MTS's Latsanych Heralds End to OTT Cold War

MTS, Russia's biggest telco, has had to contend with an array of economic challenges in the last year. Despite the devaluation of the Russian ruble, political unrest in Ukraine -- its second-biggest market -- and a slump at home, the operator reported sales growth in its July-to-September quarter and claims to be coping much better with the present-day telecom realities than peers in Western Europe.

Digital transformation is now at the heart of Mobile TeleSystems OJSC (MTS) (NYSE: MBT)'s growth strategy, and the operator has already delivered a boost to online sales through investments in this area. Marketing Vice President and MTS Board Member Vasyl Latsanych met with Telco Transformation at this year's Mobile World Congress to explain how a more open, collaborative approach to over-the-top players and traditional rivals is now paying dividends.

Telco Transformation: You've managed to continue growing sales despite various economic challenges. Has that surprised you?

Vasyl Latsanych: We're definitely not surprised. It is rather disappointing that we couldn't do better under such economic pressure. This is something we face when we talk to our investors in London and New York and they say we love what you do, we like your results, but it got devalued by two and half times because of the ruble, because of the economy, because of the oil price. They see our managerial and operational performance is solid and countering most of the challenges that Western Europeans have difficulties with, but unfortunately we can't turn it into straight bottom-line profits because of the surrounding economy, which we have no power over.

TT: As you say, though, the performance is much better than among Western European operators and Russia's telecom market is becoming very developed. What is driving sales growth in particular?

VL: The Russian market is very competitive and that competitiveness drives sales in rubles. The bigger challenge is to have a healthy bottom line and to have a healthy churn line. Russia sells about 100m SIM cards every year with a population of 140 million -- that is ridiculous. The challenge is how to get the minimum churn out of that. The fact we've been sustaining churn at a very low level of less than 10% per quarter consistently shows that we have found the best balance so far between aggressiveness and retention of customers and revenues.

TT: You mention bottom-line pressure and your operating income declined last quarter. What is causing that and do you expect this to continue?

VL: There are really two factors. One is the currency exchange rate, which means that international services we buy are depressing the bottom line. The other is to do with handsets. We are not selling at zero margin on average but there are a lot of handsets we do sell at zero margin, and that means we have to turn over much more to make OIBDA [operating income before depreciation and amortization] healthy.

TT: Is this handset strategy about driving smartphone sales?

VL: It's about driving smartphone sales and customers into stores. We've had to create extra attractiveness in our own shops to better engage customers and monetize them on services, not handsets. As a first step we've taken the difficult decision to minimize earnings in order to attract customers. These are the most important factors in terms of the OIBDA situation. The first -- ruble volatility -- is out of our hands. If it happens again there will be more difficulty but I don't think we'll face the same kind of devaluation again. With smartphone sales, that's purely our initiative and that is set to continue in 2016. It generates a lot of traffic and a healthy bottom line from services.

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