EQS-News: PJSC MegaFon: MegaFon reports results for Q1 2019

MegaFon reports results for Q1 2019

Press-release

Moscow, Russia (30 May 2019) - PJSC "MegaFon" ("MegaFon" or the "Company" and, together with its consolidated subsidiaries, the "Group") (MOEX: MFON), a pan-Russian operator of digital opportunities, announces its financial^[1] and operating results for Q1 2019.

Key financial and operating highlights for Q1 2019^[2]

• Revenue increased by 4.8% y-o-y^[3] to RUB 80,128 million

• Including the positive impact of IFRS 16 OIBDA increased by 15.2% y-o-y to RUB 35,226 million and organic OIBDA was RUB 30,189 million

• OIBDA Margin was 44.0% and organic OIBDA Margin was 37.7% versus 40.0% in Q1 2018

• Net Profit including the impact of IFRS 16 decreased by 63.8% y-o-y to RUB 2,187 million and organic Net Profit decreased by 49.7% y-o-y to RUB 3,036 million

• CAPEX decreased by 6.2% y-o-y to RUB 7,963 million

• Free Cash Flow to Shareholders^[4] increased by RUB 12,218 million y-o-y and amounted to RUB 12,065 million

• Net Debt as of 31 March 2019 was RUB 363,294 million

• The number of mobile subscribers^[5] as of 31 March 2019 increased by 0.9% y-o-y to 76.9 million

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

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

Financial results, Russia only^[6]
(In millions of RUB, except as indicated)

Revenue

Total revenue in Q1 2019 increased by 4.8% y-o-y to RUB 80,128 million. Revenue from Russia remained the major component, accounting for over 98.4% of total revenue.

In Q1 2019 our wireless revenue, including data revenue, increased by 3.0% y-o-y to RUB 66,325 million. Data revenue was up 8.1% y-o-y to RUB 25,132 million. The reason for both increases is the continued growth in data consumption in the market generally and our efforts to capitalise on this trend by providing more attractive product offerings such as innovative tariffs, including the upgraded "Vklyuchaisya! 3.0" ("Connect! 3.0") tariff, as well as promoting various initiatives such as "Buy one Samsung smartphone get another one free", and "Gigateka" and other bundled offerings which result in more subscriptions to our data-consuming services.

Our revenue from VAS-services such as mobile finance services, MegaFon TV and other digital products increased by 14.2% y-o-y in Q1 2019 due to marketing initiatives and also selected repricing of services undertaken late in 2018 and in Q1 2019 as a result of market analysis which we conducted.

In Q1 2019 wireline service revenue remained basically stable, decreasing only slightly by 0.2% y-o-y to RUB 6,441 million.

Revenue from sales of equipment and accessories in Q1 2019 increased by 31.0% y-o-y to RUB 7,362 million as a result of our successful efforts in streamlining our distribution network as well as an increase in sales of new Samsung and Apple smartphones during the quarter.

OIBDA and OIBDA Margin

OIBDA in Q1 2019 increased by 15.2% y-o-y to RUB 35,226 million, while OIBDA Margin increased by 4.0 p.p. y o-y to 44.0%. These increases include the positive impact of the adoption of IFRS 16 which amounted to RUB 5,037 million. Organic OIBDA in Q1 2019 decreased by 1.2% y-o-y to RUB 30,189 million, and the organic OIBDA Margin in Q1 2019 showed a decrease of 2.3 p.p. y-o-y to 37.7%. While revenue in Q1 2019 increased by 4.8% y-o-y, this was largely offset by growth in low-margin sales of equipment and accessories, higher advertising expenses linked to promoting our marketing initiatives, and higher personnel costs resulting from increases in the number of skilled employees being hired to pursue our digital development agenda.

Net Profit

Net Profit in Q1 2019 decreased by 63.8% y-o-y to RUB 2,187 million. Eliminating the negative impact of IFRS 16 in the amount of RUB 849 million, organic Net Profit decreased by 49.7% y-o-y to RUB 3,036 million. The major reason for the decrease in either case was a 33.0% increase in finance costs^[7] resulting from our taking on additional financing in order to complete the Tender Offer for shares and GDRs completed in September 2018 as well as the Mandatory Tender Offer completed in Q1 2019.

CAPEX

CAPEX in Q1 2019 decreased by 6.2% to RUB 7,963 million, mainly because CAPEX in Q1 2018 included the significant cost of our major billing platform development project which was then still under way.

The major investment projects in Q1 2019 included the continued roll-out of LTE and LTE-Advanced coverage and investment in equipment required to comply with the Yarovaya (data storage) law.

Free Cash Flow to Shareholders^[8]

Free cash flow to shareholders in Q1 2019 increased by RUB 12,218 million to RUB 12,065 million. The increases in either case resulted from an increase in operating cash flows and lower CAPEX payments this year.

Net Debt⁸

Net debt increased by 23.4% from RUB 294,318 million as of 31 December 2018 to RUB 363,294 million as of 31 March 2019 due to the additional financing taken on for purposes of the Mandatory Tender Offer. Our Net debt/OIBDA ratio was 2.94x.

EPS

Basic and diluted EPS decreased from RUB 10 per share for Q1 2018 to RUB 5 per share for Q1 2019, in line with the decrease in Net Profit.

New accounting standard

Starting from 1 January 2019 we 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 our operating expenses for Q1 2019 decreased by RUB 5,037 million, while our finance costs and depreciation increased - all of which decreased our Net Profit by RUB 849 million in Q1 2019, net of tax.

On transitioning to IFRS 16 we recognised a right-of-use asset and a lease liability in respect of our 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 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

Our Russian wireless subscriber base increased by 1.0% y-o-y to 75.3 million as of 31 March 2019 driven by a 9.3% y-o-y increase (to 33.8 million ) in our data service user base in Russia which is the result of our successful efforts in attracting data-using clients via targeted marketing initiatives such as "Buy one Samsung smartphone get another one free" and "Gigateka", as well as development of "Vklyuchaisya!" ("Connect!") tariff.

Accordingly, our share of data service users continued to grow and reached 44.9% of the overall subscriber base in Russia.

Data operating indicators

In Q1 2019 ARPDU remained at the same level as last year in the amount of RUB 246.

DSU increased in Q1 2019 by 2.4 gigabytes, or 27.6% y-o-y, to 10.7 gigabytes as a result of a positive response to our marketing initiatives focused on data consumption and digital products, including the upgraded "Vklyuchaisya!" ("Connect!") tariff line.
 

For more information

Investors: Dmitry Kononov, Director of Investor Relations and M&A                   +7 925 696 6490
dkononov@megafon.ru

Media: Artem Lebedev, Head of Media Relations                                                 +7 925 696 0677
artem.lebedev@megafon.ru
 

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 and was the first operator in the world to launch commercial operation of an LTE-Advanced (4G) data network. MegaFon is traded on the Moscow Exchange under the symbol MFON. 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.

LTV means lifetime value of a subscriber, i.e. the present value of the future cash flows attributed to the subscriber during his/her entire relationship with the Group.

Net debt position 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.

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 Q1 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] Excluding mutual settlements with "TT mobile" CJSC, "AQUAFON-GSM" CJSC and "OSTELEKOM" CJSC

^[7] This is shown without taking into account the effect of the IFRS 16 implementation.

^[8] This is shown without taking into account the effect of the IFRS 16 implementation.

^[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.