Is VimpelCom showing signs of problems?

Mobile operator VimpelCom (NYS: VIP) has reported its third quarter results and net profit fell below analysts' expectations. The company's declining margins in some geographic business segments are also a cause for concern. Let's take a closer, foolish look at VimpelCom's performance.

Find out
VimpelCom reported a 116% increase in total revenue to $6 billion, mainly due to the impact of the acquisition of Wind Telecom in April. Excluding acquisitions, organic revenue increased by 5%. The company's net profit, however, plunged by 79%, mainly due to large currency losses and higher interest expenses.

The company's Russian operations, which represent its largest source of revenue, recorded solid revenue growth of 14%. This was possible because the number of Russian subscribers increased by 10% and ARPU (average revenue per user) increased by 2.7%.

On the margin side, the EBITDA margin of the Russian business plunged by 700 basis points as a higher share of sales from low-margin mobile phones led to a 700 basis point decline as the company faces increased competition from Russian rivals such as Mobile telesystems (NYS: MBT) .

It would have been nice if the pricing strategy had been effective in retaining customers. Unfortunately, the share of Russian subscribers who hooked up with VimpelCom increased by 4% to 16.3% in the quarter. In addition to Russia, the company's Italian and Ukrainian markets also saw declines in EBITDA margins. Bright spots were the African and Asian operations, as well as the CIS countries, where EBITDA margins improved by 200-300 basis points. The company's CIS operations include Kazakhstan, Uzbekistan, Armenia, Kyrgyzstan (since Q1 2010), Tajikistan and Georgia.

No signs of weakening yet
VimpelCom's management says it is working on a contingency plan in case the Italian business is affected by the economic slowdown. So far, however, the company claims that its business has performed well compared to its Italian peers as consumer spending has not shown a decline. This can be seen in the fact that VimpelCom's fixed broadband subscribers in Italy increased by 15%, and revenue from its mobile broadband business also increased by a whopping 34%.

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

Foolish’s conclusion
Because the company generates such a large portion of its revenue in Russia, the problems in the EU may not have as big an impact on sales as one might think. A more compelling reason why VimpelCom may not be affected by the European crisis is that the company generates nearly 40% of its revenue in Russia. Recent reports show that Russia saw 4.8% growth in GDP in the third quarter compared to the same period last year. This is the highest growth rate of the Russian economy since the second quarter of 2010. This would be a good sign for the telecom company, but it remains to be seen how big the difference will be. To stay up to date with the latest developments at VimpelCom, feel free to add it to your own free watchlist by clicking here.

At the time of publication of this article Keki Fatakia has no ownership interests in any of the companies mentioned in this article. Try one of our Foolish newsletter services free for 30 days. We Fools may not all agree, but we all believe that considering a broad range of insights makes us better investors. The Motley Fool has a disclosure policy.

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