VEON Ltd (VEON) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to this VimpelCom Third Quarter 2009 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mateo Millett.

Good morning and welcome to VimpelCom's Conference Call to discuss the Company's third quarter 2009 financial and operating results.

Before getting started, I'd 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 proposed combination with Kyivstar and its benefits, the Company's anticipated sales in the fourth quarter, and the completion of the Company's transaction in Laos.

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 third quarter and nine months 2009 financial and operating results, the Company's earnings presentation entitled 3Q '09 Financial and Operating Results, the Company's annual report on Form 20-F for the year ended December 31, 2008, 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 third quarter and nine months 2009 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission's website at www.sec.gov. VimpelCom disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements made on this conference call or to make corrections to reflect future events or developments.

If you have not received a copy of the third quarter 2009 financial and operating results press release, please contact FD at 617-897-1500 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'd like to turn the call over to Boris Nemsic, Chief Executive Officer of Vimpel Communications. Boris?

Thank you, Mateo. Good morning, good evening. Hello, everyone. Thank you for joining our conference call today. Let me introduce the team participating in this call. Here with me are Alexander Torbakhov, General Director, Elena Shmatova, Chief Financial Officer, Dmitry Pleskonos, Executive Vice President for the B2C Russia, Kent McNeley, Vice President, Chief Marketing Officer, Russia, Andrey Patoka, Vice President, Head of B2B Russia, and Alexey Subbotin, Director of Investor Relations.

On this call, we will discuss our operational and financial results for the third quarter of 2009. During the third quarter, telecom markets in Russia and the CIS continued to be resilient, which coupled with the usual seasonal trends, helped us increase our revenues in both fixed and mobile segments while maintaining a very good level of profitability.

Continued focus on operational efficiency helped us to maintain our consolidated fixed and mobile OIBDA margin above 50%. Our focus on cash generation resulted in almost $1.1 billion quarterly operational cash flow, which we primarily used for CapEx funding and debt repayment.

We continue to expand commercial operations in Southeast Asia. We nearly doubled the size of our network in Cambodia and continue to build out coverage in Vietnam. In September, VimpelCom entered into agreement to acquire Millicom's operations in Laos.

On October 5th, the Company's major shareholders, Telenor and Altimo, proposed to create a new company that would combine VimpelCom's operations with Kyivstar operations. Our management team welcomes the deal which, when completed, will create a powerful new vehicle for growth and we have positive strategic, synergistic, and operational value for both companies, their shareholders, and their customers.

Overall, we are pleased with the third quarter results. In the accompanying slides, we will present the results of the key business units. Let me now pass the floor to Elena, who will present the third quarter financial results and describe our financial position in greater detail.

Thank you, Boris. As it has been mentioned, our third quarter results continue to show revenue growth, both quarter-on-quarter and year-on-year. Although the year-on-year increase was modest, 3.5%, it concerns the robustness of our business as the third quarter of 2008 was the last pre-crisis quarter from the operational perspective.

Our strong financial position has been confirmed by the fact that the consolidated fixed and mobile OIBDA margins stayed above 50% for the second quarter in a row. As a result, our OIBDA in that full term in the third quarter reached an all-time high and was about RUB2.4 billion higher than in the third quarter of 2008.

Net income this quarter best reflects operational performance, as recognized only RUB693 million of foreign exchange gain compared to RUB10.6 billion gain reported in the previous quarter. Our liquidity position continues to be strong and we have been actively restructuring our debt portfolio. During the third quarter, we repaid everything which was due, $690 million, and received new funding in rubles.

Additional ruble-denominated debt, coupled with the ruble appreciation, increased our total debt by the end of the third quarter to $8.1 billion, which is 1% higher than reported in the second quarter of 2009. At the same time, our net debt declined substantially from $6.3 billion to $5.5 billion as the new cash we received from Sberbank bank and from ruble bonds placement was to a large extent kept on our bank account.

Our debt to OIBDA ration at the end of the third quarter was below 2% which is fully in line with our internal policy. With the bond buyback in October and further scheduled debt repayments, we expect this ratio to decline by the end of the year. The quarterly free cash flow amounted to RUB29.5 billion, which is a remarkable achievement when compared to RUB46.7 billion free cash flow we had in the first half of the year.

As of today, we received more than $2 billion of our debt obligation. It is more than we initially planned for this year due to the recent bonds buyback. Our financial position allowed us to partly prepay the debt due in 2011 and 2013 on top of the current schedule. As a result, the total debt repayment this year will be $2.4 billion instead of $1.9 billion, which substantially improves our total debt position. This change, coupled with a more balanced currency structure, while debt gives us more comforts regarding our financial position going forward.

The portion of ruble debt in our total debt portfolio increased from 15% at the beginning of the year to 24% as of the end of September and we continue to move in this direction. We expect that the ruble portion of our debt, by the end of this year, will increase further, as in the fourth quarter we plan to repay $765 million of debt stated in dollars and euros. This, coupled with RUB76 billion in cash which we had at the end of September, gives us comfort regarding our ability to service debt in 2010.

Now, I pass the floor back to Boris to discuss the operational developments in each of our key segments.

Thank you, Elena. In Russia, our core markets, the quarterly revenue growth rates reflect good performance versus the previous quarter and the exceptionally strong third quarter of 2008. In light of the strengthening ruble, we recalculated our CapEx guidance, which is now approximately 10% to 12% of revenue for the full year of 2009. We already signed a number of contracts worth RUB6.7 billion which will be recognized as CapEx in the future periods. We are investing efficiently and we are confident that we have enough capacity to accommodate current demand and maintain the high quality of our service.

The cash cushion we have accumulated gives us flexibility to increase capital investments as necessary. The recent developments in 3G frequency allocation in Moscow and further talks about potential opening of the 4G spectrum may impact our investment plans going forward. We continue to invest into 3G rollout and the reactivated construction of fiber networks which we currently see as our top priority projects.

In the mobile segment, our active customer base continued to grow, but at a slower pace than in the previous quarter, reflecting high penetration levels and our focus on subscriber quality. A seasonal increase from roaming coupled with stable usage led to quarterly ARPU growth of 2.8% quarter-on-quarter. We delivered at 30.8% year-on-year increase in value-added service revenues, which contributed positively to our top line and OIBDA. We continue to develop a range of data and content-related services and expect continued growth.

Overall, mobile revenues in Russia increased by 4.2% quarter-on-quarter. In the saturated market environment with stable pricing, we see usage growth as the key revenue driver going forward. At the moment, we think that macroeconomic indicators such as unemployment, inflation expectations, and level of disposable income are the key growth catalysts.

I want to highlight again that, during the third quarter, we managed to increase revenues while maintaining a high OIBDA margin, which was in line with the previous quarter at around 53%. Looking forward to the fourth quarter, we anticipate the typical seasonal increase in sales and marketing efforts during New Year holiday promotions.

In the fixed line segment, our revenues grew 26% year-on-year and 5% quarter-on-quarter. Seasonal trends and continued overall decline in economic activity negatively affected the business segment revenues. Business segment revenues were further impacted by ruble appreciation as part of our contract to business customers affect to foreign currencies. The quarterly wholesale revenues increased 13% quarter-on-quarter, partly compensating for the fall in the business segment. However, as the profit margins in these segments differ substantially, the overall OIBDA margin declined by about 3 percentage points.

We continue to be client-focused and are happy that we managed to retain the absolute majority of the large corporate plans where we successfully cross-sell our services. At the same time, we remain competitive in the small and medium segment, providing a whole range of communication solutions at competitive prices. In the residential segment, our revenues remained in line with the previous quarters, reflecting seasonality, a slight increase in broadband and decline in all legacy products.

Now, let's look at our broadband business in greater detail. During the third quarter, we continued to add broadband subscribers, both in the fixed and the mobile segments. The total number of our residential broadband customers was more than 1.8 million by the end of the quarter. In the fixed line segment, we achieved positive results. The take-up rate exceeded 10%. Revenues from fixed residential broadband increased 53% year-on-year and the total broadband subscriber base grew by almost 140%.

In Moscow, more than 20,000 households have already signed for -- signed up for our IPTV service. We continue to expand product offering and are going to launch IPTV in St. Petersburg. As of November 21st, we have launched our 3G networks in all regions of Russia as required by our license. This is a major step forward in mobile broadband development and we are pleased to see steady increase in USB modem traffic revenue. Overall, our residential broadband revenues increased 10% quarter-on-quarter and 130% year-on-year. Presently, we see encouraging dynamics in broadband pickup, both in fixed and mobile segments.

Now, let's look at the results of our operations outside of Russia. First, Kazakhstan. During the third quarter, we continue to observe signs of economic recovery and the resulting positive effect on our operating performance. We increased the number of active mobile subscribers to 6.8 million, 22% more than we had last year. ARPU in local currency terms increased by 5% quarter-on-quarter, driven by a continuous increase in usage which improved by 8% quarter-on-quarter.

As a result, our revenues in Kazakhstan increased by almost 10% quarter-on-quarter in local currency terms or 6% in ruble terms. We continue to focus on operational efficiency and cost control which allowed us to maintain our OIBDA margin to well above 50%. At the same time, an extremely high OIBDA margin reported for the third quarter of 2009 was caused by several one-time adjustments, which made our OIBDA margin higher than usual.

We reversed our previous excess accruals rate [to the universal service] fund after the government clarified the final amount that we owed to the fund and also recognized the decline in our bad debt provisions. Given the one-off nature of these adjustments, we do not anticipate such extremely high margins going forward.

In Ukraine, we continue to gain market share and improve our operational performance. The consolidated fixed and mobile revenue grew by 13% quarter-on-quarter in local currency terms or 8% in ruble terms. In the mobile segment, we seasonally increased our active subscriber base when compared to the previous quarter. An efficient pricing policy helped to offset the slight decline in usage and led to 6% ARPU increase in local currency terms. Overall, our mobile revenues in Ukraine increased by 12%.

The fixed line revenues in Ukraine increased 10% quarter-on-quarter and 12% year-on-year, driven by good performance in the corporate segment and strong progress in residential broadband. Despite the seasonal slowdown, we increased our active subscriber base in this segment to more than 70,000, 32% more than the previous quarter while year-on-year growth comprised more than 300%. In the third quarter of 2009, our consolidated fixed and mobile OIBDA margin improved to 21%. Margin improvement came primarily from the cost reduction efforts at synergies from the integration of our mobile and fixed businesses.

Armenia. Despite the difficult macroeconomic situation, we managed to improve our operational performance when compared to the previous quarter. The revenues were up 5% in local currency, 2% in ruble terms, and consolidated OIBDA margin was above 51%. In the mobile segment, we recorded a modest quarterly increase in revenues and OIBDA on the back of growth in usage and the number of subscribers with stable ARPU in local currency terms. All in all, our Armenian business remains financially robust, generating healthy operational cash flows.

In Uzbekistan, our quarterly operational results reflect aggressive price competition launched by our competitors. In response, we launched more competitive tariffs, which led to an 81% increase in usage quarter-on-quarter and a 7% ARPU decline in ruble terms. The new competitive marketing initiatives we started to implement during the second quarter of 2009 helped us to partly mitigate the negative effect of price competition on revenues and to keep OIBDA margin at 47%. The competitive situation in Uzbekistan remains challenging. We are working on new initiatives to improve our operational performance.

Our operations in Tajikistan and Georgia remain on track demonstrating positive dynamics. In Tajikistan, we delivered strong annual OIBDA growth of 41%. In Georgia, we continue to expand our active subscriber base. All key indicators demonstrated positive quarterly dynamics, which resulted in 26% quarterly revenue growth in local currency terms. The OIBDA margin improved to 11%, reflecting our focus on cost control and efficiency. Overall, our CIS operations continue to deliver good results in the current macroeconomic environment.

Now, let's look at our newly launched operations in Southeast Asia. We continue to build up our operations in Southeast Asia. In Vietnam, our network covers 24% of the total population while in Cambodia our network covers 47% of the total population. Since the launch of our networks in Cambodia and Vietnam, we have seen very encouraging results. The Beeline brand is well accepted in both countries.

We have introduced innovative marketing initiatives and product designs. During the third quarter, our revenues in Cambodia amounted to RUB102 million. At this stage, the early results of our operations in Southeast Asia are somewhat volatile, so we will report our results in more detail after the year end. In September 2009, we entered into agreement to acquire from Millicom its operations in Laos. The deal completion is subject to various conditions and we expect it to close before the year end.

To sum it up, it was another good quarter for us. We achieved good financial results. We continue to develop our business. We fulfilled the 3G license requirements and continue to invest in residential broadband, both fixed and mobile. Presently, VimpelCom's position is very strong. We run a growing profitable business with excellent prospects of further expansion, particularly if the plans to create VimpelCom Ltd. are successfully implemented.

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

Thank you very much. (Operator Instructions).

Our first question will come from Tibor Bokor with Otkritie.

Hi, it's Tibor Bokor, Otkritie. If I may, I would like to ask a question about your operating cash flow, free cash flow guidance for the fourth quarter this year and some kind of guidance on CapEx next year. I heard some comments about CapEx going up by at least 50% for the next year. If you could further comment on this one. Thank you.

Well, actually, we are not giving forecasts or outlooks regarding our free cash flow, but talking about CapEx, that's --

Yes, I'll comment on CapEx. You see that the CapEx of the year 2009 was less -- actually, less than we expected due to several factors. The first half of year was actually a time where it was -- we have been very cautious in spending CapEx. But we speed up significantly in the third quarter. We showed also the RUB6.7 billion of contracts and CapEx signed and this will continue until year end.

We expect that the next year CapEx will be higher than this year. But of course, this is subject to the shareholder approval of the budget for the next year. But the order of magnitude we expect is roughly 50% more than this year. This is everything, of course, subject to, of course, to the volatile ruble-dollar FX rate, which makes this reconciliation or recalculation necessary.

May I have a follow-up? When you do the CapEx planning for next year, do you already consider merger with Kyivstar? Can you comment like how this event would impact CapEx budgeting?

We have a different -- no, we do not consider this. We are making it for VimpelCom GSC as it is now. And as you know, our Ukrainian operations which are much smaller than the Kyivstar operations could be affected by this, but for the time being we are making our planning without this.

Understood. Thank you.

And our next question will come from [William Kirby] with Nevsky Capital.

Thank you. Given the debt restructuring and the change from dollar to ruble debt, what sort of blended interest rate should we be expecting for 2010, please?

Our current interest rate is approximately 8%, of course, assuming that we are more switching to ruble financing, which is more expensive effectively now. We assume that maybe next year interest rates will increase, being somewhere around maybe 9%. But today it's maybe too early to say because we are always saying that although we do not need additional funding for our current operations, but if we will see some investment opportunities, we will go for additional funding and then this will change. The whole picture may change.

Okay. Thank you. And then, just on usage trends in the first few weeks of the fourth quarter. I mean, typically I suppose there's a seasonal decline. Are you seeing any comeback in demand post-crisis or are you seeing a normal drop off due to the fourth quarter? Thank you.

Yes, the trends for the fourth quarter are following normal seasonal trends and we're not seeing anything either above or below those norms.

Okay. Great. Thank you.

And our next question will come from Alex Kazbegi with Renaissance Capital.

Yes. Hi. Good evening. Two question as well. One would be just to clarify again. You had a fairly small Forex gain, the currency impact. I think most other people probably -- well, I definitely expected a bigger one. Just looking again at that -- there was obviously a 6% change in the Forex in Q2 and 3% in Q3. So, I would have expected a bigger number there. Did you start to hedge your exposure? What was the reason and what should we expect sort of going forward?

And the second one, I was looking at your fixed line sort of business segment revenues which declined again to RUB5 billion in ruble terms in Q3. What is general a situation, so to say, with the corporate spending? And I was -- I wanted also to go back to one of the comments which Alexander made, I think, recently saying that when [Vimpel] increased its share of the subscribers which are using both fixed and mobile from 30% in the beginning of the year to 50%. And if that is true, then when and how are we going to see that? And what is the reason why we haven't seen that, so to say, so far in the numbers? Thank you.

So, let me start with the foreign exchange gain. Alex, actually, as we discussed several times, that -- of course, our intention is to hedge everything because we don't want to see neither loss nor gain in our P&L regarding to this. But definitely, we had limited abilities for the hedging. So, this time we used, I would say, kind of the instruments which was only available to us is that we were keeping a lot of our cash on our balance, predominantly in hard currency.

And so, that made the impact of affects gain and loss the minimal to the extent you see it in our profit and loss statement. And going forward, we also assume that, to the best of the possibilities which we will see on the market, we would like to hedge all our open hard currency positions.

Can I just ask that -- because as far as I understand, you have separated there the net interest received and that -- well, basically, the interest paid and interest received, which would have been from the hard currency. As far as I understand, the number RUB693 million refers to specifically Forex gain, which is very different from [RUB610 million] RUB612 million, which was before, which is a very significant difference.

No, but interest on cash is a different line. But in the line affects gain. A loss is just really a revaluation of our assets and liabilities on the balance. And so definitely, first of all, we changed the structure of the debt, right, the portion of ruble debt increase --

Yes, not that much, though.

Yes, but what's more important, of course, is that our cash on the balance increased substantially and more than 80% of our cash is in hard currency, which has also [increased]. That's why that balanced, to a certain extent, our abilities in hard currency.

Okay.

Coming back to the question about the corporate customers and the trends over there, we see no surprises in quarter three. As we said, in the first half of this year, together with the corporate customers, we have embarked on the number of the anti-crisis measures, which resulted in, first of all, the reduced consumption of the services from the site of the corporate customers and the changes in the tariff plans.

In the third quarter, this is the traditional seasonal decline in the consumption of the fixed line services, which this year was coupled with only one surprise. This is the appreciation of the ruble. As you remember, a significant part of our corporate agreements on the fixed line business are expressed in hard currency, which had an impact on the overall revenue level that we saw during this period of the year.

Okay. And what about the numbers which we were talking about -- the increase of the overall customers which are using now? Can we just expand on that one? I mean, how did you achieve that then? How and when we will see the same numbers?

The number of the customers is growing, but it's growing not only on the side of the fixed line business. It's also in the mobile and especially due to the cross sales and the opening of the converged services. So, the effect of this increase of the customer base is reflected in the mobile figures and will be more seen further to the end of the year.

Okay. So, it's more new mobile subscribers to the existing corporate subscribers on the fixed line?

Absolutely.

Okay. Thank you.

And our next question will come from Herve Drouet with HSBC.

Yes. Good afternoon. My first question is regarding CapEx. Can you tell us a little bit more where your reduction of CapEx, which was relatively low, in fact, again this quarter has been? Has it been more on the fixed segment? Has it been more on the mobile segment?

And can you explain why you have some kind of limitation of growth at the moment, especially on the fixed broadband subscribers? Is this your [attach] cut on mobile broadband subscribers? And looking forward in '010, you are talking about a substantial increase of CapEx. Again, where do you think this substantial increase of CapEx will happen, in which segments?

And second question is on Uzbekistan. I mean, it looks like there's been a bit of pressure, especially on the margins there with some stabilization as well on the revenue side. I just want to know if you can give a bit more light on what's happening there. Thank you.

Concerning the CapEx question, there is, of course, a small delay in the CapEx, which is recognized in the book like CapEx. So, that's why we posted or we showed the contract signed, which are related to CapEx which we did in the third quarter of 2009. And this is a substantial amount, which will be recognized formally as CapEx in the next period. So, we --

How much total that it will be?

Yes, we are -- at the end of the year, we are expecting between 10% to 12% of the revenues.

Yes, yes.

But again, this is a calculation, so we stated clear that we are recalculating due to the stronger ruble. Of course, this percentage goes down. This is poor mathematics, that's pretty clear. On the 2010 CapEx, we expect the most investment in broadband, both fixed line broadband and mobile broadband. We expect a strong investment also in the 3G license fulfillment. 1st of April is one of the due dates which we have to fulfill. And the part of the investment of the fourth quarter this year and especially first quarter of next year will be related to this. So, this is where the CapEx goes mostly into broadband.

Okay. On your priority, short term is more mobile because of your 3G license [color] rather than the fixed mobile -- fixed broadband?

I would not put it a priority. We have enough CapEx invest into both in parallel. These are also, let's say, in the -- put in the construction, they are different businesses. We are using the same core networks, which is very favorable. But of course, attaching a new household is a pretty cumbersome story.

So, what we are focused now is to attach the households past. Household past means that we are with our fiber on the roof of this building, but then you have to go through the ducts to the particular flats which is, of course, pretty lengthy stuff. But we are fully committed to the further expansion of the FTTB business. And again, we are doing both -- both wireless in 3G HSPA as in the fiber to the building.

All right. Okay. And for Uzbekistan sales?

Would you mind repeating the question so we have it exactly?

Yes, it just looked like, in Q3, I mean, it looks like the margins were a bit under pressure. It looks like in Uzbekistan. Just wondering if you can give a bit more light on that. What has been the key trigger? I mean, they were at 51.1% in Q2, went to 47.1% in third quarter and with the revenue which doesn't look growing that much over the last four quarters. So, just was wondering what makes plain that dynamics.

Yes, I'll offer a couple things and then Dmitry can add if you'd like to. First of all, in Q3, we did take some action to react to competitive moves that happened both in Q2 and Q3 because it still is a market that's underdeveloped and we wanted to be sure that were capturing subscriber growth. So, we did make some adjustments to tariffs. And the second thing is we launched a tariff which focused on international long distance and that drove a good bit of volume in revenue and that has a negative impact on margins because it's lower margin than our normal tariffs.

All right. Thank you. Thank you very much.

Alexander Balakhnin with Goldman Sachs, has our next question.

Hi. My question is on CapEx. Basically, you talk that the priority for your CapEx spend will be mobile and fixed broadband as well as 3G and you don't talk about voice CapEx. Does that mean that you don't expect the medium-term growth of your voice traffic or you just have enough capacity for that? So, can you please elaborate on that?

And basically you and your competitors, MTS and Megaphone, will have quite a big CapEx next year. Do you think there is a risk that there will be an overcapacity which may be negative for the pricing stability in Russia or it's not really a risk? And just a short question on Kazakhstan [EBIDA] margin. Is it sustainable or there was any one-off? And if one-off, what's the nature of that? Thank you.

Coming to the CapEx, of course, we are adding the worst CapEx where necessary, but we have a pretty mature network which works very efficiently. So, there will be voice CapEx capacity additions where necessary. For example, in Moscow typically, but this is not substantial because the big amount of CapEx comes mostly then when you go to coverage, which we will do to some extent 2010. But this is, I would say, the smaller part compared with the CapEx into broadband.

Concerning your question about the high CapEx numbers of our competitors, I will not comment them. But of course, bringing 3G into the market initially brings you a high capacity. That's due to the nature of the 3G networks with a pretty high bandwidth they are offering initially. We don't see that this influence -- or we expect that this will not influence the voice pricing.

We expect stable voice pricing for the next year. And of course, we will do our part for this. On the data pricing, this is still open because it's -- let's go with embryonic stage where a lot of operators are trying to get the right spot onto this and we consider that especially Megaphone is pretty aggressive on this side.

Talking about Kazakhstan margin, as Boris mentioned that we have, during third quarter, one time impact. Of course, we do have pretty strong margin and Kazakhstan helped with the seasonality, but in the third quarter we also reversed certain conservative accruals which we did in first and second quarter related to universal service fund.

And after we got some clarifications from the government how it should be paid, we reversed that excessive accrual. And so, that helped one time to the margin in the third quarter. Also, we saw a certain decline in bad debt provisions, which also helped to the OIBDA margin, specifically this quarter.

Thank you.

Next is [Viktor Zumavich] with VTB Capital.

I have two questions, basically. First of all, do you plan any acquisitions? And if yes, in which areas? And my second question is regarding advertising expenses, which looks quite small and do you plan to increase them this year and what will be the situation next year? Thank you.

Concerning M&A, we are in the process of closing the transaction in Laos. And for the time being, there are no major projects in this area.

In the area of advertising, what's referred to here is primarily the media costs. Historically, we spend a little bit more in media in the fourth quarter than we have in the third. And in general, we would expect that the media -- I'm sorry, that the total marketing costs would be just over 2% for this year. We've commented on that number before. As we look forward to next year, it's difficult to give precise numbers, but we don't see significant media inflation in the major channels next year.

So, can we assume that the total number for the next year will be in this -- at this range, around 2%, maybe a bit more of revenues?

Yes, I think somewhere in the 2% to 2.5% range would be a good assumption.

Thank you very much.

And our next question comes from Igor Semenov with Deutsche Bank.

Thank you. I just wanted to follow up on Kazakhstan. So, can you provide the adjusted OIBDA margin? So, if there were no one-offs, what would be the sort of underlying normalized OIBDA margin in the third quarter and also in the first half of this year? And the second question is on the competitive situation, can you talk a little bit about the tenders for frequencies in the 2.3 to 2.4 megahertz range scheduled for early next year? What do you think how it might change the competitive landscape mid-term? Thank you. In Russia.

Igor, talking about normalized OIBDA for the third quarter, of course, it's not an easy task to take all the impacts and effects, because I have mentioned only two major impacts on the one-time effect of OIBDA margin. And roughly speaking, we can assume that at least half of the growth in OIBDA margin comes from that impact.

Concerning the frequency tenders which, in 2.3 megahertz -- gigahertz band, we see this as a frequency band which is now to be tendered for some kind of WiMax operations, mostly in TDD and the tender circumstances which are now known are actually excluding mobile operators who have 3G out of this tender. We see this more as an extension of the fixed line business through wireless technologies for some of the wireline operators which are now in the market.

Yes, but I understood that [size] is quite keen to get those licenses and they [find it] correctly, the tender documents did not really specify that it has to be WiMax. I mean, it could be whatever and they could -- if they are able to get the manufacturers to produce the sort of LTE equipment for them so they could use that for -- to launch LTE with -- I mean, regardless of what -- how it's done, do you think this is going to have quite a significant impact on the competitive situation in Russia?

Our latest discussion with the government shows that they are ready to change the whole approach for the distribution of the spectrum and we're now discussing that the spectrum will be distributed for the development of broadband and without specifying which specific technology will be used. This is first.

Second is that the dimension auction is designed currently in such a way that we are losing that 100% because we've got minus 40 points and one company is getting plus 40 points. So, it's no chance to win this. But we've discussed it already and we hope that with some probability that the whole approach will be changed. If the rules stay as it is now, we don't see a huge impact as the names of the regions. Actually, the list of the regions is not that advanced in terms of economic development. So, this is it.

Okay. Thank you.

And next is Alex Wright with UBS.

Yes, thank you. I had a couple of questions on broadband, please. One on the fixed line side. As you've mentioned, you're planning to invest more aggressively in that next year. So, when it comes to the pace of building out of homes passed by the FTTB network, should we expect that the pace of construction will return to levels that we were seeing pre-crisis where you were adding 0.5 million or more than a 1 million homes passed in some quarters? Do you think it makes sense to build at that rate or if you could give us some sense for your plans there, please.

And secondly, on the mobile broadband ARPUs, as you mentioned the pricing in the market is relatively aggressive at this point. To what extent do you believe that ARPU levels are depressed by initial promotions? Do you think that we could see ARPUs pick up as the initial impact of those promotions wears off? And if so, when do you think that might happen? Thank you.

To the first part of your question, again, the homes passed are one of the important perimeters, but it's more important to be ready to put full delivery, meaning the construction finished. So, I think that the number of households passed will not completely reach the level of before the crisis because, at this time, it was more a rollout in bigger cities like Moscow and St. Pete where you have a lot of high rise buildings on a pretty small surface, which is actually much easier to achieve and to reach.

We will go into new cities also, of course, considering the efficiency of the investment and the core network and transport network which VimpelCom today has. So, this will be one of the focuses for us, but I would say on the reasonable fast space.

And -- thank you. And just one follow-up on that. What is your estimate of the potential addressable market given your current network coverage and backbone coverage?

This is a very difficult question because it depends on a lot of perimeters. What are the alternative technologies, where they are present? Are wireless technologies competing with this or not? But let's say, for the time being, we now are somewhere around 7.9 million households. Definitely, we see that the addressable market is at least twice such big.

Thank you.

And regarding USB modem ARPU, certainly there area some effects of the -- of different promotional activity that we're seeing now. But as Boris said earlier, I think that it's very early to be drawing many conclusions. And it would certainly seem reasonable that we would see different pricing structures, perhaps use of bundles that would become more prevalent, bigger bundles as we go forward and as 3G gets further proliferated. And that could have a positive effect, that could also have a negative effect. But it could go either way in terms of how it would affect the ARPU going forward.

Thank you. And if I could ask a quick follow-up question on that as well. Given the current level of pricing of the various USB packages that are out there, do you feel that the pricing is at a level where you and the other operators are generating a positive return on the investment in that segment of the business or do you need to see some improvements in pricing or in something else in the rate of bundling with other services, for example, for returns to be driven up to acceptable levels?

Well, for example, in most of the markets where we've introduced even unlimited pricing, the general price that we have has been RUB695 and above. And at that level, I would certainly expect that we would make healthy margins. In our lower bundles, lower sized bundles, we're certainly making attractive margins. So again, it'll depend how it evolves. But it's still very early to draw any conclusions.

Okay. Thank you very much.

And our next question comes from Evgeny Golossnoy, Troika.

Good evening, everybody. I've got two questions. One is could you provide more detail on the type of hedging contracts you are using? What's the time period? What's the band within which you are hedged and what's approximately the percentage of your hard currency exposure that is hedged using this contract?

And second is on iPhones. What happened? I mean, what happened with the iPhones you previously purchased? What percentage of handsets not sold? Are you still selling them using fixed line contracts or subsidizing the customers or what's the possibility of writing off unsold inventories and on whose books these inventories are on -- yours or on Euroset's? Thank you.

So, let me start with hedging. Actually, we have a very limited amount, I would say, of hedging contracts and so, what we have hedged is approximately $160 million. The rest, as I said, the hedging comes from the fact that we are kind of decreasing our net position in hard currency and trying to balance cash on our balance with the debt profile.

And regarding iPhones, the original purchases that we made have been completely sold through. We recently reordered and have started now shipping new batches of iPhones to retailers. Because we've bought them at a higher price from a rubles standpoint, you will see the prices from a rubles standpoint go up. But we don't plan any subsidizing of the iPhones at all.

Yes, but are you still kind of trying to stimulate people to subscribe to these fixed term contracts or really it's a pure sale of handset with 100% of revenues hitting your income statement immediately -- of cash?

Most of the iPhones that we sold, we sold with normal tariff plans. We did sell some with -- behind the tariff plan Apple Fresh and that provided a benefit, if a consumer stayed with us for a period of time, but in any case, those were not subsidizing contracts and we've really avoided that.

Okay. Thank you.

And we have time for three more questions. And our next will come from Nadezhda Golubeva with Unicredit.

Yes, good afternoon. I just wanted to ask about fixed revenue. The residential segment was up 8% in rubles quarter-on-quarter, and looking at the average subscriber growth, it's 4%. So, about 4% is due to the [upper] increases, I understand. Could you please elaborate on what were the key drivers behind the [upper] increase? Did you raise prices? So, did -- or is it the result of switching one of the IPTV services or what they were? This is the first question.

And second question -- we see incremental services in Russia lagging by $53 million behind those of MTS in third quarter and this is pretty high gap. We haven't seen that recently. Can you comment on that? Do you think this is temporary, connected with some specifics of demand or whatever? And finally, if I may, I have a technical question. Can you elaborate on whether we should anticipate suspension of your ADS trading and the period that are the old ADS rule stop trading while the new ones will not start yet. So, how long do you think this period could last if I understand correctly that they would (inaudible)? Thank you.

To start with your question about broadband ARPUs, we -- I would say there are two factors. One is in the second quarter we do see some people that switch off their broadband as they leave for summer holidays and then it starts to come back on as they return from summer holidays. So, that has a supporting effect.

Additionally, we've used targeted marketing efforts to try and move people up to broader bundles where it makes sense for consumers and that also supports the ARPU growth. So, I think those are the two key factors. The IPTV does expand ARPU, but the number of consumers that's on it is still a relatively small portion of the total since, in the third quarter it was only launched in Moscow.

Regarding the revenue gap versus MTS, I would comment that the biggest part of this gap -- virtually all of this gap is coming in the VOS area. VOS, we grew in the last year at 31%. If you look at Q3 of '09 versus Q3 '08, that's actually faster than MTS grew on a year-on-year basis. In messaging, we grew faster than they did. In data, we grew at 90% over the last year and again, much faster than they did. The big difference that we have is in content.

And in content, we trail them by -- in the third quarter, by more than a couple of billion rubles. But importantly, the accounting that we use and the accounting that MTS uses are really quite different. For one thing, we use on net accounting or net-net revenue accounting. They use completely gross accounting. A second thing is that we, from a billing standpoint, we do all real time billing, online billing, and they do a good portion that's offline. So, the two numbers are, to a very large extent, not comparable.

Now, I would say that even if you make adjustments for those, our content business is still behind MTS and it's a key area of focus. We've made some good progress, for example, in ring back tone. We've built from nothing a year-and-a-half ago to 6.5 million subscribers in the last year-and-a-half and made great progress there. And in the aggregation area, we've initiated a number of partnerships which are having very positive early results. So, we remain optimistic about continued growth in the future.

Well, and do you think we should expect like same -- you lag behind MTS in the [near year], let's say, because when you're saying that their accounting is different, well, in fact,[it's not clear to me] why it's the risen because it also was different in second quarter, yes. And I understand that you had grown ahead of MTS in the past, but now this not true and I'm trying to, I guess, how long MTS operating growth can continue, do you think?

Well, specifically in the area of content, though, they did launch an important initiative in the last quarter, which was content on credit. And again, because we use different accounting, that has a substantial impact on the total revenue recognition that they have in this quarter.

Okay. And may I ask a follow-up on the VOS. Do you post-revenue growth so net of the content portion? I mean, content provider.

Yes, for CPA content providers, we report net.

Net.

And that's different than how competition does it. Yes.

Okay. Thank you. And my last question about ADS. Could you please answer, if possible.

Yes, in ADS, if VimpelCom limited transaction is completed, then the new ADS will start trading before the current VimpelCom ADS are delisted.

Okay. So, there were no period when we will see no trading curve. It was either all the New Year?

Vice versa.

Yes. You will see a period where you will see both.

Overlapping.

Okay. Okay. I see, I see. Thank you very much.

Our next question comes from Stephen Pettyfer with Merrill Lynch.

Hi. I have two questions, please. Could you give us an update on the merger and from a regulatory standpoint is there anything to tell us now? And secondly, going back to your earlier comments about usage growth and employment being a key driver going forward, can you tell us what you're thinking about wage growth in your Russian business in 2010? Thanks.

About your first question, if I understood correctly, you ask about the merger and the regulatory impact. I think it's not time for us to speculate about this. We are in a very, very early stage on this.

Okay.

The second -- what was exactly your question, second one? The impact of the --

I'm just wondering what you're thinking about employee wage growth in 2010 in Russia.

We look more to the disposable income of the potential customers and our customers and we expect that this disposable income will slightly -- this growth will be slightly bigger than the growth of the GDP. So, we think that people react mostly on the disposable income they have.

So for your employees, does that mean that you're anticipating wage growth?

It depends when you look at -- on the sum of the employees or part employee and what is the qualification of the employees. So, it's very difficult to say there is -- there are different methods of looking of it. Some employees will get some wage increase. Others will not. It really depends.

Do you think, generally speaking, you can see wage growth picking up next year?

The growth rate in this line in our P&L will be not larger than the revenue growth. So, the -- it will be a low, single-digit figure.

Okay. Thank you.

We have time for one final question and that final question will come from Igor Semenov with Deutsche Bank.

Hi there. Yes, thank you. Can I just come back to the CapEx question and the growth question? So, if you're increasing CapEx quite substantially, what kind of growth are you expecting in the mid-term? Are you expecting similar growth that your competition is guiding, sort of low, single digits, sort of below inflation? Or you're a bit more optimistic or could you talk a little bit about the growth outlook, please? Thank you.

The hardest question for the end. At this stage, considering the low visibility and actually high macroeconomic uncertainty, it's still difficult to get the precise view of the future growth. We can be at best directional at this stage, being clear about where the growth will come from. But it's very difficult and we are not in position to quantify the potential and specify the timing. We think that mobile voice is one of the growth area. We have a good quality customer base, but lowest minutes of use.

In B2B, we have a solid reputation against the fragmented competition. As mentioned before, we have a pretty good growth in value-added services in the larger 3G coverage area. We have a good exposure to fixed line broadband. So, we have growth areas. But we think overall that the growth for next year will be single digit.

Also single digits, yes? Okay. Thank you.

And that does conclude our question-and-answer session. I will now turn the conference back over to Mr. Boris Nemsic, Chief Executive Officer.

Thank you very much for participating in this call. If you have more questions, please contact our Investor Relations department and we will be happy to provide you with additional information. Have a nice day. Good-bye.

And that does conclude our conference call. Thank you for your participation.