After back-to-back disappointing earnings reports early in 2006, Russian mobile phone provider Mobile TeleSystems (NYSE:MBT) turned things around big time last quarter, blowing analyst estimates completely out of the water with a third-quarter report of $1.20 per share -- 35% higher than Wall Street had expected. Can it repeat that feat when it reports fourth-quarter and full-year 2006 earnings on Wednesday?

What analysts say:

  • General consensus. Seventeen analysts follow MTS, with 13 rating it a buy, and four a hold.
  • Revenues. On average, they expect to see quarterly sales rise to $1.7 billion, a 29% rise year over year but 4% less than sequential Q3 results.
  • Earnings. Profits are predicted to rise 49% to $0.91 per American Depositary Receipt (and note that each ADR represents five shares of common stock over in Moscow).

What management says:
The big news was bad news at MTS this quarter. In March, the firm all but admitted defeat in its efforts to regain control over Kyrgyz mobile telecom provider Bitel. Without going into too many gory details, through a complicated scheme of buying, selling, re-buying, and re-selling Bitel shares, certain third parties were apparently able to steal away the entirety of MTS subsidiary Tarino Limited's interest in Bitel, rendering the $150 million that MTS spent to acquire the subsidiary worthless. While continuing the legal battle, MTS has decided to write off the full amount of the investment, and will take a $150 million charge to earnings in consequence.

And it gets worse. In January, MTS was hit with a lawsuit (actually, a request for foreign arbitration) from Tarino Limited's seller. The seller wants to enforce a put option against MTS, requiring MTS to pay a further $170 million to acquire the remainder of its worthless subsidiary.

In other news, in January, MTS confirmed its guidance for fiscal 2006 and released guidance for fiscal 2007. MTS expects to report at a minimum 20% revenue growth for last year, and to grow that by another 15% to 17% in 2007. It expects in 2006, and predicts for 2007, an "operating earnings before depreciation and amortization" (OIBDA) margin of 50%, and capital expenditures of about $1.8 billion.

What management does:
Going into Wednesday's news, things had been looking pretty good at MTS, despite a continuing slide in gross margins as the Russian telecom market begins to mature. Rolling operating margins turned the corner in June and began rising again, followed soon by net margins. Expect Wednesday's charge to earnings to stop the net margin improvement in its tracks.





























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As bitter a pill to stomach as a $150 million write-off may be, in the bigger picture, it will amount to little more than a speed bump on MTS' road to growth (to mix several metaphors). Long-term investors should focus instead on the trend of decelerating subscriber growth, which continues apace and, in my view, poses the more significant threat to MTS' stock price.

As you may recall, we clocked MTS at 48.5% subscriber growth in May, then 31% in October. At last report, subscriber growth had slowed to 22% in February. The same regional trends we identified last round still hold true:

  • Russian growth has slowed to near-first-world rates in the low teens (and in fact, the clock ran backwards in St. Pete and the provinces, with MTS losing subscribers between January and February).
  • Ukraine and Belarus are still growing strongly at near 50% per year.
  • The real growth drivers, hitting triple digits consistently, remain the relative hinterlands of Uzbekistan and Turkmenistan.

For comparison, archrival VimpelCom (NYSE:VIP) is still growing in the low 20s in Russia, outpacing MTS' growth in Ukraine, and just entered the Uzbek and Turkmen markets (which may hurt MTS' own growth rates there). If CIS-centered growth is your thing, then now might be a good time to change horses.

What did we expect out of MTS last quarter, and what did it give us? Find out in:

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Fool contributor Rich Smith has no interest, short or long, in any company named above. The Motley Fool has a disclosure policy.