Is VimpelCom Showing Signs of Trouble?

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Cell phone operator VimpelCom (NYS: VIP) came out with its third-quarter results with net income that fell below analyst expectations. The company's dwindling margins in a few geographical operations are also a cause of concern. Let's take a closer, Foolish look at VimpelCom's performance.

Figuring it out
VimpelCom reported a 116% rise in total revenues to $6 billion, mainly due to the effects of it acquiring Wind Telecom in April. Excluding acquisitions, organic revenues grew by 5%. The company's net income, on the other hand, crashed by 79%, mainly because of heavy foreign exchange losses and higher interest expenses.

The firm's Russian operations, which form its largest source of revenue, saw solid revenue growth of 14%. This was made possible because of a 10% jump in the Russian subscriber base and an increase of 2.7% in ARPU, or average revenues per user.

On the margins front, a higher sales mix of low margin handsets sent EBITDA margins for the company's Russian operations crashing by 700 basis points, as it faces heightened competition from its Russian rivals like Mobile TeleSystems (NYS: MBT) .

Now, it would have been great if the pricing strategy effectively kept a hold on customers. But regrettably, the percentage of Russian subscribers who chose to hang up on VimpelCom increased by 4% to 16.3% for the quarter. Besides Russia, the company's Italian and Ukrainian markets also witnessed declines in EBITDA margins. The bright spots, on the other hand, were African and Asian operations, along with the CIS countries, which saw 200 to 300 basis-point improvements in EBITDA margins. The company's CIS operations include Kazakhstan, Uzbekistan, Armenia, Kyrgyzstan (since the first quarter of 2010), Tajikistan, and Georgia.

No slowdown pangs yet
VimpelCom's management claims that it has been working on a contingency plan, should its Italian operations get pulled down by the economic slowdown. But so far, the company claims that its operations have been running great compared to its Italian rivals, as consumer spending has not shown a slowdown. This can be understood by VimpelCom's fixed broadband subscriber numbers in Italy that saw an increase of 15%, along with mobile broadband revenues that jumped by a healthy 34%.

No confidence in Algeria
But while the company seems perfectly happy with Italy, it has expressed doubts about its operations in Algeria. The company said that it would not renew its risk-sharing agreement with the Egyptian billionaire Naguib Sawiris over Djezzy, a unit of Orascom Telecom, which has been threatened with nationalization by the Algerian government. VimpelCom owns almost half of Orascom's stake, while the other half is owned by Sawiris.

The Foolish bottom line
Given that the company gets so much of its revenue from Russia, the trouble in the EU may not have as significant an impact on revenues as one might think. A more convincing reason why VimpelCom may not be affected by the European crisis is because it derives almost 40% of its revenues from Russia. The latest reports show that Russia witnessed a 4.8% growth in GDP for the third quarter against the same period last year. This is the highest growth rate the Russian economy has seen since the second quarter of 2010. This would bode well for the telecom company, but it remains to be seen how much of a difference it makes. To stay up to speed with the latest on VimpelCom, feel free to add it to your very own free watchlist by clicking here.

At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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