Global Insight Perspective | |
Significance | Kyivstar's net revenue, profit, and EBITDA all rose in the first half of the year, while ARPU showed a quarterly increase, although it was still down on last year. |
Implications | With the boardroom disputes between VimpelCom and Telenor now seemingly over, Kyivstar will be able to focus on developing policies within a mobile market that still has room for growth. |
Outlook | In the longer term, the Ukrainian market is likely to follow the trend of the Russian market, where high penetration levels have forced operators to increase their focus on ARPU stabilisation and customer retention rather than subscriber uptake. |
Ukraine's leading mobile operator, Kyivstar, has released its financial figures for the first six months of 2006, calculated according to U.S. Generally Accepted Accounting Principles. The company recorded net revenue of US$757.27 million, a 67.9% year-on-year (y/y) increase from the US$450.9 million recorded at the end of first-half 2005. The company's net profit increased 133.4% year-on-year (y/y) to US$243.9 million, while EBITDA (earnings before interest, tax, depreciation and amortisation) rose 90.3% y/y to US$242.7 million. Kyivstar announced that at the end of the first half of 2006 it had 16.005 million subscribers, of which 14.886 million were pre-paid customers. However, Kyivstar's subscriber figure slightly contradicts the recent estimate of Ukraine's State Statistics Committee of 15.8 million (see Ukraine: 10 August 2006: Mobile Subscriber Levels in Ukraine Reach 35.6 mil. by End of H1). Kyivstar's monthly ARPU at the end of the second quarter of 2006 was US$8.6, up from US$7.9 in first-quarter 2006 but down y/y from the US$9.7 in second-quarter 2005. ARPU from contract subscribers was US$28.7 in the second quarter of 2006, a quarterly rise from US$26.2 in first-quarter 2006 but down y/y from US$29.4 in second-quarter 2005. ARPU from pre-paid subscribers also rose on the quarter, from US$6.4 to US$7.1 in the second quarter of 2006, although this again represented an annual decrease, from US$7.6 in the second quarter of 2005.
Outlook and Implications
Boardroom Problems Unsettling in First Half: Kyivstar's positive performance is particularly impressive in light of the boardroom unrest it has been ongoing since the start of the year. Telenor, a 56.5% stakeholder in Kyivstar, had been hoping that VimpelCom would acquire the Ukrainian operator, for US$5 billion, but after months of negotiations and legal wrangling VimpelCom withdrew its interest in June, instead redoubling its interest in minor Ukrainian operator Ukrainian RadioSystems (URS) (see CIS: 2 June 2006: VimpelCom Withdraws Kyivstar Bid). Against this background Kyivstar has, understandably, been unable to pursue an entirely transparent short- or medium-term strategy. However, it maintains its position at the head of the country's mobile market, and with the boardroom unrest now seemingly over it may be able to reorganise and pursue a clear policy for the rest of the year and beyond.
ARPU Slowdown Likely: Subscriber numbers in Ukraine rose 117% y/y from 13.8 million to 29.9 million. While growth is continuing—at the end of the first half there were 35.6 million subscribers—the country is unlikely to see an increase on the scale of 2005. Mobile penetration currently stands at around 75.7%, and as this level rises it is likely that ARPU growth will slow down and stabilise. The increased presence on the mobile market of minor operators Astelit and URS is also likely to contribute to ARPU slowdown. Each of these companies will attempt to increase significantly its market shares of 11.5% and 1.6%, respectively, through competitive pricing policies and, in URS's case, an aggressive marketing campaign driven by VimpelCom (see Ukraine: 4 April 2006: WellCom Promotes Beeline Brand in Ukraine). ARPU growth will also be limited by the dominance of pre-paid subscribers in Ukraine's mobile market. Pre-paid subscribers account for 93% of Kyivstar's customers, and the operator's own figures indicate that pre-paid customers generate less than a quarter of the monthly ARPU levels of contracted customers. Nevertheless, Kyivstar's ARPU figures compare favourably with that of its main rival, Ukrainian Mobile Communications (UMC). In first-quarter 2006 UMC's ARPU was US$7.5, compared with Kyivstar's US$7.8.
The Trends of Neighbouring Russia: In Russia, mobile penetration in 2005 rose from 50.2% to 86.7%. The Russian market now has little room for further growth, and consequently operators are looking to retain subscribers through the introduction of value-added services and loyalty plans and to stabilise ARPU levels, rather than actively seek new customers (see Russia: 16 June 2006: MTS Q1 Net Profit Down 21% Y/Y). The Ukrainian market should still have at least six months of strong growth ahead of it, and Kyivstar has reported that average monthly minutes of use per subscriber climbed to 118 in the second quarter of 2006, from 110 in the previous quarter and 90 in second-quarter 2005. Monthly SMS sent by subscribers has also climbed annually, from 16 in the second quarter of 2005 to 21 in the second quarter of 2006, although this represents a quarterly decrease from 22 in the first quarter of 2006. The immediate future therefore looks secure, but ultimately the Ukrainian market will begin to follow the trend of neighbouring Russia. This suggests that in the medium and long terms, Ukrainian mobile operators will begin to investigate further the possibilities of value-added services such as 3G and music, video, internet, and gaming content as well as data services. Ukrainian operators may also examine the possibility of increasing contract subscriber uptake, as an obvious means of increasing ARPU.