OREANDA-NEWS. On 14 April 2009 Far East Telecom (RTS: ESPK, МICEX: DLSV, OTC USA: FEEOY, Frankfurt and Berlin stock exchanges: D7A) presented its audited financial results for 2008 in accordance with Russian accounting standards (RAS).

“This year we increased revenue not only by way of broadband Internet access and interactive services on its basis, but also as a result of traditional telecom services.  Unfortunately, the pace of growth of expenses exceeded the pace of growth of the company’s revenue. This was due first of all to an increase in lease tariffs for network resources from outside operators (the expenses for this item will decrease already next year following the completion of infrastructural projects).  In the second place, payroll expenses rose due to the indexation of salaries for the purpose of strengthening the positions of one of the best employers in the region. Already in 2009 the company’s operating margin is increasing, and OIBDA will exceed Rub 4.5 bln, the general director of the Company Anton Kolpakov noted.  “Net profit in 2008 amounted to Rub 1.74 bln, and not including revenue from restoration of reserves against contingent obligations would be Rub 1.51 bln.  In 2008 Far East Telecom improved the structure of its balance sheet: shareholder equity reached 48.3% of total liabilities, and net debt decreased by 10.7% to Rub 5.4 bln”, he went on to say.

Efficiency indicators

The average number of employees reached 11,319 as of December 31, which is a decrease of 1,062 or 8.6% compared with the same indicator as of January 1, 2008;

Revenue per employee increased by 19.1% to Rub 1,070,700 in 2008 (vs. Rub 899,100 in 2007)

The number of lines per employee increased by 9.1% to 130.0 lines (vs. 119.2 in 2007);

Cost of production per ruble of revenue stood at 77.98 kopecks in 2008, which is 3.9% higher compared with the year-earlier period (74.07 kopecks).

Growth in revenue was attributable to:

higher revenue from ISP services;

higher revenue from interactive television services;

higher revenue from local telephony services;

higher revenue from intrazonal communication services.

Revenue from ISP and data services

A rapid rise in revenue was achieved from broadband Internet services.  The main revenue driver was growth in the subscriber base, which increased by 111,499 compared with 2007.  As regards “Interactive television (IP TV)” the increase in revenue stood at Rub 75.2 mln. Higher revenue was due to an increase in the subscriber base by 25,193 subscribers (as of December 31, 2007, vs a year-on-year increase of 15,625 subscribers as of December 31, 2008 to 40,818 subscribers).  The increase in the subscriber base was due to aggressive development of services and geographic promotion of service in 2007 and 2008.

Revenue from local telephony

Higher revenue from local telephony services was due to a tariff hike in subscriber fees for the unlimited tariff plan (in cases where time-based billing is available) from July 1, 2007 and September 20, 2008.

Revenue from intrazonal telephony

Higher revenue was due to the fact that revenue from mutual reservation of channels with Transelecom was recorded effective July 2008 in the Primorsk and Khabarovsk branches.

Revenue from cellular telephony

Revenue from cellular telephony services in 2008 decreased by 22.9% compared with 2007. The decline was due to a decrease in the subscriber base by 7,500 subscribers and a decrease in average revenue per user (ARPU), which resulted from fierce competition on the part of Big 3 operators in the Magadan and Kamchatka regions.

Interconnect and traffic transmission

A decline in revenue from interconnect and traffic transmission in 2008 was attributable to:

cancellation of the fee for servicing interconnect points effective March 1, 2008;

cancellation of the compensatory surcharge effective January 1, 2008;

decrease in the share of revenue from interconnect traffic services due to deregulation of the zonal fixed line market and the entry of alternative telecom operators into this market.  These trends are typical mainly for the Primorsk, Khabarovsk and Amur regions.

Dynamics of the subscriber base and share of value-added services in 2008

The share of value-added services (Internet access, datacom, mobile telephony, and interactive television and video on demand services) reached 27.8% in the company’s revenue breakdown (value-added services accounted for 21.2% in 2007);

The subscriber base for users of dial-up Internet access decreased by 26% to 148,627 subscribers (vs. 200,772 in 2007) as subscribers switched over to broadband Internet access;

The broadband Internet subscriber base increased by 70% to 271,447 subscribers (vs. 159,948 subscribers in 2007);

The cellular subscriber base decreased by 7% to 93,347 subscribers (38,495 in the Kamchatka region (vs. 48,891 in 2007), 58,852 in the Magadan region (vs. 55,956 in 2007);

Growth in the subscriber base of main telephone line stood at 545 subscribers as of the end of 2008; the subscriber base reached 1,380,219 lines.

payroll expenses increased by Rub 327.1 mln or 12% compared with 2007 and due to the indexation of the salaries of the Company’s employees, which was carried out during the reporting period.

depreciation charges increased by Rub 103.2 mln or by 7.9% in connection with the commissioning of fixed asset facilities.  The proportion of this expense item in the cost of production structure decreased compared with 2007 and stood at 14.8%.

an 11% increase in the material expenses item compared with the 2007 level was caused by a rise in expenses for subscriber equipment, to provide broadband Internet services and interactive digital television (IP-TV).

a Rub 66 mln increase in the expense item “Interconnect” in 2008 compared with the year-earlier period was caused by:  a tariff hike for the subscribers of cellular networks, an increase in this subscriber base, the origination of service fees for termination of ABC codes for cellular operators, lease in the satellite segment and additional channels to carry out the federal special-purpose program Education.

an increase in Rostelecom’s services was due to higher tariffs for leasing channels in zonal interests as of March 2008, and also a rise in expenses associated with an increase in consumption of Internet services.

Growth in other expenses in 2008 compared with 2007 by Rub 345.6 mln was due mainly to an increase in expenses related to reservation of channels with Transtelecom (Rub 241.8 mln), costs associated with software and databases (Rub 40.8 mln), agency services (Rub 23.3 mln) and expenses for leasing assets (Rub 19.2 mln).

Other revenues and expenses

In 2008 the company posted a loss on other non-operating activity amounting to Rub 359.5 mln, which is 75.3% less than the loss in 2007 (equal to Rub 1.45 mln);

Interest income decreased 2.6% compared with 2008 or by Rub 1.09 mln and stood at Rub 73.7 mln;

Interest expenses amounted to Rub 492.1 mln, which is 3.4% or Rub 17.2 mln less than interest expenses in 2007 (Rub 509.3 mln);

A major impact on the decreased in loss from other activity came from the fact that the 2007 report showed additionally levied taxes, and also fines and penalties on taxes and duties amounting to Rub 165.2 mln under a tax inspection held for 2001-2002.  Also in the 2007 report “Other expenses” recorded charges involving contingent obligations for a lawsuit filed by MTS with respect to the issue of enlarging network capacity for a total of Rub 296 mln, and funds transferred to the federal budget as revenue under instructions from the Federal Antimonopoly Service due to violation of the anti-monopoly legislation on establishing tariffs for interconnect services on telecommunications networks for a total of Rub 205 mln.  There were no such charges in the 2008 report.  In addition, in 2008 revenue amount to Rub 296 mln was shown from the recovery of reserves against contingent obligations under MTS’ claim, after the court failed to uphold MTS’ claim.

Shareholder equity and borrowed capital

The net assets of Far East Telecom increased by 23.6% and amounted to Rub 8.15 bln as of December 31, 2008 (vs. Rub 6.59 bln as of December 31, 2007), while the proportion of borrowed capital decreased in comparison with the beginning of the reporting period by 6.8% (from 58.5% to 51.7%).

Liquidity

As of December 31, 2008 current liabilities exceeded current assets by Rub 2.25 bln (vs. 1.02 bln as of December 31, 2007).

Additional information on the company can be found in SKRIN’s system of comprehensive information disclosure at www.skrin.ru, Interfax news agency at www.interfax.ru, and AKM news agency at www.akm.ru.