwide backbone and state of the art local access fiber network.

Furthermore, with VimpelCom's strong brand name and position in the consumer market and Golden Telecom's, broadband network we're well placed to take advantage of the strong growth that we anticipate in the Russia residential broadband market. In addition, we expect significant benefits from cross-selling into the corporate sector where Golden Telecom is strong.

The deal is also very good geographically given VimpelCom's nationwide footprint and Golden Telecom's increasing focus on the regions. These overlapping geographies, both within Russia and outside, allow us to create an integrated operator across much of the CIS. And last but not least, of course there are anticipated cost synergies with a net present value of $474m.

Summarizing, I would like to say that with 2007 numbers we have reported another good year. Our business has made great progress on many fronts. We have strong financial position, favorable economic and competitive situation in our key markets and we have created new business opportunities in both our core and new business. In other words, we are well positioned to continue on a growth path and to create substantial shareholder value.

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

Very good. [OPERATOR INSTRUCTIONS]. Our first question will come from William Kirby with Nevsky Capital.

Thank you. My first question is for Jean-Pierre. Leaving aside your residential broadband opportunities at Golden, what's your estimate of the total size of the business in corporate services market? And how long do you think that Golden will be able to continue growing that line?

Secondly my more general question on Q4 result. We saw service costs as a percentage of revenues decline slightly during Q4 after they rose during Q3. What's driving the fluctuation there and how should we think about it in the future? Thank you.

As far as the possibility of Golden to grow in the business market in concerned we are currently, together with VimpelCom, looking at the opportunities not just from a stand alone but on a combined basis. We had previously, when Golden was a standalone company, given guidance for this year, which assumed that the growth in absolute figures would continue that we have had in 2007. So we had anticipated a growth of about 40% for 2008.

Now that we are one company we have to revisit these numbers and see what it will mean for the future. So I think it's too early to give any forecast and I also believe that it's not a policy of VimpelCom to give any forecast. So all of that there the forecast that we have given in the past I can't give you nothing else on that.

Talking about gross margin and service cost, that's correct. That's our gross margin increased slightly in the fourth quarter compared to the third. But it was very slight increase. It was growing from 81.3 to 81.7 and mainly it's reflection of seasonally less roaming both expenses and revenues in the fourth quarter compared to the third.

Okay, thank you.

Our next question then will be from Sergei Arsenyev with Goldman Sachs.

Hi, good afternoon. Can I just continue in the same vein please and then ask a question on the residential broadband? Have you had the chance to review the residential broadband targets with the combination of both companies?

And I appreciate that you can't give us the number of subscribers that you would expect at the end of 2008 or 2009, but it will be really useful if you could maybe describe the joint vision of Corbina with VimpelCom? And where this residential broadband development can end up at the end of this year or next year, let's say in the medium term?

I think you have to broadband vision over a longer term. And if I read the analyst reports, so these are not my figures, these are your figures, then the forecast for 2010, 2011, 2012 seems to be anywhere between 15m and 25m broadband subscribers in the Russian Federation alone.

We have never given any estimates of what share of the market we believed we could get, and again I have never given any forecasts of this and as I said earlier VimpelCom has never given any guidance on it. What I can tell you is the figures that we have reached in the fourth quarter. And as you remember from anybody who has been on the Golden calls, the figures that we report is always the ones as the week before we do the conference call.

So presently we have 538,000 broadband customers. That's 140,000 more than at the end of Q3. So that's an increase of about 30,000 per month as far as the households that are covered. So with the houses that we pass, the flats that we pass that's not 5m; that's up 900,000 from the end of the fourth quarter. So we need now nearly at the run rate of new flats covered is now about close to 200,000 per week additional flat that we cover. Sorry, per month, 200,000 new apartments or 200,000 connections to -- we pass 200,000 additional flats per month. So that's where we stand at this stage.

And just one follow up to this. Out of this 538,000 how many are in the regions?

The majority of them. I don't have the figures here with me. But this is large majority. More then 90% are still in Moscow and in St Petersburg. The regions are only coming on line in the last two or three months so you have to look at penetration rates. The first three months penetration, once a building comes on line the first three months penetration is about 3% and that goes up to the mid-20s after two years. So other then 20,000 or 30,000 the majority is still in Moscow.

Okay, thank you.

And just one additional remark. These are customers that are counted the same way that VimpelCom counts its customers. So meaning that these people that have had a positive payment balance in the last three months and we believe that that is different than some other companies do there counting.

Our next question is from Olga Bystrova with Credit Suisse.

Good evening this is Olga Bystrova from Credit Suisse. One question is I want to ask about dynamics in the Russian KPIs on usage and pricing. Because we saw a slight decrease in usage in the fourth quarter this year and last year it was actually a positive dynamics. So I wanted to know if you could comment on what's the difference between the two years let's say. And pricing has been very strong in dollars and also flat in rubles. So maybe you can comment on the overall market dynamics in terms of -- in pricing terms.

And my second question is on 3G because when you mentioned the CapEx expectations for the 2008 I either missed it or you didn't mention 3G CapEx in there. So maybe could you mention if you're not planning to go ahead with the 3G or I'm mistaken? And if you do go ahead with 3G do you have any more specific thoughts on how much coverage you will have and what kind of products you think might be successful, particularly given Golden Telecom acquisition. Thank you.

Thank you Olga. Let me start with usage. Our minutes of use in Russia for the fourth quarter increased by 29% year on year compared to the Q4 of 2006. And we believe this number is showing a very strong growth on the yearly basis.

If you compare it with the previous quarter the third quarter of 2007 you need to take into consideration that it was special time of promotion, which was increasing there the usage during the summer months. As soon as we stopped this promotion of course we get a slightly less usage, and of course this was affecting overall results. But overall, this dynamics of minutes of use and reaching more than 200 minutes per active subscriber in a seasonally weaker fourth quarter, we believe it's very strong number.

Talking about the changing pricing, we believe in Russia right now it's -- we see mature behavior from all players. And of course our target would be to keep prices as high as possible. And in general we're happy that during that last quarter that it was more or less flat tendencies on pricing. Although strengthening rubles or course were helping a bit during the last year.

On 3G, actually we were analyzing how to give our guidance and we understood that it's very difficult right now to split investment to the 3G and 2G. And the reason for that is that we're building integrated network. We're building the same switches, which are right now working both for 3G and 2G. We're using the same transport network for that and that's why it will be one integrated network. That's why to give a clear guidance is very different -- difficult.

As for our timing and rollout, we will -- we're planning to launch 3G networks in all regions of Russia by 2009. But of course with certain commercial priorities according to our marketing research for potential for different regions.

Okay, thank you very much. And in terms of -- what are you thoughts on the products that will be successful and also obviously you were talking about residential broadband market in Golden Telecom acquisition etc. Do you have any specific thoughts on the mobile broadband products or anything else like that? Thank you.

Yes, we -- one of the first things that we will focus on is mobile broadband because we believe that can help us to enter this new area. And particularly coupled with the strength of the fiber to the building operations that Golden has we think there's a great synergy there.

In terms of mobile products for 3G, we have not articulated what our product set will be exactly. I would say that use of data and improving the capabilities of downloads will be some of the first priorities because they're the easiest to do. But we are certainly looking at other products that are successful in Europe and in the United States as we develop our timeline. And we'll announce that as time goes on.

Okay, great, thank you very much.

Our next question will come from Jean Charles Lemardeley with JP Morgan.

Yes, good afternoon. Can you just share with us what your expectation are in terms of your marketing spending overall? Looks like we -- this year your marketing spend as a share of revenues went down by about half a percentage point. What would be our expectation for 2008?

And also by down the road with 3G, can you give us a sense of what kind of savings you can achieve on CapEx to sales thanks to the greater or the better spectrum efficiency of the technology?

Okay, I'll start with marketing spending. Our strategy on marketing spending has remained purely constant for the last couple of years. We target a range of between 3 -- I'm sorry, between 4% and 5%. Often at the beginning of the year over the last couple of years we've targeted the higher end of that range but as our revenues have come in the last couple of years stronger than we expected it's ended up at the lower end of the range.

So it wasn't so much a plan to reduce marketing spending as it just was fast revenue growth as we went through the year. Our plans going forward are really to be in that same range from 4% to 5% for marketing.

In terms of efficiency when we look at the 3G, it's very difficult question to answer and we never really looked at it like that. There are few underpinnings to our thinking about the 3G licenses. We're saying that it's not much of a positive but rather now a negative. That was the assumption that we have to have a 3G just to be positioned for the future growth.

Second, when we learned more about HSPA and the wireless broadband we believed that we can really generate an incremental revenue stream based on that technology.

But as Nikolay said it's now so much intertwined the 3G as such, which we usually call a radio access, which is based on HSPA technology, together with all the investments, which go into all IP network in terms of transport and NGN switches. So all this new technology would be more efficient but it would be more efficient transmitting larger volumes of data, which we don't have at the moment. And therefore it's a very academic question that if we were to apply a larger volumes of data to the (inaudible) GSM network and that comparison we never really done.

So our intention going forward that not to have much of incremental. It will be some of course, but not much of incremental investment in 2G compared to what we would have invested if we were to accommodate this growth with 2G. But to generate additional revenue stream from wireless broadband and new services which 3G brings.

Currently, when you're talking to people like Hutchinson and so on, they all see significant revenue uplift only coming from broadband. Everything else gives them addition to the ARPU in terms of value added services and so on. But the lion's share still is with the wireless broadband.

Thank you.

Our next question is from Stephen Pettyfer with Merrill Lynch.

Thank you. Just two questions please. I wonder for starters if you could give us some color as to what's happening with the Golden accounts?

And secondly just looking at dealer commissions I noticed in Kazakhstan a notable step change per gross add in Q4. And I wondered if Kazakh dealer commissions were up, were going to be trending towards much closer towards where the Russian dealer commissions are now? Thank you.

Let me pick up the Kazakh question. The sales were significantly up so naturally in there it went up. We didn't really step up investments in sales in any significant fashion in the fourth quarter.

So it is numbers, which are very difficult to read. And we were talking about that in Russia, that it always impacts the delayed commission, the delayed payments when they're linked to traffic. And the increase in traffic of the subscribers who bought it in the previous quarters actually catches up as a wave at the later stage.

So having these factors all intertwined it would be very difficult to say on the basis of one quarter that we see an increased investment in dealer commissions in Kazakhstan. Certainly we haven't done it consciously and we will see the dynamics and I don't think that we will see real rate is increasing.

As far as the Golden accounts is concerned, the 10Q will be filed as normal and as required by the SEC seeing the fact that in the fourth quarter we were still a publicly traded company. And by the way also in the first quarter we were still a partially publicly traded company. We still have to file for that one too.

As far as the press conference of yesterday that was cancelled. It doesn't make a lot of sense to have an analyst's call and investors call if you're no longer publicly traded company. So we thought that it would be not useful for your time to spend on that, so that's why we cancelled it.

Thank you very much.

Our next question is from Alex Kuznetsov with Bear Stearns.

Good afternoon, I have a couple of questions. First of all I see that much of the EBITDA reduction is explained by employee stock option expenses. But should we expect reversion of a portion of the option expense given the market weakness in first quarter of this year?

And secondly, could you elaborate on the reasons for a 28% sequential increase in Russian subscriber acquisition costs and a 63% increase Kazakh SAC? Thank you.

So talking about accruals on stock option plans, yes, that is long as it's connected with the ADS price. Of course if we will see by the end of the first quarter decrease in that price we will have reversal of part of the accrual which was done in the fourth quarter.

As for subscriber acquisition costs in Russia I should say that it's less and less important to look to this number divided total expense divided by the number of gross addition. Because some part of that, majority of marketing and advertising expense we're using right now for the loyalty programs we're increasing this increased usage of the base to promote new products for existing subscribers.

But if you look to the percentage of total sales and marketing expenses to revenues, actually we have good tendency. If you look year on year or even slightly decrease it was 9% in 2006 and it was approximately 8% in 2007, which we believe is a healthy tendency. Also I would mention that fourth quarter is seasonally high spending quarter because we have this New Year, Christmas campaign and it's usually some additional advertising seasonally.

And frankly in Kazakhstan we did note on our press release that we did see in the fourth quarter an intensifying in competition, and so therefore as we planned our activities for the Christmas period there were stronger Christmas activities.

This is very consistent with what we have done in Russia in previous years when penetration was below 100%. So it really was, as Alexander said, somewhat the spilling in of dealers' commission from -- based on revenue and increased Christmas spending from a marketing standpoint.

I see. May I just ask for additional clarification on the third question? Could you tell us what approximate percentage of the employee stock option expense can be reversed? Because usually a certain portion is exercised, was probably exercised in 2007 but certain portion is vested for the next two years.

Actually of course it's very hard to predict what will be the share price, which is the main driver for that accrual. But I can tell you that first of all the exercise of the options in our Company can be done only in so-called window periods, which is opened in certain cases. And it's not like every month anyone can exercise without any restrictions, as the major drivers for that calculation is not just how much was exercised but how much was percentage of what becomes invested. And again we made very preliminary estimations that if by the end of the first quarter the share price will be, let's say, $33 per ADS, so then the reversal would be approximately $24m.

Thank you very much.

Our next question is from Dalibor Vavrushka with ING.

Hello, Dalibor Vavrushka from ING. Thanks for your call. Just very quickly if I can follow up on Olga's question about the usage in the fourth quarter. Based on some calculations I have done I think this fourth quarter was the first quarter in a long history, maybe in the whole history of the Company when there was actually no meaningful increase in the usage on a quarter to quarter basis. I understand there were some promotions in the third quarter which were discontinued. But if you look at the price, the price in ruble terms was roughly stable. So I was wondering whether maybe you can elaborate on this comment. What actually happened, how much of the traffic was new to the promotion that disappeared in the fourth quarter? And if that was the case, then it appears that the effective price might have come down because otherwise if the promotion was low price one would have expected the price to go up, which didn't happen. I am fully aware of the seasonal effect. I am just trying to compare in the previous years, as Olga pointed, for example last year, the trend was slightly different.

And also maybe if you can make a comment about market share, if there was anything -- if you think that the usage trend is the same for the whole market, or maybe there was something specific for Beeline?

And my second question is just very quickly, I do not know if you can comment about restrictions, where actually the stock options are exercisable? If it's -- if there is a simple answer for this. Thank you.

Let me start your question on usage. First of all, important to mention again that in terms of usage, fourth quarter is a weak quarter because we do not have summer traffic, which usually Russians go to their country houses and there is no fixed telephony to use it a lot. More people are outside. They use the telephone, the more roaming revenues usually for the second. And third quarter and less revenues and traffic for the fourth quarter. That's why we need to take it into consideration.

If we take second and third quarter, it was really additional promotional effect. In the second quarter it was one summer month. In the third specifically it was two summer months heavy promotional effect. By the way, if you compare third quarter minutes of use to the first quarter it was growth of 30%, which was partly -- real partly specifically driven by this promotion, summer promotion, effect. That's why when we stopped promotion of course we had some decline in usage. But still we believe that this number of 204 minutes per active user or 29% year on year quarter, fourth quarter 2007 compared to the fourth quarter 2006 is very healthy growth. And of course our strategy is to continue to stimulate usage of our subscribers. And we believe it is possible.

Let me try to shed some light on the stock option thing because we didn't talk much about it. But obviously it became this quarter such a pronounced feature, so we have to clarify how it works. And first of all we're capped by the decision of the Board at 2% of the outstanding stock. We're not issuing new stock. We're buying it on the market. And we don't -- we cannot have more than that effectively in the pool.

The stock options are granted to about 150 people inside the Company. And the grant is happening every year. The size of the grant varies and it's decided by the compensation committee and by the Board. And it depends as well on the availability of the options to be granted. After the share has been granted, and they always, always grant it at market price. After share has been granted there is a two year vetting period and four year exercise period. And people -- therefore the vetting portion is actually accounted for. But as the grant has been happening for the last three years, so we have different strike price on the options and therefore dynamics are quite different. So maybe that's why the restricted stock in effect similar to the restricted stock appears when you have such a rapidly growing price of the shares.

And second, what's also important to understand that when a window opens, people not necessarily dump the stock at the price which is in the window. People have a right to put a sell, irrevocable sell, or buy instruction at a certain price. And that's exactly how it works. Some people just stagger their stock options, the vested ones and they say sell some at this and then some at 20% above and 30% above. So we might see, even without the instructions or windows open, some fluctuations on the stock options which are currently taken into account when we incur the accruals. So I hope that clarifies it.

Thank you very much. That's very useful. Thanks.

Our next question is from Nadezhda Golubeva with Unicredit.

Good afternoon. First of all, could you please repeat your total CapEx plan for 2008? And do I understand it correctly that the number of $1.9b for Russia, it includes Golden Telecom?

And also could you please repeat your CapEx plan for CapEx down to 2008, because I didn't go that. This is first question.

And secondly I wanted to ask you about the -- some possible one offs in the first quarter of '07, in particular connected to the merger with Golden Telecom. So I am wondering whether there could be some costs associated with consultant expenses than when are we going to see the payments on the execution of Golden Telecom management options? And so yes, that's basically it. And possibly could you specify some other one offs in first quarter?

If somebody can put a mute. Yes, thank you. So let's start with CapEx. Our CapEx for the next year, and yes, we're talking about all inclusive number, meaning that it's our current view of the development of our project with Golden Telecom and also radio part of our networks and the development in the CIS. So everything included, that would be $1.9b for Russia. And out of that about $450m would be attributed to Golden Telecom. We will stop giving this guidance going forward because actually it is very difficult to do it that way because we also had inside of our investments in the previous years, investments in the transport infrastructure. And it all will go now into one bucket, so to speak.

So we will be reporting -- and we're still analyzing what's the best way to disclose this information, not to overload. I appreciate that analysts would like to have as much as possible. But actually it has to be a nice balance between really useful information and excessive.

So, Russia $1.9b, Kazakhstan $300m, Ukraine $160m, Uzbekistan $180m and everything else $150m. Meaning Armenia, Tajikistan and Georgia. So altogether that brings us to almost $2.7b. That's our CapEx plan for the next year.

As we said that in Russia, and in principle I think in the mature market, but we are not there yet. In Russia we are. In Russia we're targeting a quota of between 15% and 20% of CapEx to revenue. And given the exceptional nature of 2008 when so many things collided, including the addition of Golden Telecom who's got a different, a bit different investment profile in terms of CapEx to revenue ratio, and effort absolutely necessary effort to rollout 3G and also starting part of our operations, 3G, totally blank territory of Far East where we didn't have operations. So all of that creates this higher number which will be slightly above 20% which we intend to have.

Okay, thank you very much. And my second question?

Our next question will be from --

Hold it.

Okay.

Sorry to the Operator. I'll say that all the one offs will be disclosed in the first quarter. And I cannot say that they would be so significant that we would be talking about them as affecting our performance.

Okay, thanks.

All right, and our next question therefore will be from Will Milner with Arete Research.

Thanks. Just a couple of questions on sustainability of Russian margins going forward. I think if you strip out the stock option cost out of over 54%, in the past I've heard people say if you're printing margins over 50% in Russia you're inviting greater regulatory risk. Is that something you think has increased, looking into 2008?

And secondly, obviously inflationary pressure in Russia is increasing. I just wonder which areas of your cost base you're seeing greatest pressure from rising prices. And would you say that you're much more cautious on the outlook for Russian margins looking into 2008 than you were one year ago? Thanks.

Actually we're staying on exactly the same position. We've always been saying that it's in the high 40s and currently it's converged around 50. But we've always been saying that a margin above 50 is probably less sustainable territory. And on the other hand, we've always said that we're not going to spend it just to prove ourselves right. So in the short and mid-term you might see the margins are staying about 50%. But later on restructure our models actually to be around 50. Or in the high 40s. Taking into account that we're merging now all our operations with Golden, it will have impact on the margins. And therefore we'll see the numbers which are close to mid 40s and on the combined basis. So from that perspective I think we're in a less of a dangerous zone with the regulator or with the competitors coming and attacking our margin levels.

As far as the inflationary pressure is concerned, of course it's there. And of course we see that actually it's quite strong on the marketing side because we see very high media inflation because of the reduction of the available time on air for TV advertising and so on. We see very strong food inflation which naturally is being translated into CPI index which naturally is being translated into wage inflation. However, said all this, we do not intend to use it as an excuse for lowering the margins because we believe that we have enough room both through growth and through improvement of the scale of the business and extracting value from there. But also finding pockets of inefficiencies and continuously improving the efficiency and the performance of the business compensates for that. So that's how we think about the business. Yes, there is a pressure but we're certain that we can counterbalance it with our efficiency programs.

Okay, you've seen no change in consumer behavior over the last three to six months, say, with the increasing pressure from rising prices?

Not really. Russia, and here actually comes very handy that we're in the emerging markets because Russia used to live in high inflation environment. And we've always been dealing with double digits. In that sense not much has changed. Yes, it's running a bit faster. Yes, there is a bit of a push back on in general how people accept inflation. So that restricts our capacity to increase our prices, for example. But on the other hand, if you compare Russian market to the Western market, where it's been much more affected by the subprime mortgage crisis and in general banking crisis, because the consumer financing and mortgage is still pretty nascent in Russia. And therefore general population is much less affected by the financial turmoil compared to a more mature market. So we might feel some, but on the other hand it probably will be smaller effect than in the other markets.

Okay, that's very helpful, thanks.

Our next question is from Olga Bystrova with Credit Suisse.

Good evening. I just have a follow up question on primarily CapEx actually. If you look at Russian CapEx now with the breakdown that you gave for Golden, or at least preliminary, right, and Mobile business, it looks like there -- basically I do not see any synergies, potential CapEx synergies that you have been talking about previously. So from my perspective I am thinking that CapEx has actually increased. And I was wondering why is that? Are you accelerating for example residential broadband network rollout for Golden? Or you think there is more investment than capacity either fixed line or mobile as necessary and you -- and maybe if you can comment if you're front loading this CapEx or it is more of a recurring CapEx for the next couple of years.

And also, we haven't heard about Vietnam being as part of the plan for capital expenditure in 2008. So maybe you could update us on this also. Thank you very much.

Yes, Vietnam is not part of this because we're not certain and therefore although we have pretty good hope and here is my two second update on what's happening in Vietnam. We're in discussions and they're progressing reasonably well. The change in structure might change compared to what we discussed initially. Unfortunately I cannot say more but we're still very -- fairly optimistic about that. However it would be premature for us to include any CapEx would reflect Vietnam in our guidance which we give at the moment.

As far as Russia is concerned, that we didn't include any signatures into that yet. We simply took at the face value the CapEx which we budgeted for, GSM development plus 3G. And we added on top of it everything which has been budgeted by Golden Telecom. The idea of course would be to balance and understand that after we finalize the synergies, after we carve out the additional resource, to understand how we spend it. Whether we not spend it, or we accelerate the rollout of fiber network for example in the regions and things like that.

So it is a work in progress. This number might shift naturally going forward, but it reflects our current thinking. If you say but yes, even for Russia, if you take away Golden Telecom it seems to be number one on a high side. Again the number would have been budgeted solely on the basis of three things which drive the numbers. It's expected growth in traffic, which we still expect and we still expect to be significant. It's a rollout of 3G which we need to happen. And actually the most expensive part of it and the most intensive part of it, i.e. changing the core towards the integrated core, will be happening in 2008. So in that sense you can consider that it is frontloaded if we talk about 3G project.

And the third one that we start, Far East operations in a number of regions where we don't have anything. And that of course is reflected in the additional CapEx as well.

Okay. And maybe just a qualification question on Golden Telecom CapEx further to you, to Jean-Pierre. Because it looks like the CapEx could be more than 20% of revenues. And I understand that you are not in a position to give guidance. But previously you have been talking about 20% of revenues, so in terms of Golden Telecom CapEx. So I also think that the Golden Telecom CapEx looks a little bit higher than I think maybe we have been thinking recently. Is that correct, or not?

It is correct in a certain sense that in -- when we in the fourth quarter when we gave guidance for next year that we had the assumption that we would be rolling out the BSTB network in place to at least 50m households by 2010. What we've been doing in the last couple of months is getting much more permissions to roll out the network in many more cities than we originally planned. So what we have been doing even prior to our acquisitions by VimpelCom was pull that back from 2010 to 2009. So the plan had been accelerated with nearly a year, with more than a year. And I also believe that several cases at press conferences that we have also said that we were accelerating the plan with one year. So that's what is there.

Okay, great, thank you very much.

Our next question is from Jossef Assis with Fidelity International.

Hi, my question is to Alexander really for a filling orders question. Do you plan to continue the way Golden Telecom deployed fiber optic on rooftops. The main reason why Golden managed to expand so rapidly.

The good rule is ain't broken, ain't fixed it and therefore if it's working and it's a unique possibility for us and capability actually to construct a network that way, and therefore to go very, very fast, passing high rises, I think it's an excellent opportunity which would be incorrect to miss. So unless Jean-Pierre suggests otherwise I don't think that we will be changing anything.

You're dealing with environmental issues?

And I'm not changing anything. The environmental issues, I don't know how often you have been in Russian cities. But if you look above then you see quite a lot of cables, electricity cables, plenty of cables going off. So one more or less cable doesn't really make a big difference.

I think that on environmental stuff, we're taking the following view. That unless it is strongly pushed against by either the environmental organizations or by the authorities of course in that case we follow. By the way, the requirements in Russia are more stringent, for example on the meeting power of the base stations and so on, than in Europe. However, if we take just pure aesthetics, and I believe that it's more about aesthetics than real environmental hazard, then I believe it's better to roll now as fast as possible to provide low cost and fast solution to bring the population of Russia on net. And then when already we have this working, we gradually will find other solutions putting it in ground, for example the cable and rewiring the buildings. And again, if that requirement will be necessary.

And even on the aesthetics, if you look at it, see the fact that we only go to high rise buildings which are usually 11, 15 floors. A cable of let's say a centimeter thick that's hanging 33 meters above the air, I'm not really sure that's lot of aesthetic hindrance over there. So it's not cables that run from one building to the other on ground level or on 5 meters high. You don't really see them that well.

And again maybe my view has been spoiled by Vietnam. Because in Vietnam you have -- originally you don't have any cables in the ground, everything is on the poles. And maybe our tolerance is different. But again, frankly speaking, at this stage of development we believe that speed is essential and the cost of the solution is essential.

And also for the Company itself, it's also for the Company itself, I think it's much more important to get Russia -- for question of broadband to get minimum on par with European countries and then speed is in fact much faster than European countries because the speeds we operate is five to 20 times faster than what you can get in Europe or in U.S.

Thank you.

Our next question is from Alastair Jones with New Street Research.

Hi, good afternoon. Just a quick question on the Ukraine. We've seen a pretty positive environment there where usage has picked up to 23% growth year over year from flat in Q3. Is there any explanation for the ramp up in usage? Are you seeing the competitive environment changing? Or macro environment? It does look suspiciously like the Russian macro piece is coming through there. And I just wondering if you see that as sustainable or if there's a specific reason for that.

And then just secondly on the Ukraine, you said in your commentary that you aim to increase your subs pretty aggressively during 2008. I was wondering how, if you explained how you intend to do that? Is it through some marketing? Or are you going to be a bit more aggressive on pricing? Just a bit more color on that would be great.

Okay, first of all to talk about the usage. I think we've talked about it, at least in the last quarterly call if not also the one before that, that we have made some changes in our tariff policy where we've shifted some from on-net to tariffs which were going both to our on-net but also to off-net. And we think that that helps improve the quality of subscribers and actually bring a better subscriber that talks more. And so those dynamics have been coming through and evolving as we have hoped, bringing more stable ARPU even in a consistently aggressive market. And so the strategy has worked really as we had hoped it would there.

And in terms of how specifically we will build our subscribers we continue to look at different tariff structures and different targets. And continue to move the tariffs that show very strong results. And so as we do our planning, I'm not going to disclose the specifics of the tariffs that we'll pursue, but we'll continue to use that strategy where we try various approaches and then promote heavily ones that can drive the best active subscriber base.

Okay, thank you.

Our next question is from Alex Kuznetsov with Bear Stearns.

Good afternoon. I have a couple of additional follow up questions. First of all I noted that the effective income tax rate extended to 29.2%. Is it related just to some difference between Russian tax accounting and U.S. GAAP? And should we expect the income tax rate to normalize around 25% in 2008?

And secondly, I would also like to clarify changes in the effective tariffs. I noticed an increase in VimpelCom's effective tariff in Russia, in Ukraine. I believe that increase in effective tariff in Russia is related to discontinuation of some seasonal promotions in the fourth quarter. However, could you explain tariff trends in other markets, please?

So let me start with effective tax rate. Effective tax rate is influenced by the fact that we have different tax rates in different jurisdictions. And for example, if we look on Russia standalone, so effective tax rate was approximately 27% in the third quarter and approximately 27% in the fourth quarter. So the major division is explained by the different portions of taxes coming from different countries. And so this time we saw a higher portion of it coming from Kazakhstan where statutory tax rate is 30% and the higher also impacts coming from other countries. So going forward, I don't think that we will ever see it coming close to the Russian statutory tax rate at closest 25%. So as we discussed previously, maybe it will be around on average for the year 27%, 28% or something like this. But it also depends on that question, how much of the taxable income will come from different countries.

And just to comment, I won't go into the detail of every country, but we -- we are constantly looking at developing tariffs which meet our specific marketing objectives. So as Nikolay has talked earlier in Russia, in the second and third quarter we want to try and push our MOU up and get people to use particularly on-net minutes a lot higher. We wanted a very successful tariff that did that and feel good about the fact that we're able to sustain most of that, the vast majority of that MOU gain in the fourth quarter.

In the Ukraine I just mentioned that we have launched tariffs that really made it more cost efficient for consumers to call competitive networks. And again our objective there was to bring quality subscribers in and the results were strong.

In Georgia, a market we had some issues with, we launched a tariff based on Golden numbers and giving out two Golden numbers for the price of one. And really after a couple of different attempts down to tariff that was really able to kick start our business and start to drive [bunches] for subscriber growth.

So this strategy, analyzing what we need, using the history of what's worked before in Russia or in other markets in the CIS and then applying a tariff that should deliver that objective, this is exactly how we run our tariff programs.

Thank you very much.

Our final question in the queue will be from Igor Semenov with ING.

Yes, hi, thanks very much. Can you give us the update on the integration process between VimpelCom and Golden Telecom? What is the progress with retaining management of Golden Telecom and not just top level but also second level below Jean-Pierre?

And also can you maybe comment on the possible entrance of another competitor into the mobile market in Russia? Air Link recently told us at an analyst meeting that they were working on getting the 2100 megahertz frequencies to Moscow. So can you talk about that, please? Thank you.

The integration with Golden is going very well. So we identified a few work streams, so there is very intensive work going between those departments which are affected. As we said, the idea of the integration is actually 80/20. So to get 80% of the benefit with 20% of the disruption. So we're not talking about fully merging two companies together operationally. And therefore it focuses the mind and focuses the people who are doing it. And the process is well orchestrated and well on the way.

The initial indications are that our assessment of synergies was very realistic and we're fairly optimistic that we will be able to capture.

In terms of management retention, the idea of buying Golden was not to buy glass or copper in the ground. The idea of bringing Golden in is to bring also the expertise. And clearly that we're making -- we would love to retain the full team of Golden and the whole business and we're still discussing with the management and we hope and we're optimistic in that sense that the management will stay and help us to move forward in this pretty exciting endeavor of building the first of that kind in our integrated operator. And it's when I -- kind of said that, I probably would like Jean-Pierre to comment on this.

Up till now nobody of my management has left. So as far as the retention efforts is concerned, up till this moment they have been pretty successful I would say, seeing the fact that nobody left.

As far as the rest is concerned, I -- the way they did the integration, or while the integration is being done on the 80/20 rule, there is no immediate reason why someone would have to leave either Golden or VimpelCom, because it works two ways. Really it's not just the retention of Golden people. I think you also when you merge two competencies of the retention of VimpelCom people. But the way the integration is done, or the way the two companies were set up originally, if you look at the strengths and the weakness of the two companies, it would be very, very difficult to find two companies that are more complementary than these two. If I would have had to have put a strengths and the weaknesses of Golden on a piece of paper and you would have asked Alexander to put the same strengths and weaknesses of VimpelCom on a piece of paper, I think that the only difference would have been where it said strengths for me that it said weaknesses for him.

So the logic is more or less where you have the good people on both sides of the equation, keep them. And as Alexander has said there is no reason to assume that people would not be retained. That being said, there is definitely a lot of competitors from both VimpelCom and Golden that has been spending a lot of money on telephone calls to I think both management teams. So I would expect that in the first quarter that the ARPUs of both companies will go up, this simply because of revenues from incoming calls from competitors.

That's the way to generate ARPU. As far as the Sky Mobile are concerned, Sky Link, sorry, Freudian slip of the tongue. As far as Sky Link is concerned, I don't think that we're really that threatened yet. The reason for that is that in most of the regions we already compete with four, five other players. And the fact that one of them would be holding more licenses across the country doesn't change much. It depends quite a bit on their strategy. It depends quite a bit on their financial robustness or their model. And the fact that they will aggregate the operations probably is not more threatening.

As far as their effort in Moscow is concerned, they're holding so-called temporary commercial use license for EVDO which is exactly sitting in the lower band of HSPA. And they've been using these frequencies for that technology. To the best of my knowledge they cannot automatically convert it. They have to go through a process of returning this and issuing the license for different technologies should be issued. And actually the license should be for any technology in that sense. And I have not heard of a licensing process would have been announced. It might happen. But even if it happens it means that unlikely we'll see much of progress in that front this year. So it's more potential speculation how the 3G scene will look in 2009 in Moscow if Sky Link manages to convert what they hold into HSPA, and into permanent license.

Just to add a bit, I think that in -- during this year some additional competitive pressure we will get, not only from Sky Link but also by Tele2 who got some additional licenses. And maybe from some other players. But on the other hand, we believe that we are well positioned to compete. We have the strongest brands, biggest active base, very good regional presence, a unified business model. So we're well positioned to be very competitive.

Okay, thanks very much. And I don't know, maybe with acquisition of Golden, are you planning to also inherit the practice of giving guidance for these parameters like revenue growth? You talked about CapEx a little bit already, but -- and a little bit of margins. But revenue growth, do you have anything to say on that?

We would rather cure it than inherit. And I think that we're going to stick to our policy of giving guidance on known CapEx.

Thank you very much.

Thank you.

And with that there are no further questions in the queue. I'd like to turn the call to Alexander Izosimov for our closing comments.

With this I would like to close, and just to say thank you for your attentions and your questions. So if you have any more questions, please do not hesitate to contact us and we will be happy to give you all necessary clarifications and explanations. So with this have a nice day and goodbye.