September 6, 2011. Moscow, Russia. Sistema Mass-Media (“SMM”), one of Russia’s largest media holdings, has published unaudited consolidated US GAAP financial results for the first six months, ended on June 30, 2011. SMM owns and manages STREAM Television Company (“Stream”), Russian World Studios (“RWS”), Maxima Communications Group (“Maxima”), and Digital Television Broadcasting (“DTV”).

Main financial results

Revenues totaled US$48.4 million, up 1.1% year-on-year

OIBDA equaled US$15.1 million, compared with US$20.4 million in the first half of 2011, due to fluctuations in RWS’ production cycle, giving an OIBDA margin of 31.2%

The net loss fell to US$6.7 million, down 25.6% year-on-year

Debt stood at US$89.4 million at the period end, down 29.1% year-on-year

Main operating results

Stream’s subscriber base increased to 5.6 million, up 11.4% year-on-year

Stream’s revenues from advertising came to US$1.2 million, up 496% year-on-year, while its net income amounted to US$2.4 million, up 117.5% year-on-year

At the period end, the value of RWS’ intangible assets stood at US$57.0 million, up 53.6% compared with a year earlier

RWS’ library totaled 1,312 hours, up 24.0%

RWS’ own production came to 102 hours and its content sold to 132 hours

Commenting on the results for the first half of 2011, SMM CEO Andrey Smirnov said:

“The financial and operating results show that the holding continued to develop rapidly, particularly in the advertising and TV divisions. The rise in the financial indicators, with revenues reaching US$48.4 million while the net loss and debt fell, indicates that SMM is expanding steadily.

In the first half of 2011, we continued to work actively in the TV broadcasting segment, which enabled Stream to increase all financial and operating indicators significantly, boosting its subscriber base to     5.6 million. In the near term, we expect the holding’s movie and TV production to grow. Thanks to the loan to RWS from Sberbank and ING, the first to be secured against intellectual property in Russia, content production and sales will increase substantially.

Meanwhile, we made further progress in developing in-car TV, as part of DTV’s business, streamlining services, extending transmission licenses, and developing and testing in-car signal reception and viewing equipment. We plan to launch the service on the mass market at the end of 2011.

The holding’s advertising division is expanding steadily following the restructuring, with all indicators increasing significantly. In the reporting period, Maxima’s billing rose to US$41.3 million, up 8.3% year-on-year.

SMM is actively developing its new media projects and is testing Stream Interactive, which offers multi-platform interactive content. Already this year, the holding’s own content, as well as that from partners, will be available to owners of TV sets with the Smart TV function.

Throughout 2011 and 2012, SMM expects all of its divisions to remain stable and plans to expand rapidly through both organic growth and M&A.”

Financial results

* US$ million, except the OIBDA margin; unaudited US GAAP results

Revenues 

Overall revenues reached US$48.4 million, up 1.1% year-on-year. This positive dynamic was driven by higher revenues from content distribution and aggregation thanks to organic growth at Stream, as well as a rise in the share of revenues from advertising services at Maxima.

OIBDA and Net income

OIBDA (operating profit before the amortization of main and intangible assets) came to US$15.1 million, down 26.0% year-on-year. This was due to lower sales at RWS (caused by fluctuations in the content production cycle) and an increase in the share of fixed costs in overall expenses. As a result, the OIBDA margin was 31.2%, down 11.4 percentage points.

The net loss dropped to US$6.7 million, down 25.6% year-on-year, due to income from the sale of Thema Production. The asset was divested in mid 2010, as RWS oversees international movie production.

Cash flow and liquidity

Operating cash flow remained positive compared with the same period of 2010, confirming that SMM is in a stable financial position.

CAPEX (invested in producing and renewing content) totaled US$17.0 million, down 42.2% year-on-year. The fall was due to fluctuations in the content production cycle during the year. CAPEX is expected to increase in the second half of 2011.

Financial results by segment

* US$ million, except the OIBDA margin; from the unaudited US GAAP results

Operating results by segment

TV

SMM’s TV broadcasting business is overseen by Stream, a leader on the Russian market for producing non-terrestrial channels, content aggregator and supplier of modern TV services. It produces nine own channels and aggregates over 100 others for mobile operator MTS in Moscow and Moscow region. Most of its revenues – up to 76% from distributing channels – come from providing services to external subscribers.

In the first half of 2011, Stream boosted overall revenues by 23.8%, thanks to organic growth, and expanded its subscriber base to 5.6 million, up 11.4% year-on-year. It is also experiencing an increase in revenues from advertising, which climbed to US$1.2 million in the reporting period, up 496.0% year-on-year. This was due to greater revenues from advertising following the successful expansion of the channel distribution business, as well as the low base in the first half of 2010. The dynamic organic growth was also reflected in OIBDA, up 68.9% year-on-year, and net income, up 117.5%.

DTV operates mobile TV in the DVB-T format and is preparing to launch it in the in-car TV segment in Moscow and the surrounding region. In the first half of 2011, preparations were made to upgrade the broadcasting network. Six channels have been transferred to MPEG4 format, while work is under way with partners to develop and test in-car signal reception and viewing equipment. Also, transmission licenses were extended, and potential markets were researched. The plan is to launch the service on the mass market at the end of 2011.

Movie and TV production

SMM’s movie and TV production business is overseen by RWS, a leading producer of film and television content and an increasingly active distributor, with one of the largest libraries on the market.

In the first half of 2011, RWS’ revenues dropped by 14.7% year-on-year and OIBDA by 20.1%. This was due to fluctuations in the movie production cycle, preparations for a number of filming large projects in the second half of 2011, and, consequently, a planned shift in the schedule for production and for securing external financing to the second half of the year.

In the reporting period, RWS produced 102 hours of content, down 61.1% year-on-year. This was caused by fluctuations in the movie production cycle and the shift in the production schedule to 2H11.

As of 30 June 2011, RWS’ library totaled 1,312 hours, up 24.0% year-on-year. The value of RWS’ intangible assets stood at US$57.0 million, representing an increase of 53.6%, which was driven by an increase in pricing for premium series produced by RWS in the second half of 2010 and first half of 2011 for leading Russian channels.

This year, RWS’ client base has expanded to include the REN and Domashny channels in Russia and Inter in Ukraine. Alongside Russia and the wider CIS, the subsidiary sells its movies and TV content to the Baltic countries, Israel, Germany and India.

RWS also manages movie studios. At present, it owns 22,000 square meters of facilities in Moscow and St Petersburg. LenFilm XXI is building a second phase at the complex in St Petersburg, and this is due to be launched in 2014.

Advertising

SMM’s advertising business is overseen by Maxima, one of the leading non-network full-service advertising agencies that buys and sells media services for a number of Sistema companies and external clients.

Following the successful restructuring in 2010, Maxima continued to improve its key indicators in 1H11, almost breaking even amid an increase in clients and tenders won. New clients include DKNY, Volkswagen, Kronenbourg, Russian Standard and Nokia.

Alongside taking part in tenders and seeking new clients, the agency is creating a unique pool of advertising opportunities from Sistema and other partners that will be offered to players on the market.

Outlook for 2011

For the remainder of 2011, SMM plans to continue expanding across all business lines through both organic growth and M&A.

In the TV division, the holding intends to increase its base of own non-terrestrial channels on local and external networks. In addition, as part of the drive to develop in-car TV, it plans to continue modernizing the network and preparing for launch on the mass market.

As regards movie and TV production, SMM will continue to ramp up its production of series and distribution on various platforms. There are plans to increase the volume of repeat sales, the rights to which will expire during the year.

In the advertising division, the main focus will be on taking part in tenders and hiring more staff.

Events after the reporting period

SMM, ING Bank N.V. and the Moscow Bank of Sberbank of Russia have signed an agreement to provide RWS with a loan secured against RWS’ own library of video content.

ING Bank and Sberbank will provide RWS with a 3-year secured club loan of RUB 1.2 billion with OJSC Sistema Mass-Media acting as a guarantor. This is an unprecedented transaction for the Russian corporate credit market as it is the first time in the history of the Russian media industry that a loan is to be granted with a library of video content as security.

The signing of the memorandum of understanding reflects the fact that a civilized intellectual property market has been created in Russia according to internationally recognised economic and legal standards that have been successfully implemented across the world’s financial markets and the global film industry.