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CEO’s address to shareholders

CEO’s address to shareholders

We continue to invest in network quality, which is of the utmost importance in maintaining our leading position in coverage and capacity; while at the same time maintaining efficiency of our capital expenditures.

In 2014, MegaFon delivered a solid operational and financial performance. During a period of economic instability and uncertainty in Russia, we implemented well-timed measures to help weather the storm and mitigate potential risks. We know that in the year ahead, only the most disciplined operators will be able to succeed, and we go into 2015 determined to maintain our leading market position through our commitment to continuous improvement.

Our performance

In 2014, MegaFon demonstrated financial resilience despite the considerable economic turmoil seen during the second half of the year, and managed to achieve results that were fully consistent with the guidance throughout the year for both revenue and OIBDA.

Our projections for revenue growth were the highest among telecoms operators in Russia and were not revised once during 2014. The Company’s revenues for the year increased by 5.9% compared to 2013, reaching RUB 314.8 billion, and meeting our lowest projected estimate for the year. In fact, our revenue growth rate in 2014 was the fastest among the ‘Big three’ operators in Russia. We also managed to maintain a high level of OIBDA and OIBDA profitability for the year, through our revenue growth and close attention to operating costs. OIBDA was up 4.4% in Russia, which is our core segment, and our OIBDA margin of 44.5% was the highest in the industry.

Our net profit decrease of 28.8% year-on-year was due to a non-cash foreign exchange loss incurred primarily as a result of the considerable ruble depreciation in the fourth quarter of the year. However, a number of management decisions taken in 2014 as part of our overall long-term risk management strategy allowed us to substantially mitigate the broader impact of these currency fluctuations. In particular, early payment of our US dollar obligation relating to the Euroset transaction, the refinancing of our USD-denominated deferred obligation for the Scartel acquisition in 2014, and a pro-active approach to CAPEX management, helped to minimise our losses.

In 2014, we took steps enabling us to be well-prepared for possible market uncertainties and cater for our medium-term requirements in terms of financing of our further infrastructure development. We signed financing agreements with China Development Bank Corporation and Finnvera for the purchase of equipment and services from Huawei and Nokia Siemens Networks, respectively, and also entered into long-term contracts with Ericsson and Huawei for the construction and modernisation of our network based on the total cost of ownership concept. In fact, we were one of a few corporate borrowers to successfully tap the domestic ruble bond market, and overall we ended the year with sufficient liquidity, a stable leverage position, and the highest OIBDA-CAPEX indicator in the industry – RUB 82 billion.

Leading the field in mobile data

During 2014 we enjoyed our leading position in mobile date. MegaFon has been a leader in mobile data transmission since 2008, and in 2014 this continued to be a key growth driver with revenue from mobile data services increasing by 33.3% year-on-year and representing 21.3% of total revenue compared to 17.0% in 2013. We managed to achieve a 39.2% market share in mobile data revenue among the ‘Big three’ operators in Russia.

In 2014, we focused our effort on the further development of our networks and expansion of our fibre optic cable line infrastructure, ensuring we offer a broad spectrum of network capacity and services to our customers. To strengthen our preeminent position in 4G/LTE, in 2014 we added 23 regions to our 4G network coverage and, as of the year-end, our 4G services were available in 72 federal regions in total, covering 51% of the Russian population. Our 4G penetration also doubled, from 3 million 4G-enabled devices registered on our network in 2013 to 5.8 million devices in 2014, while data transmission traffic per subscriber (DSU) up 64.1%. In 2014 we also began to focus on LTE-roaming and during the year managed to expand our roaming coverage to the 37 popular travelling destinations by concluding contracts with the 37 operators serving those markets.

In February 2014, we commercially launched the world’s fastest network, LTE-Advanced, and started offering Internet access at speeds of 150–300 Mb/sec in Moscow, St. Petersburg and Chelyabinsk. At the moment of launch, the MegaFon network was recognised by GSA (Global Supplier Association) as the fastest commercial mobile network in the world. This year we are planning to continue the deployment of this network in the biggest Russian cities. Also, to access the LTE Advanced network, we launched sales of our branded MegaFon Space router and became the first operator in the world to do this.

In recognition of these developments, and of our 4G leadership generally, Telecom Daily announced in 2014 that MegaFon provides the fastest internet speeds in eight Russian cities with a population of over one million people, including Moscow, Nizhny Novgorod and Samara.

On the back of extensive 4G/LTE network development in Russia and growing popularity of 4G devices, across the 4G device portfolio in our retail network, we currently offer around 200 4G-enabled models. During 2014, our sales of 4G devices went up twofold, reaching 1.7 million devices, while sales of 4G tablets grew nine times more than in 2013 and sales of 4G smartphones – three times more.

To stimulate higher mobile data usage we promoted sales of affordable branded data-enabled devices. MegaFon is a strong player in this category, providing branded and customised budget smartphones and tablets that meet customers’ quality expectations. In 2013, we launched first budget Login smartphones and tablets, creating a revolution in the market, and in 2014, we launched sales of MegaFon Login 3 tablet at a lowest market price. The MegaFon Login 3, initially priced at RUB 1,990, achieved record sales from the moment it launched, and for the last five months of the year was a bestseller in our MegaFon Retail chain. Our customised devices also sold well during the year, with 3.4 million units sold in total, up 5.7% on 2013. Sales of customised smartphones exceeded 650,000 units and customised tablets 640,000 units, which is 26% and almost ten times, respectively, higher than a year ago.

Commitment to service quality and customer experience

Delivering exceptional client service remained a major strategic priority for MegaFon in 2014. We continued to leverage our unrivalled competitive and technological advantage to deliver the highest quality services and products to our customers. This commitment was reflected in our investment in premium network coverage during 2014, with CAPEX up 20% on 2013 levels, and in our completion of planned infrastructure developments despite the market situation.

Nowhere was our commitment to service quality more evident than during the 2014 Winter Olympics in Sochi. For this purpose we invested heavily in the deployment of mobile infrastructure, building this from scratch, completing everything on deadline, and installing over 220 km of fibre-optic cable and constructing more than 950 base stations, including over 270 4G stations. As a result of our efforts, the Sochi Winter Olympics were officially the ‘most mobile’ Olympics Games in history. Once again, MegaFon proved itself a reliable partner in a major international event, and we are proud of the part we played in delivering exceptional quality to the millions of people who enjoyed the Games via our networks, services and products. What’s more, these investments enabled us to strengthen MegaFon’s brand and increase brand recognition and visibility on a global stage.

Maximising subscribers’ experience in all areas of our services was certainly a key focus in 2014. We invested significantly in attracting and retaining new customers. We rolled out a number of products and tariffs to ensure MegaFon remains an accessible and affordable option. By the end of the year we increased our mobile subscriber base by 3.0% year-on-year to 72.2 million subscribers, with our total number of customers in Russia up 2.4% to 69.7 millions; the number of data service users in Russia, meanwhile, went up 10%, reaching almost 40% of the total customer base.

During the year, we continued to put much effort on improving customer service via our MegaFon Retail chain, call centres and self-care tools. We introduced a new 24/7 virtual service called ELENA, which uses speech recognition to help solve customer problems and answer questions, launched a brand-new site for our corporate and government clients, and revealed a dedicated mobile self-care application to replace numerous outdated applications. As a result of our effort aimed at delivering customer excellence, we retained the highest Net Promoter Score1 in the industry at the year-end and was named by our clients the leader in client-oriented businesses among domestic telecommunication companies.

Looking ahead: 2015 and beyond

Looking ahead, we know that 2015 is likely to be a challenging year. Our strategic priorities for 2015 include retaining our leadership position in mobile internet and other key business areas; continuing our development of innovative products and services in line with customer needs; retention and continuous expansion of our subscriber base; rationalising our expenditures and improving our operational efficiencies; and improving our internal business processes, including implementation of the unified billing system.

We will also continue our efforts to enhance the quality of our network and maintain our leading coverage and capacity. Having invested significant amounts in 3G and 4G network rollout over the last few years, we are currently at such an advanced stage of technological development that we are now prioritising expenditure in efficient network development and infrastructure maintenance rather than investing heavily in next generation technology. In fact, CAPEX increases in 2014 were more related to Russian currency fluctuations and instability than outright investment.

I would like to personally thank all our dedicated employees, whose hard work, ingenuity and skill helped us achieve another successful year. I would also like to thank the members of the Board of Directors and my colleagues in management, as well as our shareholders, for their ongoing commitment and support.

Ivan Tavrin
Chief Executive Officer

1 According to the research conducted for Q4 2014 by independent agency Synovate Comcon