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Performance2008 Results Results for 2008 (Audited Data) April 22, 2009 MegaFon | Presentation title here | 4/22/2009 1 AGENDA RUSSIAN MOBILE MARKET TRENDS AND OUR STRATEGIC PRIORITIES OPERATIONAL HIGHLIGHTS AND MARKET POSITIONS IN RUSSIA KEY FINANCIAL HIGHLIGHTS MegaFon | 2008 Results | 4/22/2009 2 Key Development Trends of Russian Mobile Market in 2008 130% Mobile operators in Russia are focusing on escalating 200 119% 120% their revenue – most players in the market have 190 102% increased prices for their services; 100% 180 188 170 80% All the operators in one way or another are trying to 173 160 offer convergent product to their customers; 60% 150 40% Mobile retail market demonstrates considerable 140 152 20% structural changes (mergers, strategic partnerships, 130 development of own retail chain); 120 0% 2006 2007 2008 Total market subs (SIM) in Russia, mln. Market penetration, % In 2008, the Russian operators entered the market for subscriber handsets: they started to sell iPhones and special equipment for data transmission (USB- modems); In late summer 2008, the Russian economy experienced the negative influence of the global financial crisis which also effected the telecom market MegaFon | 2008 Results | 4/22/2009 3 Mobile Internet – Effective Tool to Support ARPU Mobile Internet turned out to be the most crisis resistant among the Russian telecom segments. Data is the fastest growing segment of value-added services in the Russian cellular networks. Such growth is based on roll-out of 3G 5% networks, growing number of mobile internet users and 14% increasing traffic usage. * 29% Mobile Internet revenues structure In 2008, the Mobile Internet segment demonstrated the in Russia, highest growth rates as compared to other value-added 24% 2008 YE services and even as compared to voice services. The data transfer services generated 25.4 BRUR (1.0 BUSD) of revenue for the Russian operators, which is an 87% 28% improvement over a year before. * MegaFon MTS Vimpelcom Sky Link Such impressive growth of revenue was driven by almost Other doubled number of subscribers using data transfer services, which reached 31.2 mln by 2008 year-end, or 17% of the total number of mobile communication subscribers in Russia * * According to ComNews Research MegaFon | 2008 Results | 4/22/2009 4 Strategic Vision: “SMART” Growth on Solid Basis Our strategy was in focusing efforts on developing business in the Russian Federation and deriving maximum revenue from our core business. First of all, we invested in the regions with high market potential and low mobile penetration, and we also paid special attention to developing our network in Moscow and the Moscow region. STRATEGIC GOALS • Leadership in revenue among the Russian mobile operators • Leadership in top segments (3G, data Selective transfer) Convergence development in CIS • Maintaining high margins for our business (EBITDA margin, Gross margin) in spite of high inflation, strong competition and changing Core Business market situation MegaFon | 2008 Results | 4/22/2009 5 AGENDA RUSSIAN MOBILE MARKET TRENDS AND OUR STRATEGIC PRIORITIES OPERATIONAL HIGHLIGHTS AND MARKET POSITIONS IN RUSSIA KEY FINANCIAL HIGHLIGHTS MegaFon | 2008 Results | 4/22/2009 6 MegaFon’s Network Footprint MegaFon-Far East MegaFon – North-West 2.9 mln. 7.7 mln. MegaFon – Siberia 2.3 mln. MegaFon – Volga 9.9 mln. MegaFon – Moscow 6.5 mln. MegaFon – Urals MegaFon – Center 3.4 mln. As of end of 2008, MegaFon was providing service to about MegaFon – Kavkaz 4.8 mln. 43.6 mln. subscribers, including 269 K in Tajikistan. 5.8 mln. MegaFon | 2008 Results | 4/22/2009 7 Subscriber Base 50 23% 45 21% 20% 18% 40 19% 43.6 31% NW branch 35 + 22% 15% Subs in 35.6 Sonic Duo 30 + 20% regions, Kavkaz 10% 15% 25 2008 YE 29.6 Volga region 20 5% Other 15 23% 13% 10 0% 2006 2007 2008 Total subs, mln. Market share, % As compared to 2007, MegaFon’s subscriber base grew by 22% and reached 43.6 mln. In 2008, MegaFon became the leader in number of new additions in Russia. Growth of subscriber base in 2008 over 2007 showed improvement due to better trends in new additions and lower churn rate. MegaFon | 2008 Results | 4/22/2009 8 Growth of Russian Mobile Subscriber Base in 2008 Subscriber's base growth in Russia (Dec'08 vs Dec'07), % + 7.8 mln. 17.2% 22% 25.4% + 7.2 mln. + 15 mln. Market 13% share in Russia, 23.0% Dec'08 9% 34.4% Total Russia VimpelCom MTS MegaFon VimpelCom MTS MegaFon Other -8% - 4 mln.* In 2008, MegaFon demonstrated the best result of subscriber base growth in Russia both in absolute and in relative terms. MegaFon accounts for 52% of net additions to the Russian mobile operators in 2008. •After changing the counting policy VimpelCom’s subscriber base shrunk by 9.5 mln. • Data for VimpelCom were presented by ACM-consulting MegaFon | 2008 Results | 4/22/2009 9 In 2008, We Managed to Reduce Churn 35% 3,6% Russian Mobile market is close to saturation, 3,5% nevertheless the Company’s subscriber base 30% 3.5% 33% grew by 7.8 mln subscribers in 2008 3,4% 25% In spite of a “lower” quality of new subscribers due to the mature market, we managed to 25% 3,3% reduce average monthly level of churn from 20% 3,2% 3.5% to 3.2% (% from average number of 3.2% 15% customers) due to our compelling subscriber 3,1% loyalty program. 10% 3,0% 2007 2008 MegaFon-Bonus program penetration Combined Churn, % Since 2005, the MegaFon-Bonus progressive loyalty program has been in place. With no significant promotion expenses the penetration of this program has reached 33% over three years. As contrasted to many loyalty programs of our competitors, the MegaFon-Bonus program is designed for the mass market. Average lifetime of a subscriber participating in the MegaFon-Bonus program is approximately 50% higher than of subscribers who do not participate. Expected revenue from a program participant over his/her lifetime in MegaFon’s network is higher than the average expected revenue for the subscriber base. MegaFon | 2008 Results | 4/22/2009 10 Usage of Standard Services is Slowing Down 289 Voice traffic QtQ growth, % 400 244 250 200 13% 211 12% 13% 350 372 360 150 + 3% 9% 300 + 18% 100 7% 306 6% 50 250 3% 3% 0 200 - 50 1q 2q 3q 4q 2006 2007 2008 ARPU (total), RUB. MOU (total), min. 2007 2008 In Q1 and Q2, 2008, we saw ARPU based on 6 months results grew to 374 RUR but in August the growth was replaced with a negative trend. Nevertheless we performed various measures which allowed us to maintain a strong ARPU level and to achieve annual growth for 2008 over 2007. MegaFon’s MOU is traditionally one of the highest in Russia. In 2008 MOU grew by 18.4% to 289 min per subscriber. MegaFon | 2008 Results | 4/22/2009 11 Demand for Data Services Is Growing 25,0 25.2 19,0% VAS Revenue structure 20,0 17,0% 18.2 15,0 15,0% 74% 14.5% 81% 79% 10,0 11.6 13,0% 12.3% 5,0 11.5% 11,0% 26% 19% 21% 0,0 9,0% 2006 2007 2008 2006 2007 2008 GPRS/EDGE Other VAS VAS Revenue (net), RUB bln. Share in total Revenue, % data traffic, Tb 232.0 During 2008, VAS revenue in Rubles grew 39% over 2007 and the share of VAS revenue to total net revenue increased to 14.5%. 57.8 Data services became one of the major growth drivers for 19.9 VAS revenue in 2008. Data traffic grew by a record breaking 435% to 1.766 Petabytes, and revenue from data transfer services was 26% of the total VAS revenue for 2008. MegaFon | 2008 Results | 4/22/2009 12 MegaFon is VAS ARPU leader in Russia VAS ARPU в России, $ 14% 2.3 28% 2.0 MegaFon 1.8 VAS Revenue 1.7 MTS 1.5 1.5 share in 25% 1.3 Russia, VimpelCom 1.1 2008 Other 33% 2007 2008 MegaFon MTS VimpelCom Other In 2008 MegaFon’s revenue from value-added services grew by approximately 40% and reached about 1 BUSD (which is 28% of total VAS revenue in Russia according to ACM-Consulting estimates). Mobile Internet become the key driver of VAS revenue (in 2008, data traffic in MegaFon’s network grew more than three-fold). RBT-service is quickly becoming more and more popular (by the end of 2008, the number of “Change Your Ringback Tone” service users was over 8 mln.) MegaFon | 2008 Results | 4/22/2009 13 Technology Development 25 135.6 110 20 94.9 11% 21.5 24% 66.1 60 15 17.7 Technical Core + 21% CAPEX Radio network (2G, 3G) 10 structure, 10 13.9 + 27% 2008 Backbone - 40 5 65% 0 - 90 2006 2007 2008 Number of BTS sites (YE), 000 Total voice traffic, bln.min. Our primary focus in technology development during 2008 was on the development of radio access systems (65% of the total technological CAPEX), where the major part was the expansion of network capacity. In the future, we plan to reduce investments to increase capacity of 2G network via construction of the commercial 3G network (2008 investments in 3G were approx. 250 MUSD) MegaFon | 2008 Results | 4/22/2009 14 Results of 3G Networks Construction in 2008 1 056 NORTH-WEST Number of NodeB, 2008 YE Wide range of services is provided Two business- (~ 700 K handsets) models for 3G development CAUCASUS 185 High-speed access to Internet 45 (for 3 months of operation ~ North - West DAGESTAN SOCHI 8.5 K subscribers) Key effort in the Russian market must be focused on technological evolution of new generation networks.