Recent news

06.04.2010
VolgaTelecom boosts 2009 net profit by 44.4%

Press release

Nizhny Novgorod, April 2010. The largest telecommunications company in the Volga region VolgaTelecom (RTS: NNSI/NNSIP, MICEX: VTEL/VTELP, АDR: VLGAY) hereby announces its full-year 2009 financial results in accordance with Russian Accounting Standards (RAS). An audit of the company’s 2009 accounting (financial) reports was performed by KPMG.

Revenue – RUR 27,007 (up 2.5% compared with 2008);
Income from telecom services – RUR 26,652 mln (up 2.8%);
Expenses – RUR 21,097 mln (up 1%);
EBITDA – RUR 11,963 mln (up 20.7%);
EBITDA margin – 44.2% (up 6.7%)
Net profit – RUR 4,263 mln (+44.4%)
Net profit margin – 15.74% (+4.57%).

“Measures aimed at raising the efficiency of business activities by cutting costs and maximizing the use of in-house resources, as well as increasing free cash flow will make it possible to minimize risks, ensure growth of revenue, raise the Company’s operating and financial efficiency, the general director of VolgaTelecom Vladimir Rybakin points out. The fact that the pace of revenue growth outpaces that of expenses shows that we’re on the right road”.

Headline financial and operating indicators, 2009

Indicator	2009	2008	Change, 2009/2008
Revenue, RUR, mln	27,077	26,420	+2.5%
Revenue from telecom services, RUR, mln	25,652	24,944	+2.8%
Operating expenses, RUR, mln	21,097	20,898	+1%
EBID*, RUR, mln	5,980	5,522	+8.3%
EBID margin, % ¹	22.1	20.9	+1.2%
OIBDA, RUR, mln²	10,826	9,870	+9.7%
OIBDA margin, % ³	40.0	37.4	+2.6%
EBITDA, RUR, mln⁴	11,963	9,916	+20.7%
EBITDA margin, % ⁵	44.2	37.5	+ 6.7%
Net profit, RUR, mln	4,263	2,952	+44.4%
Net profit margin, % ⁶	15.74	11.17	+4.6%
Number of subscribers: fixed line (not incl. official lines) ‘000 units Broadband Internet, ‘000 units	4,752 994	4,796 777	-0.9% +28%
Digitalization, %	81	80	+1%
Average number of staff, ‘000	29,856	32,548	-8.3%

* Expense and EBIT dynamics are heavily impacted by the accounting policy used to record expenses from the provision of universal telecom services in operating expenses and compensation for losses related to the provision of universal telecom services and other revenues.

¹ EBIT margin is calculated as EBIT/revenue.
² OIBDA is calculated as the sum of EBIT and the depreciation of fixed assets.
³ OIBDA margin is calculated as OIBDA/revenue.
⁴ EBITDA is calculated as the sum of pre-tax profit, interest payable, depreciation of fixed assets, expenses as lease payments adjusted for the amount of interest receivable.
⁵ EBITDA margin is calculated as EBITDA/revenue.
⁶ Net profit margin is calculated as net profit/revenue.

Revenue breakdown

Revenue from telecommunications services in 2009 amounted to RUR 25,652 mln, which is 2.8% more than in 2008.

Revenue breakdown from telecom services in 2009

Revenue by type of service, RUR mln	2009	Percentage in revenue, %	2008	Percentage in revenue, %	Change (2009/2008), %
Local voice telephony	11,459	44.7	11,005	44.1	+4.1
Intrazonal voice telephony	4,568	17.8	4,828	19.4	-5.4
Data transmission, telematic services, datacom	5,912	23.0	5,097	20.4	+16
Interconnect and traffic transmission	2,633	10.3	2,928	11.7	-10.1
Radio broadcasting,	374	1.5	340	1.4	+10
Wire broadcasting	364	1.4	364	1.5	+0.3
Mobile radio communication and radio telephone communication	341	1.3	381	1.5	-10.5
Total	25,652	100	24,944	100	+2.8

Revenue from telecommunications services amounted to 94.7% of the total amount of revenue generated by VolgaTelecom in 2009.

In addition, the proportion of revenue from telecommunications services provided to households amounted to 56.1%. The main changes to the revenue breakdown of VolgaTelecom in 2009 related to the following items:

The main source of revenue growth in 2009 was the provision of dedicated Internet access services (up 127.5% on the whole and 149.1% in the household segment). Revenue growth came from a 26.1% increase in the number of broadband Internet users compared with 2008, as a result of which the subscriber base of VolgaTelecom’s users stood at 994,000.
Revenue from interconnect and traffic transit decreased by 10% due to increased competition on the wholesale market and reached RUR 2,633 mln in 2009.
The main factor which reduced revenue from intrazonal services was a decline in the average amount of traffic per subscriber and its reallocation among zones.
A tariff hike by the Federal Tariff Service of the Russian Federation in the first quarter of 2009 contributed to growth of revenue from local voice telephony.

Expense breakdown

In order to reduce expenses, which the Company regards as one of the main areas for raising operating efficiency, action was taken in the following areas:

Overhauling sales outlets with centralized functions for online customer service;
Optimizing the procurement process;
Reducing the number of in-house premises used;
Decreasing SG&A (overhead) expenses;
Lowering telecommunications network maintenance and operating costs (raising the digitalization rate of the telecom network, centralizing the network management system).
As a result of the measures taken the expenses increased by 101% in 2009, which is less than the pace of growth in expenses in 2009 (102.8%).

VolgaTelecom’s expense breakdown, 2009

Expenses, RUR, mln	2009	Proportion in expenses, %	2008	Proportion in expenses, %	Change (2009/2008), %
Payrolls	6,279	29.8	6,305	30.2	-0.4
Social insurance contributions	1,433	6.8	1,423	6.8	+0.7
Depreciation and amortization	4,846	23	4,348	20.8	+11.5
Interconnect	2,175	10.3	2,373	11.4	-8.3
Material expenses	1,917	9.1	1,921	9.2	-0.2
Other operating expenses	4,448	21.1	4,527	21.7	-1.7
Total	21,097	100	20,898	100	+1

The main change in VolgaTelecom’s expenses occurred in the following items:

An 11.5% increase in depreciation deductions (or RUR 498 mln) is attributable to implementation of the company’s investment program and the commissioning of a large number of new telecom facilities at the end of 2008.
Payroll expenses decreased by 0.4% in 2009 as a result of measures taken to optimize headcount. The average number of employees on record, including those who combine positions and workers employed under civil law contracts, decreased by 2,700 and stood at 29,856 (91.7% compared to 2008).
Thanks to strict cost control over spending, expenses for materials and fuel were reduced, which allowed the Company to offset fuel/electricity tariff hikes, as well as higher utility rates and postal costs. The decrease in material expenses amounted to 0.2% compared to last year’s level.
A decrease in interconnect expenses was due to a decline in the cost of the free transmission range as a result of the company’s steady operations with trunk Internet providers, as well as stronger competition on the Internet providers’ market. The main factors which contributed to lower interconnect expenses can be singled out as follows: a decline in the lease of datacom channels by telecommunications operators due to a shift in transiting traffic via their own regional multi-service datacom channels; a decrease in traffic transmitted in favor of mobile networks as a result of mobile substitution (traffic flow within mobile networks which impacted VolgaTelecom’s call termination expenses).

Main business segments

Local voice

According to expert estimates at VolgaTelecom, the Company’s share of the local voice telephony market stands at 84%. The main trend which impacts the expansion of highly saturated local voice market is the factor of mobile replacement of traffic and lines, as well as higher service tariffs.

	2009	2008	Change (2009/2008), %
Total number of access lines, ‘000	5,239	5,250	-0.2
Number of subscribers (main lines) not incl. official lines, ‘000 lines incl.	4,752	4,796	-0.9
Households	4,144	4,182	-0.9
Corporate clients	608	614	-1

Revenue from local voice telephony, RUR mln, incl.	11,459	11,005	+4.1
Households	8,733	8,336	+4.8
Corporate clients	2,726	2,669	+2.1

Internet

VolgaTelecom’s share of the regional Internet access service market is equal to 55.7%, according to estimates by the Company’s experts. Noteworthy among the main trends are a slowdown in the pace of the broadband Internet market owing to a high saturation rate in a number of large cities (about 40% of households have broadband Internet connections) and a reduction in corporate client expenses, which is attributable to the consequences of the economic downturn. In addition, the Company has conducted a number of measures aimed at lowering Internet access tariffs while boost access speeds, which has made it possible to maintain leadership positions on the highly competitive broadband Internet market of the Volga region.

	2009	2008	Change (2009/2008), %
Number of broadband subscribers, ‘000	994	777	+28
Revenue from Internet and datacom services, RUR mln, incl.	5,775	4,953	+16.6
dedicated access channels (lines)	4,899	3,843	+27.5
dial-up access lines	296	611	-51.5

Intrazonal telephony

VolgaTelecom’s share of the intrazonal telephony market is equal to 94.9%, according to estimates by the Company’s experts. The main factors which influenced the level of revenue derived from this segment include the trend towards mobile replacement as well as a reduction in the traffic of corporate clients against the background of the economic downturn.

	2009	2008	Change (2009/2008), %
Outgoing intrazonal traffic, mln min, incl.	2,282	2,428	-6
From fixed-line to fixed-line subscribers	634	707	-10.3
From fixed-line to mobile subscribers	1,647	1,721	-4.3

Revenue from intrazonal services, RUR mln

incl.

4,568

4,828

-5.4

Households

1,918

2,063

-7

Corporate clients

2,650

2,765

-4.1

Investments

The total amount of investments in 2009 stood at RUR 2,138 mln, which is 64.7% less than in 2008. This reduction was due to the need to limit during the crisis period investments which were not associated with the generation of revenue. As a result, the main areas of investment in 2009 were geared towards advanced telecommunications services, and their proportion in overall investments stood at 48.1%.

Investment breakdown

	2009	2008	Change 2009/2008,%
Investments, total, RUR mln	2,138	6,061	-64.7
Traditional telephony	222.6	1,253	-82.2
Value-added services	1,027.6	3,094.9	-66.8
Datacom network and infrastructure	456.6	701.8	-34.9
IT investments	161.2	423.5	-61.8
Other infrastructure	269.3	587.8	-54.2

Main projects under 2009 investment program:

arranging xDSL access (203,600 broadband Internet ports were commissioned using xDSL technology);
arranging Ethernet/FTTx access;
constructing and reconstructing telecommunications networks using Softswitch technology;
construction and expansion of cable television networks;
construction of regional multi-service datacom network;
construction of fiber-optic and radio relay telecommunications lines.

Debt load

Measures aimed at raising operating efficiency and optimizing the investment program allowed the Company to dramatically improve generation of free cash flow, which in turn made it possible to substantially reduce the debt load, refinancing risks and improve liquidity. VolgaTelecom’s net debt stood at RUR 6,563 mln in 2009 (56.9% less than in 2008).

	2009	2008	Change, %
Debt*, RUR mln	8,518	13,095	-35
Net debt **, RUR mln	6,563	11,533	-43,1
Net debt/Equity	0.25	0.50	-50
Net debt/Assets	0.16	0.26	-38.5

* The Company’s debt is calculated as the sum of long-term and short-term liabilities for credits and loans.
** Net debt is calculated as the sum of borrowed obligations adjusted for the amount of cash and equivalents.

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06.04.2010
VolgaTelecom boosts 2009 net profit by 44.4%