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VimpelCom / Annual Report 2007
US$159.1 million increase in stock price based compensation expenses
due to new options granted under our stock based compensation plans
in 2007 and rapid appreciation of VimpelCom’s share price in 2007; (2) a
US$144.3 million increase in salaries and bonuses due to the launch of
new bonus programs for our employees; (3) a US$127.3 million increase in
dealers’ commissions and advertising expenses relating to the acquisition
of new subscribers; (4) a US$88.4 million increase in technical support
and maintenance expenses due to increased equipment-related costs and
payments for licenses, frequencies and permissions; (5) an approximately
US$41.1 million increase in rent, utilities and repair of offices due to
annual increase in fees for services and opening of new offices; (6) an
approximately US$27.9 million increase in software support; (7) a US$23.4
million increase in property and other taxes due to our overall growth in
2007; (8) a US$22.9 million increase in dealer commissions for the sale
of prepaid subscriber cards and payment commissions relating to existing
subscribers; (9) a US$17.5 million increase in required payments to the
«universal services fund»; and (10) a US$50.8 million increase in other
expenses due to increase business activity in both Russia and the CIS.
As a percentage of net operating revenues, our selling, general and
administrative expenses remained level at 30.8% during 2007 compared
to 30.9% during 2006.
Depreciation and amortization expense. Our depreciation and
amortization expense increased by 31.9% to US$1,390.6 million in 2007
from US$1,054.5 million during 2006. The overall increase in depreciation
and amortization expense was due primarily to continuing capital
expenditures in Russia, Kazakhstan, Ukraine and Tajikistan, coupled
with the first full year consolidation of the amortization expenses of
Unitel, Mobitel and ArmenTel, all of which we acquired in 2006.
Provision for doubtful accounts. Our provision for doubtful accounts
increased by 142.2% to US$52.9 million during 2007 from US$21.8
million during 2006. As a percentage of net operating revenues, provision
for doubtful accounts increased to 0.6% in 2007 compared to 0.4% in
2006 due to the increase in negative balances of prepaid subscribers, the
extension of post-paid tariff plans and recent acquisitions in the CIS.
Operating Income
Primarily as a result of the foregoing, our operating income increased
by 57.9% to US$2,206.2 million during 2007 from US$1,397.3 million
during 2006. During 2007, our operating income in Russia grew by 41.9%
to US$1,991.8 million compared to US$1,403.2 million during 2006. This
growth in Russia was primarily attributable to increased traffic on our
networks, an increase in interconnect charges between mobile operators,
as well as management’s efforts to control costs. In 2007, our operating
income in Kazakhstan grew by 355.5% to US$216.8 million compared to
US$47.6 million in 2006 primarily due to an increase in our subscriber
base, along with a stable ARPU. In 2007, we had an operating loss of
US$43.2 million in Ukraine compared with US$61.7 million operating loss
in 2006. The improvement in our operating loss was primarily due to the
costs associated with launching our re-branded commercial operations
in April 2006 and significant growth of advertising expenses due to
active sales and subscriber base growth and the opening of branches
countrywide, which resulted in technical and administrative expense
growth in 2006. In 2007, our operating income in Uzbekistan grew by
114.3% to US$25.5 million compared to US$11.9 million during 2006
primarily due to significant growth in our subscriber base which lead to
an increase of net operating revenues. We believe that the increase in our
total operating income in 2007 was primarily attributable to our focus on
revenue growth and increasing ARPU, which, when combined with our
efforts to control costs relative to growth, resulted in an increase in our
operating income during 2007.
Other Income and Expenses
Interest expense. Our interest expense increased 4.5% to US$194.8
million during 2007 from US$186.4 million during 2006. The increase in
our interest expense during this period was primarily attributable to an
increase in the overall amount of our debt during 2007.
Foreign currency exchange gain/loss. We recorded a US$73.0 million
foreign currency exchange gain during 2007 as compared to a US$24.6
million foreign currency exchange gain during 2006. The appreciation
of the Russian ruble against the U.S. dollar during 2007 resulted in a
significant foreign exchange gain during 2007 from a corresponding
revaluation of our U.S. dollar denominated financial liabilities under our
loan agreements. In order to reduce our foreign currency risk, in November
2006, we entered into a series of forward agreements to acquire US$972.7
million in Russian rubles to hedge our U.S. dollar denominated liabilities
due in 2007 and the first quarter of 2008 (including a swap agreement in
the principal amount of US$236.1 million). In March and August 2007,
we entered into a series of forward agreements to acquire US$173.6
million in Russian rubles to hedge our short-term US dollar denominated
liabilities due in the first and second quarters of 2008 (including a zerocost
collar agreement in the principal amount of US$120.6 million). As
of December 31, 2007, we had swap and forward agreements to purchase
U.S. dollars for Russian rubles in an aggregate amount of US$220.8
million. In August 2006, we entered into a forward agreement to acquire
US$110.0 million in Kazakh tenge to hedge financial liabilities of KaR-
Tel. In October 2006, the forward agreement was restructured into a swap
agreement in a principal amount of US$100.0 million to purchase U.S.
dollars for Kazakh tenge at the fixed rate of 122.64 Kazakh tenge per
U.S. dollar and transfer our floating U.S. dollar interest rate loans to a
fixed Kazakh tenge loan with an interest rate of 9.9%. As of December
31, 2007, we had a swap agreement to purchase U.S. dollars for Kazakh
tenge with principal amount of US$90.3 million.
Income tax expense. Our income tax expense increased 52.0% to US$593.9
million during 2007 from US$390.7 million during 2006. This income tax
expense consisted of current and deferred taxes. The increase was primarily due
to the increase in our taxable income. Our effective income tax rate of 28.0%
during 2007 was lower than our effective income tax rate of 32.2% in 2006.
Net income and net income per share. In 2007, our net income was
US$1,462.7 million, or US$28.78 per common share (US$1.44 per ADS),
compared to US$811.5 million or US$15.94 per common share (US$0.80