Racing faster than the market

The subscription base and revenues of the Russian telecom market continue to race ahead. In keeping with this development, NIB is increasing its engagement in this sector of Russia’s economy.

MegaFon’s numbers up
MegaFon’s numbers are skyrocketing. In 2006, the number of the carrier’s subscribers jumped 30%, revenues swelled by 56% and net profits more than doubled. During summer 2007, MegaFon became the fi rst mobile operator with a network covering all of Russia’s 86 regions. Operating throughout the world’s vastest country with 11 time zones sets priorities: the company needs modern telecom equipment supplies for rolling out networks even in the remotest areas of the Federation as far as eastern Siberia or Kamchatka.

“In covering a license area limited only by national borders, MegaFon follows a successful and consistent development strategy tailored for the Russian market,” says Raymond Ho, MegaFon’s Deputy CFO.

Investing in state-of-the-art technological solutions is one of MegaFon’s winning strategy pillars. The operator’s technological platform has been built from scratch. During the last fi ve years, MegaFon’s investments in network development and upgrading exceeded USD 4 billion.

Deliveries from NIB member countries

Finnish-German Nokia Siemens Networks is one of the key suppliers of GSM/GPRS/EDGE equipment to MegaFon, ensuring that the operator delivers advanced mobile solutions to its subscribers. Nokia Siemens’ multi-technology platform may also support MegaFon’s roll-out of the next generation, 3G, network.

“Nokia’s solution now serves MegaFon’s entire multivendor network in Russia and enables the service provider to manage devices from over 40 different manufacturers using a onedevice management solution. This configuration improves the user experience and enhances customer loyalty,” says Jyrki Holmala, Vice President of Networks at Nokia.

“Super brand”

Innovative market promotion with a focus on the end-user is another success factor in the MegaFon way of doing business. Being a strong brand on the Russian market-awarded a national “Super Brand” prize in 2006-helps the operator not only to gain customers but also to maintain the highest monthly average revenue (ARPU) per user in Russia.

“We give our full attention to detail in addressing our customers,” says Mr Ho, referring to the company’s mission statement, which emphasises customer care as the cornerstone of MegaFon’s corporate philosophy. In response to care, the operator’s subscribers actively use value-added services. “A simple explanation for the higher ARPU is the fact that our subscribers talk more, plus we have fewer inactive SIM cards compared to our competitors.”

After years of rapid growth, the overall SIM card penetration rate in Russia has topped 108% of the country’s population-albeit not without some “air” in the subscription base and, in fact, a very uneven distribution among the regions. Market development is also expected to remain strong. Yet industry analysts predict the pace will eventually slow to just above GDP growth levels.

Improving service quality

As growth slows, operators are shifting their focus from pure, unfettered growth to improving service quality, offering innovative products and increasing efficiency. Mr Ho expects business efficiency to be challenged by the fact that earnings per customer on the Russian mobile market remains relatively low compared to Western markets, while capital cost intensity remains relatively high and comparable to Western levels.

“This is why we are now focusing more on increasing customer loyalty and decreasing churn, alongside filling in the coverage gaps as well as centralising functions and internal processes, to capture greater economies of scale and scope,” Mr Ho explains.

Although the company attributes its success partly to staying focused on Russia, MegaFon is currently exploring an opportunity to leverage its expertise and replicate its success in other CIS markets. Besides its core market, the operator runs a subsidiary in Tajikistan, whereas its two competitors’ expansion geography is much broader.

Nordic telecoms in Russia

The smart combination of offering the latest technological solutions, finding a way to the customer’s heart and prudent financial management results in rewarding economic performance and a continuing positive impact on MegaFon’s corporate rating. The major rating agencies, Fitch, Moody’s and Standard&Poor’s, raised the carrier’s corporate credit rating in early 2007. “We fully approve and support MegaFon’s organic growth strategy and meticulous branding policies,” says Per- Olof Sjöstedt, Senior Vice President of TeliaSonera Russia.

Nordic telecoms have historically been the most important foreign players in the Russian telecommunications sector. Mr Sjöstedt explains this dominance by pointing to the highly fragmented and complicated procedure for licensing in Russia.

“Initially, there was no single GSM license covering the whole of the country. Licenses were issued by regions, and licensing rules and cellular technologies varied from one region to another. There has never been a clear-cut opportunity for a foreign investor to make a large-scale entry. We did not give up during the hardships of the 1990s, when we acquired a stake in the St. Petersburg-based telecom North- West GSM, which later became the backbone of today’s MegaFon. No international telecom giant had the guts to take the risks of those times-we did!” he says proudly.

With 44% of MegaFon’s stock, TeliaSonera is now the largest individual shareholder in the Russian operator. The holdings in MegaFon contribute about 10% of Telia Sonera’s consolidated net profits. Mr Sjöstedt does not deny that his company is interested in acquiring a controlling interest in the successful Russia venture. This is the strategy the Nordic company is employing on the Russian and CIS markets, while MegaFon itself is targeting leadership on the market, both in terms of its subscriber base as well as its revenue, within the coming two years.

“MegaFon is still a growth company, as it has not yet exhausted its potential for organic growth. The Russian mobile telecom market’s growth potential has been underestimated. This is why we believe the market leadership target is realistic,” Mr Sjöstedt concludes.

NIB financing an important benchmark

NIB, together with Nordea Bank and Bayern LB, has signed a revolving loan facility agreement with MegaFon totalling 100 million US dollars. By financing MegaFon’s investment programme, NIB supports the development of telecommunications infrastructure in Russia, and helps Nordic Telia Sonera and Nokia Siemens to gain muscle on key foreign markets.

Both Mr Sjöstedt and Mr Ho acknowledge that having NIB on board implies a quality seal for MegaFon.

“Financing from a triple-A international bank is an important benchmark and a further reaffirmation of our quality and credibility. It facilitates our access to high-quality funds and sets standards for more flexible terms and conditions,” says MegaFon’s Deputy CFO.

Mr Ho names quality sources of financing among the most critical factors of success for his company’s business. He acknowledges that the lower interest rates which stem from the high credit ratings of the Nordic countries, combined with MegaFon’s value-for-money strategic product and market positioning, strong track record and modern management, enable MegaFon’s business to race ahead faster than the market.