Value-Added Services Growth Drives MTS's Q3 Revenues Up 10.8%

Leading CIS operator Mobile TeleSystems (MTS) has reported that in the third quarter of 2010 it generated revenues of US$2.911 billion, representing a 10.8% year-on-year (y/y) increase. Operating income before depreciation and amortisation (OIBDA) was up 8.2% y/y to 1.309 billion, while capital expenditure in the third quarter was US$397.2 million, equating to 13.6% of revenue. While there was revenue growth across each of MTS’s five key markets, the greatest proportion of revenue came from its domestic Russian market, in which revenues rose by 9.2% y/y to 73.752 billion roubles (US$2.42 billion).

In operational terms, MTS’s group mobile subscriber number rose by 1.7% on the quarter to 105.21 million, reflecting increases in each of its markets. MTS maintained its leading 32% share of the Russian mobile subscriber market, and reported 2% quarterly growth in fixed-broadband subscriber numbers to 1.466 million, although pay-TV subscriber numbers dropped by 6.8% on the quarter to 2.028%. Earlier this week MTS fixed-line subsidiary Comstar, now 70.97% owned, reported its third-quarter results, including a breakdown of Russian broadband performance (see Russia: 16 November 2010: Comstar Agrees 3G Backhaul Deal with MTS As Q3 Revenue Rises 7%).

Outlook and Implications

• Value-Added Service Growth: MTS president and chief executive Mikhail Shamolin has noted in a press release that revenue growth was driven by “positive seasonal dynamics, subscriber additions, and a general increase in usage in our core markets”. Relatively low penetration levels in many of its CIS markets have indeed allowed healthy subscriber growth to continue, while there was even encouraging uptake of 400,000 subscribers annually in the competitive Ukrainian market. However, the most eye-catching trend was for an increase in subscriber expenditure, particularly in the core Russia mobile market where mobile ARPU rose 5% y/y and 6% on the quarter to 269 roubles (US$8.8), minutes of use rose by 15% y/y and 6% on the quarter to 244, and value-added services (VAS) as a percentage of ARPU stood at 20.5%, compared to 18.4% in the third quarter of 2009. While VAS as a percentage of ARPU has been higher in previous quarters this year, the trend for such a figure to be over 20% in 2010, compared to previous quarters prior to 2010, in which it has been under 20%, reflects the positive effects of 3G roll-out. As 3G investments continue and LTE looms on the horizon, this trend is only likely to continue and, even though subscriber uptake might stagnate, such strong VAS growth will help to drive revenues.

• MTS to Retain Status Quo: The short-term future is unlikely to bring about any seismic changes in MTS’s strategy. In operational terms, it will continue to push mobile data services while looking to develop its growing fixed-broadband presence in Russia, to which end it completed the acquisition of broadband and cable TV group Multiregion earlier in the year (see Russia: 19 July 2010: MTS Bolsters Fixed-Broadband Presence with US$123.5-Mil. Purchase of Multiregion). MTS is also reported by Reuters to have registered its interest in NTC, the Russian mobile unit of South Korea’s KT Corp and tenth-largest mobile operator in Russia (see Russia: 9 November 2010: KT Corp Mulls Sale of Russian Mobile Unit NTC). MTS has also indicated that it expects the full merger with Comstar to be completed by the end of April 2011. Financially, MTS has indicated that its capex as a percentage of revenue will be around 20% in 2010, compared to earlier projections of between 22% and 24%, due to optimisation of a payment schedule for equipment suppliers. However, Mikhail Shamolin has hinted that group capex in 2011 will be higher than in 2010, without providing specific figures.

• Exciting Times in Russian Telecoms Market: With the third-quarter results of rival VimpelCom due to come out in early December 2010 and MegaFon also set to release its financials, MTS has set the bar as high as ever with its double-digit revenue growth and continued mobile subscriber uptake. MTS’s figures point to a period of exciting development in Russia, with the traditional area of mobile telephony now superseded by mobile data and fixed-broadband growth. Moreover, the smaller markets of the CIS are being used by operators as a testing ground for the more advanced 4G LTE technology, with MTS having gained a 4G licence in Armenia, and launched services in Uzbekistan and tested services in Turkmenistan (see Armenia: 11 November 2010: Armentel Seeks Permission to Roll Out 4G Network As Vivacell Announces US$17-Mil. LTE Investment). As well as providing a platform for 4G introduction in the main revenue-generating market of Russia pending regulatory approval, such developments create a route for extra revenue generation across the CIS.