Telecom operators increase revenue, reducing investments in networks

Russian telecom operators ended the second quarter with growth in revenue and net income, which, according to analysts, was mainly due to higher prices for basic telecom services. At the same time, the credit burden of operators against the background of rising interest rates is increasing, and the capital costs for building a network among market participants are decreasing: the main purchases were made in the first half of 2022, when foreign equipment was still available on the market. At MTS, in particular, CAPEX does not cover depreciation for half a year, which may lead to a reduction in market share, analysts warn.

“Kommersant” got acquainted with the financial performance of the MTS group in the second quarter. It follows from them that the operator’s revenue for the period year-on-year increased by 14.8%, to 146.7 billion rubles, net profit increased by 53.5%, to 16.8 billion rubles. The company notes that revenue from communication services in Russia (provides more than 98% of the group’s revenue) in the second quarter grew by 7.6% year-on-year, to 108.7 billion rubles. by increasing revenues from basic and digital services. Revenue in the consumer segment amounted to 98.9 billion rubles, an increase of 15%.

“In terms of revenue growth, MTS reports are at the level of average market indicators. In absolute terms, the growth is mainly due to an increase in prices for communication services,” says Timur Nigmatullin, an investment consultant at Finam.

According to Kommersant’s interlocutor in the industry, in the first half of the year, operators demonstrated relatively good results in terms of revenue, including due to the increase in prices for basic communication services, which has been going on in stages since last year.

Federal Antimonopoly Service at the end of the year accused MTS and MegaFon, in unjustified price increases for more than 44.5 million subscribers, obliged to return prices to the previous level and imposed a fine. The operators tried to appeal this decision to the Moscow Arbitration Court. In July the court rejected their complaints.

Veon (owns the Russian VimpelCom) for the second quarter increased revenue in Russia by 6.9%, to 73.8 billion rubles, for the first half of the year the growth was 2%, to 144 billion rubles. Service revenue grew in the second quarter year-on-year by 6.9%, to RUB 68 billion, for the first half of the year the growth was 4.4%, to RUB 132 billion. In August, reports were submitted and “Megaphone”, the company disclosed indicators for the half year (data for the quarter are not provided) for the first time in a year and a half (MegaFon decided not to disclose the statements in March 2022 after the start of the military operation in Ukraine). In the first half of the year, revenue grew by 13%, to 209.8 billion rubles, net profit increased by 133.9%, to 26.9 billion rubles. The growth in revenue in the company was associated with an increase in income from content services, digital business solutions and growth in the subscriber base. Tele2 does not disclose figures.

At the same time, the operators’ debt burden is growing. This is one of the “red flags” in MTS’s reporting amid rising interest rates in the economy, Timur Nigmatullin notes: “The ratio of net debt to adjusted OIBDA was 1.8, while until the second half of 2021 the company sought to maintain the figure below 1.5 more than specific to the industry.” At the same time, MTS notes that it maintains a comfortable debt burden. It follows from the reporting that as of June 30, long-term liabilities amounted to 509 billion rubles.

MTS aggressively distributes capital among shareholders through dividends and share buybacks, the analyst notes.

“As a result, over the past two years, equity under IFRS has gone into the negative zone (but the company, in theory, can continue to pay as long as it is positive under RAS). At the same time, the distribution of capital negatively affects the investment program, CAPEX for the first half of the year not only does not cover depreciation (37.4 billion versus 58 billion), but is nominally lower than that of key competitors, despite the fact that their networks are somewhat inferior in density,” says Timur Nigmatullin.

Something similar was observed at VEON in the past decade, which ultimately became the trigger for a decrease in market share, the analyst recalls. VimpelCom has long maintained CAPEX in relation to revenue at 15% (see Kommersant dated December 27, 2017). But in 2019, after a change in leadership, VimpelCom accelerated the process of investing in the network. Now operators’ investments in the network are limited, including due to a shortage of equipment, reminds Kommersant’s interlocutor in the telecom market: “All major investments were made in the first half of 2022, while there was still foreign equipment on the market.”

At MTS, capital expenditures decreased by 7% year-on-year in the first half of the year, to RUB 37.4 billion.

“This is due to the massive purchases of equipment in the first half of 2022,” the report says. At the same time, MTS assures that at the end of the year they will maintain the indicator of capital expenditures at the level of previous years, investments will be directed to the development of the network and the growing areas of the ecosystem. At MegaFon, CAPEX for the first half of the year grew by 99.1%, to 71 billion rubles, however, it is noted that the company included in the indicator the cost of acquiring the Yota trademark at the end of 2022 for 27 billion rubles. VimpelCom’s CAPEX decreased by 17.7% year-on-year to RUB 23.4 billion over the first half of the year. Tele2 does not disclose figures.

Julia Silence