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For many businesses and industries 2015 was a year of transformation, a time for reviewing management strategies, and a test of corporate resilience against the backdrop of a worsening economic environment within Russia. The mobile telecommunications industry was no exception here and, given the added factor of intensified competition, the paradigm of interaction between the market players called for reinvention. Despite all this, in 2015 we achieved the goals we set for the year and delivered performance consistent with our expectations. Solid financial and operational performance was achieved in spite of negative trends in the economy and increasing competition in the telecoms industry. We have maintained our leadership position in communication quality, and further developed our pro-active customer-centric approach.
In 2015, our consolidated revenue totaled RUB 313.4bn, the same level as in 2014. Our OIBDA was RUB 132.4bn, with an industry-leading OIBDA margin of 42.2%. CAPEX (including acquisition in August 2015 of frequencies from four companies of the SMARTS Group) grew 24.2% year-on-year to RUB 70.2bn. Given the increased volatility in the rouble, we have continued the implementation of initiatives to ensure the Company’s financial sustainability and optimise its debt portfolio. Over 80% of our cash and deposits are held in US dollars or euros. 55% of our debt portfolio is due in three years or more, with the overwhelming majority of the Company’s debt denominated in roubles and the percentage of FX-denominated loans and borrowings which are not hedged being less than 30%. Including interest and cross-currency swaps over 80% of our debt portfolio has fixed rates.
To secure sustainable financing for growth we have signed loan agreements with China Development Bank Corporation, providing credit facilities of up to US$ 600m, of which US$ 300m will be used to finance purchases of equipment and services from Huawei to support further rollout and replacement of equipment for our network. The second loan facility will be used to refinance existing higher rate debt.
To finance the purchase of telecommunications equipment, software and related services from Nokia Solutions and Networks we also signed a Finnvera-covered facility agreement with Unicredit Bank Austria AG for EUR 150m in June 2015, and a further facility agreement with Sberbank for the RUB equivalent of EUR 70m in December 2015.
Also in December 2015, we signed a new revolving credit facility agreement with Sberbank for RUB 30bn, of which RUB 15bn was immediately drawn down to prepay more expensive short-term debt and extend maturities for a further two to three years.
We continued to tap the Russian debt market as well, successfully completing a placement of RUB 15bn of 11.4% two-year exchange-traded bonds in October 2015, with the offering being oversubscribed over three times. Complementing this achievement was our early repayment in May 2015 of the entire issue of the Company’s series BO-04 exchange-traded bonds in order to reduce interest costs.
In 2015, we made vigorous efforts to improve communication quality by further developing our network, focusing on two key areas: upgrades of existing and replacement of obsolete equipment in our 2G and 3G networks and the active rollout of our 4G/LTE high-speed transmission network. Our state-of-the-art infrastructure which provides fast, high-quality data transmission to meet the communications needs of our customers comprised over 113,000 base stations as of the end of 2015, with the total number of base stations growing 10% over the previous year and the number of 3G and 4G base stations amounting to 65,300. At the end of 2015, the total length of our fibre-optic communications lines was 184,400 km, enough to circle the globe almost five times.
Yet another milestone in our commitment to infrastructure development came when we signed a seven-year contract with Nokia to construct and upgrade MegaFon’s nationwide 4G+ federal network using Single RAN (radio access network) technology.
Frequency bands are a key asset for any mobile operator and, to improve our spectrum position, we made a number of important acquisitions over the year. Specifically, in August 2015, the Company acquired additional spectrum in the Samara, Astrakhan and Yaroslavl regions and the Chuvash Republic through the purchase of a 100% interest in four companies belonging to the SMARTS Group, which significantly improved our position in the 900/1,800 MHz bands in these regions. In October 2015, MegaFon made the winning bids at Russia’s first auction for frequencies held by the Federal Service for Supervision of Communications, Information Technology, and Mass Media for the 1,800 MHz bands in Dagestan and the Karachay-Cherkess Republic, which will enable us to improve network quality and minimise capital expenses on infrastructure expansion in these regions. This year, in another auction held in February 2016, MegaFon acquired frequencies in the 2,570–2,595 MHz and 2,595–2,620 MHz bands in 40 regions of Russia, including St Petersburg and the Leningrad region. In addition, in accordance with our investment strategy, MegaFon completed several strategic transactions. In September 2015, we acquired a 100% interest in GARS Holding Limited (“GARS”), which provides a full range of fixed-line services to tenants of business centres in Moscow and St Petersburg. This strategic transaction will significantly expand our footprint in Russia’s two capitals and consolidate our position in the corporate and SME segments of the telecoms market.
I should also mention that, in October 2015, we acquired a 49.999% interest in a new class A office building at Oruzheyny Pereulok in Moscow, which will allow us to consolidate all of our Moscow offices and production sites in a single location in the centre of Moscow, thereby saving occupancy costs and improving our internal communications and inter-actions.
Also in 2015 we completed and placed into full operation our Global Network Operational Centre (GNOC), one of the largest and most advanced hubs in Russia and globally to monitor the performance of our entire network and ensure its reliable operation.
Our Unified Billing, a strategically important, complex project, deserves a special mention. We have been preparing for the realisation of this project for several years and launched its testing for B2C customers on 15 December 2015. Through this new project, we will have the technical capabilities to serve customers in any part of the country, thereby effecting an improvement in the quality of our customer service.
Leading the field in mobile data
In 2015, our mobile revenue was up 0.2% year-on-year, driven by industry-leading growth in revenue in mobile data and value-added services (VAS). Revenue from mobile data services, our fastest growing business segment, reached RUB 79.9bn, up 19% year-on-year and representing over 25.5% of our total revenue. Several developments contributed to this significant growth in mobile data revenue — the growing popularity of mobile internet, subscribers using social media and instant messaging instead of telephony and SMS for communication purposes, and greater availability of smartphone offerings as well as price-cuts in this product category. Our own efforts also contributed — we continued to roll out 3G and 4G networks and to implement new business initiatives such as updates to our line of tariff plans to stimulate data usage, and a wide offering of data-enabled devices at affordable prices in our retail network. As a result, penetration of data-enabled devices on the Company’s network reached 53%, while data transmission traffic per subscriber (DSU) grew to 3.3 GB per month.
The growth in revenue from mobile data and VAS fully compensated for the drop in revenue from traditional voice services, demonstrating the success of our strategy of focusing primarily on developing mobile data services and innovative products to complement such services. The development of 4G networks and services remains the Company’s priority. MegaFon’s 4G network is deployed in as many as 77 regions of the Russian Federation, while LTE-Advanced services with record-breaking speeds of 150 Mbit/s—450 Mbit/s were available in nine cities, including Moscow and St Petersburg. At the end of 2015, our roaming services were available to MegaFon’s subscribers in 224 countries worldwide, while LTE-roaming services were available in 66 countries. In 2015, we saw the penetration rate of 4G-enabled devices on our network grow by 34.3% to 7.9 million devices.
Always there for our customers
We continue to make further improvements in communication quality, maintaining our industry leadership in this area. High-quality telecoms services are our key advantage and the reason why customers choose us.
We also maintain our focus on acquiring new and retaining existing customers by developing new products and tariffs to enhance our existing offerings. Our mobile subscriber base in Russia keeps growing, up 7% to 74.8 million subscribers at the end of 2015.
Our vigorous marketing initiatives and a new strategic partnership agreement with Svyaznoy, Russia’s leading mobile retailer, to expand the distribution network for MegaFon’s products and services, have contributed to this growth in the subscriber base.
At the same time, I want to reiterate our commitment to developing the Company’s own retail chain. At the end of 2015, our controlled retail network comprised almost 2,100 MegaFon Retail stores, approx. 2,000 MegaFon-branded franchised stores, and almost 4,000 Euroset stores. We offered over 330 models of 4G-enabled devices, with sales of 4G smartphones and tablets in our retail channel up 111% in 2015 from a year before, reaching 0.5 million units. In spring 2015, MegaFon re-examined its branding, resulting in the launch of a new communication platform, “Truly with You”, which we believe will help to build a stronger emotional bond with consumers and enable MegaFon to engage with customers on a more personal level.
We are proud to report that our customer-centric approach was recognised nationally when we won awards in two categories in the 2015 Russia Customer eXperience Awards: the Most Customer-Oriented Company in Russia (360° customer experience management) and the Best Multi-Channel Customer Experience. MegaFon was also the winner of the 2015 Customer Rights and Quality of Service award (in the Communications and Telecoms sub-category within the Retail Services category) and the 2015 No. 1 Brand in Russia award in the Mobile Operator category.
In 2015, MegaFon was the first of the “Big Three” mobile operators to remove time limits for free on-net calls. In July 2015, we also stopped charging for on-net calls in Moscow for subscribers on our ‘Perekhodi na Nol’ (‘Switch to Zero’) tariff, which has the largest number of subscribers in the mobile market as it has no subscription fee and no billing increments for on-net calls.
Outlook for 2016
Based on our forecasts, 2016 will be another challenging year for the Company. Tough macroeconomic conditions and the resulting changes in consumer behaviour, as well as price competition in the market, will continue to put pressure on our business and financial performance.
As we consider these factors, we are fully aware that achieving our goals will call for maximum focus and smart financial planning.
We will focus on keeping up with new market realities and trends, further improving communication quality and developing our network. We remain committed to retaining our leadership position in the Russian telecoms market, by developing the innovative areas of our business, retaining our subscriber base, and improving the efficiency of our business processes. And, of course, maximising the quality of our customers’ experience will remain at the heart of everything we do.
In conclusion, I want to thank all our employees, managers, and shareholders for all of their efforts and support in the past year and express my confidence that our team’s superior expertise, and their pro-active and hard-working attitudes will continue to drive the successful growth of our business.
Chief Executive Officer