Sistema Announces Financial Results for Three Months
OREANDA-NEWS. Sistema (the "Group") (LSE: SSA), the largest private sector consumer services company in Russia and the CIS, today announced its unaudited consolidated US GAAP financial results for the three months ended March 31, 2007.
FIRST QUARTER HIGHLIGHTS
Consolidated revenues up 44% year on year to US$ 2.7 billion
OIBDA up 58% year on year to US$ 1.1 billion with increased margin of 40.5%
Operating income up 87% year on year to US$ 728.5 million with increased margin of 27%
Net income up more than five fold year on year to US$ 745.9 million
US$ 356.4 million raised through SITRONICS initial public offering in February 2007
Completion of sale of 49.2% stake in ROSNO insurance joint venture for US$ 750 million in February 2007
Alexander Goncharuk, President and Chief Executive Officer, commented: "The 44% revenue growth generated in the first quarter of 2007 demonstrates our solid performance across all business lines, and particularly in the telecommunications segment. The non-telecommunications businesses now account for almost a quarter of total revenues. We have successfully combined this growth with a more than five fold year on year increase in net income, which reflects our focus on maximizing shareholder value creation through improved operational performance and selective asset realizations. Specifically, we have been able to realize our investment in ROSNO through the sale of our 49.2% stake for US$ 750 million. The IPO of SITRONICS was another important milestone in the development of our Group. We are well positioned for continued growth in all of our business areas and remain focused on enhancing our competitive position and profitability in each segment."
OPERATING REVIEW
Sistema's consolidated revenues increased by 44% year on year in the first quarter of 2007 as a result of the healthy performance by the Group's Telecommunications and non-telecommunications operations. The non-telecommunications businesses accounted for 24% of Group consolidated revenues in the first quarter, compared to 19% for the corresponding period of 2006. The organic year on year growth in the first quarter (excluding businesses acquired or divested since the end of the first quarter of 2006) was 38%.
Group OIBDA increased by 58% year on year in the first quarter and by 10% quarter on quarter compared to the fourth quarter of 2006. The Group's OIBDA margin increased from 36.8% in the first quarter of 2006 to 40.5% in the first quarter of 2007. MTS showed particularly strong growth and expanded its OIBDA margin by 5.4 percentage points year on year to 51.9%, as a result of improving efficiency levels. Comstar's adjusted[5] OIBDA margin was up quarter on quarter from an underlying level of 33% in the fourth quarter of 2006 to 40%, due to the positive effect of the introduction of new tariffs at MGTS and the benefits of the restructuring on Comstar Moscow's margin. The first quarter profitability levels were however adversely impacted by the delaying of some key projects at SITRONICS until later in 2007.
Group operating income was up 87% year on year and by 15% quarter on quarter. The Group operating margin increased in the first quarter to 26.9%, from 20.7% a year ago, and from 19.7% in the fourth quarter of 2006.
Consolidated depreciation and amortization expenses increased by 21% year on year from US$ 303.8 million to US$ 367.0 million due to the growth in the Group's fixed and intangible asset base over the past twelve months, and the previously announced accelerated depreciation of analogue equipment by MGTS.
Selling, general and administrative expenses rose by 32% year on year from US$ 339.6 million to US$ 447.7 million, due to the growth in advertising expenses in the telecommunications businesses and the overall increase in wage expenses.
The effective tax rate decreased from 40.2% in the first quarter of 2006 to 32.0% in the first quarter of 2007, largely as a result of the change in the functional currency of MTS with effect from January 1, 2007. The change eliminated the difference between the accounting treatment of foreign exchange gains on MTS' US Dollar-denominated debt under US GAAP and the Russian tax code.
Sistema's share in the net income of the affiliated Bashkir oil companies amounted to US$ 21.5 million in the first quarter of 2007.
The growth in net income before US$ 99.4 million of discontinued operations resulted from the organic growth in the telecommunications segment and was partly offset by the decrease in net income reported by the technology segment. The sale of the Group's stake in ROSNO contributed an additional US$ 522.9 million of net proceeds after tax to the total net income for the first quarter of 2007. As a result, net income increased more than five fold year on year.
The Telecommunications segment, which comprises MTS, the largest mobile phone operator in Russia and the CIS, and Comstar UTS, the leading combined telecommunications operator in the CIS, generated 35% year on year revenue growth in the first quarter of 2007. The segment accounted for 76% of the Group's consolidated revenues in the quarter, compared to 81% a year ago. The growth was primarily organic, with the exception of US$ 5.7 million of revenue generated by businesses acquired after the end of the first quarter of 2006 by Comstar (DG Tel and Technologic Systems in Ukraine, Cornet and Callnet in Armenia, and Astelit in Russia) and MTS (Dagtelecom). MTS continued to be the main contributor to the segment revenues and accounted for 84% of the segment's year on year growth in the quarter.
MTS added 1.3 million subscribers during the quarter and had 74.2 million subscribers by the end of the first quarter of 2007. The Company generated 35% year on year revenue growth to US$ 1.7 billion, which reflected a year on year increase in average monthly service revenue per Russian subscriber ("ARPU") from US$ 6.6 to US$ 8.2. Russian subscribers' monthly Minutes of Use (MOU) increased by 14% year on year to 134. MTS' consolidated OIBDA rose by 51% year on year to US$ 0.9 billion, largely as a result of optimized marketing and advertising spending. MTS was also able to decrease the cost of customer acquisition on a sequential basis in the first quarter, with subscriber acquisition costs (SAC) falling from US$ 29.1 in the fourth quarter of 2006 to US$ 26.2 in the first quarter of 2007.
Comstar UTS generated 32% year on year revenue growth to US$ 328.9 million, reflecting healthy organic revenue growth driven by the high customer demand for the unlimited tier of the tariff plans introduced by MGTS from February 2007, the positive impact of the introduction of ‘Calling Party Pays', and the healthy development of the Comstar Direct broadband Internet and double-play offerings. Comstar Direct announced in April that it had become the first operator in Moscow to pass the 400,000 subscriber milestone, and increased its subscriber base by 11% quarter on quarter. Comstar UTS reported a 23% year on year increase in OIBDA to US$ 133.9 million in the first quarter.
Segment OIBDA was up 53% year on year, with an increased combined OIBDA margin of 52.3% in the first quarter, up from 46.2% a year ago and 45.0% in the fourth quarter of 2006. This increase in margin primarily reflected the increased operating profitability at MTS as a result of the restructuring program implemented from May 2006. Segment net income for the first quarter increased by 77% year on year.
MTS provided updated guidance for the full year 2007 in May. MTS stated that it expects its revenues to grow by no less than 22% in 2007 and its OIBDA margin for the full year to be at least 50%. MTS announced in April 2007 that it had been awarded third generation (3G) licenses for the entire territory of Russia and Uzbekistan. MTS is currently forecasting capital expenditure of up to US$ 1 billion up until the end of 2009 on network deployment and the commercial launch of 3G services. The Technology segment comprises SITRONICS, which is a leading provider of telecommunications, IT and microelectronic solutions in Russia and the CIS, with a growing presence in other EEMEA emerging markets. SITRONICS generated 30% year on year revenue growth in the first quarter and accounted for 11% of Group revenues for the quarter, compared to 9% for the same period of 2006.
SITRONICS reported a negative OIBDA and a net loss in the first quarter. The first quarter profitability levels were adversely impacted by the deferral of some key customer projects until later in 2007. The increase in the cost base was due to the higher level of fixed costs following the scaling up of operations, the increase in research and development costs related to new products that were due to be implemented during the period but have been delayed, and the ongoing expansion into the Middle East and Africa.
The Company's revenue streams are largely dependent on scale contracts which tend to weight more to the second half of the year and SITRONICS has won a number of new public and private sector contracts during the first half of 2007. In addition, the delayed MGTS and MTS projects are now expected to commence during the second half of 2007 and run into 2008. New contracts have been secured with the Russian Federal Agency of Industry, Wateen Telecom in Pakistan, Telecom Srbija in Serbia, CALLAX in Germany, BTC Mobile in Bulgaria, a World Bank-funded project in Ukraine, and National Machinery Import & Export Corporation in China.
SITRONICS completed its Initial Public Offering on the London Stock Exchange in February 2007 and raised US$ 356.4 million of net proceeds.
Revenues for the Real Estate segment, which comprises Sistema Hals, a leading Moscow-based real estate development, management and investment company, more than doubled year on year in the first quarter. The Segment's OIBDA margin increased from 2% in the first quarter of 2006 to 20% in the first quarter of 2007, primarily due to the growth of revenue from operating activities and a decrease in operating expenses. The net loss in the first quarter of 2006 was therefore reversed into a net profit in the first quarter of 2007. The real estate development division remained one of the primary growth drivers of the business and accounted for 46% of segment revenues for the quarter, compared to 37% for the corresponding period of 2006. The growth in revenues primarily resulted from the construction of the Siemens Tower project, Yartsevskaya, 27V, a residential building with 29,910 square meters of gross built area (GBA), located in the western part of Moscow, and the sale of land plots at Avrora residential development in the Moscow region. Additionally, Sistema Hals recognized US$ 3.5 million in revenues from the partial completion of the Siemens Tower project. Revenues in the project construction management division more than doubled year on year to US$ 8.9 million in the first quarter of 2007. The asset management division increased revenues by 81% year on year to US$ 6.4 million in the first quarter of 2007, primarily as a result of an increase in the number of houses sold within the asset restructuring program and the growth in rental revenues.
Sistema Hals announced the results of an independent valuation of its real estate property and projects in March 2007. The valuation was carried out by Cushman and Wakefield Styles & Riabokobylko (C&WS&R), and indicated that the value of the Sistema Hals portfolio had increased by 35% between June 30, 2006 and January 1, 2007 to US$ 2.0 billion.
Sistema Hals signed an agreement with the X5 Retail Group, Russia 's largest grocery retailer, in May 2007 for the opening of branches of the Perekrestok supermarket chain in two of Sistema Hals retail & leisure centers in Moscow and in several regional malls.
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