MegaFon Investor presentation€¦ · LTE, no other operator beside MegaFon can provide such band length After implementation of technology neutrality MegaFon is the only operator

MegaFonInvestor presentation

HSBC

EEMEA & LATAM Investor Forum 20165-6 September 2016

2

Certain statements and/or other information included in this document may not be historical facts and may constitute “forward looking statements”

within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 2(1)(e) of the U.S. Securities Exchange Act of 1934, as amended. The

words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plans”, “forecast”, “project”, “will”, “may”, “should” and similar expressions may

identify forward looking statements but are not the exclusive means of identifying such statements. Forward looking statements include statements

concerning our plans, expectations, projections, objectives, targets, goals, strategies, future events, future revenues, operations or performance,

capital expenditures, financing needs, our plans or intentions relating to the expansion or contraction of our business as well as specific acquisitions

and dispositions, our competitive strengths and weaknesses, the risks we face in our business and our response to them, our plans or goals relating

to forecasted production, reserves, financial position and future operations and development, our business strategy and the trends we anticipate in

the industry and the political, economic, social and legal environment in which we operate, and other information that is not historical information,

together with the assumptions underlying these forward looking statements. By their very nature, forward looking statements involve inherent risks,

uncertainties and other important factors that could cause our actual results, performance or achievements to be materially different from results,

performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous

assumptions regarding our present and future business strategies and the political, economic, social and legal environment in which we will operate

in the future. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be

achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most

likely or standard scenario. We expressly disclaim any obligation or undertaking to update any forward-looking statements to reflect actual results,

changes in assumptions or in any other factors affecting such statements.

Disclaimer

Agenda

1. About MegaFon

2. Market Overview

3. Key Corporate and Financial Highlights for Q2 2016

4. Appendix

About MegaFon

1

Wireless revenues; 84.4%

Wireline revenues; 8.0%

Sales of handsets and accessories;

7.6%

>98% of revenues comes from Russia

RUB 153.9 bn

MegaFon – a leading Russian telecommunication company…

Highlights Consolidated 1H 2016 revenue breakdown

Source: Company data. Note: (1) – By overall mobile revenue and number of subscribers as of the year end of Q2 2016 in Russia

(2) – Total number of subscribers as of the year end of Q2 2016 was 76.6m in Russia, Tajikistan, South Ossetia and Abkhazia(3) – Russian population as of the latest census in October 2010

Compelling historical financial performance

• 2nd largest Russian mobile operator(1), with 74.7m subscribers(2) and historically growing market share

• Unique network position overall on the back of substantial investments

• Unrivalled frequency spectrum

• Leading 4G/LTE operator providing access to 4G/LTE network in 77 Russian regions to 65%(3) of population by the end of Q2 2016

• Innovative player with a customer-centric approach and a leading position in digital services and content

• Extensive retail network consisting of over 8,000 stores, including >2,000 owned-and-operated stores, approx. 2,000 third-party monobrand stores and 4,000 Euroset stores

• Managed by a professional team with solid track record

• Listed on the London and Moscow stock exchanges since 27 Nov 2012

Strong fundamentals

Growth

Returns

• Superior historical growth among Big 3 Russian mobile operators with future growth potential

• Robust dividends payout history based on the Company’s attractive shareholder remuneration policy: at least 50% of net income, or 70% of free cash flow

RUB bn 2012 2013 2014 2015 CAGR 1H 2016

Total mobile subscribers (m) 64.6 70.1 72.2 76.8 5.2% 76.6

Consolidated revenue 272.3 297.2 314.8 313.4 6.6% 153.9

Consolidated OIBDA 117.1 132.6 138.5 132.4 7.1% 59.8

Margin (%) 43.0% 44.6% 44.0% 42.2% 38.9%

Capex (45.2) (47.1) (56.5) (70.2) -0.1% (27.2)

As % of revenues 16.6% 15.9% 17.9% 22.4% 17.7%

OIBDA−Capex 71.9 85.4 82.0 62.2 20.0% 32.6

As % of revenues 26.4% 28.7% 26.1% 19.8% CAGR 21.2%

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… with 22 years of our success story to become a market leader…

Source: Company data.

Launch of 4G/LTE services in partnership with Yota

Acquisition of 50% stake in Euroset

Start listing on the LSE and MICEX

242.4

272.3297.2

314.8 313.4

1993 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

“NorthWest GSM” founded, launched operations in St. Petersburg

1st operator in Europe to launch “MMS” and 1st

operator in Russia to introduce “Mobile-TV”

1st operator to cover all regions in Russia

1st operator to launch 3G network in Russia in St.Peters-burg

Acquisition of Synterra

Becomes #2 mobile operator in Russia in terms of subscribers

Acquisition of Net-by-Net

MegaLabs launches operations

NorthWest GSM acquired nine other regional GSM operators and renamed MegaFon

MegaFon total revenues(RUB bn)

Launch of online store and introduction of EDGE technology

Acquisition of 100% stake in Yota/Scartel

Number of 4G subscribers hits 1 million

~20x

Leading 4G provider in Russia

General Communication partner for Sochi Olympics 2014

Acquisition of four SMARTS companies in the Volga region

Acquisition of GARS

Purchase of a 49.99% stake in class A office building in Moscow

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30.9%29.3%

31.0% 30.7% 30.9% 30.9%

27.1%

28.8% 29.0%29.7% 29.7% 29.7%24.3%

23.9% 23.8% 23.7% 23.0% 22.9%

17.6% 18.1%16.1% 15.9% 16.4% 16.5%

2012 2013 2014 2015 1Q 2016 2Q 2016

Source: Bloomberg Consensus Forecast summary (April 2015)Note:(1) - Government focus on MTR and potential roaming regulation is increasing(2) - Fully implemented since April 2014 (3) - Including numbers ported into Scrtel/Yota network(4) - Includes Canada, Germany, France, Italy, Japan, United Kingdom, United States

… operating in a highly attractive Russian telecommunications market despite turbulent macroeconomic environment…

Russian market fundamentals

Competitive telecom market dynamics

• 3 nationwide mobile operators

• Tele2 lags the Big3 operators in the market share, but launched its services in Moscow in late October 2015

• Predominantly prepaid market, limited handset subsidies

• Relatively high OIBDA margin (compared to developed markets) on the back of relatively benign competition and regulatory framework

Benign regulatory framework

• Mobile termination rates, roaming rates, and last mile fiber access are not regulated(1)

• Mobile number portability implemented relatively late in terms of market development(2). In 2015, MegaFon was the beneficiary of 32% of total numbers ported in(3).

• Local loop unbundling is not implemented

MegaFon track record of gaining market share

(Subscribers in millions)

-0.1 pp

-0.1pp

+0.1 pp

+0.1 pp

∆ Q2 2016/Q1 2016

228 230 237 240

Others

Total mobile revenues 1H 2016

252

RussiaEastern Europe

G7(4)

GDP (CAGR 2015-2018E, real change p.a.) 0.6% 2.2% 1.8%

CPI (CAGR 2015-2018E, change p.a.) 6.8% 5.4% 1.8%

29.7%

33.5%

25.0%

11.7%

-0.5 p.p.

-0.1 p.p.

-0.1 p.p.

+0.7 p.p.

YoY change in market shareOther

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7

MegaFon has noticeable advantage in terms of frequencies… … allowing to get significantly higher datatransfer rate in MegaFon’s network

Both operator and end-user equipment already support 2x20 MHz for

LTE, no other operator beside MegaFon can provide such band length

After implementation of technology neutrality MegaFon is the only

operator able to utilize 3 times 2x20 MHz channels (2x20 MHz in 1800

band and 2 times 2x20 in 2600 band) for LTE

In other technologies all nation-wide operators are almost equal

None of nation-wide operators except MegaFon can realize significant

benefits from implementing technological neutrality

700 MHz (LTE) 2x7,5 2x7,5 2x7,5 2x7,5

800 MHz (LTE) 2x7,5 2x7,5 2x7,5 2x7,5

900 MHz (2G(2))2x4,8-

2x15,6(1)2x2,4-

2x13,2(1)2x0,8-

2x13,6(1)2x0,6-2x8,4(1)

1 800 MHz (2G / LTE)

2x14,6-2x30,6(1)

2x13,6-2x44,4(1)

2x12-2x29,6(1)

2x9,4-2x44,6(1)

2 100 MHz (3G) 2x15 2x15 2x15 2x15

2 400 MHz (LTE) - - - 30 - 70(1)

2 600 MHz (LTE - TDD(3))

25 25 - -

2 600 MHz (LTE) 2x40 2x10 2x10 2x10

(1) Band size varies depending on Russian region(2) 3G only for Moscow, Moscow region and Komsomolsk-on-Amur(3) In Moscow only

Wider band means higher data transfer rate and higher capacity of the network

… possessing a unique spectrum advantage…

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9Note: (1) — Russian population as of the latest census in October 2010

4G development in Q2 2016 – focus on quality

4G/LTE network development

• MegaFon is focused on expansion of coverage and increaseof its 4G network capacity in existing areas of presence andservice quality improvement

• More 4G availability:– 78 federal regions

–more than 1,000 cities and towns

– 15 out of 15 cities with a population(1) over 1m people

• 4G infrastructure included c.25,100 base stations

4G/LTE services

• LTE-Advanced services providing speeds of 150-450 Mbit/swere available in 19 cities and regions as of the end of the

quarter

• 4G-enabled devices registered on MegaFon network – 9.0 munits, or +37% y-o-y

• 4G traffic usage increased by 46% y-o-y

• Share of 4G traffic in total data traffic is 42%

LTE-roaming

• MegaFon is one of the world’s leaders in LTE-roamingcoverage in terms of countries covered

• In Q2 2016, LTE-roaming coverage extended to 74 countrieswith 103 operators

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Key

Hig

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4972

77 77 78

36%51%

59% 59% 65%

2013 2014 2015 Q1 2016 Q2 2016

Availability of MegaFon 4G services

Number of Russia’s regions, where MegaFon 4G is available

% of population covered

Federal regions covered by MegaFon 4G / LTE network

Cities where LTE-Advanced available

Saint-Petersburg

Chelyabinsk

Moscow

Rostov-on-Don

Chita

Nizhniy Novgorod

Samara

Sakhalin

Vladivostok

Ufa

Tula

OmskSochiNovosibirsk

KhabarovskKrasnoyarsk

9

IvanovoYaroslavl

Lipetsk

… an increasing footprint in digital services…

10

Content

Devices supported

Uniqueness

• Unique terms of use for subscribers using “All inclusive” bundled tariff plans and options

• VOD and LiveTV tandem solution

• Premium HD content: Amedia, Discovery HD, HBO, Disney, Warner, Universal, Sport HD, etc.

• Individual recommendations based on ratings and perceptions by subscribers

• OTT solution available for all types of devices: smartphone, tablet, SMART TV, Web

• VOD: Large catalogue of movies, TV series and sequels of first-rate Russian and foreign studios

• Live TV: 130+ channels, including 1 and 2 multiplex

Company’s existing subscribers

3rd party clients

… aimed at both subscribers of MegaFon and those of other mobile operators

Clients Purposes

• Boosting of subscribers loyalty and lifetime

• Data usage enhancement

• Monetisation of subscriber base

• Monetisation of active users of MegaFon.TV app

• Acquisition of new subscribers

80% of app users rate the service as “good” and “excellent”3.5 average rate in Google Play and AppStore

Fully-fledged video and TV OTT solution launched in June 2015 MegaFon TV creates value for digital offering…

Customers’ dynamics satisfaction by the service

796K users registered at 31 March 2016c.40% average monthly growth of user base since launch

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Key developments in B2X(1) segment in 1H 2016

Note: (1) B2X includes B2B and B2G business segments(2) SAP became MegaFon’s client using MNP

Key projects in 1H 2016

• Contract with the state-owned company GLONASS (Global Navigation SatelliteSystem) for MegaFon to act as a full-MVNO partner and an operator fortransmission of emergency call traffic

• Signing of a memorandum of partnership with Rosseti, the largest Russianoperator of energy grids, to install in 300K power stations special equipmentallowing Rosseti to monitor cases of intrusion and collect telemetric data

• Providing a complex of telecommunication services at the Russia – ASEAN forumin Sochi

• Completion of construction of a telecommunication cluster in the Tomsk region toexpand coverage of MegaFon’s services at 18 oil deposits in the north of the region

B2X continued strong performance in 1H 2016

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New products and services

• New approach to corporate client service reflected in the “Policy of contacts”stipulating continuous client support over the period of contract

• Upgrade of the tariff plan line “Corporate unlimited” by extending the range ofavailable services and making the process of individual tariff selection moreflexible and convenient

• Joint project with Tochka Commercial Bank for entrepreneurs. The clients ofTochka Bank, medium and small-sized legal entities, are offered a discount forMegaFon’s mobile services. In return, MegaFon’s clients are given the opportunityto open an account with Tochka Bank and get a discount on the card maintenancefee and an attractive interest rate on cash balance

288 K

Number of B2X clients + 3% y-o-y

3.2 m

Number of B2X mobile data users

+31.3% y-o-y

8.0%

B2X total revenue

+ 8.0% y-o-y

5.2%

B2X mobile revenue

+ 5.2% y-o-y

9.6%

B2X mobiledata revenue + 9.6% y-o-y

New B2B/B2G clients

11

(2)

Data ARPU, RUB per month APPMb, RUB

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed. (1 ) —Data Service User is defined as a Subscriber who has used any of our data transfer services within the preceding one month (2) — Active subscribers that do not comply with the definition of Data Service User Base(3) — Total data revenues in a given period divided by average number of data service subscribers during such period, divided by number of months in such period(4) — Starting from 2013, APPMb presented here vary from those reported earlier do to the change in methodology for data service user calculation. APPMb is calculated by taking ARPDU for a given period, and dividing by DSU in that period(5) — Total number of megabytes transferred during a given period divided by average number of data subscribers during such period, divided by number of months in such period(6) — Total CAPEX, including CAPEX on spectrum acquisition via purchase of SMARTS in August 2015. Refers to actual CAPEX accrued for the year and may not match cash flow CAPEX

Operating results provided on this page cover only the Russian business. Financial results are presented on a consolidated basis

241.1 259.0 269.5 270.0

130.9 129.9

17.9 20.122.2 23.4

10.8 12.3

13.318.1

8.4 11.7

272.3297.2

150.1 153.9

2012 2013 2014 2015 1H 2015 1H 2016

117.1132.6 138.5 132.4

66.759.8

43.0% 44.6% 44.0% 42.2%

44.4%38.9%

2012 2013 2014 2015 1H 2015 1H 2016

21.0 25.2 27.429.3 29.6 30.0

62.668.1 69.7

74.8 74.5 74.7

2012 2013 2014 2015 Q1 2016 Q2 2016

Data service user base (1) User base not using data service (2) Wireless services Wireline services Equipment & Accessories

Total Russia wireless subscribers, m

Russia Data ARPU (ARPDU(3)) and APPMb(4)

Consolidated Revenue breakdown, RUB bn

Consolidated OIBDA and OIBDA margin

45.2 47.156.5

70.2

20.627.2

16.6% 15.9% 17.9%22.4%

13.7%17.7%

2012 2013 2014 2015 1H 2015 1H 2016

Consolidated CAPEX(6) and CAPEX margin

Operating and financial results

314.8

23.1313.4

19.9

1,091 1,5562,614

3,2863,942 3,951

32%38%

47% 53% 54% 55.4%

2012 2013 2014 2015 Q1 2016 Q2 2016

Data-enabled device penetration

Russia DSU(5) and data-enabled device penetration

DSU, MB/month

164 177

211233 232 229

0.150.11

0.08 0.07 0.06 0.060.00

0.05

0.10

0.15

0.20

2012 2013 2014 2015 Q1 2016 Q2 2016

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Growth▲ 2.5%

Lower▼ 10.3%

Growth▲ 31.8%

Existing MegaFon Corporate Governance structure complies with allrequirements of the London Stock Exchange and Moscow Exchange whereMegaFon trades

Board of Directors elected in August 2016 consists of 7 members:

5 Board members represent interests of minority shareholders: 2TeliaSonera representatives and 3 INEDs

2 representatives of controlling shareholder USM

Three Committees of the Board of Directors have been set up forimproving corporate governance standards:

Audit Committee

Remuneration and HR Development Committee

Finance and Strategy Committee

On 12 Nov 2013, MegaFon’s Board of Directors approved the Code ofBusiness Conduct and Ethics further streamlining the corporategovernance procedures in the Company

Following the listing reform on the Moscow Exchange, in June 2014, theCompany’s shares were upgraded to the “Highest” quotation list QL I,thus allowing pension funds and state corporations to invest inMegaFon’s stock

- This upgrade confirms MegaFon compliance with MOEX’s highestcorporate standards

Corporate governance Board of Directors composition

MegaFon employs the best-in-class Corporate Governance practices…

Vladimir StreshinskyChairman of the Board

Nikolay Krylov

Carl Peter Christian Luiga

Ingrid Maria Stenmark

Jan Rudberg

Nominated by USM Nominated by TeliaSonera

Independent directors

Lord Myners

The majority of the Board represents minority shareholders

Ivan Tavrin

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…led by a management team with extensive TMT experience

Konstantin Likhodedov, Director, Consumer Business

● Director for Consumer Business since September 2015

● Previously Director of the Moscow branch of MegaFon

● Joined MegaFon in 2012

Dmitry Kononov, Director, Investors Relations and M&A

● Director for Business Development, M&A, IR since Dec 2008

● Joined MegaFon in 2000. Served as the Company’s CFO in 2002-2004

● 22 years of TMT experience

Alexander Bashmakov, Chief Technical Officer

● CTO since August 2015

● Previously Chief Strategy and Procurement Officer of MegaFon

● 8 years in management consulting with focus on Telecom & IT (Accenture and BCG)

Gevork Vermishyan, Chief Financial Officer

● CFO since Jul 2011

● Previously Director of Corporate Finance at AFK Sistema

● 13 years of finance / 8 years of TMT experience

Sergey Soldatenkov, Acting Chief Executive Officer

● Acting Chief Executive Officer since 28 April 2016

● Chief Executive Officer of MegaFon from April 2003 to April 2012

● Extensive experience in the Russian telecom industry

● Before joining MegaFon held senior management positions in Telecominvest, Delta Telecom, North West GSM

● Member of the Board of Directors of MegaFon since May 2012

Evgeny Chermashentsev, Chief Operating Officer

● Appointed Chief Operating Officer (Executive Director) of MegaFon in July2015

● Previously Deputy CEO for Infrastructure of MegaFon


● Before joining MegaFon held various senior positions at media andbroadcasting companies

● c.20 years of TMT experience

Executive Bodies

Alexander Sobolev, Director, Strategy

● Director for Strategy since September 2015

● Previously Head of Strategic Partnerships and Projects, MegaFon


● 5 years in consulting (Strategy Partners Group and BCG)

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Return to growth through digital strategy

15

New strategy focuses on “Digital“ trend, mobile data monetization and new product offerings

Since 2012 MegaFon successfully implementedan efficient growth strategy

Strategy implementation in 2012-15 allowed to accumulate free cash flow and increase the dividends

• Grown MegaFon share in the mobile market

• Increased business efficiency

• Deployed modern infrastructure and full-fledged 4G communications network

• Implemented new investment management process and subsequent optimized investment budget

• Enhanced organizational structure to strength the Company's position in the B2C, B2B, B2G and B2O markets with the aligned governance models

• Cover digital subscriber needs and requirements

• Leverage Internet and OTT companies cooperation

• Develop own innovative products and services (MegaFon TV, М2М services, mobile finance mobile advertising, cloud solutions)

• Well-timed construction and modernization of the network, utilizing spectrum advantage

• Identification and implementation of new growth areas in operating efficiency

Despite challenging macro MegaFon will return to sustainable growth with winning the “Digital”

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Market overview

2

World mobile market is declining, but still there are countries which return to growth in local currency

Countries: developed – Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong-Kong, Israel, Italy, Japan, S.Korea,Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, USA, UK; emerging – Argentina, Brazil, Chile, China,Columbia, India, Indonesia, Malaysia, Mexica, Nigeria, Peru, Philippines, South Africa, Taiwan, Thailand, Turkey, Ukraine

Source: Bank of America Merrill Lynch Wireless Matrix, MegaFon Strategy analysis

-6%

2015

5%

-10%

2014

14%

2011

16%

-4%-5%

2012

4%

-2%

2010 2013

6%

-4%

3%

2009

1%

-4%

2008

24%

7%

Marketvolume

% y-o-y growth,developed

% y-o-y growth,emerging

World mobile market dynamics, USD bn

-20%

-10%

0%

10%

2015201420132012

Sweden

Singapore

New Zealand

Greece

Finland

AustraliaMobile market dynamics in local currency, %

-10%

0%

10%

20%

30%

2015201420132012

Taiwan

Thailand

Turkey

Nigeria

Philippines

South Africa

Indonesia

India

China

Argentina

World mobile market in USD is declining… ... but still some countries grow in local currencies

Developed countries

Emerging countries

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In 2015 Russian economy suffered from recession

-3,8%

1Q14

1,3%

0,7%

4Q151Q15

-2,2%

0,6%0,9%

1Q13

Since 1Q 2015 Russian economy started to shrink …

GDP growth, % YoY

… along with decline in consumer spending…

… yet a small portion of population tends to cut telco-

related spending

-7%

1%

1Q15

0%2%

1Q14

3%

-8%

-10%

-12%

4Q15

Household consumption growth, % YoY % population who cut spending on services, %

15%

33%

42%

57%

63%69%69%

76%76%

Tra

veli

ng

Eat

ing

ou

t

Ou

tin

gs

Mo

bil

e

Cin

ema

Rep

airs

FT

TB

Pet

rol

Spo

rts

Source: Rosstat, Synovate Comcon, MegaFon Strategy analysis

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Mobile market in Russia is entering area of zero growth

Russian mobile market(1) quarterly dynamics, RUB bn

-4%

-2%

0%

2%

4%

6%250

100

0

50

150

200

2Q 2014

1Q 2014

4Q2014

3Q2014

1Q 2013

2Q2013

3Q2013

4Q2013

1Q2015

2Q 2015

4Q2015

3Q 2015

% y-o-y growthMobile market volume

Note: (1) - Mobile market consists of Big-4 official revenue (including MTS Crimean operations), Yota revenue and small regional operators’ revenue

according to AC&M. Source: operators’ official data, AC&M, MegaFon Strategy analysis

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Data revenue remains the major growth driver

Data users by devices in Russia, mn units

80

120

20

40

60

100

0201520142013 2018F2017F2016E

Modem

Others

Tablet

Featurephone

Smartphone

Source: official companies’ reporting, ACM, MegaFon Strategy analysis, B2C data

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Revenue continues to grow in the new businesses and fixed BB

On fixed BB markets B2B and B2C segments grow against negative

dynamics of B2G и B2O

One of key new markets for MF –Video and TV – will continue to grow,

in particular due to OTT and IPTV

Other target new markets will grow significantly faster than traditional

ones

0

50

100

150

200

250

300

20182017201620152014

B2C/B/G/O fixed BB market forecast in Russia(excl. fixed telephony), RUB bn

0

20

40

60

80

100

20182017201620152014

Pay Video and TV market forecast in Russia, RUB bn

New businesses market forecast in Russia, RUB bn

0

20

40

60

2017201620152014 2018

Corporate M2M connections

Cloud B2B communications

Mobile advertising

ОТТ

IPTV

Satellite TV

Cable TVB2OB2GB2BB2C

Note: B2B market excludes cloud servicesSource: TMT consulting, iKS, J’Son, MegaFon Strategy analysis

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Financial and Operating Results

3

Events in Q2 2016 and post-closing events

APPROVAL OF RUB 35BN DIVIDENDS

• MegaFon’s Annual General Meeting of Shareholders, held on 30 June 2016, approved dividends inthe total amount of RUB 35bn1, equivalent to RUB 56.44 per ordinary share (or GDR), out of which:

- RUB 30bn based on the results of 2015

- RUB 5bn based on the results of Q1 2016

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RECORD MOBILE INTERNET SPEED TESTING IN RUSSIA

• In June, MegaFon conducted the first test in Russia of mobile data transfer at a speed close to 1Gbit/s by aggregating three frequency bands and using Huawei and Qualcomm network equipment.The peak data download speed achieved was 1.24 Gbit/s

• This result is testimony to MegaFon’s unrivaled advantage in spectrum and is considered a vitalstep towards formation of the next generation standard, which will allow us to offer a radically newlevel of service and capabilities to customers

(1) Exact amount of the dividends declared is 34,992,800,000 rubles

STRATEGIC AGREEMENT WITH ROSSETI

• In June, MegaFon signed a memorandum of partnership with Rosseti, the largest Russian operatorof energy grids. Under the memorandum, MegaFon will install special equipment in 300,000 powerstations to monitor cases of intrusion and collect telemetric data. The equipment will help tominimise electric power losses and is expected to save up to 20% per year in power stationmaintenance

• This is an example of what MegaFon offers as one of many major M2M solutions to enhancecustomers' operating efficiencies and improve their business processes in the future, leveragingMegaFon's developed high-quality mobile infrastructure and the capacity of its best-in-class GlobalNetwork Operations Center to collect and analyze big data

23

CHANGES IN MANAGEMENT TEAM

• MegaFon’s Annual General Meeting of Shareholders, held on 30 June 2016, approved appointmentof Sergey Soldatenkov as the Company’s new CEO

• Natalia Chumachenko was appointed Managing Director for Strategic and OrganisationalDevelopment

• Irina Likhova was appointed Director for Corporate Development and Human Resources

STRATEGIC AGREEMENT WITH SAP

• In June, MegaFon and SAP CIS signed a memorandum of strategic partnership, under which SAPCIS will implement the brand new IT-system S4/HANA allowing the re-engineering of MegaFon’sERP-centralised system, to transform and facilitate the Company’s business processes. The cost ofthe system implementation over the next 3 years is expected to amount to RUB 1.5bn

CORPORATE REORGANISATION

• On 26 July, the Board of Directors of MegaFon convoked EGM to approve a reorganization of theCompany, consisting:

- a spin-off of MegaFon’s certain infrastructure assets and related liabilities, including a portfolioof >15,000 towers, related land plots and other auxiliary equipment to JSC First TowerCompany, a wholly-owned subsidiary of MegaFon;

- a merger with the companies, acquired earlier from SMARTS. The merger will allow MegaFon toreduce network maintenance expenses and to improve efficiency of radio spectrum usage in therange of 900/1,800 MHz

• Those shareholders, who vote against or abstain from voting, will have the right to request aredemption of their shares at a redemption price of RUB 557

SHARED SERVICES CENTER

• In July, MegaFon launched a Shared Services Center in Samara to handle its operational processessuch as accounting and reporting, financial control and treasury operations, certain HR functionsand others. This functionality will be transferred from MegaFon and its subsidiaries to the SharedServices Center, which will employ around 900 people and help MegaFon to save more than 470million rubles per year once the project begins operating at its full capacity in 2018.

ANTI-TERROR LAW

• In 07 July, the President of the Russian Federation signed a package of anti-terror laws. Thepackage requires telecommunication operators to store all calls, messages and data transmittedby customers for certain time periods, effective from 01 July 2018. This would require us toestablish additional data centers and may potentially result in significant capital expenditures andnegatively impact the Company’s future performance

Key highlights: earnings trends

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Revenue

Revenue, OIBDA and Net profit

76.1 81.3 82.0 75.2 78.7

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Growth▲ 3.4%

OIBDA

Net profit(1)

Quarterly data, RUB bn % of RevenueHalf-year data, RUB bn

34.7 36.129.5 30.2 29.6

45.6% 44.5%36.0% 40.2% 37.5%

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

13.0 13.3

5.38.8

7.217.1% 16.4%

6.5%11.8% 9.2%

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

• In Q2 2016, total revenue increased by 3.4% y-o-y to RUB

78.7bn driven by 18.4% increase in wireline revenue and by

78.0% growth in revenue from sales of equipment and

accessories, which fully compensated the decrease in

wireless revenue

• OIBDA decreased by 14.9% y-o-y due to increased cost of

revenues driven by shift in the revenue structure towards

lower-margin segments, higher interconnect charges,

increased advertising expenses and dealer commissions,

growth in general and administrative expenses driven by

employees benefits and social charges, and increased rent

expenses and operating taxes

• As a result of the OIBDA decline, OIBDA margin decreased by

8.1 p.p. y-o-y to 37.5%

• Net profit(1) decreased by 44.4% y-o-y due to decline inOIBDA, higher depreciation resulting from an increase in thebook value of fixed assets related to the Unified BillingSystem and other strategic projects of the Company, non-cash loss from our equity associates and a one-off additionalincome tax accrual in connection with a tax audit in Tajikistan

24

150.1 153.9

1H 2015 1H 2016

20.416.1

13.6% 10.4%

1H 2015 1H 2016

66.7 59.8

44.4% 38.9%

1H 2015 1H 2016

Lower▼ 14.9%

Lower▼ 44.4%

Growth▲ 2.5%

Lower▼ 10.3%

Lower▼ 21.2%

Key highlights: free cash flow and CAPEX

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CAPEX

CAPEX(1), OIBDA-CAPEX, Free Cash FlowGrowth▲ 2.8%

OIBDA-CAPEX

Free Cash Flow

• In Q2 2016, MegaFon spent RUB 12.9bn, which is 2.8% higher

than in Q2 2015 mainly due to:

– spending on 4G/LTE network roll-out and modernisation of

2G/3G network

– development of Unified Billing system

• Due to the lower OIBDA and higher CAPEX spending, OIBDA-

CAPEX decreased by 25.0% y-o-y

• Free Cash Flow decreased by 50.4% y-o-y mostly due

decreased operational cash flow, and an increase in inventory

12.5

25.923.6

14.3 12.9

16.5%

31.9% 28.8%19.0% 20.0%

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

22.2

10.25.9

15.9 16.7

29.1%

12.6% 7.2%

21.2% 20.0%

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

19.3

8.9

13.8

8.9 9.625.4%

10.9%16.9%

11.9% 12.2%

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

25

20.627.2

1H 2015 1H 2016

31.1

18.520.7%12.0%

1H 2015 1H 2016

46.0

32.630.7%

21.2%

1H 2015 1H 2016

Lower▼ 25.0%

Lower▼ 50.4%

Growth▲31.8%

Lower▼ 29.2%

Quarterly data, RUB bn % of RevenueHalf-year data, RUB bn

Lower▼ 40.4%

26

Key revenue components

Due to rounding, manual calculations for financials and KPIs may differ from those displayed.Note: (1) — Other wireless revenue includes revenues from VAS services; revenue from local subscribers which includes monthly fees, airtime revenues, own subscriber roaming and connection fees; wireless interconnection revenues; roaming charges to other wireless operators(2) — Include smartphones, tablets, dongles, routers, and other data-enabled devices

Wireless revenue decreased in Q2 2016 by 2.3% y-o-y impacted by adecline in revenue from traditional voice services due to an increasingnumber of subscribers using bundled tariffs, provision of free on-netcalls, introduction of free national roaming for bundled tariffs,revision of bundled tariff plans with more services and continuedcompetitive pressure on pricing

Growth in mobile data revenue and higher demand for MegaFon’svalue-added services partially offset the decline in voice revenue

Mobile data continued to be one of the key growth drivers andrepresented 26.3% of total revenue in Q2 2016 vs. 25.6% in Q2 2015,increasing by 6.3% y-o-y due to:

― expansion of data user base by 7.2% y-o-y to 30.5 million users asa result of our pro-active data user acquisition efforts and higheradoption of data-enabled devices (55.4% of data-enableddevices(2) registered on MegaFon network)

― higher data usage resulting from:

• effective promotion of mobile data offerings and new tariffinitiatives, including recent upgrade of internet options

• active promotion of data-enabled and data-hungry devices

Wireline service revenues increased by 18.4% y-o-y due to continuedstrong growth in our B2G segment on the back of expansion of ourclient portfolio, further growth in our B2B segment and the GARSacquisition

Sales of handsets and accessories increased by 78.0% y-o-y due torevival of demand for more expensive devices resulting from thepositive change in customer behaviour patterns, diversification ofassortment of high-end devices. our attractive offerings, successfulpromotion activities and exclusive distribution contracts

Wireless 87.8% 86.9% 83.5% 85.9% 83.0%

- Data 25.6% 26.6% 25.6% 27.5% 26.3%

Wireline 7.0% 7.0% 8.5% 8.0% 8.0%

Handsets and accessories

5.2% 6.1% 8.0% 6.1% 9.0%

19.5 21.6 21.0 20.6 20.7

47.4 49.0 47.5

43.9 44.6

5.3 5.7 6.9

6.0 6.3

4.0 5.0 6.6

4.67.1

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Growth▲3.4%

▲ 6.3%

Other wirelessrevenue(1)

Wireline

Handsets and

accessories

Data

76.181.3 82.0

75.278.7

▲ 18.4%

▲ 78.0%

▼ 2.3%

(RUB bn)

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Total Russia wireless subscribersincluding data service users(million)

27.928.5 29.3 29.6 30.0

71.473.9 74.8 74.5 74.7

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Data service user base (1) User base not using data service (2)

Drivers of Russia total wireless services revenues: Wireless subscribers

Results provided on this page cover only the Russian business

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — Data Service User is defined as a Subscriber who has consumed any amount of data traffic within preceding month(2) — Mobile subscribers that do not fall within the definition of Data Service User Base

• Overall subscriber base in Russia increased by 3.3 million

new subscribers (+4.6% y-o-y) to 74.7 million resulting from:

- pro-active subscriber acquisition efforts in the B2C, B2B

and B2G segments

- upgrade of existing tariff plans and options

- active promotion of Yota brand

- dealer contract with Svyaznoy, which provides access to

an additional attractive customer base

• Data service user base expanded by 7.4% y-o-y to 30.0

million users accounting for over 40% of the overall

subscriber base

– The Increase was driven by effective promotion of mobile

data services, more affordable data offerings and active

promotion of data-enabled devices

Share of data users in overall subscriber base, %

39.1% 38.6% 39.2% 39.7% 40.1%

▲ 7.4%y-o-y

▲ 4.6%y-o-y

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DSU(1) & APPMB(2)

DATA ARPU (ARPDU(3))

Drivers of Russia total wireless services revenues: DSU and APPMB

Results provided on this page cover only the Russian business

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) Total number of megabytes transferred during a given period divided by average number of data subscribers during such period, divided by number of months in such period; (2) ARPDU for a given period divided by DSU in such period; (3) Total data revenues in a given period divided by average number of data service subscribers during such period, divided by number of months in such period

• Strong increase in DSU (+26.9% y-o-y) in Q2 2016 resulted

from:

– upgrade of tariffs and internet options with higher mobile

data allowances at a more affordable price

– promotion of new tariff initiatives

– promotion of data-enabled and data-heavy devices

– growing penetration of data-enabled devices on

MegaFon network to 55% as of the end of the quarter

– intensive roll-out of the 4G/LTE network

– continued increase in 4G-enabled devices registered on

MegaFon network reaching 9.0 million

• APPMB decreased by RUB 0.01 to RUB 0.06

• ARPDU decreased by 1.3% y-o-y due to increased

competition, greater take-up by customers of bundled tariffs

with higher data allowances, revision of tariffs and internet

options at a reduced price, and special seasonal offerings

232244 238 232 229

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

3,113 3,1853,638

3,942 3,951

0.07 0.08 0.07 0.06 0.06

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Growth▲26.9 %

RUB per month

DSU, Mb/month APPMb, RUB

Data revenue operating statistics

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Lower▼ 1.3 %

Quarterly data, RUB bn Half-year data, RUB bn

Growth▲ 25.1%

Growth▲ 3.1%

3,154

3,946

0.07 0.06

1H 2015 1H 2016

225 232

1H 2015 1H 2016

28

29

34.72.6

(4.8) (0.7)

(2.3)

29.6

OIBDAQ2 2015

Revenue Cost of revenue Sales &Marketing

General &Administrative

OIBDAQ2 2016

▼ (0.5%)

OIBDA (RUB bn)

25.2%3.4% +15.6% +12.8%

Key factors influencing OIBDA margin

• In Q2 2016, OIBDA decreased by 14.9% y-o-y, while OIBDA margin

declined by 8.1 p.p. y-o-y to 37.5%

• The following factors influenced OIBDA:

- Gross profit decreased by 3.8% y-o-y and gross profit margin declined

by 5.2 p.p. to 70.0% due to:

- higher cost of revenues due to a higher share of lower-margin

segments in the revenue structure

- increased interconnect charges

- Sales & marketing expenses increased by 15.6% y-o-y due to:

– higher advertising expenses resulting from active promotion of

Yota brand and sponsorship of the 2016 Ice Hockey World

Championship

– higher dealer commissions due to the growing number of

subscribers, including those acquired through Svyaznoy

- General & administrative expenses grew by 12.8% due to:

– higher employee benefits and social charges due to indexation of

salaries of non-executive personnel, increased employee-based

social taxes and higher LTIP expense compared to those in Q2

2015

– higher operating taxes due to a one-off tax charge accrual related

to tax audit in Tajikistan

– increased rent and utilities expenses due to further expansion of

our network, higher office rent costs and inflation-driven

increases in utility rates

y-o-y growth

Lower▼ 14.9 %

Gross profit

Key components

OIBDA margin

(%)

Gross profit margin45.6% 37.5% ▼ 8.1 p.p.

▼ 0.7 p.p ▼ 2.2 p.p.

S&M as % of revenue

G&A as % of revenue

y-o-y decrease

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▼ 5.2 p.p

29 Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed.

30

34%

66%

RUB USD

Liquidity(1) currency split

Net debt build-up, RUB bn As of 31 Dec 2015 As of 30 June 2016 Change

Cash and cash equivalents 17.5 35.9 18.4

Short-term investments 20.2 7.3 (12.9)

Total debt 218.5 210.3 (8.2)

Long-term debt 172.6 185.4 12.8

Short-term debt 45.9 24.9 (21.0)

Net debt 180.8 167.1 (13.9)

• MegaFon’s leverage remained at an acceptable level

– Net debt/LTM OIBDA at 1.33x level at the end of Q2 2016

• Continued FX risks mitigation

– 66% of cash held in US dollars offsetting the revaluation

of FX-denominated liabilities

• Attractive market conditions allowed us to replenish

liquidity at compelling rates and tenors

- RUB 10bn exchange bonds placed for a 3-year tenor and

RUB 10bn exchange bonds placed for a 10-year tenor out

of the new exchange bonds programme registered in

April 2016

- High investor’s interest allowed MegaFon to price bonds

at significant discounts to existing corporate benchmarks

and become the first Russian corporate borrower to

achieve a single digit coupon rate since 2014

- New RUB 30bn facility agreement signed with Sberbank

maturing in 2022

• In July, S&P Global Ratings affirmed MegaFon’s long-term

local currency and long-term foreign currency credit ratings

at “BBB-” and “BB+” levels, respectively

Net debt and liquidity evolution

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — Liquidity is calculated as the sum of Cash @ cash equivalents and Short-term investments(2) — c. 0,1% in EUR for operating purposes

113.6 123.0

180.8 173.9 167.1

0.82x0.90x

1.37x 1.33x 1.33x

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

RUB bn / (x)

Net debt Net debt/LTM OIBDA

Growth▲ 0.51x

Net debt and Net debt/LTM OIBDA

(2)

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Debt portfolio structure

Debt profile

• Increase in the RUB-denominated portion of the debt portfolio

- Expansion of the pure RUB-denominated portion of the portfolio

and the hedged portion on the back of historical ECA-type

facilities repayment and further hedging programme

implementation

• Continued commitment to mitigating the refinancing risk and

extending the average credit portfolio life in action

- c.50% of the Company’s debt becomes due within 3Y tenor or

later

- On 01 July, MegaFon and Sberbank signed addendum

agreements to two outstanding credit facilities opened in April

2012, extending the maturity of the first one until 2022, and the

second one until 2023

• Building momentum for future financings

- On 30 June, MegaFon and VTB signed an addendum agreement

to a credit facility established in 2012 extending its maturity

until 2023 and increasing the facility limit from RUB 30bn to RUB

50bn

21%

24%34%

10%

11%

61%9%

28%

2%

44%

39%

17%

31-D

ec-2

015

By currency (1)By instrument By maturity

Bonds

Bank Loans

Equipment Financing 3 Years

1 Year

5 Years and Longer

4 Years

2 Years

EUR

RUB

USD Hedged(2)

30-J

un-2

016

% of total

USD

Note: Due to rounding, manual calculations for financials and KPIs may differ from those displayed(1) — On nominal basis; (2 ) — Including structured and plain vanilla FX hedges

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47%

27%

26%12%

41%22%

11%

14%

74%

16%

6%4%

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Flat to low single digit y-o-y growth

RUB 120-126bn

Up to RUB 70bn

Revenue

OIBDA

CAPEX

Outlook for 2016

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Reiterate

Reiterate

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Appendix

4

MegaFon’s headline tariffs (Moscow region) (1/2)TARIFF NAME

MegaFon -All included S

PRICE

MegaFon -All included M

MegaFon -All included L

300 RUB/ month• 300 minutes

• 2 GB of 3G, 4G+ traffic

• 200 SMS

• 1 free movie and channels on MegaFon TV

FEATURES

500 RUB/ month

• 550 minutes


• 400 SMS

• 2 free movies and channels on MegaFon TV

800 RUB/ month

• 1,000 minutes in Russia


• 1,000 SMS


BEYOND THE PACKAGE

• To MegaFon subs in Russia – 0 RUB/min

• To other subs of Moscow region – 1.6 RUB/min

• All outgoing calls to other regions of Russia – 2.9 RUB/min

Bun

dled

tar

iffs

Pop

ular

tari

ffs Switch to zero

Everything is simple 0 RUB/ month

• Outgoing calls to MF subs of Moscow region –0 RUB/ min

• Outgoing calls to other subs of Moscow region – 2.5 RUB/ min

• Outgoing call on not MG subs of Moscow region – 1.6 RUB/min

• Outgoing calls to other subs in Russia – 3.9 RUB/min

0 RUB/ month • All outgoing calls to other regions of Russia – 3 RUB/min

• Not applicable

MegaFon -All included VIP 2,700 RUB/ month



• 5,000 SMS


Fre

e o

n-ne

t ca

lls

in R

uss

ia













1,200 RUB/ month



• 2,000 SMS


MegaFon -All included XL

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MegaFon’s headline tariffs (Moscow region) (2/2)

MegaFon - Internet XS

350 RUB/ month

• 3 GB of traffic

• Maximum speed is not limited


590 RUB/ month

890 RUB/ month

Inte

rnet

tari

ffs

opti

ons

• 16 GB of traffic*



• 36 GB of traffic*



• Once a plan data allowance isused, the Internet access willautomatically be suspendeduntil the next calendar monthor until the plan is upgradedwith other options

(*) 50% of traffic is available from 8.00 am to 00.59 am, the rest 50% of traffic is available from 1.00 am to 7.59 am

(**) Amount of traffic available is unlimited from 1.00 am to 7.59 am, 30 GB of traffic is available from 8.00 am to 00.59 am

TARIFF OPTION NAME PRICE FEATURES BEYOND THE PACKAGE

190 RUB/ month – 1st month7 RUB/day – from 2nd month

1,290 RUB/ month

• 70 MB of traffic per day


• Unlimited amount of traffic**



Roa

min

gta

riff

san

dop

tion

s

Around the world- Roaming tariff 0 RUB/ month• Europe, CIS: incoming, outgoing calls – 13 RUB/min / SMS – 11 RUB/ sms

• Other countries: incoming, outgoing call – 19 or 43 RUB/ min / SMS – 14 RUB/ sms

Whole world – voice tariff option 59 RUB/ day • Incoming calls - 0 RUB/ min from 0 to 40 minutes, from 41st minute – according to the

roaming price list of the country of location

MegaFon - Internet S

MegaFon - Internet M

MegaFon - Internet L

MegaFon - Internet XL

400 RUB/ month• 4 GB of traffic



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0 RUB/ 1st subscription • Daily fee – RUB 0-9 / day depending on the bundled tariff plan

Internet Tablet S

MegaUnlimited Internet option

35

Contact Information

MegaFon Investor Relations30 Kadashevskaya embankmentMoscow, 115035, RussiaTel.: +7 495 926 2012Email: [email protected]: corp.megafon.com

Documents

MegaFon Investor presentation€¦ · LTE, no other operator beside MegaFon can provide such band length After implementation of technology neutrality MegaFon is the only operator