VolgaTelecom Net Profit for First Six Months 2010 Raised by 25.9%

OREANDA-NEWS. August 4, 2010. The largest telecommunications company of the Volga Region OJSC VolgaTelecom (RTS: NNSI/NNSIP, MICEX: VTEL/VTELP, ADR: VLGAY) presents the results of its operations in the first six months of 2010 as per the Russian Accounting Standards (RAS).

·         Proceeds – 14,121.5 million rubles (+5.6% vs. the first six months in 2009);

·         Communication services revenue – 13,377.6 million rubles (+5%);

·         Expenses – 10,614.9 million rubles (+1.3%);

·         EBITDA – 6,346.4 million rubles (+2.3%);

·         EBITDA margin – 44.9 % (-1.4 percentage points).

·         Net profit – 2,803.5 million rubles (+25.9%)

·         Net profit margin – 19.9% (+3.2 percentage points).

The growth of company’s net profit by 25.9% in the first six months of 2010 results from proceeds increased by 5.6% and reduced interest expenses connected with loans and credits due to its anti-crisis strategy aimed to increase free cash flow.

Basic financial and operating indicators in the first six months of 2010

Indicator	First six months 2010	First six months 2009	Change
Sales proceeds, RUB million	14,121.5	13,374.9	+5.6 %
Communications services revenue, RUB million	13,377.6	12,741.7	+5.0 %
Ordinary operations expenses, RUB million	10,614.9	10,481.0	+1.3 %
Sales profit, RUB million	3,506.6	2,893.9	+21.2 %
Net profit, RUB million	2,803.5	2,227.1	+25.9 %
Sales profit margin, %1	24.8	21.6	+3.2 percentage points
Net profit margin, % 2	19.9	16.7	+3.2 percentage points
OIBDA, RUB million 3	5,971.8	5,622.0	+6.2 %
OIBDA margin, %4	42.3	42.0	+0.3 percentage point
EBITDA, RUB million5	6,346.4	6,201.2	+2.3 %
EBITDA margin, % 6	44.94	46.36	-1.42 percentage points
Number of basic phone sets of fixed-line telephony network (including official) at the end of the period, thousand units	4,790.6	4,829.3	-0.8 %
Number of broadband Internet access users at the end of the period , thousand users	1,071.6	903.2	+18.7 %
Average headcount, people	28,478	30,308	-6.0 %

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

2 Net profit margin is calculated as net profit/proceeds

3 OIBDA is calculated as the total of sales revenues, depreciation of fixed assets and lease payments.

4 OIBDA margin is calculated as OIBDA/proceeds.

5 EBITDA is calculated as earnings before taxes, interest payable, depreciation of fixed assets and lease payments adjusted by interest receivable.

6 EBITDA margin is calculated as EBITDA/proceeds.

Structure of income

Communication services revenue for the first six months of 2010 made 13,377.6 million rubles and increased by 5.0% as compared to the same period in the previous year.

Communication services revenue structure

Revenue by type of services, RUB million	First six months 2010	First six months 2009	Change
Local telephone communication	6,206.6	5,692.0	+9.0 %
Intra-zone telephone communication	2,173.9	2,266.1	-4.1 %
Telegraphy, data transmission and telematic services	3,200.8	2,927.1	+9.4 %
Interconnect and traffic transit services	1,269.2	1,317.1	-3.6 %
Wire broadcasting, radio broadcasting, television	376.5	370.2	+1.7%
Mobile radio communication and radiotelephony communication	150.2	168.7	-10.9%
Other core types of activity	0.39	0.46	-15.2%
Total	13,377.6	12,741.7	+5.0%

Communication services revenue for the first six months of 2010 made 94.7% of the Company’s total proceeds. The share of revenue from communication services provided to the general public made 60.5%. Increased revenues of VolgaTelecom OJSC in the first six months of 2001 may be attributed mainly to the following factors:

- number of broadband Internet access users increased by 18.7%, which became possible due to a flexible tariff policy, active marketing actions and improved technical quality of this service;

- rates for local telephony communication (provision of a dedicated line to a subscriber, local telephone calls) were increased from February 1, 2010 in accordance with Order of the Federal Tariff Service No. 274-с/1 dated November 11, 2009.

Having an extensive base of xDSL users and following the development trends of the telecommunication market, the Company is actively constructing fiber-optical communication lines using FTB technology (Fiber To the Building, i.e. Internet connection via high-speed fiber-optical lines that do not require any telephone lines or modems). VolgaTelecom OJSC provides xDSL and Ethernet/ FTTx Internet access services throughout the entire area where the company operates; the Company provides Wi-Fi Internet access at its branch in Nizhny Novgorod and in the Republic of Mariy-El.

In the first six months of 2010 the number of broadband Internet access users was 1,071.6 thousand (exclusive of users connected to the Internet within national projects).

Major business segments

Local communication

The main factors affecting the profitability of local communication market include mobile substitution of traffic and lines, as well as growth of rates.

	First six months 2010	First six months 2009	Change
Number of basic phone sets of network (including official), thousand units	4,790.6	4,829.3	-0.8 %
including
General public	4,137.3	4,167.8	-0.7 %
Organizations	653.3	661.5	-1.2 %

 

Local communications services revenue, RUB million including	6,206.6	5,692.0	+9.0 %
General public	4,753.3	4,343.0	+9.4 %
Organizations	1,453.3	1,349.0	+7.7 %

Internet

	First six months 2010	First six months 2009	Change
Number of broadband Internet access users, thousands	1,071.6	903.2	+18.7 %
Revenue from Internet and data transmission networks RUB million, including	3,126.8	2,860.9	+9.3 %
revenue from internet access via dedicated channels (lines)	2,694.9	2,400.8	+12.3 %
revenue from dial-up access to the internet	72.8	176.1	-58.7 %
revenue from data transmission services	359.1	284.0	+26.4 %

Intra-zone communication

Reduction of the volume of services due to mobile substitution still remains the main factor affecting the level of revenues in this sector. For the first six months of 2010 F2F traffic decreased by 6%, and F2M traffic decreased by 4% as compared to the same period in the previous year.

	First six months 2010	First six months 2009	Change
Outgoing traffic – intra-zone communication, million minutes, including	1,079.1	1,130.4	-4.5 %
F2F traffic	300.6	319.9	-6.0 %
F2M traffic	778.5	810.5	-4.0 %

 

Revenues from intra-zone communication services, RUB million, including	2,173.9	2,266.1	-4.1 %
General population	896.1	959.7	-6.6 %
Organizations	1,277.8	1,306.4	-2.2 %

Expenditure structure

In the first six months of 2010 VolgaTelecom’s expenditure raised by 1.3% as compared to the same period in the previous year, which is 4.3 percentage points less that the proceeds growth rate. The prime cost per 100 rubles of proceeds was 75.17 rubles, which is 3.2 rubles less that in the same period of the previous year.

VolgaTelecom’s expenditure structure  

Expenditure, RUB million	First six months 2010	First six months 2009	Change
Labour costs	3,326.8	3,146.4	+5.7 %
Deductions for social insurance	786.4	760.3	+3.4 %
Depreciation of fixed assets	2,206.4	2,432.9	-9.3 %
Expenses on services of communication operators	1,044.4	1,092.2	-4.4 %
Material expenses	1,001.6	890.3	+12.5 %
Other operating expenses	2,249.3	2,158.9	+4.2 %
Total	10,614.9	10,481.0	+1.3 %

Mainly the following items of VolgaTelecom’s expenditure changed:

·         Depreciation of fixed assets. These expenses decreased by 9.3% after reduction of the investment program in 2009 within the implemented anti-crisis strategy;

·         Material expenses. This item increased by 12.5%, which is attributed to increased rates for energy resources, fuel, utilities and postal services, as well increased prices for material connected with the implementation of communication service promotion plans;

·         Labour costs. Wages and salaries of main groups of professionals were increased within inflationary expectations.

Investments

For the first six months of 2010 investments made 2,301.6 million rubles, which is 4.7 times more than for the same period in the previous year. The main area of investments during the first six months of 2010 includes modern services (66.9% or 1,540.0 million rubles of total investment was used to provide xDSL, FTTx, Ethernet-based broadband access to the Internet, to building NGN networks, etc.). During the reporting period 287.9 thousand broadband access ports were put into operation.

Investment Structure

	First six months 2010	First six months 2009	Change, RUB million
Total investments, RUB million	2,301.6	488.8	+1,812.8
Traditional telephone	65.7	21.3	+44.4
Modern services	1,540.0	309.6	+1,230.4
Data transmission network and infrastructure	396.3	108.7	+287.6
Investment to IT	108.7	11.7	+97
Other investments	190.9	37.5	+153.4

Major projects within the investment plan for the first six months of 2010:

- provision of xDSL access (total investments made 212.7 million rubles, 68.1 thousand xDSL broadband access ports were put into operation);

- provision of Ethernet/FTTx access (total investments made 1,100.7 million rubles, 219.8 thousand Ethernet/FTTx broadband access ports were put into operation;

- construction of NGN networks (total investments made 224.9 million rubles, 44.1 thousand numbers based on switching technology were put into operation);

- construction of an inter-regional multi-service data transmission network (investments made 116.2 million rubles)

Debt load

All major financial indicators of the Company improved as compared to the same period in the previous year; net debt reduced by 11.5% to 9,873.4 million rubles.

	First six months 2010	First six months 2009	Change, RUB million
Equity to toal assets1	0.60	0,56	+0.04
Net Debt 2, RUB million	9,873.4	11,158.1	-11.5 %
Net Debt to EBITDAttm3	0.82	1.01	-0.19
Interest payable to EBITDA4	0.06	0.14	-0.08
Receivables turnover5, days	22.6	23.1	-0.5
Quick ratio6	0.85	0.63	+0.22

1 Equity to total assets is calculated as equity capital to total assets according to the balance sheet as of the and of the accounting period.

2 Net debt is calculated as the sum of borrower's liabilities adjusted for the amount of cash and cash equivalents.

3 Net debt is calculated as the sum of borrower's liabilities adjusted for the amount of cash and cash equivalents.

4 Interest payable toEBITDA is calculated as the ratio of interest expenses according to the Profit & Loss Statement to EBITDA for the accounting period.

5 Receivables turnover is calculated as the ratio of average receivables from operating activity (less VAT) to proceeds for the accounting period multiplied by the number of days in the accounting period (180 days).

6 Quick ratio is calculated as the ratio of current assets less inventories and VAT for acquired goods, works and services to current liabilities according to the balance sheet as of the end of the accounting period.