SISTEMA SHYAM TELESERVICES LTD.
April 2013 Presented by: Mikhail Shamolin, President & CEO, Sistema Anton Abugov, First Vice President, Sistema Vsevolod Rozanov, President & CEO, SSTL
Disclaimer
Certain statements in this presentation may contain assumptions or forecasts in respect to forthcoming events. The words expect, estimate, intend, will, could and similar expressions identify forward-looking statements. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements to reflect events and circumstances occurring after the above-mentioned date or to reflect the occurrence of unanticipated events. Many factors could cause actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, deteriorating economic and credit conditions, our competitive environment, operating risks, rapid technological and market change in our industries, as well as many other risks.
SSTL Overview
Past Successfully navigated challenging 12 months Managed costs, maintained team, improved financials Present
Enhanced footprint: more carriers, large demographic and data potential coverage Clear data driven strategy with superior quality Rationalising regulatory landscape and lower competition
Look to the future
Establish operator of choice for data Create high in class LTE experience in India Monetise through consolidation Breakeven end 2014 / H1 2015
SSTL is well placed to turn the page on historic challenges and capture the Indian market opportunity
SSTL Lessons, Objectives, Strategy
1 Experience has shown
the need to focus on data:
-
2 Auctions resulted in an
excellent platform for data-driven strategy:
3 carrier slots substantially improve quality
3 Strategy geared towards
creating the best LTE experience in India:
-
India is one of the best data growth stories globally Subscribers have no real preference for GSM or CDMA
Optimise existing business
Reach breakeven and improve sales and distribution
Sharper focus on circles with greatest data potential plays to MTS brand positioning
Tech neutrality allows LTE roll out
Expand data services and strengthen brand
Migrate and launch LTE
Coverage and quality of services are number one consumer factors
New strategy focused on strengthening the brand and creating the number one player in data services segment
2013 auction and its results
Changes in auction terms (compared to November 2012) Reserve prices of spectrum in 800 MHz band reduced by 50% compared to November 2012 prices or 75% since first price recommendation in April 2012 Government allowed the full offset of SSTL licence fees paid in 2008
SSTL strategy in Auction 2013
Secure 8 most attractive circles (3 carriers in each) Circles with minimum period to OIBDA breakeven Minimise expenses in 2013 for spectrum acquisition using the offset for previous licence payments in 2008 Focus on circles with greatest data potential and LTE opportunity
Results of auction Secured spectrum in 800 MHz band in all 8 circles Purchased on reserve prices for about US$ 678 mln Payments for spectrum to be made in the following order: 25% advance payment, 75% by deferred payments in 10 equal annual installments at 9.75% per annum (cumulative) starting from 2016 No payments in 2013 because of offset of licence costs paid in 2008 (US$ 296 mln) which account for 45% of reserve price Deferred payments from 2016 will amount up to US$ 73 mln per year for 10 years
Successfully implemented auction strategy, securing the most attractive circles at a substantially reduced cost
New footprint with maximum data potential
*Geographic coverage
Circle Selection Parameters
40% Population coverage
Maximize data market coverage through choice of data heavy circles Focus on locations where coverage benefits of 850 MHz can be leveraged as a means of competitive advantage
Circles where path to 5MHz spectrum is available**
Circles where spectrum is available at a viable / optimal price Circles with an early breakeven profile
4
5 60% Data market coverage
Circles of Presence after auctions
*Delhi, Kolkata, Rajasthan, Gujarat, Karnataka, Tamil Nadu, Kerala, Uttar Pradesh (West) & West Bengal ** With the exception of strategic metro circles of Delhi and Kolkata
Key Indicators Across New Circles
Excellent coverage of potential data market 60% of the entire Indian market Safeguarded 75% of revenues despite closure of 13 circles
Circle
No. of players
% Revenue Contribution in Indian market 5.8% 7.1% 8.8% 4.3% 5.0% 4.3% 3.3% 8.3% 2.5% 49%
Data potential
# of >0.5 M population cities 11 11 12 11 6 25 8 1 1 86
HH Income > Rs 5 lpa Mn (% share) 8.4% 5.8% 7.9% 5.1% 3.9% 8.2% 3.5% 6.2% 3.8% 53%
Share in SSTL revenue 1.7% 16.5% 9.3% 3.7% 15.2% 2.7% 11.6% 8.9% 5.5% 75%
Gujarat Karnataka Tamil Nadu Kerala Rajasthan Uttar Pradesh (W) West Bengal Delhi Kolkata TOTAL in 9 circles out of 22
9 8 8 8 7 7 8 7 8 n/a
6.2% 11.0% 14.9% 4.7% 2.1% 3.9% 1.6% 12.9% 3.8% 61%
Strong fundamentals and excellent growth opportunity across all nine circles
Source: TRAI Quarterly indicators report, Dec 2012, Company data
Data potential in India
Data revenue as a percentage of ARPU
36% 35.5%
Ex-SMS data revenue as a percentage
Smartphone Penetration
27% 28.7% 20.6%
15%
7% 6%
India
SSTL
APAC average
India
SSTL
APAC average
India
APAC average
* UBS research, companys data
* UBS research, companys data
* UBS research, companys data
Amongst the APAC countries India has one of the highest potential for growth of data consumption over the course of the medium and long term
Data success so far and opportunity across nine circles
Demand for data services historically
SSTL Non Voice Revenues
US$ mln
Excellent outlook for nine circle
9 Circles: Data active subscribers
Mln
10
36.0% 30.1%
+17%
8.4 7.4 6.5 5.3
9.7
16.6% 109
Non Voice as % of total revenue Non Voice revenue (US$ mln)
6 4 2 0
20 2010
25 2011 2012
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
SSTL Data Card Subscribers (000)
75% 1 783 1 339 584
18 16 14 12 10 8 6 4 2 0
9 Circles: Smartphone active subscribers
Mln 17.8
+15%
13.7 12.1 10.1
15.6
CAGR Del 16% Guj KTK Ker KOL Raj TN 17% 15% 11% 14% 14% 13%
EVDO 2010 BTS 3,044
2011 6,642
2012 7,233
UP (W) 14% RoWB 21% Q4 12 Q1 13 Q2 13 Q3 13
Q4 13
Source: Company Data, market research
CDMA advantages and technology considerations
...CDMA experience in 850MHz superior to 3G
EVDO SP devices might get a boost due to China Telecoms focus on SPs
CTs shipments in mln 100
850 MHz band provides better inbuilding experience
97 76
75
65 94
50
32
25
2300 2100 1800 850 700
57
71
19 13 8 2012 E 5 2013 E
3
2014 E
2011
EVDO Smartphones
Others
Customer experience on 800 MHz far superior than 2100 MHz 3G experience
Over 97% of China Telecoms procurements in 2014 expected be in EVDO SPs
Source: TRAI, Expert calls (CT), Team analysis
10
LTE deployment in 850 MHz
LTE ecosystem on 850 MHz already exists Can be rolled out on scarce spectrum Superior customer experience
Examples of roll-out
850 MHz is a standard LTE band (band 5) A study by RFMD forecasts that almost all 4G device chipsets will support band 5 Out of forecasted ~600+ Mn shipments in 14 only <~10 Mn may not support band 5
Narrow band LTE standards support roll-out even on single 1.4 MHz carrier
Speeds and capacity available on broadband LTE (>5MHz) are superior to any technology
Currently LTE on band 5 is being rolled out in some geographies, like South Korea (LG Uplus, SK Telecom)
Even on Narrow band (1.4MHz) LTE deployment, LTE user experience is far superior to CDMA Rev A
850MHz spectrum provides an opportunity for SSTL to migrate to LTE and provide users with a better experience than 3G. LTE roll out expenditures estimated at US$ 200 mln with potential synergies of US$ 100 mln
11
SSTL focus: cash in the smartphone opportunity in India
Differentiated focus on Tier 2/3 cities
Smartphones (mln)
104
75
51
Focus on smartphone business in Tier 2/3 cities Several reasons make it easier for MTS to compete in these locations: Lower variety and choice of handsets Low cost voice is still the dominant product used on smartphones Existing distribution infrastructure is tuned toward sales in tier 2/ 3 cities
Attractive Voice and Data bundle offers MTS in India to offer value low cost voice along with data
30
17 8
2011 2012 2013e 2014e 2015e 2016e
Source: IDC Forecasts: Smartphones in India
Pricing Data and Voice bundles competitively against the incumbents.
Smartphone opportunity in India will require further strengthening of sales and distribution capabilities across all geographies with particular focus on tier 2 / 3 cities
12
Key financials and guidance
US$ mln
Decreasing debt
US$ mln
Cash requirement from Hold Co
OIBDA breakeven
Number of profitable circles out of 9
Financing of operations, CAPEX and one-time restructuring costs in 2013
-55.5%
Interest expense
561 1574 415
Cash requirement to fall further
1047
700
392 356 169 59 0
1
2013 2014 2015
2011
2012
2013
2012
2013
2014/2015
SSTLs debt was substantially reduced in 2012 by Sistema Further reduction of debt continued in Q1, with total debt anticipated to fall by end of 2013 subject to applicable instruments Majority of remaining debt in dollars and at lower cost
Total cash requirement significantly falling the course of the next 3 years
West Bengal reached OIBDA breakeven in Q4 2012 Breakeven across all 9 circles expected end of 2014 / H1 2015 OIBDA losses to dramatically reduce in 2013 and 2014
Cash requirements in 2014 and 2015 are expected to fall to < US$ 250 mln per year One-off restructuring costs spread over 2013 and 2014 and may be reduced further
*Excluding possible LTE investments
13
Summary
Fewer circles but still a vast data and demographic potential
Optimised Operations
Lower funding requirements and easier road to breakeven
Existing strong data franchise
Focused Strategy
Positioned to tap into a unique data growth story Greater opportunity and improved quality with 3 carriers Clear roadmap to LTE migration and monetisation
Solid financial performance
Generating value for shareholders through focus on profitability Target OIBDA breakeven by end 2014 / H1 2015 Consider future consolidation opportunities to deliver return
14
Appendix
15
SSTL At a Glance
Overall Business
Data focused network operator in India; 23% market share in EVDO data cards Created Datacard Prepaid Category High quality, technology neutral spectrum of 3.75 MHz in 8 circles in 850 MHz band HSD data services in 350+ towns.
Operational KPIs (9 Circles)
Parameters Feb13 10.58 mln
Spectrum
HSD Coverage
Subscribers
10 out of top 15 and 30 out of top 50 cities under coverage Over 2,500+ distributors and 23,000+ unique activating retailers
600+ high quality branded retail outlets Amongst top-4 players in data cards category
Data Subs.
1.18 mln
Robust Distribution Channel
MTS Brand
Recognized by TRAI for one of the highest customer satisfaction
16
Regulatory, legal and competitive environment
Before Now
In medium term
After the regulatory and legal crisis in 2012 market lost 3 players, which took decision to exit 2 players now operating only in 1 circle
15
12
4/5
18 Months Ago
Spectrum and licences combined Fixed price regime Pan-Indian licences Spectrum fixed to specific technology Foreign ownership capped at 74%
Only 6 operators kept pan-Indian coverage
2 operators have 6 service areas
Advantages
More transparency through auctions Operators can now focus on specific circles
Present
Spectrum and licences separated. Spectrum for auction. Licences issued for US$ 4 mln for 20 years Circle based licences Technology neutral spectrum
Operators can now pick optimal spectrum use Opens opportunity for possible consolidation Helps LTE migration Clear advantages to companys and India: Easier financing Easier and transparent ownership structures Greater investment into India Allows exit opportunities Stimulates M&A
Regulation remains unchanged but discussions are being held to raise it to 100%
Licencing arena completely changed: spectrum neutrality is a big step forward; liberalizing FDI regulation and clarifying on spectrum ownership for M&A would reenergize the sector
17
Low data revenues and smartphone penetration than APAC offers opportunity
Countries
Japan Hong Kong Australia
Data revenue as a percentage of ARPU
56.40% 54.50% 42.80%
Ex-SMS data revenue as a percentage
56.40% NA 25.10%
Smartphone penetration (%)
17.20% 57.50% 50.00%
Indonesia
Singapore New Zealand China Malaysia Korea Thailand Taiwan India APAC Average
Source: UBS Research
37.90%
36.90% 36.80% 35.70% 35.40% 33.50% 20.10% 22.20% 15.00% 35.50%
14.30%
19.70% 9.20% 25.80% 20.30% 20.00% 12.60% 15.80% 7.00% 20.60%
10.00%
67.00% 20.00% 12.00% 22.50% 46.50% 13.00% 22.30% 6.00% 28.70%
18