Rostelecom announces its IFRS financial and operating results for the second quarter and first half of 2016

Print version 10.08.2016

Moscow, Russia – August 10, 2016 - Rostelecom PJSC (MOEX: RTKM, RTKMP; OTCQX: ROSYY), Russia’s national telecommunications operator, today announces its consolidated financial results for the second quarter and first half of 2016 prepared in accordance with IFRS ¹.

KEY ACHIEVEMENTS

• The digital segment’s ² contribution to total revenue reached 44%;
• Rostelecom accounted for more than a half of the new subscriptions achieved in the pay-TV market (59%) ³ and broadband market (63%) ⁴;
• Total fibre optic network coverage reached 31.7 million households by the end of the second quarter of 2016.

SECOND QUARTER 2016 FINANCIAL HIGHLIGHTS

• Revenue amounted to RUB 71.8 billion compared to RUB 72.1 billion in the second quarter of 2015;
• OIBDA ⁵ amounted to RUB 22.7 billion compared to RUB 25.4 billion in the second quarter of 2015;
• OIBDA margin of 31.6% compared to 35.1% in the second quarter of 2015;
• Net profit amounted to RUB 1.6 billion compared to RUB 6.1 billion in the second quarter of 2015;
• CAPEX ⁶ increased by 33% year-on-year to RUB 14.8 billion (20.6% of revenue) from RUB 11.1 billion (15.4% of revenue) in the second quarter of 2015;
• Free Cash Flow (FCF) ⁷ was RUB -5.7 billion compared to RUB 6.1 billion in the corresponding period of last year;
• Net debt ⁸ increased by 5% since the beginning of the year and amounted to RUB 182.5 billion, resulting in a Net Debt/OIBDA ratio of 1.9x.

Key figures for 2Q 2016

RUB million	2Q 2016	2Q 2015	% change, y-o-y
Revenue	71,794	72,130	(0.5%)
OIBDA	22,692	25,353	(10%)
OIBDA margin %	31.6%	35.1%
Operating Income	8,271	10,116	(18%)
Operating margin %	11.5%	14.0%
Net Income	1,601	6,129	(74%)
% of revenue	2.2%	8.5%
Capital Expenditure	14,804	11,119	33%
% of revenue	20.6%	15.4%
Net debt	182,533	168,207	9%
Net debt/ annualised OIBDA	1.9	1.7
FCF	(5,744)	6,065	-

FIRST HALF OF 2016 FINANCIAL HIGHLIGHTS

• Revenue grew by 0.3% to RUB 144.3 billion;
• OIBDA amounted to RUB 47.4 billion compared to RUB 49.8 in the first half of 2015;
• OIBDA margin of 32.8% compared to 34.7% in the first half of 2015;
• Net profit amounted to RUB 4.6 billion compared to RUB 8.2 in the first half of 2015;
• CAPEX increased by 23% year-on-year to RUB 33.8 billion (23.4% of revenue) from RUB 27.4 billion (19.1% of revenue) in the first half of 2015;
• Free Cash Flow (FCF) was RUB -8.2 billion compared to RUB 6.5 billion in the corresponding period of last year;

Key figures for the first half of 2016

RUB million	1H 2016	1H 2015	% change, y-o-y
Revenue	144,258	143,840	0.3%
OIBDA	47,362	49,846	(5%)
OIBDA margin %	32.8%	34.7%
Operating Income	16,773	19,384	(13%)
Operating margin %	11.6%	13.5%
Net Income	4,603	8,228	(44%)
% of revenue	3.2%	5.7%
Capital Expenditure	33,768	27,405	23%
% of revenue	23.4%	19.1%
Net debt	182,533	168,207	9%
Net debt/ annualised OIBDA	1.9	1.7
FCF	(8,171)	6,468	-

Sergei Kalugin, President of Rostelecom:

We continue to make progress on the development of our business in the second quarter of 2016, which provides stability despite the impact of lower interconnection and traffic transit demand on overall revenue growth.

The digital sector continued to display strong growth dynamics in the second quarter, as we built up our subscriber base in the broadband and pay-TV market and attracted more than half of all new subscribers coming to the market. As a result, we were able to strengthen our competitive position by increasing market share to deliver an 11% rise in income in the digital segment.

Two major events led to a RUB 2.7 bln reduction in OIBDA during the second quarter of 2016, including reduced funding for the "Bridging the Digital Divide" project (RUB 1 bln.), and a one-off increase in bad debt expense accruals (RUB 0.6 billion), mainly due changes to the technical ratio used to calculate bad debt reserve expenses.

Our shareholders continue to benefit from a progressive dividend policy, one that saw our June AGM approve the payment of a dividend that is more than 70% higher than our previous payout. This is a considerable achievement, and one that reflects Rostelecom’s focus on maximising shareholder value and improving its investment case. We are aiming to accomplish a great deal more operationally during the remainder of 2016, both in terms of improving internal efficiency and increasing revenues to ensure that shareholder remuneration remains in line with the current dividend policy.

Kai-Uwe Mehlhorn, Senior Vice-President and Chief Financial Officer:

The first half of 2016 saw an abnormally high level of investment activity, which contributed to our negative cash flow position, however this will be offset by a lower level of investment in the second half, with capital expenditure anticipated to be less than 19% of revenues, excluding the "Bridging the Digital Divide” project. Our operational and financial results for the second quarter are in line with our expectations and we reaffirm our guidance for 2016. Our revenues will grow by 1-2%. At the same time there is a possibility that the reimbursement terms agreed as part of the BDD contract will be placed under review. As it stands, we expect OIBDA to remain at the same level as seen in 2015, provided that the terms stipulated in the "Bridging the Digital Divide" project contract remain unchanged.”

KEY OPERATING HIGHLIGHTS

1. The number of broadband subscribers grew by 7% year-on-year to 12.0 million in 2Q 2016;
   • The B2C subscriber base grew by 7% to 11.2 million, whilst the number of subscribers connected by fibre optic increased by 21% year-on-year to 6.8 million (57% of the subscriber base).
2. The number of pay-TV subscribers grew by 9% year-on-year to 9.0 million households.
   • The number of IPTV subscribers increased by 29% to 3.9 million.
3. The number of local telephony subscribers decreased by 8% to 21.3 million.

Number of subscribers (million):	2Q 2016	2Q 2015	% change, y-o-y	1Q 2016	% change, y-o-y
Broadband	12.0	11.2	7%	11.9	1%
Residential	11.2	10.5	7%	11.1	1%
Corporate clients	0.7	0.7	2%	0.7	1%
Pay TV	9.0	8.2	9%	8.8	2%
Incl. IPTV	3.9	3.0	29%	3.7	5%
Local telephony services	21.3	23.2	(8%)	21.7	(2%)

Full press-release

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¹ International financial reporting standards.

² The digital segment comprises broadband, pay-TV, VPN, VAS and cloud services.

³ According to data by the analytical agency Telecom Daily

⁴ According to data by the analytical agency TMT-consulting

⁵ Here and below, please refer to Attachment 1 of this statement for a full definition of OIBDA.

⁶ Here and below, capital expenditure (“CAPEX”) comprises cash spent on fixed assets and intangible assets.

⁷ Here and below, FCF is calculated as free cash flow from operating activity minus CAPEX, plus proceeds from selling fixed assets and intangible assets

⁸ Here and below, Net Debt is calculated as total debt less cash, cash equivalents and short-term investments (other financial assets).