Far East Telecom Released Its Audited Results for 2008

OREANDA-NEWS. On 09 June 2009 Far East Telecom (RTS: ESPK, MICEX: DLSV, US OTC: FEEOY, Frankfurt and Berlin Exchanges: D7A) announced its audited results for 2008 drafted to International Financial Reporting Standards (IFRS).

The consolidated financial statement includes assets, liabilities and results achieved by Far East Telecom Group, core activities of which are to provide local voice, intrazonal, wireless, datacom and other telecommunications services.

TheGroup’s headline financials

Subsidiaries

“Compared to 2007 we managed to increase EBITDA and the EBITDA margin, raise telecom earnings by 7.2%, boost the free cash flow by 4.6 times and cut interest debt by 17% to Rub 5.7 bln. In 2008 the net debt/EBITDA ratio came in at 0.88,” Far East Telecom CEO Anton Kolpakov noted, adding this year the company intends to bolster the group’s market and financial positions by aggressively promoting telecom services, rolling out technical infrastructure, keeping opex under control and increasing returns from its investment activities.

Revenue

Revenue grew on the back of:

a spike in datacom and telematics earnings;

A jump in local voice earnings.

Telegraph, datacom and telematics services

The highest rate of growth was recorded in interactive digital television (IP TV) earnings, which soared 133% from Rub 63.9 mln in 2007 to Rub 149 mln in 2008. This revenue item jumped as 28,888 subscribers were added to the subscriber base (17,902 users in 2007 and 46,790 subscribers in 2008). Major expansion of the subscriber base stems from aggressive promotion of IP-TV services in 2008 and the fact that Far East Telecom’s Amur branch launched these services in June 2008, while they were offered only by the Primorie, Khabarovsk and Kamchatka branches of Far East Telecom and Sakhatelecom in 2007.

As for broadband Internet access services, earnings surged 84% (Rub 1.47 bln in 2007 and Rub 2.71 bln in 2008). A bigger subscriber base is the primary reason behind rising earnings. Against 2007 the number of users increased by 130,855 (including 19,356 customers hooked up by Sakhatelecom). In addition, Far East Telecom managed to retain the item “average monthly revenue per user” at Rub 878.00 (Rub 865.00 in 2007).

A sharp rise in earnings (Rub 38.5 mln or 43%) was achieved in the IP VPN segment, as the number of customers increased from 1,078 in 2007 to 1,590 in 2008.

Local voice telephony

Local voice earnings grew on the back of tariff hikes effective September 20, 2008.

Intrazonal telephony

Intrazonal earnings dropped 1.1% y-o-y in 2008 owing to a contraction in F2F traffic along with a rise in mobile traffic, as a substitution for fixed line telephony.

Mobile telephony

In 2008 wireless earnings decreased by 3% y-o-y, as Far East Telecom’s Kamchatka and Magadan branches posted softer earnings due to toughening competition and the introduction of new tariff plans with lower monthly line subscription fees. Akos’ revenue, on the contrary, jumped 10.9% or Rub 139 mln compared to 2007.

Interconnect and traffic transmission

A reduction in interconnect and traffic transmission earnings in 2008 compared to income derived in 2007 was caused by:

the cancellation of installation fees effective March 1, 2008;

the cancellation of the compensatory surcharge as of January 1, 2008;

the introduction starting May 1, 2008 of different tariffs for zonal call termination services within one locality (Rub 0.80-1.25 per minute instead of Rub 1.52 per minute);

loss of some traffic transmission earnings (zonal call termination) due to the demonopolization of the zonal fixed-line market and the arrival of alternative operators. These trends were primarily seen in the Primorie, Khabarovsk, Amur and Kamchatka branches of Far East Telecom;

A drop in revenue derived from traffic transmission to access points (local call origination) in connection with a contraction in the share of dialup Internet access services and an increase in DSL services.

Alongside this, a decline in Far East Telecom Group’s zonal call termination revenue is partly offset by higher earnings from other traffic transmission services (local call termination) and also a spike in revenues at other subsidiaries.

Operating expenses

Payrolls, other payments and social security contributions

In 2008 this cost item grew 5.7% y-o-y owing to the indexation of salaries paid to Far East Telecom employees during the reporting period.

Supplies, repair and maintenance, public utilities

A 17% increase in this cost item stemmed from the fact that more funds were spent on subscriber equipment for broadband Internet (BI) and interactive television (IP-TV) services, and also higher prices for services and materials compared to 2007.

Expenses related to services provided by telecom operators

This item increased 4% to Rub 1.74 bln. This occurred to a large extent owing to a rise in Rostelecom’s tariffs starting March 2008 for intrazonal line lease services for the construction by Far East Telecom Group of an intrazonal network. Furthermore, during the reporting period growth was recorded in expenses related to the growing consumption of Internet access services.

Depreciation and amortization

This cost item rose 5.6%, as new fixed assets were put into service.

Other operating expenses

A contraction in this item stemmed from the restoration of reserves for contingent liabilities  (Rub 350 mln) and more funds allocated to offset losses from universal telecom services (Rub 21 mln). Apart from this, expenses under the following items declined in 2008: reserves accrued under contingent liabilities (Rub 371 mln), fines, penalties, forfeits (Rub 150 mln), contributions to no-profit partnerships (Rub 58 mln) and property insurance (Rub 23 ln).

Equity capital and borrowed capital

As of December 31, 2008 Far East Telecom Group’s net assets surged 24.5% to Rub 10.5 bln (Rub 8.43 bln as of December 31, 2007), while the portion of equity capital jumped by 6.9% compared to the beginning of the reporting period from 43.4% to 50.3%.

Liquidity

As of December 31, 2008 short-term liabilities exceeded short-term assets by Rub 2.24 bln (Rub 1.02 bln as of December 31, 2007).