VimpelCom (VIP) reported lower-than-expected fourth quarter 2009 results with earnings per ADS of 27 cents largely missing the Zacks Consensus Estimate of 44 cents, due to lower revenue, higher expenses and adverse currency fluctuations. For 2009, earnings per ADS of $1.08 fell short of the Zacks Consensus Estimate of $1.36.
The second-largest Russian telecom carrier, which offers services under the “Beeline” moniker, reported a quarterly net income of $283 million, compared to a net loss of $816 million (or 81 cents per ADS) in the year-ago quarter, which was hit by a hefty impairment charge and foreign exchange losses.
Operating revenues declined 9.6% year over year to $2.31 billion, below the Zacks Consensus Estimate of $2.81 billion, largely due to declines across major CIS markets. Revenue from the wireless operation was US$1.96 billion while the fixed-line business generated revenues of $507 million. For 2009, revenues declined 14% year over year to $8.7 billion, falling short of the Zacks Consensus Estimate of $8.95 billion. 
Geographically, revenues from Russia declined 7.5% year over year to $2 billion, representing 86% of the company’s total sales. Consolidated revenues from the CIS dipped 18.6% to $341.6 million due to adverse exchange rate movements. Revenues were also impacted by falling call prices.
Revenues from Kazakhstan (the largest CIS market) declined 13.5% to $170 million. Sales also declined year-over-year in other key markets such as Ukraine (down 31.8%) and Armenia (down 25.7%).
Subscriber Trend

The company’s total active cellular subscriber base grew by roughly 3.6 million year-over-year in the quarter to reach 64.6 million. Its broadband subscriber base increased 85% year over year and 17% sequentially to reach approximately 2.26 million.
Mobile subscriber base in Russia grew 6.7% year over year to 50.9 million. VimpelCom added 278,000 broadband subscribers during the quarter, bringing the total customer base to 2.1 million.
The company expanded its fiber-to-the-building (FTTB) network in Russia to cover approximately 7.9 million households, representing an adoption rate of roughly 12%. Mobile subscribers in CIS remained flat year-over-year at 13.3 million while the broadband subscriber base grew nearly three-fold to 146,000.
VimpelCom spent $423 million and $814 million in capital expenditures (CAPEX) during the fourth quarter and full year 2009, respectively. The company has lifted its CAPEX guidance for the current year. VimpelCom expects CAPEX in the range of 15%-20% of its 2010 annual sales, compared to roughly 9% in 2009. The company plans to boost spending to support 3G network expansion. VimpelCom’s 3G services currently cover all regions of Russia.
Financial Condition
During the fourth quarter, VimpelCom repaid debt worth $742 million. The company exited 2009 with a net debt of $5.9 billion (down from $7.5 billion in 2008) and cash and cash equivalent of $1.4 billion. Free cash flow for 2009 was $2.7 billion versus $851 million a year ago, boosted by a 68% year over year decline in capital spending.
Opportunities & Challenges

VimpelCom remains the second-largest wireless operator in Russia with over a 25% market share. Nevertheless, the company has a higher projected growth rate than its Russian peer Mobile Telesystems (MBT) as it continues to demonstrate the ability to succeed in emerging markets on the strength of sustained subscriber growth.
Besides maintaining its strong market position in the rapidly maturing Moscow metropolitan area, VimpleCom has successfully expanded into incipient Asian markets such as Vietnam and Cambodia.
The company completed the commercial launch of its cellular operation in Cambodia in May 2009. This was followed by the launch of wireless operation in Vietnam in July 2009. Moreover, VimpleCom is also entering the Laos mobile market.
VimpelCom achieved network coverage of more than 70% of Cambodia’s population by the end of 2009 with a presence in 40 provinces. The relatively lower mobile penetration in these new Asian markets offers attractive growth opportunities for the company.
In October 2009, the company’s two major shareholders Telenor and Altimo announced plans to merge their holdings in VimpelCom and Ukranian mobile operator Kyivstar to create a jointly owned telecom operator. The deal was cleared recently by the Russian antitrust authority and Ukraine’s anti-monopoly regulator. 
We remain intrigued by VimpelCom’s ability to retain subscribers on a recurring basis, even as overall economic factors remain weak. The company is also progressing well in expanding its 3G wireless and residential broadband network deployments.
However, VimpelCom’s CIS operations are yet to recover from the economic downturn, as manifested by declines in revenue and mobile subscriber base in some key markets. The carrier is also experiencing year-over-year decline in wireless revenue per user in most of markets, in part, due to lower service usage and intense price competition.
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