Телекоммуникации

In October 2008, revenues from the provision of telecommunications services in Ukraine decreased by 2.5% compared to September, falling from UAH 4,007.918 mln to UAH 3,909.746 mln. This information was released by the State Statistics Committee of Ukraine.

The overall decrease in revenues for telecommunications services occurred as a result of lower revenues for the mobile cell phone segment. Revenues for mobile telephone operators in October decreased 8.1% MoM to UAH 2,414.611 mln. The share of revenue from this type of telecommunication services, in general, accounted for 61.8% of all telecom revenues.

In January-October revenues from all forms of telecommunication amounted to UAH 38,114.367 mln.

September revenues from telecommunications services decreased by 0.9% MoM, dropping from UAH 4,043.739 mln to UAH 4,007.918 mln. In 2007, revenue from all forms of telecommunications amounted to UAH 39,869.797 mln.

Our view:We see this news as NEUTRAL for Ukrtelecom [UTEL UZ, U/R] since the overall drop in revenues for telecommunications service in October was mainly dependent upon an 8.1% revenue drop for the mobile phone segment.

In revenue terms, the effect on the market share for UTEL, which has a 3G license and as a subsidiary of Ukrtelecom, is negligible. However, Ukrtelecom’s traditional services have demonstrated positive dynamics in October. Revenue from urban communications rose by 9.8% and domestic long distance (DLD) grew 4.8%. Only rural communications experienced as slight decreased of 0.3%.

92.79% of the OJSC Ukrtelecom is currently owned by the state, with the other 7.14% held by the company’s staff. We currently have this company under review and will keep investors posted as to important developments concerning this company as they arise.

On Thursday, November 13, the National Communication Regulation Commission (NCRC) announced it will start accepting applications from those companies wanting to purchase 3G mobile licenses in the UMTS standard in order to render 3G communications services.

According to a statement issued by the NRCR’s press service, six licenses will be considered for sale, covering the frequency bands of 1,920-1,935 MHz, 1,950–1,980 MHZ, 2,110–2,125 MHz, 2,140–2,170 MHz, 2,010–2,015 MHz and 2,020–2,030 MHz for UMTS radio technology.

The UMTS (Universal Mobile Telecommunications System) is a third-generation communications standard operating in a frequency band above 2 GHz and allows the provision of services such as high-speed data transfer, Internet, videophone, streaming video and audio.

Applications are to be submitted by candidates between November 24, 2008 and January 8, 2009. The NCRC is planning to arrange an auction to sell the 3G mobile licenses in mid-2009.

In summer 2007, the Ukrainian Government approved a plan of for radio frequency resource conversion, which foresaw the attraction of funds from mobile communication operators in return for use of the bands. Originally, the NCRC had planned to open up bidding for 3G frequency access in the second to third quarter of 2008. Subsequently, mobile operator Kyivstar tried to compel the Commission to issue it a 3G license in court but lost the case.

Currently the only owner of a 3G license for using the radio frequencies in a band of 2.1 GHz is the OJSC Ukrtelecom [UTEL UZ, U/R], the largest telecommunications company and the incumbent fixed line operator in Ukraine, having received it in December 2005 without competition for UAH 151.39 million.

Our view: While this development is POSITIVE for the potential 3G operators, it is surely NEGATIVE for Ukrtelecom because it appears as if the company will lose its monopolistic situation. As the only company to have received a 3G communication license in Ukraine, Ukrtelecom will soon find itself in a tight squeeze to secure this market before other operators enter the market and are eventually able to present competitive alternatives for telecommunications consumers.

As Sokrat predicted in news of September 24 and October 20, the awarding of 3G licenses to other operators has again been pushed back. The target dates announced by the NCRC for the 3G market’s opening have been postponed on three separate occasions, including this last delay from October-November 2008 to December 2008- January 2009. Until now, it seemed probable that the state was waiting for Ukrtelecom to finally be privatized, the funds from which could be used to convert the spectrum for 3G use. This no longer excludes the possibility of increased competition and, consequently, a reduced market share for Ukrtelecom.

We see several telecommunications companies that would like to participate in the 3G license tender, including Kyivstar, MTS (AFK Systema), Vimpelcom, mobile operator Astelit (partially under SKM control, and also Vega (Farlep-Optima), which is the biggest alternative fixed line operator in Ukraine. Obtaining a 3G license would allow these operators to expand their services for existing clients and also increase their ARPU.

92.79% of Ukrtelecom is currently owned by the state, with the other 7.14% held by the company’s staff. We currently have this company under review and will keep investors posted as to important developments concerning this company as they arise.

The Open Joint Stock Company ‘Ukrtelecom’ [UTEL UZ, U/R] will launch its IPTV digital cable TV service in December 2008, according to an announcement made by Ihor Syrotenko, the company’s Deputy Chairman of the Board.

The company announced this service for the first time a year ago. At that time, it was planned that the service would be launched by late 2007. On Thursday, Syrotenko noted that, at the moment, everything is ready to begin providing the service to subscribers. One year ago, Ukrtelecom also presented plans for a separate service – a computer telephone service using a IP-protocol. Syrotenko remarked that this service is also ready, but will be launched somewhat later.

At a separate venue on Thursday, Syrotenko also commented on the company’s development and financial plan for 2008. The UTEL official affirmed that the company is continuing to operate according to its previously approved development program and still aims to meet the financial plan for 2008. In accordance with Sokrat’s supposition in a news piece earlier this autumn, the major reason behind the company's declining profitability in both January and September 2008, was the outflow of long distance calls from Ukrtelecom's networks to those run by mobile operators.

He stated that revenues from its broadband Internet access service are growing, although its development does not yet match the outflow of traffic.

Our view: It is POSITIVE news that Ukrtelecom is launching its IPTV service, since it will allow the company to attract new clients and build up a larger client base than simply offering its currently existing services, especially since the Ukrainian telecommunications market is now seeing serious competition on the market. Some of the Ukrtelecom’s competitors have already lunched their IPTV service in Ukraine and others have the strategy of setting up service in early 2009. In general, we look optimistically at this service in Ukraine for both the mid- and long-term; however, we think that Ukrtelecom, a state-regulated company, has limited access to increasing its marketing budget to promote this new service, compared to the spending possibilities of Utel’s major competitors.

Regarding its financial plans for 2008, no doubt that the crisis is also being felt by this Ukrainian telecom giant. To achieve its targets, the company will have to build up its subscriber base to the levels originally planned (500,000 clients), which seems highly unlikely at this point given that only two months remain to achieve this objective and the company is very far away from doing so. In the broadband Internet segment, for instance, doing so has become even more challenging due to increasing competition from smaller local Internet providers and the recent introduction of a new competitor – ‘Beeline’ – in the broadband Internet segment.

As well, in terms of its 3G services, the high cost of Utel’s services may currently serve as a hindrance for money-wise customers. Anyways, the company seems extremely unlikely to achieve its target of 200,000 subscribers. Once 3G licenses become available to other operators, which may occur as soon as March 2009, Utel may find itself in a tight squeeze to secure this market before other operators present affordable services. Utel has the unique opportunity to secure this niche by offering a ‘one stop shop’ for telecommunications services to its clients – including Internet, fixed line, 3G mobile, IPTV, and other services. By successfully marketing package services, the company could attract more clients and build customer loyalty, which is increasingly important as operators in all of these telecommunications segments progressively become more competitive.

With the awarding of 3G licenses to other operators having been postponed three times now, it is quite possible that the state is waiting for Ukrtelecom to finally undergo privatization in order to use the funds from that sale to convert the spectrum for 3G use. Indeed, Ukrtelecom securities remain attractive due to enduring hope that this telecommunications giant will eventually be privatized in 2010. We are skeptical about privatization in 2009, because it will be the year of the President election in Ukraine and due to political issues.

At present, 92.79% of Ukrtelecom is owned by the state, with the other 7.14% having been sold to the company’s staff members. We currently have Ukrtelecom’s stock under review and will keep investors posted as to important developments concerning this company as they arise.

For its operations in the period July-September, Ukraine's largest telecommunications enterprise Ukrtelecom [UTEL UZ, U/R] reported losses of UAH 211.261 mln (approx. USD 34.35 mln at 1USD = UAH 6.15). This drop compares to the results for 3Q2007, which recorded a net profit of UAH 98.057 mln. In 3Q2008, the company’s net revenues fell by 6.04% (or UAH 103.45 mln) to reach UAH 1,609 bln, while gross profit climbed by 59.6% to reach UAH 180.8 mln.

The company finished January-September with a net loss of UAH 313.149 mln, compared to a net profit estimated at UAH 270.94 mln in the same period of 2007.

Compared to the previous year, the first nine months of 2008 saw Ukrtelecom’s revenues fall by 3.9% (or UAH 196.298 mln) to a level of UAH 4.876 bln and gross profit declined by 46%, to UAH 693.59 mln. This information was released in a company report published through the information disclosure system of the State Commission for Securities and the Stock Market. The company's financial plan foresees a net profit of UAH 8.5 mln in 2008.

Our view: This news is unquestionably NEGATIVE for Ukrtelecom. The company has demonstrated losses in all three quarters of 2008. These losses and the company’s figures are in line with Sokrat’s forecasted estimates for the company’s financials in 2008. We see that new services such as mobile and ISP cannot cover the losses had in the fixed line segment or compensate for unprofitable state regulated services that the company has to subsidize. The company is also spending significant amounts on the advertising and promotion of new services, which puts pressure on company profit.

We expect that the fourth quarter will be better and probably result in profits due to the increasing tariffs for fixed line services, which is the core cash generating part of Ukrtelecom’s financials. Ukrtelecom definitely requires strategic investors, who will initiate a comprehensive reorganization process, improve sales, and focus on cost control. We believe that the privatization process for Ukrtelecom will occur in 2010, following the President election at the end of 2009.

At present, 92.79% of Ukrtelecom is owned by the state, with the company’s staff members holding the other 7.14%. Earlier, on February 6, the Cabinet of Ministers approved an updated plan for sale of shares in this company under which the state would retain 25% + 1 shares in the company and 67.79% would be sold via an auction.

We currently have Ukrtelecom’s stock under review and will keep investors posted as to important developments concerning this company as they arise.

Ukrtelecom [UTEL UZ, U/R] has announced its plans to establish a 3G network covering the entire territory of Ukraine. As a major telecommunications company and Ukraine’s incumbent fixed line operator, Ukrtelecom has drafted plans for the construction and operation of its third generation (3G) mobile communications network.

The project is estimated to require USD 687.22 mln, while Ukrtelecom plans to raise USD 250 mln from private investors towards its implementation. According to experts’ calculations, the project’s profitability will be 34% per annum if Utel’s mobile network reaches 9 mln subscribers, with the average annual revenue to be USD 550 mln and its operating cost at USD 292.24 mln.

According to Igor Sirotenko, the Deputy Chairman of the Board for Ukrtelecom, the existing network established by Utel is already at a capacity to serve 1 mln clients. He noted that while Utel’s 3G client base currently stands at 60,000 people, it is on the rise.

“Sales in this segment have recently increased and we plan to have more than 200,000 customers by the end of the year,” explained Sirotenko. “Of course, by next year our capacities will already not be enough, and we will increase the number of access points. Admittedly, the situation in the world right now is such that it is disadvantageous to borrow money for investment projects”.

As previously noted by Sokrat, the only 3G license of the UMTS communications standard in Ukraine so far was awarded to the fixed-line incumbent Ukrtelecom, under the “Utel” brand (trademark). That issuance was not subject to a tender process. While that decision was made back in December 2005, the operator finally launched 3G services under the "Utel" brand in November 2007. It ambitiously aims to achieve a total of 200,000 3G service subscribers by the end of 2008.

At present, Ukrtelecom controls 78.5% of the fixed line telecommunications market in the country and has more than 10.1 mln clients.

Our view: It remains highly doubtful that Utel can achieve its target subscriber level by year end. At the end of 1H2008, it had only 25,700 clients, which supposes an average growth of 9,800 clients per month from that time until the mid-October level of 60,000. Given this rate of growth, reaching 200,000 clients would take just over 14 months; otherwise, according to Utel’s announced targets, the company will have to attract 56,000 new customers per month on average for its 3G services.

Regarding Utel’s plans to raise USD 250 mln from private investors towards its 3G network’s expansion, it is worth considering that, in August 2008, Ukrtelecom issued bonds in order to obtain funds for the development of its Internet networks and mobile communications, as well as the difficulties the company may experience in accessing loans during the current financial crisis.

As the only company to have received a 3G communication license in Ukraine, Ukrtelecom is in a privileged position on the telecommunications market. It has also just had its monopolistic position extended until at least next spring, thanks to a recent announcement by the National Communications Regulation Commission (see related story in today’s news bulletin). This buys Utel some time (at least five months) to get a head-start in developing its 3G network and secure this market and expand its client base.

Once 3G licenses are awarded to other operators, which may occur as soon as March 2009 according to the NCRC’s decision, Ukrtelecom may find itself in a tight squeeze to secure this market before other operators present consumers with competitive alternatives. Utel has the unique opportunity to secure this niche by offering a ‘one stop shop’ for telecommunications services to its clients – including Internet, fixed line, 3G mobile, and other services. By successfully marketing package services, the company will increase its chances of attracting business and customer loyalty, which will be increasingly important as other more affordable 3G operators gradually enter this market.

With the awarding of 3G licenses to other operators having been postponed three times now, it is quite possible that the state is waiting for Ukrtelecom to finally undergo privatization in order to use the funds from that sale to convert the spectrum for 3G use.

Ukrtelecom securities remain attractive due to enduring hope that this telecommunications giant will eventually be privatized in 2010. We are skeptical about privatization in 2009, because it will be the year of the President election in Ukraine and due to political issues. At present, 92.79% of Ukrtelecom is owned by the state, with the other 7.14% having been sold to the company’s staff members. We currently have Ukrtelecom’s stock under review and will keep investors posted as to important developments concerning this company as they arise.