Russian cellular service provider VimpelCom (NYSE:VIP) gave investors good reason to crack open another bottle of vodka today -- its fourth-quarter and year-end results show the same powerful performance that has more than doubled its share price in the past year.
First, let's look at the good news in the big picture:
- Yearly revenue increased 51.6%, to $4.868 billion.
- Net income totaled $811.5 million, a 31.9% increase from 2005.
- Operating cash flow was up 51.8%, to $1.971 billion, yielding free cash flow of $459.2 million for the year.
VimpelCom is doing a bang-up job of scaling growth in the face of major competitor Mobile TeleSystems (NYSE:MBT). The company added 10 million new customers last year, ending with more than 55 million overall. While its size pales in comparison to foreign behemoths China Mobile (NYSE:CHL) and Vodafone (NYSE:VOD), the 21.4% yearly growth is what counts. The new customers were split between Russia and other countries in the Commonwealth of Independent States, such as Kazakhstan (1.8 million additions) and Ukraine (1.6 million additions), where VimpelCom will focus for continued subscriber growth.
The mobile operator has also encouraged subscribers to put down the vodka and make more phone calls, boosting the average minutes of use (MOU) by 16.3% to 118 minutes in 2006. Since 96.5% of VimpelCom's customer base is on prepaid plans, increasing minutes of use directly translates into increased revenues and is reflected in the 6.7% increase in average revenue per user to $8 per month. These numbers show that CEO Alexander Izosimov's plan to increase use of higher-value services is paying off.
The downside of heavy exposure to the prepaid business, however, is high levels of churn, or net turnover of accounts. VimpelCom has been struggling to reverse increasing churn, which it reported at 35.1% for all of 2006, compared to 30.4% for 2005. What feeds this is the nearly 8.4 million "inactive subscribers" -- those with no account activity for at least three months -- in Russia that VimpelCom reported in 2006. This has grown from the less than 7.2 million inactive subs in Russia in 2005. Since these will turn into churned customers when they hit six months of inactivity, VimpelCom needs to make progress in improving the quality of its customer base going forward.
Even with the challenges facing VimpelCom, the carrier is well-poised to profit from the continued maturation of Russian and Eastern European markets. CEO Izosimov has executed well on plans to improve operations so far, leaving the company well equipped to continue its winning ways.
More Foolish musings (in English not Russian) can be found here:
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Fool contributor Dave Mock had a very bad vodka experience once, and has never looked at orange juice the same way since. He owns no shares of companies mentioned here. Vodafone is a Motley Fool Inside Value recommendation. Dave is the author ofThe Qualcomm Equation. The Fool has a disclosure policy.
