MegaFon Investor Presentation
July 2015
1 Disclaimer
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 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.
2 Agenda
1. What is MegaFon? What MegaFon?is
2. Corporate and Financial Highlights for FY 2014 and Q1 2015
3. Appendix
Corporate Highlights Financialand Appendix
3 1
What is MegaFon? 4 MegaFon at a glance
Highlights Consolidated Q1 2015 revenue breakdown
Strong • 2nd largest Russian mobile operator(1), with 69.5 MM subscribers(2) and RUB 74.0 Bn fundamentals What MegaFon?is historically growing market share >98% of revenues comes from Russia • Unique network position overall on the back of substantial investments Sales of handsets Wireless revenues; and accessories; 86.6% • Leading 4G/LTE operator providing access to 4G/LTE network in 74 6.0% Russian regions to c.52.0%(3) of population by the end of Q1 2015
• Innovative player with a customer-centric approach and a leading position Wireline revenues; in digital services and content 7.4%
• Extensive retail network consisting of over 8,087 stores, including almost 2,047 owned-and-operated stores, third party monobrand stores and Euroset stores Compelling historical financial performance
• Managed by a professional team with solid track record RUB Bn 2010 2011 2012 2013 2014 CAGR Q1 2015 Corporate Highlights Financialand Total mobile 57.2 62.8 64.6 70.1 72.2 6.0% 72.0 • Listed on the London and Moscow stock exchanges since 27 Nov 2012 subscribers (MM) Consolidated revenue 215.3 242.4 272.3 297.2 314.8 10.0% 74.0 • Superior historical growth among Big 3 Russian mobile operators with Growth Consolidated OIBDA 97.6 100.6 117.1 132.6 138.5 9.1% 32.0 significant future growth potential Margin (%) 45.3% 41.5% 43.0% 44.6% 44.0% 43.2% • Focus on improving operating efficiency and capital expenditure Capex (66.5) (70.6) (45.2) (47.1) (56.5) -4.0% (8.1) Returns management which translates into growing cash flows As % of revenues 30.9% 29.1% 16.6% 15.9% 17.9% 10.9% • Highly attractive shareholder remuneration policy: 90% dividend payout OIBDA−Capex 31.1 30.0 71.9 85.4 82.0 27.4% 23.9
ratio for 2013 As % of revenues 14.4% 12.4% 26.4% 28.7% 26.1% 32.3% Appendix
Source: Company data. Note: 5 (1) – By overall mobile revenue and number of subscribers as of the end of Q1 2015 in Russia (2) – Total number of subscribers as of the end of Q1 2015 was 72.0MM in Russia, Tajikistan, South Ossetia and Abkhazia (3) – Russian population as of the latest census in October 2010 20 years of our success story to become a leading telecom operator in Russia
Leading 4G Acquisition of 100% provider in Russia stake in What MegaFon?is Launch of 4G/LTE Yota/Scartel General MegaFon total revenues services in partnership recommended for Communication What MegaFon?is (RUB Bn) with Yota, reached 76 shareholder vote partner for Sochi cities and towns by YE Olympics 2014 2012 Number of 4G subscribers hits 1 Acquisition of 25% million stake in Euroset
Acquisition of Start listing on the Net-by-Net LSE and MICEX Acquisition of MegaLabs ~20x Synterra launches operations
Becomes #2 mobile Corporate Highlights Financialand 1st operator to operator in Russia in launch 3G terms of subscribers network in 1st operator to Russia in St. 314.8 cover all Peters- Launch of online regions in burg 297.2 store and Russia 272.3 Corporate Highlights Financialand st 1 operator in introduction of 242.4 Europe to launch EDGE technology st NorthWest GSM “MMS” and 1 acquired nine operator in Russia other regional to introduce “NorthWest “Mobile-TV” GSM” founded, GSM operators OperatingandResultsFinancial launched and renamed operations in St. MegaFon Petersburg
1993 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Appendix Outlook for2014 6 Source: Company data. Resilient Russian telecom play Reputable analysts are optimistic about MegaFon’s performance
and see upside to guidance recovers Share price performance since January 2014(1) What What MegaFon?is 35.00
Soft numbers but cash return remains solid. Hold What MegaFon?is 30.00 … Telcos are sensitive to private consumption trends than in the 25.00 past, but we believe Q1 marked the bottom and Russian reaching -35% -55% macro equilibrium should work in MFON’s favour in the coming 20.00 quarters, thus we see upside to guidance…. -58% -61% Data remains the star of the show with 28% y/y traffic growth 15.00
10.00 Bank of America Merrill Lynch, April 2015 5.00 Corporate Highlights Financialand
1Q15 in line; accumulated 8% DY supported by low leverage. Buy!
MSCI Russia Corporate Highlights Financialand
We highlight that MegaFon had a tough comp with the strong 1Q14 due to Sochi Olympics and changes in VAS regulation and think that
the company may accelerate revenue growth in 2016 to +1.7% (vs Financial and OperatingandResultsFinancial +4% previously) and maintain margins at 42% … An implied 8% DY (accumulated) is supported by low 1x leverage and prudent cash allocation with >60% exposure to hard currency
Morgan Stanley, April 2015 Appendix Outlook for2014 7 Source: Analysts reports, Bloomberg Notes: (1) — Share prices indexed to MegaFon LSE share price Russian telecommunications market preserves attractiveness despite turbulent macroeconomic environment
Competitive telecom market dynamics MegaFon track record of gaining market share What What MegaFon?is • 3 nationwide mobile operators Russian mobile subscribers market share • Predominantly prepaid market, limited handset subsidies What MegaFon?is (Subscribers in millions) • Relatively high OIBDA margin (compared to developed markets) 188 208 219 228 230 237 240 ∆2014/2013 on the back of relatively benign competition and regulatory framework 34.4% 33.4% 32.6% 30.7% 30.9% 31.0% Benign regulatory framework 29.3% +1.7 pp 28.8% 27.1% 27.1% +0.2 pp • Mobile termination rates, roaming rates, and last mile fiber 25.4% 24.2% 25.8% 29.0% (1) 25.1% 24.3% -0.1 pp access are not regulated 23.0% 24.5% 23.7% 23.9% 23.8% Others 18.0% 17.8% 18.1% -2.1 pp Corporate Highlights Financialand • Mobile number portability implemented relatively late in terms 17.2% 17.1% 17.6% 16.0% of market development(2). In 2014, MegaFon was the main 2008 2009 2010 2011 2012 2013 2014 beneficiary of this process with 35% of total numbers ported in. • Local loop unbundling is not implemented Total mobile revenues FY2014 Data revenues FY2014 Russian market fundamentals Corporate Highlights Financialand 12.6% 3.9% East-Central Russia G7(4) Europe(3) 29.8% 22.1% 37.5%
GDP (CAGR 2014-2016E real change p.a.) -1.5% 2.9% 1.8% 24.9% OperatingandResultsFinancial Private consumption (CAGR 2014-2016E -2.9% 2.4% 1.6% real change p.a.) 32.7% 36.5%
Source: EIU (as of March 1, 2015) Others Appendix Note: (1) - Government focus on MTR and potential roaming regulation is increasing
(2) - Fully implemented since April 2014 Outlook for2014 8 (3) - Includes Czech Republic, Hungary, Romania, Bulgaria, Poland, Slovakia (4) - Includes Canada, Germany, France, Italy, Japan, United Kingdom, United States Network infrastructure development in 2014
• In 2014, MegaFon remained focused on increasing the quality of connections. By Growth ▲ 19.5% the year-end, the key indicators improved: 3G - call set up success rate up to 99.52% 18,636 - drop-call rate down to 0.52% What MegaFon?is 10,106 2G - call set up success rate up to 97.13% Corporate Highlights Financialand 38,151 Number of base 33,298 - drop-call rate down to 0.82% stations • The improvement in quality of services was achieved due to further roll-out and 46,341 42,929 modernisation of 4G/3G/2G networks in Russia 4G base stations + 84% y-o-y 2013 2014 2G BS, units 3G BS, units 4G BS, units 3G base stations + 15% y-o-y 2G base stations + 8% y-o-y Growth
▲ 7.4% Length of fiber-optic communication lines +7% y-o-y Financial and OperatingandResultsFinancial 121,102 (backbone infrastructure) Corporate Highlights Financialand
112,783 • In 2014, MegaFon launched the Global network operational center (GNOC) to Backbone 64% improve network quality through centralization of operational and maintenance infrastructure activities in one center 62% • The GNOC has two sites in Saint Petersburg (NOC “West”) and Samara (NOC “East”), each of them responsible for 4 branches • To ensure efficient 24/7 network quality control and timely reaction to any 2013 2014 communication problems, at the GNOC MegaFon uses umbrella OSSs(2), Backbone Share of BS interconnected including the Fault management system deployed in 2014 in cooperation with Appendix
(1) Outlook for2014 FOCL , km via FOCL, % IBM
9 Note: (1) FOCL – fiber-optic communication lines (2) OSS – Operation support system 4G network coverage and roaming in Q1 2015
44 • MegaFon is one of the world’s leaders in LTE-roaming coverage LTE-roaming in terms of countries covered • 4G/LTE services are available in: available in 44
74 What MegaFon?is (1) countries • In 1Q 2015, LTE-roaming coverage extended by 7 countries to 44 –74 federal regions with 52% of Russia’s population countries with 45 operators in total 4G services are
–2 regions added during this quarter Corporate Highlights Financialand available in 74 of Russia’s federal –14 out of 15 cities in Russia with a population above 1 million regions 6.4 • LTE-Advanced services providing speeds of up to 150-300 • 4G-enabled devices registered on MegaFon network - 6.4 million Mbit/sec are available in 3 cities with testing being commenced 4G devices on units (+56% y-o-y) in Rostov-on-Don network • 4G traffic usage increased by 42% y-o-y 6.4 million • Share of 4G traffic in total data traffic – at 39%
Saint-Petersburg
Financial and OperatingandResultsFinancial Corporate Highlights Financialand
Moscow Nizhniy Novgorod
Kazan Perm Samara Rostov-on-Don Ufa Ekaterinburg Volgograd Chelyabinsk Krasnoyarsk Omsk
Novosibirsk Appendix
Federal districts covered by MegaFon 4G / LTE network Outlook for2015 Cities where LTE-Advanced available 10 Note: (1) — Russian population as of the latest census in October 2010 Demonstrating strong operating and financial performance
Operating results provided on this page cover only the Russian business. Financial results are presented on a consolidated basis
Superior operating performance… …translating into solid financials What MegaFon?is Total Russia wireless subscribers, MM Consolidated Revenue breakdown, RUB Bn Lower
▼ 1.2% What MegaFon?is 69.7 69.5 68.1 67.6 297.2 314.8 62.6 272.3 74.9 74.0 18.1 22.2 23.1 4.9 25.2 27.7 27.3 13.3 20.1 4.4 21.0 26.0 17.9 5.3 5.5
259.0 269.5 241.1 64.7 64.1
2012 2013 2014 Q1 2014 Q1 2015 2012 2013 2014 Q1 2014 Q1 2015 Data service user base (1) User base not using data service (2) Wireless services Wireline services Equipment & Accessories
Blended Russia ARPU(3) and blended MOU(4) Consolidated OIBDA and OIBDA margin Lower Corporate Highlights Financialand 344 344 334 ▼ 1.7%
44.6% 43.4% 43.0% 44.0% 43.2% 319 326 321
117.1 132.6 138.5 32.5 32.0 Corporate Highlights Financialand 2012 2013 2014 2012 2013 2014 Q1 2014 Q1 2015 ARPU, RUB per month MOU, minutes per month Russia Data ARPU (ARPDU(5)) and DSU(6) Consolidated Capex and capex margin 3,188 Lower 2,603 ▼ 3.1%
2,489 OperatingandResultsFinancial 1,586 17.9% 11.2% 1,068 16.6% 15.9% 10.9% 216 56.5 181 209 45.2 47.1 164 207 8.4 8.1 2012 2013 2014 Q1 2014 Q1 2015 2012 2013 2014 Q1 2014 Q1 2015 Data ARPU, RUB per month DSU, MB/month Appendix
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed. (1) — Data Service User is defined as a Subscriber who has used any of our data transfer services within the preceding three months
(2) — Active subscribers that do not comply with the definition of Data Service User Base Outlook for2014 (3) — Total wireless services revenues (including interconnection and roaming charges but excluding connection revenues) for a given period divided by average number of wireless subscribers, divided by number of months in such period 11 (4) — The numbers starting from 2012 are calculated in accordance with the new methodology. The total number of minutes charged per the tariff plan of a subscriber during a given period divided by the average number of subscribers during such period and dividing the result by the number of months in such period. (5) — 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 (6) — 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 period MegaFon Strategy
Goal Priority What What MegaFon?is
1 Retention & development of current customer base through focus on the most valuable subscribers What MegaFon?is Sustain revenue growth in core 2 Focus on market share increase business 3 Mobile data monetization
4 Focus on development of current B2B subscriber base Corporate Highlights Financialand
Develop 5 Development of B2C fixed broadband “second core”
6 Focus on real opportunities in new businesses Corporate Highlights Financialand
7 Continuous search and implementation of operational improvements Financial and OperatingandResultsFinancial Be more efficient than competitors in 8 Maintaining technological leadership managing business
9 Development of management system focused on value creation
Appendix Outlook for2014 12 2
Corporate and Financial Highlights for Q1 2015 13 MegaFon reports financial results highlighting strong profitability Key corporate events in Q1 2015
Stable performance in Q1 2015 despite macroeconomic uncertainties Recommendation of dividends for 2014 • Total subscriber base increased by 2.3 million y-o-y to reach 72 million • On 28 April 2015, based on the results for 2014, MegaFon Board of Directors recommended payment of dividends in the amount of RUB 10 Bn, equivalent • Consolidated revenue decreased by 1.2% y-o-y, because revenues in Q1 2014 Corporate Highlights Financialand to RUB 16.13 per ordinary share (or GDR), subject to approval by the Annual were elevated on one-off basis as a result of the Winter Olympics General Meeting of Shareholders on 30 June 2015 • Data revenue increased by 10.4% y-o-y • The Board of Directors also agreed to include in the agenda of its meeting • OIBDA margin declined slightly by 0.2 p.p. to 43.2% scheduled for 28 October 2015 an item on recommendation to an extraordinary general meeting of shareholders to distribute additional Definite 4G/LTE leadership in Russia dividends in 2015, so that the total amount of dividends distributed in 2015 is at least RUB 40 Bn, or RUB 64.52 per ordinary share (or GDR), taking into • In February, MegaFon and Ericsson achieved a maximum speed of 450 Mbit/s account the Company’s Dividend Policy in the course of LTE-Advanced trials using a combination of three bands of LTE spectrum of 20 MHz each Strategic partnership between MegaFon and QIWI
• In March, MegaFon started test exploitation in Rostov-on-Don of a LTE- • MegaFon and QIWI, a leading provider of payment services, announced the Financial and OperatingandResultsFinancial Advanced network with a speed of up to 300 Mbit/s creation of a strategic partnership to develop high-tech solutions in electronic payments utilizing the combined business expertise of both • MegaFon signed a 7-year contract with Nokia Systems & Networks to companies. A unique co-branded product Visa QIWI Wallet is the first product develop a 4G/LTE network based on the Single Radio Access Network being developed technology Agreement with Svyaznoy Superior customer satisfaction • MegaFon signed a strategic partnership agreement with Svyaznoy, a
• MegaFon customer satisfaction index in Q1 2015 was the highest among the national chain of mobile telecom retail outlets, for wider distribution of 2015 Big 3 mobile operators in Russia(1) MegaFon services and products, including free top-up services for its
subscribers, and implementation of various joint e-commerce projects Outlook for All financial figures provided in this presentation are presented on consolidated IFRS basis unless otherwise stated. Note: 14 (1) — According to the research conducted in Q1 2015 by the independent agency Synovate Comcon Key highlights: resilient OIBDA margin
Lower ▼ 1.2% Revenue, OIBDA and Net profit 82.2
74.9 76.7 81.1 74.0 What What MegaFon?is Revenue • Total revenue declined by 1.2% y-o-y mainly due to
the fact that the revenue in the comparable period in Corporate Highlights Financialand 2014 benefited from the one-off effect of the 2014
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Winter Olympics, as well as weaker sales of equipment and accessories Lower ▼ 1.7% • OIBDA decreased by 1.7% y-o-y impacted by lower 34.3 37.3 32.5 34.5 32.0 revenue and gross margin, while OIBDA margin OIBDA 43.4% 44.7% 46.0% 41.9% 43.2% declined by only 0.2 p.p. to 43.2% mainly because sales and marketing expenses were lower as compared to Q1 2014 when there was large-scale
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Financial and OperatingandResultsFinancial
Olympics-related advertising spending Corporate Highlights Financialand
Growth • Net profit(1) increased by 2.4% y-o-y principally due to ▲ 2.4% 13.9 12.8 higher interest income resulting from active management of the deposit portfolio, and lower FX Net profit(1) 7.2 7.4 18.1% 2.8 9.7% 15.8% 10.0% loss 3.4%
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Appendix % of Revenue
Quarterly data, RUB Bn Quarterly data, RUB Bn Outlook for2015
15 Note: Due to rounding, manual calculations for financials and KPIs(2) may differ from those displayed (1) — Net profit attributable to equity holders of the Company (2) — Key performance indicators (“KPIs”) Key highlights: Free Cash Flow and CAPEX
Lower ▼ 3.1% (1)
20.5 CAPEX , OIBDA-CAPEX, Free Cash Flow What What MegaFon?is CAPEX 13.4 14.3 8.4 . In Q1 2015, MegaFon invested RUB 8.1 Bn, which
8.1 Corporate Highlights Financialand 17.5% 17.6% 24.9% 11.2% 10.9% is 3.1% lower than in Q1 2014. Our CAPEX: ― Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 represents c.11% of our revenue, and ― in line with our CAPEX rationalization efforts Lower ▼ 1.0% . Despite 1.7% decline in OIBDA, OIBDA-CAPEX 24.1 23.9 20.9 23.0 decreased by only 1.0% y-o-y as a result of 14.0 OIBDA-CAPEX 32.3% 32.2% 27.2% 28.4% lower CAPEX y-o-y 17.0% . Free Cash Flow decreased by 10.6% y-o-y Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 OperatingandResultsFinancial mostly due to lower cash flow from operating Corporate Highlights Financialand Lower ▼ 10.6% activities as a result of one-off expenses 25.4
17.2 13.6 14.0 31.4% 12.1 Free Cash Flow 20.9% 18.1% 18.3% 16.4%
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Appendix
Quarterly data, RUB Bn Quarterly data, RUB Bn % of Revenue Outlook for2015
16 Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed (1) – MegaFon CAPEX refers to actual CAPEX accrued for the year and may not match cash flow CAPEX. Key revenue components
Mobile data revenue remains the key revenue growth driver Wireless revenue decreased by 1.0% y-o-y mainly due to the Lower one-off effect of the Olympics in Q1 2014, continued ▼ 1.2% migration of subscribers to bundled tariffs, intensified price
competition, discontinued targeting of seasonal workers and What MegaFon?is 81.1 82.2 76.7 lower VAS revenue Handsets 74.9 6.2 7.2 74.0
and 5.0 Corporate Highlights Financialand accessories 4.9 5.2 6.3 4.4 ▼ 9.7% • Mobile data continued to be the key growth driver and 5.4 Wireline 5.3 5.5 ▲ 3.9% represented 24.1% of total revenue in Q1 2015 vs. 21.6% in Q1 2014, increasing by 10.4% y-o-y due to
― expansion of data user base by 5.1% y-o-y to 27.8
Other wireless 52.4 million users 50.1 51.2 revenue(1) 48.6 46.2 ― higher data usage resulting from active marketing ▼ 1.0% efforts and attractive tariff offerings, intensive 4G network development and expansion of coverage, and popularity of heavy data-consuming products
Data 16.2 16.2 17.4 17.5 17.9 ▲ 10.4% ― higher adoption of data-enabled devices. The share (2)
of data-enabled devices on MegaFon network is OperatingandResultsFinancial Corporate Highlights Financialand Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 now at c.48%
Wireline service revenues increased by 3.9% y-o-y mainly Wireless services 86.4% 86.5% 86.0% 83.6% 86.7% due to expansion of our B2B and B2G client base as well as good performance of our carrier service under the DREAM - Data 21.6% 21.1% 21.4% 21.3% 24.1% project Wireline services 7.1% 7.0% 6.4% 7.7% 7.4% Sales of handsets and accessories decreased by 9.7% y-o-y Handsets and 6.5% 6.5% 7.6% 8.7% 5.9% as a result of shift to lower-end devices amid weaker
accessories consumer purchasing power Appendix
Due to rounding, manual calculations for financials and KPIs may differ from those displayed. Outlook for2015 Note: (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 17 revenues; roaming charges to other wireless operators and other wireless revenues (2) — Include smartphones, tablets, dongles and routers, and other data-enabled devices Drivers of Russia total wireless services revenues: Results provided on this page cover Wireless subscribers only the Russian business
(MM) Total Russia wireless subscribers including Growth ▲ 2.8% data service users
Growth • Overall subscriber base in Russia increased by 1.9 What MegaFon?is
▲ 5.0 % million new subscribers (+2.8% y-o-y) to 69.5 Corporate Highlights Financialand million resulting from our active subscriber 69.1 69.7 69.5 67.6 68.0 acquisition marketing efforts, attractive tariff offerings, introduction of new services and customer-oriented business approach: 26.0 26.1 26.8 27.7 27.3 ― In Q1 2015, MegaFon attained the highest customer satisfaction index(3) and the highest net promoter score among Big 3 in Russia(4) • Data service user base expanded by 5.0% y-o-y to 27.3 million users accounting for more than 39% of
the overall subscriber base
Financial and OperatingandResultsFinancial Corporate Highlights Financialand • Increase in data service users was achieved due to organic growth through initiatives aimed at Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 stimulating higher data usage, switch of “pure” Data service user base (1) User base not using data service (2) voice users to data usage, and increased penetration of data-enabled devices on MegaFon
Share of data users in overall subscriber base, % network
38.5% 38.4% 38.8% 39.7% 39.3%
Appendix Outlook for2015 Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed (1) — Data Service User is defined as a Subscriber who has used any of our data transfer services within the preceding three months 18 (2) — Mobile subscribers that do not fall within the definition of Data Service User Base (3) — According to the research conducted for Q1 2015 by independent agency Synovate Comcon (4) — According to the research conducted in Q1 2015 by the independent agency Ipsos Drivers of Russia total wireless services revenues: Results provided on this page cover DSU and APPMB only the Russian business Data revenue operating statistics DSU(1) & APPMB(2) • Strong increase of DSU (+28.1% y-o-y) in Q1 2015 Growth resulted from: ▲28.1 % What MegaFon?is 3,188 2,959 – intensive roll-out of the 4G/LTE network 2,529 Corporate Highlights Financialand 2,489 2,428 – continued increase in 4G-enabled devices registered on MegaFon network to 6.4 million – active marketing initiatives aimed at stimulation 0.08 0.08 0.08 0.07 0.07 of higher mobile data usage and adoption of data- enabled devices Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 – growing share of data-enabled devices on DSU, Mb/month APPMB, RUB MegaFon network in Q1 2015 +8 p.p. y-o-y to 48.0% DATA ARPU (ARPDU(3)) • APPMB decreased by 0.01 RUB/MB/month y-o-y RUB per Growth
month ▲4.3% largely because of stimulation of subscriber shift to Financial and OperatingandResultsFinancial data packs and bundled tariffs with high amount of Corporate Highlights Financialand 213 210 216 207 204 data available • ARPDU increased by 4.3% y-o-y due to faster organic growth in data traffic usage, partly offset by a decreasing APPMB
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015
Appendix Outlook for2015 Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed (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 19 period; (2) — ARPDU for a given period divided by DSU in such period; (3) — 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 Key factors influencing OIBDA margin
Lower ▼ 1.7% Key drivers of OIBDA margin Key components OIBDA • In Q1 2015, OIBDA decreased by 1.7% y-o-y, while What MegaFon?is margin Gross profit margin S&M margin G&A margin OIBDA margin held up well, declining by only 0.2
43.4% ▼0.4 p.p. ▲ 0.4 p.p ▼ 0.2 p.p. 43.2% ▼0.2 p.p. Corporate Highlights Financialand (%) p.p. y-o-y to 43.2% due to the following factors: 32.5 - Gross profit margin decreased by 0.4 p.p. to OIBDA 0.0 0.3 0.1 32.0 (RUB Bn) 73.1% largely due to lower service gross (0.9) margin (-1.2 p.p. y-o-y) resulting from increased international interconnection charges - Sales & marketing expenses declined by 7.5% y-o-y largely due to lower advertising expenses in Q1 2015 (-17.8% y-o-y) as
compared to high cost of Olympics-related OperatingandResultsFinancial Corporate Highlights Financialand ▼ 1.6% marketing campaigns in Q1 2014 - 0.4% decrease in general & administrative expenses resulted from strict operational -1.2% 0.0% -7.5% -0.4% efficiency control, which was partly offset by OIBDA Revenue Cost of revenue Sales & General & OIBDA higher costs relating to network rollout and Q1 2014 Marketing Administrative Q1 2015 modernisation
y-o-y growth
Appendix Outlook for2015
20 Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed. Net debt and liquidity
Net Debt Build-up As of 31 Dec 2014 As of 31 Mar 2015 Change • Sufficient liquidity and stable leverage
Cash and cash equivalents 22.2 38.4 16.2 position, at the end of 1Q 2015: What What MegaFon?is Short-term investments 47.9 44.7 (3.2) - Net debt/LTM OIBDA at 0.94x level at
Total debt 206.3 212.2 5.9 the end of Q1 2015 Corporate Highlights Financialand Long-term debt 157.6 157.9 0.3 • Most of the liquidity kept in hard Short-term debt 50.2 55.7 5.5 currencies to mitigate FX risks Deferred financial cost (1.6) (1.5) (0.1) • On 22 April 2015 the Company decided Net debt (1) 136.2 129.1 (7.1) on early repayment exchange bonds series BO-04 at 19 May 2015 Net debt(1) and Net debt/LTM OIBDA Liquidity(2) split by currency
RUB Bn / (x) Growth ▲ 0.25x
16% OperatingandResultsFinancial Corporate Highlights Financialand 1.04x 0.98x 0.94x 0.90x 40% 0.69x
140.3 118.8 136.2 129.1 91.4 44%
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 RUB USD HKD
Net debt Net debt/LTM OIBDA
Appendix Outlook for2015 Q1
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed 21 (1) — Net debt is calculated as the difference between (a) principal amount of loans and borrowings less unamortized debt issuance fees and (b) cash, cash equivalents, and principal amount of deposits (2) Liquidity is calculated as the sum of Cash & cash equivalents and Short-term investments Debt profile Debt portfolio structure • We maintain a balanced debt portfolio By instrument By currency By maturity
structure and currency mix, allowing us to What What MegaFon?is % of total minimize FX exposure
2% − Insignificant expansion USD component of Corporate Highlights Financialand 18% 21% 20% 24%
debt portfolio connected with new ECA- 2014
- 46% financing for realisation of CAPEX program Dec - 15% 62% 24% − More than 60% of total debt is in RUB, 31 36% 20% 12% while another 14% covered in cross- currency hedging arrangements • More than 50% of Company’s debt becomes due within 3Y tenor or later
2% 17% 21%
23% 26% OperatingandResultsFinancial
Corporate Highlights Financialand 2015
- 47% 14% Mar 61% - 14% 18%
31 36% 21%
Bank Loans RUB 1 Year 2 Years Equipment Financing USD Swapped(1) 3 Years 4 Years Bonds USD 5 Years and Longer
EUR Appendix Outlook for2015 Q1
Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed 22 (1) — Including structured and plain vanilla FX swaps on a nominal basis
Outlook for 2015 What What MegaFon?is
Revenue growth Flat y-o-y Reiterate Corporate Highlights Financialand
OIBDA margin ≥40% Reiterate Financial and OperatingandResultsFinancial In line with the Capex guidance for 2013-2015 at RUB 165-180 Bn Corporate Highlights Financialand CAPEX Reiterate
previously announced during the IPO
Appendix Outlook for2015
23 3
Appendix 24 MegaFon employs the best-in-class Corporate Governance practices…
Corporate governance Board of Directors composition . Existing MegaFon Corporate Governance structure complies with all requirements of the London and Moscow stock exchanges where MegaFon Nominated by USM Nominated by Independent trades Teliasonera directors What MegaFon?is . Board of Directors elected in June-2015 consists of 7 members: — 4 Board members represent interests of minority shareholders: 2 TeliaSonera representatives and 2 INEDs — 3 representatives of controlling shareholder USM Sergey Soldatenkov Carl Peter Christian Luiga Jan Rudberg . Three Committees of the Board of Directors have been set up for Chairman of the Board improving corporate governance standards: — Audit Committee
— Remuneration and HR Development Committee Appendix — Finance and Strategy Committee . On 12 Nov 2013, MegaFon’s Board of Directors approved the Code of Vladimir Streshinsky Ingrid Maria Stenmark Lord Myners
Business Conduct and Ethics further streamlining the corporate Corporate Highlights Financialand governance procedures in the Company . Following the listing reform on the Moscow Exchange, in June 2014, the Company’s shares were upgraded to the “Highest” quotation list QL I, thus allowing pension funds and state corporations to invest in The majority of the Board MegaFon’s stock Sergey Kulikov represents minority shareholders - This upgrade confirms MegaFon compliance with MOEX’s highest
corporate standards Appendix
25 …led by a management team with extensive TMT experience
Ivan Tavrin, Chief Executive Officer ● Appointed Chief Executive Officer of MegaFon in Apr 2012
● Previously, Deputy CEO and member of the Management Board since Mar 2012 What MegaFon?is ● Extensive experience in the Russian media industry, pioneering its development over the past 16 years, including Regional Media Group, Media One Holding, Vyberi Radio Group and TV-3 ● Board positions outside MegaFon include MO-TV Holdings Limited, UTH Russia Limited, Media-One Holdings Limited and CJSC Kommersant Publishing House.
Mikhail Dubin, Executive Director, Consumer Business Gevork Vermishyan, Chief Financial Officer ● Deputy CEO for Strategic Development since Jul 2010 ● CFO since Jul 2011 ● Previously Deputy CEO of Telecominvest ● Previously Director of Corporate Finance at AFK Sistema ● Previously Head of Telecom Project Finance Group at ● 13 years of finance / 8 years of TMT experience Sberbank
● 15 years of TMT experience Corporate Highlights Financialand Dmitry Kononov, Director, Investors Relations and M&A Alexander Bashmakov, Director, Strategy ● Director for Business Development, M&A, IR since Dec 2008 ● Strategy Director since Mar 2012 and Chief Procurement ● Joined MegaFon in 2000. Served as the company’s CFO in Officer since early 2013 2002-2004 ● Previously core member of BCG CIS telecom practice ● 22 years of TMT experience ● 8 years in management consulting with focus on Telecom
& IT (Accenture and BCG) Appendix
26 MegaFon’s Spectrum Advantage
MegaFon has noticeable advantage in terms of frequencies… … allowing to get significantly higher data transfer rate in MegaFon’s network
. Both operator and end-user equipment already support 2x20 MHz for What MegaFon?is LTE, no other operator beside MegaFon can provide such band 800 MHz (LTE) 2x7,5 2x7,5 2x7,5 2x7,5 length . After implementation of technology neutrality MegaFon is the only 2x0,8- 2x2,2- 2x0,6- 900 MHz (2G(2)) 2x5-2x15,2(1) 2x13,6(1) 2x13,2(1) 2x8,4(1) operator able to utilize 3 times 2x20 MHz channels (2x20 MHz in 1800 band and 2 times 2x20 in 2600 band) for LTE 2x14,6- 2x12- 1 800 MHz (2G) 2x14,2-2x29,4(1) 2x5,2-2x29,8(1) 2x29,8(1) 2x29,8(1) . In other technologies all nation-wide operators are almost equal . None of nation-wide operators except MegaFon can realize
2 100 MHz (3G) 2x15 2x15 2x15 2x15 significant benefits from implementing technological neutrality Corporate Highlights Financialand 2 600 MHz (LTE) 2x40 2x10 2x10 2x10
Wider band means higher data transfer
rate and higher capacity of the network Appendix
27 (1) Depending on Russian region (2) 3G only for Moscow, Moscow region and Komsomolsk-on-Amur Telecom companies are more resilient to economic shocks Using more fundamental approach, It is commonly accepted that mobile market In that approach, we see two drawbacks, macroeconomic risk turned out to be less for
growth rate depends on GDP growth which we tried to eliminate the two reasons What What MegaFon?is
That is supported by regular correlation analysis 1 Correlation coefficient became lower Problem Solution Beta(1) ≈ 0,6 Mobile communication market (national currency)’05-’12 CAGR 2 Consumption is less volatile than GDP GDP does not define Consumption is 30% 1 communication used instead of GDP Growth rate Each point is an services usage independent country 20% 30% +6% 20% 10% A lot of factors that Such factors as 10% can lead to strong market maturity, FX 0% 2 Corporate Highlights Financialand Beta(1) ≈ 0,9 correlation are not rate, world trends -5% considered are controlled(2) 0%
-10% -10% -11% -10% 0% 10% 20% 30% 2007 2008 2009 2010 2011 2012 2013 Nominal GDP (national currency) ’05-’12 CAGR Russian nominal GDP (in RUB) Russian nominal consumption (in RUB)
Note: Covered countries- ARG, AUT, BEL, BRA, CAN, CHL, CHN, COL, DNK, EGY, FIN, FRA, DEU, GRC, IND, ISR, ITA, JPN, MEX, NLD, NOR, PER, PRT, RUS, ZAF, SWE, CHE, TUR Appendix (1) Beta – correlation coefficient that shows how market growth rate depends on macroeconomic factors (e.g. GDP or disposable income); (2) Controlling parameters: subscriber base growth rate, broadband internet access penetration, FX rates, time parameters, random effects for each country Source: IE Market Research, World Bank, FSSS, Merrill Lynch Wireless Matrix, MegaFon Strategy analysis 28 MegaFon’s headline tariffs (Moscow region) (1/2)
TARIFF NAME PRICE FEATURES BEYOND THE PACKAGE
MegaFon - • 300 minutes on MegaFon subs • On MegaFon subs of Moscow region – 0 RUB/min 199 RUB/ month
All included XS • 0.5 GB of 3G, 4G+ traffic • Other MegaFon subs – 6.5 RUB/min What MegaFon?is
• 400 minutes • On MegaFon subs of Moscow region – 0 RUB/min MegaFon - 390 RUB/ month • 3 GB of 3G, 4G+ traffic All included S • Other MegaFon subs – 6.5 RUB/min • 100 SMS/MMS
• 600 minutes MegaFon - • 4 GB of 3G, 4G+ traffic • On MegaFon subs of Moscow region – 0 RUB/min 590 RUB/ month All included M • 600 SMS/MMS • Other MegaFon subs – 2.9 RUB/min • Intercity calls — 2.90 rub/min • 1,800 minutes in Russia • Bundledtariffs MegaFon - On MegaFon subs of Moscow region – 0 RUB/min 1,290 RUB/ month • 8 GB of 3G, 4G+ traffic • All outgoing calls to other regions of Russia – 2.9 All included L • 1,800 SMS/MMS RUB/min
• Special terms for trips in Russia Corporate Highlights Financialand • 5,000 minutes in Russia • On MegaFon subs of Moscow region – 0 RUB/min MegaFon - 2,500 RUB/ month All included VIP • 10 GB of 3G, 4G+ traffic • All outgoing calls to other regions of Russia – 2.9 • 5,000 SMS/MMS RUB/min
• Outgoing call on subs of Moscow region – 1.5 RUB/ min, 0 RUB from • Not applicable Switch to zero 0 RUB/ month 21st min • 9.9 RUB/MB
• Outgoing call on subs of Moscow
tariffs Appendix Popular Everything is simple 0 RUB/ month region – 1.6 RUB/min • Not applicable • 9.9 RUB/MB
29 MegaFon’s headline tariffs (Moscow region) (2/2)
TARIFF NAME PRICE FEATURES BEYOND THE PACKAGE
MegaFon - 190 RUB/ month – 1st month • 70 MB of traffic per day
Internet XS 7 RUB/day – from 2nd month • Maximum speed is not limited What What MegaFon?is
MegaFon - • 3 GB of traffic 350 RUB/ month • Internet S Maximum speed is not limited • Once a plan data allowance is used, the Internet access will automatically be suspended until MegaFon - • 16 GB of traffic* the next calendar month or until the plan is upgraded with other options Internet M 590 RUB/ month • Maximum speed is not limited
MegaFon - • 36 GB of traffic* 890 RUB/ month
Internet L • Maximum speed is not limited Internettariffsoptions
MegaFon - • Unlimited amount of traffic** 1,290 RUB/ month Internet XL
• Maximum speed is not limited Corporate Highlights Financialand
• Europe, CIS: incoming, outgoing calls – RUB 6/min SMS – RUB 6 Around the world 0 RUB/ month • Other countries: incoming, outgoing call – 9 or 36 RUB/ min - Roaming tariff SMS – 9 or 16 RUB • Russia: incoming calls – 0 RUB/ min, SMS – RUB 3.9
• Incoming calls - 0 RUB/ min from 0 to 30 minutes, from 31st minute – according to the
Whole world – voice tariff option 39 RUB/ day roaming price list of the country of location Roaming
• 10 MB of traffic per day - from RUB 49 to 329 per day (Europe – RUB 129/ day) Appendix Internet abroad – data tariff option Depends on country
tariffsandoptions • 30 MB of traffic per day – from RUB 129 to 829 per day (Europe – RUB 329/day)
30 (*) 50% of traffic is available from 8.00 am to 00.59 am, the rest 50% of traffic is available from 1.00 am to 7.59 am (**) Amount of traffic available is unlimited from 1.00 am to 7.59 am, 30 GB of traffic is available from 8.00 am to 00.59 am Contact Information MegaFon Investor Relations 30 Kadashevskaya Embankment Moscow, 115035, Russia Tel.: +7 495 926 2012 Email: [email protected] Web: ir.megafon.com
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