MOSCOW--()--
COMSTAR — UNITED TELESYSTEMS OJSC
FINANCIAL RESULTS
FOR
THE SECOND QUARTER AND FIRST SIX MONTHS OF 2010
Moscow, Russia – August 25, 2010 – “COMSTAR – United TeleSystems” OJSC (“Comstar” or “the Group”) (LSE: CMST), the largest integrated telecommunications provider in Moscow and 83 Russian cities, today announced its unaudited consolidated US GAAP financial results for the second quarter and the six months ended June 30, 2010.
SECOND QUARTER HIGHLIGHTS
- Consolidated revenues up 6% year on year in ruble terms to US$ 411.1 million1
- Adjusted OIBDA2 of US$ 164.5 million, up 2% year on year in ruble terms when excluding previously accrued expenses for cancelled 2008 phantom option programme from the financial results for 2Q2009
- Adjusted OIBDA margin of 40.0% (compared to 41.4% in 2Q2009 when excluding previously accrued phantom option expenses from the financial results for 2Q2009)
- Adjusted net income3 attributable to Comstar-UTS shareholders up 47% year on year in ruble terms to US$ 48.8 million (when excluding previously accrued phantom option expenses from the financial results for 2Q2009)
- Cash and cash equivalents and short term investments almost tripled year on year in ruble terms to US$ 551.9 million
- Cash flow from operations of US$ 89.6 million
- Cash capital expenditure4 of US$ 40.7 million represents 9.9 % of consolidated revenues
- Free cash flow5 of US$ 48.9 million
- Total broadband subscriber base up 22% year on year and 6% quarter on quarter to 1.4 million
- DLD/ILD traffic passed through Comstar’s proprietary network up more than 2.5 times year on year to 178.3 million minutes, with DLD/ILD consolidated revenues of US$ 20.3 million
HALF YEAR HIGHLIGHTS
- Consolidated revenues up 7% year on year in ruble terms to US$ 818.1 million
- Adjusted OIBDA of US$ 324.3 million, up 6% year on year in ruble terms when excluding the effect of previously accrued expenses for cancelled 2008 phantom option programme from the financial results for 1H2009 and 1Q2010
- Adjusted OIBDA margin of 39.6% (compared to 39.8% in 1H2009 when excluding the effect of previously accrued expenses for cancelled 2008 phantom option programme from the financial results for 1H2009 and 1Q2010)
- Adjusted net income attributable to Comstar-UTS up 87% year on year in ruble terms to US$ 94.9 million (when excluding the effect of previously accrued expenses for cancelled 2008 phantom option programme from the financial results for 1H2009 and 1Q2010)
- Cash flow from operations up 5% year on year in ruble terms to US$ 237.7 million
- Cash capital expenditure of US$ 57.3 million represents 7.0% of consolidated revenues
KEY STRATEGIC DEVELOPMENTS OF THE SECOND QUARTER
- Signed agreements to sell 25%+16 share stake in OJSC Svyazinvest to OJSC Rostelecom for RUR 26 billion through a series of transactions, and subject to the parties involved obtaining the necessary approvals
- Acquisition of Penza Telecom, the leading alternative telecommunications operator in the Penza telecoms market, and the leading internet and pay-TV services provider in the cities of Penza and Zarechye
- MGTS’ AGM approved the payment of a RUR 49.44 dividend (approximately US$ 1.59) per preferred share for the full year 2009, and decided that no dividend shall be paid to holders of MGTS’ ordinary shares for the full year 2009. The total dividend payment to be made to holders of preferred shares will therefore total RUR 789 million (or approximately US$ 25.4 million), which is equivalent to 10% of MGTS’ net income for the full year 2009 under Russian Accounting Standards (RAS). Comstar’s AGM decided that no dividend should be paid out for the full year 2009 due to the losses reported for the full year under Russian Accounting Standards (RAS) and US GAAP.
- The Boards of Directors of MTS and Comstar recommended the merger of MTS and Comstar-UTS Open Joint Stock Companies. The announcement was followed by the launch of a voluntary tender offer by MTS for up to 9% of Comstar ordinary shares and including shares underlying GDRs.
- Standard & Poor's Ratings Services revised its outlooks on Comstar and MGTS to positive from stable as a reflection of a corresponding upgrade to MTS’ outlook.
Sergey Pridantsev, President and Chief Executive Officer, commented: “We have reported another quarter of consistent sales and profit growth, which has enabled us to deliver healthy financial results in line with our expectations, whilst sustaining the momentum of the implementation of our strategy. We have initiated the organic rebranding of our alternative segment, and launched the first convergent subscriber offerings in May, in line with Comstar’s integration into MTS. On June 25, both Comstar’s and MTS’ Boards of Directors recommended the proposed merger of Comstar and MTS. The merger is subject to approval by 75% of the shareholders present at each company’s EGMs, which are scheduled for December 23, 2010.”
“We accelerated the modernization of our networks in the regions during the quarter and, following the acquisitions of Multiregion by MTS and Penza Telecom by Comstar, the fixed-line business of MTS Group is now present in over 110 regional cities, compared to 83 cities at the end of the first quarter. MGTS has continued to up-sell its subscribers to additional services and 24% of MGTS voice subscribers now also subscribe to broadband services either from MGTS or Comstar, while 28% of MGTS’s voice subscribers are also customers of Comstar DLD/ILD connection services.”
Alexey Kaurov, Chief Financial Officer, added: “Consolidated revenues were up 6% year on year in ruble terms in the second quarter and up 7% for the first half of the year, which is in line with our guidance for mid single digit percentage point revenue growth this year. Our OIBDA, when excluding the reversal of the cancelled 2008 phantom option programme, was up 2% year on year in the second quarter and up 6% in the first half of the year in ruble terms. We therefore delivered an adjusted OIBDA margin of 40.0% in the quarter and 39.6% for the first half of the year, which is at the top end of the range of our long-term OIBDA margin guidance of between 35 and 40 per cent.”
“Cash capital expenditure represented 9.9% and 7.0% of consolidated revenues for the second quarter and first six months respectively. We expect cash CAPEX to increase in the second half of the year and to represent up to 20% of full year revenues. This includes our investments in the MGTS digitalization project using IMS technology, which was re-launched in the middle of this year, as well as the modernization of our regional broadband networks, which we expect to finalize by the end of 2010. The weighting also reflects the post-payment terms of our agreements with telecom equipment suppliers.”
FINANCIAL SUMMARY
|
RUR millions,
except where stated otherwise |
Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
|
Revenues |
12,422 | 11,702 | 6% | 12,167 | 2% | 24,589 | 23,045 | 7% | |||||||||
| OIBDA | 4,965 | 4,803 | 3% | 5,337 | (7%) | 10,302 | 9,094 | 13% | |||||||||
| Margin (%) | 40.0% | 41.0% | 43.9% | 41.9% | 39.5% | ||||||||||||
| Adjusted OIBDA | 4,965 | 4,849 | 2% | 4,768 | 4% | 9,733 | 9,174 | 6% | |||||||||
| Margin (%) | 40.0% | 41.4% | 39.2% | 39.6% | 39.8% | ||||||||||||
| Operating income | 3,490 | 3,378 | 3% | 3,881 | (10%) | 7,371 | 6,176 | 19% | |||||||||
| Margin (%) | 28.1% | 28.9% | 31.9% | 30.0% | 26.8% | ||||||||||||
| Net income attributable to Comstar-UTS’ shareholders | 1,460 | 958 | 52% | 1,794 | (19%) | 3,254 | 1,452 | 124% | |||||||||
| Adjusted net income attributable to Comstar-UTS’ shareholders | 1,460 | 995 | 47% | 1,372 | 6% | 2,832 | 1,516 | 87% | |||||||||
| Cash flow from operations | 2,706 | 3,308 | (18%) | 4,420 | (39%) | 7,126 | 6,768 | 5% | |||||||||
| Cash CAPEX | 1,232 | 500 | 146% | 495 | 149% | 1,727 | 2,524 | (32%) | |||||||||
| % of revenue | 9.9% | 4.3% | 4.1% | 7.0% | 11.0% | ||||||||||||
| Free Cash Flow | 1,474 | 2,808 | (48%) | 3,925 | (62%) | 5,399 | 4,244 | 27% | |||||||||
| Total Assets | 114,963 | 116,591 | (1%) | 112,367 | 2% | 114,963 | 116,591 | (1%) |
|
US$ millions,
except where stated otherwise |
Q2 2010 | Q2 2009 | Growth |
Q1 2010 |
Growth |
1H
2010 |
1H 2009 | Growth | |||||||||
|
Revenues |
411.1 | 363.6 | 13% | 407.0 | 1% | 818.1 | 698.0 | 17% | |||||||||
| OIBDA | 164.5 | 149.3 | 10% | 178.8 | (8%) | 343.3 | 275.7 | 25% | |||||||||
| Margin (%) | 40.0% | 41.0% | 43.9% | 41.9% | 39.5% | ||||||||||||
| Adjusted OIBDA | 164.5 | 150.6 | 9% | 159.8 | 3% | 324.3 | 278.0 | 17% | |||||||||
| Margin (%) | 40.0% | 41.4% | 39.2% | 39.6% | 39.8% | ||||||||||||
| Operating income | 115.7 | 105.1 | 10% | 130.1 | (11%) | 245.8 | 187.3 | 31% | |||||||||
| Margin (%) | 28.1% | 28.9% | 31.9% | 30.0% | 26.8% | ||||||||||||
| Net income attributable to Comstar-UTS’ shareholders | 48.8 | 30.0 | 63% | 60.3 | (19%) | 109.0 | 42.6 | 156% | |||||||||
| Adjusted net income attributable to Comstar-UTS’ shareholders | 48.8 | 31.0 | 57% | 46.1 | 6% | 94.9 | 44.5 | 113% | |||||||||
| Cash flow from operations | 89.6 | 102.2 | (12%) | 148.1 | (39%) | 237.7 | 201.4 | 18% | |||||||||
| Cash CAPEX | 40.7 | 15.5 | 163% | 16.5 | 146% | 57.3 | 75.2 | (24%) | |||||||||
| % of revenue | 9.9% | 4.3% | 4.1% | 7.0% | 11.0% | ||||||||||||
| Free Cash Flow | 48.9 | 86.7 | (44%) | 131.5 | (63%) | 180.4 | 126.2 | 43% | |||||||||
| Total Assets | 3,685.3 | 3,726.1 | (1%) | 3,826.7 | (4%) | 3,685.3 | 3,726.1 | (1%) |
OPERATING REVIEW
Group Overview
Comstar generated 6% year on year revenue growth in ruble terms in the second quarter, which reflected:
- Growing domestic and international long distance (DLD/ILD) and Calling Party Pays (CPP) traffic volumes, as well as the growth in the MGTS Broadband Internet business
- Ongoing up-selling of regional pay-TV subscribers to broadband Internet services
- Average increases in MGTS regulatory ruble prices for residential and corporate voice services of 8.0% from March 1, 2009 and 10.3% from February 1, 2010
Group’s revenues were up 2% quarter on quarter in ruble terms despite the second quarter being a seasonally weaker period of the year.
Comstar generated 7% revenue growth in ruble terms for the year to date, which reflected:
- Growing domestic and international long distance (DLD/ILD) and Calling Party Pays (CPP) traffic volumes, as well as the growth in the MGTS Broadband Internet business
- Ongoing up-selling of regional pay-TV subscribers to broadband Internet services
- Average increases in MGTS regulatory ruble prices for residential and corporate voice services of 8.0% from March 1, 2009 and 10.3% from February 1, 2010
- Prices up 12% on average in rubles from March 1, 2009, both in the alternative segment in Moscow and the regions
Revenues from fixed-to-mobile calls grew by 4.3% year on year to RUR 1,275 million in the second quarter and up 6.2% year on year to RUR 2,452 million for the year to date, which represented 10.3% and 10.0% of Group revenues in second quarter 2010 and first half of 2010 respectively. CPP-traffic levels were up 4% year on year to 874 million minutes in the second quarter and to 1,686 million minutes in the first six months of 2010.
|
Operating Expenses7 |
|||||||||||||||||
| RUR millions | Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Employee expenses | 2,761 | 2,589 | 7% | 2,242 | 23% | 5,003 | 5,342 | (6%) | |||||||||
| Network traffic expenses | 1,748 | 1,599 | 9% | 1,696 | 3% | 3,444 | 3,141 | 10% | |||||||||
| Selling & marketing expenses | 519 | 300 | 73% | 465 | 12% | 984 | 645 | 53% | |||||||||
| Repair & maintenance expenses | 414 | 447 | (7%) | 371 | 12% | 785 | 853 | (8%) | |||||||||
| Taxes | 395 | 339 | 16% | 387 | 2% | 782 | 667 | 17% | |||||||||
| Utility & energy expenses | 346 | 316 | 10% | 450 | (23%) | 796 | 716 | 11% | |||||||||
| Other, net | 1,274 | 1,311 | (3%) | 1,218 | 5% | 2,492 | 2,588 | (4%) | |||||||||
| Total | 7,457 | 6,901 | 8% | 6,830 | 9% | 14,287 | 13,952 | 2% | |||||||||
| % of revenues | 60.0% | 59.0% | 56.1% | 58.1% | 60.5% | ||||||||||||
|
Operating Expenses,
US$ millions |
Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Employee expenses | 91.3 | 80.2 | 14% | 74.7 | 22% | 166.0 | 161.5 | 3% | |||||||||
| Network traffic expenses | 57.8 | 49.7 | 16% | 56.8 | 2% | 114.6 | 95.1 | 20% | |||||||||
| Selling & marketing expenses | 17.2 | 9.3 | 85% | 15.6 | 10% | 32.8 | 19.4 | 69% | |||||||||
| Repair & maintenance expenses | 13.6 | 14.0 | (2%) | 12.4 | 10% | 26.0 | 25.8 | 1% | |||||||||
| Taxes | 13.1 | 10.5 | 24% | 12.9 | 1% | 26.0 | 20.2 | 29% | |||||||||
| Utility & energy expenses | 11.5 | 9.8 | 17% | 15.0 | (24%) | 26.5 | 21.6 | 23% | |||||||||
| Other, net | 42.2 | 40.8 | 3% | 40.7 | 3% | 82.9 | 78.5 | 6% | |||||||||
| Total | 246.6 | 214.2 | 15% | 228.2 | 8% | 474.8 | 422.3 | 12% | |||||||||
| % of revenues | 60.0% | 59.0% | 56.1% | 58.1% | 60.5% |
Total operating expenses, when excluding depreciation and amortization costs, were up 8% year on year in ruble terms in the second quarter, which reflected the net effect of:
- Increased sales and marketing activity in line with economic stabilisation and rising demand for services
- Salary levels up 5% on average throughout the Group to compensate for inflation from April 1, 2010, combined with introduction of bonus system in Comstar-Regions, offset by a reduction of compensation due to summer vacation season
- Growing DLD/ILD and CPP traffic volumes
- Rise in utilities and energy costs due to increase in state regulated tariffs from January 1, 2010
Total operating expenses, when excluding depreciation and amortisation costs, were up 9% quarter on quarter in ruble terms, which reflected the effect of US$ 19.0 million reversal in 1Q2010 of previously accrued expenses for cancelled 2008 phantom option programme.
Total operating expenses, when excluding depreciation and amortisation costs, were up 2% year on year in ruble terms for the year to date, which reflected the net effect of:
- Increased sales and marketing activity in line with economic stabilisation and rising demand for services
- US$ 19.0 million previously accrued expenses for cancelled 2008 phantom option programme from the financial results for 1H2009 and 1Q2010 respectively compensated by the introduction of bonus system in Comstar-Regions in 2010 and a 5% average increase in Group salary levels to compensate for inflation
- Growing DLD/ILD and CPP traffic volumes
- Rise in utilities and energy costs due to increase in state regulated tariffs from January 1, 2010
Group adjusted OIBDA was therefore up 2% year on year in ruble terms when excluding previously accrued expenses for the cancelled 2008 phantom option, with an adjusted OIBDA margin of 40.0%. Group adjusted OIBDA was up 4% quarter on quarter in ruble terms. Group adjusted OIBDA for the first six months of 2010 was up 6% year on year in ruble terms when excluding previously accrued expenses for the cancelled 2008 phantom option programme from the financial results for 1H2009 and 1Q2010, with an adjusted OIBDA margin of 39.6%.
Group depreciation and amortisation charges were up 4% year on year in ruble terms in the second quarter, which reflected the increase in capital expenditure. Group depreciation and amortisation charges were stable in ruble terms for the year to date. This reflected the increase in depreciation due to the growth of the regional networks, capital expenditure in the regions in previous quarters, and was offset by decreased depreciation in MGTS as a result of the completion of the depreciation and write-offs of certain items at the end of 2009.
Group interest expenses decreased by 10% quarter on quarter in ruble terms and by 15% year on year in the second quarter of 2010, and were down 23% for the year to date, which reflected the reduction in the interest rate payable on the Sberbank credit facility from 13.35% to 10.50% from March 1, 2010. Interest income doubled year on year and was up 13% quarter on quarter and 21% year on year for the year to date, due to the accumulation of significant short-term investments in the first and second quarters 2010.
The Group’s income tax charges doubled year on year in the second quarter, and increased by 9% quarter on quarter, but were up 73% during the first six months of 2010, which reflected the year on year increases in pre-tax profit.
Net income attributable to non-controlling shareholders was down 34% year on year in the second quarter, due to the acquisition of a 14.20% stake in MGTS from minority shareholders in December 2009. Net income attributable to non-controlling shareholders was up 6% quarter on quarter in the second quarter, and 17% year on year for the year to date, which reflected the growth in MGTS’ net income, partially offset by the increase in the Group’s ownership in MGTS at the end of 2009. Total net income attributable to Comstar-UTS’ shareholders increased by 52% year on year in the second quarter and more than doubled year on year for the year to date, and amounted to RUR 1.5 billion (US$ 48.8 million) and RUR 3.3 billion (US$ 109.0 million) respectively. The quarter on quarter developments in net income were distorted by the reversal of previously accrued expenses for cancelled 2008 phantom option programme from the financial results for the 1Q2010.
Overview of Broadband Internet & Pay-TV Business in Moscow & the Regions
This overview addresses the Group’s actual and potential development in the Russian broadband internet and pay-TV markets. The operating and financial results for these businesses are included in each of the three following reporting segments.
| 2Q 2010 | 2Q 2009 | Growth (%) | 1Q 2010 | Growth (%) | 1H 2010 | 1H 2009 | Growth (%) | ||||||||||
| MOSCOW | |||||||||||||||||
| Residential | |||||||||||||||||
| Voice subscribers (000s) | 3,607 | 3,600 | 0% | 3,609 | 0% | 3,607 | 3,600 | 0% | |||||||||
|
ARPU8 (RUR) |
339 | 314 | 8% | 332 | 2% | 335 | 306 | 10% | |||||||||
| ARPU (US$) | 11.2 | 9.7 | 15% | 11.1 | 1% | 11.2 | 9.3 | 20% | |||||||||
|
Voice + Broadband Internet subscribers9 (000s) |
867 | 792 | 10% | 860 | 1% | 867 | 792 | 10% | |||||||||
| ARPU (RUR) | 283 | 330 | (14%) | 302 | (6%) | 293 | 326 | (10%) | |||||||||
| ARPU (US$) | 9.4 | 10.2 | (8%) | 10.1 | (7%) | 9.7 | 9.9 | (1%) | |||||||||
|
Premium subscribers10 (000s) |
574 | 609 | (6%) | 583 | (2%) | 574 | 609 | (6%) | |||||||||
| ARPU (RUR) | 321 | 358 | (10%) | 341 | (6%) | 331 | 349 | (5%) | |||||||||
| ARPU (US$) | 10.6 | 11.1 | (4%) | 11.4 | (7%) | 11.0 | 10.6 | 4% | |||||||||
| Mass-market subscribers (000s) | 293 | 182 | 61% | 276 | 6% | 293 | 182 | 61% | |||||||||
| ARPU (RUR) | 206 | 228 | (10%) | 212 | (3%) | 209 | 229 | (9%) | |||||||||
| ARPU (US$) | 6.8 | 7.1 | (4%) | 7.1 | (4%) | 7.0 | 7.0 | 0% | |||||||||
|
Voice + Broadband Internet + Pay-TV subscribers11 (000s) |
121 | 133 | (9%) | 125 | (3%) | 121 | 133 | (9%) | |||||||||
| ARPU (RUR) | 272 | 550 | (51%) | 550 | (51%) | 413 | 522 | (21%) | |||||||||
| ARPU (US$) | 9.1 | 17.1 | (47%) | 18.4 | (51%) | 13.8 | 15.8 | (13%) | |||||||||
| Corporate | |||||||||||||||||
| Broadband Internet subscribers (000s) | 45 | 48 | (6%) | 46 | (2%) | 45 | 48 | (6%) | |||||||||
| ARPU (RUR) | 3,957 | 4,117 | (4%) | 3,924 | 1% | 3,941 | 3,971 | (1%) | |||||||||
| ARPU (US$) | 131.0 | 128.1 | 2% | 131.3 | 0% | 131.1 | 120.3 | 9% | |||||||||
| REGIONS | |||||||||||||||||
| Residential | |||||||||||||||||
|
Households passed12 (000s) |
4,335 | 3,614 | 20% | 4,147 | 5% | 4,335 | 3,614 | 20% | |||||||||
| Pay-TV subscribers (000s) | 2,055 | 1,951 | 5% | 1,997 | 3% | 2,055 | 1,951 | 5% | |||||||||
| ARPU (RUR) | 112 | 106 | 6% | 110 | 3% | 111 | 105 | 6% | |||||||||
| ARPU (US$) | 3.7 | 3.3 | 13% | 3.7 | 2% | 3.7 | 3.2 | 17% | |||||||||
| Premium subscribers (000s) | 1,710 | 1,577 | 8% | 1,642 | 4% | 1,710 | 1,577 | 8% | |||||||||
| ARPU (RUR) | 134 | 128 | 4% | 131 | 2% | 132 | 127 | 4% | |||||||||
| ARPU (US$) | 4.4 | 4.0 | 11% | 4.4 | 1% | 4.4 | 3.8 | 15% | |||||||||
| Basic subscribers (000s) | 346 | 374 | 0% | 355 | (3%) | 346 | 374 | (8%) | |||||||||
| ARPU (RUR) | 12 | 13 | 0% | 13 | (5%) | 12 | 12 | (2%) | |||||||||
| ARPU (US$) | 0.4 | 0.4 | 0% | 0.4 | (6%) | 0.4 | 0.4 | 8% | |||||||||
|
Broadband Internet subscribers (000s) |
495 | 316 | 57% | 426 | 16% | 495 | 316 | 57% | |||||||||
| ARPU (RUR) | 286 | 304 | (6%) | 297 | (4%) | 291 | 309 | (6%) | |||||||||
| ARPU (US$) | 9.5 | 9.4 | 0% | 9.9 | (5%) | 9.7 | 9.3 | 4% | |||||||||
| Voice subscribers (000s) | 260 | 262 | (1%) | 259 | 0% | 260 | 262 | (1%) | |||||||||
| ARPU (RUR) | 283 | 255 | 11% | 283 | 0% | 283 | 281 | 1% | |||||||||
| ARPU (US$) | 9.4 | 8.0 | 18% | 9.5 | (1%) | 9.4 | 8.5 | 11% | |||||||||
| Corporate | |||||||||||||||||
| Broadband Internet subscribers (000s) | 30 | 27 | 10% | 28 | 6% | 30 | 27 | 10% | |||||||||
| ARPU (RUR) | 2,290 | 2,675 | (14%) | 2,352 | (3%) | 2,320 | 2,753 | (16%) | |||||||||
| ARPU (US$) | 75.8 | 83.0 | (9%) | 78.7 | (4%) | 77.2 | 83.7 | (8%) | |||||||||
| TOTAL NUMBER OF HOUSEHOLDS PASSED (000s) | 7,942 | 7,213 | 10% | 7,756 | 2% | 7,942 | 7,213 | 10% | |||||||||
| TOTAL NUMBER OF BROADBAND INTERNET SUBSCRIBERS (000s) | 1,437 | 1,182 | 22% | 1,359 | 6% | 1,437 | 1,182 | 22% | |||||||||
| TOTAL NUMBER OF PAY-TV SUBSCRIBERS (000s) | 2,176 | 2,083 | 4% | 2,122 | 3% | 2,176 | 2,083 | 4% |
Broadband in Moscow
Comstar’s residential broadband subscriber base in Moscow grew by 10% year-on-year to 867 thousand. The Group continued to grow its residential double play (voice + broadband internet) subscriber base in Moscow in the second quarter, with ARPU levels reflecting the usual quarter on quarter seasonality patterns. The MGTS mass market residential subscriber base grew by 6% quarter on quarter and 61% year on year to a total of 293 thousand subscribers by the end of the quarter. The number and ARPU of premium residential subscribers were slightly down quarter on quarter.
The number of triple-play subscribers in Moscow (voice, broadband internet & pay-TV) was slightly down quarter on quarter and ARPU was up by 1% quarter on quarter.
Broadband in the Regions
Comstar has “last mile” access to 4.3 million households in cities outside Moscow, of which 2.1 million are active pay-TV users. The regional broadband internet subscriber base grew by 57% year on year and 16% quarter on quarter to 495 thousand. Comstar also began the process of modernizing the existing regional networks and up-selling its existing regional pay-TV subscribers to broadband Internet services. The growth is partly attributable to the consolidation of the subscriber base of TenzorTelecom and PenzaTelecom, which were acquired in February and June 2010, respectively.
SEGMENTAL OPERATING REVIEW
1. Traditional Segment in Moscow
Comstar owns 69.93% of Moscow City Telephone Network (MGTS), which is Moscow’s incumbent fixed-line telecommunications operator and the infrastructure provider for the Group. MGTS is the owner of
‘last mile’ access in Moscow, which is not unbundled and provides 4.4 million residential and corporate telephony lines. MGTS provides regulated voice services, unregulated mass market broadband internet access and pay-TV services, as well as DLD/ILD services as an agent to Comstar.
Operating Highlights
| Q2 2010 | Q2 2009 | Growth (%) | Q1 2010 | Growth (%) | 1H 2010 | 1H 2009 | Growth (%) | ||||||||||
| Installed telephone lines (000s) | 4,897 | 4,856 | 1% | 4,896 | 0% | 4,897 | 4,856 | 1% | |||||||||
| Residential | |||||||||||||||||
| Number of subscribers / active lines (000s) | 3,607 | 3,600 | 0% | 3,609 | 0% | 3,607 | 3,600 | 0% | |||||||||
| CPP traffic (millions of minutes) | 515 | 492 | 5% | 487 | 6% | 1,002 | 956 | 5% | |||||||||
| ARPU (RUR) | 356 | 326 | 9% | 349 | 2% | 352 | 318 | 11% | |||||||||
| ARPU (US$) | 11.8 | 10.1 | 16% | 11.7 | 1% | 11.7 | 9.6 | 22% | |||||||||
| Corporate | |||||||||||||||||
| Number of active lines (000s) | 786 | 762 | 3% | 783 | 0% | 786 | 762 | 3% | |||||||||
| Number of subscribers (000s) | 69 | 70 | (1%) | 70 | (2%) | 69 | 70 | (1%) | |||||||||
| CPP traffic (millions of minutes) | 236 | 222 | 6% | 211 | 12% | 448 | 416 | 8% | |||||||||
| ARPU (excl. revenue from points of interconnect) (RUR) | 6,891 | 5,442 | 27% | 6,468 | 7% | 6,679 | 4,914 | 36% | |||||||||
| ARPU (excl. revenue from points of interconnect) (US$) | 228.1 | 169.0 | 35% | 216.4 | 5% | 222.2 | 148.8 | 49% | |||||||||
| Number of points of interconnect (000s) | 22 | 30 | (26%) | 23 | (5%) | 22 | 30 | (26%) | |||||||||
| Average monthly revenue per point of interconnect (RUR) | 7,125 | 5,314 | 34% | 6,036 | 18% | 6,541 | 5,292 | 24% | |||||||||
| Average monthly revenue per point of interconnect (US$) | 235.7 | 165.1 | 43% | 201.9 | 17% | 217.6 | 160.4 | 36% | |||||||||
| Operators | |||||||||||||||||
| Number of interconnected operators | 207 | 267 | (22%) | 207 | 0% | 207 | 267 | (22%) | |||||||||
| Number of points of interconnect (000s) | 226 | 223 | 2% | 225 | 1% | 226 | 223 | 2% | |||||||||
| Average monthly revenue per point of interconnect (RUR) | 1,174 | 1,171 | 0% | 1,161 | 1% | 1,167 | 1,150 | 2% | |||||||||
| Average monthly revenue per point of interconnect (US$) | 38.8 | 36.4 | 7% | 38.8 | 0% | 38.8 | 34.9 | 11% |
Financial Highlights
| RUR millions | Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Revenues | |||||||||||||||||
| Residential | 3,896 | 3,561 | 9% | 3,812 | 2% | 7,708 | 6,936 | 11% | |||||||||
| Corporate | 1,970 | 1,888 | 4% | 1,881 | 5% | 3,850 | 3,705 | 4% | |||||||||
| Operators | 1,979 | 1,855 | 7% | 2,024 | (2%) | 4,003 | 3,815 | 5% | |||||||||
| Total | 7,845 | 7,304 | 7% | 7,717 | 2% | 15,561 | 14,456 | 8% | |||||||||
| Intersegment sales | (771) | (679) | 14% | (769) | 0% | (1,540) | (1,422) | 8% | |||||||||
| Net Revenues | 7,074 | 6,626 | 7% | 6,948 | 2% | 14,021 | 13,034 | 8% | |||||||||
|
Operating Expenses13 |
4,141 | 3,817 | 9% | 4,001 | 4% | 8,142 | 7,788 | 5% | |||||||||
| OIBDA, gross | 3,703 | 3,488 | 6% | 3,716 | (0%) | 7,419 | 6,668 | 11% | |||||||||
| Margin (%) | 47.2% | 47.7% | 48.2% | 47.7% | 46.1% |
| US$ millions | Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Revenues | |||||||||||||||||
| Residential | 128.9 | 110.7 | 17% | 127.5 | 1% | 256.5 | 210.2 | 22% | |||||||||
| Corporate | 65.2 | 58.6 | 11% | 62.9 | 4% | 128.1 | 112.2 | 14% | |||||||||
| Operators | 65.5 | 57.6 | 14% | 67.7 | (3%) | 133.2 | 115.4 | 15% | |||||||||
| Total | 259.6 | 226.9 | 14% | 258.1 | 1% | 517.8 | 437.8 | 18% | |||||||||
| Intersegment sales | (25.5) | (21.3) | 20% | (25.6) | (0%) | (51.1) | (43.2) | 18% | |||||||||
| Net Revenues | 234.1 | 205.7 | 14% | 232.5 | 1% | 466.7 | 394.6 | 18% | |||||||||
| Operating Expenses | 137.0 | 118.6 | 16% | 133.8 | 2% | 270.8 | 235.7 | 15% | |||||||||
| OIBDA, gross | 122.6 | 108.3 | 13% | 124.4 | (1%) | 246.9 | 202.1 | 22% | |||||||||
| Margin (%) | 47.2% | 47.7% | 48.2% | 47.7% | 46.1% |
Net revenues were up 7% year on year in the second quarter and up 2% quarter on quarter in ruble terms, and up 8% for the year to date. The growth reflected the average regulatory ruble price increases for residential and corporate voice services of 8% from March 1, 2009 and 10.3% from February 1, 2010, as well as a 17% increase in regulated interconnect tariffs from September 1, 2009 as well as year on year growth in CPP traffic volumes.
Operating expenses, excluding depreciation and amortisation charges, increased by 9% year on year in the second quarter, 4% quarter on quarter, and 5% for the year to date in ruble terms. The growth primarily reflected an increase in network traffic costs in line with increasing traffic volumes, a 5% average increase in Group salary levels to compensate for inflation from April 1, 2010, growing selling and marketing costs in line with the growing demand, rising regulated utility tariffs, costs incurred in connection with state registration of MGTS property and the effect of previously accrued expenses for the cancelled 2008 phantom option programme from the financial results for 1H2009, 2Q2009 and 1Q2010.
Segment OIBDA therefore increased by 6% year on year in the quarter and was stable quarter on quarter in ruble terms, with an OIBDA margin of 47.2%. Segment OIBDA increased by 11% for the year to date in ruble terms with an increased OIBDA margin of 47.7%.
2. Alternative Segment in Moscow
Comstar owns a group of leading alternative fixed-line telecommunications operators, which provide broadband internet access, Long Distance telephony services, and multi-service solutions to residential and corporate subscribers in Moscow and the surrounding region.
| Operating Highlights | Q2 2010 | Q2 2009 | Growth (%) | Q1 2010 | Growth (%) | 1H 2010 | 1H 2009 | Growth (%) | |||||||||
| Installed telephone lines (000s) | 659 | 658 | 0% | 658 | 0% | 659 | 658 | 0% | |||||||||
| Residential | |||||||||||||||||
|
Number of subscribers14 |
568 | 632 | (10%) | 583 | (3%) | 568 | 632 | (10%) | |||||||||
| ARPU (RUR) | 570 | 416 | 37% | 527 | 8% | 548 | 391 | 40% | |||||||||
| ARPU (US$) | 18.9 | 12.9 | 46% | 17.6 | 7% | 18.2 | 11.8 | 54% | |||||||||
| Corporate | |||||||||||||||||
| Number of subscribers (000s) | 28 | 29 | (2%) | 27 | 0% | 28 | 29 | (2%) | |||||||||
| ARPU (RUR) | 13,495 | 13,555 | 0% | 13,668 | (1%) | 13,580 | 12,746 | 6% | |||||||||
| ARPU (US$) | 446.6 | 421.4 | 6% | 457.3 | (2%) | 451.9 | 386.2 | 17% | |||||||||
| Operators | |||||||||||||||||
| Number of active lines (000s) | 438 | 438 | 0% | 438 | 0% | 438 | 438 | 0% | |||||||||
| – of which, used by mobile operators (000s) | 307 | 307 | 0% | 307 | 0% | 307 | 307 | 0% |
Financial Highlights
| RUR millions | Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Revenues | |||||||||||||||||
| Corporate | 1,509 | 1,613 | (6%) | 1,513 | 0% | 3,021 | 3,099 | (3%) | |||||||||
| Operators | 824 | 851 | (3%) | 827 | 0% | 1,652 | 1,670 | (1%) | |||||||||
| Residential | 995 | 810 | 23% | 956 | 4% | 1,951 | 1,581 | 23% | |||||||||
| Total | 3,328 | 3,273 | 2% | 3,296 | 1% | 6,623 | 6,350 | 4% | |||||||||
| Intersegment sales | (129) | (156) | (17%) | (126) | 3% | (255) | (254) | 1% | |||||||||
| Net Revenues | 3,198 | 3,117 | 3% | 3,170 | 1% | 6,368 | 6,097 | 4% | |||||||||
|
Operating Expenses15 |
2,800 | 2,452 | 14% | 2,367 | 18% | 5,167 | 4,946 | 4% | |||||||||
| OIBDA, gross | 528 | 822 | (36%) | 929 | (43%) | 1,457 | 1,404 | 4% | |||||||||
| Margin (%) | 15.9% | 25.1% | 28.2% | 22.0% | 22.1% |
| US$ millions | Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Revenues | |||||||||||||||||
| Corporate | 49.9 | 50.1 | (0%) | 50.6 | (1%) | 100.5 | 93.9 | 7% | |||||||||
| Operators | 27.3 | 26.5 | 3% | 27.7 | (1%) | 55.0 | 50.6 | 9% | |||||||||
| Residential | 32.9 | 25.1 | 31% | 32.0 | 3% | 64.9 | 47.8 | 36% | |||||||||
| Total | 110.1 | 101.7 | 8% | 110.3 | 0% | 220.4 | 192.4 | 15% | |||||||||
| Intersegment sales | (4.3) | (4.9) | (12%) | (4.2) | 2% | (8.5) | (7.8) | 9% | |||||||||
| Net Revenues | 105.9 | 96.8 | 9% | 106.0 | (0%) | 211.9 | 184.6 | 15% | |||||||||
| Operating Expenses | 92.6 | 76.0 | 22% | 79.0 | 17% | 171.6 | 149.5 | 15% | |||||||||
| OIBDA, gross | 17.6 | 25.7 | (32%) | 31.2 | (44%) | 48.8 | 42.9 | 14% | |||||||||
| Margin (%) | 15.9% | 25.1% | 28.2% | 22.0% | 22.1% |
Net revenues were up 3% year on year in ruble terms in the second quarter, and were up 1% quarter on quarter and up 4% for the year to date. The growth reflected rising DLD/ILD volumes generated by MGTS residential voice subscribers.
Operating expenses, excluding depreciation and amortisation charges, increased by 14% year on year and 18% quarter on quarter in the second quarter, and by 4% for the year to date in ruble terms. This reflected the increase in network traffic expenses due to growing CPP and DLD/ILD traffic volumes generated by MGTS and the alternative segment in the regions, and an increase in selling and marketing expenses as a result of increased demand for the Group’s services. The increase in operating expenses also reflected the reversal of previously accrued expenses for the cancelled 2008 phantom option programme from the financial results for 1H2009, 2Q2009 and 1Q2010.
Segment OIBDA therefore decreased by 36% year on year and 43% quarter on quarter in ruble terms, with an OIBDA margin of 15.9%. Segment OIBDA increased by 4% for the year to date in ruble terms with a stable OIBDA margin of 22.0%.
3. Alternative segment in the Regions & CIS
This segment comprises the Group’s operations in 83 Russian cities and in Ukraine and Armenia.
Operating Highlights
| Q2 2010 | Q2 2009 | Growth (%) | Q1 2010 | Growth (%) | 1H 2010 | 1H 2009 | Growth (%) | ||||||||||
| Residential | |||||||||||||||||
| Number of subscribers (000s) | 2,730 | 2,528 | 8% | 2,630 | 4% | 2,730 | 2,528 | 8% | |||||||||
| ARPU (RUR) | 162 | 149 | 8% | 158 | 2% | 160 | 150 | 6% | |||||||||
| ARPU (US$) | 5.3 | 4.6 | 15% | 5.3 | 1% | 5.3 | 4.6 | 17% | |||||||||
| Corporate | |||||||||||||||||
| Number of subscribers (000s) | 61 | 53 | 15% | 58 | 4% | 61 | 53 | 15% | |||||||||
| ARPU (RUR) | 3,232 | 3,698 | (13%) | 3,299 | (2%) | 3,265 | 3,614 | (10%) | |||||||||
| ARPU (US$) | 107.0 | 115.1 | (7%) | 110.4 | (3%) | 108.6 | 109.7 | (1%) | |||||||||
| Operators | |||||||||||||||||
| Number of active lines (000s) | 5 | 2 | 179% | 7 | (19%) | 5 | 2 | 179% |
Financial Highlights
| RUR millions | Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Revenues | |||||||||||||||||
| Residential | 1,304 | 1,149 | 14% | 1,252 | 4% | 2,556 | 2,308 | 11% | |||||||||
| Corporate | 583 | 555 | 5% | 563 | 4% | 1,146 | 1,094 | 5% | |||||||||
| Operators | 400 | 329 | 22% | 371 | 8% | 770 | 615 | 25% | |||||||||
| Total | 2,287 | 2,033 | 13% | 2,186 | 5% | 4,473 | 4,017 | 11% | |||||||||
| Intersegment sales | (137) | (74) | 86% | (137) | 1% | (274) | (103) | 167% | |||||||||
| Net Revenues | 2,150 | 1,959 | 10% | 2,049 | 5% | 4,199 | 3,914 | 7% | |||||||||
|
Operating Expenses16 |
1,545 | 1,527 | 1% | 1,481 | 4% | 3,026 | 2,951 | 3% | |||||||||
| OIBDA, gross | 742 | 505 | 47% | 705 | 5% | 1,447 | 1,065 | 36% | |||||||||
| Margin (%) | 32.5% | 24.9% | 32.3% | 32.4% | 26.5% |
| US$ millions | Q2 2010 | Q2 2009 | Growth | Q1 2010 | Growth | 1H 2010 | 1H 2009 | Growth | |||||||||
| Revenues | |||||||||||||||||
| Residential | 43.1 | 35.7 | 21% | 41.9 | 3% | 85.0 | 69.8 | 22% | |||||||||
| Corporate | 19.3 | 17.2 | 12% | 18.8 | 2% | 38.1 | 33.2 | 15% | |||||||||
| Operators | 13.2 | 10.2 | 30% | 12.4 | 7% | 25.6 | 18.7 | 37% | |||||||||
| Total | 75.7 | 63.2 | 20% | 73.1 | 3% | 148.8 | 121.7 | 22% | |||||||||
| Intersegment sales | (4.5) | (2.3) | 98% | (4.6) | 0% | (9.1) | (3.1) | 191% | |||||||||
| Net Revenues | 71.1 | 60.9 | 17% | 68.6 | 4% | 139.7 | 118.5 | 18% | |||||||||
| Operating Expenses | 51.1 | 47.5 | 7% | 49.5 | 3% | 100.6 | 89.7 | 12% | |||||||||
| OIBDA, gross | 24.6 | 15.7 | 57% | 23.6 | 4% | 48.2 | 32.0 | 51% | |||||||||
| Margin (%) | 32.5% | 24.9% | 32.3% | 32.4% | 26.5% |
Net revenues were up 10% year on year in ruble terms in the second quarter, and up 5% quarter on quarter. Net revenues were up 7% the year to date following the successful up-selling of residential pay-TV subscribers to double-play (broadband internet + pay-TV) services and the consolidation of the subscriber base of TenzorTelecom and PenzaTelecom, which were acquired in February and June 2010, respectively.
Operating expenses, excluding depreciation and amortisation charges, increased by 1% year on year in the second quarter and 4% quarter on quarter, and were up 3% for the year to date in ruble terms. This primarily reflected the rise in selling and marketing expenses due to increased demand for the Group’s services, a reduction in allowance for uncollectable receivables as a result of the ongoing reorganisation of the regional businesses, and the reversal of previously accrued expenses for cancelled 2008 phantom option programme from the financial results for 1H2009, 2Q2009 and 1Q2010.
Segment OIBDA therefore increased by 47% year on year in the second quarter, and 5% quarter on quarter in ruble terms, with an increased OIBDA margin of 32.5%. Segment OIBDA increased by 36% for the year to date in ruble terms, with an increased OIBDA margin of 32.4%.
FINANCIAL REVIEW
Net cash generated by operating activities decreased by 18% year on year to RUR 2.7 billion (US$ 89.6 million) in the second quarter due to payments of annual and first quarter bonuses during the second quarter of 2010, as well as the payment of annual and first quarter taxes.
Net cash used in investing activities increased 13 times to RUR 2.7 billion (US$ 90.0 million) and included RUR 1.0 billion (US$ 33.1 million) of short-term investments and RUR 1,232 million (US$ 40.7 million) of capital expenditure.
Free cash flow generation was therefore down 48% year on year and 62% quarter on quarter to RUR 1.5 billion (US$ 48.9 million), due to the increase in capital expenditures and a decrease in cash flow from operating activities.
Net cash received from financing activities amounted to RUR 218 million (US$ 7.2 million) in the quarter, and primarily comprised proceeds from the new credit line from Sberbank, net of repayments of various borrowings, payments of principal of capital lease obligations, acquisition of non-controlling interests in subsidiaries and one-off charge payable to Sberbank for the opening of new credit line. The new Sberbank credit line was opened in the second quarter of 2010.
The Group’s cash and cash equivalents and short term investments therefore increased almost threefold year on year and 7% quarter on quarter to RUR 17.2 billion (US$ 551.9. million) at the end of the period.
The Group’s total borrowings, including capital lease obligations, increased by 2% quarter on quarter to RUR 29.3 billion (US$ 939.4 million), and primarily comprised the RUR 26.6 billion Sberbank credit facilities, the RUR 1.8 billion debt to MTS, and RUR 0.4 billion of vendor financing.
Approximately 99% of the Group’s total debt was ruble denominated at the end of the second quarter of 2010, and was equivalent to 1.4 times trailing twelve month OIBDA. The Group’s total debt remained stable compared to the end of the first quarter 2010. The Group’s net debt17 was reduced from RUR 12.8 billion at the end of the first quarter 2010 to RUR 12.1 billion at the end of the quarter, and was equivalent to 0.6 times annualized OIBDA and remained stable compared to the end of the first quarter 2010.
OTHER INFORMATION
Conference call