EQS-News: PJSC MegaFon: In Q2 2019 MegaFon reported strong increase in revenue 4.5% and in OIBDA 20.6%

In Q2 2019 MegaFon reported strong increase in revenue 4.5% and in OIBDA 20.6%

Moscow, Russia (8 August 2019) - PJSC "MegaFon" ("MegaFon" or the "Company" and, together with its consolidated subsidiaries, the "Group"), a pan-Russian operator of digital opportunities, announces its financial^[1] and operating results for Q2 2019.

Key results for Q2 2019

In Q2 2019 MegaFon demonstrated steady growth in its key performance indicators^[2] while maintaining its loyal subscriber base. The operating results show that MegaFon is pursuing the right strategy towards its digital transformation goal:

• Revenue increased by 4.5% y-o-y^[3] to RUB 85.6 billion
• OIBDA including the impact of IFRS 16 increased by 20.6% y-o-y to RUB 38.9 billion, at the same time MegaFon demonstrated steady growth in organic OIBDA of 4.7% y-o-y to RUB 33.8 billion
• OIBDA Margin including the impact of IFRS 16 was 45.4% and organic OIBDA Margin was 39.4%
• Net profit including the impact of IFRS 16 was RUB 2.9 billion and organic Net profit was RUB 3.8 billion
• CAPEX increased by 1.2% y-o-y to RUB 16.4 billion
• Free Cash Flow to Shareholders^[4] decreased by 22.7% y-o-y to RUB 6.1 billion. The decrease is mainly due to the increase in finance costs resulting from the additional debt financing taken out to finance the buy-back of shares and GDRs of the Company from non-affiliated shareholders
• Net debt decreased since last quarter to RUB 360.6 billion
• The number of mobile subscribers as of 30 June 2019 increased by 0.1% y-o-y to 77.6 million^[5]
• The number of data service users as of 30 June 2019 increased by 6.9% y-o-y to 34.4 million[5]

In June 2019, the Company completed the buy-back of the remaining shares held by non-affiliated shareholders. Shares of MegaFon are no longer trading on the London or the Moscow stock exchanges. The buy-back was partly carried out using debt financing which increased the Company's total debt over the period of the buy-back process. The Company used part of its profit to service the debt.

The concentration of greater control over the Company by its main shareholder in the second quarter enabled MegaFon to significantly increase its operational efficiency, and to continue to invest in its network, accelerate implementation of new projects and launch new digital products and services as part of its strategy of digital transformation:

• It embarked upon a revolutionary transformation of the telecom-retail business, launching a new type of store called "The store of the Future" with an initial investment of RUB 1.5 billion
• It signed an agreement with Alibaba, Mail.Ru and the Russian Direct Investment Fund for the creation of the AliExpress Russia e-commerce joint venture
• It created an international consortium for the construction of a unique transcontinental underwater high-speed fiber optic line, which will connect Helsinki to Tokyo
• It continued to invest in the widening of its network and the development of its infrastructure. As of 30 June 2019 MegaFon maintains its leading position in regard to the number of base stations in Russia - it has more than 240,000 base stations covering all communication standards, including 100,000 base stations supporting LTE and LTE Advanced^[6]. For the third year in a row MegaFon's mobile internet has been named by Ookla the fastest in Russia

Gevork Vermishyan, the Group's Chief Executive Officer, commented on the quarter results as follows:

Nikita Orlov, the Group's Chief Financial Officer, commented on the quarter financial results as follows:

Key corporate events

Financial results
(In millions of RUB, except as indicated)

Financial results, Russia only^[8]
(In millions of RUB, except as indicated)

Revenue
Total revenue in Q2 2019 increased by 4.5% y-o-y to RUB 85,640 million. Revenue from Russia remained the major component, accounting for over 98.4% of total revenue.

In Q2 2019 MegaFon's wireless service revenue increased by 5.5% y-o-y to RUB 72,055 million, while data revenue increased by 13.5% y-o-y to RUB 28,021 million. The continuous growth that the Company has been observing over the last two years is the result of both positive trends in the market and MegaFon's focus on developing its innovative product offerings and solutions such as upgrading the "Vklyuchaisya!" ("Connect!") tariff line and extending it through new offers and partner services (such as providing access to MegaFon TV content, cashbacks from mobile top-ups, and cashback usage to pay for additional services) as well as other special offers aimed at stimulating data consumption (including by subscribers who are roaming) and "revenue per user" growth.

The Company's revenue from VAS services such as mobile finance services, MegaFon TV and other digital products increased by 13.2% y-o-y in Q2 2019 largely as a result of the positive response to MegaFon's marketing initiatives as well as changes to its pricing policies for some VAS services following its Big Data market analysis undertaken in 2018 and early 2019.

In Q2 2019 wireline service revenue decreased by 15.2% y-o-y to RUB 6,699 million. The main reason for the y-o-y decrease was that Q2 2018 included significant one-off revenue from the provision of telecom infrastructure for the FIFA World Cup.

Revenue from sales of equipment and accessories in Q2 2019 increased by 20.2% y-o-y to RUB 6,886 million, as a result of an increase in sales of Samsung smartphones during the quarter as well as the Company's work on streamlining its distribution network.

OIBDA and OIBDA Margin
OIBDA in Q2 2019 including the impact of the adoption of IFRS 16 increased by 20.6% y-o-y to RUB 38,904 million. Organic OIBDA in Q2 2019 increased by 4.7% y-o-y to RUB 33,774 million. The increase was supported by the 4.5% increase in revenue and effective management of operating expenses.

In Q2 2019 OIBDA Margin increased by 6.0 p.p. y-o-y to 45.4%. Virtually all of this increase resulted from the adoption of IFRS 16. MegaFon's organic OIBDA Margin remained stable y-o-y at 39.4% despite the increase in organic OIBDA as Q2 2018 OIBDA Margin included a significant one-off item.

Net profit
Net profit in Q2 2019 including the impact of IFRS 16 was RUB 2,937 million. Eliminating the negative impact of IFRS 16 in the amount of RUB 832 million, organic Net profit was RUB 3,769 million. The increase in finance costs^[10] resulting from the additional loans raised to finance the Tender Offer for shares and GDRs completed in September 2018, the Mandatory Offer completed in Q1 2019 and the buy-back of shares from the remaining non-affiliated shareholders completed in Q2 2019 had a significant impact on Net profit.

CAPEX
CAPEX in Q2 2019 increased by 1.2% y-o-y to RUB 16,424 million. The major investment projects in Q2 2019 remained the continued roll-out of LTE and LTE Advanced networks: more than 4,300 new base stations have been put into operation in Q2 2019, including approximately 3,800 LTE / LTE Advanced base stations.

Free Cash Flow to Shareholders^[11]
Free cash flow to shareholders in Q2 2019 decreased by RUB 1,783 million y-o-y to RUB 6,084 million. The decrease is mainly due to the increase in finance costs resulting from additional debt financing required to carry out the three rounds of share and GDR buy-backs mentioned above.

Net debt¹¹
Net debt decreased from RUB 363,294 million as of 31 March 2019 to RUB 360,601 million as of 30 June 2019. MegaFon's Net debt/LTM OIBDA ratio was 2.88x.

EPS
Basic and diluted EPS decreased from RUB 10 per share for Q2 2018 to RUB 7 per share for Q2 2019 as a result of the decrease in Net profit.

New accounting standards
Effective from 1 January 2019 MegaFon adopted the new accounting standard IFRS 16 'Leases'. The standard requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases (with limited exceptions). As a result of this MegaFon's operating expenses for Q2 2019 decreased by RUB 5,130 million, while its finance costs and depreciation increased - all of which decreased the Company's Net profit by RUB 832 million in Q2 2019, net of tax.
On transitioning to IFRS 16 MegaFon recognised a right-of-use asset and a lease liability in respect of its operating leases - both in the amount of RUB 88,679 million as at 1 January 2019.

The Company continues to fine tune its information systems to streamline the accounting for leases under IFRS 16. The effects of the transition to IFRS 16 are unaudited and certain management estimates and calculations may be subject to change up till the issuance of the Company's 2019 annual financial statements.

Wireless subscribers in Russia as of

The Russian wireless subscriber base remained stable y-o-y at 75.9 million users as of 30 June 2019. The Company regards this as a good result as the subscriber base in 2018 was positively affected by the one-off effect of SIM-card purchases by visiting World Cup fans.

The data service user base in Russia increased by 6.7% y-o-y to 33.5 million at 30 June 2019 as a result of MegaFon's continued marketing initiatives such as those relating to Samsung smartphone sales promotions and development of the "Vklyuchaisya! 3.0" ("Connect! 3.0") tariff line and other products attracting data consuming subscribers. The share of data service users continued to grow and reached 44.1% of the overall subscriber base in Russia.

Data operating indicators in Russia

ARPDU increased in Q2 2018 by 5.8% y-o-y to RUB 273 as a result of the Company's efforts at developing and promoting products and offers stimulating data consumption and generating data revenue growth such as the upgraded tariff line "Vklyuchaisya! 3.0" ("Connect! 3.0") and "Gigateka".

DSU increased in Q2 2019 by 2.4 gigabytes, or 28.3% y-o-y, to 11.0 gigabytes also resulting from MegaFon's focus on developing and promoting data usage offers.

For more information
Media:
pr@megafon.ru +7 925 696-05-07

Investors:

ir@megafon.ru +7 495 926-20-12

Notes to editors
PJSC "MegaFon" is a pan-Russian operator of digital opportunities, operating in all segments of the telecommunications markets in Russia, and in the Republics of Abkhazia, South Ossetia and Tajikistan. MegaFon is a recognised market leader in the provision of mobile data services, was the first operator in Russia to launch commercial operation of a third generation (3G) network, the first operator in the world to launch commercial operation of an LTE Advanced (4G) data network and was the first operator in Russia to complete 5G international videocall. Additional information about MegaFon and the products and services provided by the Group can be found at http://www.megafon.ru.

Disclaimers, statement regarding inside information and forward looking statements

The above discussion and analysis should be read in conjunction with the Group's consolidated financial statements which are available for download on the Group's website at: http://corp.megafon.com/investors/

Certain statements and/or other information included in this document may not be historical facts and may constitute "forward looking statements" within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 2(1)(e) of the U.S. Securities Exchange Act of 1934, as amended. The words "believe", "expect", "anticipate", "intend", "estimate", "plans", "forecast", "project", "will", "may", "should" and similar expressions may identify forward looking statements but are not the exclusive means of identifying such statements. Forward looking statements include statements concerning our plans, expectations, projections, objectives, targets, goals, strategies, future events, future revenues, operations or performance, capital expenditures, financing needs, our plans or intentions relating to the expansion or contraction of our business as well as specific acquisitions and dispositions, our competitive strengths and weaknesses, the risks we face in our business and our response to them, our plans or goals relating to forecasted production, reserves, financial position and future operations and development, our business strategy and the trends we anticipate in the industry and the political, economic, social and legal environment in which we operate, and other information that is not historical information, together with the assumptions underlying these forward looking statements. By their very nature, forward looking statements involve inherent risks, uncertainties and other important factors that could cause our actual results, performance or achievements to be materially different from results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the political, economic, social and legal environment in which we will operate in the future. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario. We expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect actual results, changes in assumptions or in any other factors affecting such statements.

Schedule 1: Definitions
ARPDU (Average Monthly Revenue Per Data Services User) is calculated for a given period by dividing the Group's data services revenues for a given period by the average number of its data services users during that period, and further dividing the result by the number of months in that period.

Capital Expenditures (CAPEX) comprises the cost of purchases of new equipment, new construction, acquisition of new or upgrades to software, acquisition of spectrum and other intangible assets, and purchases of other long-term assets, together with related costs incurred prior to the intended use of the applicable assets, all accounted for as of the earliest time of payment or delivery. Long-term assets obtained through business combinations are not included in the calculation of capital expenditures.

Data service user is defined as a subscriber who has consumed any amount of data traffic within preceding month.

Diluted EPS is calculated by adjusting both numerator and denominator in the EPS calculation so as to reflect the effect of including the additional shares that would have been outstanding if all options and other rights to acquire shares had been converted into actual shares.

DSU (Monthly Average Data Services Usage per User) is calculated by dividing the total number of megabytes transferred by our network during a given period by the average number of data services users during such period and dividing the result by the number of months in such period.

EPS (Earnings per Share) means an amount of the Group's profit allocated to one share of its stock, and is calculated by dividing Net profit for a reporting period by the weighted average number of shares outstanding during the period. No earnings are allocated to treasury shares.

Free Cash Flow to Shareholders means cash from operating activities, less cash paid for purchases of property, equipment and intangible assets and interest paid, increased by proceeds from sales of property and equipment and interest received. It is a financial measure which should be considered as supplementary but not as an alternative to the information provided in the Group's financial statements. A reconciliation of free cash flow and cash from operating activities is provided in Schedule 2.

Group means PJSC "MegaFon" together with its consolidated subsidiaries. Previously, the Group had consolidated the financial position and the results of operations of its subsidiary, Mail.Ru Group Limited ("Mail.Ru"), from the beginning of 2017. As of June 2018, the Group concluded that it no longer had the ability to direct relevant activities of Mail.Ru, and therefore no longer had control over that company. Accordingly, the Group ceased to consolidate the financial position and the results of operations of Mail.Ru, with effect from the end of Q2 2018.

Net debt means the difference between (a) cash, cash equivalents, and principal amount of deposits and (b) principal amount of loans and borrowings less unamortised debt issuance fees. It is a financial measure which should be considered as supplementary but not as an alternative to the information provided in the Group's financial statements. A description of how the metric is calculated is provided in Schedule 2.

Net profit is profit for the period from continuing operations attributable to equity holders of the Group grossed up for intragroup amounts between MegaFon Group and Mail.Ru Group.

Organic Net profit is Net profit, and organic Net profit Margin is Net profit Margin, in each case excluding the impact of IFRS 16 adoption. MegaFon adopted this new IFRS standard, effective 1 January 2019. For convenience of use, throughout the financial year 2019, MegaFon will be presenting its financial results "as reported", i.e. including the impact of IFRS 16, and "organically", i.e. excluding the impact of the adoption of IFRS 16.

OIBDA (Operating Income Before Depreciation and Amortisation) is a financial measure not defined by IFRS, should be considered as supplementary and not as an alternative to the information provided in the financial statements of the Group. OIBDA Margin means OIBDA as a percentage of revenue. OIBDA and OIBDA Margin are widely used by investors, analysts and rating agencies as a measure to evaluate and compare current and future operating performance and to determine the value of companies within the telecommunications industry. However, the Group's definition of OIBDA and OIBDA Margin may not be directly comparable to similarly named financial measures and disclosures by other companies. A reconciliation of OIBDA to operating profit is provided in Schedule 2.

Organic OIBDA is OIBDA, and organic OIBDA Margin is OIBDA Margin, in each case excluding the impact of IFRS 16 adoption.

LTM OIBDA means last twelve months OIBDA.

Wireless Subscriber is defined as each SIM card that is activated in our billing system or has had at least one chargeable traffic event (that is, use of voice, VAS or data transfer services) within the preceding three months, whether chargeable to the subscriber or to a third party (for example, interconnection charges payable by other operators). Where an individual person holds more than one SIM card, each SIM card is included as a separate subscriber.

Schedule 2: Reconciliations of Non-IFRS financial measures
(In millions of RUB, except as indicated)

OIBDA

OIBDA Margin as percentage of revenue

Net profit and Net profit Margin

Net debt as of

Free cash flow to shareholders

^[1] . Based on the interim unaudited condensed consolidated financial statements for 1H 2019 reviewed by JSC KPMG.

^[2] . See Schedule 1 for definitions of the terms used and Schedule 2 for the reconciliation of non-IFRS measures. Due to rounding actual numbers and calculations for financials and KPIs may differ from those set forth in this release.

^[3] . Year over year ("y-o-y") stands for the same periods in the current and previous year on either a quarterly or yearly basis.

^[4] . This is shown without taking into account the effect of the IFRS 16 implementation.

^[5] . Includes subscribers of the Company in Russia and the subscribers of its subsidiaries: "TT mobile" CJSC in the Republic of Tajikistan, "AQUAFON-GSM" CJSC in the Republic of Abkhazia and "OSTELEKOM" CJSC in the Republic of South Ossetia.

^[6] . Based on Roskomnadzor, as of 30 June 2019.

^[7] . The amounts are presented as reported results from continuing operations grossed up for the intragroup amounts between the Group and Mail.Ru Group.

^[8] . Еxcluding mutual settlements with "TT mobile" CJSC, "AQUAFON-GSM" CJSC and "OSTELEKOM" CJSC.

^[9] . The amounts are presented as reported results from continuing operations grossed up for the intragroup amounts between the Group and Mail.Ru Group.

^[10] . This is shown without taking into account the effect of the IFRS 16 implementation.

^[11] . This is shown without taking into account the effect of the IFRS 16 implementation.

^[12] . The amounts are presented as reported results from continuing operations grossed up for the intragroup amounts between the Group and Mail.Ru Group.

^[13] . This is shown without taking into account the effect of the IFRS 16 implementation.