FX Gains Help VimpelCom

Yesterday, VimpelCom (VIP - Analyst Report) posted second-quarter profit of 69 cents per ADR (based on an average exchange rate 32.21 RUR/US$) that outpaced both the Zacks Consensus Estimate of 42 cents and the year-ago earnings of 46 cents.

The company reported quarterly net income of RUR22.6 billion ($701.5 million), more than double the net income of RUR11.1 ($345 million) reported in the year-ago period. This significant year-over-year growth was largely attributable to the RUR10.6 billion ($329 million) in foreign exchange gains from a strong ruble versus the US dollar.

VimpelCom’s net operating revenue in the quarter was RUR69.0 billion ($2.1 billion), reflecting 12% and 3.3% increase over the year-ago and the previous quarter, respectively. While sales from its wireless operation came in at RUR58.2 billion ($1.8 billion), the fixed-line business generated revenue of RUR14.6 billion ($453 million). The reported OIBDA of RUR35 billion ($1.1 billion) reflects a year-over-year growth of 8.7%, yielding an OIBDA margin of 50.6%.

The company’s total active cellular subscriber base grew by about 10 million year over year and by 1 million sequentially to 63.7 million at the end of the second quarter. Its broadband subscriber base increased 11.3% sequentially to approximately 1.7 million.

Reviewing operations by territory, revenue from Russia tallied RUR59.1 billion ($1.8 billion), up 11.8% year over year, accounting for more than 85% of VimpelCom’s total sales. Total mobile subscriber base reached 49.97 million (up 17.6% year over year) from 49.35 million in the previous quarter. Broadband subscriber base grew to 1.66 million from 1.5 million sequentially. Russian ARPU (average revenue per user) fell 7.2% year over year but rose 5.2% sequentially to RUR322.5 ($10).

Total operating revenue of RUR10.7 billion ($332 million) in the CIS markets reflects a 16.3% year-over-year growth. Revenue from Kazakhstan (the largest CIS market) registered sales of RUR5.1 billion ($158 million), up 15.6% year over year. Revenue from the other key CIS markets were: RUR1.6 billion ($50 million) in Ukraine (down 2.3% year over year), RUR1.6 billion ($50 million) in Armenia (up 3.7%) and RUR1.7 billion ($53 million) in Uzbekistan (up 37.8%).

During the quarter, VimpelCom had RUR5 billion ($155 million) in capital expenditures. It plans to raise this level in the second half of the year for expanding business operations.

Last month, the company successfully placed ruble bonds worth RUR10 billion ($303 million). Net proceeds from this issue will be used to refinance existing foreign currency denominated debt and finance the ongoing business-expansion initiatives. VimpelCom repaid debt worth $456 million during the second quarter.

VimpelCom remains the second-largest wireless operator in Russia with over 25% market share. Nevertheless, the company has a higher projected growth rate than its Russian peer Mobile Telesystems (MBT - Analyst Report) as it continues to demonstrate the ability to succeed in emerging markets on the strength of sustained subscriber growth.

Besides maintaining its strong market position in the rapidly maturing Moscow metropolitan area, VimpleCom has started expanding into incipient markets like Vietnam and Cambodia. The company completed the commercial launch of its cellular operation in Cambodia in May under the Beeline brand and plans to cover more than two-third of the country’s population by the end of 2009.

Recently, VimpelCom launched commercial mobile operation in Vietnam in three major provinces of the country. It plans to reach over 40 provinces and 41 million people by the end of 2009, translating into a 48% penetration of the country’s population. The relatively lower mobile penetration rates in these markets offer attractive growth opportunity for the company.

We expect acquisitions and expansions in emerging markets to enhance prospects in the wireless space and foster much of the company’s growth going forward.

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