Far East Telecom Announces Financial Results for 1H

OREANDA-NEWS. On 31 July 2009 OJSC Far East Telecom (RTS: ESPK, MICEX: DLSV, ADR of the USA: FEEOY, Frankfurt and Berlin Stock Exchange: D7A) announces financial results for the 1st half year 2009 according to Russian Accounting Standards (RAS).

Financial highlights according to the financial result of the 1st half year 2009

	Index	1st half year 2009, million rubles	1st half year 2008, million rubles	Changes, %
	Revenues from ordinary activities	6,639.8	5,886.6	12.8%
	including revenues from communication services	6,312.5	5,592.6	12.9%
	Expenses from ordinary activities	4,907.7	4,293.5	14.3%
	Sales profit	1,732.1	1,593.1	8.7%
	Before tax profit	1,370.7	1,184.6	15.7%
	OIBDA (1)	2,433.9	2,291.0	6.2%
	OIBDA margin (2)	36.7%	38.9%	-
	EBITDA (3)	2,324.5	2,093.0	11.1%
	EBITDA margin (4)	35.0%	35.6%	-
	Net profit	1,071.7	862.5	24.3%
	NP margin	16.1%	14.7%	-

1. OIBDA was calculated as revenues minus operational expenses before depreciation.

2. OIBDA margin was calculated as OIBDA/proceeds.

3. EBITDA was calculated as profit before tax plus depreciation plus leasing payments on off-balance leasing plus interest payable less interest receivable.

4. EBITDA margin was calculated as EBITDA/proceeds.

"Proceeds growth rate demonstrated by internet access, IP TV and tradition telephony enabled us to increase revenues increment rate as compared to the value obtained in the 1st quarter of 2009”, - pointed out Andrey Balatsenko, Company General Director. “Important management tasks for the year included strict control over operational expenses accompanied by business-process optimization, and increasing effectiveness of the investments. This will improve our profitability, liquidity values and reduce the debt”.

Performances

Staff on the payroll as of June 30, 2009 reduced by 591 persons (or 5.2%) as compared to the data as of January 1st 2009 (11,319 persons) and reached 10,728;

Revenue per employee increased by 23.4% to 621.2 thousand rubles for the 1st half year 2009 (503.5 thousand rubles for the 1st half year 2008); 

Number of lines per employee increased by 8.8% to 138.4 lines (127.2 for the 1st half year 2008); 

Prime cost per ruble of proceeds was 73.91 kopecks in the 1st half year 2009, which is a 1.3% increase against similar period of the last year (72.94 kopecks in the 1st half year 2008).

Revenues from communication services for the 1st half year 2009

Revenues growth is highlighted by:

Internet access service income growth;

IP TV service income growth; 

Local telephone communication service income growth

Income from Internet access and data transmission service

High income growth rate is achieved due to enlarging broadband access subscriber base. It increased by 116,198 subscribers as against the 1st half year 2008 (subscriber base as of June 30, 2009 was 327,469). Besides, the income growth was influenced by the promotion of new limit and unlimited tariff plans, which contributed to subscriber fee income growth.

IP TV income increase was 70.1% or 39.4 mln rubles as compared to the 1st half year 2008. The income increase is driven by subscribers base enlargement by 28,022 numbers (as of June 30, 2009 subscribers base reached 54,678 numbers). Revenue service of the IP TV that started in July 2008 in Amursky Branch also added to the income growth.

Income from local telephone communication services

Increase in income from local telecommunication service by 10.5% is caused by tariff growth in September 2008 and March 2009.

Income from intrazone communication service

Income growth is preconditioned by the fact that since July 2008 income from intrazone communication services have included income from mutual JSC Transtelecom channel reserve in Primorsky and Khabarovsky krais. Regardless of the above income reduction was 0.9% or 7.6 mln rubles. The reduction is caused by a drop in intrazone traffic volume that decreased the income by 7.7% (58.7 mln rubles) due to the F2F traffic income reduction (by 14.2% or 50.9 mln rubles). The traffic volume reduction is related to alternative zone communication operators emergence on the market and mobile replacement.

Income from mobile communication

Income from mobile communication services reduced in the 1st half year 2009 by 19.9% as compared to the 1st half year 2008. The reduction is caused by subscribers base decrease by 8,058 numbers (as of June 30, 2009 the subscribers base was 93,512 numbers) and decrease in average income per subscriber from 249 rubles in the 1st half year 2008 to 212 in the 1st half year 2009 due to the tough competition from the Large Three operators in Magadanskaya oblast and Kamchatsky krai.

Income from traffic interconnection services

Income from traffic interconnection services decreased in the 1st half year 2009 as against the 1st half year 2008 due to:

cancellation of payment for interconnection points maintenance starting on March 1, 2008; 

partial income loss from traffic interconnection caused by zone fixed communication market demonopolization and alternative operators entering the market. These trends are most evident for Primorsky, Khabarovsky krais and Amurskaya oblast; 

income loss from traffic interconnection at local and zone levels caused by mobile replacement and traffic partial overflow to ip-networks; 

decrease in partial income from traffic interconnection to trunk access nodes (local call initiation) due to the reduction in Internet dial-up access service share and DSL service share growth.

Subscribers base and new service share in the 1st half year 2009

New service (Internet access, data transmission, mobile communications, IP TV and video on demand) share in Company revenue structure for the 1st half year 2009 reached 30.1% (in the 1st half year 2008 new service share was 27.2%); 

Internet dial-up access subscribers base reduced by 44% to 96,017 numbers (171,081 subscribers in the 1st half year 2008) due to subscribers shift to Internet broad band access services; 

Internet broad band access subscribers base increased by 55% to 327,469 numbers (211,271 subscribers in the 1st half year 2008); 

Cellular communication subscribers base reduced by 8% to 93,512 numbers (Kamchatsky krai – 34,777 (43, 693 in the 1st half year 2008), Magadanskaya oblast – 58,735 (57,877 in the 1st half year 2008); 

Main station subscribers base as of June 30, 2009 was 1,379,270 numbers (1,381,092 subscribers as of June 30, 2008).

Expenses according to financial results of the 1st half year 2009

	Expenses	1st half year 2009, million rubles	1st half year 2008, million rubles
	Wage costs	1,515.98	1,330.31	13.96%
	Social insurance contributions	325.65	329.55	(1.18%)
	Fixed assets depreciation	701.77	697.87	0.56%
	Tangible costs (5)	480.92	444.69	8.15%
	Expenses on telecommunication operators (other than OJSC Rostelecom)	821.82	590.51	39.17%
	Expenses on OJSC Rostelecom services	171.89	141.41	21.55%
	Outsourced services (6)	376.54	334.67	12.51%
	Universal service reserve deductions	66.50	58.99	12.73%
	Taxes and fees included into expenses on ordinary activities	4.74	4.50	5.33%
	Other expenses (7)	441.94	360,96	22.43%
	TOTAL	4,907.75	4,293.46	14.31%

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5. Including 184.8 mln rubles for electric and heat power (155.3 mln rubles in the 1st half year 2008).

6. Information, consulting, audit, transportation, security, current maintenance and repairs, staff retraining, advertisement.

7. Leasing payments, property rent, non-government pension insurance, voluntary medical insurance in favor of employees.

Wage costs increased by 185.67 mln rubles or 14% as against the 1st half year 2008 due to Company staff wages increase program implemented in 2008. 

Fixed assets depreciation remained at the 1st half year 2008 level. 

Growth of tangible costs by 36,2 mln rubles or 8.2% as compared to the 1st half year 2008 is mostly caused by heat and power energy tariff increase. 

Increase in “Telecommunication operator services” line by 231.3 mln rubles in the 1st half year 2009 as against similar period of the last year is related to contract execution JSC Transtelecom for mutual channel reserve for STM-16 Vladivostok – Khabarovsk telecommunications on July 1, 2008 (120 mln rubles per quarter). Regardless of the above fact, the line shows decrease due to reduced Internet service consumption from other operators and increased Internet service consumption from OJSC Rostelecom. 

Increase in "Expenses on OJSC Rostelecom services” line is caused by growth in channel rent tariffs for the zone benefit from March 2008 and by increase in internet service consumption.

Increase in “Outsourced services” expenses by 41.9 mln rubles is mostly related to the growth of expenses of outsourced building, facility and equipment maintenance, repairs and service, advertisement, and enlarged expenses on information and consulting services. 

Increase in “Other expenses” in the 1st half year 2009 by 81 mln rubles is mostly related to the growth of expenses on software and data bases, agency services and non-government pension insurance in favor of employees.

Other revenues and expenses

As a result of the 1st half year 2009 OJSC Far East Telecom received loss from other non-operational activities in the amount of 361.4 mln rubles, which is a 11.6% loss drop as compared to the 1st half year 2008 (408.6 mln rubles loss).

Interest yields decreased by 52.9 mln rubles to 6.1 mln rubles due to the changes in interest rate for funds accommodation and raising; 

Interest costs amounted by to 258.1 mln rubles to demonstrate a 4.5 mln rubles decrease as against the 1st half year 2008 (262.6 mln rubles);

Reduction in loss from other activities was much affected by the sale of real estate not used for production activities in the 1st quarter 2009. Also, other expenses reflect the excess of tax authority VAT and income tax sanctions charged in the amount of 21.9 mln rubles according to the 2001-2002 tax audit results. Income in “Reimbursement of losses caused by universal communication services” for the 1st half year 2009 was accrued in the amount of 63.7 mln rubles (22.9 mln rubles for the 1st half year 2008).

Equity and liabilities

		as of June 30, 2009 mln rubles	as of December 31, 2008 mln rubles	Changes, %
	Interest bearing debt(8)	5,498.3	5,675.6	(3.1%)
	Net debt (9)	5,415.0	5,398.5	0.3%

8. Interest-bearing debt is equal to the sum of long-term credit and loan liabilities and short term credit and loan liabilities.

9. Net debt is calculated as actual interest-bearing debt minus cash funds and their equivalents.