Krasnodar, Russia, November 17, 2004 – Southern Telecommunications Company (“UTK”) (RTS: KUBN, KUBNP; OTC: STJSY), the principal telecommunications provider for Russia’s Southern Federal District, today reported its 2003 financial results in accordance with International accounting standards (IAS).

• 2003 consolidated revenues rose 17.4% over 2002, reaching RUR 13,966.1 mln (USD 455.4 mln);
• 2003 OIBDA increased 16.9% year on year to RUR 3,608.1 mln (USD 117.6 mln) representing an OIBDA margin of 25.8%;
• Operating income grew 77.9% to RUR 1,118.2 mln (USD 36.5 mln);
• 2003 revenues from new value added services rose 51.3% to RUR 580.2 mln (USD 18.9 mln);
• Number of basic telephone sets (subscriber lines in use) increased 79% year on year as a total of 296.8 ths new subscribers were added in 2003;
• Long-distance traffic grew 17.2% to 1.84 trillion minutes.

Commenting on the 2003 financial results, Ivan Ignatenko, UTK CEO, stated: “2003 was a year of integration, modernization and development of the consolidated company. During the year UTK PJSC made every effort to optimize its organizational structure and business management practices, to unify technical systems and solutions on a regional basis, to introduce an automated accounting and planning system, to reorganize the sales system and to improve customer service.  Due to more stable market environment,, tariff growth and improvements in business efficiency, 2003 consolidated revenue and OIBDA were both up 17 %, and the OIBDA margin rose to 26%.

UTK PJSC’s strategy is aimed at strengthening its leadership position in the SFD telecommunications market. In 2003 and 2004 UTK PJSC increased its capital expenditures in order to build our position in the most lucrative segments of the fixed-line and value-added regional markets that would allow for favorable long-term improvements in operating and financial performance going forward.  The Company is planning to cut back capital expenditures in subsequent years due to a reduction of investment in traditional telephony services and an increased focuson new higher-margin services, thereby contributing to steady improvements in UTK’s business efficiency and balance sheet strength.

The increase in our debt burden is a consequence of the Company’s marketing strategy resulting from heavy capital expenditures and attraction of external funding. The management has undertaken measures to shore up the Company’s current liquidity, namely: substantial reduction of the investment projects not relating to strategic market segments; redistribution of capital investments in favor of new lucrative value-added services; re-structuring of UTK’s credit portfolio with a view of prolongation of the terms and reduction of the costs of funding; re-structuring of the contracts of short-term funding currently in force; increase of tariffs for rendered services; selling of non-core assets”.

UTK’s 2003 consolidated revenue grew 17.4 % to RUR 13,966.1 mln. (USD 455.4 mln). Revenues from telecom services increased by 22.7 % to RUR 13,549.7 mln. (USD 441.8 mln). 2003 OIBDA amounted to RUR 3,608.1 mln (USD 117.6 mln), and the OIBDA margin stood at 25.8%.

Revenues Up due to increased demand and tariff growth 

The increase in UTK’s 2003 revenues from telecommunications services was due to a 9.1% expansion in the Company subscribers’ base, a 9.8% increase in users’ talking activity (MOU), a 7.4% increase in average revenue per user (ARPU) and a 51.3%-growth in revenues from value-added services. Another important factor in the 2003 revenue increase was the increase in local tariffs. From July 1, 2003 monthly subscriber fees increased by an average of 23.4 % for the urban population, 25 % - for the rural population, and 20.7% for the business sector.

2003 revenues from local telephony services grew by 32.7%, reaching RUR 4,962.5 mln. Revenues from local calls (subscriber monthly fee and time-based payments for local calls) rose by 28% to RUR 3,740.9 mln, revenues from installation fee increased by 49.8% to RUR 1,221.6 mln.

Revenues from long-distance telephony services increased 7.9% to RUR 6,046.8 mln, including RUR 4,822.6 mln (up 5.7%) from domestic long-distance telephony and RUR 1,224.2 mln (up 17.5%) from international long-distance telephony. The increase in long-distance telephony revenues resulted from optimization of tariffs within the framework of the policy aimed at eliminating cross-subsidies between local and long-distance telephone services. Volume of long-distance traffic saw a 17.2% growth rate in 2003 (1.84 trillion minutes) including 17.8% (1.74 trillion minutes) growth in domestic long-distance traffic and 8.5% (0.1 trillion minutes) growth in international long-distance traffic.

Due to UTK’s aggressive investment program, rapid digitization growth rates and the introduction of new technologies, the Company considerably strengthened its competitive positions in the regional market for new telecom services:  market share increased from 32 %  to 36 % in 2003. As a result UTK revenues from new value added services (Internet, ISDN, intelligent networks, IP-telephony, etc.) increased by 51.3 % to RUR 580.2 million (representing 4.3 % of the Company’s total telecom revenues for the year 2003). Internet traffic increased by 80.1% to 170.2 Tb, and connection time to the Internet was up 51.2 % to 16.1 million hours.

Revenues from other telecom services (including from national telecom operators, wired radio, radio communication, radio broadcasting, paging) increased by 48.8% to RUR 1,960.2 mln (USD 63.9 mln.).

Other important milestones in the Company’s development strategy were the reduction of other revenues (down by 50.9 % to RUR 416.4 million), that allowed the Company to focus its efforts and resources on the development of its primary activities, thus increasing the business efficiency.

Operating costs

UTK’s operating expenses increased by 14% in 2003 to RUR 12,847.8 mln. The Company’s weighted policy on cost control allowed it, for every 1 ruble of revenues from primary activities, to reduce costs by 3 %, from 0.95 to 0.92 rubles.

The main contributors to the growth in operating cost were the increase of expenses on wages and salaries and other social payments to employees (up 17.9% to RUR 4,941.3 mln) as well as expenses on traffic transit services (up 14.8% to RUR 1,918.9 mln). The increase of wage and salary expenses was due mainly to growth in the number of highly skilled workers, as well as to the necessary annual salary increases made in order to minimize inflationary effects and stimulate increases in working efficiency.

The increase of expenses in traffic transit services was due to the implementation of a new interconnect settlement system with OJSC Rostelecom, effective since August 1, 2003, as well as to growth in the volume of long-distance traffic. In 2003 payments to OJSC Rostelecom increased by 20.5% to RUR 1,612.1 mln, including RUR 273.9 mln due to the implementation of the new interconnect settlement system.

Depreciation charges of the Company rose by 1.3% to RUR 2,489.8 mln (sizeable fixed assets volume was put into operation in 4Q03) and contributed slightly to operating costs growth.

Material expenses (including repair and maintenance, public utilities) grew by 25.8 %, up to RUR 1,588.3 mln which was mainly due to the increase in the installed and equipped capacity, increase in cost of materials and spare parts, as well as increases in the electricity tariff.

The increase in bad debt expenses (up 76.9%, to RUR 97.7 mln) was caused by an increase in the accounts receivable from budget-funded organizations in connection with the decision of the Anti-Monopoly Ministry of Russia to cancel incentive tariffs for telecom services (previously, accounting principles for incentive tariffs allowed a company not to reflect non-compensated figures from budget expenses in its accounts. Now all non-compensated pieces of incentive tariffs are to be included in full in the debt structure).

Other 2003 operating expenses of the Company rose by 12.2% to RUR 1,342.9 mln. Expenditures for protection of buildings and fire prevention in the structure of the Company’s overheads and administrative expenses increased by 79.7% to RUR 167.4 million and on Gossvjaznadzor by 33.0% to RUR 40.1 million. This was the case for the whole of the telecommunications sector and the region, as well as due to the Company’s desire to provide its customers with reliable telecommunications services of high quality.

2003 operating income of UTK PJSC grew 77.9 % to RUR 1,118.2 million (USD 36.5 million). The increase in operating margin was related to a positive trend inrevenue growth compared to the Company’s operating costs (by 1.24 times). As a result the 2003 operating margin of UTK PJSC stood at 8% in comparison with 5.3% last year.

Other revenues and expenses 

“Other revenues” of the Company in 2003 decreased by 75.4 % to RUR 473.8 million due to a change in profits from associated companies and from long-term financial investments (in 2002 a one-time transaction of a sale of financial assets concluded by the Company). Profit from the change of purchasing power of the Ruble was not included since the inflation index was not applied to cash items in the 2003 accounting reports.

Conversely, miscellaneous costs increased by 39.7 % to RUR 1,039.7 million in the reporting period. Interest expenses rose by 86.7% to RUR 638.8 million in 2003 in connection with sizeable long borrowings. At the same time,  the foreign exchange loss decreased by 46.3 % due to the relative strengthening of the Ruble in relation to the US dollar in 2003.

Therefore, the negative net value of “other revenues (expenses)” of the Company was RUR 565.9 mln in 2003. As a result, income before tax stood at RUR 552.4 mln (USD 18.0 mln), a 69.5% decrease over the year 2002.

Taxes 

Income tax expenses stood at RUR 217.2 mln (USD 7.1 mln), a 75.7% decrease over a year ago.

Minority interest

In 2003 minority interest increased by 99.9% from RUR 94.3 mln to RUR 188.6 mln. in connection with net profit growth of the CJSC Telesot-Alanja and OJSC Stavtelecom by V.I. Kuzminov.

Net income

2003 net income of the Company decreased by 82.2% to RUR 146.1 mln (USD 4.8 mln). The high net income figure in 2002 was due to the one-time sale of financial assets, which impacted the net result (excl. taxes) by RUR 779 mln.

Capital expenditures:  investments will peak in 2003-2004

UTK PJSC’s 2003 capex was RUR 9,814.3 mln (USD 320 mln).  This significant capex growth can be attributed to UTK’s strategy aimed at growing share in the lucrative segments of the regional market of fixed-line and value-added services thus allowing the Company to maintain its leading position in the Southern Russian telecommunications market. Such an increase in market share of the regional telecom market will allow the Company to substantially decrease capital expenditures in subsequent years, thereby contributing to steady improvements in UTK’s financial performance going forward.

Cash flow and debt burden

To maintain the high rates of development UTK PJSC  had to borrow money. Total debt of the Company increased by 131.9 % over 2002 to RUR 17,301.3 million (USD 587.5 million) as at 31 December 2003. Increase in the debt level resulted from realization of the Company’s investment program, which would peak in 2003 – 2004.

Complete version of 2003 IAS press-release you can download here.

Complete version of 2003 IAS consolidated financial statements of UTK with notes may be found on the company corporate web site in “IR section/Financial reports” section.

UTK IR Team
phone + 7 8612 53 20 30,
fax + 7 8612 53 19 69,
e-mail: pmaleev@mail.stcompany.ru
66, Karasunskaya Str., Krasnodar, 350000