One week ago today, I typed the fateful words: "As things stand, Mobile TeleSystems (NYSE:MBT) (usually referred to as 'MTS') remains the more profitable of Russia's two biggest mobile providers, but over time, VimpelCom's (NYSE:VIP) efforts to get its existing customers to spend more on 'not-just-talking' are likely to close the gap."
Two days later, the company put its money where my mouth was. In an earnings report released at the ungodly hour of 6:05 a.m. ET, the Russian mobile phone provider announced a stream of numbers that were anything but.
- Sales are up a better-than-expected 52.6%, to $1.36 billion.
- Profits per ADS are up an also-better-than-expected 37.5%, to $1.32.
- The company posted $551.1 million in free cash flow through the first three quarters of 2006, a 262% year-over-year increase from last year's $152 million.
Which is all well and good, and perhaps enough to justify investors bidding VimpelCom's shares up 13% in the days since the news came out -- but it's not what I want to talk about today. Rather, I'd like to discuss an aspect of the Russian market that I raised a few months ago in Russia's New Telecom Math -- its rapid saturation by VimpelCom & Co.
According to CEO Alexander Izosimov: "As the Russian market becomes saturated and subscriber growth slows. retention and loyalty of the entire existing subscriber base" replaces "attracting new subscribers" as the focus of VimpelCom's efforts. This, I suspect, is what Izosimov refers to when stating that one of his key objectives in Russia (as opposed to the other CIS markets, where it is still focusing on attracting new subscribers) is to "focus on the quality of our subscriber base." Although the earnings release wasn't too specific on this point, the "bad" numbers in the release show where quality is lacking and improvements are needed.
Specifically, we see that VimpelCom claims 47,651,000 customers in Russia proper -- but that only 38,790,400 of these are "active" subscribers. The remainder, presumably, are people who own but are not currently using VimpelCom SIM cards, or who own multiple VimpelCom SIM cards but are not using all of them at once. A corollary "quality problem," tied to the issue of individual users owning multiple SIM cards (and being counted as multiple subscribers as a result), is churn (the industry term of art that refers to subscribers leaving a company).
Subscribers who aren't generating revenue aren't terribly useful to VimpelCom. Over time, therefore, we should look to see the battle to attract new subscribers give way to a battle to attract and retain active, paying subscribers, both at VimpelCom and at its rivals.
For further Foolish musings on Russia's telecom titans, read:
- Foolish Forecast: Mobile TeleSystems Rings In
- Investors Ring Up Mobile TeleSystems
- Foolish Forecast: Dialing VimpelCom
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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy never calls during dinner.
