In Q3 2019 MegaFon increased its revenue by 1.4% y-o-y

14 November 2019

PJSC "MegaFon" ("MegaFon" or the "Company" and, together with its consolidated subsidiaries, the "Group"), a pan-Russian operator of digital opportunities, announces its financial^[1] and operating results for Q3 2019.

Key results for Q3 2019^[2]

- Revenue increased by 1.4% y-o-y^[3] to RUB 90.0 billion

- OIBDA increased by 15.8% y-o-y to RUB 39.0 billion^[4]

- OIBDA Margin was 43.3%^[5]

- Net profit was RUB 3.2 billion^[6]

- CAPEX decreased by 37.2% y-o-y to RUB 11.6 billion

- Net debt decreased since last quarter to RUB 350.3 billion

- The number of mobile subscribers in Russia as of 30 September 2019 increased by 0.1% y-o-y to 75.3 million

- The number of data service users in Russia as of 30 September 2019 increased by 6.2% y-o-y to 34.2 million
 

In Q3 2019 MegaFon unveiled a number of new products for its clients. These included providing its clients with a single point of access for wireless services, home internet and MegaFon TV via its convergeant product called "Obyedinyai! (Unite!)", as well as implementing a flexible system for increasing cashbacks on its "Vklyuchaisya!" ("Connect!") tariffs.

The transformation of MegaFon's retail network through the introduction of "new generation" stores, focused on the provision of top quality client service and a unique customer experience, is proceeding well and showing promising initial results. The daily average number of clients visiting the upgraded stores in Q3 2019 is up 20%, and the daily average revenue for such stores in Q3 2019 is up between 30% and 40%, in each case as compared with the corresponding figures prior to the stores' transformation.

Total revenue from sales of equipment and accessories is up 36.5% y-o-y. The suppliers which are the most popular with Russian consumers are Huawei/Honor, Samsung, Xiaomi, and Apple. Demand for new Apple models at the end of the quarter was three times higher than the year before^[7], and the order backlog for the new models before their launch date in September 2019 was up 20% y-o-y compared to the order backlog in September 2018 for the prior year's new models.

MegaFon continues working on reducing its leverage and using part of its profits to pay down the debt. (As a reminder, the Company's leverage increased as a result of a series of buy-backs of its shares and GDRs during 2018 and the first half of 2019.) As a result, the Company's net debt had decreased to RUB 350.3 billion by the end of the reporting period. This enabled MegaFon to reduce the Net debt/LTM OIBDA ratio from 2.88x at the end of Q2 2019 to 2.80x at the end of Q3 2019.

MegaFon continues the roll-out of LTE and LTE Advanced networks. At the same time CAPEX in the quarter was lower than the year before because of the completion of major projects for the upgrade of the billing platform and financial software on which the Company had been working in 2018.

Gevork Vermishyan, the Group's Chief Executive Officer, commented on the quarter results as follows:

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

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

Financial results, Russia only^[9]
(In millions of RUB, except as indicated)

Revenue
Total revenue in Q3 2019 increased by 1.4% y-o-y to RUB 89,991 million. Revenue from Russia remained the major component, accounting for over 98.3% of total revenue.

In Q3 2019 MegaFon's wireless service revenue decreased by 1.5% y-o-y to RUB 71,236 million, while data revenue increased by 4.3% y-o-y to RUB 27,242 million. The decrease in wireless revenue is largely a result of the one-off increase in the consumption of wireless services during the FIFA World Cup 2018, which included the provision of services related to the World Cup infrastructure, as well as voice, SMS and data transfer services, and MegaFon TV and other VAS-services. In addition to that, the summer holiday season revealed the negative impact on the Company's financial statements of the scrapping of domestic roaming fees in Russia which took place at the end of 2018.

The continuing growth in data revenue has been sustained by MegaFon's ongoing upgrading of its "Vklyuchaisya!" ("Connect!") tariff line with new technological offers and partner services aimed at stimulating data consumption.

In Q3 2019 wireline service revenue decreased by 7.7% y-o-y to RUB 7,670 million. The main reason for the y-o-y decrease was that Q3 2018 included significant one-off revenue from the provision of telecom infrastructure for the FIFA World Cup.

Revenue from sales of equipment and accessories in Q3 2019 increased by 36.5% y-o-y to RUB 11,085 million, as a result of an increase in sales of smartphones, including those in the high-end price range, such as Samsung and the new model of Apple smartphone launched in September, as well as marketing initiatives aimed at promoting purchases of Honor and Huawei smartphones. Also, the increase in revenue was helped by MegaFon's opening of "new-generation" retail outlets focused on the provision of top quality client service and a unique customer experience.

OIBDA and OIBDA Margin
OIBDA in Q3 2019 including the impact of the adoption of IFRS 16 increased by 15.8% y-o-y to RUB 38,970 million. Organic OIBDA in Q3 2019 remained stable y-o-y at RUB 33,670 million. Last year OIBDA included the one-off positive impact of the FIFA World Cup. Accordingly, matching the Q3 2018 OIBDA level in Q3 2019 is a good result for MegaFon and was achieved principally by the reduction of certain expenses, e.g. frequency charges and selling costs.

In Q3 2019 OIBDA Margin increased by 5.4 p.p. y-o-y to 43.3%. Virtually all of this increase resulted from the adoption of IFRS 16. MegaFon's organic OIBDA Margin decreased slightly by 0.5 p.p. y-o-y to 37.4%. The main reason for the decrease in the organic OIBDA Margin was the increase in low-margin sales of equipment and accessories.

Net profit
Net profit in Q3 2019 including the impact of IFRS 16 was RUB 3,202 million. Eliminating the negative impact of IFRS 16 in the amount of RUB 771 million, organic Net profit was RUB 3,973 million. The increase in finance costs^[11] resulting from the additional loans raised to finance the Tender Offer for shares and GDRs completed in September 2018, the Mandatory Offer completed in Q1 2019 and the buy-back of shares from the remaining non-affiliated shareholders completed in Q2 2019 had a significant impact on Net profit. Net profit also was negatively affected by the amortisation of the investment in the billing platform which was upgraded during the last year and the beginning of the current year.

CAPEX
CAPEX in Q3 2019 of RUB 11,607 million was a decrease of 37.2% y-o-y, mainly because significant expenditures were made last year on the billing platform upgrade and network extension and improvement. The major investment projects in Q3 2019 remained the continued roll-out of LTE and LTE Advanced and other networks: approximately 3,000 new base stations have been put into operation in Q3 2019, of which approximately 2,200 are LTE / LTE Advanced base stations.

Free Cash Flow to Shareholders^[12]
Free cash flow to shareholders in Q3 2019 decreased by RUB 4,157 million y-o-y to RUB 10,069 million. The decrease is mainly due to the increase in finance costs resulting from the additional debt financing which was required to carry out the share and GDR buy-backs.

Net debt
Net debt decreased from RUB 360,601 million as of 30 June 2019 to RUB 350,290 million as of 30 September 2019. MegaFon's Net debt/LTM OIBDA ratio was 2.49x and its Net debt/LTM OIBDA ratio without the impact of IFRS 16 was 2.80x.

EPS
Basic and diluted EPS decreased from RUB 14 per share for Q3 2018 to RUB 7 per share for Q3 2019 as a result of the decrease in Net profit.

New accounting standards
Effective from 1 January 2019 MegaFon adopted the new accounting standard IFRS 16 'Leases'. The standard requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases (with limited exceptions). As a result of this MegaFon's operating expenses for Q3 2019 decreased by RUB 5,300 million, while its finance costs and depreciation increased - all of which decreased the Company's Net profit by RUB 771 million in Q3 2019, net of tax.

On transitioning to IFRS 16 MegaFon recognised a right-of-use asset and a lease liability in respect of its operating leases - both in the amount of RUB 88,679 million as at 1 January 2019.

The Company continues to fine tune its information systems to streamline the accounting for leases under IFRS 16. The effects of the transition to IFRS 16 are unaudited and certain management estimates and calculations may be subject to change up till the date of the issuance of the Company's 2019 annual financial statements.

Wireless subscribers in Russia as of

The Russian wireless subscriber base increased by 0.1% y-o-y to 75.3 million users as of 30 September 2019.

The data service user base in Russia increased by 6.2% y-o-y to 34.2 million at 30 September 2019 as a result of MegaFon's continued marketing initiatives and the development of the "Vklyuchaisya!" ("Connect!") tariff line and other products to attract data consuming subscribers. The share of data service users continued to grow and reached 45.4% of the overall subscriber base in Russia.

Data operating indicators in Russia

ARPDU decreased in Q3 2019 by 1.9% y-o-y to RUB 260 as a result of a number of promotional initiatives which were undertaken during the period such as increasing the amount of data services available under the "Vklyuchaisya!" ("Connect!") line of products.

While these initiatives decreased ARPDU, at the same time DSU increased in Q3 2019 by 2.9 gigabytes, or 31.7% y-o-y, to 11.9 gigabytes.

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. 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

ARPDU (Average Monthly Revenue Per Data Services User) is calculated for a given period by dividing the Group's data services revenues for a given period by the average number of its data services users during that period, and further dividing the result by the number of months in that period.

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.

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

Diluted EPS is calculated by adjusting both numerator and denominator in the EPS calculation so as to reflect the effect of including the additional shares that would have been outstanding if all options and other rights to acquire shares had been converted into actual shares.

DSU (Monthly Average Data Services Usage per User) is calculated by dividing the total number of megabytes transferred by our network during a given period by the average number of data services users during such period and dividing the result by the number of months in such period.

EPS (Earnings per Share) means an amount of the Group's profit allocated to one share of its stock, and is calculated by dividing Net profit for a reporting period by the weighted average number of shares outstanding during the period. No earnings are allocated to treasury shares.

Free Cash Flow to Shareholders means cash from operating activities, less cash paid for purchases of property, equipment and intangible assets and interest paid, increased by proceeds from sales of property and equipment and interest received. It is a financial measure which should be considered as supplementary but not as an alternative to the information provided in the Group's financial statements.

Group means PJSC "MegaFon" together with its consolidated subsidiaries. Previously, the Group had consolidated the financial position and the results of operations of its subsidiary, Mail.Ru Group Limited ("Mail.Ru"), from the beginning of 2017. As of June 2018, the Group concluded that it no longer had the ability to direct relevant activities of Mail.Ru, and therefore no longer had control over that company. Accordingly, the Group ceased to consolidate the financial position and the results of operations of Mail.Ru, with effect from the end of Q2 2018.

Net debt means the difference between (a) cash, cash equivalents, and principal amount of deposits and (b) principal amount of loans and borrowings less unamortised debt issuance fees. It is a financial measure which should be considered as supplementary but not as an alternative to the information provided in the Group's financial statements.

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

Organic Net profit is Net profit, and organic Net profit Margin is Net profit Margin, in each case excluding the impact of IFRS 16 adoption. MegaFon adopted this new IFRS standard, effective 1 January 2019. For convenience of use, throughout the financial year 2019, MegaFon will be presenting its financial results "as reported", i.e. including the impact of IFRS 16, and "organically", i.e. excluding the impact of the adoption of IFRS 16.

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.

Organic OIBDA is OIBDA, and organic OIBDA Margin is OIBDA Margin, in each case excluding the impact of IFRS 16 adoption.

LTM OIBDA means last twelve months OIBDA.

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 interim unaudited condensed consolidated financial statements for 9 months 2019 reviewed by JSC KPMG.

^[2] . See Schedule 1 for definitions of the terms used. Due to rounding actual numbers and calculations for financials and KPIs may differ from those set forth in this release.

^[3] . Year over year ("y-o-y") stands for the same periods in the current and previous year on a quarterly basis.

^[4] . OIBDA is shown including the positive impact of IFRS 16. Organic OIBDA remained stable y-o-y at RUB 33.7 billion.

^[5] . OIBDA Margin is shown including the positive impact of IFRS 16. Organic OIBDA Margin was 37.4%.

^[6] . Net profit is shown including the impact of IFRS 16. Organic Net profit was RUB 4.0 billion.

^[7] . The volume of sales of new Apple models in the 20 days following their launch in September 2019 was compared to the volume of sales in the 20 days following the launch of last year's models in September 2018.

^[8] . The amounts are presented as reported results from continuing operations grossed up for the intragroup amounts between the Group and Mail.Ru Group.

^[9] . Еxcluding mutual settlements with "TT mobile" CJSC, "AQUAFON-GSM" CJSC and "OSTELEKOM" CJSC.

^[10] . The amounts are presented as reported results from continuing operations grossed up for the intragroup amounts between the Group and Mail.Ru Group.

^[11] . This is shown without taking into account the effect of the IFRS 16 implementation.

^[12] . This is shown without taking into account the effect of the IFRS 16 implementation.