PJSC ROSTELECOM / 1st Quarter Results
THE DIGITAL SEGMENT'S CONTRIBUTION TO TOTAL REVENUE GROWS TO 47%
Moscow, Russia - May 17, 2017 - Rostelecom PJSC (MOEX: RTKM, RTKMP; OTCQX: ROSYY), Russia's national telecommunications operator, today announces its consolidated financial results for the first quarter of 2017 prepared in accordance with IFRS 1.
- The digital segment's 2 contribution to total revenue reached 47%;
- Total fibre optic network coverage reached 32.6 million households by the end of the first quarter of 2017;
- Consistently high growth rates in FTTx Broadband connectivity (+14%) and in pay-TV subscribers (+20%).
FIRST QUARTER 2017 FINANCIAL HIGHLIGHTS
- Revenue declined by 2.8% to RUB 70.4 billion compared to the first quarter of 2016;
- OIBDA 5 decreased by 12.6% year-on-year to RUB 21.6 billion;
- OIBDA margin of 30.6% compared to 34.0% in the first quarter of 2016;
- Net profit increased by 5% to RUB 3.2 billion compared to the first quarter of 2016;
- CAPEX 6 decreased by 7% year-on-year to RUB 17.7 billion (25.1% of revenue) from RUB 19.0 billion (26.2% of revenue) in the first quarter of 2016;
- Consolidated Free Cash Flow 7 (FCF) improved by 5% to RUB -2.3 billion compared to the first quarter of 2016;
- Net debt 8 increased by 1% since the beginning of the year and amounted to RUB 180.0 billion, resulting in a Net Debt/OIBDA ratio of 1.9x.
Key figures for 1Q 2017, RUB mln
Mikhail Oseevsky, President of Rostelecom, commented:
'The Company's digital transformation continued to gain momentum, as evidenced by the digital segment's growing contribution to total revenue, which increased by 5 p.p. and reached 47% by the end of the first quarter. We are also increasing our competitive positions in the key pay-TV and broadband segments, thanks to higher levels of positive client experience and the best fibre optical infrastructure in the country. We are happy to have recorded the highest level of revenue growth in our broadband segment during the first quarter than at any other period over the past six quarters at 7%.
'A great deal of attention is also being placed on the expansion of our product line, in both the public and private sectors, by growing our new offering to include among other solutions cyber security services and the development of 'cloud' solutions for businesses.
In May, the BoD proposed to its AGM the dividend payment for 2016. We believe that the dividend pay-out for 2016 reflects the company's actual performance in the reporting period. We intend to significantly increase the portion of free cash flow that is distributed to our shareholders. This reflects our commitment to the key principle of our policy which is to allocate more than three quarters of the free cash flow for dividends, and no less than RUB 45 billion within a period of three years, without increasing the Company's debt burden. The proposed level of RUB 5.39 per share enables us to maintain a high dividend yield, generally in-line with our current dividend policy.
Kai-Uwe Mehlhorn, Senior Vice-President and Chief Financial Officer, added:
'The first quarter results reflect the mixed dynamics across our key segments. Our business is successfully transforming into a leading digital services provider, through units that are contributing significantly to our top-line. At the same time, we are experiencing a certain level of decline in our traditional business line. As a result, lower revenues from interconnect and traffic transit, mainly influenced by the strengthening of the rouble, prevented us from reporting revenue growth in the first quarter of 2017. Nevertheless, we have a positive outlook for the economy in 2017, particularly given the growing trend for digitalization across private and public sectors, which is opening up new growth prospects for our business. We therefore maintain our full year forecast of delivering revenue growth of approximately 1%, and an increase in OIBDA within 1%. We also expect a CAPEX to Revenue ratio of 18.5% excluding the implementation of the Bridging the Digital Divide project.'
KEY OPERATING HIGHLIGHTS
1. The number of broadband subscribers grew by 5% to 12.5 million in 1Q 2017 compared to the corresponding period of last year;
- The B2C subscriber base grew by 5% to 11.7 million, whilst the number of subscribers connected by fibre optic increased by 13% year-on-year to 7.3 million (62% of the subscriber base).
2. The number of pay-TV subscribers grew by 6% year-on-year to 9.4 million households;
- The number of IPTV subscribers increased by 20% year-on-year to 4.4 million.
3. The number of local telephony subscribers decreased by 7% year-on-year to 20.3 million.
KEY EVENTS RELATING TO 1Q 2017 AND AFTER THE END OF THE REPORTING PERIOD
- Mikhail Oseevesky was appointed as President of the Company in March, 2017;
- Rostelecom continues to expand its range of services:
- The 'Interactive TV' service was modernized in terms of its functionality: VoD virtual showrooms introduced;
- A DDoS protection service was launched under a could service-provider scheme for clients who are not connected to Rostelecom's channels;
- A pilot version of the 'Security Awareness' project was launched;
- The trial of a 'Virtual services for small businesses' offering was launched;
- A special offer of providing free calls to MVNO numbers was extended for 'New Telephony' users;
- Rostelecom managed to connect approximately 200,000 subscribers through the promotion of 'Unlimited Russia' and 'Unlimited Kazakhstan' tariff options;
- Rostelecom's subscriber base has grown by 224,000 users thanks to the launch of the MVNO project based on the Tele2 network;
- Rostelecom achieved a 22% increase in subscribers for a unique 'Gaming' tariff plan promoted in partnership with Wargaming;
- Rostelecom took the lead with 42% share in the corporate pay-TV market 9;
- Rostelecom successfully organised the video surveillance of the preliminary Unified State Exam in 2017;
- Rostelecom increased the total fibre optic network coverage to 32.6 million households;
- Rostelecom provided satellite communications channels to residents of remote localities in Kamchatka and Magadan, following the completion of the Kamchatka-Sakhalin-Magadan submarine fiber-optic cable line construction;
- During the first quarter, the Company strengthened its competitive position in the broadband and pay-TV markets by accounting for around 70% 10 of new subscriptions in the pay-TV market and over 50% 11 in the broadband market;
- Rostelecom signed a number of large contracts, including contracts with the Judicial Department's information-analytics centre, Roseestr (The Federal Service for State Registration, Cadastre and Cartography), Saint-Petersburg Committee on IT and Communications, Sberbank, 'Zenith' football club and Skolkovo;
- Rostelecom introduced a client scoring system aimed at increasing receivable collection rates while reducing debt collection costs;
- Rostelecom signed contracts with Vimpelcom, Megafon and a number of other large corporate clients that rely on leasing Rostelecom's network infrastructure to handle additional traffic, thereby monetising the Company's leading position as the major telecoms infrastructure operator in the country.
- Rostelecom's board of directors recommended a dividend payment for 2016. The dividends are to be paid as follows:
- RUB 5.39 per Class A preferred share;
- RUB 5.39 per ordinary share
- Rostelecom placed bonds equal to RUB 10 billion at a record low coupon rate of 8.65% per annum;
- Rostelecom signed credit facility agreements with:
- VTB Bank for a total of RUB 30 billion for a period of 5 years,
- Alfa Bank JSC for a total of RUB 20 billion for a period of 5 years,
- Gazprombank JSC for a total of RUB 20 billion for a period of 5 years.
- Rostelecom acquired Tyumen's independent Internet provider Sibitex;
- Rostelecom consolidated 100% of SAFEDATA Group of companies;
- Fitch affirmed its outlook on Rostelecom credit rating of investment class as 'stable';
- Rostelecom and Gazprom Neft signed a strategic partnership agreement to establish a cooperation tasked with developing innovative solutions to develop and implement the Industrial Internet;
- Rostelecom's Venture Fund has invested in an e-Freight management operator engaged in the tracking of international cargo Transportation Information Technologies (TransInfoTech).
Revenue structure by services
Revenue structure by customer segments
- a 24% decrease in interconnection and traffic transmission services, mainly due to the stronger rouble and lower demand for connection and traffic transmission services provided to other operators;
- an 11% decrease in revenue from fixed-line telephony services;
- a 7% increase in revenue from broadband services due to an increased number of subscribers and higher ARPU;
- an 18% increase in revenue from pay-TV services due to growth in the IPTV subscriber base, an increase in the consumption of VoD services and higher ARPU;
- an 18% increase in revenue from VAS and cloud services related to the 'Smart City' and 'Electronic Government' projects and data-centres and cloud services promotion.
Operating income analysis
Operating expenses structure
In the first quarter of 2017, operating expenses decreased by 3% compared to the corresponding period of 2016 and amounted to RUB 62.3 billion due to the following factors:
- a 37% decrease (by RUB 1.8 bln) in other operating income, mainly due a larger base in the first quarter of 2016, as a result of cancellation of certain obligations 12; a decrease in proceeds from the Bridging the Digital Divide project (by RUB 0.7 bln) has also had an impact on the dynamics of the other operating income;
- a 69% decrease (by RUB 0.3 bln) in gain on the disposal of PPE, mainly due to the one-off compensation for damaged equipment in the first quarter of 2016;
- a 44% increase (by RUB 0.2 bln) in the reserves for bad debt expenses due to the recovery of certain losses;
- a 16% decrease (by RUB 2.0 bln) in interconnection charges, as a result of changes in corresponding income;
- stable level of personnel costs.
Operating profit decreased by 5% year-on-year to RUB 8.1 billion in the first quarter of 2017.
OIBDA for the first quarter of 2017 decreased by 13% year-on-year to RUB 21.6 billion. The OIBDA margin was 30.6% in the first quarter of 2017 compared to 34.0% in the corresponding period of 2016.
Net Income Analysis
In the first quarter of 2017, profit before tax was RUB 4.0 billion, a 6% increase year-on-year.
Profit before tax in the first quarter of 2017 was mainly influenced by the following factors:
- a decrease in losses from associates, mainly from the joint venture with Tele2 Russia;
- a decrease in finance costs, due to, among other factors, the optimization of interest expenses amidst reduction of borrowing costs in the market;
- lower operating income;
- a decrease in positive foreign exchange rate differences in the reporting period.
Income tax in the first quarter of 2017 increased by 12% to RUB 0.9 billion. The income tax dynamics reflects the changes in profit before income tax.
The effective income tax rate was 21% in the first quarter of 2017, compared to the rate of 20% set by the Tax Code. A higher income tax rate in the first quarter of 2017 was driven by the non-deductible expenses for taxation purposes.
Net profit increased by 5% in the first quarter of 2017 and totalled to RUB 3.2 billion.
Consolidated net operating cash flow in the first quarter of 2017 amounted to RUB 14.9 billion compared with RUB 15.9 billion in the corresponding period of 2016. This decrease in consolidated net operating cash flow was partly caused by changes in working capital which was mainly driven by a decrease in accounts payable. Significant profit tax refunds in the first quarter of 2017, as well as the decrease in the profit tax payments, had a positive effect on the Company's cash flow.
Consolidated cash outflow for investments in fixed assets decreased by 7% year-on-year to RUB 17.7 billion in the first quarter of 2017; excluding the 'Bridging the Digital Divide' project, it increased by 5% year-on-year to RUB 17.2 billion (24.4% of revenue). The higher level of investments, excluding the 'Bridging the Digital Divide' project, in the first quarter of 2017 was due to the payment of contract liabilities, delivered in the end of 2016, as well as due to capital expenditure being unevenly distributed across the calendar year in accordance with the terms of signed contracts.
Consolidated free cash flow improved by 5% in the first quarter of 2017 and totalled RUB (2.3) billion compared to RUB (2.4) billion in the corresponding period of 2016. The consolidated free cash flow dynamics were driven by a lower consolidated cash outflow for investments in fixed assets.
As at March 31, 2017, the Group's total debt increased by 1% compared to the beginning of the year, and amounted to RUB 189.8 billion. Over 99% of the Group's total debt was rouble-denominated as at March 31, 2017.
As at March 31, 2017, the Group's consolidated net debt amounted to RUB 180.0 billion. A net debt /OIBDA ratio stood at 1.9x for the past twelve months ended in first quarter of 2017.
OTHER INFORMATION: CONFERENCE CALL
Rostelecom's management will hold a conference call and webcast today at 6.00 PM (Moscow), 5.00 PM (CET), 4.00 PM (UK) and 11.00 AM (NYT). To participate in the conference call, please dial:
Russia: +7 495 213 1767
UK/ International: +44 (0)330 336 9105
USA: + 1 719 325 4746
Confirmation Code (ENG): 9296574
A webcast of the conference call will only be available in English. To access the webcast please follow the link: http://www.audio-webcast.com/cgi-bin/visitors.ssp?fn=visitor&id=4583.
A replay of the conference call will be available on the Company's website http://www.rostelecom.ru/en/ir/results_and_presentations/financials/IFRS/2017/1/ in due course.
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1. Reconciliation of OIBDA
2. Statement of Comprehensive Income for the first three months of 2017
3. Statement of Cash Flows for the first three months of 2017
4. Statement of Financial Position for the first three months of 2017
APPENDIX 1: RECONCILIATION OF OIBDA
OIBDA is a non-U.S. GAAP and non-IFRS financial measure, which the Company defines as operating income before depreciation and amortisation as well as non-cash expenses. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, including our ability to finance capital expenditures, acquisitions and other investments and our ability to incur and service debt.
Non-cash expenses related to the long-term management incentive programme, implying accruals in personnel costs line starting from Q2, 2014, are not taken into account in the calculation of OIBDA.
APPENDIX 2: Statement of Comprehensive Income for 1Q 2017
Rostelecom (www.rostelecom.ru) is one of the largest national telecommunications operators in Russia and Europe. The Company operates in all segments of the telecommunications market and covers millions of households in Russia.
Rostelecom is an undisputable leader of the broadband and pay-TV markets in Russia with over 12.5 million fixed-line broadband subscribers and over 9.4 million pay-TV subscribers, over 4.4 million of which are subscribed to Rostelecom's IPTV services.
In the first quarter of 2017, the Group generated RUB 70.4 billion of revenues, RUB 21.6 billion of OIBDA (30.6% of revenue) and RUB 3.2 billion of net income.
The Group is a market leader in providing telecommunications services to government bodies and corporates of all levels.
Rostelecom is an important innovator that provides solutions in the field of E-Government, cloud computing, healthcare, education, security and housing & utility services.
The Group's stable financial position confirmed by its credit ratings. Rostelecom was assigned 'BBB-' and 'BB+' international credit ratings by Fitch Ratings and Standard&Poor's respectively.
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Certain statements in this press release are forward-looking statements within the meaning of the U.S. federal securities laws and intended to be covered by the safe harbours created thereby.
Those forward-looking statements include, but are not limited to:
- Assessment of PAO Rostelecom's (the Company) future operating and financial results as well as forecasts of the present value of future cash flows and related factors;
- The Company's plans to take ownership stakes in other organisations;
- the Company's anticipated capital expenditures and plans to construct and modernize its network;
- the Company's expectations as to the growth in demand for its services, plans relating to the expansion of the range of its services and their pricing;
- the Company's plans with respect to improving its corporate governance practices;
- the Company's expectations as to its position in the telecommunications market and forecasts on the development of the market segments within which the Company operates;
- economic outlook and industry trends;
- the Company's expectations as to the regulation of the Russian telecommunications industry and assessment of impact of regulatory initiatives on the Company's activity;
- other statements regarding matters that are not historical facts.
Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include:
- risks relating to changes in political, economic and social conditions in Russia as well as changes in global economic conditions;
- risks relating to Russian legislation, regulation and taxation, including laws, regulations, decrees and decisions governing the Russian telecommunications industry, securities industry as well as currency and exchange controls relating to Russian entities and their official interpretation by regulatory bodies;
- risks relating to the Company, including the achievement of the anticipated results, levels of profitability and growth, ability to create and meet demand for the Company's services including their promotions, and the ability of the Company to remain competitive in a liberalized telecommunications market;
- technological risks associated with the functioning and development of the telecommunications infrastructure, technological innovations as well as the convergence of technologies;
- other risks and uncertainties. For a more detailed discussion of these and other factors, see the Company's Annual Report and the Company's other public filings.
Many of these factors are beyond the Company's ability to control or predict. Given these and other uncertainties, readers are cautioned not to place undue reliance on any of the forward-looking statements contained herein or otherwise. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements (which are made as of the date hereof) to reflect events or circumstances upon the annual report publication or to reflect the occurrence of unanticipated events, except as may be required under applicable laws.
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