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August 17, 2004

South Telecommunications Company comes out with 1H 2004 RAS results

Southern Telecommunications Company (STC) (RTS: KUBN, KUBNP; OTC USA: STJSY), the largest fixed-line operator in the South Federal District, released today its 1H 2004 results prepared in accordance with Russian Accounting Standards (RAS). Theheadlinefiguresareasfollows:

§The telecom carrier’s revenues surged 33.5% year-on-year to Rub 7,816 mln ($271.8 mln)*, while 2Q revenues powered ahead 33.8% to Rub 4,023 mln ($139.2 mln).

§1H 2004 EBITDA climbed 27.3% to Rub 2,231 mln ($77.6 mln), whereas in 2Q 2004 this figure stood at Rub 1,042 mln ($36.1 mln), i.e. up 29.3% against the same period last year. ?BITDAprofitmarginsstoodat 28.5%.

§Earnings from value-added services jumped by 67.3% to Rub 390.1 mln, i.e. these revenues account for 5.1% of the company’s tariff earnings.

§146,600 basic telephone lines were installed in 1H 2004, or up 51.8% than in 1H 2003.

§LD traffic rose 14% year-on-year and totaled 995,000,000 minutes.

Due to the rise in the subscriber base and LD traffic upswing, the telecom entity’s 1H 2004 revenues escalated 33.5% to Rub 7,816 mln, EBITDA reached Rub 2,231 mln, 27.3% more than in the first six months of 2003, while sales profit equaled Rub 1,416 mln, i.e. 10.1% than in 1H 2003.

The contraction in operating profit margins is attributed to rising depreciation charges and payables to Rostelecom (after the launch of the new settlement system). Depreciation charges grew on the back of considerable commissioning of capital assets due to the steep growth in the subscriber base, digitalization of local and central office networks, construction of Internet access systems and use of financial leasing as a tool to purchase telecom facilities (contracts are valid 5 years on average).

Upon signing long-term loan agreements and paying out 1st bond coupon yields, South Telecommunications Company saw in 1H 2004 a precipitous rise in interest payable on borrowed funds. As a consequence, the telecom operator’s net profit nosedived 92.4% to Rub 44.3 mln.

STC's stellar performance in 1H 2004 is a result of well-thought-out measures taken in accordance with the approved 2004 business plan. In particular, the projected target for 1H 2004 net profit was set at Rub 100.9 mln.

Earnings from telecom services rose 32.6% y-o-y to Rub 7,614 mln, while revenues from local and LD services increased 32.4% and 20.5%, respectively, and those from value-added services and of voice transmission operators climbed 67.3% and 120.1%, accordingly (excl. a 38.2% upsurge on the part of Rostelecom). Revenues from other telecom services (wired broadcasting, radio communications, paging, etc.) dropped 8.7% due to the decrease in sales of unprofitable and non-perspective services.

STC's operating expenses amounted to Rub 6,401 mln, or up 40% compared with 1H 2003. Operating expenses went up owing to the rise in depreciation charges and payments to Rostelecom.

Network digitalization and optimization of the corporate structure resulted in a decline in the telecom entity’s head count to 39,500 employees, down 4.1% versus 1H 2003.

LD and ILD traffic at South Telecommunications Company in 1H 2004 totaled 995 mln (+14%), including 935 mln minutes of LD domestic traffic (up 14.2%) and 55.7 mln of ILD traffic (an 11% upsurge).

Modernization and expansion of the telephone network performed in 1H 2004 enabled STC to successfully meet its growth target for lines in use, as 146,000 lines were added in the period. Households account for 90.5% of all lines added, while businesses and budget-financed institutions accounted for 8.36% and 1.14%, respectively, of new additions. As of July 1, 2004, South Telecommunications Company operates 3,713,900 basic lines (lines in use), including 2,795,800 lines in urban telecommunication networks and 918,100 lines in rural telecommunication networks. The average wireline density within South Telecommunications Company’s operational territory is 20.88 telephone sets per 100 inhabitants, including 25.82 telephones sets in urban telecommunication networks and 13.04 telephone lines in rural telecom networks.

Revenues from value-added services (VAS) in 1H 2004 soared 67.3% y-o-y to Rub 390.1 mln and accounted for 5.1% of total telecom revenues. Earnings from Internet services surged by 64.1%, from virtual private networks (VPN) services by 92.8%, from intellectual network services by 52.2% and from ISDN services by 44.9%. It should be noted that VAS (especially Internet services) posted a dramatic rise: Internet traffic increased 48.7% to 130.8 Tb compared with 1H 2003 and connection via switched Internet access was 11.3 mln hours (up 48.7% versus 1H 2003).

The telecom operator’s 1H 2004 capital expenditures skyrocketed 150.9% compared with the first half of 2003 to Rub 4,988 mln, fixed assets put into service totaled Rub 3,965 mln (up 260.4%). During the first six months of 2004 STC’s local network added 263,400 lines to its total capacity, including 102,400 lines launched to replace outdated analog facilities, which allowed the operator to cut network operating costs. As of July 1, 2004, the telecom entity’s installed line capacity was 4,001,200 lines, including 3,752,000 lines in operation.

The digitalization rate of South Telecommunications Company’s local network was up 29.8% against 1H 2003 and stood at 52.7% at the beginning of 3Q 2004, including 59.4% in urban telephone networks and 31.2% in rural telephone networks.

The length of long-distance telephone channels rose by 1,201.5 ch/km in 1H 2004 and currently stands at 12,621.3 ch/km, including digital transmission systems which increased by 1,301.7 ch/km to 10,406.5 ch/km (82.5% of the total length). During the first half of 2004 STC central office networks added on 803.5 km to its fiber-optic lines, and they stood at 6,497.6 km as of July 1, 2004.

The full version of STC’s 1H 2004 report can be viewed on the web site in the section entitled “Financial Reports ”.




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