Voice Traffic, Subscriber Additions Drive MegaFon's Q1 Profit Up 51%

Russian mobile operator MegaFon has reported that in the first quarter of 2008, its net profit rose 50.8% year-on-year (y/y) to 9.257 billion roubles (US$396.7 million), according to US Generally Accepted Accounting Principles (US GAAP). The operator's revenue rose by 28.8% y/y to 37.789 billion roubles, while earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 32.3% y/y to 18.887 billion roubles. The EBITDA margin—generally a good gauge of company efficiency—was up to 50.0% from 48.7% a year earlier. MegaFon's subscriber base rose to 36.072 million, up 19.3% y/y, and its market share grew to 21.9% from 19.9% in the previous year. Minutes of use (MoU) rose to 275 from 220 in the previous year, and ARPU was up to 352.5 roubles (US$15.0) from 327.9 the previous year.

Outlook and Implications

• Subscriber and Usage Gains Mask Reduced Spending Per Minute: MegaFon's strong profit growth has been due to subscriber growth and increased use of services, according to company director general Sergei Soldatenkov in a press release. Soldatenkov noted that within the highly-penetrated Russian mobile market, MegaFon has employed marketing initiatives aimed at increasing its user base, while he also emphasised the positive impact of a balanced tariff policy. However, MegaFon's MoU grew at a much higher rate (25.0%) than ARPU (7.5%). As such, its yield per minute, indicating the amount earned per minute of voice traffic, fell 14% on the year to 1.28 roubles from 1.49 roubles. So, while MegaFon's low tariff pricing has helped it to attract more subscribers and increase usage, ultimately boosting revenues, its customers are now spending less per minute. However, MegaFon's ARPU of US$15.0 remains greater than that of rival operators Mobile TeleSystems (MTS) and VimpelCom (at US$10.0 and US$13.2 respectively), while its MoU of 275 is also stronger than that of MTS and VimpelCom (193 and 199 respectively).
• Price-War Threat, But Room for Increased Data Usage: With mobile penetration at around 113% at the end of 2007, there is limited room for organic subscriber growth in the Russian market and the trend for operators over the last year has been to focus on increasing usage as a means of generating revenue. MegaFon's results are evidence of this, but there is a possible danger that too concentrated an effort by operators to encourage voice traffic through reduced tariffs may lead to a price war. Indeed, VimpelCom chief executive officer Alexander Izosimov has been forced to deny that his company will spark off such a move in the wake of a disappointing first-quarter performance in Russia (see Russia: 5 June 2008: Integration of Golden Telecom Drives VimpelCom Q1 Revenue Up 42%). With each of the "big three" operators still recording double-digit ARPU, talk of a price war is probably premature and overly pessimistic. The operators can also look to data usage as a means of increasing ARPU and Global Insight expects the percentage of revenues from data usage within each operator's revenue mix to increase substantially in the future. Indeed, MTS has already noted an increase in data usage within its revenue mix, and momentum is likely to increase as 3G services are now being rolled out, and devices such as the BlackBerry and Apple's iPhone are soon to hit the market (see Russia: 21 May 2008: Subscriber Growth and Traffic in Core Russian Market Drives MTS Q1 Profit Up 36%, 19 June 2008: MegaFon Extends 3G Footprint across North-West and 26 June 2008: VimpelCom Admits Interest in Possible iPhone Development in Russia).

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