VEON Ltd (VEON) 2008 Q2 法說會逐字稿

Good day everyone, and welcome to this VimpelCom conference call. As a reminder, today's conference is being recorded. At this time, I'd like to turn things over to your moderator for today, Mr. Michael Polyviou. Please, go ahead.

Thank you. Good evening, good afternoon and good morning. Welcome to VimpelCom's conference call to discuss the company's second quarter 2008 financial and operating results.

Before getting started, I would like to remind everyone that except for historical information, statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties. These statements relate in part to the company's strategies and development plans in Russia, the CIS and Southeast Asia, market growth and the competitive environment in Russia, the CIS and Southeast Asia, 3G and fiber-to-the-building development and projections relating to the company's cash position, dividend payments and capital expenditures.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statement, including the risks detailed in the company's press release announcing the Second Quarter 2008 Financial and Operating Results, the company's earnings presentation entitled Presentation of 2Q 2008 Financial and Operating Results, the company's annual report on Form 20-F for the year ended December 31, 2007, and other public filings made by the company with the United States Securities and Exchange Commission, each of which are posted on the company's website at www.vimpelcom.com.

In addition, the company's Second Quarter 2008 Financial and Operating Results press release and Form 20-F are posted on the SEC'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 2008 Financial and Operating Results press release, please contact FD at 212-850-5600, and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented on this conference call can be downloaded from the VimpelCom website.

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

Thank you. 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; Jean-Pierre Vandromme, our Executive Vice President of Russian Operations; Dmitry Pleskonos, our Executive Vice President of CIS Operations; and Nikolay Pryanishnikov, Executive Vice President of International Business Development. Also with us are Kent McNeley, our Chief Marketing Officer, and Alexander Boreyko, Director of International and Investor Relations.

Today's presentation will start with a general overview of our performance in the second quarter. After that, we will review in more detail the results from Russia and the other markets where we operate.

In general, we observed good growth in all of our markets and across both mobile and fixed segments. We grew consolidated revenue by 52% with a healthy 47% OIBDA margin. The OIBDA margin is in line with our internal targets at this stage of integration of Golden Telecom.

In the middle of the second quarter, we intensified our marketing efforts in the Russian mobile segment and are already seeing an increased momentum in sales. We expect to see this momentum continue into the third quarter.

The fixed line segment also showed a strong underlying performance. Pro forma year-on-year revenue of Golden Telecom grew by more than 50%, which is faster than the growth rate in our mobile segment. The integration with Golden Telecom is on track, and we are making good progress there.

We are very pleased with the performance of our CIS operations. In the second quarter, we outperformed major competitors in revenue market share in all of our CIS markets. We have also made progress in our expansion strategy by signing agreements to enter Vietnam and Cambodia.

Now, Elena will tell us about the financial results.

Thank you, Alexander. The second quarter results include full-quarter consolidation of Golden Telecom's operations. This, coupled with positive development in our mobile segment, produced once again remarkable growth in revenue, 52% year-on-year. As we anticipated, the consolidation of Golden Telecom led to the group margins moving to the mid 40s, at 46.8%.

In absolute terms, our quarterly OIBDA increased year-on-year by $326 million, a good indication of further improvement in our cash generation capacity. Net income reached $470 million, an increase of 31% year-on-year. Most of the decline compared to the previous quarter can be explained by unusually high foreign exchange gain of close to $185 million that were recognized in the first quarter of 2008.

In the second quarter, our share price was stable, and thus accruals connected with our stock option plan, came to a more standard level and were mainly connected without pending options listings.

As we discussed previously, at the end of the third quarter, our balance sheet changed quite substantially compared to the year-end due to the Golden Telecom consolidation. During the second quarter, our total assets increased in line with the business growth from approximately $16 billion to approximately $17.7 billion.

This increase in assets includes the minority buy-out of 49% of Corbina Telecom, a subsidiary of Golden Telecom for $404 million. And we successfully refinanced a $1.5 billion bridge loan facility with a $2 billion bond placement. Coupled with some other funding activities, this increased our total debt to $7.7 billion. Our debt-to-OIBDA ratio is now 1.8, which is within our comfort zone below 2.

With this, I give the floor back to Alexander to discuss in more detail our activities by segments and product lines.

Elena, thank you very much. Let's look now at the sources of our revenue growth. Mobile communications represent the larger part of our business, and it continues to grow. At the same time, the fixed-line business is already responsible for 17% of our revenue, and we expect this segment to remain an important source of growth in the future.

From a geographical standpoint, the CIS business accounts for 14% of our revenue, and we expect the contribution of our CIS operations to consolidated revenue will also grow going forward.

Let's now move to specific geographies, starting with Russia. In Russia, our revenue grew by 53% as a result of strong growth in both mobile and fixed revenues, as well as full-quarter consolidation of Golden Telecom. Our OIBDA in Russia was 47.3%, in line with our internal targets. We are on track with our 3G and FTTB roll-out plans. By the end of 2008, we plan to launch 3G and FTTB networks in more than 40 cities each, significantly expanding our presence in the broadband market.

In the Russian mobile segment, we have regained momentum and are pleased with increasing gross sales, active subscribers and ARPU. We attribute the continued growth in ARPU to stable pricing and an 11% quarter-on-quarter increase in usage, but the margin of 52% is in line with our historical averages for Russian mobile.

Fixed-line revenues in Russia grew by 52% compared to Golden Telecom's revenue in the second quarter of 2007. The business segment grew year-on-year by 37%, wholesale segment by 47%, and the residential segment by 262%. The OIBDA margin of the Russian fixed-line business in the second quarter was 21.7%. The margin was affected by $11.2 million of one-off expenses related to the buy-out of the minority stake in Corbina Telecom. Without this effect, the fixed-line OIBDA margin would have been 24.4%.

We see huge growth potential in the Russian residential broadband market and are accelerating our push in this area. Our focus in residential broadband is the active roll-out of our fiber-to-the-building network in Russia. At the end of the second quarter, we passed 5.5 million households with our FTTB technology. We had 476,000 FTTB subscribers yielding a current take-up rate of 8.6% for the FTTB service. We're intent to increase marketing pressure by rebranding our residential broadband service under the Beeline brand, which will lead to further acceleration in the take-up rate.

Now moving to the CIS countries. Kazakhstan remains our largest geographical segment outside of Russia. It is the largest contributor to our CIS business, accounting for 48% of the revenues and 59% of the OIBDA for the CIS reporting segment. At the same time, Armenia, Ukraine and Uzbekistan are becoming increasingly important parts of our business as well.

Let's now look at the major CIS markets in more detail. In Kazakhstan, we have been focusing on improving network quality, strengthening the direct dealership, and intensifying sales and marketing activities. These efforts resulted in a 13.8% quarter-on-quarter revenue growth rate, which is two times higher than that of our major competitor. ARPU grew by 6% compared to the first quarter, which is particularly encouraging in light of ongoing economic difficulties in the country.

In Uzbekistan, we have been focusing on improving our network and service quality, and that has helped us to grow our active subscriber base. We're also the only operator which increased ARPU compared to the first quarter. The result, our revenue market share increased by 1.5% in the second quarter alone, which is ahead of all the competitors.

Our Ukrainian business demonstrated impressive 200% year-on-year revenue growth. Our mobile operations reached a point that permitted us to launch aggressive new campaigns targeting high-quality subscribers. The results were positive -- 26% increase in mobile revenue compared to the first quarter, improvement in the quality of our subscriber base, which increased usage, and average price per minute yielding an ARPU of $7.5.

With the addition of Golden Telecom's sizable operation, we're executing an integrated operator strategy in this market. We expect Golden Telecom's operations to help us to strengthen our position in the Ukrainian market, especially in the corporate and residential broadband segments.

We introduced the Beeline brand in Armenia in April and are focusing on marketing and execution in retail. We are already seeing positive results with a 26% quarter-on-quarter increase in active mobile subscribers, a 3.7% increase in our subscriber market share, and gains in revenue market share.

As part of our integrated operator strategy, we're stimulating traffic between our fixed and mobile networks. Second quarter, both mobile and fixed revenues showed sequential growth. It's also worth mentioning that we more than doubled our revenues year-on-year in two smaller markets, Tajikistan and Georgia.

Now internationally, we have recently added another growth platform, international operations outside of Russia and the CIS. We started the build-up of our Southeast Asian cluster by signing a joint venture agreement to launch a GSM network in Vietnam. We added to this cluster by acquiring a company holding a mobile license for Cambodia. Both markets represent attractive opportunities due to relatively low penetration and positive demographic and economic trends.

The combined population of these two countries exceeds 100 million people. The Vietnamese market is predominantly prepaid and SIM cards are widely subsidized, leading us to believe that the reported penetration numbers of over 50% are significantly overstated. Although six companies, including three CDMA operators, do have licenses in Vietnam, we believe that the existing players have not yet engaged in intensive marketing activities and have not fully developed their sales networks.

Therefore, Vietnam offers us a great opportunity to utilize our strengths and experience in branding, marketing and sales. Both countries will require additional work, preparation and approvals before we can launch operations. We plan to launch commercial operations in both Vietnam and Cambodia in the first half of 2009.

So in summary, the second quarter was a strong quarter with good results across all geographies and business lines. Business is in good shape, demonstrating momentum in Russia and strong dynamics in the CIS. We have launched our expansion into Southeast Asia and are excited about the growth prospects in these countries. The company is in good financial shape and is well positioned for the future.

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

(OPERATOR INSTRUCTIONS). And we'll take our first question from Jean-Charles Lemardeley at JPMorgan.

Yes, hello. Could you please on the topic of Vietnam, people locally, other operators who are seeking entry into Vietnam in particular are still dismissing your chances there of getting spectrum and a license, claiming that the telecom industry does not approve of your venture, also claiming there's still some uncertainties about foreign ownership restrictions in the telecom sector in Vietnam. So could you just clarify your position again there and specifically your expectations of actually getting the license and the spectrum?

Yes, thank you for the questions. So we signed a joint venture agreement. It was a very big advance in Vietnam and was approved on all levels, including prime minister. And right now, we're in the final stage of getting investment certificates and getting the license with the frequencies.

According to our information, everything is moving absolutely fine, according to the plan. It's just a question that all documents in Vietnam takes time for kind of final approval. But as of today, we don't see any significant risk of not receiving these documents.

Even more, we already started some preparation work. For example, we started, together with our partner, preparation work for their switches in this country and some preliminary work on site, acquisitions for the base station.

And when do you expect to hear something definitive in terms of spectrum?

We believe this will happen during the nearest month.

Okay, great. The second question is just on the issue of Russia and your -- the momentum you've regained in terms of growth. July was your best year in three years almost in terms of net additions in the market. Does that reflect a change in your stance in relation to the opportunity to grow through subscribers in that market? Or not at this point?

Not in particular. I think on the previous call and what we had announced that we had reduced our marketing efforts in light of the short-term debt that we had. As soon as the short-term debt was refinanced in May, we resumed our activities on the same level as in the previous quarters of '07, and we've seen the yield of that immediately, as by the way we had also predicted that would happen.

I understand that, but over the last two years, you've been a bit more dismissive of subscriber growth in MTS, generally speaking, claiming there was little value to be added to subscriber growth and that the growth was going to come from usage, which is correct. But so I was wondering whether it was just indeed what you had indicated in the first quarter in terms of coming back to the market, or highlighted a greater shift in terms of your reviews on the market?

I guess that part of the blame for the previous views should go to me, because I think that partially we got it wrong. We have underestimated the impact on revenues of the ongoing activities and the influence of the sales. We thought that the quality of the subscribers would be actually not as strong as we've discovered.

So in that sense that, yes, we do correct our view. We are not saying that there is a lot coming to the market. The market will be growing probably in terms of penetration in single digits. Again, the numbers are overstated because MTS is reporting on six-months basis, and that's not exactly accurately reflecting the true active base. And it brings some confusion on what's the real penetration on the market.

But it will continue to expand in the single digits, and also there is of course risk of if you are not actively present in retail, you will start bleed your subscriber base. What we continue to be dismissive of is that you can win significant advantage on the market, given everything else equal, by actively marketing and pushing and sales, and create gap in your market share. This is not going to happen.

The market share in that sense is very difficult to redistribute. You can lose 1%, 2%, you can gain 1%, 2%, but the competition will instantly retaliate. Hence, we're still holding that view, and for now I would reiterate that our vision of Russian dynamics is to grow with the market, and growth in the market actually is quite strong. But to perform better than the market, not through gaining market share in mobile at the expense of margins, but actually to extract a faster growth in the broadband area. And hence was the logic of our acquisition of Golden Telecom.

So, we're still holding firm to that area. However, we had to step up our presence in retail in order to protect our market share and return what we left, what we've lost during last quarter.

Thank you very much.

And we'll go next to Igor Semenov at Deutsche Bank.

Yes, hi. I have a couple of questions. First on the iPhone, please. You had said that you have signed an agreement with the Apple iPhone. But firstly, there's no press release from Apple, so I just wanted to clarify why there is a delay and why isn't there a simultaneous release?

And if possible, I'd like to get more details on the agreement. Are you planning to introduce contracts? What are the potential penalties maybe if you are unable to actually sell as many iPhones as the press suggests that you have committed to? And just in general, how are you going to sell them, at what price levels and things like that?

And the second question is on the price premium to MTS and Megaphone. This is probably this third quarter when the price differential between you and your competitors is pretty significant, so how long you think -- and their prices, effective prices are going down. So I'm just wondering how long you think you can sustain that price differential? Thank you.

First of all, on the iPhone, in general Apple's approach is that they tend to make an announcement across the market once the final date is established for when the launch will be. They're still in the process of working on various issues that need to be completed before they can set that date.

But we discussed with them the need for us to disclose the fact that we were having somewhat of a shift in strategy by moving into the acquisition of hand phones directly, which we've ever done. And so based on that, they agreed to let us include this in our release and make it public. But, the final announcement that will provide more details of our plans will be when we know the date.

And just in general, the terms of the contract, we really are not in a position today to release those, and the marketing plans will become more apparent as we get closer to launch.

Igor, as far as the devicing, I assume that you refer to the APPMs in Russia is concerned. However, APPMs have been flat more or less for three quarters, and we have seen that the APPMs for both Megaphone and for MTS have slightly increased in the last quarter. So we believe that there's no immediate need to decrease our prices. And looking at the sales results of July, there doesn't seem to be an immediate need to reduce our prices, again simply looking at the sales results.

Okay.

And we'll go next to Pamela Antay at KBC Securities.

Hi. Good afternoon, gentlemen. And just a couple of quick questions. The market share erosion in Russia seems to have eased now. Is that because the stricter churn policy is not completely in place? And so, can we expect your market share to remain stable at a 25% level? And in relation to that, what can you attribute the strong ARPU to? It would appear it is from strong tariffs per minute. Can we expect that trend to hold up? And what risks can you foresee at this point to retail tariffs?

Answering on the question on RPUs, seeing the effect that all of our APPMs have remained stable for the last three quarters, the increase is RPUs are solely due to increase in minutes in usage.

As far as the erosion in market share is concerned, there's no further or no significant erosion in the second quarter. And looking at the announced increase in active subscribers of the three operators in July, there's definitely no further erosion going on.

All right. And can you share with us any risks that you can foresee at this point to mobile retail tariffs?

As I said earlier, on the mobile retail status, we have been very disciplined over the last three quarters and kept our APPMs at the same levels. We have seen competition, both MTS and Megaphone in the last quarter raising their prices, so I believe that our discipline is starting to pay off.

Good. Okay.

Well, let me just add that on this 25% number, we believe it's not very correct because we and Megaphone used three months, a period of [fact] where subscribers (inaudible) using six months, and other players are using different methodology. So our estimation is that on active subscribers who have seriously higher numbers. But these numbers, it's not -- we're using this public data in order just to have as much information to investors as possible.

Sure, understood. Thank you.

The real number is higher.

Okay. Just the second question, on the fixed side, can you just take us through the dynamics behind the lower broadband take-up in 2Q '08 and how you think you can stimulate take-up again? Can we maybe expect broadband ARPU erosion to stimulate that?

So if you look at the take-up rates, they are very much linked to the amount of construction that goes on. If you look at Q3 versus Q1, there was only a construction of an additional 300,000 households in that quarter.

Yes.

And that means that in that quarter, the majority of the buildings was more than a quarter online.

Right.

If you look in the second quarter, we've constructed an additional 1.4 million households. These 1.4 million households are on average only six weeks ready for sale. So, the reason for that is simply that we have a large amount of buildings that came online very recently. A more realistic view of looking at it is looking at those buildings that have been online for a longer period.

And just to give you some information, 48% of the total amount of buildings are situated in Moscow. Seventy-four percent of the clients are in Moscow. But if you look at the take-up rate in Moscow, then that is 14.1%. So you can see if buildings are online for a longer period, then the take-up rate is much higher.

Perfect, okay. So we can expect that for Russia, this take-up rate figure should be higher perhaps in the coming quarters then?

Yes. There's a second reason. On that, we have historically seen over the last -- '07 and '06, since this project has started, that in the summer months, June, July, August, that the ratio, active subscribers versus total subscribers drops about 5%, because people leave in those months for their summer houses. They go on holiday, and they freeze their accounts during that period. So we see that systematically happening every -- for during these three months, and we see them coming back in September and getting back to a completely normal level by October.

Okay, that makes sense. Thank you very much.

And we'll go next to Herve Drouet at HSBC Bank.

Yes, hi. My question is also regarding take-up rate in residential broadband. I understand what you are saying in saying the second quarter drop in take-up rates is due to accelerating the amount of the households being passed. I was wondering if you can share with us if you see any difference in terms of take-up rates between the different regions? And if there are any regions or cities where the take-up rate is below 10% after a year that the building has been passed out?

And my follow-up questions would be as well regarding margin, I don't know if you can share with us what is the current EBITDA margins of residential broadband? And how do you see the evolution and the trend looking forward? Thank you.

Well on the take-up rate, the only two cities that have buildings online for more than a year are Moscow and, to a lesser extent, St. Petersburg. But even in St. Petersburg, there are very few buildings that have been online or on sale for more than 12 months. So for all the rest of the countries, it's really too early to say because there, the amount of buildings, most of them have been online for less than three months by now. So it's absolutely impossible to say.

But if we look at the Moscow market, when you look at different areas in Moscow, then it's a very mechanical process, that as long as buildings are less than three months online, the take-up rate is between zero and 3%. Once we go to six months, it goes up to about 6%, and speaking absolutely mechanically, you can for all practical purposes really say that per month, that a building is online if the percentage of penetration really goes up with the percentage.

And have you noticed any big difference? I know really it's maybe too early to say, but even after three months in terms of the ramp-up between the different regions. Is there a big variation between regional cities? Or do you see all cities behaving in a roughly similar way?

It's really too early to say that. As I said, the data that we have from other cities is, for all practical purposes, the average lifetime of a building is less than three months.

Okay.

As far as the margins are concerned, at this stage, looking at the margins is fairly irrelevant. If we look at the margins for Q1, they will have been much better than the margins for Q2 because again, we have 5.5 million households that we've passed, of which 1.5 nearly, so a quarter practically or more than a quarter, have been online for less than three months, where we have to carry all the costs and have practically no revenues for it. So you really have to look at it over a much longer period than that.

But in terms of a medium-term view, will you still say that in a medium-term EBITDA market you would expect will be 30% EBITDA margin? I mean, I understood you were saying it could reach even mobile EBITDA margins. Is it something you would still say? Or you will give maybe a slightly lower figures?

I think that the only indication on margins that we have given ever was on the whole of the business, and I think that Alexander on the last conference call reiterated that we expect the margins to return to the high 40s for the combined business. And I think that we should stick to that.

Okay. But do you expect EBITDA margin -- I mean, we see Western Europe ISPs, EBITDA margins roughly 20%, 25%. Do you think you can achieve more than that?

I think if you do the analysis of where the cost of the ISP comes from, practically all ISPs are DSL providers, and the big cost for the DSL provider, this is what they've paid for the unbundled local loop to the incumbent, we don't have that cost. And what effectively what we have done with building our own FTTB networks, rather than having the more future-proofed technology, we've also shifted OpEx into CapEx, which means that the margins will be higher than 25%.

Okay. So it will actually be between mobile and 25% -- you don't want to be more specific in the range?

Right.

But it would be within that range?

I think we better move on, all right? I mean, we gave you as much as we could.

Okay. All right, thanks.

And we'll go next to Stephen Pettyfer at Merrill Lynch.

Thanks. If I could go back to the issue of the regained momentum in the mobile segment please, just looking at your disclosure on the advertising costs. I was interested in the comments made about things moving forward, moving more aggressively post May.

But if I look at the advertising cost, that was quite a notable upward shift for the whole quarter versus Q1. Does that imply that advertising and, indeed, sales and marketing generally will be at a higher level than we've seen historically going forward for the remainder of the year? Thanks.

Well, first of all, I think we've said before that you should really be cautious about reading quarter-to-quarter swings in marketing. We have continuously said on the mobile business that our target in marketing was to be between 4% and 5%. The fixed-line business from Golden has historically been lower than that, and I think if you look at the marketing in the first half, we're down at about 3.4% of revenue from marketing.

So we're below the quarter that we have historically talked about. But it's just something that's more volatile. We'll continue to support the business at levels that we believe are sufficient to drive our initiatives.

Thanks. And if I could just ask a follow-up, and apologies if I've missed something. But just on your cash flow statement. There's a line there for prepayment of Limnotex, is it, $562 million-odd. What's that refer to?

That's the buying of 25% in our operations in KaR-Tel, so we increase our stake from 50% to 75%.

Oh, okay. Thank you.

And we'll go next to William Kirby at Nevsky Capital.

Yes, thank you. On the cost side, your press release mentioned fixed-line SG&A of $127 million, and this compares with $50 million at Golden Telecom a year ago. What was the cause of that increase? And how long will that sort of OpEx growth rate continue? Thank you.

No, we just showed the total quarterly SG&A spending of Golden Telecom in the amount $126 million, which was included in our consolidation statement. And I guess that's exactly in line with what was shown in Golden before, so there was no big swings. Everything which was growing were in line with business growth in Golden Telecom.

But that $127 million as a percentage of Golden's revenues is much larger than it was as a percentage of Golden's revenues a year ago, no?

There's the $11 million --.

That incorporates the $11 million for Corbina, which we said artificially depresses it.

Okay, thank you.

On the rest the SG&A is at the same, about 20%, but it was earlier.

Yes, actually more or less in line with what we told before.

And we'll go next to Will Milner at Arete Research.

Hi. Just a couple of quick questions, firstly on your group CapEx. I think at the start of the year, you mentioned $1.45 billion was your full-year '08 budget for VimpelCom and another $0.45 billion for Golden, which I think made about (inaudible) $1.9 billion. Just on the timing of that CapEx, it looks like you spent well over half in the first half of this year.

And I just wonder if there's a reason for that, if there's sort of an unusual timing of CapEx? Because obviously historically, you have a big spend in the fourth quarter. Is that not going to be the case this year? Or maybe you can just talk about that?

And secondly on Russian usage -- and this may be something that we do offline I guess -- but the 220 MOU in Russia, could you maybe just say what proportion of that was inbound and how that has changed over the last year? Thanks.

On CapEx, actually our guidance, $1.9 billion, was for Russia only. And therefore, you need to separate those numbers. And so in principle, we're actually under 50% if you look at it that way.

We're at $600 million for Russia, $638 million, so that's well under $1.8 billion. Other than that, we have indeed tried to accelerate the CapEx into the beginning of the year and not to have the high expense we had in previous years each time in the fourth quarter, try and build a little bit faster and spread it out more throughout the year.

On traffic, approximately 60% of the total traffic is within our network, and the rest holds to our competition and to our fixed line. And it was approximately stable during the last year. The difference was within the few percentages. Calls -- incoming calls are a few percentage points higher than outgoing, so that's that status.

And has that changed over the last year, that proportion?

Not seriously. Also within a couple of 1, 2 percentage points. So it was not any serious difference. The main serious difference was when CBT was introduced. At that time, it was some growth of amount of calls from the fixed line phones, but then it stabilized.

Okay, thanks a lot.

And we'll go next to Nadezhda Golubeva at Unicredit.

Yes, good afternoon. First of all, could you please tell how much of the broadband subscribers are in Moscow, in St. Petersburg and in the regions? And the same information about homes passed. And also, I'm curious about what is the take-up rate in Moscow in the buildings which are more than 20 months online? So possibly I missed this.

Secondly, your usage growth fell from 24% year-on-year in first quarter to 14% year-on-year in second quarter. So do you think this is a trend? And do you think we're about to stay at this level for now, or we can quickly come to just single-digit growth in usage year-on-year?

Also, I wanted to ask you about the ruble transfer. In case ruble appreciation trend reverses, are you thinking about this and are you planning some measures? And so, if yes, what you think could be done to support the dollar-based revenue growth? So in particular, I'm curious about is it possible that you can reach to some sort of units and that you were [judging] previously?

And finally, I wanted to ask you about Vietnam. Could you bring some light about CapEx agreement with your partner? So in particular, is it correct that you are going to bear all the CapEx, at least for a certain period of time? Could you comment on this, please?

Which one of those?

Sorry about that. So first of all, breakdown of broadband subscribers, mostly from St. Petersburg and region if possible.

So Moscow is 74%. The buildings 48%, clients 74%. The remainder of the subscribers, St. Petersburg is a total of 10% of the total, and then the remainder is the rest of the country.

As far as WiFi is concerned, out of the total of 609,000 broadband subscribers, 94 are in WiFi. And that is staying stable, more or less, for the last two quarters. We are making no further major investment in the WiFi network, so we expect that figure to remain either slightly increasing or on the same level.

So could you please tell the number of broadband subscribers in the regions outside of Moscow and St. Petersburg, active subscribers?

So the total amount of broadband subscribers is 609,000. And then Moscow is in total 440,000. And St. Petersburg is, what did I say, 66,000. So the remainder is the rest of the country. So that's what, 100,000 is the rest of the country.

Okay. And what is the take-up rate in Moscow in those buildings which are more than 20 months online?

As I said earlier, if you look at it practically, we have practically no buildings that are more than two years online. So it is practically a mechanical line that if a building is online for more than six months, then per month as the building is online, it increases with a slightly under 1%. It's about 0.9% per month that the increase is. So if you have a building that's online for 24 months, then the uptake will be about 22%.

Okay. And then about usage?

This quarter, we're selling 14% minutes of use growth in Russian mobile, and we believe that's a very strong number year-on-year. And that's kind of in line with our forecasts, which were same. We were always saying that we believe in more than 10% growth year-on-year, and now we're showing 14%. So that's pretty in line.

So do you think we can see this above 10% for about -- for another six months or so?

That's the question as I understand it, that we still stand by our view that, while the traffic is not being stimulated, and just through the sheer growth of the economy, prosperity and the comfort of the subscribers with the category, which we validate through our corporate analysis over the period of time, we see natural growth coming through between 10% and 15%. And therefore, that case of 14% pretty much squares well with what we would anticipate.

Okay, thank you. And then to ruble?

Yes, overall we really believe that the right way to price, certainly in the short and even medium term, is to focus on the local currency and not so much pegged to what the dollar is doing, because first of all, fluctuations.

But longer term, the right way to price, we believe, is based on inflation, on GDP, looking at the wages in the market and what competition is doing. So we'll keep a ruble focus and look at those factors.

So in other words, does it mean that in case of high price inflation and high wage inflation, there is a chance that you will be able to right prices? Say, if we see a weakening of the ruble and hence weakening of your dollar-based top-line growth?

Again, Nadezhda, I think that we need to let the others also ask the questions, but finishing this one off -- the underlying question here is can we protect the margin from inflation, as I understand it. And as long as we see that our margins are where we want them to be, i.e. between mid-40s and high 40s for the group and 50 or slightly above in the mobile segment, we're not going to revert to pricing, because that's probably the most our last resort.

If you ask the question can we do it in principle, the answer is yes. Because when you're operating in the ruble price environment, and there is the ruble price inflation, people in general tend to accept that the prices will be adjusted for inflation. But before we revert to this, we would be more keen to look for efficiency gains in the cost base. And only when we exhausted that resource we will revert to inflationary price adjustments.

I'm not talking in that sense what we do with adjusting different tariffs and the legacy tariffs and bringing our portfolio more in line. That's a little bit different exercise on pricing. But the pure passage of inflationary pressures into pricing, we'll do only when we don't have any other means to protect the margins. But the margins can be protected.

Right. Let's move to the next question now.

Let me answer on Vietnam. So in Vietnam, our agreement is the following. That for the 40% of the company, GSA or mobile, we paid $267 million. And that's our contribution to the venture, contribution of the partners is license, frequencies, et cetera.

As soon as the venture will start running, it will be kind of managed by both parties, and we have agreements that it will be management from VimpelCom in the venture and from our partner. Then after that, after the company would need more financing, we will be ready to discuss it and we would like to move towards controlling stage --stake in this company.

I just want to stress that $270 million goes into the company. It's not being paid to the government. It goes into the company and it will be used to build the infrastructure.

We'll take our next question from Ivan Kim at Renaissance Capital.

Good evening. Firstly on your performance in the Ukraine. Could you please elaborate a bit more what stands behind the increase in APPM in Ukraine, and just overall what dynamics do you see for the future, say mid-term competitive ARPU usage dynamics?

And secondly, could you please shed more light on your Cambodian operations? What was the competition that is there? What is the pricing? Are you going to rely on the local management in terms of execution or when you going to [get] frequencies? Any restrictions in terms of foreign ownership or capital expense overall? Thank you.

All right. On Ukraine. So basically, as we were saying last year, for us it was very, very important. There were concerns among the shareholders, among the investors, among the directors, to stabilize the business, that it wouldn't become for us a black hole which sucks up cash. And for us to bring it into a positive EBITDA territory, it was very, very important. Hence, that was the focus of the management.

By the end of the year, when we achieved that, we decided that it's time now to shift the gears and start attacking the market again and build up our subscriber base. So what we introduced in the second quarter, it was a set of tariffs and changes in the tariff policies, which turned out to be quite successful. And it yielded -- it became very attractive for higher usage type of subscribers and attracted quite a few of those away from our competition. Bringing them on our network resulted in quite significant increase in ARPU, and as a result, we see this growth happening.

As far as APPM is concerned, that naturally the - unnaturally -- but the market currently still is in a pretty dangerous zone, I would say a war zone, where pricing of all the competitors is very, very aggressive. There are a lot of offers on the market with zero net.

And of course, larger operators can sustain it through extremely high, prohibitively high, interconnect, and they fund their operation through that. It's a little bit more challenging for us and Astelit, and therefore we decided to go a little bit different way.

But overall, summing it up, pricing situation in Ukraine remains very, very aggressive.

On Cambodia, their market, we believe, gives us a good potential. There is a number of players, but there it's one big competitor. It has two thirds of the markets, and the rest distributed to the smaller players. And we believe that it's relatively easy to compete with them. Pricing on the markets are seriously higher than in Russia, for example. It's approximately 40% higher APPMs. RPUs are also seriously higher than in Russia and most of our markets, and penetration is low, 18% only.

This gives us a good chance to compete actively. There is no restriction on shares of foreign ownership. That's why we have 90% of the company, and we have that very good local partner, having 10% and supporting us with some local issues. And in terms of management, we plan to have combined management team -- some VimpelCom strong and proven managers and some local managers from Cambodia and from Southeast Asia.

Thank you.

And we'll go next to Kathleen Middlemiss at UBS.

Yes. Hello. Good afternoon, I have two questions. I couldn't find it in your presentation, can you provide us with your blended churn number? And also, a question on your funding. Do you have any plans to come to the markets in say the next six months for any funding that you may have? Any funding needs you may have?

Let me start with the funding question. So, as we discussed earlier that we need funding only for acquisitions, because our current operations are funded by our own cash generation.

Right.

And so, depending on what will be in the pipeline, I would say now M&A activities and then the potential that we may look for additional funding. That's the point.

Okay. Thank you.

Well, I mean in a meaningful way, to talk about churn, we can on a country-by-country basis, right? And carving out the mobile segment. So probably we need to talk about Russia, because the situation is fairly different across the countries. In Russia, churn on three months basis is just under quarterly churn, just under 9% in Q2.

And your other major contributing countries? We don't have to go through them all, but I mean, just the main countries?

If we look at Kazakhstan, the number would be under 8%, 7.6%. If we look at Ukraine, here the situation is different, of course, because there you don't have requirement for registering ID of the subscribers, so churn is naturally high, 17%, but down from 20% on the previous quarter. And Uzbekistan is about 13%. That's all quarterly numbers.

Thank you.

And we'll go next to Dalibor Vavrushka at ING.

Oh, hello. Good afternoon, good evening. Just two quick questions. One is back to the issue of the Russian mobile market growth. I mean, it seems that the net additions, not just for you, but for the market are now picking up. And I just wanted to ask how many of these are really new subscribers and how many of them are just churning between the operators? And what is the business model, basically? If the actual market is saturated and you start churning more and more subscribers between the operators, where do you think this is going to lead to in terms of subscriber acquisition costs, et cetera?

And the second question is also on that subject. I don't know if you can highlight how your profitability changed in the Russian mobile business during the second quarter, because obviously you still showed some negative additions at the beginning of the quarter and then you resumed the marketing activities or you started gaining subscribers. So whether it had any impact during the quarter on the profitability of the Russian mobile business? Thank you.

On the increased volumes of sales in the mobile sector in Russia, you have to take into account that all three large operators have partially engaged in sampling. So our estimation is that of the total sales on the market, that there's probably about 10% that relate to sampling. So [excluding] partly will be the new subscribers.

Let's also not forget that if you look at the Russian population, that every year there is 4.5 million people that get a year older. So in other words, they move into the age group where they would become mobile users. While on the other hand, we estimate that the penetration in those people that pass away is probably much lower.

We also see that the age in which people use mobile phones is further decreasing. So I think the increase in sales itself is a combination of three factors. People getting at an age that they get a mobile phone, sampling, and then the last one will be churn.

And then the very last thing is on an annual basis, we've seen sales increase each time during the summer. So seasonal factors, people -- that move people that are on holidays and instead of using roaming, they buy local SIM cards. So if we let, for an example, go to the south, especially Krasnodar, the highest sales of the year are in the two, three summer months. In fact, in the three summer months, sales are nearly the same as in the rest of the year, and that's people that move to the south on holidays, and go and buy local SIM cards.

Yes. And talking about profitability, yes, of course the major impact, as you know, on the profitability comparing first quarter with the second quarter was that big swings in accruals and stock option plans. So in the first quarter, we reversed 43 million. In the second quarter, we accrued additional 12 million. So it will take out that fluctuation.

We still have some decline in OIBDA margin in the second quarter, which is connected to some small extent to roaming, which has led margin and brings slightly down gross margins. Then of course, as we discussed already, we intensified marketing activities in the second quarter, and also intensified the rollout. And so, our expenses connected with the management of the network was slightly high in the second quarter compared to the first quarter.

Okay. Thank you. I mean, I don't know if I can still ask and probably you will not be able to answer, but my question on the profitability was more in the month in June, for example, when you actually started adding more subscribers than in the previous two months. I would assume that that also has some impact on profitability.

And given the fact that you're now talking about resumed growth in subscribers, I was wondering if the profitability that you are achieving in the second quarter as a whole is a good proxy for the numbers going forward, or perhaps whether the number should not be lower, given the fact that you are actually planning to resume the growth in subscribers?

If you look historically, the margins have been around 52%, and really the only two quarters where there is a substantial difference is in a swing of about 1% depending on the quarter. But the only two quarters where there's a substantial difference is the fourth quarter, when we had the huge accrual and margins went down to 45% in Russia. You then had the reversal the next quarter, in March, it went up to 57%.

So these are two quarters which are related to the accruals. If you normalize these quarters, then this margin has pretty much stayed stable at around 52% for the last four or five quarters. Again, with the swing of 1% up and down, depending on seasonality, roaming or no roaming, higher marketing activities, higher advertising spend in the second half of the year versus the beginning of the year. So overall, on an annual basis, it has stayed very, very stable.

Okay. Thank you.

And we'll go next to Olga Bystrova at Credit Suisse.

Yes good evening. My question is primarily on the integrated business and perhaps some synergies or progress on synergies coming through on the revenue side. We are seeing about 40% growth in business revenues at Golden Telecom. Is that mainly driven by increased spending, or you are still signing up new customers? And if it is customers, is there any way you can elaborate whether VimpelCom participating in this on the mobile side, for example?

The second question is coming back to the broadband subscriber growth. As far as I can see, historically, take-up rate in the second quarter did not really decline. Maybe because it was in Moscow, but still, could you maybe point out exactly what has been happening there? And have you been using maybe distribution, joint distribution efforts in the regions to mitigate this?

And then finally, are you currently, given your usage growth on the mobile, are you seeing mobile substitution as part of the reason in the market? And in general, how do you see mobile substitution playing going forward in the market, including broadband, particularly your integrated model on the fixed and mobile program? Thank you very much.

So on the Golden revenue and the increase of 40% in the business segment, that is still very much as usual. So it's pretty much the same distribution. It's partly an increase of revenue in existing customers. It's partly gain of market share still in those markets where it's available, where we have been historically active. But it's also partly greenfield opportunities, so expansion of the fixed line network -- I will call it on the Beeline fixed line network, in those cities where we in the past were not present.

It's a combination of three things. As far as the take-up rates of the broadband are concerned, we have historically seen a drop-off of about 5% in '06 and '07. And again, now in Q2 of this year, on the ratio of active versus registered, the difference is that if we have a 5% swing, like last year on a total of 150,000 subscribers in the FTTB network, you do not see a big influence on new sales minus those that are turning inactive.

If you have the same on 450,000 customers, then you get down to about 25,000 to 30,000 customers. So you have your normal take-up rate, minus 25,000, and you start to see the difference.

So we expect come next year's second quarter, with having more subscribers online, that it is even going to be more pronounced, and going on forward.

And then your third question was regarding mobile substitutions. We have not seen any mobile substitution. In other words, fixed line operators, fixed line customers, that start to substitute fixed line phones by mobile phones. That is a little [erosions] in there for the moment.

However, if we continue to extend the question and say what's going to happen with FTTB roll-out, certainly with that capacity which we are putting into the building, we will be very keen to attack bread and butter business of [Amarkas], and take some part of that. So it's not mobile substitution, but actually broadband, which might help us to do it. Not necessarily I would start factoring it right away, but on the lines of expanding our service offering, we will be thinking.

If you look at it on a more global view, if the figures of analysts are correct, that in five years time, about 50% of the Russian population is going to have broadband, that means for all practical purposes, that 50% of the population -- that's 25 million households in other words -- has a second provider in the home, other than the cable, the copper cable that comes into their home from the Amarkas, they will also have fiber from us and other operators going into their home.

And then the question simply is, for your fixed line network, do you get it from two operators, the Amarkas and the fiber provider, or do you go through one provider? And if you go through one provider, do you go for the fiber network or do you go for the old, slower copper network? And I leave it to you to answer what the choice will be.

Fiber network.

Okay, thanks. And how does your mobile broadband come into play in this environment from your perspective? You have not yet fully launched -- I could be wrong, right? But I don't think you have fully launched the 3G network compared to your competitors (inaudible)?

I think that the competitors have a somewhat different approach. We have, legally, we have to roll out the networks later than them. We're legally only obliged to start operations in a number of cities by Q1 next year. So we have no pressure to launch what we have done. We have decided that we will launch networks when they are commercially ready.

So you can launch networks with two [base stations]. You can launch the network, but you have no commercial operations. We have decided that we will launch networks once we have commercial operations. And we expect that by the end of the year, we will have commercial operators in around -- more than 40 cities.

Yes. Okay. And I think you didn't really answer, if you don't mind, the first question on VimpelCom participating in the mobile business, participating in the fixed line business growth. Meaning that VimpelCom, is there any progress on VimpelCom potentially signing some corporate customers that are currently using Golden Telecom, et cetera?

And also, are you already starting to use distribution that is available by Beeline in the regions, to accelerate broadband, the fixed-line broadband growth?

On the VimpelCom signing up for mobile some of the Golden customers, cross-selling has been -- well first of all, we have cross-trained practically all employees by now. Sales have started, and we have seen some very encouraging first successes with regards to large Golden corporate customers that have signed up for mobile deals. So that is as far as the cross-selling of mobile into the business market is concerned.

As far as the opposite, using the residential distribution channels of VimpelCom to start to sell broadband, we plan to launch broadband under the Beeline brand in the second half of September.

Okay, great. Thank you very much.

And we'll go next to Frank Maao at DnB NOR.

Yes hello. Do you hear me?

Yes.

Good afternoon. I have a question elaborating a bit, if you could elaborate a bit, on increased sales volume there in July. You mentioned that there hasn't been any necessity of doing something regarding the pricing, and if you could comment on -- more -- describe your acquisition costs perspective, whether or not you see that moving particularly compared to the activities you have in the first half of the year, now that the volumes have picked up and you have changed that strategy slightly? That's my question.

Let me answer the last question. As far as subscriber acquisition costs, the SIM is concerned, we haven't seen any dramatic changes in the second quarter, and we also do not expect any major differences. And major differences would mean differences of 15%, 20%, 30%. We do not expect any such changes for the rest of the year.

As far as the why, we have picked up additional sales. It's really a combination of all different sales channels. We've paid more attention to it. We have invested in the sales channels again. And it's really across the board, a mixture of national dealers, strategic dealers, local dealers, own exclusive shops, et cetera.

So there is no specific channel where we have increased sales dramatically. It's really an effort across the board where we have, as we have previously announced, that we will again start to invest in the sales channel as soon as we were sure that the short-term debt was being converted into long-term debt. So we've done exactly what we've said that we would do on the previous call.

Yes, thank you.

And we'll go next to Anastasia Obukhova of VTB.

Good afternoon, this is Anastasia Obukhova from VTB. I have two questions, one of them back onto the Ukraine. You were talking about there are some prominent marketing campaigns undertaken in the second quarter. I would like to know, do you see or can you estimate some one-off impacts from this campaign? Particularly to explain the nature or the essence of this campaign? Was it due to some cancellation on the previous tariffs or some other particular things?

The next question is where do you see your further market share in terms of the revenue in Ukraine again? Do you keep losing the market share in the country? And where do you see this different way as you were previously saying? Is it to Astelit to improve your position in the market? And do you see any potential or in the subscriber growth in the Ukraine as well.

Also the third question is on the gross margin of the mobile business.

Let us answer the first two.

Yes, thank you.

So as far as Ukraine is concerned, the nature of the offer was actually we offered more unlimited tariffs, leveraging relatively under loaded network. And also creating something which would appeal for people to shift from larger networks to smaller networks and not being penalized with the interconnect charges. So that's the nature of the offer.

Clearly, that has impact on our OIBDA and gross margin, because of the cost of interconnect. However, if we would apply the wisdom of other markets, the cost of interconnect tends to come down. It's been originally designed in Ukraine, like in many European countries, to be protective of kind of nascent mobile operators, and soon mobile operators become not so nascent. The costs tend to move down.

For comparison, interconnect in Ukraine is $0.12; in Russia it's $0.04. So that's the ballpark.

In Europe, you will have somewhere between $0.07 and $0.08 as an average number. So that reduction will help us to improve our profitability going forward, the improvement in the gross margin.

As far as market share is concerned, the last quarter has shown that we have gained market share, both in subscribers and in revenue. So as I said, that for us primary focus last year was to stabilize the cost side of the operations, and now we shifted the gears and we're moving forward.

We always said that with situation when SIM cards are being given away left and right, you talk about subscriber market share is not a very meaningful thing. And actually, with this type of pricing behavior, very difficult to predict what would be the development of the market.

Hence, we're currently focusing less on a targeted number for the market share. As long as it's increasing, we are on the right path. But rather we're saying, is it sustainable or is it achievable what we put in front of ourselves as a target on the scale of the business.

And I will remind you that we were talking about building a $300 million business by 2010, with mid-40s in our OIBDA and committing about $500 million, $550 million in CapEx. And we still believe that it's an absolutely achievable thing. So if you project our revenues going forward, you will see that we are on a pretty good trajectory to hit the revenue targets.

We're probably going to end up initially with the lower margin, for the reasons which I'll explain, that the raging price war and our structural disadvantage on the interconnect, which should go away following the logical development in the different markets. And then we'll arrive to our profitability as well.

Okay, thank you. And can you please offer comments on the gross margin of your mobile operations and the gross margin of your Russian mobile operations? How does it develop? Is it being diluted, like we see for example at MTS? Or do you have some other plans? Thank you.

Actually, as I had mentioned, it's slightly declined in the second quarter compared to the first quarter, but mainly stays on the same level, as that's a slight decline connected on one hand to some redistribution of the traffic and, as Nikolay mentioned, not very significant, but some percentage growth of outbound traffic coming through other mobile networks. And then we also see normally during the summer time, the effect of the roaming, which is less marginal.

Elena, you're talking about Russian gross margin, right?

Right. Yes.

Yes. Thank you.

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

Alex Wright, your line is open. Please go ahead with your question.

We'll move on to Alexander Balakhnin at Goldman Sachs.

Hi. This is Alexander Balakhnin from Goldman Sachs. I had just one question. On the first quarter conference call, you mentioned that you expect to see high 40s EBITDA margin. And now, the business isn't the greatest for already six months, and you see where these efficiencies may come from. Can you please tell us what particular steps you are going to implement in order to achieve these profitability improvements, and in what particular areas these efficiencies should be found?

If you look at the efficiencies, then they fall in a number of categories. First of all, we have a number of synergies not so much in the OpEx area, but in CapEx. So joint purchasing is one area. Secondly, both companies were in the process of constructing long distance fiber networks. We have joined these efforts now, so instead of building two networks, we're now building one long distance network.

Also in the past, being two separate companies, we then took capacity from third-parties operators, and it was not always justified to build fiber because the returns weren't high enough.

Once you joined the traffic from two companies, then the business case for building versus lending becomes much more compelling. That's the third area where we have really significant synergies and where OpEx is being shifted towards CapEx at very good payback [fees].

The next one is a lot of the traffic, or the majority of the traffic for VimpelCom went through third-party long distance operators. We've shifted more and more of the traffic away from these third-party operators towards the Golden network. As we upgrade the Golden Network to keep for all of the traffic, more and more until probably about 95% of the traffic will go through the Golden network.

As of today, practically all of the international traffic goes through the Golden network. Around 80% of the long distance fixed traffic already goes through the Golden Network, and about 50% of the mobile-to-mobile traffic goes by the Golden Telecom Network. So that's the fourth area of major synergies that we can see.

Then the last one is in a number of cities, either Golden or VimpelCom was lending capacity on its [core] in the cities. There again, we shift away, and those rented channels that were rented from third parties by VimpelCom, are being put on the Golden network and vice versa, and I think that's the five major areas of cost synergies.

On the revenue side, which we have not mentioned when we talked about 474 billion of MPV value in savings, which was we can now see that there is some revenue synergies also on what we discussed earlier, Golden business customers that are taking the mobile phones from Beeline.

And then as I said, at the end of the third quarter and fourth quarter, we will be launching the broadband under the Beeline brand. So we do not have to invest in brand awareness for either the Golden or our Cardina brand because the brand awareness is there already for Beeline.

And just a quick follow-up. So these steps, you expect, will help to improve the profitability of the combined business by 2, 3 percentage points in the coming two years, right?

Well, if you count it like from 47% to the high 40s. It depends where you put the high 40s. 48% is also high 40s. So we had this discussion actually, what we count as mid-40s, what we count as the high 40s.

I must say that this is not the only source of margin improvement. But it's more sort of indication to the market where the management sees the margin and what would be our internal aspirational target, to bring it to the high 40s. In that sense, as we've been reluctant before to commit to the number, we continue to be reluctant. But the corridor would be there. The ballpark would be there.

I think it's helpful.

And we'll go next to Chris Taylor at Evergreen.

Can you talk about your operations in Georgia? What kind of damage has been sustained there? Do you have a sense of that?

At the moment, of course, it's not the easiest situation. But from a pure operational standpoint, it was only one base station hit, and the rest of the network is pretty much intact. It's operational. And the business is carrying on.

Our tendency is actually to rely less on the expat community and to rely more, as soon as we can, I shall put it that way, rely more on the local staff, and that's the case in Georgia. So -- and we have also a Georgian partner. So it's from that perspective, the company is intact and running.

We're also pretty much hopeful for the Georgian government to follow on their public statements that none of the businesses will be affected, including Russian-owned businesses. Therefore, in our current thinking, we are not making any adjustments to the way we operate the business and towards our expectations from that business. But of course, given the volatility of the political situation around Georgia, one has to be prepared that our view might be changed.

And I mean, it seems like your competitors' operations are being looted. Are you exempt from that? Or have occupation forces been looting your systems as well?

We, frankly speaking, don't know much about looting of the operations of the competitors. You are referring to which one?

Both of them, well, you know, who knows. But I've been hearing that communication systems have been getting looted there.

We haven't heard any of those reports. And some of the operators had sustained big damages because their infrastructure was more severely damaged during the war, but I haven't heard about any other implications.

We tend to register all of those incidents, and line of communication is pretty good between the headquarters in Georgia and our operations. So I wouldn't say that it's a lack of information which we're having here, but we are not aware of anything of that nature. All right?

And our next question is a follow-up from Jean-Charles Lemardeley of JPMorgan.

Oh, yes. I was wondering if you could give us the breakdown of your non-voice revenues in the Russian mobile business for this quarter and last year? And if possible, speak between SMS and non-SMS?

Maybe we can move on to the next question while we get to the correct data.

Okay. So maybe another question on -- if you can describe a little bit the competitive environment in broadband and fixed broadband. You're facing -- hearing a lot. The Amarkas is still offering very low speeds in ADSL, 128, [206 gig]. Just if you could describe the competitive environment in I guess Moscow, and then the regions. I mean, Moscow is very different, so primarily focusing on the regions, maybe?

If you look at the dynamics in Moscow and the rest of the country, in Moscow we'll face the same competition that it faced for the last couple of quarters. So that's mainly Comstar. Then we further have competition from two larger players, [Kuresia] and [Accardo], where Accardo in anticipation of (inaudible) has been stepping up its marketing efforts for the last couple of months quite significantly. And then finally, we have the multitude of home networks, where we can see consolidation slowly starting to happen.

But overall for Moscow, the situation hasn't changed dramatically. As for the speeds and pricing, again, the situation is pretty much the same as it was the last couple of quarters.

Once you move outside of Moscow, the major competitor over there is still [VMS Cast]. Although that being said, the home networks component has more than half of the market once you move outside of Moscow. So there again, you have even a much more diversified market than in Moscow. You have literally hundreds and hundreds of small networks that still have the bulk of the revenues. They're usually underfunded. The speeds that they offer, once you get out of their own service, is usually very slow. The backbone speeds are very slow. And the situation with the Amarkas is pretty much the same.

So it is still a market if you can build fast, which we have been doing in the last quarter and really heavily invested and concentrated on. We believe it's still a market for the first mover. The first mover advantage is still very much there.

In the meantime, I think that my colleague Kent has the information with regards to the data revenues that you were asking for.

Yes in terms of service revenues, this quarter we were at a little bit above 13%. Basically in line with where we were in the same quarter a year ago. Typically, first quarter is a strong quarter for us, and then we see a seasonal decline.

It was a little more down this year than last because we made an important change on Internet and walk traffic. We changed from offline charging to online charging. And that had a short-term depression, particularly in the walk revenue. The Internet revenues come back very nicely, and the walk revenue is starting to grow again, but did suffer a little bit more.

On the positive side, we also started to roll out our ring-back tone service, and that really was in May and June in a few selected regions. We've since expanded to the entire country, and the revenues there have been quite satisfying in terms of exceeding our expectations and should help to drive non-voice revenues up in future quarters.

Okay. And could you tell us how much was messaging out of the 13% this year and last? Roughly?

It's slightly-

Slightly higher than 50%.

Okay.

On messaging. Total messaging.

I go back to Jean-Pierre, maybe just the fee that you are offering and your fixed and your [STP] service? What are you achieving?

The ARPUs on the --.

The bandwidth and the speeds you're offering for broadband, yourself?

On speeds, it's traditional to start -- the most popular offer that we have for the moment is one with unlimited usage at two megabits per second speed. So that seems to be the package that is most of all popular, and the price for that is -- that's Moscow -- the price for that is RUB450, which includes VAT, which is more or less exactly where our overall ARPUs are. So if you look at our overall ARPUs--

Okay. Thank you very much.

And we'll take our --

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Thank you, ladies and gentlemen. This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.