MTS, the Russian operator with a footprint which also covers neighbouring states, saw Q2 revenue rise thanks to domestic adoption of data services and a surge in handset sales, but Ukraine’s conflict knocked the group’s profitability in a big way.

Group revenue rose by 4 per cent to RUB 103 billion ($1.56 billion) in the three months to the end of June. The performance was mainly due to Russian service revenue and device sales.

Domestic mobile service revenue grew by 2.8 per cent to RUB 73 billion because of increased data adoption resulting from higher penetration of smartphones and tablets.

Mobile device sales were pushed higher as the group aggressively cut prices in April 2015, a move motivated to head off rivals as well as encouraging subscriber adoption of higher value plans.

Service revenue was also boosted by upselling existing data users to higher value plans and an expansion of the total subscriber base.

Revenue from selling handsets and accessories rose steeply by 27 per cent to RUB 7.6 billion, thanks to the aforementioned price cutting.

MTS is changing its retail strategy by rolling out its own network of shops, instead of relying of Svyaznoy, the country’s second largest independent handset retailer, which has about 3,000 stores in Russia and Belarus. At end Q2 2015, MTS boasted 4,422 of its own stores including 1,435 franchise outlets.

22% profit fall
Using its own stores benefited profitability because of lower dealer commission but this positive failed to offset a group fall in net profit by 22 per cent to RUB 17 billion.

The group said the fall in profitability was because of Ukraine, the group’s second largest market after Russia, where net profit fell by 72 per cent (and revenue by six per cent). The dramatic fall follows the cessation of operations in Crimea, which was annexed by Russia, as well as the conflict in the east of the country and the devaluation of the country’s currency.

In addition, group profit was impacted by the cost of relaunching operations in Uzbekistan. In September last year, MTS took a controlling stake in UMS which has a mobile licence in the country and launched a service in December 2014. The group expects the fledgling operator to hit 1.15 million subscribers by the end of 2015.

Separately, the group is being investigated by both the US Department of Justice and Securities and Exchange Commission (SEC) relating to MTS’ former activities in Uzbekistan.

The company reaffirmed its group guidance for revenue and profitability but revised 2015 capex guidance to RUB 92 billion because it is building out a 3G network in Ukraine, having received a licence earlier in 2015.