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Financial results | Q2 2017
Some of the information in this document may be inside information. The subject matter, the identity of the issuer, the identity of the persons making the notification and their titles,
and the date and time of the notification are all as set forth above.
Certain statements and/or other information included in this document may not be historical facts and may constitute “forward looking statements” within the meaning of Section 27A
of the U.S. Securities Act of 1933 and Section 2(1)(e) of the U.S. Securities Exchange Act of 1934, as amended. The words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plans”,
“forecast”, “project”, “will”, “may”, “should” and similar expressions may identify forward looking statements but are not the exclusive means of identifying such statements. Forward
looking statements include statements concerning our plans, expectations, projections, objectives, targets, goals, strategies, future events, future revenues, operations or
performance, capital expenditures, financing needs, our plans or intentions relating to the expansion or contraction of our business as well as specific acquisitions and dispositions, our
competitive strengths and weaknesses, the risks we face in our business and our response to them, our plans or goals relating to forecasted production, reserves, financial position and
future operations and development, our business strategy and the trends we anticipate in the industry and the political, economic, social and legal environment in which we operate,
and other information that is not historical information, together with the assumptions underlying these forward looking statements. By their very nature, forward looking statements
involve inherent risks, uncertainties and other important factors that could cause our actual results, performance or achievements to be materially different from results, performance
or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding our present and future
business strategies and the political, economic, social and legal environment in which we will operate in the future. We do not make any representation, warranty or prediction that the
results anticipated by such forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should
not be viewed as the most likely or standard scenario. We expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect actual results, changes
in assumptions or in any other factors affecting such statements.
Q2 2017KEY HIGHLIGHTS
SERGEY SOLDATENKOV,MEGAFON CEO
FINANCIAL HIGHLIGHTS
Q2 2017 KEY CONSOLIDATED
OF MEGAFON GROUP1
1 Consolidated financial highlights of MegaFon Group include the financial results of MegaFon standalone and the financial results of Mail.Ru Group Ltd. since the beginning of 20172 Profit attributable to equity holders of the Company, excluding non-cash impairment of Euroset joint venture in the amount of 15.93 Starting from the first quarter of 2017, pursuant to the adoption of its new dividend policy, the Group switched from reporting free cash flow, the financial measure previously used, to reporting a new financial measure, free cash flow to shareholders
NOTE:
All financial figures provided in this presentation are presented on consolidated IFRS basis unless otherwise stated
89.7CONSOLIDATED REVENUE RUB bn
Q2 / 2017
Q2 / 2016 78.7
34.2 15.8% y-o-yCONSOLIDATED OIBDARUB bn
Q2 / 2017
Q2 / 2016 29.6
38.2 0.7 p.p. y-o-yOIBDA MARGIN %
Q2 / 2017
Q2 / 2016 37.5
5.6 22.2% y-o-yAdj. NET PROFIT2
RUB bnQ2 / 2017
Q2 / 2016 7.2
13.8CAPEX RUB bn
Q2 / 2017
Q2 / 2016 12.9
9.9 100.5% y-o-yFREE CASH FLOW3
RUB bnQ2 / 2017
Q2 / 2016 5.0
6.8% y-o-y
13.9% y-o-y
Q2 2017 and post-closing events
Another step to 5G
During St. PetersburgInternational Economic Forum,MegaFon and Huawei set anabsolute record for the speed ofthe mobile Internet connection inRussia at 35 Gbit/s
Pavel Korchagin was appointedas a new Chief TechnologicalOfficer following the resigning ofAlexander Bashmakov, who leftthe company in June to pursuenew opportunities
End of Euroset JV
Changes in management team
VK Mobile
Based on the agreement reachedbetween the parties, MegaFonwill acquire VimpelCom’s 50%interest in Euroset, which willsurvive as an operating company.VimpelCom will acquire half ofEuroset’s retail stores
“Vkontakte”, the largest socialnetwork in Russia, in cooperationwith MegaFon launched newproduct offering VK Mobile withunlimited access to VK, incl. freemusic streaming and 50% cash-back for VK content
Membership in ANO “Digital economy”
The Board approved membership of MegaFon in Autonomous non-profit organization ”Digital economy” aimed to coordinate realization of the program “Digital economy of the Russian Federation” till 2024 adopted by the Government
New tariff plans “Vklyuchaisya1!”
MegaFon introduced a new tariffline “Vklyuchaisya!” for a newgeneration of mobile users.These tariffs are tailored to meetthe interest of our digitalsubscribers in their everyday life,based on the profile of usage
1 Connect
To End EurosetJoint Venture
MegaFon and VEON
to pursue their independent retail strategies and optimise mobile distribution in Russia.
Analysis of fairness of split was confirmed by Deloitte²
Expected completion by end of 2017- Q1 2018
At closing VEON pays RUB bn 1.25 and acquires rights to 50% of Euroset stores in exchange for VEON’s equity stake in Euroset
FAS and corporate approvals obtained, completion is subject to other conditions precedent
Following completion
We consider a number of strategic options with respect to Euroset:– keeping Euroset as a separate multibrand channel– integration into monobrand stores, incl. footprint optimization– possible combinations with other market players
MegaFon
~ 2 K stores
1.2
5
RU
B b
n
100%
NewCo¹
~2 K stores
50% stake in Euroset
10
0%
sta
ke
in
New
Co
Euroset
VEON
100%
NOTE:1 A company with ~2K lease agreements for VEON stores2 CJSC ”Deloitte & Touche CIS”, an independent appraisal
EXECUTION OFCOMMERCIAL STRATEGYVLAD WOLFSON,MEGAFON CСO
Vklyuchaisya1!
MegaFon introduced a new service price offering
to meet the interest of our digital subscribers in their everyday life
2 Previously one had to increase number of minutes, when increasing number of MBs and vice versa when moving to senior tariffs
NOTE:
Considers behavior of our subscribers
based on Big Data analysis of a
subscriber’s mobile app usage
We have changed our approach to forming service price offerings. New offering Vklyuchaisya!:
Includes most popular services in
subscription fee
Offers tailor-made options depending on
usage profile of each subscriber2
This leads to a bigger share of higher ARPUsubscribers in new gross adds without a change intotal number of gross adds
Uplift in ARPU without direct increase in prices
Avoidance of direct comparison with competitors' products
Enhancement of emotional attractiveness of the tariff
1 Connect!
Connect! Interact Connect! Speak
Connect! Premium Connect! Watch
Connect! ListenConnect! Write
Unique loyalty program1
for card-holders
MegaFon.TV MegaFon.Card
Unique freeTV & VoD OTT service offering premium contentfor high LTVclients
Unique single account for mobile and banking card
2.4 mlnusers registered
70% of registered users are subscribers using MegaFonbundled tariffs
0.8 mln cardsissued to MegaFonsubscribers
RUB 9bn total transaction volume 1H2017
UniqueDigital Products
MegaFon continues improving its
NOTE: 1 For each RUB100 spent on MegaFon.Card a cardholder gets 10 MB giftCardholders subscribed for Connect! tariff line get additional 1GB gift for the fist transaction above RUB 100
Launch of SMS advertising service - MegaFon.Target
An effective targeted advertising tool. Customer base > 6,000 customers as of 30 June 2017
FMC partnership program across Russia
Aimed at expansion of B2B service portfolio through offering of FMC and Virtual PBX solutions
B2X1
segment
Key developments in
in 1H 2017
B2X continued strong performance in 1H 2017
Note: (1) B2X includes both B2B and B2G segments
Fiscal data solution tool for mobile cash desks
A comprehensive solution for working with online cash-desks that allows companies to send fiscal data to tax authorities. Customer base includes 2,500 subscribers and 500 customers as of 30 June 2017
New clients\projects
302 K number of B2X clients,
+5% y-o-y
+8.8% y-o-y growth of total
B2X revenue
+9.7% growth of B2X mobile
revenue
3.9 mln number of B2X mobile
data users, +21% y-o-y
Number of B2Xprojects
On the back of superior infrastructure MegaFonexecuted the
In 1H 2017
Complete network and infrastructure support¹:• 11k km of FOCL used • Additional indoor coverage provided on 80 venues• Geo-differentiated DWDM2 network rolled-out• ISDN-telephony arranged for sportscasters
35 Mb/s average downlink speed of the mobile
Internet connection
20 TB of total traffic used with
• Instagram as the most traffic-intensive app
• WhatsApp as the most popular messenger, and
• YouTube / FB as preferred streaming channels
1.2 mln mins talked = 24 months of non-stop talk Installation of sensors technology on traffic signs
Installation of smart utility metering systems in Innopolis (City of Kazan)
Note: (1) Pursuant to the Agreement with National Center of Informatization for rendering full range of mobile and wireline services and arrangement of the respective infrastructure at 2017 Confederations Cup and 2018 World Cup venues (2) DWDM - Dense Wavelength Division Multiplexing, technology allows to avoid possible network interruptions in the event of failure of one of the elements(3) Narrow Band Internet of Things (4) LoRa is a wireless communication technology developed to create the low-power, wide-area networks (LPWANs) required for machine-to-machine (M2M) and Internet of Things (IoT) applications
IoT project at the gas condensate field in Yamal
Based on NB-IOT3 technology
Based on LoRa4 technology
Q2 2017
GEVORK VERMISHYAN, MEGAFON CFO
RESULTS
High-speed network development
Focus on increase of 4G/LTE network capacityand improvement of 4G service quality
28
49
7277
82 83
25%36%
51%59%
65% 67%
2012 2013 2014 2015 2016 1H 2017
Number of Russia’s regions where MegaFon 4G services are available
% of population covered(2)
Note:1 Acquisition of SMARTS Group regional assets with 900/1,800 MHZ spectrum in 2014-20172 Russian population as of the latest census in October 2010
Federal regions covered by MegaFon 4G / LTE network
Cities where LTE-Advanced available
ChelyabinskRostov-on-Don
Nizhniy Novgorod
SamaraUfa
Tula
OmskSochi
Novosibirsk
Khabarovsk
Krasnoyarsk
IvanovoYaroslavl
Lipetsk
Krasnodar
Yakutsk
Kaliningrad
Neryungri
Amur region
Saint-Petersburg
Moscow
Chita
Sakhalin
Vladivostok
4G available in 83 federal regions
> 33,270 4G base stations
94 countries /153 operators for LTE roaming
12.7 million 4G-enabled devices in network
In Moscow and Moscow region since Q4 2016
LTE-A services launched in 29 regions of Russia
52.6% share of 4G traffic in total data traffic
2-fold increase of 4G traffic usage y-o-y
1,800 MHz spectrum acquired from SMARTS is being
deployed for LTE development
In Q2 2017, total revenue decreased by 1.0 % y-o-y to RUB 78.0 bn mainly due to 13.0% decline in sales of equipment and accessories, while wireless revenue remained stable, wireline revenue was up 2.8%.
EARNINGS TRENDS
KEY HIGHLIGHTSOF TELECOM SEGMENT:
1 In Q4 2016, adjusted OIBDA is represented. It is OIBDA adjusted to exclude impairment loss relating to the goodwill allocated to the Broadband internet cash generating unit2 Net profit attributable to equity holders of the Company, excluding non-cash impairment of Euroset joint venture in the amount of 15.9 3 Key performance indicators
NOTE:
Due to rounding, manual calculations for financials and KPIs(3) may differ from those displayed
REVENUE
In Q2 2017, OIBDA increased by 3.6% y-o-y and reached RUB 30.6 bn due to decline in cost of services, lower marketing and G&A expenses
Adj. Net profit2 decreased by 23.7% y-o-y to RUB 5.5 bnmainly due to increased interest expense and forex loss
OIBDA
Adj. NET PROFIT2% of Revenue
RUB bn
78.7 81.1 81.3 74.5 78.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
153.9 152.5
1H 2016 1H 2017
29.6 32.329.1 29.0 30.6
37.5% 39.8% 35.7% 39.0% 39.3%
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
59.8 59.6
38.9% 39.1%
1H 2016 1H 2017
7.2 6.3
3.1 3.85.5
9.2% 7.8%3.8% 5.2% 7.1%
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
1
3.6%
Growth
0.3%
41.8%
1.0%
Lower
23.7%
Lower
0.9%
16.19.410.4%6.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0.0
5.0
10.0
15.0
20.0
1H 2016 1H 2017
SEGMENTREVENUE
KEY COMPONENTS OF TELECOM
1 Other wireless revenue includes revenues from VAS services; revenue from local subscribers which includes monthly fees, airtime revenues, own subscriber roaming and connection fees; wireless interconnection revenues; roaming charges to other wireless operators2 In Q4 2016, adjusted OIBDA is represented. It is OIBDA adjusted to exclude impairment loss relating to the goodwill allocated to the Broadband internet cash generating unit
NOTE:
Due to rounding, manual calculations for financials and KPIs(3) may differ from those displayed
1.0%
Lower
WIRELESS SUBSCRIBERS- RUSSIA
Handsetsand accessories
Wireline
Other wirelessrevenue1
Data
RUB bn
(million)
Share of data users in total subs base, as % of total
Share of data revenue in total Revenue
1.5%
y-o-y
5.9%
2.8%
2.8%
20.7 21.7 21.4 20.9 21.9
44.6 46.2 44.5 41.8 43.4
6.36.4 7.0
6.16.5
7.1 6.8 8.45.7
6.2
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
26.3% 26.8% 26.3% 28.1% 28.1%
13.0%
30.0 30.8 31.0 31.1 31.0
74.7 75.5 75.6 75.6 75.8
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
40.1% 40.8% 41.0% 41.2%40.9%
Data users, mln User base not using data, mln
0.2%
Service revenue demonstrated positive growth of 0.2% y-o-y forthe first time since Q1 2016, which can be an inflection point ofrevenue recession:
- Total wireless revenue remained stable y-o-y impacted by adecline in revenue from traditional voice services which was off-set by growth of mobile data revenue and value-added services
- Mobile data segment increased by 5.9% y-o-y to RUB 21.9 bnand represents 28.1% of total revenue. Growth was driven byhigher data usage on the back of MegaFon data initiatives,including cancelation of unlimited tariffs, bundles repricing andintroduction of new tariff line “Vklyuchaisya!” (Connect!)
- Wireline revenue increased by 2.8% y-o-y due to continuedexpansion of B2X client base and B2X service portfolio
Sales of handsets and accessories decreased by 13.0%y-o-y as a result of reduction in the number of owned retail storesand change in product line in favor of higher margin but lower-volume device portfolio
In Q2 2017, OIBDA was up 3.6% to RUB 30.6 bn and OIBDA margin increased by 1.8 p.p. y-o-y to 39.3%KEY FACTORS
INFLUENCING OIBDA MARGININ TELECOM SEGMENT
NOTE: Due to rounding, manual calculations for financials and KPIs may differ from those displayed
- Gross profit increased by 0.7% y-o-y and gross profit margin was up by 1.2 p.p. to 71.2% due to the decline in the cost of services resulting from decrease in:
- cost of equipment and accessories as a result of decline in sales of equipment
- channel lease cost due to shift from expensive satellite communication channels to cheaper terrestrial ones
- Sales & marketing expenses were down by 6.3% y-o-y due to higher advertising expenses in Q2 2016 related to rebranding
- General & administrative expenses declined by 1.7% y-o-y due to higher operating taxes in Q2 2016 related mainly tosignificant tax charge accrual due tax audit in Tajikistan
KEY COMPONENTS
OIBDA margin (%)
OIBDA (RUB bn)
37.5%
1.2 p.p.
S&M as % ofrevenue
0.3 p.p.
G&A as % ofrevenue 39.3% 1.8 p.p.
30,629,6 0,3
Cost of revenue Sales&Marketing
0,3
OIBDA Q2 2016
(0,8) 1,2
Revenue General&Marketing
OIBDA Q2 2017
Gross profit
Gross profit margin
-1.0% -5.0%
+0.7%
-6.3% -1.7%
0.2 p.p.
3.6%
Growth
In Q2 2017, MegaFon invested RUB 13.1 bn, which is 1.9% higher than in Q2 2016, due to higher spending on network roll-out and modernization. Our CAPEX is in line with our technical plan for network development
FREE CASH FLOW AND CAPEX
KEY HIGHLIGHTSOF TELECOM SEGMENT:
1 MegaFon CAPEX refers to actual CAPEX accrued for the year and may not match cash flow CAPEX.2 In Q4 2016, adjusted OIBDA is represented. It is OIBDA adjusted to exclude impairment loss relating to the goodwill allocated to the Broadband internet cash generating unit
NOTE:
Due to rounding, manual calculations for financials and KPIs(3) may differ from those displayed
CAPEX1
OIBDA-CAPEX increased by 4.9% y-o-y due to higher OIBDA
Free Cash Flow increased by 49.7% y-o-y mainly due tohigher operating cash flow generation on the back ofworking capital improvement, mainly due to decrease ininventory and receivables
4.9%
Growth
OIBDA-CAPEX
FREE CASH FLOW
% of Revenue
RUB bn
12.9 11.7
26.7
8.113.1
16.4% 14.4%32.9%
10.9% 16.9%
0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
27.2 21.3
17.7%14.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1H 2016 1H 2017
16.720.6
2.3
20.917.5
21.2% 25.4%
2.9%
28.0% 22.4%
0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
0.0
5.0
10.0
15.0
20.0
25.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
32.6
38.4
21.2%
25.2%
10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%
28.0
30.0
32.0
34.0
36.0
38.0
40.0
1H 2016 1H 2017
5.0
10.7
6.74.0
7.4
6.3%13.2%
8.3% 5.3%9.5%
0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
10.3
11.4
6.7%
7.5%
5.9%6.4%6.9%7.4%7.9%8.4%8.9%9.4%9.9%
9.69.8
10.010.210.410.610.811.011.211.411.6
1H 2016 1H 2017
1.9%
Growth
21.7%
17.6%
49.7%
Growth
10.9%
Strong increase in DSU (+52.6% y-o-y) in Q2 2017 was driven by
DSU AND APPMB– RUSSIA
1 Total number of megabytes transferred during a given period divided by average number of data subscribers during such period, divided by number of months in such period2 ARPDU for a given period divided by DSU in such period3 Total data revenues in a given period divided by average number of data service subscribers during such period, divided by number of months in such period
NOTE:
Due to rounding, manual calculations for financials and KPIs may differ from those displayed
- promotion of bundle tariffs with higher data allowances- intensive roll-out of high-speed network- continued increase in data-enabled devices registered on
MegaFon network, representing 59.4% of all devices as of the end of quarter
APPMB decreased by 0.02 RUB y-o-y due to higher data allowance and increased penetration of bundle tariffs
52.6%
Growth
DSU1 & APPMB2
DATA ARPU(ARPDU3)
APPMb, RUB
In Q2 2017 ARPDU increased by 1.7% y-o-y on the back ofdata revenue growth supported by cancelation of unlimitedtariffs, bundles repricing and introduction of new tariff line
DSU, Mb/month
RUB per month
3,9514,195
5,061 5,727 6,029
0.06 0.06 0.05 0.04 0.04
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
3,9465,878
0.06 0.04
1H 2016 1H 2017
49.0%
229 231 228 224233
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
232 228
1H 2016 1H 2017
1.7%
1.7%
Growth
1 Liquidity is calculated as the sum of Cash @ cash equivalents and Short-term investments
NOTE:
Due to rounding, manual calculations for financials and KPIs may differ from those displayed
NET DEBT AND LIQUIDITY POSITIONIN TELECOM SEGMENT
Net debt and Net debt/LTM OIBDA
Net debt/LTM OIBDA
0.54x
Growth
Liquidity1
Currency split
Net debt
RUB bn / x
RUB
USD
Net debt build-up, RUB bn As of 31 Mar 2017 Change
Cash and cash equivalents 21.9 (2.0)
Short-term investments 9.7 9.6
Total debt 261.0 4.2
Long-term debt 208.9 (7.5)
Short-term debt 52.1 11.7
Net debt 229.4 (3.4)
44%
56%
As of 30 Jun 2017
19.9
19.3
265.2
201.4
63.8
226.0
167.1 190.2 196.9
229.4 226.0 1.33x
1.56x 1.63x
1.91x 1.87x
0.50x
0.70x
0.90x
1.10x
1.30x
1.50x
1.70x
1.90x
2.10x
2.30x
100.0
120.0
140.0
160.0
180.0
200.0
220.0
240.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
MegaFon retained a comfortable level of leverage
- Net debt/LTM OIBDA at 1.87x level at the end of Q2 2017
Continued mitigation of FX risk and ample liquidity for dividend payment
- 56% of cash held in US dollars to offset the revaluationof FX-denominated liabilities
- Remaining cash held in Rubles to take advantage of higher deposit rates
- A comfortable level of liquidity for dividend payment
Predominant portion of the debt portfolio is denominated in Rubles to minimize FX risk
DEBT PROFILEOF TELECOM SEGMENT
1 On nominal basis2 Including structured and plain vanilla FX hedges
NOTE:
Due to rounding, manual calculations for financials and KPIs may differ from those displayed
By instrument
% of total
No short-term refinancing risk
- 51% of the Company’s debt becomes due within 5 years or later
- Most of 1Y maturities attributable to RUB bonds
Bank Loans
Bonds
30 Jun 2017
By currency1 By maturity
Equipment Financing
RUB
USD
USD Hedged2
EUR
1 Year
3 Years
2 Years
4 Years
5 Years and Longer
20%
11%
11%
57%
83%
10%5%
2%
62%17%
21%
31 Mar 2017
24%
11%
7%
51%
81%
10%
5%
4%
61%18%
21%
7%
Diversified portfolio structure with no reliance on any specific means of financing
FOR TELECOM SEGMENT
Service revenue
OUTLOOKFOR 2017
Flat to low single digit y-o-y growth
OIBDA112-118 RUB bn
CAPEX55-60 RUB bn
Reiterate Reiterate Reiterate
CONTACT INFORMATIONMEGAFON INVESTOR RELATIONS
+7 495 926 2012
41 Oruzheyniy lane, Moscow, 127006 RussiaIR@megafon.ru
corp.megafon.com
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