2. The President's Message toáthe Shareholders

2. The President's Message
toáthe Shareholders

Dear Shareholders,  

2010 was a year of transition for MTS. With the completion of our merger with Comstar by April 01st 2011, MTS has transformed itself into an integrated telecommunications provider.

Today we offer to our customers the mobile, fixed, internet, pay TV and content products and services. Our accomplishments during the year, clearly establish MTS as the leading telecommunications provider in Russia and the CIS countries, boasting a platform for managing growth and realizing profitability in the coming years.

Group annual revenue increased 14% to 11.3 billion US dollars in 2010. MTS' revenues in Russiaጠincluding mobile, monobrand retail and fixed businessesጠincreased 12% to 286.4 billion rubles. In our mobile business, growth was driven by: subscriber acquisitions, general growth in consumption of voice and data products, and strong handset sales. In Q4 2010 alone, revenue from the sale of handsets, modems and accessories exceeded $276 million US dollars. The increase was largely driven by the expanded range of premium handsets and smartphones. Sustained development of MTS retail network with the launch of new retail services also contributed to this growth.

In our fixed business, we witnessed growth of 12% year-over-year. This was driven by increased domestic and international long-distance calling, contributions from acquired companies and subscriber growth.

In Ukraine, revenues grew by 4% in 2010 to roughly 8.5 billion hryvnas. Our efforts to improve the quality of our subscriber base and loyalty of our customers resulted in contraction in churn during the past yearጠfrom 9.7% to 8.2%. In 2010, data content revenues grew by more than two times, or by 107%.

In Uzbekistan, we improved our top line in 2010 by 11% to $448 million US dollars on the back of continued subscriber additions and expansion of product portfolio. We continue to lead the market with a 42% market share as for the subscriber base. In Turkmenistan, we suspended operations starting from December 21, 2010 in compliance with the notice from the Ministry of Communications. Revenues for the year reached 592 million manats, however the suspension of operations leading up to the New Year holidays negatively impacted our annual performance in the country. In Armenia, our revenues decreased by 4% year-over-year to 77.3 billion drams. Despite competitive pressure, we retain our leadership position as for the subscriber base with a market share of 72%. 

For 2010, MTS Group's net income came in at $1.39 billionጠa healthy 36% improvement from 2009. This does include a non-cash impairment loss of $138 million US dollars recorded in the fourth quarter resulting from the suspension of our operations in Turkmenistan. Recognition of a loss is consistent with US GAAP rules related to situations like ours. This doesn't mean we have necessarily given up on the Turkmenistan market. Our assets remain in Turkmenistan, and we are taking every effort to find a constructive resolution to the situation by negotiating the issue with the Turkmenistan government.

In 2010 CAPEX to sales reached $2.7 billion US dollars as we continued to build-out our 3G and fixed networks in Russia. We expect CAPEX for 2011 to come in at around 22-24% as a percentage of revenues. The exact figure will depend upon a number of factors including currency volatility, vendor terms, project implementation schedules and other developments we cannot accurately predict. In 2011 we will be roughly doubling the number of 3G base stations and advancing certain high-profile projects, like the digitization of our fixed-line networks, namely those in Moscow and other large urban centers.

Free cash flow in 2010 increased 43% to $1.5 billion US dollars despite higher CAPEX spending. The increase is attributable to healthy operating cash flows as well as the sale of our Svyazinvest stake for 26 billion rubles.

To date we have been focused on an acquisition model of business. This has served us with the sustained growth of subscribers and the changes in distribution over the years. Having now established ourselves in both the fixed-line space and retail, we can now begin to focus on subscriber base development, customer loyalty improvement and innovative and convergent services launch as key operational goals of our business.

When I took charge of our Ukraine operations in 2008, the Ukraine market was fully penetrated and the company's profitability was falling on the back of tough competition. However, by expanding the capacity and coverage of our network and driving usage, we were able to strengthen our position on the market and improve the profitability of the business. We are going to use this approach to drive our operational goals in Russia.

Unlike Ukraine, the Russian market offers more scenarios and ways to improve the telecom services and reach the customer. In addition to the installation of roughly 10,000 3G base stations, we are going to improve our back haul capacity, increase our transport network and transit to HSPA+ across Russia regions to enhance data transmission speed on our 3G networks. In our fixed business, we will also be modernizing networks to provide more FTTB connections in both Moscow and in the regions. 

Improving networks is critical for us to both meet the growing customer needs and ensure beneficial impact on the company's revenue growth. Right now we see that the volume of value-added services can be increased by 20% of a percentage of ARPU. We believe we can avail ourselves of the situation. With better networks, we can increase usage of our services which will help us improve performance and loyalty and reduce churn.

Overall, in terms of revenue we see growth of around 10% for 2011. Given the scope of our business, Russia will remain the primary driver of growth. Key drivers continue to be:

  • increased mobile voice and data usage and the continued expansion of our fixed-broadband and IPTV offerings;
  • greater take-up of convergent products as allowed by completion of merger with Comstar;
  • rising sales of handsets and accessories;
  • better subscriber additions as we sell subscriptions through our own proprietary networks.

In Ukraine and other CIS countries, growth performance should be similar to 2010.

Lastly, I just want to emphasize that it is an honor and a privilege to be given the opportunity to lead the Company. MTS has been my home since 2004, when I joined to lead our efforts in Nizhny Novgorod. Since then, I have managed both regions and countries, and I have watched MTS develop. I am confident that these experiences will allow me to ensure MTS's further development, realize the goals of our corporate strategy and enable MTS to remain the market leader and strengthen its innovator image.

A.A. Dubovskov,
President, MTS OJSC