08.04.2010, 21:00

VolgaTelecom Net Profit at 2009 Year End Grew by 44.4%

OREANDA-NEWS. April 08, 2010. OJSC VolgaTelecom, the largest telecom company of the Volga region, (RTS: NNSI/NNSIP; MICEX: VTEL/VTELP; ADR: VLGAY) presents the results of its operations in 2009 as per the Russian Accounting Standards (RAS). The Company’s accounting (financial) statement for 2009 was audited by ZAO KPMG.

· Revenues – RUB 27, 077 million (+ 2.5% vs. 2008);

· Telecommunications services revenue – RUB 25, 652 million (+ 2.8%);

· Expenses – RUB 21, 097 million (+1%);

· EBITDA – RUB 11, 963 million (+20.7%);

· EBITDA margin – 44.2% (+6.7 percentage points).

· Net profit – RUB 4, 263 million (+44.4%)

· Net profit margin – 15.74% (+4.57 percentage points).

“The arrangements of improving the efficiency of operations due to cost saving and maximum use of own resources, as well as the arrangements of increasing FCF have made it possible to minimize the risks, to ensure the gain of revenues, to increase the Company’s operating and financial efficiency, - notes Vladimir Rybakin, OJSC VolgaTelecom’s General Director. The fact that the growth ratio of revenues outstrips the growth ratio of expenses confirms the correctness of the course selected by us”.

Basic financial and operating indicators of 2009:

Indicator	2009	2008	Change 2009/2008
Sales revenue, RUB million	27, 077	26, 420	+2.5%
Telecommunications services revenue, RUB million	25, 652	24, 944	+2.8%
Ordinary operations expenses, RUB million	21, 097	20, 898	+1%
Sales profit*, RUB million	5, 980	5, 522	+8.3%
Sales profit margin, %1	22.1	20.9	+1.2 percentage points
OIBDA, RUB million 2	10, 826	9, 870	+9.7%
OIBDA margin, %3	40.0	37.4	+2.6 percentage points
EBITDA, RUB million4	11, 963	9, 916	+20,7%
EBITDA margin, % 5	44.2	37.5	+ 6.7 percentage points
Net profit, RUB million	4, 263	2, 952	+44.4%
Net profit margin, %6	15.74	11.17	+4.6 percentage points
Number of subscribers: Fixed line (less office phones), thousand units Broadband access, thousand units	4, 752 994	4, 796 777	-0.9% +28%
Digitalization, %	81	80	+1 percentage point
Staff on the payroll, men	29, 856	32, 548	-8.3%

*The dynamics of expenses and sales profit is materially affected by the accounting policy of classifying the expenses from universal services in ordinary operations expenses and repair of loss caused by universal services provision in other revenue.

1 Sales profit margin is calculated as sales profit/revenues.

2 OIBDA is calculated as the sum of sales profit and amortization and depreciation of property, plant and equipment.

3 OIBDA margin is calculated as OIBDA/revenues.

4 EBITDA is calculated as the sum of pretax earnings, interest due, amortization and depreciation of property, plant and equipment, expenses of leasing payments; this sum is adjusted by the amount of interest receivable.

5 EBITDA margin is calculated as EBITDA/revenues.

6 Net profit margin is calculated as net profit /revenues.

Revenue structure

In 2009 telecommunications services revenue amounted to RUB 25, 652 million; 2.8% increase vs. 2008.

The structure of telecommunications services revenue for 2009:

Revenue structure, RUB million	2009	Share in revenue, %	2008	Share in revenue, %	Change (2009/2008), %
Local telephony services	11, 459	44.7	11, 005	44.1	+4.1
Intrazonal telephony services	4, 568	17.8	4, 828	19.4	-5.4
Recording communication, telematic services and data transmission services	5, 912	23.0	5, 097	20.4	+16
Interconnect and traffic transit services	2, 633	10.3	2, 928	11.7	-10.1
Radio broadcasting, TV services	374	1.5	340	1.4	+10
Wire broadcasting services	364	1.4	364	1.5	+0.3
Mobile radiotelephony and radiotelephony services	341	1.3	381	1.5	-10.5
Total	25, 652	100	24, 944	100	+2.8

In 2009 telecommunications services revenue amounted to 94.7% of VolgaTelecom’s total revenues. The share of revenue from telecommunications services rendered to household accounted for 56.1%. The major changes in VolgaTelecom’s revenue structure were in the following items:

· The major source of revenue gain in 2009 was the services of granting Internet access over leased channel (the growth ratio in this type of services upon the whole accounted for 127.5% and in household segment – 149.1%). The revenue grew due to 26.1% increase in the number of broadband services users vs. 2008, thus VolgaTelecom’s subscribers’ base of Internet users accounted for 994, 000.

· Revenue from interconnect and traffic transit services showed 10% decrease due to the increase in competition on wholesale market and in 2009 the revenue amounted to RUB 2, 633 million.

· The major factor of decrease in intrazonal telephony services revenue was the drop of average volume of traffic consumption per a subscriber and its redistribution in zones.

· The increase in local telephony services revenue was encouraged by the increase in tariff rates by the RF Federal Tariffs Service in Q 1-2009.

Expenditure pattern

The efficient cost management was one of the key factors which had the effect on the increase in profitability of VolgaTelecom’s operations in 2009. For the purpose of cost saving which the Company considered as one of the major trends of improving the operating efficiency, the following arrangements were elaborated and realized:

· Reform of sales channels with centralization of functions of remote customer services;

· Optimization of procurement process;

· Reduction of own operated premises;

· Reduction of general administrative expenses (overhead cost);

· Reduction in expenditure of maintenance and operation of communications network (improvement of digitalization level of communications network, the process of centralization of network management system).

The realized arrangements resulted in 101% growth ratio of expenditure increase, which is lower than the growth ratio of revenue increase in 2009 (102.8%).

VolgaTelecom’s expenditure pattern in 2009:

Expenditure, RUB million	2009	Share in expenditure, %	2008	Share in expenditure, %	Change (2009/2008), %
Labor costs	6, 279	29.8	6, 305	30.2	-0.4
Deductions to social insurance	1, 433	6.8	1, 423	6.8	+0.7
Depredation and amortization	4, 846	23	4, 348	20.8	+11.5
Telecom operators’ services costs	2, 175	10.3	2, 373	11.4	-8.3
Material costs	1, 917	9.1	1, 921	9.2	-0.2
Other operating expenses	4, 448	21.1	4, 527	21.7	-1.7
Total	21, 097	100	20, 898	100	+1

The major changes in VolgaTelecom’s expenditure pattern were in the following items:

· 11.5% increase in amortization expenses (or by RUB 498 million) was related to realization of the investment program and putting into operation of a large number of new objects at the end of 2008.

· In 2009 labor costs reduced by 0.4% as a result of arrangements of headcount optimization. Staff on payroll, including dual jobholders and workers employed under civil law contracts, reduced by 2, 700 men and accounted for 29, 856 persons (91.7% vs. 2008).

· Due to tight control over the funds application the costs for materials and fuel were reduced, which enabled the Company to compensate for the increase in tariffs for heat/electric power, other utility services and postal services. The reduction of material costs vs. the prior year was 0.2%.

· The reduction of telecom operators’ services costs was caused by the reduction of cost of a pass band as a result of the Company’s methodical work with the backbone Internet providers, as well as due to the increase in competition on the market of services providers. Among the factors of reduction of expenses for interconnect it is also possible to highlight: refusal from the use of channels of operators’ data transmission network due to passing to traffic transit via proprietary intraregional multiservice data transmission network; drop of traffic of mobile communications network operators due to mobile substitution (termination of traffic within the networks of mobile communications network operators) which had its effect on the reduction of VolgaTelecom’s expenses for call termination.

Major business segments

Local telephony

As per the estimations of VolgaTelecom’s experts, the Company’s share of local telephony market accounted for 84%. The major trend affecting the development of saturated market of local telephony is the factor of mobile substitution of traffic and lines, as well as the growth of tariff rates for the services.

	2009	2008	Change (2009/2008), %
Installed capacity, thousand numbers	5, 239	5, 250	-0.2
Number of subscribers (basic phone sets) less office phones, thousand numbers including	4, 752	4, 796	-0.9
Household	4, 144	4, 182	-0.9
Entities	608	614	-1

Local telephony services revenue, RUB million

including

11, 459

11, 005

+4.1

Household

8, 733

8, 336

+4.8

Entities

2, 726

2, 669

+2.1

Internet

VolgaTelecom’s share of Internet services market, as per the estimates of the Company’s experts, accounted for 55.7%. Among the basic trends one should note growth retardation of broadband market due to achieving high level of saturation in a number of large cities (about 40% of households are connected to broadband services) and reduction of costs of corporate customers related to the effects of financial crisis. However, the Company realized a number of arrangements intended at reduction of tariffs for internet access services and concurrently increased the rate of access, which enabled it to maintain the lead on a highly competitive market of broadband services in the Volga region.

	2009	2008	Change (2009/2008), %
Number of broadband subscribers, thousand	994	777	+28
Internet and data transmission network services revenue, RUB million, Of which	5, 775	4, 953	+16.6
From access via leased channels (lines)	4, 899	3, 843	+27.5
From access via dial-up lines	296	611	-51.5

Intrazonal telephony

VolgaTelecom’s market share of intrazonal telephony services, as per the estimates of the Company’s experts, accounted for 94.9%. The major factors affecting the level of revenue from this sector were the trend for mobile substitution as well as the reduction of traffic of corporate customers on the background of financial and economic crisis.

	2009	2008	Change (2009/2008), %
Outgoing traffic of intrazonal telephony, million of minutes, Of which	2, 282	2, 428	-6
From F2F subscribers	634	707	-10.3
From F2M subscribers	1, 647	1, 721	-4.3

Intrazonal telephony services revenue, RUB million,

Of which

4, 568

4, 828

-5.4

Household

1, 918

2, 063

-7

Entities

2, 650

2, 765

-4.1

Investments

In 2009 the investments amounted to RUB 2, 138 million which is by 64.7% lower vs. 2008. Such reduction was caused by the need to limit in the course of crisis the investments in the projects not related to revenues generation. So, in 2009 the major trend of investments was modern telecommunications services, their share in the total investments amounted to 48.1%.
Structure of investments:

	2009	2008	Change 2009/2008,%
Investments, total, RUB million	2, 138	6, 061	-64.7
Traditional telephony	222.6	1, 253	-82.2
New services	1, 027.6	3, 094.9	-66.,8
Data transmission network and infrastructure	456.6	701.8	-34.9
IT investments	161.2	423.5	-61.8
Other infrastructure	269.3	587.8	-54.2

Major projects within the investment plan of 2009:

- arrangement of xDSL access (203, 600 xDSL-based broadband ports were commissioned);

- arrangement of Ethernet/FTTx access;

- construction and modification of communications network by applying Softswitch technology;

- construction and expansion of cable TV networks;

- construction of intraregional multiservice data transmission network, construction of fiber-optic and microwave radio links.

Debt load

The arrangements intended at improvement of operating efficiency, optimization of investment program enabled the Company to increase substantially FCF generation, which allowed to substantially reduce the debt load, to mitigate refinancing risks and to improve the liquidity. In 2009 VolgaTelecom’s net debt amounted to RUB 6, 563 million (56.9% vs. 2008).