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29.07.2010
Far East Telecom: RAS net profit up 13% y-o-y in H1 10

Press Release

Vladivostok – July 29, 2010.  Far East Telecom (RTS: ESPK, MICEX: DLSP, OTC USA FEEOY, Frankfurt and Berlin stock exchanges: D7A) hereby announces the results of its unaudited financial and operating activities for the first half of 2010 according to Russian Accounting Standards (RAS).

Headline financial indicators of H1 2010 

Efficiency indicators  

• The average number of staff on record stood at 9,800 employees as of June 30, 2010, which is 415 (or 4.1%) less than the figure as of January 1m 2010 (10,215 employees);
• Revenue per employee increased by 15.9% to RUR 719,800 during H1 2010 (up from RUR 621,200 in H1 2009);
• The number of lines per employee increased by 8.2% to 149.8 lines (up from 138.4 lines in H1 2009);
• Cost per ruble of revenue rose 1.1% in H1 2010 compared to the same period last year and stood at 74.73 kopecks (up from 73.91 in H1 2009). 

 Revenue breakdown for 1H 2010

Higher service revenues are attributable to:

• an increase in ISP revenue;
• an increase in interactive television revenue;
• an increase in local voice revenue.  

ISP and datacom revenue 

Strong revenue was derived from a rise in the broadband Internet subscriber base, which increased by 87,812 subscribers compared to the first six months of 2009.  The subscriber base stood at 415,281 users as of June 30, 2010.  Revenue was also influenced by strong promotion of new maximum limit tariff plans, which, in turn, contributed to a rise in revenue from subscriber fees. 

As for the service “Interactive television” the growth in revenue compared to the first half of 2009 amounted to 64.5% or RUR 61.6 mln.  This was due to an increase in the subscriber base by 42,531 subscribers (the subscriber base stood at 97,209 subscribers as of June 30, 2010). Revenue was also boosted by the commercial launch of interactive TV at the Magadan and Sakhalin branches in September 2009.  

Local voice revenue  

A 5.7% increase in local voice revenue was attributable to a tariff hike effective February 2010.

Intrazonal telephony revenue 

A 2.9% decrease in revenue or RUR 81.82 mln was attributable to a decline in volumes of intrazonal traffic, which resulted in an 11.8% (RUR 88.2 mln) drop in traffic owing to a 20.1% (RUR 62 mln) contraction in F2F traffic.  The decline in traffic volumes was attributable to lower demand for this service resulting from mobile substitution.  This decrease was partially offset by a 34% rise (RUR 51.1 mln) in lease of intrazonal telecom lines. 

Cellular telephony revenue 

Cellular telephony revenue decreased by 19.8% in the first half of 2010 compared with the same period in 2009.  The decline was attributable to a decrease equal to 74,528 users in the subscriber base.  The subscriber base stood at 74,528 users as of June 30, 2010.   This trend was driven by fierce competition from the Big-3 in the Magadan region and the Kamchatka krai.

Revenue from interconnect and traffic transmission  

A contraction in revenue from interconnect and traffic transmission in the first six months of 2010 was due to the following factors: 

• a decrease in revenue from Rostelecom (RUR 21 mln) as a result of the fact that the tariff was lowered by 33% from RUR 1.25/min to RUR 0.50/min. The 33% decline in revenue from Rostelecom came at the same time as a decrease in outlays for Internet lines by the same amount;
• a lower share of revenue from traffic transmission which was due to deregulation of the zonal fixed line telephony market and the entry into this market of alternative telecom operators.  These trends mainly characterize Primorie, Khabarovsk, Kamchatka, and Amur regions;
• lower interconnect traffic on the local and zonal levels, which is due to mobile substitution and the rerouting of some traffic to IP networks;
• a decrease in the proportion of traffic transmission to access nodes (local origination of calls) due to a decrease in the proportion of dial-up Internet services and an increase in the proportion of DSL traffic.

 Subscriber base trends and proportions of value-added service revenues in H1 2010 

• The proportion of value-added services (ISP, datacom, mobile telephony, interactive TV and video on demand)  in the company’s revenue mix for H1 2010 reached 83.1% (the proportion of value-added services stood at 30.1% in H1 2009);
• The broadband Internet subscriber base increased by 26.8% to 415,281 subscribers (up from 327,469 subscribers in H1 2009);
• The cellular subscriber base decreased by 20.6% to 74,528 subscribers (Kamchatka krai – 30,522 (up from 34,959 in H1 2009), Magadan region – 44,006 (down from 58,943 in H1 2009);
• The fixed-line subscriber base amounted to 1,370,040 lines as of June 30,10`0 (down from 1,379,270 lines in H1 2009). 

Breakdown on expenses, H1 2010  

• Payroll expenses went up by RUR 126.2 mln or 8.3% compared to the figure released as of H1 2009 due to efforts aimed at raising the salaries of the Company’s employees and the accrual of a reserve under the current premium;
• A RUR 67.4 mln (or 14.0%) increase in material expenses compared to the figure released in H1 2009 which is attributable to heat and electricity tariff hikes and higher expenses for subscriber equipment;
• A RUR 54.8 mln increase in the item “Other expenses” was attributable mainly to higher costs related to software and databases, agency services, and outlays on interactive and entertainment services.

 Miscellaneous revenues and expenses  

A loss was reported in H1 2010 a loss equal to RUR 199.0 mln from other non-operating activities (vs. a loss in H1 2009 equal to RUR 864.4 mln) due to the following factors: 

• Interest income rose RUR 14.2 mln and amounted to RUR 20.3 mln, which is due to an increase in the amount of free cash for placement;
• Interest expenses amounted to RUR 352.7 mln, which is 94.6% higher than the level of interest expenses recoded in 1H 2009 (RUR 258.1 mln), which is attributable to the placement of series BO-05 tradable bonds with a 15% coupon yield.
• The item “Revenue from the participation in other organizations” records dividends from Sakhatelecom for 2009, which accrued during the second quarter of 2010;  

In-house and borrowed capital 

Far East Telecom’s net assets increased 6.7% as of June 30, 2010 and stood at RUR 10,602.1 mln June 30, 2010 (vs. RUR 9,932.9 mln as of January 1, 2010). 

Additional information on the company can be found in the SKRIN comprehensive disclosure system at www.skrin.ru , news agency Interfax at www.interfax.ru , and news agency AKM at www.akm.ru.

[1]  OIBDA is calculated as revenue minus expenses before depreciation

[2] OIBDA margin is calculated as OIBDA/revenue

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

[4] EBITDA margin is calculated as EBITDA/revenue

[5] Including expenses for electricity and heat equal to RUR 212.0 mln (up from RUR 184.8 mln in H1 2009)

[6] Information, advisory, audit, transportation, security services and current repair and maintenance, staff retraining and advertising costs

[7] Lease payments, lease of property, private pension insurance, voluntary medical insurance provided for employees

[8] Interest debt is equal to the sum of long-term liabilities on credits and loans and short-term liabilities

[9] Net debt is calculated as interest debt minus the sum of cash minus the sum of short-term financial investments