OREANDA-NEWS. On 29 June 2009 Rostelecom (NYSE: ROS; RTS and MICEX: RTKM, RTKMP), Russia’s national telecommunications operator, announced its consolidated financial results in accordance with international financial reporting standards (IFRS):

consolidated 2008 revenue increased by 3.1% compared to 2007 up to Rub 66.6 bln;

Revenue from datacom and intellectua ltelecom services, i.e. value-added services provided in the course of business diversification, rose by 2.8 times in 2008 to Rub 6.7 bln, while their share in consolidated revenue stood at 10%;

OIBDA[1]rose by 28.5% compared with 2007 to Rub 14.3 bln; OIBDA margin reached 21.4%;

2008 net profit stood at Rub 12.2 bln, which is 4.3 times more than in 2007.

In 2008 the Rostelecom Group of Companies (hereinafter – “the Company” and “Rostelecom”) showed positive financial results, rolling value-added services while continuing the process of business diversification.

Revenues of the Rostelecom Group of Companies and position on key markets

The company’s 2008 consolidated 2008 revenue increased by 3.1% to Rub 66.629 bln.

By adhering to its policy of intense expansion and rolling out value-added services, Rostelecom is developing its presence in VAS segments.

By and large, VAS revenues, including datacom, intellectual network services, line leasing and technical maintenance, rose by 26.6% to Rub 18.486 bln.  In addition, datacom revenue increased by 4.2 times to Rub 5,437 mln compared with 2007[2], while intellectual network services rose by 10.4% to Rub 1.251 bln.

In 2008 the share of the Rostelecom Group’s on the backbone Internet market reached 30%.

In 2008 the company increased its share of revenues from value-added services compared with revenue from traditional services as part of the diversification process.  During the reporting period revenues from datacom services and intellectual network systems more than doubled to 10% compared with the previous year.  The share of revenue from traditional DLD and ILD telephony stood at 72% from the company’s consolidated earnings.

In the segments of traditional telecom solutions, Rostelecom continues to maintain stable positions and a 50% share of the market for terminating and transiting the traffic of international operators.  At the end of the reporting year ILD traffic rose by 8% to 3,305.7 mln minutes.  Revenue from the termination and transit of LD traffic of foreign operators increased by 13% compared with the previous year to Rub 6,450 mln.

The volume of DLD traffic in 2008 increased by 0.5% to 10.229 mln minutes.  Revenue from DLD traffic decreased by 7.4% and stood at Rub 29,611 mln. As a result of the change in the structure of the fixed line market due to the cannibilization of DLD traffic from fixed line networks into cellular networks, in order to provide consumers with competitive tariffs the Company adopted flexible price formation methods, which had a direct impact on the preservation of DLD traffic against the backdrop of decreasing revenue from DLD telephony.

Outgoing international (ILD) traffic increased by 11.2% to 2,024.1 mln minutes.  Revenue from the provision of ILD traffic to Russian clients stood at Rub 12,082 mln, which is 1.9% more than 1.9% less than in the same indicator in 2007.  The revenue dynamics for ILD traffic is related to the increase in competition and the change in the structure of outgoing international traffic.

In 2008 the share of the Company on the DLD and ILD telecommunications market for Russian end users individuals and legal entities) stood at over 50%.

On the fixed line DLD and ILD market for households, Rostelecom continues to command a leadership position, maintaining an 85% share as of the end of the year.

As a result, by continuing to diversify its business and roll out value added services, Rostelecom demonstrated the sustainability of its positions on the national telecommunications market in 2008.

Оperating expenses, OIBDA, operating profit, investment program

The operating profit of Rostelecom in 2008 increased by 2.3 times compared with the previous year and stood at Rub 6,820 mln.  Operating profit margin stood at 10.2%.  The main driver behind the positive operating profit was the increase in the Company’s revenue along with an adequate decrease in operating expenses.

In addition, OIBDA rose by 28.5% to Rub 14,274 mln compared with the previous year, which OIBDA margin stood at 21.4%.

The Company’s operating expenses for 2008 amounted to Rub 59,809 mln, which is a 2.9 decrease compared to the previous year.  The main reason behind the decrease in operating expenses was the decline in payments to Russian telecom operators. Interconnect fees paid to Russian telecom operators decreased by 7.6% compared to 2007 and stood at Rub 27,743 mln.  The main reason for the decline in expenses under this metric is the elimination of the compensatory surcharge effective January 1, 2009 [3].            Fees paid to international operators increased 11.4% during the reporting period to Rub 8,706 mln, which is due to an increase in the volumes of outgoing ILD traffic and DLD transit traffic, and also a change in foreign exchange rates in the fourth quarter of 2008.

Payroll expenses amounted to Rub 9,473 mln in 2008, which is 8.1% higher than in the previous year.  The main factors behind the rise in the expenses under this metric include the consolidation of the results of RTKomm.ru effective July 1, 2008, an increase in payrolls, and also an increase in the number of staff engaged in marketing, sales and customer service.

Thanks to further efforts to optimize business processes and organizational structure, the total number of staff employed at Rostelecom and its subsidiaries decreased by 0.7% and stood at 22,372 as of December 31, 2008.

In 2008 the implementation of the Company’s investment program continued, which aims to upgrade and expand its network, and also to develop the technical and IT infrastructure for providing value added services.  The total amount of capital expenditure increased by 9.6% compared with 2007 and stood at Rub 7.8 bln.  Implementation of the investment program will make it possible to further diversify its activity, while rolling out new areas of business and also maintaining solid positions in the Company.s traditional segments.

Other revenue and expenses

The Company’s other expenses in 2008 increased by 11.4 times compared with the previous year, from Rub 815 mln to Rub 9,324 mln. This increase is due to Rostelecom’s receipt of significant additional profit from the sale of financial investment, and also a 2-fold rise in interest revenue, which offset the loss in foreign exchange differences.

In February 2008 the Company sold its stake in the charter capital of Golden Telecom Inc.  The pre-tax profit from this transaction amounted to Rub 8,666 mln.

Consolidation

Consolidated financial reports in 2008 include the operating results of Rostelecom, and also its subsidiaries – Vestelecom, GlobalTel, Zebra Telecom, MTS NTT, RTKomm.ru, etc.

The results of RTKomm.ru were included in the current consolidated reports, effective July 1, 2008, when Rostelecom essentially took control over this company.

Net profit

The consolidated net profit of the Rostelecom Group of companies increased to Rub 12,182 mln, which is 4.3 times higher than in 2007.  In addition, net profit margin stood at 18.3%.

The audio broadcasting of the conference call on the 2008 consolidated results of Rostelecom will be available on the website of Rostelecom at the Center for Investors and Shareholders at the address www.rt.ru/icenter/on June 18, 2008 beginning at 5.30 pm Moscow time.

[1]              OIBDA is not a metric calculated according to US GAAP or IFRS.  The Company calculates OIBDA as operating profit before amortization, devaluation of non-working assets and loss (profit) from the disposal of fixed assets.  We believe that OIBDA provides important information to investors, since it reflects the state of the company’s business, including its ability to finance capital expenses, acquisitions and other investments, and also the ability to attract borrowed funds and service debt.

[2]              Including the income of RTKomm.ru, which amounted to Rub 2,022 mln.

[3]              According to statutory requirements, from January 1, 2006 until January 1, 2008 Rostleecom as a LD operator paid a compensatory surcharge on the value of services provided to it for local and zonal origination of calls to operators of zonal and local networks which hold “a substantial market position”.