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Financial Corporation "Sistema"

July 10, 2007

Sistema announces financial results for three months ended March 31, 2007

Moscow, Russia - July 10, 2007 - Sistema (the "Group") (LSE: SSA), the largest private sector consumer services company in Russia and the CIS, today announced its unaudited consolidated US GAAP financial results for the three months ended March 31, 2007.

 

FIRST QUARTER HIGHLIGHTS

  • Consolidated revenues up 44% year on year to US$ 2.7 billion
  • OIBDA up 58% year on year to US$ 1.1 billion with increased margin of 40.5%
  • Operating income up 87% year on year to US$ 728.5 million with increased margin of 27%
  • Net income up more than five fold year on year to US$ 745.9 million
  • US$ 356.4 million raised through SITRONICS initial public offering in February 2007
  • Completion of sale of 49.2% stake in ROSNO insurance joint venture for US$ 750 million in February 2007

Alexander Goncharuk, President and Chief Executive Officer, commented: "The 44% revenue growth generated in the first quarter of 2007 demonstrates our solid performance across all business lines, and particularly in the telecommunications segment. The non-telecommunications businesses now account for almost a quarter of total revenues. We have successfully combined this growth with a more than five fold year on year increase in net income, which reflects our focus on maximizing shareholder value creation through improved operational performance and selective asset realizations. Specifically, we have been able to realize our investment in ROSNO through the sale of our 49.2% stake for US$ 750 million. The IPO of SITRONICS was another important milestone in the development of our Group. We are well positioned for continued growth in all of our business areas and remain focused on enhancing our competitive position and profitability in each segment."

 

FINANCIAL SUMMARY[1]

 

(US$ millions)

 

Q1 07

Q1 06

Year on Year Growth

Q4 06

 

Quarter on Quarter Change

 

Revenues

 

2,706.0

1,882.4

43.8%

3,218.6

-15.9%

OIBDA[2]

OIBDA Margin

 

1,095.5

40.5%

692.7

36.8%

58.2%

 

992.7

30.8%

10.4%

 

 

Operating income

Operating Margin

 

 

728.5

26.9%

 

388.9

20.7%

 

87.3%

 

 

634.1

19.7%

 

14.9%

 

Net income

Net income Margin

745.9[3]

27.6%

129.5

6.9%

476.1%

2.9[4]

0.1%

-

OPERATING REVIEW

 

Sistema's consolidated revenues increased by 44% year on year in the first quarter of 2007 as a result of the healthy performance by the Group's Telecommunications and non-telecommunications operations. The non-telecommunications businesses accounted for 24% of Group consolidated revenues in the first quarter, compared to 19% for the corresponding period of 2006. The organic year on year growth in the first quarter (excluding businesses acquired or divested since the end of the first quarter of 2006) was 38%. 

Group OIBDA increased by 58% year on year in the first quarter and by 10% quarter on quarter compared to the fourth quarter of 2006. The Group's OIBDA margin increased from 36.8% in the first quarter of 2006 to 40.5% in the first quarter of 2007. MTS showed particularly strong growth and expanded its OIBDA margin by 5.4 percentage points year on year to 51.9%, as a result of improving efficiency levels. Comstar's adjusted[5] OIBDA margin was up quarter on quarter from an underlying level of 33% in the fourth quarter of 2006 to 40%, due to the positive effect of the introduction of new tariffs at MGTS and the benefits of the restructuring on Comstar Moscow's margin. The first quarter profitability levels were however adversely impacted by the delaying of some key projects at SITRONICS until later in 2007.   

Group operating income was up 87% year on year and by 15% quarter on quarter. The Group operating margin increased in the first quarter to 26.9%, from 20.7% a year ago, and from 19.7% in the fourth quarter of 2006.

Consolidated depreciation and amortization expenses increased by 21% year on year from US$ 303.8 million to US$ 367.0 million due to the growth in the Group's fixed and intangible asset base over the past twelve months, and the previously announced accelerated depreciation of analogue equipment by MGTS.

Selling, general and administrative expenses rose by 32% year on year from US$ 339.6 million to US$ 447.7 million, due to the growth in advertising expenses in the telecommunications businesses and the overall increase in wage expenses.

The effective tax rate decreased from 40.2% in the first quarter of 2006 to 32.0% in the first quarter of 2007, largely as a result of the change in the functional currency of MTS with effect from January 1, 2007. The change eliminated the difference between the accounting treatment of foreign exchange gains on MTS' US Dollar-denominated debt under US GAAP and the Russian tax code.

Sistema's share in the net income of the affiliated Bashkir oil companies amounted to US$ 21.5 million in the first quarter of 2007.

The growth in net income before US$ 99.4 million of discontinued operations resulted from the organic growth in the telecommunications segment and was partly offset by the decrease in net income reported by the technology segment. The sale of the Group's stake in ROSNO contributed an additional US$ 522.9 million of net proceeds after tax to the total net income for the first quarter of 2007. As a result, net income increased more than five fold year on year.


[1] ROSNO is accounted for as a discontinued operation for all periods presented. Thus, here and further, ROSNO's financial results are excluded from all the captions presenting the Group's consolidated results from continuing operations.

[2] See Attachment A for definitions and reconciliation of OIBDA and OIBDA margin to their most directly comparable US GAAP financial measures.

[3] During the three months ended March 31, 2007, the Group's investments in Svyazinvest and Permskie Motory were recorded at cost, due to the unavailability of financial information for the respective period.

[4] Net income for the three months ended December 31, 2006 includes a charge to non-operating expenses of US$ 170 million, net of minority interest of US$ 150 million, related to the Bitel liability and investment write-offs.

[5] Adjusted for the impact of the US$ 62.1 million stock bonus awards in the three months ended December 31, 2006.

 

Telecommunications[6]

 

(US$ millions)

Q1 07

Q1 06

Year on Year Growth

Q4 06

 

Quarter on

Quarter

Change

Revenues

2,067.1

1,534.2

35%

2,096.3

-1%

OIBDA

1,081.4

708.2

53%

942.3

15%

Operating Income

743.1

404.9

84%

606.8

23%

Net Income

227.3

128.6

77%

69.8[7]

226%

 

The Telecommunications segment, which comprises MTS, the largest mobile phone operator in Russia and the CIS, and Comstar UTS, the leading combined telecommunications operator in the CIS, generated 35% year on year revenue growth in the first quarter of 2007. The segment accounted for 76% of the Group's consolidated revenues in the quarter, compared to 81% a year ago. The growth was primarily organic, with the exception of US$ 5.7 million of revenue generated by businesses acquired after the end of the first quarter of 2006 by Comstar (DG Tel and Technologic Systems in Ukraine, Cornet and Callnet in Armenia, and Astelit in Russia) and MTS (Dagtelecom). MTS continued to be the main contributor to the segment revenues and accounted for 84% of the segment's year on year growth in the quarter.

MTS added 1.3 million subscribers during the quarter and had 74.2 million subscribers by the end of the first quarter of 2007. The Company generated 35% year on year revenue growth to US$ 1.7 billion, which reflected a year on year increase in average monthly service revenue per Russian subscriber ("ARPU") from US$ 6.6 to US$ 8.2.  Russian subscribers' monthly Minutes of Use (MOU) increased by 14% year on year to 134.  MTS' consolidated OIBDA rose by 51% year on year to US$ 0.9 billion, largely as a result of optimized marketing and advertising spending.  MTS was also able to decrease the cost of customer acquisition on a sequential basis in the first quarter, with subscriber acquisition costs (SAC) falling from US$ 29.1 in the fourth quarter of 2006 to US$ 26.2 in the first quarter of 2007.

Comstar UTS generated 32% year on year revenue growth to US$ 328.9 million, reflecting healthy organic revenue growth driven by the high customer demand for the unlimited tier of the tariff plans introduced by MGTS from February 2007, the positive impact of the introduction of ‘Calling Party Pays', and the healthy development of the Comstar Direct broadband Internet and double-play offerings. Comstar Direct announced in April that it had become the first operator in Moscow to pass the 400,000 subscriber milestone, and increased its subscriber base by 11% quarter on quarter. Comstar UTS reported a 23% year on year increase in OIBDA to US$ 133.9 million in the first quarter.

Segment OIBDA was up 53% year on year, with an increased combined OIBDA margin of 52.3% in the first quarter, up from 46.2% a year ago and 45.0% in the fourth quarter of 2006.  This increase in margin primarily reflected the increased operating profitability at MTS as a result of the restructuring program implemented from May 2006.  Segment net income for the first quarter increased by 77% year on year.

MTS provided updated guidance for the full year 2007 in May.  MTS stated that it expects its revenues to grow by no less than 22% in 2007 and its OIBDA margin for the full year to be at least 50%. MTS announced in April 2007 that it had been awarded third generation (3G) licenses for the entire territory of Russia and Uzbekistan. MTS is currently forecasting capital expenditure of up to US$ 1 billion up until the end of 2009 on network deployment and the commercial launch of 3G services.

 


 

[6] Here and further, in the comparison of period to period results of operations, in order to analyze changes, developments and trends in revenues by reference to individual segment revenues, revenues are presented on an aggregated basis, which is revenues after the elimination of intra-segment (between entities in the same segment) transactions, but before inter-segment (between entities in different segments) eliminations, unless accompanied by the word "consolidated".  Amounts attributable to individual companies, where appropriate, are shown prior to both intra-segment and inter-segment eliminations. SITRONICS' and Sistema Hals' financial results may differ from respective standalone values due to certain reclassifications and adjustments.

[7] Net income for the three months ended December 31, 2006 includes charges to non-operating expenses of US$ 170 million, net of minority interest of US$ 150 million, related to the Bitel liability and investment write-offs.

 

Technology

 

(US$ millions)

Q1 07

Q1 06

Year on Year Growth

Revenues

310.8

239.6

30%

OIBDA

-11.6

21.0

-

Operating Income

-24.9

19.7

-

Net Loss/Income

-23.0

5.6

-

 

The Technology segment comprises SITRONICS, which is a leading provider of telecommunications, IT and microelectronic solutions in Russia and the CIS, with a growing presence in other EEMEA emerging markets. SITRONICS generated 30% year on year revenue growth in the first quarter and accounted for 11% of Group revenues for the quarter, compared to 9% for the same period of 2006.

SITRONICS reported a negative OIBDA and a net loss in the first quarter.  The first quarter profitability levels were adversely impacted by the deferral of some key customer projects until later in 2007.  The increase in the cost base was due to the higher level of fixed costs following the scaling up of operations, the increase in research and development costs related to new products that were due to be implemented during the period but have been delayed, and the ongoing expansion into the Middle East and Africa.  

The Company's revenue streams are largely dependent on scale contracts which tend to weight more to the second half of the year and SITRONICS has won a number of new public and private sector contracts during the first half of 2007. In addition, the delayed MGTS and MTS projects are now expected to commence during the second half of 2007 and run into 2008.  New contracts have been secured with the Russian Federal Agency of Industry, Wateen Telecom in Pakistan, Telecom Srbija in Serbia, CALLAX in Germany, BTC Mobile in Bulgaria, a World Bank-funded project in Ukraine, and National Machinery Import & Export Corporation in China.

SITRONICS completed its Initial Public Offering on the London Stock Exchange in February 2007 and raised US$ 356.4 million of net proceeds.   

 

Real Estate

 

(US$ millions)

Q1 07

Q1 06

Year on Year Growth

Revenues

34.5

15.7

119%

OIBDA

7.0

0.3

-

Operating Income

4.1

-0.4

-

Net Income/Loss

4.7

-5.8

-

 

Revenues for the Real Estate segment, which comprises Sistema Hals, a leading Moscow-based real estate development, management and investment company, more than doubled year on year in the first quarter. The Segment's OIBDA margin increased from 2% in the first quarter of 2006 to 20% in the first quarter of 2007, primarily due to the growth of revenue from operating activities and a decrease in operating expenses. The net loss in the first quarter of 2006 was therefore reversed into a net profit in the first quarter of 2007. The real estate development division remained one of the primary growth drivers of the business and accounted for 46% of segment revenues for the quarter, compared to 37% for the corresponding period of 2006.  The growth in revenues primarily resulted from the construction of the Siemens Tower project, Yartsevskaya, 27V, a residential building with 29,910 square meters of gross built area (GBA), located in the western part of Moscow, and the sale of land plots at Avrora residential development in the Moscow region. Additionally, Sistema Hals recognized US$ 3.5 million in revenues from the partial completion of the Siemens Tower project. Revenues in the project construction management division more than doubled year on year to US$ 8.9 million in the first quarter of 2007. The asset management division increased revenues by 81% year on year to US$ 6.4 million in the first quarter of 2007, primarily as a result of an increase in the number of houses sold within the asset restructuring program and the growth in rental revenues.  

Sistema Hals announced the results of an independent valuation of its real estate property and projects in March 2007. The valuation was carried out by Cushman and Wakefield Styles & Riabokobylko (C&WS&R), and indicated that the value of the Sistema Hals portfolio had increased by 35% between June 30, 2006 and January 1, 2007 to US$ 2.0 billion.

Sistema Hals signed an agreement with the X5 Retail Group, Russia 's largest grocery retailer, in May 2007 for the opening of branches of the Perekrestok supermarket chain in two of Sistema Hals retail & leisure centers in Moscow and in several regional malls.

 

Banking

 

(US$ millions)

Q1 07

Q1 06

Year on Year Growth

Revenues

79.8

44.1

81%

OIBDA

10.5

9.0

16%

Operating Income

9.3

8.7

7%

Net Income

4.4

5.9

-27%

The Banking segment comprises the Moscow Bank for Reconstruction and Development (MBRD), which provides corporate and retail banking services in Russia, and its subsidiaries.  Segment revenues almost doubled year on year in the first quarter. The bank's loan portfolio grew by 59% year on year to US$ 1.6 billion as at March 31, 2007 and interest income received from the retail banking operations increased to US$ 13.9 million in the first quarter of 2007. The bank increased its interest income from non-Sistema clients following the expansion of its retail business with the opening of 5 mini-offices in the first quarter of 2007. The bank's retail network included a total of 13 branches and 112 mini-offices as at the end of the quarter. Leasing activities contributed US$ 6.1 million to the segment's revenue in the first quarter of 2007.

 

Retail

 

(US$ millions)

Q1 07

Q1 06

Year on Year Growth

Revenues

86.9

56.0

55%

OIBDA

-5.0

-2.9

-

Operating Income

-7.0

-3.1

-

Net Loss

-8.5

-5.0

-

The Retail segment comprises Detsky Mir, one of the largest children's goods retail store chains in Russia. Total revenues grew by 55% year on year, whilst retail revenues, which accounted for 89% of total revenues in the period, increased by 149% year on year to US$ 77.0 million. Wholesale and rental revenues represented the remaining share of total revenues.

Detsky Mir reported a net loss in the quarter, which was largely due to the significant expansion of the retail store network undertaken in the fourth quarter of 2006 and the fact that the first quarter is a seasonally weaker period of the year.

The network grew to 67 retail outlets with the aggregate retail space of 117 thousand sq.m., compared to 39 stores covering 58 thousand sq.m. of retail space at the end of the first quarter of 2006.

Additionally, 7 new outlets were added to the retail store network since the end of the quarter. As at July 10, 2007, Detsky Mir's retail network consisted of 74 retail outlets, with total retail space of 133 thousand square meters, located in 36 Russian cities.

 

Media

 

(US$ millions)

Q1 07

Q1 06

Year on Year Growth

Revenues

26.9

19.8

36%

OIBDA

5.0

3.7

-

Operating Income

1.3

0.1

-

Net Loss

-0.2

-1.7

-

The Media segment, which comprises the Group's pay-TV, advertising, print and other media operations, generated 36% year on year revenue growth in the first quarter. Stream-TV, one of the largest providers of pay-TV services in Russia, which was acquired in February 2006, contributed US$ 19.2 million in revenues for the first quarter of 2007, compared to US$ 12.1 million in the first quarter of 2006.

The Stream-TV subscriber base grew by 4% quarter on quarter to 1.66 million subscribers by the end of the quarter, including 1.56 million pay-TV customers, 86,000 Internet and 9,700 telephony subscribers. The Maxima Group, an advertising agency, which operates in Russia, Ukraine, Kazakhstan and Belarus, contributed US$ 7.4 million to segment revenues, primarily due to the growth in its Ukrainian subsidiary and the increase in print advertising revenues.

The increase in segment operating income reflected the growth in the subscriber base and Stream-TV ARPU.

 

Corporate and Other

 

(US$ millions)

Q1 07

Q1 06

Year on Year Growth

Revenues

 

 

 

 Radars and Aerospace

70.3

21.4

229%

 Tourism

48.6

26.0

87%

 Pharmaceuticals

17.2

1.1

1,464%

 Healthcare Services

5.4

3.5

54%

 Other

8.5

7.5

13%

Total

150.0

59.5

152%

 

OIBDA

 

 

 

 Radars and Aerospace

12.4

1.7

-

 Tourism

6.4

0.3

-

 Pharmaceuticals

3.5

0.5

-

 Healthcare Services

0.4

0.9

-

 Other

-9.6

2.5

-

Total

13.1

5.9

-

Revenues for the Radars and Aerospace division, which comprises Concern RTI Systems, more than tripled year on year in the quarter while OIBDA increased more than six times year on year, as a result of an increase in the volume of services performed under a number of government contracts. OIBDA margin increased to 17.6% in the first quarter compared to 7.9% in the first quarter of 2006. Concern RTI Systems is a supplier of strategic missile defense systems, as well as information, communication and navigation systems for a number of Russian Ministries and Federal Agencies. RTI Systems deployed an early-warning space control radar in Lechtusi, near St. Petersburg, during the first quarter, and also completed the testing of the coastal over-the-horizon surface wave radar.

The Tourism division's revenues almost doubled year on year in the first quarter of 2007 and the OIBDA margin rose year on year to 13.2% from 1.2% in the same period of 2006. The core tour operator business is complemented by a hotel business, a chain of retail outlets and transportation services. Intourist served over 100,000 tourists in the first quarter of 2007.

The Pharmaceuticals division's revenues for the first quarter of 2007 increased almost 16 times and OIBDA rose 7 times year on year in the quarter, reflecting a number of strategic transactions.

The Healthcare Services division's revenues increased 54.3% year on year. The division, which comprises the Medsi and Medsi-II clinics, is developing into a leading private healthcare provider in Russia with comprehensive medical care and a chain of private clinics. Medsi acquired the American Hospital Group, a leading medical centre for expatriates, located in Moscow, as well as MedExpress, a chain of private healthcare facilities in Russia, after the end of the quarter. As a result of these acquisitions, the network of healthcare facilities has increased to over 20.

 

 

EQUITY IN NET INCOME OF ENERGY COMPANIES

 

The results of Sistema's participation in the equity of Bashkir Oil companies, which comprise exploration, refining and trading operations, are included in the "Equity in net income of energy companies in the Republic of Bashkortostan" line in the consolidated statements of operations. Sistema's share in the net income of the affiliated companies amounted to US$ 21.5 million in the first quarter of 2007. Sistema actively participates in the development of these assets by holding three seats on each of the Boards of Directors of the companies.

 

FINANCIAL REVIEW

 

Net cash provided by operating activities declined year on year to US$ 214 million in the first quarter of 2007 from US$ 240 million in the first quarter of 2006 largely as a result of an increase in the portfolio of trading securities.   

Net cash used in investing activities totaled US$ 378.0 million for the first quarter of 2007 and included US$ 404.0 million of capital expenditure, compared to US$ 864.7 million and US$ 393.8 million for the corresponding period of 2006, respectively. The decrease in net cash used in investing activities resulted primarily from the disposal of the Rosno stake in the first quarter of 2007. The Group spent US$ 39.0 million on the acquisition of businesses during the first quarter of 2007 as described in the Acquisitions and Disposals section later in this press release, compared to US$ 321 million in the first quarter of 2006.

Cash flow from financing activities amounted to US$ 703 million for the quarter, which primarily reflects the net proceeds from the IPO of SITRONICS in February. 

Group cash balances totaled US$ 1.1 billion at the end of the period, compared to US$ 502 million at December 31, 2006. Group net debt (debt minus cash and cash equivalents)  amounted to US$ 5.8 billion as at March 31, 2007, compared to US$ 6.3 billion as at December 31, 2006. The proceeds from the sale of ROSNO and from the IPO of SITRONICS have improved the cash position of the Group.  

Standard & Poor's (S&P) Ratings Services revised its outlook rating on Sistema in February 2007 from ‘stable' to ‘positive'. At the same time, S&P reaffirmed the 'BB-' long-term corporate credit rating for the Group.

 

 

ACQUISITIONS AND DISPOSALS

 

Telecommunications

In March 2007, Comstar sold its 45% equity stake in ZAO Metrocom, an alternative fixed-line telecommunications operator based in St. Petersburg, to ?losed joint-stock company MCT. The shares were sold for a total cash consideration of US$ 20 million. 

Technology

In March 2007, SITRONICS acquired 3.3% of ordinary shares in VZPP-Micron from BIPOLYAR LLC. As a result, SITRONICS now owns 100% of VZPP-Micron. VZPP-Micron is a producer of electronic power supply control components for customers in Russia and overseas, and is part of SITRONICS Microelectronic Solutions division.

Real Estate

In March 2007, Sistema Hals acquired a 67.58% stake in the KAMELIYA Health Resort in the city of Sochi, which is currently being renovated as a multifunctional complex that will include a 5-star hotel, luxury apartments and a full internal infrastructure.

Insurance

In February 2007, Sistema completed the sale of a 49.2% stake in ROSNO to Allianz, Sistema's strategic partner in ROSNO, for a total cash consideration of US$ 750.0 million, resulting in a net gain from the disposal of US$ 521.9 million. Sistema remains a minority shareholder in ROSNO with a 2.8% stake.

Media

Sistema Mass Media has finalised the acquisition of a 26% stake in JSC "Digital Broadcasting" - previously Sistema Mass Media had owned 74% of the share capital of the company. As a result of the deal, Sistema Mass Media has consolidated its shareholding in the company, which is working to become a key player in mobile broadcasting in DVB-H format.

Treasury Shares

In February 2007, Sistema purchased an additional 0.48% of its own stock. Sistema acquired in total 284,243 ordinary shares (2.95% of outstanding shares) for US $347.3 million. The acquired shares are intended for the funding of share option program for the top management and may also be used in connection with certain future acquisition activities.

 

SIGNIFICANT EVENTS FOLLOWING THE END OF THE REPORTING PERIOD

 

Telecommunications

In June 2007, the Annual General Meeting of shareholders ("AGM") of MTS approved the payment of annual dividend of RUR 9.67 per ordinary share (approximately US$ 1.87 per ADR) for the year ended December 31, 2006, amounting to a total of RUR 19.3 billion (US$ 747.4 million). Dividends are due to be paid before the end of 2007. The AGM elected the new Board of Directors, including two independent directors. Following the AGM, the Board elected Mr. Alexey Buyanov, Senior Vice President, Chief Financial Officer of Sistema, as Chairman of the Board and Mr. Sergey Drozdov, Senior Vice President, Head of Property of Sistema, as Vice Chairman of the Board.

In June 2007, MTS acquired the remaining 26% stake in Uzdunrobita, the leading mobile operator in Uzbekistan, from a private investor for $250 million. As a result of this transaction, MTS' ownership stake in Uzdunrobita has increased to 100%.

In June 2007, MTS announced that its Board of Directors approved an employee remuneration program. The employee motivation and retention program consists of two parts: a performance-based monetary award and a phantom share program based upon MTS' American Depositary Receipts (ADRs).  It will apply to up to 420 top- and mid-level managers.

In June 2007, the Comstar AGM approved an annual dividend of approximately RUR 1.3 billion, or approximately US$ 51.5 million, for the year ended December 31, 2006, to holders of MGTS shares as at the record date of May 12, 2007.  The dividends of RUR 8.75 per ordinary share (approximately US$ 0.34), and of RUR 39.77 per preferred share (approximately US$ 1.54), are due to be paid by the end of 2007.

The Comstar AGM approved annual dividends of approximately RUR 62.7 million, or approximately US$ 2.4 million, for the year ended December 31, 2006, to be paid to holders of Comstar's shares as at the record date of May 17, 2007. The dividends of RUR 0.15 per ordinary share, or approximately US$ 0.0058 per Global Depositary Receipt, are due to be paid within 60 days of the AGM approval.

In June 2007, Comstar signed a 5-year ruble-denominated credit facility for RUR 26 billion (approximately US$ 1 billion) at a fixed annual interest rate of 7.6% with the Savings Bank of the Russian Federation (Sberbank). The credit line is expected to be used to finance Comstar's investment in the development of its telecommunications network development and the refinancing of existing loan facilities.

In June 2007, MGTS received preliminary approval from the Federal Service for Tariffs (FST) for the optimized structure of its combined tier of tariff plans for regulated voice services.

In June 2007, Comstar announced the appointment of Sergey Pridantsev as President and Chief Executive Officer with effect from June 13, 2007. Mr. Pridantsev is the former General Director of CenterTelecom, a provider of fixed-line telecommunications services in the Central Federal District of Russia.

In June 2007, Comstar announced acquisition of a 25% minority stake in its Ukrainian subsidiary, Comstar-Ukraine for a total cash consideration of US$ 0.9 million. Following the closing of this transaction, Comstar became the 100% owner of Comstar-Ukraine.

In April 2007, the Extraordinary General Meeting of Svyazinvest shareholders elected Sergei Shchebetov (Chairman of the Comstar Board of Directors) and Anton Abugov (First Vice President and Head of Strategy and Development at Sistema) to the Svyazinvest Board of Directors.

 

Real Estate

In June 2007, Sistema Hals announced the adoption of a stock option program for members of its Board of Directors and Management Board. The program will provide both stock options and stock bonuses. Stock options entitle participants to acquire a specific number of shares in Sistema Hals, at a price determined and agreed in advance. Stock bonuses come in the form of shares granted to participants free of charge in return for their contribution to the development of the company.

 

Technology

In June 2007, SITRONICS announced the approval by its AGM of the Company's annual report and annual financial statements for 2006, as well as the allocation of 5% of the Company's net profit to set up a reserve fund. The AGM also approved the proposal of the Board of Directors not to pay an annual dividend for the year ended December 31, 2006.

On June 29, 2007, SITRONICS through its 100% owned subsidiary Sitronics Finance S.A. redeemed US$ 200 million of outstanding Eurobond Notes due 2009.

 

Banking

In May 2007, the Moscow Bank for Reconstruction and Development signed an agreement with the Dresdner Bank for a US$ 50 million credit line for 2 years.

 

Corporate & Other

In June 2007, Sistema announced results of its AGM. The AGM approved an annual dividend of RUR 48.0 per ordinary share, or approximately US$ 1.9 per GDR, for the year ended December 31, 2006. The dividends of RUR 463.2 million or approximately US$ 17.9 million, represents approximately 2% of Sistema's US GAAP consolidated net income for the full year 2006, and is due to be paid within 60 days of the date of AGM approval on June 30, 2007.

In June 2007, Sistema announced that it intends to purchase its own stock through a wholly owned subsidiary Sistema Finance Investments at a price of US$ 1,350 per share for a total amount of up to US$ 150 million. The acquired shares are intended for the funding of this share option program and may also be used in connection with certain future acquisition activities.

 

Conference call information

Sistema management will host a conference call today at 10 am (New York time) / 3 pm (London time) / 4 pm (CET) / 6 pm (Moscow Time) to present and discuss the first quarter results.

 

The dial-in numbers for the conference call are:

UK/International:         + 44 20 7138 0836

US:                              + 1 718 354 1172

 

A replay will then be available for 7 days after the conference call. To access the replay, please dial:

UK/International:         + 44 20 7806 1970

US:                              + 1 718 354 1112

 

PIN number:    8074290#   

 

***

 

For further information, please visit www.sistema.comor contact:

 

Sistema Investor Relations     Shared Value Limited                Sistema Public Relations

Laila Simanova                         Larisa Kogut-Millings                Kirill Semenov

Tel: +7 495 629 2741             Tel.: +44 (0) 20 7321 5037     Tel: +7 495 730 7188

ir@sistema.ru                          sistema@sharedvalue.net       ksemenov@sistema.ru

 

Sistema is the largest private sector consumer services company in Russia and the CIS, with over 75 million customers. Sistema develops and manages market-leading businesses in selected service-based industries, including telecommunications, technology, insurance, banking, real estate, retail and media. Founded in 1993, the company reported revenues of US$ 2.7 billion for the first quarter of 2007, and total assets of US$ 21.6 billion as at March 31, 2007. Sistema's shares are listed under the symbol "SSA" on the London Stock Exchange, under the symbol "AFKS" on the Russian Trading System (RTS), and under the symbol "SIST" on the Moscow Stock Exchange (MSE).


Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Sistema. You can identify forward looking statements by terms such as "expect," "believe," "anticipate," "estimate," "intend," "will," "could," "may" or "might" the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. In addition, there is no assurance that the new contracts entered into by our subsidiaries referenced above will be completed on the terms contained therein or at all. We do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, general economic conditions, our competitive environment, risks associated with operating in Russia, rapid technological and market change in our industries, as well as many other risks specifically related to Sistema and its operations.

 

SISTEMA JSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Amounts in thousands of U.S. dollars)

 

 

 

Jan - Mar 2007

Jan - Mar 2006

Oct - Dec 2006

 

 

 

 

Sales

2,630,463

1,845,084

3,138,455

Revenues from financial services

75,493

37,289

80,183

 

 

 

 

TOTAL REVENUES

2,705,956

1,882,373

3,218,638

 

 

 

 

Cost of sales, exclusive of depreciation and amortization shown separately below

(1,147,397)

(803,622)

(1,548,968)

Financial services related costs, exclusive of depreciation and amortization shown separately below

(31,329)

(20,908)

(37,943)

 

 

 

 

TOTAL COST OF SALES

(1,178,726)

(824,530)

(1,586,911)

 

 

 

 

Selling, general and administrative expenses

(447,695)

(339,608)

(608,115)

Depreciation and amortization

(367,026)

(303,784)

(358,565)

Other operating expenses, net

(23,757)

(42,209)

(64,095)

Equity in net income of investees

36,511

16,658

13,178

Net gain on disposal of interests in subsidiaries and affiliates

3,216

-

20,011

 

 

 

 

OPERATING INCOME

728,479

388,900

634,141

 

 

 

 

Interest income

20,752

17,902

17,659

Interest expense, net of amounts capitalized

(99,963)

(74,643)

(98,217)

Change in fair value of derivative financial instruments

13,500

-

(60,000)

Currency exchange and translation gain

31,821

27,665

62,260

Bitel liability and investments write-off

-

-

(320,000)

 

 

 

 

Income before income tax and minority interests

694,589

359,824

235,843

 

 

 

 

Income tax expense

(221,931)

(144,746)

(207,031)

 

 

 

 

Equity in net income/(loss) of energy companies in the Republic of Bashkortostan

21,521

57,185

(11,514)

 

 

 

 

 

Income before minority interests

494,179

272,263

17,298

 

 

 

 

Minority interests

(271,188)

(148,633)

(16,206)

 

 

 

 

 

Income from continuing operations before extraordinary gain

222,991

123,630

1,092

 

 

 

 

Income from discontinued operations

960

5,848

1,825

 

 

 

 

Gain on disposal of discontinued operations

521,963

-

-

 

 

 

 

NET INCOME

745,914

129,478

2,917

 

 

 

 

SISTEMA JSFC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands of U.S. dollars)

 

 

 

March 31,

2007

 

December 31,

2006

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

$

1,138,649

$

501,706

Short-term investments

 

966,442

 

554,157

Loans to customers and banks, net

 

1,602,870

 

1,290,082

 

 

 

 

 

Accounts receivable, net

 

966,139

 

1,069,706

Prepaid expenses, other receivables and
other current assets, net

 

1,031,229

 

917,551

VAT receivable

 

408,721

 

450,703

Inventories and spare parts

 

711,678

 

661,568

Deferred tax assets, current portion

 

193,409

 

195,672

Assets of discontinued operations

 

-

 

946,866

 

 

 

 

 

Total current assets

 

7,019,137

 

6,588,011

 

 

 

 

 

Property, plant and equipment, net

 

7,970,522

 

7,412,468

Advance payments for non-current assets

 

321,894

 

305,846

Investments in affiliates

 

1,155,376

 

1,108,647

Investments in shares of Svyazinvest

 

1,390,302

 

1,390,302

Other investments

 

122,500

 

122,500

Goodwill

 

519,030

 

504,166

Licenses, net

 

450,211

 

452,372

Other intangible assets, net

 

1,202,211

 

1,222,676

Loans to customers and banks, net of current portion

 

650,751

 

464,490

Debt issuance costs, net

 

78,960

 

80,220

Deferred tax assets, net of current portion

 

93,956

 

73,623

Other non-current assets

 

571,375

 

465,917

 

 

 

 

 

Total non-current assets

 

14,527,088

 

13,603,227

 

 

 

 

 

TOTAL ASSETS

$

21,546,225

$

20,191,238

 

 

SISTEMA JSFC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Amounts in thousands of U.S. dollars)

 

 

 

March 31,

2007

 

December 31,

2006

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

$

936,755

$

868,378

Bank deposits and notes issued, current portion

 

1,084,396

 

961,595

Insurance-related liabilities

 

-

 

-

Taxes payable

 

181,670

 

148,849

Deferred tax liabilities, current portion

 

66,791

 

48,885

Subscriber prepayments, current portion

 

477,317

 

552,997

Derivative financial instruments

 

170,816

 

184,316

Accrued expenses and other current liabilities

 

1,097,607

 

988,810

Short-term loans payable

 

1,504,651

 

1,296,778

Current portion of long-term debt

 

277,328

 

280,427

Liabilities of discontinued operations

 

-

 

869,534

 

 

 

 

 

Total current liabilities

 

5,797,331

 

6,200,569

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

Long-term debt, net of current portion

 

5,198,544

 

5,269,017

Subscriber prepayments, net of current portion

 

127,645

 

136,861

Bank deposits and notes issued, net of current portion

 

129,154

 

65,200

Deferred tax liabilities, net of current portion

 

288,183

 

287,125

Postretirement benefits obligation

 

16,352

 

16,391

Deferred revenue

 

130,712

 

129,120

 

 

 

 

 

Total long-term liabilities

 

5,890,590

 

5,930,714

 

 

 

 

 

TOTAL LIABILITIES

 

11,687,921

 

12,131,283

 

 

 

 

 

Minority interests in equity of subsidiaries

 

4,072,794

 

3,459,245

 

 

 

 

 

Commitments and contingencies

 

-

 

 

 

 

 

 

 

Puttable shares of SITRONICS

 

80,000

 

80,000

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

Share capital (9,650,000 shares issued and 9,365,757 outstanding with par value of 90 Russian Rubles)

 

30,057

 

30,057

Treasury stock (284,243 shares with par value of
90 Russian Rubles)

 

(347,068)

 

(347,068)

Additional paid-in capital

 

2,428,972

 

2,196,475

Retained earnings

 

3,241,600

 

2,499,302

Accumulated other comprehensive income

 

351,949

 

141,944

 

 

 

 

 

TOTAL SHAREHOLDERS' EQUITY

 

5,705,510

 

4,520,710

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

21,546,225

$

20,191,238

 

 

SISTEMA JSFC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THREE MONTHS ENDED MARCH 31, 2007, 2006 (UNAUDITED)

(Amounts in thousands of U.S. dollars)

 

 

 

 2007

 

2006

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

$

745,914

$

129,478

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

367,026

 

304,805

(Gain)/Loss on disposals of property, plant and equipment

 

(1,257)

 

(600)

Profit recognized by the percentage-of-completion  method on real estate developed for sale

 

(9,963)

 

(2,800)

Gain from discontinued operations

 

(522,923)

 

-

Gain on disposal of interests in subsidiaries and affiliates

 

(3,216)

 

-

Currency exchange and translation gain

 

(31,821)

 

(23,085)

Minority interests

 

271,188

 

154,678

Equity in net income of investees

 

(58,032)

 

(73,798)

Deferred income tax benefit

 

(15,552)

 

(37,129)

Debt issuance cost amortization

 

6,830

 

6,500

Change in fair value of a derivative financial instrument

 

(13,500)

 

-

Amortization of connection fees

 

(23,533)

 

(23,086)

Provision for doubtful accounts receivable

 

28,745

 

37,610

Allowance for loan losses

 

995

 

-

Inventory obsolescence expense

 

-

 

4,644

 

 

 

 

 

Changes in operating assets and liabilities, net of effects from purchase of businesses:

 

 

 

 

Trading securities

 

(236,462)

 

(93,577)

Loans to banks

 

(219,665)

 

(139,775)

Insurance-related receivables

 

-

 

(49,651)

Accounts receivable

 

74,824

 

(188,304)

Prepaid expenses, other receivables and other current assets

 

(127,050)

 

29,062

VAT receivable

 

41,982

 

36,543

Inventories and spare parts

 

(40,146)

 

(55,054)

Accounts payable

 

40,413

 

(63,539)

Insurance-related liabilities

 

-

 

119,643

Taxes payable

 

(115,989)

 

35,122

Subscriber prepayments

 

(61,363)

 

31,696

Accrued expenses and other liabilities

 

116,429

 

100,309

Postretirement benefits obligation

 

(39)

 

265

 

 

 

 

 

Net cash provided by operations

 

213,835

 

239,957

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Purchases of property, plant and equipment

 

(332,657)

 

(320,034)

Purchases of intangible assets

 

(71,360)

 

(73,812)

Purchases of businesses, net of cash acquired

 

(39,000)

 

(320,698)

Proceeds from disposals of subsidiaries, net of cash disposed

 

636,683

 

-

Purchases of long-term investments

 

(5,479)

 

-

Proceeds from sale of long-term investments

 

20,000

 

-

Purchases of other non-current assets

 

(105,551)

 

-

Purchases of short-term investments

 

(212,306)

 

(124,965)

Proceeds from sale of short-term investments

 

10,973

 

109,705

Proceeds from sale of property, plant and equipment

 

1,357

 

662

Net increase in loans to customers

 

(280,629)

 

(135,507)

 

 

 

 

 

Net cash used in investing activities

 

(377,969)

 

(864,649)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Proceeds from/(principal payments on) from short-term borrowings, net

 

208,800

 

(113,725)

Net increase/(decrease) in deposits from customers

 

70,954

 

(14,427)

Net increase in bank promissory notes issued

 

157,027

 

22,732

Proceeds from capital transactions of subsidiaries

 

356,463

 

1,032,917

Proceeds from long-term borrowings, net of debt issuance costs

 

76,950

 

452,264

Principal payments on long-term borrowings

 

(159,112)

 

(84,572)

Principal payments on capital lease obligations

 

(7,713)

 

(1,504)

Purchase of treasury stock

 

-

 

(50,892)

 

 

 

 

 

Net cash provided by financing activities

$

703,369

$

1,242,793

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1,033

 

934

 

 

 

 

 

increase IN CASH AND CASH EQUIVALENTS

$

540,268

$

619,035

CASH AND CASH EQUIVALENTS, beginning of the year

 

598,381

 

482,647

CASH AND CASH EQUIVALENTS, end of the period

$

1,138,649

$

1,101,682

 

 

SISTEMA JSFC AND SUBSIDIARIES

SegmentAL BREAKDOWN FOR THREE MONTHS ENDED MARCH 31 2007, 2006 (UNAUDITED)

(Amounts in thousands of U.S. dollars)

 

 

For the three months  

ended March 31, 2007

Tele­commu­nications

Tech­nology

Banking

Mass Media

Real

Estate

Retail

Corporate and Other

Total

 

 

 

 

 

 

 

 

 

Net sales to external customers (a)

2,064,895

282,227

75,500

20,357

30,705

86,846

145,426

2,705,956

Intersegment sales

1,856

28,596

4,339

6,587

3,797

7

4,603

49,785

Income from equity affiliates

38,312

13

-

2,060

-

-

-60

40,325

Interest income

10,485

5,565

-

46

7,157

-164

14,462

37,551

Interest expense

(50,850)

(8,907)

-

(1,230)

(2,121)

(2,715)

(40,057)

(105,880)

Net interest revenue (b)

-

-

10,468

-

-

-

-

10,468

Depreciation and amortization

(338,234)

(13,338)

(1,174)

(3,712)

(2,883)

(2,041)

(5,643)

(367,025)

Operating income/(loss)

743,132

(24,928)

9,294

1,317

4,109

(7,029)

7,410

733,305

Income tax expense

(205,039)

(1,726)

(4,422)

(37)

(3,803)

(1,228)

(11,770)

(228,025)

Income/(loss) before minority interests

494,236

(26,468)

4,873

(285)

9,591

(8,528)

(2,829)

470,590

Investments in affiliates

301,285

-

-

8,748

2,628

-

858,122

1,170,783

Segment assets

13,688,740

1,982,743

3,439,731

371,916

967,347

298,990

4,056,517

24,805,984

Indebtedness (c)

3,867,884

586,878

438,598

26,028

363,891

138,423

1,556,717

6,978,419

Capital expenditures

309,420

16,281

4,246

7,158

60,802

6,512

16,071

420,490

 

 

 

 

 

 

 

 

 

 

 

For the three months  

ended March 31, 2006

Tele­commu­nications

Tech­nology

Banking

Mass Media

Real

Estate

Retail

Corporate and Other

Total

 

 

 

 

 

 

 

 

 

Net sales to external customers (a)

1,531,486

171,015

37,289

16,288

13,384

56,003

56,908

1,882,373

Intersegment sales

2,695

68,546

6,834

3,480

2,365

5

2,615

86,540

Income from equity affiliates

16,690

7

-

-

-

-

(39)

16,658

Interest income

11,347,

836

-

-

67

995

459

13,704

Interest expense

(48,430)

(3,850)

-

(560)

(1,458)

(1,422)

(22,742)

(78,462)

Net interest revenue (b)

-

-

(9,032)

-

-

-

-

(9,032)

Depreciation and amortization

(303,251)

(1,275)

(326)

(3,519)

(612)

(230)

(4,385)

(313,598)

Operating income/(loss)

404,917

19,688

8,706

132

(351)

(3,100)

1,502

431,494

Income tax expense

(109,219)

(14,191)

(2,411)

(836)

(1,554)

(339)

(16,196)

(144,746)

Income/(loss) before minority interests

272,918

42,656

6,295

(1,765)

(6,023)

(4,588)

(23,402)

286,091

Investments in affiliates

222,215

-

17,749

487

960

-

706,824

948,235

Segment assets

10,894817

884,099

1,552,524

257,456

418,063

154,541

2,169744

16,331,244

Indebtedness (c)

3,121,238

240,763

210,000

219,490

214,857

73,043

1,596,912

5,676,303

Capital expenditures

355,031

12,879

6,000

8,356

6,054

127

3,733

392,180

 

 

 

 

 

 

 

 

 

 

a) - Interest income and expenses of the Banking segment are presented as revenues from financial services in the Group's consolidated financial statements.

(b) - The Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest revenue,
not the gross revenue and expense amounts, in managing that segment. Therefore, only the net amount is disclosed.

(c) - Represents the sum of short-term and long-term debt

 

Attachment A

Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP.

Operating Income Before Depreciation and Amortization (OIBDA) and OIBDA margin. OIBDA represents operating income before depreciation and amortization. OIBDA margin is defined as OIBDA as a percentage of our net revenues. Our OIBDA may not be similar to OIBDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of mobile operators and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our OIBDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the wireless telecommunications industry. OIBDA can be reconciled to our consolidated statements of operations as follows:

 

Jan-March 2007

 

Jan-March 2006

 

Oct-Dec

2006

 

 

 

 

 

 

Operating Income

728,479

 

388,900

 

634,141

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

(367,026)

 

(303,784)

 

(358,565)

 

 

 

 

 

 

 

 

 

 

 

 

OIBDA

1,095,505

 

692,684

 

992,706

 

 

 

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