Mobile services

Russia's MTS Sees Profits Halve, Cuts Guidance

Russia's MTS has blamed a sharp fall in second-quarter profits on factors including a worsening of retail conditions in its domestic market.

Mobile TeleSystems OJSC (MTS) (NYSE: MBT) maintains Russia's largest mobile network, ahead of rival operators VimpelCom Ltd. (NYSE: VIP) and MegaFon , but has been hit by an economic slowdown and fierce competition in Russia and other central Asian countries. (See MTS's Russian Resolution and Russia's MTS Upbeat on Sales as Profits Dip.)

Net profits at the company sank by 47%, to 9.1 billion Russian rubles ($140 million), due to rising operating costs and much higher interest expenses than in the year-earlier period.

Despite numerous challenges, the company managed to grow sales by 5.3% on a year-on-year basis, to RUB108.1 billion ($1.7 billion), but revised down its growth forecasts for 2016.

Having formerly planned for sales growth of more than 4%, MTS is now expecting revenues to rise by just 2% to 3%.

It also reckons its operating income before depreciation and amortization (OIBDA) will shrink by 4% this year, having previously said the OIBDA change would be somewhere between a 1% decrease and a 2% increase.

In the second quarter, OIBDA fell by 4.3% compared with the year-earlier period, to RUB40.9 billion ($640 million), because of higher retail expenses in Russia and an increase in roaming costs related to currency volatility.

"Retail competition impacts both the gross margin and OIBDA directly, but it also has a sustained impact on effective pricing," said Andrei Dubovskov, the CEO of MTS, in a statement. "These factors, combined with the continued macroeconomic volatility throughout our markets, dampened our performance for the period."

Earlier this month, MTS agreed to sell a controlling stake in Uzbek operator UMS to government authorities following allegations it had paid bribes to secure operating licenses in the country. (See Russia's MTS Quits Uzbekistan.)

The "no cost" sale, which put Uzbek authorities in full control of UMS, prompted MTS to make a write-off of about RUB3 billion ($47 million).

From an operating perspective, however, UMS was of marginal value to MTS, accounting for less than 2% of second-quarter revenues.

In the more important Ukrainian market, sales rose by 13.5%, to 2.7 billion Ukrainian hrvynia ($110 million), with net profit up 2.2%, to UAH222 million ($8.8 million).

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MTS had mixed results in other countries, reporting sales declines in Armenia and Turkmenistan but an increase in Belarus.

"Revenue in Armenia declined 18.6% year-on-year, while in Turkmenistan we saw a 7.5% decline," said Vasyl Latsanych, the vice president of sales and marketing. "Both markets remain exposed to macroeconomic trends, which continue to weaken voice and data usage."

Despite some foreign expansion, MTS is still heavily reliant on the Russian market, which accounted for about 90% of its second-quarter sales.

Although it claims to be outpacing the market, the operator has complained about growing retail competition in the mobile sector.

Efforts to maintain market share are partly responsible for projections that OIBDA will shrink this year.

In a presentation shedding more light on its results, MTS claimed to have picked up another 500,000 mobile customers in Russia between April and June, giving it 77.8 million in total.

Revenues from mobile services edged up just 0.1%, however, to RUB72.8 billion ($1.14 billion), while fixed-line sales fell 2.8%, to RUB15.3 billion ($240 million). "Spending has fallen due to macroeconomic factors, which reduces voice calling," said Latsanych.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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