Far East Telecom RAS H109 Net Profit Rises 24.3% y-o-y

OREANDA-NEWS. On 07 August 2009 Far East Telecom (RTS: ESPK, MUCEX: DLSV, OTC USА: FEEOY, Frankfurt and Berlin stock exchanges: D7A) announced its financial and economic indicators for the first six months of 2009 drafted to Russian Accounting Standards (RAS).

Headline financial and economic indicators for the first six months of 2009

1. OIBDA is calculated as revenue minus amortization expenses.

2. OIBDA margin is calculated as OIBDA/revenue.

3. EBITDA is calculated as pre-tax profit plus amortization plus lease payments on off-balance-sheet leasing plus interest payable minus interest receivable.

4. EBITDA margin is calculated as EBITDA/revenue.

As a result of higher revenue from ISP, interactive television, and traditional telephony we managed to raise the pace of revenue growth compared with the first quarter of 2009”, noted the company’s general director Andrey Balatsenko.

“Management faced some important challenges this year, including strict control of operating expenses while optimizing business processes and raising the efficiency of investments.  This will make it possible to strengthen profit margins, and, as a result, reduce debt”, he added.

Key efficiency indicators

Total number of staff as of June 30, 2009 reached 10,728 employees, which is 591 (of 5.2%) less than as of January 1, 2009 (11,319 employees);

Revenue per employee rose by 23.4% to Rub 621,200 during the first six months of 2009 (compared to Rub 503,500 as of the end of H1 2008);

The number of lines per employee increased by 8.6% to 138.4 lines (up from 127.2 as of end of H1 2008);

The cost of ruble revenue in the first six months of 2009 stood at 73,.91 kopecks, which is 1.3% more than in the year-earlier period (Rub 72.94 in H1 2008).

Revenue trends in telecom services as of the end of H1 2009

An increase in revenue is attributable to the following factors:

higher revenue from ISP;

higher revenue from interactive television;

higher revenue from local voice telephony.

Revenue from ISP and datacom

The fast pace of revenue growth was reached by increasing the subscriber base of broadband Internet users.  Compared with the first six months of 2008, it rose by 116,198 subscribers (as of June 30, 2009 numbering 327,469 subscribers).  Higher revenue also came from active promotion of limit-based and unlimited tariff plans, which, in turn, favored an increase in earnings from subscriber fees.

As for Interactive Television, growth in this service compared with the first six months of 2008 reached 70.1% or Rub 39.4 mln.  This was due to an increase in the subscriber base by 28,022 subscribers (as of June 30, 2009 the subscriber base had reached 54,678).  Higher revenue also helped the commercial launch of Interactive Television at the Amur branch in July 2008.

Revenuefromlocal voice telephony

The 10.5% increase in revenue from local voice telephony was attributable to tariff hikes made in September 2008 and in March 2009.

Revenue from intrazonal telephony

Higher revenue was due to the reflection in this line item of earning from services provided for mutual line leasing with Transtelecom beginning in July 2008 in the Primorsky and Khabarovsk branches.  Without counting this factor, revenue would have declined 0.9% or Rub 7.6 mln.  The decline was caused by a drop in volumes of intrazonal traffic, which resulted in a 7.7% decrease (Rub 58.7 mln) in revenue due to a contraction in revenue from F2F traffic (by 14.2% or Rub 50.9 mln).  The decline in volumes of traffic was attributable to the entry into the market of alternative zonal telephony operators and the replacement of mobile telephony.

Revenue from cellular telephony

Revenue from cellular telephony decreased by 19.9% in the first six months of 2009 compared with the year-earlier period. The decrease was due to a decline in the subscriber base of 8,058 subscribers (as of June 30, 2009 the subscriber base stood at 93,512 subscribers) and the decrease in average revenue per subscriber from Rub 249 in H1 2008 to Rub 212 in H1 2009, which is due to fierce competition on the part of Big-3 operators in the Magadan and Kamchatka regions.

Revenue from interconnect and traffic transmission

The drop in revenue from interconnect and traffic transmission in the first six months of 2009 compared with the year-earlier period was caused by:

the cancellation of fees for servicing interconnect points as of March 1, 2008;

a decline in the share of revenue from traffic transmission, which is due to the deregulation of the zonal fixed-line telephony market and the entry into this market of alternative telecom operators. These trends were mainly visible in the Primorsk, Khabarovsk, and Amur regions;

a decline in revenue from traffic transmission on local and zonal levels, which is attributable to mobile replacement and the outflow of traffic to IP networks;

shrinkage in the share of service from traffic transmission to access nodes (local origination of calls) in connection with a decrease in the share of switched Internet access services and an increase in the share of DSL services.

Trends in subscriber base and shares in revenues of value-added services in H1 2009

The share of value-added services (Internet access, datacom, mobile telephony, interactive television and video on demand) reached 30.1%in the structure of the company’s revenue in the first six months of 2009 (up from 27.2% in the first six months of 2008);

The subscriber base of dial-up Internet access service fell by 44% to 96,017 subscribers (down from 171,081 in H1 2008) due to the fact that subscribers switched over to broadband Internet access);

The broadband Internet access subscriber base increased by 55% to 327,469 subscribers (up from 211,271 subscribers in H1 2008);

The cellular telephony subscriber base decreased by 8% to 93,512 subscribers (Kamchatka region – 34,777 (down from 43,693 in H1 2008), and 58,735 in the Magadan region (up from 57,8777 in 1H 2008);

The subscriber base for main lines stood at 1,379.270 in June 2009 (down from 1,381,092 as of June 30, 2008).

Expense trends in H1 2009

5. Including electricity and heating expenses equal to Rub 184.8 mln (up from Rub 155.3 mln in the first six months of 2008).

6. Information, advisory, audit, security, current maintenance and repair services, manager retraining and advertising expenses.

7. Leasing expenses, property leasing, private pension insurance, voluntary medical insurance paid on behalf of employees.

Payroll expenses increased by Rub 185.67 mln or 14% compared with the same indicator in the first six months of 2008 due to measures taken in 2008 to raise the salaries of the Company’s employees.

Depreciation deductions remained at the level of 1H 2008.

An increase in expenses for the item material expenses by Rub 36.2 mln or 8.2% compared with the first six months of 2008 is mainly attributable to the growth in tariffs for heating and electricity.

An increase in expenses for the item “Services payable to telecom operators” by Rub 231.3 mln for the first six months of 2009 compared with the same metric last year, which occurred due to the conclusion of an agreement on the mutual reservation of STM-16 telecom lines Vladivostok-Khabarovsk with TransTeleCom effective July 1, 2008 (Rub 120 mln per one quarter).  Not including this factor a decrease in expenses would have been incurred due to a decrease in the outsourcing of Internet services from outside operators and an increase in the consumption of Internet services from Rostelecom.

An increase in expenses for the services provided by Rostelecom due to higher tariffs for line leasing on behalf of the zone since March 2008, and also with an increase in the consumption of Internet services.

A Rub 41.9 mln increase in expenses for the item “Outsourcing” mainly attributable to higher outsourcing costs for technical servicing, repair, maintenance of buildings, premises, facilities and equipment, advertising, and higher expenses for information and advisory services.

A rise in the item “Other expenses” in the first six months of 2009 by Rub 81 mln which was attributable mainly to an increase in software, database and agency costs, as well as private pension insurance on behalf of employees.

Other revenues and expenses

In the first six months of 2009 the company posted a loss from other non-operating activity equal to Rub 361.4 mln, which is 11.6% less than the loss incurred in H1 2008 (a loss of Rub 408.6 mln).

Interest-bearing income decreased by Rub 52.9 mln and stood at Rub 6.1 mln as a result of a change in interest rates for the attraction and placement of monetary funds;

Interest-bearing expenses amounted to Rub 258.1 mln, which is Rub 4.5 mln less than the amount of interest-bearing expenses recorded in the first six months of 2008 (Rub 262.6 mln);

A considerable impact on the decrease in losses from other activity was the fact that real estate facilities not used for operating purpose were sold off in Q1 2009, and also other income showed additionally levied income tax VAT by tax authorities for a total of Rub 21.0 mln under a tax audit held in 2001 and 2002, and the accrual of income under the item “Reimbursement of losses due to the provision of universal telecom services during the first six months of 2009 for a total of Rub 63.7 mln (up from Rub 22.9 mln in 2008).

Own and borrowed capital

The net assets of Far East Telecom were 7.8% higher as of June 30, 2009 and reached Rub 8,835.6 mln (compared to Rub 8,196 mln as of December 31, 2008).  Net assets take into account profit paid out as dividends for the 2008 fiscal year, which amounted to Rub 431.1 mln.  The share of own capital in the breakdown of balance sheet capital reached 50.5%, which is 1.9% higher than as of January 1, 2009, when this metric stood at 48.6%.

8. Interest-bearing debt is equal to the amount of long-term liabilities on credits and loans and short-term liabilities on credits and loans.

9. Net debt is calculated as interest-bearing debt minus monetary funds.