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VimpelCom / Annual Report 2007
In general, a high level of churn is typical in mobile markets where
a large proportion of the subscribers are prepaid or mass market subscribers,
such as in Russia and the CIS. We believe the reduction in our
total churn rate in 2007 compared to 2006 is due to intense seasonal
promotional campaigns in Russia introduced by us and our competitors.
The reduction in our churn rate in Kazakhstan in 2007 compared
to 2006 was due to improved network quality and reduced tariffs. The
high churn rates in Ukraine and Uzbekistan in 2007 were due to a change
in our subscriber calculation policy in each country, pursuant to which we
decreased the period of subscriber registration in the total base from
six to three months, in order to be consistent with our policy in Russia.
We believe the increase in our churn rate in Armenia in 2007 compared
to 2006 was due to switching to a new billing system for prepaid subscribers
that better monitored those subscribers that should have been
disconnected from our network due to lack of activity for three months.
This resulted in a significant one-time churn of subscribers. The relatively
high churn rate in Tajikistan in 2006 was due to the large number
of subscribers disconnected and counted as churn following the application
of our churn policy to our subsidiary Tacom following our acquisition.
Acquisitions
Our significant acquisitions from 2005, 2006 and 2007 are summarized
below. The financial results of the companies acquired as set out below
have been consolidated into our financial statements since the first
date of acquisition. For more information on our significant acquisitions
and dispositions, see «Liquidity and Capital Resources—Investing
activities.»
On February 28, 2008, we completed our acquisition of 100.0% of Golden
Telecom. We began consolidating Golden Telecom’s financial results into
our financial statements as of March 1, 2008.
Reclassifications
Certain reclassifications have been made to the prior years’ consolidated
financial statements to conform to the current year’s presentation.
Equipment financing obligations and capital lease obligations were
combined in the line «Bank loans and other debt» from the line «Accrued
liabilities.» Please see Note 2 to our audited consolidated financial
statements included elsewhere in this annual report.
Revenues
During the three years ended December 31, 2007, we generated revenues
from providing telecommunications services and selling handsets
and accessories and other revenues. Our primary sources of revenues
consisted of:
Service Revenues
Our service revenues included revenues from airtime charges from
contract and prepaid subscribers, monthly contract fees, interconnect
fees from other mobile and fixed-line operators, roaming charges
and charges for value added services such as messaging, mobile internet,
and «infotainment.»
Sales of Handsets and Accessories and Other Revenues
We sold mobile handsets and accessories to our subscribers. Our other
revenues included, among other things, rental of base station sites.
Expenses
During the three years ended December 31, 2007, we had two categories
of expenses directly attributable to our revenues: service costs and
the costs of handsets and accessories.
Service Costs
Service costs included interconnection and traffic costs, channel
rental costs, telephone line rental costs, roaming expenses and charges
for connection to special lines for emergencies.
Costs of Handsets and Accessories
Our costs of handsets and accessories sold represented the amount that
was payable for this equipment, net of VAT. We purchased handsets and
accessories from third party manufacturers for resale to our subscribers
for use on our networks.
Operating Expenses
In addition to service costs and the costs of handsets and accessories,
during the three years ended December 31, 2007 our operating expenses
included:
Selling, general and administrative expenses. Our selling, general
and administrative expenses include:
• dealers’ commissions;
• salaries and outsourcing costs, including related
social contributions required by Russian law;
• stock price-based compensation expenses;
• marketing and advertising expenses;
• repair and maintenance expenses;
• rent, including lease payments for base station sites;
• utilities; and
• other miscellaneous expenses, such as insurance,
operating taxes, license fees, and accounting, audit and legal fees.
Depreciation and amortization expense. We depreciated the capitalized
costs of our tangible assets, which consisted mainly of telecommunications
equipment and buildings owned by us. We amortized our intangible assets,
which consisted primarily of telecommunications licenses and frequency
allocations, telephone line capacity for local numbers in Russia and the
CIS and customer relations acquired in business combinations.
Provision for doubtful accounts. We included in our operating expenses
an estimate of the amount of our accounts receivable that we believe
will ultimately be uncollectible. We based the estimate on historical data
and other relevant factors, such as a change in tariff plans from pre-paid
to post-paid.
Interest expense. We incurred interest expense on our vendor financing
agreements, loans from banks, capital leases and other borrowings.