South Telecommunications Company (STC) [(RTS: KUBN, KUBNP; OTC USA: STJSY)], the largest fixed-line telecom carrier in the South Federal District, today released its FY 2003 financials compiled in accordance with international accounting standards (IAS). The telecom operator’s financial results are as follows:
§ FY 2003 consolidated revenues totaled RUR 13.96 bln ($455.4 mln), or up 17.4% on 2002;
§ 2003 OIBDA rose 16.9% on 2002 to RUR 3,608.1 mln ($117.6 mln), while OIBDA margin reached 25.8%;
§ 2003 operating income rocketed 77.9% to RUR 1,118.2 mln ($36.5 mln) compared with 2002;
§ Revenues derived from value-added services (with advanced telecom technologies applied) surged 51.3% to RUR 580.2 mln ($18.9 mln);
§ 296,800 basic telephone sets were installed in 2003, or 79% more than in 2002;
§ LD traffic climbed 17.2% in 2003 to 1.84 tln minutes.
Commenting on the company’s 2003 financials, STC general director Ivan Ignatenko pointed out that 2003 was a year of integration, upgrade and growth, during which the Company took concerted efforts to optimize its structure and business management methods, streamline its technological approaches and solutions within the region of its operation, phase in billing and business management software, reorganize sales systems and provide high-quality telecom services. Thanks to sustained market demand, tariff hikes and implementations of projects aimed at improving operating efficiency, the Company’s consolidated revenue and OIBDA grew by an approximate of 17%, while OIBDA rose to 26%.
Enlarging the scope of its activities, STC pursues a strategy aimed at strengthening its telecom market positions in southern Russiaas the main telecom operator. In 2003 and 2004 STC allocated many more funds to its investment program to secure its presence in all promising niches of the fixed-line telecom market and value-added services segments. This move could help the Company create favorable conditions for a rise in operating and financial results in the long term. In 2005 STC will spend less under its capex program due to a drop in investments in the traditional fixed-line segment and redistribution of funds to new higher value-added segments, which could result in a steady growth in the Company’s profit margins and improve the Company’s balance sheet structure.
The Company raised its leverage on the back of its marketing policy, which called for extensive capital expenditure and borrowings. STC management is taking measures to shore up the Company’s liquidity, namely: to substantially reduce investment projects that do not target strategically important market segments; reallocate capital to high value-added segments; restructure its loan portfolio for the purpose of extending and lowering cost of borrowing; restructure its current short-term financing; hike tariffs for services provided and continue to divest non-core assets.
STC’s 2003 consolidated revenues rose 17.4% to RUR 13,966.1 mln ($455.4 mln), telecom services earnings rocketed 22.7% to RUR 13,549.7 mln ($441.8 mln), 2003 OIBDA equaled RUR 3,608.1 mln ($117.6 mln), while OIBDA margin stood at 25.8%.
The Company’s income increased as a result of higher demand for telecom services and tariff hikes.
South Telecommunications Company managed to raise revenues from telecom services in 2003 by ramping up its customer base by 9.1%, higher MOU (9.8% on the average), a 7.4% increase in ARPU, and a 51.3% surge in value-added services profits. The primary factor for increased revenues turned out to be a hike in local fixed-line services: since June 1, 2003subscription fees for urban customers increased by an average of 23.4%, 25% for rural customers and 20.7% for businesses.
In addition, 2003 income from local telecom services climbed 32.7% to RUR 4,962.5 mln, while revenues from local traffic (subscription fee plus payment of time-based connection) rocketed 28% to RUR 3,740.9 mln and those from new connections surged 49.8% to RUR 1,221.6 mln.
2003 revenues from LD and ILD services rose by 7.9% to RUR 6,046.8 mln, including those from LD services – RUR 4,822.6 mln (up 5.7%) and ILD services – RUR 1,224.2 mln (up 17.5%). LD revenues grew on the back of optimized tariffs as part of the policy aimed at eliminating cross-subsidization among local and LD services. The Company has seen a substantial rise in LD and ILD services provided: up 17.2% in 2003 (1.84 tln minutes), including in LD traffic – 17.8% (1.74 tln minutes) and ILD traffic – 8.5% (0.1 tln minutes).
Thanks to the active investment program, rapid pace of digitalization and introduction of new advanced technologies, STC succeeded in reinforcing its competitive positions on the regional higher value-added services market: the Company’s market share rose from 32% to 36% in 2003. Based on the foregoing, the telecom operator’s 2003 higher value-added service revenues (Internet access, ISDN, intellectual networks, IP telephony, etc.) surged 51.3% to RUR 580.2 mln (4.3% in the company’s tariff revenues in 2003 versus 3.5% in 2002). Meanwhile, STC saw an 80.1% increase in Internet services to 170.2 Tbyte in terms of volume and a 51.2% jump to 16.1 mln hours in terms of duration.
Earnings derived from other telecom services (telecom services provided to other telecom operators, facsimile services, radio and TV broadcasting, paging services, etc.) climbed 48.8% to RUR 1,906.2 mln ($63.9 mln).
In order to raise its business efficiency, the Company has been cutting the range of other services (by 50.9% in 2003 to RUR 416.4 mln), thereby focusing its efforts and financial resources on expansion of other core business activities.
Operating expenses:
STC's 2003 operating expenses increased 14% to RUR 12,847.8 mln. Meanwhile, the Company’s focused cost management policy made it possible to lower its 2003 per-ruble aggregate expenses on operating profit from RUR 0.95 to RUR 0.92, i.e. down 3%.
The main reasons behind a rise in operating expenses are increased payroll expenses and social contributions (up 17.9% to RUR 4,941.3 mln) and traffic-related expenses (up 14.85 to RUR 1,918.9 mln). The jump in payroll expenses was attributed to attraction of a number of highly qualified professionals, as well as the need to raise payroll in line with inflation rates and create incentives for employees to work more efficiently.
Traffic-related expenses grew on the back of changes in settlement schemes with Rostelecom effective August 1, 2003, as well as growth in LD services provided by the Company. The Company’s 2003 expenditure related to traffic and lease of Rostelecom’s telecom channels rose 20.5% to RUR 1,612.1 mln, of which RUR 273.9 are related to introduction of the new billing system.
Amortization and depreciation of the Company’s fixed assets in 2003 produced a slight impact on the overall increase in operating expenses, as most fixed assets were commissioned in 4Q 2003. All in all, operating expenses went up 1.3% to RUR 2,489.8 mln compared with 2002.
STC witnessed a 25.8% increase in 2003 material costs (including overhaul, maintenance and communal services) to RUR 1,588.3 mln due to growth in installed and equipped capacity, a rise in prices for materials and spare parts and electric power tariffs.
The jump in expenses related to bad debts (up 76.9% to RUR 224.8 mln) was attributable to a rise in receivables under subsidies to be financed from the budget after the Antimonopoly Ministry issued an order to cancel subsidized tariffs effective July 1, 2003. This means that while in previous years services recorded as subsidized tariff plans did not require amounts of uncompensated expenses to be shown in accounting reports, at present all uncompensated expenses are fully reflected in accounts receivable.
The Company also saw a 12.2% increase in other operating expenses to RUR 1,342.9 mln. As part of SG&A expenses, the Company spent more on external security and fire protection services (79.7% more to RUR 167.4 mln), those of the State Telecommunications Inspectorate (33% more to RUR 40.1 mln). This increase is related to peculiarities of the telecom industry and the region, as well as the Company’s aspiration to provide its customers with high-quality and reliable telecom services.
STC’s 2003 operating profit rose 77.9% to RUR 1,118.2 mln ($36.5 mln). An increase in the Company’s operating profit was driven by positive trends as growth in revenues outpaced (by 24%) those in operating expenses. As a result, operating profit margin stood at 8%, compared to 5.3% in the year-earlier period.
Otherrevenuesandexpenses:
On the one hand, the Company’s other expenses dropped 75.4% to RUR 473.8 mln due to changes in revenues derived from participation in associated companies and long-term financial investments (in 2002 the Company executed one transaction to sell some financial assets). In 2003 South Telecommunications Company generated no profit from changes of the ruble’s purchasing capacity compared with 2002, as the inflation rate was not applied to the report’s non-monetary items.
On the other hand, the Company witnessed a 39.7% jump to RUR 1,039.7 mln in other expenses. With a view to intensified efforts to raise long-term loans in 2003, interest expenses climbed 86.7% to RUR 638.8 mln. Meanwhile, forex losses decreased 46.3% thanks to the ruble’s appreciation against the US dollar in 2003.
Based on the foregoing, contraction in the Company’s 2003 other revenues (expenses) totaled RUR 565.9 mln. Consequently, 2003 pre-tax profit equaled RUR 552.4 mln ($18 mln), or 69.5% less than in 2002.
Taxes:
The Company paid RUR 217.2 mln in corporate income taxes, or down 75.7% on 2002.
Minority interest:
Based on 2003 results, the minority interest figure surged 99.9% from RUR 94.3 mln to RUR 188.6 mln due to gains in net profit at CJSC Telesot-Alania and OJSC Stavtelecom n.a. Kuzminov.
Net profit:
STC‘s 2003 net profit plunged 82.2% to RUR 146.6 mln ($4.8 mln). High net profit in 2002 was largely attributed to the sale of financial assets, which netted RUR 779 mln (after taxes).
Capital spending will peak in 2003-2004.
The telecom operator’s 2003 capex equaled RUR 9,814.3 mln ($320 mln). Substantial capital expenditure was driven by the strategy pursued by the telecom carrier and aimed at rapidly gaining the most promising segments of the fixed-line and higher value-added services markets, thereby allowing the Company to retain its leadership position on the telecom services market as the main operator. The tightened grip on the telecom market will enable the Company to cut its capex expenses in the future and achieve a stable growth in its financial results in coming years.
Cash flows and liabilities
High development rates of South Telecommunications Company require borrowing substantial funds. STC’s total debts rose 131.9% on 2002 to RUR 17,301.3 mln ($587.5 mln) as of December 31, 2003. The telecom operator saw its liabilities increase due to implementation of a large-scale investment program, with most funds to be invested in 2003 and 2004.
Appendices:
1. Consolidated 2002 and 2003 profit & loss statement
2. Consolidated (abridged) balance sheets as of December 31, 2002and as of December 31, 2003.
The complete version of South Telecommunications Company’s 2003 IAS consolidated financial statement and notes to it can be found in the IR/Financial Reports section on STC’s corporate website.
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