MegaFon finished 2015 with stable financial results in line with its full-year guidance despite the declining trends in the economy and increased competition in the market
This review is based on MegaFon’s audited consolidated IFRS financial results for the 12 months ended on 31 December 2015. We have included financial results from our majority-owned operating subsidiaries in Tajikistan, Abkhazia and South Ossetia in our consolidated figures.
The Company’s strict financial discipline and smart financial planning helped us achieve revenue targets in line with our projections, maintain high OIBDA margin and increase our net profit notwithstanding the high volatility in the rouble exchange rates.
Growing market competition made us take a more careful approach to monitoring the market trends and to sustain a compelling value proposition for our services and tariffs, our mobile equipment inventory and the price mix offered to customers in our controlled retail network. Our marketing initiatives helped us maintain our leadership position in the mobile market and generate steady cash flows while ensuring affordable and high-quality services for our customers.
In 2015, MegaFon paid out record-high dividends of RUB 50 bn and made several strategic acquisitions while maintaining a comfortable level of leverage.
|CONSOLIDATED KEY FINANCIAL INDICATORS|
|Revenue, RUB bn||313.4||314.8||-0.4%|
|OIBDA, RUB bn||132.4||138.5||-4.4%|
|OIBDA margin, %||42.2%||44.0%||-1.8 p.p.|
|Net profit, RUB bn||39.0||36.7||+6.3%|
|Net profit margin, %||12.5%||11.7%||+0.8 p.p.|
|CAPEX, RUB bn||70.2||56.5||+24.2%|
|Free cash flow, RUB bn||53.8||70.7||-23.9%|
|Net debt, RUB bn||180.8||136.2||+32.8%|
|Net debt/LTM OIBDA, times||1.37х||0.98x||+0.39x|
1 Based on the consolidated IFRS financial statements audited by JSC KPMG.
In 2015, the Company’s consolidated revenue declined marginally by 0.4% year-on-year to RUB 313.4 bn. Russian revenue remained the major component, accounting for over 98.4% of the Company’s total consolidated revenue. Our total consolidated revenue for Russia decreased by 0.8% year-on-year to RUB 308.4 bn. At 2015 year-end, MegaFon was the second largest among the “Big Three” operators in terms of consolidated revenue in Russia, with a 31.5% share.
Consolidated OIBDA decreased by 4.4% year-on-year to RUB 132.4 bn. Our OIBDA margin was down 1.8 p.p. year-on-year to 42.2%, in line with our full-year guidance. The decline in OIBDA was mainly due to higher advertising expenses related to the Company’s new positioning campaign, an increase in social charges, and higher rent and utilities expenses resulting from our network expansion and inflation pressures.
In 2015, the Company’s consolidated net profit increased by 6.3% year-on-year to RUB 39.0 bn. The key net profit drivers in the reporting year included lower foreign exchange losses, as well as gains in derivative financial instruments resulting from our efficient foreign exchange management.
As at 31 December 2015, our net debt was RUB 180.8 bn, an increase of RUB 44.7 bn year-on-year. The increase in net debt was mainly due to the payment of dividends in late December, acquisition of an interest in CJSC “Sadovoe Koltso” (the “Garden Ring), and repayment in October 2015 of the remaining deferred consideration for the Scartel acquisition. Nonetheless, MegaFon maintained a comfortable Net Debt/OIBDA ratio of 1.37х as at 31 December 2015.
Our free cash flow declined by 20.3% year-on-year to RUB 53.8 bn mainly due to lower operational cash flow and increased capital expenditures which we made for further infrastructure development to ensure our network’s continued premium quality.
Consolidated mobile revenue for the year was RUB 270.0 bn, compared to RUB 269.5 bn in 2014, or a 0.2% increase, on the back of overall subscriber base expansion of 6.4% year-on-year to 76.8 m subscribers and solid growth in mobile data revenue.
In 2015, mobile data revenue increased by 19.0% year-on-year to RUB 79.9 bn. Key growth drivers were: 1) mobile data user base growth by 6.8% to 29.9 m users as a result of our active marketing efforts, as well as growing penetration of data-enabled devices (the share of data-enabled devices registered on the MegaFon network reached almost 53%); and 2) higher mobile data usage (in 2015, our DSU in Russia grew 25.7% year-on-year) backed by the expansion of our 4G footprint and new and revised tariffs and tariff options, as well as marketing campaigns to stimulate sales of data-enabled devices. The share of mobile data revenue in the total consolidated revenue increased from 21.3% in 2014 to 25.5% at the end of 2015.
MegaFon's share in terms of mobile data revenue among "Big 3" operators in Russia
As at the end of the reporting year, the Company had the largest network of base stations among all Russian telecom operators – over 113,000 base stations, an increase of 9.9% year-on-year. The number of 4G base stations also grew – by 24% year-on-year. At the end of 2015, MegaFon’s 4G services were available in 77 regions of the Russian Federation.
In 2015, MegaFon remained Russia’s top mobile operator among the “Big Three” in terms of mobile data revenue in Russia with a 39.2% share.
The growth in mobile data revenue, along with higher VAS revenue (up +4.5% year-on-year) resulting from high customer demand for our traditional VAS services and new content and mobile-commerce services, fully compensated for the slowdown in revenues from traditional voice services, which has become a general trend in the market.
In 2015, revenue from wireline services was up 5.6% year-on-year to RUB 23.4 bn. This growth was driven by: 1) the expansion of our B2B and B2G client base; 2) the acquisition of GARS Telecom providing a full range of fixed-line services to tenants of business centres in Moscow and St Petersburg; and 3) further development of DREAM (Diverse Route for European and Asian Markets), our high-speed data transit project.
In 2015, revenue from sales of equipment and accessories decreased by 14.0% year-on-year from RUB 23.1 bn to RUB 19.9 bn, mainly due to the general market trend for customers to switch to more affordable data-enabled devices, including 3G and 4G smartphones exclusively introduced in the Russian market by MegaFon, in the context of a difficult macroeconomic environment and rouble depreciation.
Lower revenue from sales of equipment and accessories in 2015 is also attributable to a one-off increase in the sales volume of more expensive devices in Q4 2014 driven by the macroeconomic pressure and rapid depreciation of the rouble in that period.
In 2015, MegaFon’s capital expenditures increased by 24.2% compared to 2014, totalling RUB 70.2 bn. We continued strengthening our position in 4G/LTE network rollout and modernising our current network.
Our total capital expenditures include the cost of acquiring 900/1,800 MHz spectrum in the Volga and Central economic regions through the acquisition of companies from SMARTS Group for RUB 6.1 bn. When the cost of the SMARTS acquisition is backed out, the Company met its full year 2015 guidance on capital expenditures.
Our OIBDA-CAPEX indicator decreased by 24.2% year-on-year in 2015 to RUB 62.2 bn due to higher capital spending throughout the year and lower OIBDA.
Our free cash flow declined by 23.9% from RUB 70.7 bn in 2014 to RUB 53.8 bn in the reporting year as a result of lower cash flow from operational activities and increased capital expenditures.
1 JSC SMARTS-Samara, CJSC Astrakhan GSM, CJSC Yaroslavl GSM, and CJSC SMARTS Cheboksary.
At the end of 2015, MegaFon had sufficient liquidity and a comfortable leverage position of 1.37x Net Debt/LTM OIBDA, despite the payment of RUB 50 bn in dividends, acquisition of additional spectrum through the purchase of a 100% interest in four companies from the SMARTS Group, acquisition of a 100% interest in GARS Telecom, and the acquisition of a 49.999% interest in Glanbury Investments Ltd, the owner of a class A office building at Oruzheyny Pereulok in Moscow, to be used by MegaFon as its new corporate headquarters to consolidate all MegaFon’s Moscow business units in one location.
With the aim of mitigating foreign exchange volatility risks we kept a substantial part of our liquidity in foreign currency – over 80% of our cash was held in "hard" currencies.
Despite a volatile macroeconomic environment, we continued to enjoy access to funding and support from our major financing counterparties, while monitoring all developments and taking necessary steps to mitigate any negative impacts. The Company has access to untapped credit facilities sufficient to meet current liabilities and back-up CAPEX.
We optimised our debt portfolio so that, by the end of 2015, over 55% of the Company’s debt becomes due after three years, and 61% of the debt portfolio is denominated in roubles.
Initiatives taken during the year to optimise our debt portfolio and secure financing for further enhancement of our network were as follows:
As a result, by the end of 2015, most of the Company’s liquidity was held in US dollars, while the debt portfolio was mostly denominated in roubles, in line with MegaFon’s financial strategy. Given the unstable macroeconomic environment, this approach helps us partially mitigate the risk of the rouble depreciation.
The debt repayment profile was also optimised in 2015 to reduce the share of short-term borrowings from 24% to 21%.
1 Liquidity is calculated as a sum of cash and cash
equivalents and short-term deposits.
2 c.0.25% in EUR for operating purposes.
3 On nominal basis.
4 Including structured and plain vanilla FX swaps.