Far East Telecom Discloses Non-Audited Financial Results for 1H

OREANDA-NEWS. August 5, 2010. OJSC Far East Telecom (Telecom (RTS: ESPK, MICEX: DLSV, ADR of the USA: FEEOY, Frankfurt and Berlin Stock Exchange: D7A) discloses non-audited financial results for the 1st half 2010 in compliance with the Russian Accounting Standards.

Financial and EconomicHighlights for the 1st half 2010

Business Efficiency Highlights

Number of employees according to the records as of June 30th 2010 reaches 9.800, reduced by 415 persons (4.1% reduction), compared to the data as of January 1. 2010 (10.215 persons);

Revenue per employee increased by 15.9% up to 719,8 thousand rubles for the 1st half 2010 ( 621.2 thousand rubles for the 1st half 2009);

Number of lines per employee increased by 8.2 % to 149.8 lines (138.4 for the 1st half of 2009);

Cost per ruble of revenue was 0,7473 Rubles in the 1st half 2010, which is a 1.1% increase against the results for the corresponding period of the last year (0,7391 Rubles for the 1st half 2009).

Revenues from communication services highlights for the 1st half 2010

Services	1st half of 2010	1st half of 2009
	mln rubles	mln rubles
Intrazone telephone communication service	1.072,0	1.103,9	(2,9)%
Local telephone communication service	2.702,9	2.558,1	5,7%
Mobile radio communication, wire communication services, broadcasting, television services	86,3	80,1	7,7%
Mobile radio (cellular) communication	105.6	131.5	(19,7%)
Telegraph communication, data transmission and telematic services	2.281,0	1.936,7	17,8%
including data transmission and Internet access services (other than IP TV)	2.052,6	1.776,2	15,6%
including IP TV	157.1	95.5	64,5%
Traffic interconnection services	430.7	502.2	(14,2%)
TOTAL	6.678,5	6.312,5	5,8%

Reasons for total revenue growth are as follows:

· Increase of Internet access service sales;

· Increase of IP TV services sales;

· Increase of Local telephone communication services sales.

Revenues from Internet access and data transmission services

High growth rate of revenue is achieved due to enlargement of broad-band Internet access services subscriber base. It increased by 87.812 subscribers as against the 1st half 2009 (subscriber base as of June 30th 2010 was 415.281). Besides, the income growth was influenced by the promotion of new limited and unlimited tariff plans, which contributed to subscriber fee income growth.

Revenue from “interactive television” increased by 64,5% or 61.6 mln rubles as compared to the 1st half 2009. The revenue increased due to the enlargement of the by subscribers’ base by 42.531 subscribers (as of June 30th 2010 subscriber’s base reached 97.902 numbers). The “interactive television” service of was launched in September 2009 in Magadansky and Sakhalinsky. These branches also added to the revenue growth.

Revenue from local telephone communication services

Increase of revenue from local telecommunication service by 5,7% is caused by tariff growth in February 2010.

Revenue from intrazone communication service

Decrease of revenue by 2,9% or 31.82 mln rubles is due to reduction of intrazone traffic volume and subsequent decrease in revenue from the traffic by 11.8% (83.2 mln rubles) due to decrease in income from F2F traffic by 20,1% (62 mln rubles). The traffic volume reduction is caused by decline in the service consumption because of mobile replacement. The reduction is compensated by growing revenue from intrazone communications channel provision by 34% (51.1 mln rubles).

Revenue from mobile communication

Revenue from mobile communication services reduced in the 1st half 2010 by 19,8% as compared to the 1st half 2009. The reduction is caused by subscribers’ base decrease by 19.374 subscribers (as of June 30th 2010 the subscribers base was 74.528 numbers), due to the tough competition from the Big Three operators in Magadanskaya oblast and Kamchatsky krai.

Revenue from traffic interconnection services

Revenue from traffic interconnection services decreased in the 1st half 2010 as against the 1st half 2009 due to:

Decrease of revenue from OJSC “Rostelecom” (by 21 mln rubles) because of the decrease of rate tariff 33B from 1,25 rubles per minute to 0,50 rubles per minute as of January 01 2010. The decrease of revenue from OJSC “Rostelecom” is occurring simultaneously and proportionally with the decrease of expenses for the Internet channel.

Loss of revenue from traffic interconnection caused by zone fixed communication market demonopolization and alternative operators entering the market. These trends are most evident in Primorsky, Khabarovsky and Kamchatsky krais and Amurskaya oblast;

Loss of revenue from traffic interconnection at local and zone levels caused by mobile replacement and traffic partial overflow to ip-networks;

Decrease of partial revenue from traffic interconnection to trunk access nodes (local call initiation) due to the reduction in Internet dial-up access service share and DSL service share growth.

Changes of subscribers’ base and new service share in the 1st half 2010

New services (Internet access, data transmission, mobile communications, interactive TV and video on demand) share in Company’s revenue structure for the six months 2010 reached 33,1% (against the corresponding share for six months 2009 of 30.1%);

Internet broad band access subscribers’ base increased by 26,8% up to 415.281 subscribers (327.469 subscribers over the first 6 months of 2009);

Cellular communication subscribers base reduced by 20,6% to 74.528 subscribers (Kamchatsky krai – 30.522 (34.959 for six months of 2009), Magadanskaya oblast - 44.006 (58.943 for six months 2009);

Main station subscribers’ base as of June 30th 2010 was 1.370.040 numbers (compare to 1.379.270 subscribers as of June 30th 2009).

EE Operating expenses and highlights for the 1st half of 2010

	1st half of 2010	1st half of 2009
	mln rubles	mln rubles
Wages, salary expenses	1.642,2	1.516,0	8,3%
Social insurance deductions	401,5	325,7	23,3%
Depreciation and amortization	703,5	701,8	0,2%
Material costs	548,3	480,9	14,0%
Expenses on telecommunication operators (other than OJSC Rostelecom)	809,4	821,8	(1,5%)
Expenses on OJSC Rostelecom services	173,0	171,9	(0,6%)
Expenses on side organizations’ services	362,4	376,5	3,8%
Universal service reserve deductions	71,7	66,5	7,8%
Taxes and du cities included into operating expenses	7,3	4,7	55,3%
Other expenses	496,8	442,0	12,4%
TOTAL	5.216,1	4.907,7	6,3%

Wages and salary expenses increased by 126,2 mln rubles or 8,3 % as against the 1st half 2009 due to implementation of a staff wages increase program by the Company in 2009 and reserve accrual for the current premium;

Growth of material costs by 67,4 mln rubles or 14,0% as compared to the 1st half 2009 is caused by heat and electricity tariffs increase and growing expenses on subscribers equipment;

Increase in “Other expenses” in the 1st half 2010 by 54,8 mln roubles is mostly related to the growth of expenses on software and data bases, agency services and expenses on interactive entertainment

Other revenues and expenses

OJSC Far East Telecom received loss from non-operational activities the 1st half 2010 in amount of 199,0 mln rubles (as against 364,4 mln rubles loss in the 1st half 2009).

Interest income increased by 14,2 mln rubles to 20,3 mln rubles due to increase in free cash flow available for placement;

Interest expenditures amounted to 352,7 mln rubles to demonstrate a 94,6 mln rubles increase as against the 1st half 2009 (258,1 mln rubles). The increase is related to БО-05 commercial bonds placement in the 2nd quarter 2009 with coupon revenue rate 15% annum.

Return on investment in OJSC “Sahtelecom” over the 2009, charged during the second half 2010 are reflected in the “Income from participation in other organizations” article.

Equities and liabilities

OJSC Far East Telecom net assets as of June 30th 2010 increased by 6,7% to 10.602,1 mln rubles (9,932.8 as of January 1st 2010).