megafon investor presentation · pdf filesource: company data. note: (1) –by overall...
TRANSCRIPT
MegaFonInvestor presentation
2016 Moscow Exchange Forum
April 12-13
2
Certain statements and/or other information included in this document may not be historical facts and may constitute “forward looking statements”
within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 2(1)(e) of the U.S. Securities Exchange Act of 1934, as amended. The
words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plans”, “forecast”, “project”, “will”, “may”, “should” and similar expressions may
identify forward looking statements but are not the exclusive means of identifying such statements. Forward looking statements include statements
concerning our plans, expectations, projections, objectives, targets, goals, strategies, future events, future revenues, operations or performance,
capital expenditures, financing needs, our plans or intentions relating to the expansion or contraction of our business as well as specific acquisitions
and dispositions, our competitive strengths and weaknesses, the risks we face in our business and our response to them, our plans or goals relating
to forecasted production, reserves, financial position and future operations and development, our business strategy and the trends we anticipate in
the industry and the political, economic, social and legal environment in which we operate, and other information that is not historical information,
together with the assumptions underlying these forward looking statements. By their very nature, forward looking statements involve inherent risks,
uncertainties and other important factors that could cause our actual results, performance or achievements to be materially different from results,
performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous
assumptions regarding our present and future business strategies and the political, economic, social and legal environment in which we will operate
in the future. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be
achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most
likely or standard scenario. We expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect actual results,
changes in assumptions or in any other factors affecting such statements.
Disclaimer
Agenda
1. About MegaFon
2. Key Corporate and Financial Highlights for 2015
3. Appendix
About MegaFon
1
Wireless revenues; 86.2%
Wireline revenues; 7.5%
Sales of handsets and accessories; 6.4%
>98% of revenues comes from Russia
RUB 313.4bn
MegaFon – investment summary
Highlights Consolidated FY 2015 revenue breakdown
Source: Company data. Note: (1) – By overall mobile revenue and number of subscribers as of the year end of 2015 in Russia
(2) – Total number of subscribers as of the year end of 2015 was 76.8m in Russia, Tajikistan, South Ossetia and Abkhazia(3) – Russian population as of the latest census in October 2010
Compelling historical financial performance
• 2nd largest Russian mobile operator(1), with 74.8m subscribers(2) and historically growing market share
• Unique network position overall on the back of substantial investments
• Unrivalled frequency spectrum
• Leading 4G/LTE operator providing access to 4G/LTE network in 77 Russian regions to 59.2%(3) of population by the end of 2015
• Innovative player with a customer-centric approach and a leading position in digital services and content
• Extensive retail network consisting of over 8,000 stores, including 2,097 owned-and-operated stores, approx. 2,000 third-party monobrand stores and 4,000 Euroset stores
• Managed by a professional team with solid track record
• Listed on the London and Moscow stock exchanges since 27 Nov 2012
Strong
fundamentals
Growth
Returns
• Superior historical growth among Big 3 Russian mobile operators with future growth potential
• Strategically focus on improving operating efficiency and capital expenditure management which translates into growing cash flows
• Highly attractive shareholder remuneration policy: at least 50% of net income, or 70% of free cash flow
RUB bn 2011 2012 2013 2014 2015 CAGR
Total mobile subscribers (MM) 62.8 64.6 70.1 72.2 76.8 5.2%
Consolidated revenue 242.4 272.3 297.2 314.8 313.4 6.6%
Consolidated OIBDA 100.6 117.1 132.6 138.5 132.4 7.1%
Margin (%) 41.5% 43.0% 44.6% 44.0% 42.2%
Capex (70.6) (45.2) (47.1) (56.5) (70.2) -0.1%
As % of revenues 29.1% 16.6% 15.9% 17.9% 22.4%
OIBDA−Capex 30.0 71.9 85.4 82.0 62.2 20.0%
As % of revenues 12.4% 26.4% 28.7% 26.1% 19.8%
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
22 years of our success story to become a leading telecom operator in Russia
Source: Company data.
Launch of 4G/LTE services in partnership with Yota
Acquisition of 50% stake in Euroset
Start listing on the LSE and MICEX
242.4
272.3297.2
314.8 313.4
1993 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
“NorthWest GSM” founded, launched operations in St. Petersburg
1st operator in Europe to launch “MMS” and 1st
operator in Russia to introduce “Mobile-TV”
1st operator to cover all regions in Russia
1st operator to launch 3G network in Russia in St.Peters-burg
Acquisition of Synterra
Becomes #2 mobile operator in Russia in terms of subscribers
Acquisition of Net-by-Net
MegaLabs launches operations
NorthWest GSM acquired nine other regional GSM operators and renamed MegaFon
MegaFon total revenues(RUB bn)
Launch of online store and introduction of EDGE technology
Acquisition of 100% stake in Yota/Scartel
Number of 4G subscribers hits 1 million
~20x
Leading 4G provider in Russia
General Communication partner for Sochi Olympics 2014
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
Acquisition of 4 SMARTS companies in Volga region
Acquisition of GARS
Purchase of 49.99% stake in class A office building in Moscow
32,6%30,7% 30,9%
29,3%31,0% 30,7%
25,8%
27,1% 27,1%28,8% 29,0% 29,7%23,7%
25,1% 24,3% 23,9% 23,8% 23,7%
17,8% 17,1% 17,6% 18,1%16,1% 15,9%
2010 2011 2012 2013 2014 2015
Source: Bloomberg Consensus Forecast summary (April 2015)Note:(1) - Government focus on MTR and potential roaming regulation is increasing(2) - Fully implemented since April 2014 (3) - Including numbers ported into Scrtel/Yota network(4) - Includes Canada, Germany, France, Italy, Japan, United Kingdom, United States
Russian telecommunications market preserves attractiveness despite turbulent macroeconomic environment
Russian market fundamentals
Competitive telecom market dynamics
• 3 nationwide mobile operators
• Tele2 lags the Big3 operators in the market share, but launched its services in Moscow in late October 2015
• Predominantly prepaid market, limited handset subsidies
• Relatively high OIBDA margin (compared to developed markets) on the back of relatively benign competition and regulatory framework
Benign regulatory framework
• Mobile termination rates, roaming rates, and last mile fiber access are not regulated(1)
• Mobile number portability implemented relatively late in terms of market development(2). In 2015, MegaFon was the beneficiary of 32% of total numbers ported in(3).
• Local loop unbundling is not implemented
MegaFon track record of gaining market share
(Subscribers in millions)
-0.1 pp
+0.7pp
-0.3 pp
-0.3 pp
∆ 2015/2014
219 228 230 237 240
Others
Russian mobile subscribers market share
Total mobile revenues FY 2015 Data revenues FY 2015
252
RussiaEastern Europe
G7(4)
GDP (CAGR 2015-2018E real change p.a.) 0.6% 2.2% 1.8%
CPI (CAGR 2015-2018E, change p.a.) 6,8% 5.4% 1.8%
29,9%
33,4%
25,0%
11,7%
+0.1 p.p.
+0.7 p.p.
+0.1 p.p.
QoQ annual change in market share
37,5%
36,7%21,7%
4,1%
+0.0p.p.
+0.3 p.p.-0.4 p.p.
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
-0.9 p.p.+0.3 p.p.
Other
8
Network infrastructure development in 2015
Fiber opticsinfrastructure
Number of base stations
46 337 47 946
38 147 42 281
18 54723 003
2014 2015
Growth▲ 9.9%
2G BS, units 3G BS, units 4G BS, units
121 102 126 030
2014 2015
Growth▲ 10.8%
Share of BS interconnected via FOCL(1), %
Backbone, km
• In 2015, MegaFon remained focused on increasing the quality of itsservices by continued roll-out and modernisation of 4G/3G/2Gnetworks in Russia
• By the year-end, the key indicators for the connection quality inMegaFon network improved:
• As of the end of 2015, MegaFon had the largest network amongRussian mobile operators, which comprised more than 113,000 basestations, +10% y-o-y
• MegaFon increased the length of its backbone infrastructure by 4%y-o-y, while its fiber optics infrastructure expanded to 184.4K km(4)
This enabled it to expand network footprint and capacity to providefixed-line business services
• In 2015, MegaFon completed integration of all branches into itsGlobal network operational center (GNOC). As of now, the GNOCenables centralised monitoring of, maintenance of and control overthe network quality across MegaFon’s country-wide operations
Note: (1) FOCL – fiber-optic communication lines(2) CSSR – Call set-up success rate(3) DCR - Drop call rate(4) Refined data, vary from those reported earlier
▲ 24.0%
▲ 10.8%
▲ 3.5%
64% 64%
Backhaul, km
184 401166 453
Key points
▲ 4.1%
▲ 28.7%
4G 3G 2G
CSSR(2) 99.47% 99.27% 98.98%
DCR(3) 0.33% 0.39% 0.75%
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
9 Note: (1) — Russian population as of the latest census in October 2010
4G development in 2015 – focus on quality
Federal regions covered by MegaFon 4G / LTE network
Cities where LTE-Advanced available
4G/LTE network development
• MegaFon is focused on expansion of coverage in existingareas of presence and service quality improvement
• More 4G availability:
– 77 federal regions
–more than 780 cities and towns
– 14 out of 15 cities with a population(1) over 1m people
4G/LTE services
• LTE-Advanced services providing speeds of 150-450
Mbit/sec were available in 9 cities as of the year-end
• 4G-enabled devices registered on MegaFon network - 7.85m
units, or +34% y-o-y
• 4G traffic usage increased by 45% y-o-y
• Share of 4G traffic in total data traffic – c.40%
LTE-roaming
• MegaFon is one of the world’s leaders in LTE-roaming
coverage in terms of countries covered
• In 2015, LTE-roaming coverage extended to 66 countries
with 80 operators
Saint-Petersburg
Chelyabinsk
Moscow
Rostov-on-Don
Chita
Nizhniy Novgorod
Samara
Khabarovsk
2849
72 77
25%36%
51%59%
2012A 2013A 2014A 2015A
Availability of MegaFon 4G services
Number of Russia’s regions, where MegaFon 4G is available
% of population covered
Vladivostok
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
10
Strong position in distribution in 2015
Structure of MegaFon distribution network
MegaFon Retail,incl. online store
> 2,000 stores
Franchised stores underMegaFon brand
~ 2,000 stores
Euroset(50% interest)
~ 4,000 stores
Controlled retail
Independent dealers:
Multi-brand electronic storesRussian Post outletsLocal dealersOther
Federal retail chain(dealer agreement)
~ 3,000 stores
72% gross additions(1)
• Through its controlled and non-controlled retail network,MegaFon holds the leading position in distribution in Russia
• The current structure of the distribution network enablesMegaFon to steadily increase its subscriber and data userbase in a cost-effective way and improve the quality of grossadditions
• MegaFon’s controlled retail accounted for 72% of total grossadds, while the owned retail stores accounted for c.40% oftotal gross adds in 2015
• Despite the shift to cheaper and more affordable devicesamid weaker consumer purchasing power, in 2015 we sold25% more smartphones in unit terms than a year ago in ourown retail stores. This helped us to deliver stronger mobiledata revenue
Note: (1) - Sales for the quarter, excluding Yota, as of end of Q4 2015(2) – Sales represented in unit terms(3) – Sales of data-enabled devices include sales of 4G smartphones, tablets, modems and routers
Non-controlled retail 28% gross additions(1)
+25% y-o-y
Smartphones
+113% y-o-y
4G smartphones
Sales of data-enabled devices(2) in MegaFon
Retail in 2015
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
MegaFon TV – a key development for growth in data monetisation and increase of customer loyalty
11
Content
Devices supported
Uniqueness
• Unique terms of use for subscribers using “All inclusive” bundled tariff plans and options
• VOD and LiveTV tandem solution
• Premium HD content: Amedia, Discovery HD, HBO, Disney, Warner, Universal, Sport HD, etc.
• Individual recommendations based on ratings and perceptions by subscribers
• OTT solution available for all types of devices: smartphone, tablet, SMART TV, Web
• VOD: Large catalogue of movies, TV series and sequels of first-rate Russian and foreign studios
• Live TV: 130+ channels, including 1 and 2 multiplex
Company’s existing subscribers
3rd party clients
… aimed at both subscribers of MegaFon and those of other mobile operators
Clients Purposes
• Boosting of subscribers loyalty and lifetime
• Data usage enhancement
• Monetisation of subscriber base
• Monetisation of active users of MegaFon.TV app
• Acquisition of new subscribers
61% of app users rate the service as “good” and “excellent”4.0 average rate in Google Play and AppStore
Fully-fledged video and TV OTT solution launched in June 2015 MegaFon TV creates value for digital offering…
Customers’ dynamics satisfaction by the service
350K users registered at 31 December 2015c.40% average monthly growth of user base since launch
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
12
Key developments in B2X(1) segment in 2015
Note: (1) B2X includes B2B and B2G business segments(2) CDN – Content delivery network(3) Based on Company’s estimate of M2M market in terms of M2M subscribers
Key projects in 2015
• Development of new IT tariff products to reduce the time to market launch ofindividual offerings for corporate clients
• Launch of programme for improvement of indoor coverage in business andcommercial centers
• Launch of the mono-industry towns development programme
• Launch of new exclusive overland cross-border passages Russia-Georgia andRussia-Kazakhstan
• Contract with RT-Invest Transportation Systems signed for distribution of 2million sim-cards to be installed on board heavy vehicles to meter over thehighway tracking
B2X strong performance in FY2015
New products and services
• Launch of M2M-Monitoring service on the basis of a new platform in all branchesof MegaFon
• Commercial launch of “Wi-Fi with authorisation” service on a federal level
• Launch of “Electronic document flow” service
• Upgrade of “Office zone” service, a cloud solution for SME business
• Launch of “Online conference” service in all branches of MegaFon
• Promotion of Geo-analytics service based on BigData analysis
• Upgrade of CDN(2) network: network capacity increased by more than 40%, scopeof services expanded by 60%
286 K
Number of B2X clients + 5% y-o-y
2.8 m
Number of B2X mobile data users
+23.1% y-o-y
8.2%
B2X total revenue
+ 8.2% y-o-y
6.6%
B2X mobile revenue
+ 6.6% y-o-y
30.9%
B2X mobiledata revenue +
30.9% y-o-y
• M2M subscribers exceeded 1.6 million as at 31 Dec 2015
• MegaFon’s M2M market share increased to 25%(3)
New B2B/B2G clients
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
Data ARPU, RUB per month APPMb, RUB
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed. (1 ) —Data Service User is defined as a Subscriber who has used any of our data transfer services within the preceding one month (2) — Active subscribers that do not comply with the definition of Data Service User Base(3) — Total data revenues in a given period divided by average number of data service subscribers during such period, divided by number of months in such period(4) — Starting from 2013, APPMb presented here vary from those reported earlier do to the change in methodology for data service user calculation. APPMb is calculated by taking ARPDU for a given period, and dividing by DSU in that period(5) — Total number of megabytes transferred during a given period divided by average number of data subscribers during such period, divided by number of months in such period(6) — Total CAPEX, including CAPEX on spectrum acquisition via purchase of SMARTS in August 2015. Refers to actual CAPEX accrued for the year and may not match cash flow CAPEX
Superior operating performance…
Operating results provided on this page cover only the Russian business. Financial results are presented on a consolidated basis
…translating into strong financials
218,8 241,1 259,0 269,5 270,0
15,217,9
20,1 22,2 23,48,4
13,3 18,1242,4272,3
297,2
2011 2012 2013 2014 2015
100,6 117,1 132,6 138,5 132,4
41,5%43,0% 44,6% 44,0%
42,2%
2011 2012 2013 2014 2015
19,1 21,0 25,2 27,429,3
61,6 62,668,1 69,7
74,8
2011 2012 2013 2014 2015
Data service user base (1) User base not using data service (2)Wireless services Wireline services Equipment & Accessories
Lower▼ 0.4%
Total Russia wireless subscribers, MM
Russia Data ARPU (ARPDU(3)) and APPMb(4)
Consolidated Revenue breakdown, RUB Bn
Consolidated OIBDA and OIBDA margin
70,645,2 47,1 56,5
70,2
29,1%
16,6% 15,9%17,9%
22,4%
2011 2012 2013 2014 2015
Consolidated CAPEX(6) and CAPEX margin Growth▲ 24.2%
Demonstrating resilient operating and financial performance
Lower▼ 4.4%
314.8
23.1
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
313.4
19.9
628 1091 1 556
2 6143 286
27%32% 38%
47%53%
2011 2012 2013 2014 2015
Data-enabled device penetration
Russia DSU(5) and data-enabled device penetration
DSU, Mb/month
148 164 177
211233
0,240,15
0,11
0,08 0,07
0,00
0,10
0,20
0,30
2011 2012 2013 2014 2015
Return to growth through digital strategy
14
New strategy focuses on “Digital“ trend, mobile data monetization and new product offerings
Since 2012 MegaFon successfully implementedan efficient growth strategy
Strategy implementation in 2012-15 allowed to accumulate free cash flow and increase the dividends
• Grown MegaFon share in the mobile market
• Increased business efficiency
• Deployed modern infrastructure and full-fledged 4G communications network
• Implemented new investment management process and subsequent optimized investment budget
• Enhanced organizational structure to strength the Company's position in the B2C, B2B, B2G and B2O markets with the aligned governance models
• Cover digital subscriber needs and requirements
• Leverage Internet and OTT companies cooperation
• Develop own innovative products and services (MegaFon TV, М2М services, mobile finance mobile advertising, cloud solutions)
• Well-timed construction and modernization of the network, utilizing spectrum advantage
• Identification and implementation of new growth areas in operating efficiency
Despite challenging macro MegaFon will return to sustainable growth with winning the “Digital”
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
Financial and Operating Results
2
Results in 2015 in line with the full-year guidance
16
Note: All changes are shown on a year-on-year basis – FY 2015 vs FY 2014(1) — Revenue for FY2014 amounted to RUB 314.8bn(2) — Y-o-Y (or year over year) means the same periods in the current and previous year on either a quarterly or yearly basis. (3) — Organic CAPEX, excluding CAPEX on spectrum acquisition via purchase of SMARTS(4) — Gross CAPEX totaled RUB 70.2bn
Actual Target
Revenue growth
OIBDA margin
CAPEX
Metric
Flat(1) RUB 313.4bn
Status
OIBDA margin 42.2 %≥ 41.5 %
RUB 64.0bn(3)≤ RUB 65.0bn
Revenue was flat y-o-y(2)
CAPEX net of SMARTS acquisition
totalled RUB 64.0bn(4)
OIBDA margin was 0.7 p.p. above
guidance
In line
In line
In line
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
17
Key highlights: earnings trend
Note: Due to rounding, manual calculations for financials and KPIs(2) may differ from those displayed(1) — Net profit attributable to equity holders of the Company(2) — Key performance indicators (“KPIs”)
Revenue
Revenue, OIBDA and Net profit82,2
74,0 76,1 81,3 82,0
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
Lower▼ 0.3%
314,8 313,4
2014 2015
Lower▼ 0.4%
36,7 39,0
11,7% 12,5%
2014 2015
OIBDA
Net profit(1)
Quarterly data, RUB bn % of RevenueFull-year data, RUB bn
34,5 32,0 34,7 36,129,5
41,9% 43,2% 45,6% 44,5%36,0%
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
2,8
7,4
13,0 13,3
5,3
3,4%10,0% 17,1% 16,4%
6,5%
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
Growth▲ 89.1%
Lower▼ 14.4%
Lower▼ 4.4%
Growth▲ 6.3%
138,5 132,4
44,0% 42,2%
2014 2015
• In 2015, total revenue was in line with the full-year
target with service revenue up by 0.6% y-o-y, but
impacted by lower revenue from sales of equipment and
accessories (-14.0% y-o-y) resulting from the change in
sales mix from expensive data-enabled devices towards
affordable smartphones
• OIBDA declined by 4.4% y-o-y due to higher marketing,
and general and administrative expenses
• As a result of the OIBDA decline, OIBDA margin
decreased by 1.8 p.p. y-o-y to 42.2%, which still
remained above the full-year target
• Net profit(1) increased by 6.3% y-o-y due to lower foreign
exchange loss compared to FY2014 and gain on
derivative financial instruments due to efficient foreign
exchange management
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
18
Key highlights: free cash flow and CAPEX
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) – MegaFon CAPEX refers to actual CAPEX accrued for the year and may not match cash flow CAPEX.
CAPEX
CAPEX(1), OIBDA-CAPEX, Free Cash FlowGrowth▲ 15.5%
Growth▲ 24.2%
OIBDA-CAPEX
Free Cash Flow
Quarterly data, RUB bn % of RevenueFull-year data, RUB bn
Lower▼ 20.3%
Lower▼ 58,0%
Lower▼ 24.2%
Lower▼ 23.9%
• In 2015, MegaFon spent RUB 70.2bn, which is 24.2%
higher than in FY 2014 mainly due to:
– higher spending on 4G/LTE network roll-out and
modernisation of 2G/3G network
– RUB 6.1bn purchase of spectrum through the SMARTS
acquisition, which will enable network roll-out CAPEX
optimisation going forward
– Net of acquisition of SMARTS’ spectrum, FY 2015
CAPEX totaled RUB 64bn, which is in line with the full-
year target
• Due to the lower OIBDA and higher CAPEX spending,
OIBDA-CAPEX decreased by 24.2% y-o-y
• Free Cash Flow decreased by 23.9% y-o-y mostly due to
higher CAPEX and decreased cash flow from operating
activities
20,5
8,112,5
25,923,6
24,9%
10,9%16,5%
31,9% 28,8%
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2014
56,570,2
17,9%
22,4%
2014 2015
14,0
23,922,2
10,25,917,0%
32,3% 29,1%12,6%
7,2%
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2014
82,062,2
26,1% 19,8%
2014 2015
17,4
11,7
19,3
8,9
13,8
21,1%15,9%
25,4%
10,9%16,9%
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2014
70,7
53,8
22,5%17,2%
2014 2015
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
19
Mobile data revenue remains the key revenue growth driver
Key revenue components
Due to rounding, manual calculations for financials and KPIs may differ from those displayed.Note: (1) — Other wireless revenue includes revenues from VAS services; revenue from local subscribers which includes monthly fees, airtime revenues, own subscriber roaming and connection fees; wireless interconnection revenues; roaming charges to other wireless operators and other wireless revenues(2) — Include smartphones, tablets, dongles, routers, and other data-enabled devices
Wireless revenue increased in 2015 by 0.2% y-o-y. Growth inmobile data revenue and higher demand for MegaFon’scontent and mobile commerce value-added services (+4.5%y-o-y) fully compensated for a slowdown in revenue fromtraditional voice services
Mobile data continued to be the key growth driver andrepresented 25.5% of total revenue in FY2015 vs. 21.3% inFY2014, increasing by 19.0% y-o-y due to:
― expansion of data user base by 6.8% y-o-y to 29.9 millionusers as a result of our active data user acquisition effortsand higher adoption of data-enabled devices (more than50% of data-enabled devices(2) registered on MegaFonnetwork)
― higher data usage resulting from:
• active marketing efforts and intensive 4G networkdevelopment
• introduction of new tariff offerings to promote higherdata usage and promotion of affordable data-enableddevices in controlled retail stores
Wireline service revenues increased by 5.6% y-o-y due toexpansion of B2B and B2G client base, acquisition of GARSand attraction of new B2O projects due to DREAMdevelopment
Sales of handsets and accessories decreased by 14.0% y-o-yas a result of the change in sales mix towards more affordablesmartphones, including 3G and 4G smartphones, exclusivelyintroduced to the market by MegaFon
Wireless 83.6% 86.7% 87.8% 86.9% 83.5% 85.6% 86.2%
- Data 21.3% 24.1% 25.6% 26.6% 25.6% 21.3% 25.5%
Wireline 7.7% 7.4% 7.0% 7.0% 8.5% 7.0% 7.5%
Handsets and accessories
8.7% 5.9% 5.2% 6.1% 8.0% 7.4% 6.4%
17,5 17,9 19,5 21,6 21,0
51,2 46,2
47,4 49,0 47,5
6,3 5,5
5,3 5,7 6,9
7,2
4,4 4,0
5,0 6,6
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
Lower▼ 0.3%
▲ 19.9%
Other wirelessrevenue(1)
Wireline
Handsets and
accessories
Data
82.2
74.0 76.181.3 82.0
▲ 9.6%
▼ 8.2%
▼ 0.3%
(RUB bn)
67,2 79,9
202,3 190,1
22,2 23,4
23,1 19,9
2014 2015
Lower▼ 0.4%
314.8 313.4
▲ 19.0%
▲ 5.6%
▼ 14.0%
▲ 0.2%
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
20
Total Russia wireless subscribersincluding data service users
(million)
27,4 26,9 27,928,5 29,3
69,7 69,571,4
73,9 74,8
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
Data service user base (1) User base not using data service (2)
Drivers of Russia total wireless services revenues: Wireless subscribers
Results provided on this page cover only the Russian business
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — Data Service User is defined as a Subscriber who has consumed any amount of data traffic within preceding month(2) — Mobile subscribers that do not fall within the definition of Data Service User Base
• Overall subscriber base in Russia increased by 5.1
million new subscribers (+7.2% y-o-y) to 74.8 million
resulting from:
- active subscriber acquisition marketing efforts and
new marketing campaign
- upgrade of existing tariffs and introduction of new
services
- new dealer contract with Svyaznoy, which provides
access to an additional attractive customer base
• Data service user base expanded by 6.9% y-o-y to 29.3
million users accounting for more than 39% of the
overall subscriber base supported by growth in
smartphone users base (+23.8% y-o-y)
• Increase in data service users was achieved due to
organic growth through initiatives aimed at promoting
shift of “pure” voice users to data usage and increased
penetration of data-enabled devices on MegaFon
network, now totaling 53%
Share of data users in overall subscriber base, %
39.3% 38.7% 39.1% 38.6% 39.2%
▲ 6.9%y-o-y
▲ 7.2%y-o-y
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
21
DSU(2) & APPMB(3)
DATA ARPU (ARPDU(4))
Drivers of Russia total wireless services revenues: DSU and APPMB
Results provided on this page cover only the Russian business
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) Operating KPIs presented here vary from those reported earlier due to change of methodology for data service users calculation.
Please refer to our Q4 and FY 2015 Results press release for reconciliation details (2) Total number of megabytes transferred during a given period divided by average number of data subscribers during such period, divided by number of months in such period; (3) ARPDU for a given period divided by DSU in such period; (4) Total data revenues in a given period divided by average number of data service subscribers during such period, divided by number of months in such period
• Strong increase of DSU (+25.7% y-o-y) in 2015 resulted
from:
– upgrade of tariff and internet options with higher
mobile data allowances
– active marketing promotions
– intensive roll-out of the 4G/LTE network resulting in
a higher share of 4G traffic (almost 40% of total
traffic)
– growing penetration of data-enabled devices on
MegaFon network up to c.53% as of the end of 2015
– continued increase in 4G-enabled devices registered
on MegaFon network reaching 7.9 million
• APPMB decreased by RUB 0.01 y-o-y
• ARPDU increased by 10.4% y-o-y due to organic growth
in data traffic usage on the back of increasing customer
demand for larger data packs, which became more
affordable
214 219232
244 238
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
2 9813 195 3 113 3 185
3 638
0,07 0,07 0,07 0,08 0,07
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
Growth▲22.0 %
Growth▲11.2%RUB per
month
DSU, Mb/month APPMb, RUB
Data revenue operating statistics
Quarterly data Full-year data
2 614
3 286
0,08 0,07
2014 2015
211
233
2014 2015
Growth▲ 25.7%
Growth▲10.4% F
inan
cial
and
Ope
rati
ng R
esul
tsA
ppen
dix
Abo
ut M
egaF
on
22Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed.
138,5
(1,4)
0,2
(1,7) (3,3)
132,4
OIBDA2014
Revenue Cost of revenue Sales &Marketing
General &Administrative
OIBDA2015
▼ (0.5%)
OIBDA (RUB bn)
(0.3%)(0.4%) +10.1% +4.4%
Key factors influencing OIBDA margin
• In 2015, OIBDA decreased by 4.4% y-o-y, while OIBDA
margin declined by 1.8 p.p. y-o-y to 42.2%, remaining
above the full-year target
• The following factors influenced OIBDA:
- Gross profit decreased by 0.5% y-o-y due to lower
total revenues (-0.4% y-o-y), while .gross profit
margin remained flat at 73.1%
- Sales & marketing expenses increased by 10.1% y-o-y
mainly due to rise of the advertising activity related to
a new company positioning campaign
- General & administrative expenses grew by 4.4% due
to:
– increased rent and utilities expenses resulting from
our network expansion;
– higher employee benefits expense mainly due to an
increase in social charges
y-o-y growth
Key drivers of OIBDA margin
Lower▼ 4.4 %
Gross profit
Key components
OIBDA margin
(%)
Gross profit margin44.0% 42.2% ▼1.8 p.p.= 0% ▼ 0.6 p.p ▼ 1.2 p.p.
S&M as % of revenue
G&A as % of revenue
y-o-y decrease
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
23
17%
83%
RUB USD
Liquidity(1) currency split
Net debt build-up, RUB bn As of 31 Dec 2014 As of 31 Dec 2015 Change
Cash and cash equivalents 22.2 17.5 (4.7)
Short-term investments 47.9 20.2 (27.7)
Total debt 206.3 218.5 12.2
Long-term debt 156.3 172.6 16.3
Short-term debt 50 45.9 (4.1)
Net debt 136.2 180.8 44.6
• Despite the dividend payment in December 2015 and
M&A activity in Q3-Q4 2015, MegaFon retained a
comfortable level of leverage:
– Net debt/LTM OIBDA at 1.37x level at the end of Q4
2015
– MegaFon fully paid dividend for 9m 2015 in the
amount of RUB 40bn in December 2015
– Purchase of interest in a building at Oruzheyny Lane,
Moscow, executed in Q4 2015
• Market volatility risks mitigated by keeping liquidity in
FX:
– Over 80% of cash held in hard currencies
• In December 2015, Moody’s changed its outlook on
MegaFon’s rating to “Stable” following an upgrade of
sovereign rating outlook
Net debt and liquidity development
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — Liquidity is calculated as the sum of Cash and cash equivalents and Short-term investments(2) — c. 0.25% in EUR for operating purposes
136,2 129,1 113.6 123,0
180,8
0,98x 0,94x0,82x
0,90x
1,37x
Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
RUB bn / (x)
Net debt Net debt/LTM OIBDA
Growth▲ 0.39x
Net debt and Net debt/LTM OIBDA
(2)
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
24
21%
24%34%
10%
11%
61%9%
28%
2%
44%
39%
17%
46%
36%
18%
31-D
ec-2
014
Debt portfolio structure
By currency (1)By instrument By maturity
Bonds
Bank Loans
Equipment Financing 3 Years
1 Year
5 Years and Longer
4 Years
2 Years
Debt profile
• No short-term refinancing risk
- 55% of Company’s debt becomes due within 3Y tenor or later
• Continuing strategy to keep a predominant portion of the creditportfolio in RUB
– Changes in Q4 2015 were attributable to the ECA drawdownsand the repayment of the hedged portion of the debt
• Further optimization of the Company’s debt portfolio
– In October 2015, MegaFon successfully placed RUB 15bn ofexchange bonds at a coupon rate of 11.4% p.a. for a period of 2years
– In December 2015, MegaFon and Sberbank signed a newrevolving credit facility in the amount of up to RUB 30bn. Underthis credit facility, MegaFon has already drawn a tranche in theamount of RUB 15bn
– Proceeds from these borrowings were used to partially prepayshort-term ruble debt with higher interest rates and replenishRUB liquidity
• New credit facilities to further back-up MegaFon’s CAPEX and caterfor refinancing needs were signed in December:
– New credit facility with CDB for USD 300 mln to finance Huaweiprocurement
– Credit facility with CDB for USD 300 mln aimed at refinancing ofa part of the Company’s existing debt – the Company’s firstfacility with CDB not linked with equipment purchases
– Finnvera-covered facility agreement with Sberbank in theamount of EUR 70 mln – the first ever RUB-denominated ECA-type facility for the Company
62%15%
21%2%
24%
20%
12%
24%
20%
31-D
ec-2
015
% of total
EUR
RUB
USD Swapped(2)
USD
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — On nominal basis; (2 ) — Including structured and plain vanilla FX swaps
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
25
Flat to low single digit y-o-y growth
RUB 120-126bn
Up to RUB 75bn
Revenue
OIBDA
CAPEX
Outlook for 2016
Fin
anci
al a
nd O
pera
ting
Res
ults
App
endi
xA
bout
Meg
aFon
Appendix
3
Existing MegaFon Corporate Governance structure complies with allrequirements of the London and Moscow stock exchanges whereMegaFon trades
Board of Directors elected in June-2015 consists of 7 members:
4 Board members represent interests of minority shareholders: 2TeliaSonera representatives and 2 INEDs
3 representatives of controlling shareholder USM
Three Committees of the Board of Directors have been set up forimproving corporate governance standards:
Audit Committee
Remuneration and HR Development Committee
Finance and Strategy Committee
On 12 Nov 2013, MegaFon’s Board of Directors approved the Code ofBusiness Conduct and Ethics further streamlining the corporategovernance procedures in the Company
Following the listing reform on the Moscow Exchange, in June 2014, theCompany’s shares were upgraded to the “Highest” quotation list QL I,thus allowing pension funds and state corporations to invest inMegaFon’s stock
- This upgrade confirms MegaFon compliance with MOEX’s highestcorporate standards
Corporate governanceBoard of Directors composition
Vladimir Streshinsky
MegaFon employs the best-in-class Corporate Governance practices…
App
endi
x C
orpo
rate
and
Fin
anci
al H
ighl
ight
sW
hat
is M
egaF
on?
Sergey SoldatenkovChairman of the Board
Sergey Kulikov
Carl Peter Christian Luiga
Ingrid Maria Stenmark
Jan Rudberg
Nominated by USM Nominated by Teliasonera
Independent directors
Lord Myners
The majority of the Board represents minority shareholders
…led by a management team with extensive TMT experience
App
endi
x C
orpo
rate
and
Fin
anci
al H
ighl
ight
sA
bout
Meg
aFon
Ivan Tavrin, Chief Executive Officer
● Chief Executive Officer of MegaFon since April 2012
● Extensive experience in the Russian media industry, pioneeringits development over the past 16 years, including RegionalMedia Group, Media One Holding, Vyberi Radio Group and TV-3
● Board positions outside MegaFon include MO-TV Holdings Limited, UTH Russia Limited, Media-One Holdings Limited and CJSC Kommersant Publishing House
Konstantin Likhodedov, Director, Consumer Business
● Director for Consumer Business since September 2015
● Previously Director of the Moscow branch of MegaFon
● Joined MegaFon in 2012
Dmitry Kononov, Director, Investors Relations and M&A
● Director for Business Development, M&A, IR since Dec 2008
● Joined MegaFon in 2000. Served as the Company’s CFO in 2002-2004
● 22 years of TMT experience
Alexander Bashmakov, Chief Technical Officer
● CTO since August 2015
● Previously Chief Strategy and Procurement Officer of MegaFon
● 8 years in management consulting with focus on Telecom & IT (Accenture and BCG)
Gevork Vermishyan, Chief Financial Officer
● CFO since Jul 2011
● Previously Director of Corporate Finance at AFK Sistema
● 13 years of finance / 8 years of TMT experience
Evgeny Chermashentsev, Chief Operating Officer
● Appointed Chief Operating Officer (Executive Director) ofMegaFon in July 2015
● Previously Deputy CEO for Infrastructure of MegaFon
● Joined MegaFon in 2012
● Before joining MegaFon held various senior positions at mediaand broadcasting companies
● c.20 years of TMT experience
Executive Bodies
MegaFon has noticeable advantage in terms of frequencies… … allowing to get significantly higher datatransfer rate in MegaFon’s network
Both operator and end-user equipment already support 2x20
MHz for LTE, no other operator beside MegaFon can provide such
band length
After implementation of technology neutrality MegaFon is the
only operator able to utilize 3 times 2x20 MHz channels (2x20
MHz in 1800 band and 2 times 2x20 in 2600 band) for LTE
In other technologies all nation-wide operators are almost equal
None of nation-wide operators except MegaFon can realize
significant benefits from implementing technological neutrality
700 MHz (LTE) 2x7,5 2x7,5 2x7,5 2x7,5
800 MHz (LTE) 2x7,5 2x7,5 2x7,5 2x7,5
900 MHz (2G(2))2x4,8-
2x15,6(1)
2x2,4-2x13,2(1)
2x0,8-2x13,6(1)
2x0,6-2x8,4(1)
1 800 MHz (2G / LTE)
2x14,6-2x30,6(1)
2x13,6-2x44,4(1)
2x12-2x29,6(1)
2x9,4-2x44,6(1)
2 100 MHz (3G) 2x15 2x15 2x15 2x15
2 400 MHz (LTE) - - - 30 - 70(1)
2 600 MHz (LTE - TDD(3))
25 25 - -
2 600 MHz (LTE) 2x40 2x10 2x10 2x10
(1) Band size varies depending on Russian region(2) 3G only for Moscow, Moscow region and Komsomolsk-on-Amur(3) In Moscow only
Wider band means higher data transfer rate and higher capacity of the network
MegaFon’s Spectrum Advantage
App
endi
x C
orpo
rate
and
Fin
anci
al H
ighl
ight
sA
bout
Meg
aFon
MegaFon’s headline tariffs (Moscow region) (1/2)TARIFF NAME
MegaFon -All included S
PRICE
MegaFon -All included M
MegaFon -All included L
300 RUB/ month• 300 minutes
• 2 GB of 3G, 4G+ traffic
• 200 SMS
• 1 free movies and channels on MegaFon TV
FEATURES
500 RUB/ month
• 550 minutes
• 5 GB of 3G, 4G+ traffic
• 400 SMS
• 2 free movies and channels on MegaFon TV
800 RUB/ month
• 1000 minutes in Russia
• 7 GB of 3G, 4G+ traffic
• 1000 SMS
• 4 free movies and channels on MegaFon TV
BEYOND THE PACKAGE
• To MegaFon subs in Russia – 0 RUB/min
• To other subs of Moscow region – 1.6 RUB/min
• All outgoing calls to other regions of Russia – 3 RUB/min
Bun
dled
tar
iffs
Pop
ular
tari
ffs Switch to zero
Everything is simple 0 RUB/ month
• Outgoing calls to MF subs of Moscow region –0 RUB/ min
• Outgoing calls to other subs of Moscow region – 2.5 RUB/ min
• Outgoing call on not MG subs of Moscow region – 1.6 RUB/min
• Outgoing calls to other subs in Russia – 3.9 RUB/min
0 RUB/ month • All outgoing calls to other regions of Russia – 3 RUB/min
• Not applicable
MegaFon -All included VIP 2,700 RUB/ month
• 5000 minutes in Russia
• 20 GB of 3G, 4G+ traffic
• 5000 SMS
• 4 free movies and channels on MegaFon TV
Fre
e o
n ne
t ca
lls
in R
uss
ia
• To MegaFon subs in Russia – 0 RUB/min
• To other subs of Moscow region – 1.6 RUB/min
• All outgoing calls to other regions of Russia – 3 RUB/min
• To MegaFon subs in Russia – 0 RUB/min
• To other subs of Moscow region – 1.6 RUB/min
• All outgoing calls to other regions of Russia – 3 RUB/min
• To MegaFon subs in Russia – 0 RUB/min
• To other subs of Moscow region – 1.6 RUB/min
• All outgoing calls to other regions of Russia – 3 RUB/min
• To MegaFon subs in Russia – 0 RUB/min
• To other subs of Moscow region – 1.6 RUB/min
• All outgoing calls to other regions of Russia – 3 RUB/min
1,200 RUB/ month
• 2000 minutes in Russia
• 10 GB of 3G, 4G+ traffic
• 2000 SMS
• 4 free movies and channels on MegaFon TV
MegaFon -All included XL
MegaFon’s headline tariffs (Moscow region) (2/2)
MegaFon - Internet XS
350 RUB/ month• 3 GB of traffic
• Maximum speed is not limited
• 1 free movies and channels on MegaFon TV
590 RUB/ month
890 RUB/ month
Inte
rnet
tari
ffs
opti
ons
• 16 GB of traffic*
• Maximum speed is not limited
• 2 free movies and channels on MegaFon TV
• 36 GB of traffic*
• Maximum speed is not limited
• 4 free movies and channels on MegaFon TV
• Once a plan data allowance isused, the Internet access willautomatically be suspendeduntil the next calendar monthor until the plan is upgradedwith other options
(*) 50% of traffic is available from 8.00 am to 00.59 am, the rest 50% of traffic is available from 1.00 am to 7.59 am
(**) Amount of traffic available is unlimited from 1.00 am to 7.59 am, 30 GB of traffic is available from 8.00 am to 00.59 am
(***) Valid only within 12 months from the date of the purchase of service under the special offer
TARIFF NAME PRICE FEATURES BEYOND THE PACKAGE
190 RUB/ month – 1st month7 RUB/day – from 2nd month
1,290 RUB/ month
• 70 MB of traffic per day
• Maximum speed is not limited
• Unlimited amount of traffic**
• Maximum speed is not limited
• 6 free movies and channels on MegaFon TV
Roa
min
gta
riff
san
dop
tion
s
Around the world- Roaming tariff 9 RUB/ day• Europe, CIS: incoming, outgoing calls – 13 RUB/min / SMS – 11 RUB/ sms
• Other countries: incoming, outgoing call – 19 or 43 RUB/ min / SMS – 14 RUB/ sms
Whole world – voice tariff option 39 RUB/ day • Incoming calls - 0 RUB/ min from 0 to 30 minutes, from 31st minute – according to the roaming price list of the country of location
Internet abroad – data tariff option Depends on country• 10 MB of traffic per day - from 49 to 1990 RUB per day (Europe – 129 RUB/ day)
• 30 MB of traffic per day – from 129 to 4990 RUB per day (Europe – 329 RUB/day)
MegaFon - Internet S
MegaFon - Internet M
MegaFon - Internet L
MegaFon - Internet XL
Internet Tablet S(special offer, valid till 12-Jun-2016) 400 RUB/ month
• 4 GB of traffic + 3 GB of traffic monthy free of charge***
• Maximum speed is not limited
• 1 free movies and channels on MegaFon TV
Contact Information
MegaFon Investor Relations30 Kadashevskaya embankmentMoscow, 115035, RussiaTel.: +7 495 926 2012Email: [email protected]: ir.megafon.com