OREANDA-NEWS. On 30 June 2009 VolgaTelecom (RTS: NNSI, NNSIP; MICEX: VTEL, VTELP; ADR OTC USA: VLGAY; ADR FSE: NZH GR) announced its 2008 financial results compiled under International Financial Reporting Standards (IFRS). The operator’s financial statements were audited by independent auditing firm KPMG. The consolidated financial statement includes assets, liabilities and the results of VolgaTelecom and its subsidiaries.

The telecom operator received an unqualified auditor’s report on its consolidated financial statement drafted to IFRS.

Despite the effects of the downturn in the economy and also factors related to legislative amendments, namely, the cancellation of the compensatory surcharge and connection fees, in 2008 VolgaTelecom exhibited steady economic development indicators. Positive factors that produced an impact on its economic performance in the reporting year were the aggressive promotion of datacom and telematics services and also measures aimed at bolstering the company’s operating efficiency. VolgaTelecom’s liquidity control procedures led to improvements in all metrics characterizing the company’s ability to fulfill its obligations to creditors.

VolgaTelecom’s 2008 headline financials are as follows:

- Revenue grew 6.7% y-o-y to Rub 32.06 bln;

- Operating profit totaled Rub 5.46 bln, down 4.6%;

- Pre-tax profit amounted to Rub 3.65 bln, down 18.5%;

- Net profit dropped 3.8% to Rub 2.93 bln;

- EBITDA* increased 5.9% to Rub 12 bln;

- EBITDA margin* came in at 37.4%;

- Net margin* equaled 9.2%; and

- Net interest debt/EBITDA ratio reached 1.28.

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* EBITDA is calculated as the amount of pre-tax profit, interest expenses, depreciation and amortization adjusted to interest profit;

EBITDA margin is calculated as the EBITDA/revenue ratio;

Net margin is calculated as the net profit/revenue ratio;

Net interest debt/EBITDA is calculated as the ratio of borrowings adjusted to cash and cash equivalents to EBITDA.

Revenue

 

Revenueitems, Rubmln

2008

2007

Chng, y-o-y, %

Localvoiceservices

10,934

11,119

- 1.7

Intrazonalservices

4,829

4,814

0.3

Interconnect and traffic transmission services

4,427

4,741

- 6.6

Mobile radio telecommunications (cellular) services

4,658

4,167

11.8

Telegraph network, datacom network and telematics (Internet) services, including

5,095

3,253

56.6

Datacom network and telematics (Internet) services

4,951

3,124

58.5

Mobile telephony, wire broadcasting, radio broadcasting, television services

703

622

13.0

Outsourcing and agency fees

548

590

-7.1

Other telecommunications services

111

132

-15.9

Revenue from other operations

758

598

26.8

Total

32,063

30,036

6.7

Decisive factors that pushed up revenues in 2008 are as follows:

1. Expansion of the broadband Internet (BI) subscriber base. Pursuing an aggressive marketing policy in 2008, VolgaTelecom doubled its BI clientele to 785,800, while revenue from datacom and telematics (Internet) services soared by 58.5% and their portion in the revenue mix grew 5% to 15.4%.

2. The consolidation of Volga-based cellular operators on the basis of Nizhny Novgorod Cellular Communication, VolgaTelecom’s subsidiary, as in December 2007 Nizhny Novgorod Cellular Communication took over Tatincom-T, RTCOM, Saratov-Mobile, Chuvashia Mobile and Penza Mobile. Although the mobile telephony market is expanding at a slower pace and cellular revenues declined (because of a decline in traffic as crisis trends broke out in the national economy in the second half of 2008), consolidated efforts yielded positive results in VolgaTelecom’s performance. Earnings derived from mobile radio telecommunications (Internet) services jumped by 11.8% and the portion of this revenue item in the aggregate revenue mix grew 0.7% to 14.5%.

3. Legislative regulation of the company’s performance, as the compensatory surcharge for zonal call origination and connection fees was cancelled. The percentage of interconnect and traffic transmission earnings in the aggregate revenue mix dropped 2% to 14%.

By pursuing a development program VolgaTelecom managed:

1. To lift the share of Internet and cellular earnings in aggregate revenues to 29.97%, up 5.7% vs. 2007;

2. To decrease the influence of such factors as mobile substitution and saturation of the traditional telephony market.

Expenses

Costitems, Rubmln

2008

2007

Rate of growth, y-o-y, %

Payroll

8,738

8,343

4.7

Depreciation and amortization

6,688

5,538

20.8

Expenses related to services provided by telecom operators

3,789

3,896

-2.7

Supplies, repair and maintenance, public utilities

2,752

2,739

0.5

Otheroperatingexpenses, net

4,635

3,793

22.2

Totaloperatingexpenses

26,602

24,309

9.4

The following can be highlighted among the main factors speeding up growth in the company’s cost side over revenues:

- an increase in the item “depreciation and amortization” owing to the rollout and upgrade of network infrastructure aimed at meeting solvent demand and improving the quality of services provided;

- growth in the item “depreciation and amortization” related to the execution by VolgaTelecom of its plans to expand cellular networks as part of the long-term wireless development strategy that calls for increasing the portion of cellular assets within VolgaTelecom’s coverage area. The company regards expansion of this segment as a strategic area of business, the significance of which will further be determined by the number of subscribers;

- the write-off into other operating expenses of the cost of unused Oracle E-Business Suite licenses (Rub 293 mln) and the partial write-off of the software product Amdocs Billing Suite (Rub 190 mln);

- reserves against bad debts for a total of Rub 167 mln in 2008, while in 2007 the company restored Rub 104 mln in reserves against bad debts following the repayment of liabilities under discounted telecom services that were provided in earlier periods.

Investments

2008 capital expenditures grew 0.5% y-o-y to Rub 10.62 bln. The key areas of the company’s investment policy were:

advanced telecommunications services (providing õDSL access, the construction and upgrade of mobile networks, providing Ethernet access, the construction of telecom networks using Softswitch technology);

Mobile telephony services;

Datacom networks and infrastructure;

Cash investments into IT assets.

In 2008 VolgaTelecom entered into service 440,000 cellular lines and 416,500 fixed lines. As of December 31, 2008 the company’s network digitalization reached 80%. In 2008 xDSL ports entered into service totaled 508,978 or 33% more than in 2007. By expanding the telecom infrastructure the company’s GSM subscribers (consolidated in IFRS financials) increased 14.3% to 3,530,000.

Headline financials

 

Item

2008

2007

Chng, y-o-y, %

Non-current assets, Rub mln

49,175

47,009

4.6%

Long-term liabilities, Rub mln

14,120

13,540

4.3%

Short-term liabilities, Rub mln

13,455

11,788

14.1%

Net cash received from operations, Rub mln

10,984

9,506

15.5%

Net cash used in investing activities, Rub mln

8,391

10,552

-20.5%

Net cash used in (received from) financing activities, Rub mln

1,410

(1,079)

-230.7%

Net margin, %

9.2

10.2

-1%

Net interest debt, Rub mln

15,349

15,121

2%

Net interest debt/EBITDA

1.28

1.33

-0.05%

Net debt*/Revenue, %

47.9

50.3

-2.5%

*Net debt is calculated as the sum of funds borrowed adjusted to cash and cash equivalents;

In the aggregate, 2008 numbers are largely in line with VolgaTelecom’s development plans targeting main segments of the market and lay the groundwork for further expansion.

The full version of VolgaTelecom’s IFRS consolidated financial statement is available on the corporate website (www.vt.ru). Further important information about the company is posted on the website www.vt.ru, in the free section of comprehensive information disclosure system SRKIN Issuer (www.skrin.ru/issuers/nnsi/) and also on the company’s web pages on Reuters and Bloomberg.

We’d like to draw your attention to the fact that from 2.00 pm until 4.00 pm Moscow time on June 18, 2009 the online conference “VolgaTelecom’s FY08 IFRS Performance” will be held on VolgaTelecom’s website www.vt.ru. Those interested can ask questions to conference participants starting at 3.00 pm of June 17, 2009. We look forward to welcoming you among online conference participants.