13 August 2020
 

MegaFon announces its financial and operating results for Q2 2020

The Company was able to maintain its OIBDA Margin, reduce its leverage and increase net profit despite the continued impact of the pandemic

 

Key results for Q2 2020:[1]

• Revenue decreased by 8.3% y-o-y to RUB 78.5 billion
• Service revenue was down by 6.9% y-o-y to RUB 73.4 billion
• Revenue from sales of equipment and accessories declined by 24.7% to RUB 5.2 billion
• OIBDA dropped by 8.4% y-o-y to RUB 35.6 billion, with OIBDA Margin flat at 45.4%
• Operational CAPEX[2] slipped 20.1% y-o-y to RUB 13.1 billion
• Net profit increased by 35.2% y-o-y to RUB 4.0 billion
• Total debt decreased by RUB 17.7 billion to RUB 357.4 billion
• The subscriber base in Russia remained stable at 75.4 million
• The data user base grew by 4.2% to 34.9 million

 

Revenue impact

Service revenue in Q2 was RUB 73.4 billion, down 6.9% y-o-y, as a result of efforts to reduce communications spend undertaken by both retail and business customers amidst the pandemic. A large number of retail stores were closed, which significantly reduced both the number of new subscribers and service revenue. Additionally, to support its subscribers in self-isolation, MegaFon offered free access to a range of its most popular services over an extended period, which also had an impact on its revenues. Service revenue was also affected by a drop in roaming revenue due to border closures.

 

Despite the pandemic's negative impact on service consumption in the B2B segment and the number of non-working days in April and May, fixed-line revenue demonstrated a slight growth of 1.0% to RUB 6.8 billion, driven by demand for residential broadband, information security services and cloud solutions.

 

Store closures in some regions, travel restrictions in most large cities and the general decline in consumer confidence in Q2 had a negative impact on revenue from sales of equipment and accessories, driving it down by 24.7% to RUB 5.2 billion.The number of visitors to MegaFon stores fell by 40% y-o-y.

 

Cost optimisation

Despite the pandemic's major negative impact on the Company's financial performance, MegaFon was able to maintain its OIBDA Margin flat y-o-y at 45.4%, primarily by reducing low-margin sales of equipment, cutting selling and marketing expenses and reducing general expenses. In the new challenging environment, smart performance management has become even more important.

 

Net profit grew by 35.2% y-o-y, driven by operational efficiency gains and in particular lower finance charges due to continued deleveraging.

 

The best mobile network in Russia

Operational CAPEX was RUB 13.1 billion in Q2, down 20.1% y-o-y. As a result of the pandemic, several non-critical projects not related to network operations were postponed.

 

At the same time, the increased network load has required renewed focus on network development to maintain a high quality of service for subscribers. In Q2 2020, the number of base stations grew by 2.3% to 189,000 including more than 4,000 new base stations added in LTE and LTE Advanced standards alone. These efforts have ensured the continued delivery of our high-quality voice and mobile services. According to Ookla's Speedtest Intelligence analysis for 1H 2020, MegaFon provides the fastest mobile internet in Russia.

 

Subscriber base

MegaFon's subscriber base in Russia remained fairly stable in Q2 at 75.4 million.The data user base in Russia has continued to grow - up by 4.2% to 34.9 million, making up 46.3% of the total subscriber base. The number of 4G devices registered in MegaFon's network was 35 million, up 14.5% y-o-y.

 

Gevork Vermishyan, the Group's Chief Executive Officer, commented:

"

We believe that the pandemic's impact on the telecommunications industry peaked during the second quarter. Retail and corporate customers, particularly SMEs, have been cutting costs commensurate with reduced business activity, including their communications costs. We have also needed to invest further in network expansion to maintain service quality in the face of increased network load. We have adjusted our base station construction plans, having already achieved 80% of our annual network expansion target by the end of 1H 2020. With the increased and redistributed load on our network, our specialists were required to provide ongoing monitoring of and rapid responses to all changes in network performance. As a result, our subscribers continued to enjoy Russia's fastest data services despite the challenges of self-isolation: Ookla's Speedtest Intelligence analysis for 1H 2020 has confirmed MegaFon's leadership among Russian operators. Throughout the quarter, we supported our subscribers by offering them free access to our most popular services: we have waived access fees for our proprietary platforms such as MegaFon TV, MegaFon Education and MegaFon Games, and have zero rated traffic for popular messenger and food delivery services, online pharmacies and educational portals. Over the quarter, we offered special roaming terms to keep customers connected, including free texting to Russia and free calls to key helplines. These measures negatively affected our year-on-year financial performance but helped maintain an overall positive customer experience and high quality services for subscribers. We are focused on building solutions and services that deliver value to digital subscribers. With Russia's total data user base growing by 4.2% in Q2, we see strong growth potential in this area, and the pandemic has only accelerated this trend. During their self-isolation, our subscribers have started to use online services more often, with MegaFon TV's traffic up 30% and MegaFon Books up 28%, while our gaming platform's traffic increased by 2.5 times. We have launched our own podcast service as this format is gaining traction on our network. With restrictions imposed by some regions on retail chains, our customers are tending to make more purchases online. The number of orders via MegaFon's online store has increased by 40%. We have reflected the current needs of our subscribers in our new tariff line, #NoOvercharges. We were the first among Russian operators to offer unlimited data rollover plans. Additionally, we have resolved the issue of customers accidentally signing up for unwanted subscriptions by including free subscriber protection in all our tariff plans. In B2B segment, we have also seen increased digital penetration and higher interest in our innovative solutions from various companies and industries. During the lockdown period, demand for MegaFon's CDN solution increased by 50%, for video conferencing, by 100%, DDoS protection, by 30%, and for MegaFon Cloud, by 30-40%. We continue to offer new services to our business partners. As an example, in July, we launched a specialised IoT-solution enabling water utilities to automate their processes and simplify water quality monitoring, which is especially important in the current pandemic situation. We are convinced that businesses have renewed their focus on digitisation during the pandemic and will continue to ramp up their shift to digital solutions. Despite weaker performance on a number of metrics, our effective focus on specific priorities has helped us to retain our subscriber base and increase the number of digital subscribers. We have also been able to post a positive net profit by focusing on smart day-to-day management. These results enabled us to focus, among other things, on deleveraging. During the first half of 2020 we refinanced ruble-denominated loans in the amount of RUB 122.2 billion, extending the average life of the loan portfolio and improving the commercial terms. Having adequate cash reserves on hand through careful management of cash flow allowed us to early repay obligations in the amount of RUB 16 billion. Finally, in June 2020, MegaFon and Sberbank signed an amendment to the revolving credit line framework agreement entered into in 2018 to finance general corporate needs, which increased the credit limit from RUB 80 billion to RUB 160 billion. Looking back on the second quarter, we realise that despite the undertaken steps future external challenges will continue to require substantial efforts and some new initiatives from us to streamline our business, such as a thorough analysis of our investments in terms of both marketing and retail chain costs. "

 

Nikita Orlov, the Group's Chief Financial Officer, commented on the quarter's financial results:

"

Our quarterly performance was definitely affected by the COVID-19 crisis, particularly the lockdown measures taken and the restrictions imposed by regional authorities to curb the pandemic, as well as the continued lower social activity among consumers following the phased release from lockdown in June 2020. Revenue was down by 8.3% to RUB 78,543 million, including a reduction in service revenue of 6.9% to RUB 73,357 million, while revenue from equipment sales fell by 24.7% to RUB 5,186 million. Service revenue was primarily affected by a drop in roaming revenue due to border closures, closures of a significant number of our retail stores and a decline in mobile ARPU caused by changes in consumption in the regions during quarantine measures. Digital revenue, however, was up 37% in Q2, mainly due to increased consumption of video and other content services by self-isolating customers, as well as growth in remote access services and big data services, and new contracts for mobile PBXs and M2M services. In Q2 2020, revenue from sales of equipment and accessories was down 24.7% to RUB 5,186 million, driven primarily by lockdown measures, outlet closures and lower customer demand. Lower revenue and, accordingly, lower gross profit led to a 8.4% decrease in OIBDA to RUB 35,625 million in Q2 2020. Nevertheless, the Company was able to maintain its OIBDA Margin flat year-on-year at 45.4%, primarily by reducing low-margin sales of equipment and cutting selling and marketing expenses as well as by reducing general expenses, including initiatives to enhance process performance in a challenging business environment. As a result of active loan portfolio management in Q2 2020 we reduced our total debt by RUB 17.7 billion to RUB 357.4 billion, and financing costs decreased by RUB 1,994 million, or 16.6% y-o-y. These and other measures aimed at improving operational efficiency in Q2 2020 had a positive impact on our net profit, which increased by 35.2% y-o-y to RUB 3,972 million. "

 

Financial results (in millions of RUB, except as indicated)

 

	Three months				Six months
	Q2 2020	Q2 2019	Q2 2020/ Q2 2019		6m 2020	6m 2019	6m 2020/ 6m 2019
Revenue	78,543	85,640	(8.3%)		158,095	165,768	(4.6%)
Service revenue	73,357	78,754	(6.9%)		146,750	151,520	(3.1%)
Wireless Services	66,593	72,055	(7.6%)		133,443	138,380	(3.6%)
Including data revenue	27,539	28,021	(1.7%)		55,154	53,153	3.8%
Wireline Services	6,764	6,699	1.0%		13,307	13,140	1.3%
Sales of equipment & accessories	5,186	6,886	(24.7%)		11,345	14,248	(20.4%)
OIBDA	35,625	38,904	(8.4%)		71,638	74,130	(3.4%)
OIBDA Margin	45.4%	45.4%	0.0 п.п.		45.3%	44.7%	0.6 п.п.
Net profit	3,972	2,937	35.2%		9,144	5,124	78.5%
Operational CAPEX	13,126	16,424	(20.1%)		24,622	24,387	1.0%

 

Financial results, Russia only[3] (in millions of RUB, except as indicated)

 

	Three months				Six months
	Q2 2020	Q2 2019	Q2 2020/ Q2 2019		6m 2020	6m 2019	6m 2020/ 6m 2019
Revenue	77,029	84,294	(8.6%)		155,151	163,149	(4.9%)
Service revenue	71,843	77,409	(7.2%)		143,807	148,903	(3.4%)
Wireless Services	65,092	70,719	(8.0%)		130,523	135,781	(3.9%)
Including data revenue	26,658	27,427	(2.8%)		53,501	51,987	2.9%
Wireline Services	6,751	6,690	0.9%		13,284	13,122	1.2%
Sales of equipment & accessories	5,186	6,885	(24.7%)		11,344	14,246	(20.4%)
OIBDA	34,965	38,092	(8.2%)		70,227	72,628	(3.3%)
OIBDA Margin	45.4%	45.2%	0.2 п.п.		45.3%	44.5%	0.8 п.п.
Net profit	4,046	2,900	39.5%		9,325	5,275	76.8%

 

 

For more information

Media:

pr@megafon.ru       +7 925 696-05-07

 

Investors:

ir@megafon.ru       +7 495 926-20-12

 

Notes to editors

PJSC "MegaFon" is a pan-Russian operator of digital opportunities, operating in all segments of the telecommunications markets in Russia, and in the Republics of Abkhazia, South Ossetia and Tajikistan. It focuses in particular on quality of service and providing Internet at top speeds to its subscribers. MegaFon is a recognised market leader in the provision of mobile data services, was the first operator in Russia to launch commercial operation of a third generation (3G) network, the first operator in the world to launch commercial operation of an LTE Advanced (4G) data network and was the first operator in Russia to complete a 5G international videocall. Additional information about MegaFon and the products and services provided by the Group can be found at http://www.megafon.ru.

Disclaimers, statement regarding inside information and forward looking statements

The above discussion and analysis should be read in conjunction with the Group's consolidated financial statements which are available for download on the Group's website at: http://corp.megafon.com/investors/

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.

 

Schedule 1: Definitions

 

Capital Expenditures (CAPEX) comprises the cost of purchases of new equipment, new construction, acquisition of new or upgrades to software, acquisition of spectrum and other intangible assets, and purchases of other long-term assets, together with related costs incurred prior to the intended use of the applicable assets, all accounted for as of the earliest time of payment or delivery. Long-term assets obtained through business combinations are not included in the calculation of capital expenditures.

Operational CAPEX is CAPEX excluding expenditures on additions of right-of-use assets under leases.

Data service user is defined as a subscriber who has consumed any amount of data traffic within preceding month.

Digital revenue is revenue from digital services, which include various VAS-services, such as MegaFon TV, games, music and other content services, mobile finance, M2M-services, convergent and IT-services, and information and communication technology services such as services rendered under the State Digital Programme, known as 'Safe City' and 'Smart City' solutions.

Group means PJSC "MegaFon" together with its consolidated subsidiaries.

Net profit is profit for the period attributable to equity holders of the Group.

OIBDA (Operating Income Before Depreciation and Amortisation) is a financial measure not defined by IFRS, should be considered as supplementary and not as an alternative to the information provided in the financial statements of the Group. OIBDA Margin means OIBDA as a percentage of revenue. OIBDA and OIBDA Margin are widely used by investors, analysts and rating agencies as a measure to evaluate and compare current and future operating performance and to determine the value of companies within the telecommunications industry. However, the Group's definition of OIBDA and OIBDA Margin may not be directly comparable to similarly named financial measures and disclosures by other companies.

Wireless Subscriber is defined as each SIM card that is activated in our billing system or has had at least one chargeable traffic event (that is, use of voice, VAS or data transfer services) within the preceding three months, whether chargeable to the subscriber or to a third party (for example, interconnection charges payable by other operators). Where an individual person holds more than one SIM card, each SIM card is included as a separate subscriber.

 

[1].  Based on the IFRS interim condensed unaudited consolidated financial statements for 1H 2020 reviewed by JSC KPMG. Due to manual rounding, financial and operating results may differ from those presented here. All changes are shown for the same periods in the current and previous year on a quarterly or annual basis, unless otherwise indicated.

[2]. Operational CAPEX is CAPEX excluding expenditures on right-of-use assets under leases.

[3].  Еxcluding mutual settlements with "TT mobile" CJSC, "AQUAFON-GSM" CJSC and "OSTELEKOM" CJSC.