Mobile TeleSystems Boggles the Mind

When Russian mobile phone provider VimpelCom (NYSE:VIP) reported Q3 earnings that blew away Wall Street's best estimates, and the stock climbed 13% in response, you might have thought that was the best news Russia produced last week. You might have thought this, that is, unless you had seen the results put out by VimpelCom archrival Mobile TeleSystems (NYSE:MBT) the day before.

Here were the highlights:

• Revenues of $1.8 billion, or 8% higher than expected.
  
  
• Net income of $486 million.
  
  
• Profits per ADR of $1.20, or 41% higher than expected. (To get the per-ADR figure, multiply reported profits per share by the fact that each ADR wraps up five shares of common stock.)
  
  
• Significant free cash flow, year to date.

As for how significant, that seems to be up for debate. According to the cash flow statement that MTS included in its earnings release, the firm generated $1.65 billion in operating cash flow and spent $1.01 billion on "property, plant and equipment" (commonly referred to as "capital expenditures" or "capex") -- yielding a free cash flow figure that I put at $640 million. MTS takes a more conservative tack in its own calculations, however. Starting with the same operating cash flow figure, it subtracts not only capex but purchases of intangible assets, and of subsidiaries, to arrive at a lesser free cash flow figure of $407 million. Far be it from me to criticize conservative accounting, though.

Milestone 101
But how about a little criticism of MTS' less conservative accounting, hmm? As described some months ago in Russia's New Telecom Math, the subscriber numbers put out by VimpelCom and MTS leave much to be desired in the way of reliability, in that they appear to be:

• "Counting a single person who owns both a work phone and a personal phone as two cell phone users.
• "Counting a single person who owns two SIM cards as two separate customers.
• "Counting someone who switched from VimpelCom to MTS as a customer of each.
• "Not striking inactive customers from the customer rolls."

This kind of accounting has in the past created the potential for Russian telecom providers to eventually report greater than 100% market penetration by their services. In last week's report, that potential became actual. As of Sept. 30, 2006, MTS reported (with a straight face, I might add), that "growth in Russia . continued with mobile penetration increasing from 97% to 101% . during the third quarter of 2006."

Welcome to the land of the absurd, telecom investors. Welcome to Russia.

For related Foolishness, ring up:

• Investors Ring Up Mobile TeleSystems
• Can Mobile TeleSystems Connect With Investors?
• Foolish Forecast: Mobile TeleSystems Rings In

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Fool contributor Rich Smith has no interest, short or long, in any company named above. The Fool's disclosure policy represents 101% of the truth.