Annual Report 2015
Russian
corp.megafon.ru

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Our Strategy of Sustainable Growth

Meeting the needs of digital subscribers

Starting from 2012, MegaFon has successfully pursued a strategy of sustainable growth. Within this strategy the following results have been achieved so far:

  • MegaFon's share of the mobile communications market increased;
  • Improved business efficiencies delivered;
  • Deployment of state-of-the-art infrastructure and roll-out of 4G network, with capital expenses reduced noticeably;
  • New investment management process introduced: investment portfolio built up, diversified across a number of projects, each of which has a project manager; Investment Committee set up to evaluate the strategic value and financial attractiveness of proposed projects, and optimise budgets of certain investment initiatives.
  • Organisational structure changed to strengthen the Company's positions across the segments in the B2C, B2B, B2G and B2O markets, and appropriate management models put in place.

The effective implementation of this strategy enabled us to build up free cash flow and increase the amount of paid dividends between 2012 and 2015.

The deterioration of the macroeconomic environment in 2014-2015, due mostly to external political factors, led to the Russian rouble depreciation and reduced personal incomes. The telecoms services consumption profile is changing: subscribers use international roaming services less actively and increasingly opt for services that help them cut communications costs. At the same time, the ongoing evolution of subscribers into digital customers has become a prominent trend: demand for mobile data is growing rapidly, OTT services are gaining popularity, smartphone penetration increases along with the volume of content consumption via mobile devices.

Given the new economic situation and changes in customer preferences, MegaFon took a decision to review its strategy.

The Company's new strategy is designed to drive revenue by taking advantage of the digital customer trend, enabling data monetisation and new product offerings for subscribers. The key drivers of the new strategy include our strong presence in mobile retail (through owned-and-operated stores, franchised points of sale and Euroset retails network), infrastructure and IT.

Meeting the needs of digital subscribers;
Developing cooperation with internet companies and OTT services;
Development of branded innovative products and services complementary to the Company’s core business, specifically, MegaFon-TV and other content services, mobile finance, M2M services, mobile advertising and cloud solutions;
Timely network expansion and upgrades, optimisation of the technology mix to maintain spectrum advantage;
Leveraging new opportunities to drive operational performance in a crisis environment.
  Strategic priorities KPIs Actions for 2015 Progress in 2015
Continue growing faster than the market in core business areas Best product offering
  • Maintain leadership in mobile data  
  • Maintain revenue growth from value-added services
  • Revenue
  • Mobile data revenue (Russia)
  • Mobile data service user base
  • VAS revenue
  • Retain the revenue at the same level as in 2014
  • Launch 4G in new cities
  • Continue developing bundles
  • Revenue: RUB 313.4 billion (virtually the same y-o-y, down 0.4%)
  • Mobile data revenue: RUB 79.9 billion (up 19.0%)
  • Mobile data service user base: 29.9 million subscribers (up 6.8%)
  • VAS revenue: up 4.5%  
Best distribution
  • Continue the “smart development” of the retail network with focus on active subscriber base growth
  • Share of new subscribers acquired through the controlled distribution network1
  • Number of data-enabled devices sold in the Company’s controlled retail network
  • Develop strong data-enabled device portfolio
  • Continue renovation of owned-and-operated and franchised points of sale  
  • 8,070 stores within the retail network (flat y-o-y)
  • 71.5% of all new subscribers acquired through controlled distribution network (roughly flat y-o-y: 0.28 p.p.)
  • 4.3 million smartphones and tablets sold in 2015 (up 11.2%)2, with 4G smartphones and tablets sales up 110.6%  
Best customer experience
  • Retain customers through excellence of end-to-end customer experience
  • Active subscriber base  
  • Deliver excellence initiatives to improve customer experience
  • Monitor customer satisfaction index (“CSI”) and link it to the technical network KPIs
  • 76.8 million active subscribers (up 6.4%)  
Leverage secondary core businesses   Corporate business
  • Leverage potential in B2B, B2G and B2O business segments, increasing their “weight” within the Company
    •  
  • Share of B2B, B2G and B2O revenue
  • Implement the updated corporate strategy as a basis for consistent business development through all corporate segments  
  • 16.4% (up 1.3 p.p.)
  • Involvement in major government-sponsored projects and the government’s digital agenda: development of digital textbooks in cooperation with Prosveshcheniye Publishing House, etc.
  • Launches of new products: Big Data, video conferencing, M2M monitoring, electronic document management, etc.  
Fixed business
  • Leverage and realise synergies between fixed line, fixed broadband and mobile businesses  
  • Fixed business revenue
  • Launch Fixed-to-Mobile (FMC) products and services  
  • Increase delivered synergies between the fixed line, fixed broadband and mobile businesses
  • RUB 23.4 billion (up 5.6%)
  • Launch of WireFire, a double-play FMC service (OTT TV and broadband), for the B2C segment
  • Develop an offering for the corporate segment based on transformational solutions for traditional telephony designed to optimise business processes, reduce costs, and ensure seamless experience for customers: digital signature, virtual PBX, scoring and geolocation services, confidential communication solutions, redundancy, and smart services  
New businesses
  • Leverage opportunities in new businesses through development and delivery of innovative products synergetic to the core business
  • Ensure on-time delivery of new products  
  • Focus on high-priority new business streams (OTT TV, mobile finance and M2M services)
  • Continue developing innovative products and services through MegaLabs, the Company’s R&D unit  
  • Launch of the updated version of the MegaFon TV content service and its inclusion in bundled tariff offerings (50 TV channels and up to 6 HD movies free of charge)  
Deliver best-in-class efficiency in the management of the business Best performance
  • Identify and deliver continuous operational improvements
  • OIBDA margin
  • Implementation of operational excellence initiatives  
  • Maintain OIBDA margin not less than 41.5%  
  • 42.2% (0.7 p.p. above the Company’s outlook for 2015)
  • Launch of Unified Billing
  • Launch of a project to set up a shared services centre, a multifunctional service centre, to co-locate the following functions: accounting and reporting, treasury and financial control, procurement and logistics, HR management, B2O operations support, and receivables administration
Best network
  • Continue to actively develop network and service quality, combined with high efficiency
    •  
  • CAPEX/Revenue, %
  • Coverage (% of Russian population)  
  • Develop 3G/LTE/LTE-A networks
  • Improve service quality
  • Deliver expected capital expenditures in the range of RUB 165–180 billion for 2013–2015, as previously announced by the Company during the IPO  
  • 22.4% (up 4.5 p.p.)3
  • The Company’s CAPEX in 2013–2015 totalled RUB 173.8 billion, in line with the guidance announced by the Company during the IPO at the end of 2012
  • Launch of 4G in 77 regions accounting for 59.2% of the population4 (up 8.2 p.p.)  
Best management system
  • Develop management system focused on value creation
  • Implementation of developed management system
  • Employee motivation  
  • Develop an HR strategy  
  • As part of efforts to develop the Company’s HR strategy, the Talent Pool programme was designed and launched to develop employees’ managerial skills to ensure that the Company’s needs for managers are met promptly and efficiently
  • The Company’s values were approved and cascaded across the Company down to the regional office level.  

1  Includes the Company's sales force and own sales network MegaFon Retail, third-party points of sale operating under the MegaFon brand and Euroset stores
2  Includes MegaFon-branded equipment (smartphones and tablets only) sold in 2015 in the controlled retail network and third-party equipment sold in MegaFon Retail
3  Including the cost of acquisition of additional spectrum through the purchase of a 100% interest in four companies from SMARTS Group in August 2015. Net of this acquisition, the CAPEX/Sales ratio was 20.4%, up 2.5 p.p.
4  Russian population as of the latest census in October 2010.

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