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Continued Subscriber Growth and Increased Traffic Drives MTS's 2007 Revenue Up 29% Y/Y
17 Apr 08
Mobile TeleSystems has reported healthy subscriber growth in Russia, but subscriber quality rather than uptake will gain importance in its strategy for 2008.
Global Insight Perspective | | Significance | Despite high penetration in Russia, MTS's subscriber growth continued, while it also experienced strong uptake in the emerging markets of Uzbekistan, Armenia, and Turkmenistan. | Implications | The operator's focus on voice traffic and data services is increasing, after encouraging performances in these sectors in 2007. | Outlook | Looking ahead, MTS will aim to improve subscriber quality in the developed Russian and Ukrainian markets, while rolling out networks to accommodate subscriber growth in the emerging Eurasian markets. |
Mobile TeleSystems (MTS) has announced that at the end of 2007 its total revenue for operations across the Commonwealth of Independent States (CIS) amounted to US$8.252 billion, a 29% year-on-year (y/y) increase. Net profit rose 93% y/y, to US$2.072 billion, and operating income before depreciation and amortisation (OIBDA) rose 31% y/y to US$4.223 billion, a 31% y/y increase. Capital expenditure was reduced from US$1.722 billion in 2006 to US$1.540 billion in 2007, amounting to 18.7% of revenue compared with 27.0% in 2006. This controlling of costs has contributed towards the increased OIBDA and net profit figures. Across the region MTS increased its subscriber base 13% y/y, to 85.77 million. It maintained its market shares of 33% and 54% in Russia and Uzbekistan, respectively, and increased its market share in Turkmenistan from 86% to 88%, but experienced a slight decline in Ukraine, from 37% to 36%. By comparison, MTS's main rival across the CIS region, VimpelCom, earlier this year reported a 47% y/y increase in net operating revenues, to US$7.2 billion, with net income rising 80% y/y to US$1.5 billion and subscriber numbers also increasing 13% y/y, to 51.7 million (see Russia: 13 March 2008: Improved Domestic Subscriber Quality Drives VimpelCom 2007 Revenue Up 47%). Outlook and Implications Drivers of MTS's Growth: The most striking driver of MTS's performance in 2007 was its subscriber growth. Notably in Russia, where penetration hit the triple-digit level back in 2006, MTS achieved 12% subscriber growth, to 57.43 million. It is likely that this will have been prompted primarily by multiple SIM ownership. Elsewhere, MTS's subscriber numbers grew 100% in Uzbekistan, where penetration reached around 22%, and 94% in Turkmenistan, while the newly entered market of Armenia provided 1.38 million subscribers. In Russia, growth has also been driven by voice traffic, with minutes of use (MOU) up in both the post-paid and prepaid segments. Value-added services are becoming increasingly prominent, primarily SMS messaging, and data services now make up 7.1% of the total revenue mix, compared with 6.1% at the end of 2006. In the emerging Eurasian markets of Uzbekistan and Turkmenistan, MTS has benefited from low penetration levels, poor fixed-line infrastructure, healthy economies, and rising personal income levels. Although ARPU levels will be diluted in such markets as penetration rises, MTS will aim at least to maintain its market shares. Poor Ukrainian Performance Not Specific to MTS: Amidst the strong performances across the CIS, MTS has experienced a difficult year in Ukraine. Although revenues rose 8% y/y, subscriber numbers grew by just 100,000 and annual ARPU dropped from US$7.3 to US$6.6. The aggressive voice pricing of competitors in the market has inhibited revenue growth and triple-digit penetration leaves little room for organic subscriber growth, while churn has increased from 30% to 49%. However, such problems are also being faced by MTS Ukraine's competitors and are indicative of problems in the market rather than specific operator strategies. MTS will look to improving subscriber quality to improve its fortunes in 2008. Subscriber Quality in Mature Markets, Network Roll-Outs in Emerging Markets: Looking ahead, MTS's broad strategy is to increase voice, messaging, and data traffic. In the primary markets of Russia and Ukraine, subscriber quality is very much the priority for most operators, and the provision and use of mobile data and internet services will increase. In subscriber terms, the priority is stabilisation and maintenance of existing market shares, which reflects the maturity of these markets. Elsewhere, in the emerging markets of Uzbekistan, Turkmenistan, and Armenia, there will be significant outlay on network roll-outs, to accommodate new subscribers. MTS will look to roll out 3G services in Russia, Uzbekistan, and Armenia, incurring significant investment costs, but Global Insight expects initial uptake to be moderate. Potential inhibitors of growth across the CIS could include interconnection costs, which would rise proportionately to voice traffic levels. Inflation will also have an effect in the region, as many costs are incurred in local currencies, and costs such as advertising, marketing, and employer salaries will rise.
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