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August 17, 2004

Southern Telecommunications Company ("UTK") reports RAS financial results for 1st half 2004

Southern Telecommunications Company (?§UTK??) (RTS: KUBN; OTC: STJSY), the principal telecommunications provider for Russia?¦s Southern Federal District, today reported financial results for the first half of 2004 in accordance with Russian accounting standards (RAS).

  • Total revenues for the first half of 2004 grew 33.5% year on year to RUR 7,816 m (USD 271.8 m?x). Q2 2004 total revenues rose 33.8% year on year to RUR 4,023 m (USD 139.2 m). 
  • Subscriber lines in use increased 51.8% year on year to 3,713.8 thousand at June 30, 2004, as a total of 91.8 thousand new subscribers were added in the quarter. 
  • Long-distance traffic for first half 2004 grew 14% to 995 mln minutes compared to the same period last year, while Q2 traffic increased 12.8% from a year ago. 
  • Sales from value added services increased 67.3% to RUR 390.1 m (USD 13.5 m) in H1 2004, and now account for 5.1% of total telecom revenues compared to 4.1% in H1 2003. 
  • EBITDA for H1 2004 increased 27.3% year on year to RUR 2,231 m (USD 77.6 m), representing an EBITDA margin of 28.5%. EBITDA for Q2 2004 rose 29.3% to RUR 1,042 m (USD 36.1 m) year on year.

UTK?¦s total revenues for the first half of 2004 grew 33.5% to RUR 7,816 m as a result of subscriber base growth and long distance traffic growth. EBITDA for H1 2004 increased 27.3% year on year to RUR 2,231 m. Operating income grew 10.1% to RUR 1,416 mln.

The decline in operating margin is connected with a 40% increase in operating costs mainly due to increased interconnection payments (as a result of implementation of a new interconnect settlement system with OJSC ?§Rostelecom??) and higher depreciation. The increase of depreciation is caused by huge fixed assets volume which has been put into operation in a view of high subscribers` base growth, the process of digitization of local and intrazonal networks, construction of high-speed Internet access nodes, and the usage of financial leasing while equipment purchasing (the average contracts term is 5 years).

In addition, interest expense increased substantially as a result of increased long-term debt to finance UTK?¦s investment program. As a consequence, net profit decreased to RUR 44.3 mln in H1 2004 compared to RUR 581.9 mln in the same period last year. UTK?¦s development in the first half of 2004 reflects the implementation of the Company?¦s approved business plan for 2004.

Total telecom revenues for the first half of 2004 grew 32.6% year on year to RUR 7,614 m. Revenues from local telephony services grew by 32.6%, long-distance telephony services grew 20.5%, interconnection and traffic transit services saw 120.1% revenue growth (38.2% excluding revenues from Rostelecom). Value-added services grew 67.3% and include the following services: Internet access, ISDN, intelligent network services, IP-telephony, VPN-services, CTV services and and call-centers. Other telecom services (wired radio, radio communication, radio broadcasting, paging and others) experienced a 8.7% decrease in revenues as a result of the phasing out of uneconomic activities.

The volume of long-distance traffic for H1 2004 stood at 995 mln minutes (+14%), including 939.5 mln minutes of long-distance domestic traffic (+14.2%) and 55.7 mln minutes of long-distance international traffic (+11%).

Modernization and expansion of telephone networks implemented in H1 2004 enabled UTK to successfully fulfill its growth objectives for lines in use as 146.6 thousand telephone sets were added in the period. Households account for 90.5% of total new additions; business subscribers account for 8.4% of total new additions; budgetary subscribers account for 1.1% of total new additions.

As at July 1, 2004 UTK operates 3,713.9 thousand basic telephone sets (lines in use), including 2,795.8 thousand sets in urban telephone networks and 918.1 thousand sets in rural telephone networks. The average wireline telephone density within UTK`s operational territory is 20.88 telephone sets per 100 inhabitants, including 25.82 telephone sets per 100 inhabitants in urban telephone networks and 13.04 telephone sets per 100 inhabitants in rural telephone networks.

Revenues from value added services (VAS) in H1 2004 increased 67.3% year on year to RUR 390.1 mln. and account for 5.1% of total telecom revenues compared to 4.1% in H1 2003. Revenues from Internet services grew by 64.1%, from VPN (virtual private networks) services by 92,8%, from intelligent networks services by 52.2%, from ISDN services ?X by 44.9%. VAS (especially Internet services) sales are supported by strong usage growth: Internet traffic for the reporting period reached 130.8 Tb (up 76.3% compared with H1 2003), connect time via switched access to Internet was 11.3 mln hours (up 48.7% compared with H1 2003).

H1 2004 UTK`s capital expenditures rose by 150.9% year on year to RUR 4,988 mln as UTK implemented its network investment program. Fixed assets put into service stood at RUR 3,965 mln (up 260.4% compared with H1 2003).

During H1 2004 UTK local networks added 263.4 thousand lines to its total installed capacity on automatic telephone exchanges. UTK`s total installed capacity as of July 1, 2004 stood at 4,001.2 lines, including 3,752 equipped lines.

Digitization level of UTK local network rose by 29.8% reaching 52.7% at the end of H1 2004, including 59.4% in urban telephone networks and 31.2% in rural telephone networks.

In H1 2004 the length of long-distance telephone channels rose by 1,201.5 thousand ch/km and now stands at 12,621.3 thousand ch/km, including digital transmission systems which rose by 1301.7 ths ch/km and stood at 10,406.5 thousand ch/km (82.5% of the total length). During H1 2004 UTK intra-zonal networks added 803.5 km to its fiber-optic lines, and their total length as of July 1, 2004 stood at 6,497.6 km.

UTK`s operating expenses increased by 40% year on year to RUR 6,401 mln. This is due mainly to the growth of depreciation charges and payments to OJSC Rostelecom. The increased interconnection payments stem from the introduction of the new settlement system. The growth of depreciation is attributable to a major increase in fixed assets in operation as a result of the rapid expansion of UTK?¦s subscriber base, the process of digitization of local and intrazonal networks, construction of high-speed Internet access nodes, and the increased use of financial leasing to purchase equipment.

UTK continued to implement efficiency measures in the first half of 2004. As a result of UTK`s networks digitization and optimization of the organizational structure, average headcount decreased by 4.1% year on year to 39.5 thousand people.

Full UTK`s financial statements for the 1st half of 2004 can be accessed on the website at ?§Financial Reports??.

?x US dollar figures are provided for reader convenience at the first half 2004 Central Bank of Russia average exchange rate of USD 1 = RUR 28,8

Full version of press-release: UTK_H1_2004_RAS_press-release_eng, 225 Kb For additional details please contact: UTK IR Team phone: +78612 53 20 30, fax: +7 8612 53 1969, e-mail:




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