MegaFon Says Russian Telcos Face Margin Decline Amid Competition

  • Company targets 2016 Oibda at 38% of sales from 42% last year
  • Weaker ruble boosts network costs, while users don't pay more

MegaFon PJSC, Russia’s second-largest wireless carrier, says it expects a significant decline in its operating profit margin this year as competition in the market intensifies and the weakening ruble pushes up foreign-currency linked network costs.

Operating income before depreciation and amortization may fall to as low as 38 percent of sales in 2016 versus 42 percent last year, according to a MegaFon statement on Thursday. Sales are forecast to stay at or slightly above last year’s level of 313 billion rubles ($4.6 billion).

“Competition is intensifying” which means “you need to sell more services for the same price and this is inevitably reflected in operating income,” Chief Financial Officer Gevork Vermishyan told reporters in Moscow. “There is also another uncertainty factor, which is the ruble exchange rate.”

MegaFon, which is controlled by billionaire Alisher Usmanov, said sales fell 0.4 percent last year led by a decline in the value of smartphone and tablet sales as consumers switched to cheaper devices amid Russia’s longest recession in nearly two decades. Oibda dropped by 4.4 percent because of higher costs on advertising and dollar-linked network expansion, the company said.

The carrier reiterated that it’s splitting off its wireless towers and may consider selling either a full or minority stake in that business to reduce costs.

MegaFon Chief Executive Officer Ivan Tavrin told reporters he isn’t concerned that competitor VimpelCom Russia may sell its towers first, potentially getting better terms. “I think this is an advantage -- our towers will be of interest both to firms that would have bought another carrier’s towers by then, and to potential newcomers,” he said.

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