Improved Domestic Subscriber Quality Drives VimpelCom 2007 Revenue Up 47%

Commonwealth of Independent States (CIS) telecoms operator VimpelCom has announced that in 2007 its net operating revenues increased 47% year-on-year (y/y) to US$7.171 billion, with net income rising 80.2% y/y to US$1.462 billion. Operating income before depreciation and amortisation (OIBDA) was up 46.7% y/y to US$3.597 billion, but OIBDA margin, an indicator of company efficiency, fell slightly, to 50.2%, from 50.4% the previous year. Capital expenditure in 2007 totalled US$1.8 billion, a figure projected by company CEO Alexander Izosimov to rise to US$2.7 billion in 2008. The group reported 51.7 million active subscribers in 2007, a 13% y/y increase.

One of the main drivers of VimpelCom's revenue growth was improved subscriber quality in its main market, Russia, as demonstrated by several key indicators. Fourth-quarter ARPU was up to US$13.5, from US$10.9 12 months earlier; monthly minutes of use (MOU) were 204.1 in the fourth quarter, compared with 157.9 12 months earlier; and annual churn was down from 35.4% to 32.9%. Russian operations generated annual revenue of US$6.090 billion, a 38.4% y/y increase, with net income up 66.4% y/y to US$1.422 billion. Capital expenditure in Russia before acquisitions was US$1.1 billion, a figure expected to increase to US$1.9 billion in 2008, on the back of 3G investment and development of Golden Telecom's broadband network. VimpelCom's Russian subscriber base rose 6.1% y/y to 42.2 million, but the operator's subscriber market share actually dropped, from 31.7% to 29.9%. This is further indication of the refocused strategy of concentrating on subscriber quality, rather than subscriber numbers, in the mature Russian mobile market. However, Global Insight notes that within a Russian market in which disposable income is rising amongst the general population, improved subscriber quality and annual revenue growth of 38% represent a solid rather than spectacular 2007.

Outlook and Implications

Subscriber Quality Remains High on Agenda in Russia: Subscriber quality will remain VimpelCom's target in 2008, with higher ARPU and improved customer loyalty on the agenda. To this end, value-added services, such as 3G, will be launched, and the operator has also mentioned plans to develop situation-specific value propositions in local markets. Despite high penetration in Russia, multiple SIM ownership will drive further subscriber growth. However, VimpelCom and its Russian rivals will rely primarily on the continued increase of voice traffic to drive mobile revenues in the short term, following the 30% y/y increase in MOU in 2007. VimpelCom also anticipates revenue generation from the creation of new synergies through its acquisition of Golden Telecom, particularly in the corporate sector, and will accordingly restructure its operations in August (see Russia: 3 March 2008: Convergence to Become Reality in Russia as VimpelCom Completes Purchase of Golden Telecom). Golden Telecom's results will be incorporated from the first quarter, and fixed broadband will be offered under the "Beeline" brand.

CIS Subscriber Numbers Grow: Beyond Russia, the group's success was based largely on strong subscriber uptake across the CIS, with 3.754 million customers added outside Russia. In VimpelCom's second-largest market, Kazakhstan, net income increased sevenfold on the year, driven by the uptake of 1.6 million new active subscribers. However, this market is now maturing, with penetration at 82.5%, and VimpelCom has stated in a press release that it will pursue the Russian model here, redirecting its focus towards increasing its revenue market share rather than subscriber uptake alone. In Uzbekistan and Tajikistan, subscriber numbers increased threefold and fourfold, respectively, and these markets, along with Armenia, retain room for further significant subscriber growth. The expanding economies of these countries, driven by natural resource export and wealthy regional investors, suggest that they will remain profitable territories for Russia's leading mobile operators. Indeed, such emerging markets are increasingly being targeted for investment by other sizeable European telcos, such as TeliaSonera, Turkcell, and Telekom Austria. It should be noted that VimpelCom's Ukrainian operations remain weak. Despite tripling annual revenues the operator again reported an annual loss, and its subscriber share remained low, at 4.8%. Nevertheless, VimpelCom's goal of expanding its CIS footprint remains in place, with the added aim of leveraging Golden Telecom's operations to become an integrated operator across the region. Investments in the CIS excluding Russia are projected at US$800 million in 2008.

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