VIMPEL COMMUNICATIONS Moscow, Russia Russian Telecom Sets Sights On Being Top Dogski.
24 Jan 2002
Now it wants to be a front-runner of a different sort: the top wireless service provider in Russia.
Right now, the Moscow-based firm is No. 2. To take the lead, VimpelCom - the first Russian firm to list on the New York Stock Exchange - must venture beyond its home city into less populated areas.
"Moscow is still the cash cow for the company (because) it's not yet saturated," said analyst Will Draper of Lehman Bros. "But three years from now, other regions will provide the most growth." The wireless penetration rate in Moscow is 26%. More than 10 million metropolitan area residents are without cell phones.
The national penetration rate is a mere 4%, though, with some 140 million Russians lacking cell phones.
The Moscow market will reach saturation when it hits 50% penetration. Draper figures that won't happen until 2005. When it does, regions outside Russia's capital should pick up the slack.
Even fixed-line service is lacking in Russia. The country's teledensity rate, which measures main lines per 100 inhabitants, is 22%. By comparison, the U.S. stands at 70%, the U.K. at 58% and Spain at 42%.
VimpelCom has licenses covering 70% of Russia's population. Its "Bee Line" brand has attracted 2.1 million subscribers - short of rival Mobile TeleSystems' 2.9 million subscribers, but it's gaining ground.
In the first nine months of 2001, VimpelCom's subscriber base grew 117% from a year earlier. Its market share in Moscow reached 40%.
"VimpelCom is now challenging (Mobile TeleSystems) as a peer, rather than junior," Draper said. "There's evidence that in the last couple of months, it is actually winning the fight for new subscribers." But it's tough to get new and profitable customers in Moscow, warns Russian analyst Konstantin Chernyshev of Nikoil Investment Co.
VimpelCom's average revenue per user, or ARPU, fell 24% in the third quarter and 34% in the first six months of 2001.
"Subscribers spending $5 or $10 a month are not so interesting to these operators, which is why (VimpelCom) is switching to other regions," Chernyshev said. "There are many industrialized and potentially well-developed regions with high growth potential - the Urals, Volga and Siberia." Still, neither he nor Draper sounds too concerned with the ARPU data.
"It's one of the consequences of rapid customer base growth," Chernyshev said. "New customers become less profitable. It's a typical situation the world over. VimpelCom's first stage of development was to line up wealthy people. It has since had to shift to a wider category of customer." Draper expects to see ARPU bottom out and start moving up again, though it might not happen this year.
"We've seen it in other markets, so why not Russia?" he said. Meanwhile, VimpelCom and other Russian firms always face the risk that the Russian economy will collapse. That happened in 1998. Telecoms, including VimpelCom, really took a hit.
But Vladimir Tikhomirov, Nikoil's chief economist in Russia, downplays the threat.
The Russian economy has become much more stable, he says, with significant reserves for debt payments this year and next. Reserves are more than triple what they were before the collapse.
In 1999, Russia's gross domestic product growth was 5.4%. That rose to 8.3% in 2000 but fell back to 5.2% last year.
The country got a boost from a favorable exchange rate and rise in world commodity prices, which paved the way for strong profit increases within the commodity sector of the economy. Those increases were reinvested into expanding the industrial base.
The current environment is a bit tougher, however. Commodity prices are off, industrial output is slowing and a rebound in the world economy is taking longer than expected.
"Russia is not on the brink of collapse, but there are significant problems the government has to look at to kick-start the economy once again," Tikhomirov said.
VimpelCom doesn't need a kick-start. In last year's third quarter, its earnings hit 32 cents a share vs. a 14-cent loss the prior year. Revenue rose 61% to $114.1 million.
Analysts polled by First Call see 2001 earnings coming in at 78 cents a share. Earnings this year are expected to reach $1.24.
To grow, VimpelCom will need to get funding to build networks outside Moscow. It already has the backing of the Alfa Group, a Russian consortium that bought a 25% stake in the company in November.
Telenor ASA of Norway also holds a 25% stake, and VimpelCom is discussing a loan from a European bank.
One thing missing from its expansion program is St. Petersburg, the second largest market for mobile services in Russia.
VimpelCom doesn't have a license to operate in the region. Rival Mobile TeleSystems does, and boasts 60,000 subscribers there so far.
(c) 2002 Investor's Business Daily.
Source: INVESTOR'S BUSINESS DAILY 24/01/2002 P10
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