Mobile TeleSystems (MBT), Eastern Europe’s largest cellular operator, reported disappointing results for fourth-quarter 2009. The carrier reported a net loss of $26.1 million (or 7 cents per ADS) versus a net profit of $171.2 million in the year-ago quarter. The prior-year quarter’s figures were restated by the carrier to include the results of its subsidiary Comstar-UTS, a leading telecom solutions provider in Russia and the CIS (Commonwealth of Independent States).

Fourth quarter results were dragged down by one-time charges of $368 million in investment-related write-downs and $86 million in asset impairment charges associated with the company’s acquisition of Comstar-UTS. The bottom-line was also hit by a large tax provision. Adjusted (excluding write-offs) earnings per ADS of 80 cents missed the Zacks Consensus Estimate of $1.29.

Net income for 2009 was $1 billion compared to a net income of $2 billion reported a year ago, impacted by lower revenues and the hefty write-offs in the fourth quarter.

Revenue & OIBDA

Consolidated revenue dipped 3.3% year-over-year to $2.72 billion, affected by the macroeconomic volatily across key markets and unfavorable exchange rate (ruble versus dollar) movements which have hurt the company’s dollar-denominated revenues. OIBDA (operating income before depreciation and amortization) declined 10.2% year-over-year in the quarter to $1.19 billion, with OIBDA margin declining to 43.9% from 47.3% a year-ago.

On a geographic basis, revenue increased in Russia (8.6% year-over-year), Turkmenistan (42.7%) and Armenia (5.1%) while declining in Ukraine (0.6%) and Uzbekistan (9.1%). For 2009, revenue fell 17.6% year-over-year to $9.8 billion.

ARPU & Churn

In Russia, churn (customer switch) increased sequentially and year-over-year in the quarter while ARPU (average revenue per user) declined from both previous and year-ago quarters. Churn at Ukraine (the second-largest market) declined sequentially and year-over-year while ARPU fell sequentially (flat year-over-year).   

Subscriber and Market Share

At the end of 2009, Mobile TeleSystems served approximately 102.4 million subscribers. The carrier added 0.6 million subscribers in Russia in the quarter serving 69 million customers at the end of the year. Outside Russia, the subscriber base grew in all markets year-over-year except Ukraine.

The company maintained its leadership position in most markets it serves. Market share in Russia, Armenia and Belarus declined sequentially while increasing in the Ukraine and Uzbekistan.

Outlook

The company expects mid to high single-digit growth in consolidated revenues in 2010 boosted by a resurgent Russian economy, increased customer usage of its fixed-line and mobile services and expanded handset penetration in Russia. Group OIBDA margin is forecasted in the range of 43-45%. Capital expenditure, which includes investment in 3G network infrastructure, is projected at 22-24% of revenues compared to 23.7% in 2009.

Mobile TeleSystems remains committed to expanding its 3G network footprint as the carrier plans to spend up to $1.6 billion on 3G network upgrades in Russia through 2011. The company is securing finance from international lenders to fund the aggressive 3G network deployments.

While Mobile TeleSystems is the market leader in Russia, the company is increasingly exposed to intense price competition across most of its operating regions, resulting in decline in margins.

To remain competitive, Mobile TeleSystems continues to pursue acquisitions and strategic collaborations. Moreover, the carrier is strengthening its “mono-brand” mobile retail network while implementing cost optimization programs to lower operating expenses. The mono-brand retail initiative represents a response to its archrival VimpelCom (VIP), which has acquired 50% of mobile retailer Euroset.

To further strengthen its retail distribution network, Mobile TeleSystems has acquired the entire stake in Russian mobile retail chain Teleforum in October 2009. Moreover, the carrier has increased its stake in Comstar-UTS to 61.97% (from 50.91%) and fully acquired privately-owned Russian network carrier Eurotel in late 2009.

While the expansion of 3G network represents a critical growth driver, associated expenditures to support network deployments and promotional initiatives may continue to tighten free cash flow and margins. Moreover, competition, foreign exchange exposure, regulatory challenges and macroeconomic volatility (especially in the CIS) warrant a cautious view on the stock.
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