Chief Executive’s Review

In a challenging 2020, defined by the COVID-19 pandemic, MegaFon was able to demonstrate business resilience, improve operational efficiency and, despite a slight fall in revenue, increase profit margins and post significant growth in net profit. We also continued to expand our portfolio of the most sought-after digital products and services, focusing on the needs of our subscribers, both independently and with our partners.

Gevork Vermishyan
Chief Executive Officer

Could you tell us the highlights of MegaFon’s performance in 2020? What was COVID-19’s impact on the Company?

MegaFon continued to grow its business and improve operational efficiency in 2020. Our revenue decreased by 4.8% to RUB 332.2 billion amid the pandemic, while service revenue was down 2.5% to RUB 303 billion. At the same time, the decline in the mobile segment, which accounts for the bulk of revenue, was actually the smallest at 2.1%, with the steepest decline coming from sales of equipment and accessories at 23.6%.

The negative impact on service revenue came mainly from falling international roaming revenues, an outflow of guest workers due to international travel restrictions, and changes in subscriber behaviour – lower activity and reduced spending on communications and value-added services during the pandemic. The fall in revenue from sales of equipment and accessories was due to the closure of a significant chunk of retail stores and a marked decline in footfall.

We were able to partially offset the impact of the pandemic with increased data revenue, thanks to a sharp increase in demand for content services, including video, remote access services, big data analysis and M2M services. A positive windfall came from the increased demand for certain digital services, including information security services and cloud solutions, which were especially relevant as many subscribers shifted to working from home. We also benefited from by the launch of SIM card sales online and at convenience stores. In addition, increased online sales of equipment and accessories contributed to a twofold increase in sales at our online store.

OIBDA in 2020 fell by 2.5%, which was less than revenue, to RUB 147.8 billion, while the OIBDA margin increased by 1.1 p.p. to 44.5%. Measures to control costs, cut down on advertising spending and certain general business expenses, and reduce low-margin sales of equipment allowed us to achieve these results.

We were also able to post a very strong net profit in 2020: it grew by 158.3% y-o-y to RUB 26.6 billion, driven by overall operational efficiency gains and lower finance charges following deleveraging and an optimisation of our debt portfolio. In 2020, we adjusted the system used to account for the subscriber base, strengthening the requirements for checking the activity of subscribers not using mobile services. According to the new methodology, the subscriber base in Russia at the end of the year increased 0.9% to 70.4 million, and the number of mobile data users increased by 4.6% to 36.4 million.

How does MegaFon deliver high levels of customer satisfaction?

In its product offering, MegaFon is primarily focused on customer needs: we strive to keep a customer as satisfied and happy as possible, so that they stay with us as long as possible. To achieve this, we are enhancing our product and service portfolio, shifting our retail network to a new format, as well as continuously improving network reliability and enhancing customer experience.

In 2020, we continued opening next-generation stores offering increased levels of customer service and a special approach to the customer experience. Moscow saw the opening of our second experience store – MegaFon’s ‘Store of the Future’.

We also continued to enhance our portfolio of products and services for retail customers and businesses. We launched the tariff line Always in Touch #NoOvercharges in the first half of 2020, and were the first Russian operator to offer subscribers unlimited data rollover plans. Furthermore, we launched ‘Zakachaisya!’ (‘Get Downloading!’), a new tariff line that offers unlimited plans for data-enabled devices, to meet the needs of different user segments based on their consumption patterns.

As part of building out our digital ecosystem, we are continuously expanding our range of services and seeking to improve the quality of existing products that are particularly sought after by our customers. In 2020, we paid special attention to the development of products such as I Know Who’s Calling, Direct Carrier Billing (DCB)1, MegaDisk, MegaFon TV and Digital Shelf. All of these services have significantly increased their audiences, while elevating their net promoter score (NPS), and and most of them showed a growth in revenue.

MegaFon’s B2B product portfolio has been expanded to around 80 services, which provide solutions for the majority of our customers’ business tasks. Our focus areas for 2020 included the development of cloud solutions, information security, big data, customer communications and the Internet of Things. Our portfolio grew by 12 products over the year, including MegaFon Cloud, a computing power rental service certified to the requirements of government regulators; the Omnichannel Communications tool, used to create a single ecosystem of communications with customers and partners; the Urban Environment Analytics service, which helps monitor population movements; the MegaFon Video Analytics solution that analyses data from CCTV cameras; Anti-Fraud Services, a solution protecting customers against phone scams; and many more.

How does MegaFon maintain its industry leadership?

Providing reliable high-speed, high-quality connectivity to our customers is our top priority. For years we have delivered the fastest mobile data speeds in the country2, far outstripping the nearest competitors. MegaFon continuously invests in infrastructure development and innovations to both further enhance customer experience and increase network resilience. Thanks to this, our infrastructure successfully withstood the increased network load and redistribution of traffic brought on by the pandemic in 2020.

For many years, we have remained Russia’s unrivalled leader by number of base stations, at 193,300 in 2020. During the reporting year, we focused on expanding 4G/LTE network coverage, increasing the number of 4G/LTE base stations by 20.5% to take the total to 73,100 and bringing the 4G/LTE standard to 85% of the country’s population.

In preparation for the rollout of 5G, MegaFon worked with other operators in 2020 to continue planning for 5G networks and evaluate frequency bands to assist informed decision-making on state frequency regulation, without which the full-scale rollout of this new technology in Russia would be impossible. All operators made a special effort to work through 3.4–3.8 GHz and 700 MHz spectrum allocations, as well as to come to an agreement on the dynamic allocation of spectral resources using DSS technology3. Final decisions are yet to be made on these issues, and we continue to engage in an active dialogue with regulatory authorities.

Alongside this, our digital laboratory, located on the campus of the Graduate School of Management at Saint Petersburg State University, continued to develop new services based on 5G technology in 2020. Its first minimum viable products were presented by six teams in mid-2020. In 2020, MegaFon was also the first Russian operator to launch international 5G roaming, and in early 2021, test speeds already passed the 1 Gbit/s mark.

Implementing joint initiatives with other market players also contributed to cementing MegaFon’s position in the telecoms market. When working towards a common goal, these projects enable industry leaders to pool resources and expertise, and therefore achieve success more efficiently.

Could you name some of these partnerships that MegaFon developed in 2020?

In 2020, we continued to actively develop various joint projects with the diversified Russian IT group ICS Holding. We also acquired a stake in the fastest-growing Russian video streaming service START, went into partnership with the international gaming brand MY.GAMES (providing access to new games on the MegaFon.Games portal), shook hands on a partnership with the game service Loudplay.

We invested a lot of effort into the development of partner infrastructure projects. We launched an FVNO project in 2020 involving local internet service providers (ISPs) in towns and cities outside the footprint of NETBYNET, the Company’s own fixedline network. Through this project, MegaFon will complement its own infrastructure, and our partners will be able to monetise their own assets more effectively.

MegaFon started investing in the development of low orbiting satellite systems in 2020, with plans to engage a wide range of experts and investment partners. In the future, the Company will develop hybrid satellite-terrestrial telecom networks capable of bringing high-speed connectivity to every remote corner of Russia regardless of distance or terrain. MegaFon has earmarked RUB 6 billion over a two-year horizon for applied research, the development of technical solutions, and testing, with the first low-orbit satellite missions slated for launch within the next five years.

In parallel to this, USM Telecom and MegaFon teamed up with partners from Uzbekistan to establish Digital Holding, a joint venture that is set to become a technology leader in Central Asia’s largest telecoms market, creating a telecommunications infrastructure in line with international standards. Finally, MegaFon, Mail.Ru Group, USM Group, Ant Group and RDIF signed documents in 2021 to establish two joint ventures offering digital payment solutions and financial services.

How does MegaFon contribute to the sustainable development of society?

In everything we do, we try to balance commercial, social and economic interests rather than purely focusing on delivering business results. We are committed to making a positive contribution to society and embrace national and international initiatives, including the UN Sustainable Development Goals and the Social Charter of Russian Business. Creating value for stakeholders is a priority area for us.

MegaFon seeks to maximise its positive impact by leveraging the Company’s existing technological capabilities. Our social projects in 2020 included a programme for training blind and visually impaired schoolchildren in the non-visual use of smartphones, which enabled a more frictionless and seamless switch to distance learning during the pandemic; an object recognition app for the visually impaired; and SkillCity, a social project to give guidance on careers and socialising in the digital world for children, adolescents and young adults. A total of over 102,000 people across the 84 regions of Russia benefitted from MegaFon’s charitable initiatives in 2020.

MegaFon has partnered with Dobro Mail.ru and Metalloinvest since 2015 to hold DOBRO (which stands for Business Discussion of Philanthropy for Societal Development), an annual educational conference for foundations and not-for-profit organisations with the aim of strengthening the dialogue between NGOs, business and society, and improving the impact of social activities in Russia.

Another area of corporate social responsibility we are focused on is improving people’s quality of life by creating high-skilled jobs with competitive pay and comfortable working conditions. Furthermore, in 2020, according to a Universum survey, business students from 147 Russian universities named MegaFon as their operator of choice in the Team- Oriented Work category.

Despite the inherently marginal environmental footprint of our business activities, we seek to maximise our own contribution to environmental well-being. For this reason, in 2020, we successfully completed Paperless, a project to shift the Company’s document flow to an electronic format.

Can you elaborate on how MegaFon addressed the challenges posed by the pandemic? What social support measures did the Company adopt?

During 2020, MegaFon addressed the challenges posed by COVID-19 through timely, smart response measures. In those trying times, the Company was able to fully concentrate on social responsibility. Through the pandemic’s toughest period of lockdown, we provided our customers, employees, partners, communities, businesses and the government with an entire range of much-needed opportunities and solutions, often made available free of charge.

MegaFon offered its subscribers free access to educational and entertainment services, and unlimited data for the most popular services (messengers, e-mail, food delivery services, online pharmacies, and many others). We provided free calls to helplines to deal with restrictions imposed on air traffic with other countries and increased the limits for roaming calls. We offered all subscribers free access to educational and entertainment services, and gave SMEs free webinar and videoconferencing tools, along with a suite of other solutions to support the nation.

MegaFon seamlessly shifted more than 14,000 employees to home working in just a few days when lockdown was announced at the start of the pandemic, and also introduced all the necessary measures to curb the spread of COVID-19 among employees working in the office and visitors to our sites.

Over 2020, a total of 80% of MegaFon employees were successfully shifted to home working. We also spent more than RUB 200 million on preventing and combatting the spread of COVID-19.

What are MegaFon’s future plans?

In 2021, we will not only reach for new heights in business, but also focus on satisfying and creating value for our customers, employees and shareholders. To do this, we will stay focused on continuously improving customer experience, expanding our digital product portfolio and tailoring our offering to meet the needs of our subscribers – both independently and with our partners.

We will help our employees to grow by implementing flexible management techniques, and giving them an even greater sense of purpose and value to rally them around the Company’s common goals. We also aim to become the market leader, and not just meet shareholder expectations but exceed them.

We will continue to develop our industry-leading infrastructure: expanding 4G networks to improve connectivity on the ground, and doing everything we can to lay the foundation for undersea and outer space leadership. We will collaborate with other operators to keep on actively engaging with regulatory authorities on the allocation of frequency bands necessary for the full-scale rollout of 5G in Russia. The development of the 5G standard may provide an impetus for the growth of the entire national economy, including in areas like the IoT, smart cities, self-driving vehicles, and telemedicine, all of which will make life better for every citizen.

To conclude, I would like to thank every member of the MegaFon team for their professional approach and commitment, which allow us to reach new heights and look optimistically into the future. I hope that 2021 will be another year of dynamic growth and new opportunities for the Company amid recovery in the Russian and global economies. MegaFon’s unique digital capabilities and technologies make us well-positioned to capture these growth opportunities.

  1. Payment in application stores using the linked MegaFon client account.
  2. According to Ookla®, MegaFon provides the fastest mobile internet in Russia: the average download speed exceeded 32.79 Mbit/s, and the average upload speed was 13.22 Mbit/s. Ookla® runs its independent survey globally on an annual basis. Its results are based on over 2.9 million speed tests run in the first half of 2020 via the Speedtest app on mobile devices owned by Russian users. MegaFon has topped Ookla’s ranking every year since 2017.
  3. DSS stands for Dynamic Spectrum Sharing.
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