Golden Telecom reports a 53% year-on-year increase in revenues and 207% increase in net income
08 Nov 2007
3Q07 versus 3Q06:
53% year-on-year revenue growth
25% increase in operating income
38% increase in operating income (excluding cost of equity based compensation1)
207% increase in net income
211% increase in net income (excluding cost of equity based compensation1)
3Q07 versus 2Q07:
18% increase in revenues
6% decrease in operating income
6% increase in operating income (excluding cost of equity based compensation1)
130% increase in net income
142% increase in net income (excluding cost of equity based compensation1)
Key corporate events:
- First quarter with full consolidation of Corbina Telecom results
- Doubling the speed of our fiber-optic networks deployment (“Triple 65 Project”)
with construction works commenced in 24 cities
- 394,900 residential broadband subscribers of which 254,900 added in the first
ten months of the year, capturing 50% of incremental subscribers in Moscow
- Ongoing deployment of zonal networks in Russia. We are the largest zonal
operator in Russia with networks in 21 regions.
MOSCOW, Russia (November 8, 2007) — Golden Telecom, Inc. (“Golden Telecom” or the “Company”)
(NASDAQ: “GLDN”), a leading facilities-based provider of integrated telecommunications and Internet
services in major population centers throughout Russia and other countries of the Commonwealth of
Independent States (“CIS”), today announced its financial and operating results for the third quarter of 2007.
Commenting on today’s announcement, Jean-Pierre Vandromme, Chief Executive Officer of Golden Telecom,
said, “In the third quarter of 2007, Golden Telecom continued to demonstrate excellent financial performance.
Our revenues grew 53% year-on-year, with net income up 207% when compared to the third quarter of 2006.
Major corporate developments of this quarter include the following:
- We significantly sped up deployment of the metropolitan fiber-optic networks as part of our “Triple 65
project” announced previously. We increased our targets and started construction works in 24 cities. To
put this progress into perspective, according to some estimates, by 2010 the 25 countries of the EU
together with Iceland, Norway and Switzerland will have less than 10 million households passed by FTTx
technology, while Golden Telecom’s Fiber To The Building (“FTTB”) networks in Russia will connect at
least 15.6 million households;
- Overall, in the first ten months of 2007 we added more than 254,900 residential broadband customers. We
estimate that more than 50% of all new broadband customers in Moscow joined our networks. Throughout
Russia we have 394,900 broadband subscribers with the average blended ARPU at approximately $17, net
of VAT;
- The overall uptake of our broadband services by residential customers is 9% on average. In buildings that
are operational for more than two years, the take up rate is 28%, which demonstrates the strength of our
product offering based on superior technology compared to the incumbents;
- We continue deployment of our zonal networks in Russia. We are the largest zonal operator with presence
in 21 regions, home to more than 50 million people, where almost 55% of the total Russian long-distance
traffic is originated or terminated. Deployment of zonal networks results in significant cost of revenues
reduction;
- During the third quarter of 2007, 1.8 billion of billable long-distance minutes passed though our network.
We estimate that our market share of the long-distance traffic in Russia has reached 25%, well above our
2010 target of 20%.
We have made a substantial progress towards our goal of making Golden Telecom the leading fixed-line
communication operator in Russia and the CIS”.
FINANCIAL OVERVIEW
Financial performance
The table below illustrates the consolidated results for the third quarter of 2007 compared to previous periods.
(In Millions, Except Per Share Data)
|
3Q07 |
3Q06 |
y-o-y |
2Q07 |
q-o-q |
|
Consolidated revenues |
$350.4 |
$228.7 |
+53% |
$297.7 |
+18% |
|
EBITDA2 |
$85.1 |
$63.1 |
+35% |
$81.2 |
+5% |
|
EBITDA Margin |
24% |
28% |
- |
27% |
- |
|
EBITDA (without cost of EBC) |
$93.0 |
$65.4 |
+42% |
$83.3 |
+12% |
|
EBITDA Margin (without cost of EBC) |
27% |
29% |
- |
28% |
- |
|
Operating income |
$45.9 |
$36.7 |
+25% |
$48.8 |
-6% |
|
Operating margin |
13% |
16% |
- |
16% |
- |
|
Operating income (without cost of EBC) |
$53.8 |
$39.0 |
+38% |
$50.9 |
+6% |
|
Operating margin (without cost of EBC) |
15% |
17% |
- |
17% |
- |
|
Net income |
$74.4 |
$24.2 |
+207% |
$32.3 |
+130% |
|
Net income per share – basic |
$1.85 |
$0.66 |
+180% |
$0.85 |
+118% |
|
Net income (without cost of EBC) |
$81.9 |
$26.3 |
+211% |
$33.8 |
+142% |
|
Net income per share – basic (without cost of EBC) |
$2.04 |
$0.72 |
+183% |
$0.89 |
+129% |
Remarking on the third quarter 2007 results, Boris Svetlichny, Chief Financial Officer, noted:
- “The full consolidation of Corbina Telecom improved our financial performance in the third quarter.
Corbina demonstrated solid growth rates contributing approximately $30 million to our consolidated
revenues. We continue to work on the improvement of accounting, reporting and risk management
practices at Corbina Telecom bringing it in line with the standards of Golden Telecom;
- Our quarterly operating results were influenced by approximately $3.5 million in consulting and
professional fees incurred during the third quarter. The Company does not expect consulting and
professional fees at this level beyond 2007. The quarterly operating loss in our Consumer Internet line of
business increased by $1.1 million compared to the previous quarter due to accelerated build-out of our
FTTB networks;
- In July 2007, Golden Telecom divested its minority stake in MCT, a company operating mobile networks
in Uzbekistan, Tajikistan and Afghanistan. Without operational control over MCT, Golden Telecom was
not in a position to align business development strategies of the companies. Golden Telecom’s
approximately 23% stake in MCT was sold to TeliaSonera for a cash consideration of up to $48 million.
Golden Telecom’s investment in MCT had a carrying value of zero and consequently the full $41.3 million
consideration received so far is reflected in our third quarter results;
- We also received $20.4 million in cash from Rostelecom which exercised its non dilution rights under the
existing shareholders agreement and acquired 392,988 newly issued, but unregistered shares of Golden
Telecom’s common stock. The transaction closed on July 17, 2007;
- These two transactions added more than $61 million of cash and helped us to finance our ongoing projects,
including the ”Triple-65 project”, while maintaining a low debt level, with a Debt to Equity ratio of 0.21”.
Operational results per line of business
The following table presents our consolidated segment information for our various lines of business.
(In Millions)
|
Revenues: |
3Q07 |
3Q06 |
y-o-y |
2Q07 |
q-o-q |
|
Business and Corporate |
$190.9 |
$129.5 |
+47% |
$167.2 |
+14% |
|
Carrier and Operator |
129.2 |
85.5 |
+51% |
113.3 |
+14% |
|
Consumer Internet |
22.8 |
11.3 |
+102% |
13.5 |
+69% |
|
Mobile |
7.5 |
2.4 |
+213% |
3.7 |
+103% |
|
Total consolidated revenue |
$350.4 |
$228.7 |
+53% |
$297.7 |
+18% |
|
Operating Income: |
|
|
|
|
|
Business and Corporate |
$51.9 |
$35.5 |
+46% |
$47.5 |
+9% |
|
Carrier and Operator |
12.2 |
8.9 |
+37% |
12.1 |
+1% |
|
Consumer Internet |
(5.6) |
(2.7) |
-107% |
(4.5) |
-24% |
|
Mobile |
(0.7) |
0.2 |
-450% |
(0.3) |
-133% |
|
Corporate and Eliminations |
(11.9) |
(5.2) |
-129% |
(6.0) $48.8 |
-98% -6% |
|
Total consolidated operating income |
$45.9 |
$36.7 |
+25% |
|
The third quarter operating loss in the item “Corporate and Eliminations” reflects higher cost of equity based
compensation. In the third quarter of 2007 equity based compensation expense amounted to $7.9 million
compared to $2.1 million in the second quarter of 2007 or $2.3 million in the third quarter of 2006.
Business and Corporate Services
In Business and Corporate Services (“BCS”), the Company’s largest line of business, revenues, inclusive of
Corbina’s, increased by $61.4 million to $190.9 million in the third quarter of 2007 over the same period last
year and increased by $23.7 million over the second quarter of 2007.
Operating income in BCS increased by $16.4 million from $35.5 million in the third quarter 2006 to $51.9
million in the third quarter 2007, and increased by 9% from the second quarter 2007 to the third quarter of
2007.
During the third quarter Golden Telecom introduced the national “800” free phone numbers to its corporate
client base and quickly established a 15% market share in Russia only after a couple of weeks.
Golden Telecom continued its dominance in the high-end corporate and luxury hotel segment of the
telecommunication market in Moscow with the addition of the Ritz Carlton hotel which opened in July 2007.
Carrier and Operator Services
In the Carrier and Operator Services (“COS”) line of business, the third quarter revenues increased by $43.7
million over the same period last year to $129.2 million. When compared to the second quarter of 2007,
revenue improved by 14% from $113.3 million.
We estimate the total size of the long-distance market in Russia in 2007 at approximately 29 billion billable
minutes. In the third quarter of 2007, more than 1.8 billion minutes of long-distance traffic passed through our
networks, which represents a market share of approximately 25%.
COS operating income in the third quarter of 2007 was $12.2 million, which is $3.3 million more than in the
third quarter of 2006 and slightly higher than reported in the second quarter of 2007.
Consumer Internet
In line with our strategy, we continue to develop our retail broadband offering. Presently the Company’s
broadband customer base includes 394,900 subscribers of which more than 254,900 signed up during the first
ten months of 2007. Our policy is to recognize a broadband subscriber only if the subscriber paid for our
services in the last three months. The following table summarizes these results:
Golden Telecom Pro-Forma with Corbina Telecom
|
Golden Telecom |
Pro-Forma with Corbina Telecom |
|
Broadband access |
Dec 2005 |
Dec 2006 |
Presently |
Dec 2005 |
Dec 2006 |
Presently |
|
FTTB |
- |
- |
286,200 |
25,000 |
113,100 |
286,200 |
|
Wireless (WiFi) |
- |
- |
51,900 |
- |
- |
51,900 |
|
xDSL TOTAL SUBSCRIBERS |
14,600 14,600 |
26,900 26,900 |
56,800 394,900 |
14,600 39,600 |
26,900 140,000 |
56,800 394,900 |
Golden Telecom signed a number of co-marketing agreements with major global corporations such as
McDonalds and Starbucks to provide Golden WiFi internet access in their retail locations.
We continue to provide dial-up internet access in the areas where broadband is not available yet. The number
of dial-up customers has decreased significantly from 393,260 reported a year ago to approximately 233,983.
The Company expects that most of its dial-up customers will continue to migrate to broadband.
In the third quarter revenues from this line of business, inclusive of Corbina, increased by $11.5 million over
the same period last year. When compared to the second quarter of 2007, revenue improved by 69% from
$13.5 million to $22.8 million. The total operating loss in the third quarter of 2007 increased by $1.1 million
compared to the previous quarter due to accelerated build-out of our FTTB networks.
Mobile
During the third quarter of 2007, revenues were $7.5 million and the operating loss was $0.7 million. Corbina
plans to switch all of its DAMPS clients to GSM before the end of November 2007. For provision of services
to its customers, Corbina will be using the network of Vimpelcom. As a result, the revenue recognition for the
mobile services in Corbina is changing as we only recognize as our revenues the commission we receive from
Vimpelcom and not the amount customers pay for the service.
Consolidated revenue by geographic regions
We estimate that the fixed-line segment of the Russian telecom market will grow at 26% annually between
2006 and 2010 reaching $25 billion in nominal terms by 2010. The growth of the regional markets, estimated
at 25-35%, will outpace Moscow where the market grows at 10-15% annually.
In the third quarter of 2007, our revenues in Moscow grew by 66% compared to the same period last year. In
St. Petersburg and the Northwest region of Russia it grew by 52% year-on-year. Our market share here
increased to 15% from 11% reported a year ago. In other regions of Russia and the CIS our revenues grew by
26%. In the third quarter of 2007, 33% of total revenues came from outside of Moscow compared to 38% a
year ago. The results are summarized below:
(In Millions)
|
(In Millions) |
|
|
|
|
|
|
Revenue |
3Q07 |
3Q06 |
y-o-y |
2Q07 |
q-o-q |
|
Moscow |
$235.5 |
$142.2 |
+66% |
$191.8 |
+23% |
|
Regions |
114.9 |
86.5 |
+33% |
105.9 |
+8% |
|
Northwest region of Russia |
29.0 |
19.1 |
+52% |
26.8 |
+8% |
|
Ukraine |
28.1 |
21.5 |
+31% |
25.2 |
+12% |
|
Other regions of Russia and CIS |
57.8 |
45.9 |
+26% |
53.9 |
+7% |
|
TOTAL REVENUE |
$350.4 |
$228,7 |
+53% |
$297.7 |
+18% |
|
Moscow |
67% |
62% |
- |
64% |
- |
|
Regions |
33% |
38% |
- |
36% |
- |
|
TOTAL REVENUE |
$350.4 |
$228.7 |
+53% |
$297.7 |
+18% |
GOLDEN TELECOM’S BUSINESS OVERVIEW
Golden Telecom’s strategy
In late 2005, Golden Telecom embarked on a new strategy to transform the Company from a B2B niche player
into the leading communication services provider in Russia and the CIS. Our strategy is focused on:
1. Deepening and widening of our corporate customer base in Moscow and St. Petersburg;
2. Acceleration of our regional expansion to become a national market player;
3. Becoming a leading provider of broadband access in Russia and the CIS.
The results of the first nine months of 2007 clearly indicate that Golden Telecom is exceeding expectations in
implementing its strategy across all market segments.
Business market segment in Moscow and St. Petersburg
The top-end of the corporate market in Moscow and St. Petersburg was identified as the key segment for
Golden Telecom a number of years ago. The solutions created and offered to large corporate clients, including
major multinational corporations and Russian businesses trading with foreign partners, helped the Company to
create a solid foundation which included up-to-date fiber networks, skilled technicians and a savvy sales force
as well as product capabilities and a reputation for excellent levels of services.
As a result, in Moscow in the large corporate business segment (with monthly ARPU of $2,000 and higher) we
enjoy a high level of customer loyalty with a low churn level and an estimated market share in this segment at
43%, up from 34% reported a year ago. In St. Petersburg our market share in this segment increased to 24%
from 18% a year ago.
The acquisition of Corbina considerably increased our presence in the small and medium segment of the
corporate market in Moscow, increasing our market share in this segment from 15% to 18%. We will continue
to maintain two distinctive approaches to corporate customers, focusing on innovation, quality and customer
service in the large corporate segment; and promoting price and efficiency in the small and medium enterprises
(“SME”) segment.
Our business in Moscow also benefits greatly from ongoing regional expansion of our clients who continue to
invest in operations outside of Moscow. In helping our customers to establish and expand their presence in the
regions we not only deepen our client relationships but also capture incremental demand for communication
services in Moscow where our revenues grew at 66% when compared to the third quarter of 2006.
Regional expansion of B2C businesses in Russia and the CIS
Russia has experienced unprecedented economic growth in recent years. We estimate that between 2001 and
2007 the economy has been growing at approximately 26% annually if measured in nominal US dollar terms.
We are of the opinion that going forward the growth rates will decline slightly to approximately 20% per
annum mainly as a result of lower inflation.
In recent years the bulk of growth in Russia came from the domestic market driven by increasing disposable
income and unsatisfied demand for goods and services in the regions of Russia. Most of our clients who run
successful businesses in the B2C segment are expanding outside of Moscow establishing retail shops and
outlets, bank branches, hotels, restaurants and other retail franchises.
Our experience shows that the pattern of regional expansion for B2C business in Russia is as follows:
1. Going from Moscow into the Top-10 cities identified by size of the population or proximity to
Moscow;
2. Expansion from the Top-10 cities to the Top-50 driven by the local demand and logistics;
3. Further expansion into smaller cities and towns.
Most of our key clients are only approaching the end of the first stage. We cooperate closely helping them to
grow quickly and efficiently by providing the same level of communication services as we do in Moscow.
The infrastructure we deploy and operate in the Russian regions and throughout the CIS is technologically
superior to the existing telecom lines operated by the incumbents. Our set of licenses, including the longdistance
license, allows us to offer different products and services including corporate data networks, local and
long-distance voice services, internet, data and call centers. Our ability to offer the whole range of services to
all types of clients throughout the country is one of our definitive competitive advantages.
Golden Telecom, together with Corbina, has a technical presence in 314 locations of which 159 are in Russia,
148 in the CIS and 7 in other countries. Presently, Golden Telecom provides commercial services in more than
80 cities including 18 out of the 20 largest Russian cities, which represent approximately half of the total fixedline
telecom market in the country. In 14 of these cities the Company has a market share of 10% or higher. We
estimate that our combined market share in the Top-20 cities in Russia is approximately 17-18%. The size and
quality of our nation-wide network represent a significant barrier to entry for newcomers to the Russian
telecom market.
During the third quarter of 2007, 33% year-on-year growth of the Company’s revenues from markets outside
of Moscow demonstrated the effectiveness of our business development strategy. We believe that ongoing
expansion of B2C businesses in Russia will continue for the next 4-5 years, thus giving us a unique growth
opportunity.
Implementation of the broadband strategy
In order to meet the growing demand for broadband, Golden Telecom will construct FTTB networks in the
Top-65 cities of Russia and Ukraine with a combined population of 65 million people of which an estimated
65% live in high rise apartment blocks. The acquisition of Corbina Telecom was a pivotal step in our
broadband strategy. Corbina Telecom pioneered the construction of large scale metropolitan FTTB networks.
Golden Telecom together with Corbina Telecom started the deployment of fiber in 24 cities of Russia.
Normally, the commercial operations start 3 months after deployment of the network. This is a significant
increase from the initial business plan which foresaw fiber deployment in only 12 cities by the year end. Such
an increase in deployment pace is a result of the following factors:
- Corbina’s access to Golden Telecom’s resources including networks, technical and management expertise
and funding;
- Faster than expected licensing process. For the whole project we estimate that we require permissions for
approximately 16,000 individual construction projects. We have already secured permissions for all cities
where fiber deployment is scheduled for 2008. Once the permission is obtained, the construction works are
usually completed within six months;
- Significant acceleration of construction works by local branches of Golden Telecom fueled by the example
of Corbina.
Golden Telecom also provides broadband access to residential customers in the fast growing Moscow
broadband market using wireless WiFi technology. The GoldenWiFi network consists of more than 12,700
indoor and outdoor WiFi nodes. Golden WiFi won the Global Telecoms 2007 Innovation award in September
gaining global recognition for its service.
The status of the broadband strategy execution is presented below:
|
|
|
Moscow |
|
Outside of Moscow |
|
Total |
|
Network characteristics |
FTTB |
WiFi |
xDSL |
FTTB WiFi |
xDSL |
|
Buildings/WiFi nodes |
15,694 |
12,565 |
415 |
10,682 |
163 |
3,111 |
- |
|
Households passed |
2,142,105 |
753,900 |
- |
1,250,025 |
- |
- |
4,146,030 |
|
Broadband subscribers |
241,394 |
47,817 |
13,275 |
44,656 |
4,158 |
43,600 |
394,900 |
Note: Presently, WiFi outside of Moscow (St, Petersburg mainly) is installed only in ‘indoor’ areas.
As a result, our broadband market share in Moscow grew to 16% from 3% reported a year ago. We estimate
that Golden Telecom has approximately 8% of the total broadband market in Russia.
The Company launched IPTV service in trial mode using the infrastructure of Corbina. The IPTV technology
is based on a Microsoft platform and allows greater flexibility and interactivity enabling Video-on-Demand
(“VoD”), Pay-per-View and other value added services.
OUTLOOK FOR 2007 AND BEYOND
Our revenues are expected to grow in percentage terms in the high-40s. The EBITDA growth (without equity
based compensation expense), is expected at around 40%. We expect our revenues to grow in percentage terms
in the mid-30s during 2008 over those achieved for 2007. The growth in our EBITDA in 2008 over 2007,
without equity based compensation expense, is expected to be in the mid 40s in percentage terms.
We reiterate our guidance on CAPEX planning to spend approximately 20% of our revenues annually in the
next three years.
Forward-looking statements
Statements made in this press release are forward looking and are made pursuant to the safe harbor provisions
of the Securities Litigation Reform Act of 1995. Such statements include those on our broadband strategy
including fiber and FTTB rollouts and the expected number of customers, future costs for consulting services,
our future service offerings, the expected reach of our networks, our acquisition and regional expansion
strategies, macroeconomic factors in the markets in which we operate including market size, financial
forecasts, including expected revenue growth, expected capital expenditures, and market share estimates, plans
for Corbina to offer services over Vimpelcom’s network, our future use of cash, and future customer numbers.
It is important to note that such statements involve risks and uncertainties, which may cause outcomes to differ
materially from those set forth in these statements. Such risks and uncertainties include, but are not limited to,
that we are not able to develop our broadband networks as we anticipate, that we are not able to develop or
implement service offerings as we anticipate, that our networks and services do not reach the expected number
of customers, that we incur additional costs for consulting services, that we are not able to acquire companies
as anticipate, that we are not able to realize upon the synergies of acquisitions or integrate the acquired
companies well, that we are not able develop our regional expansion strategy as we anticipate, that
macroeconomic factors in the markets in which we operate change, that Corbina is not able to offer services
over Vimpelcom’s network, that our service offering will not be as competitive as those of our competitors,
and that our investment strategy does not bring the expected benefits or that we do not use our cash as we
currently anticipate. Additional information concerning factors that could cause results to differ materially
from those in the forward looking statements is contained in the Company's filings with the U.S. Securities and
Exchange Commission including the Company's current reports on Form 8-K filed during 2007, and the
Company's annual report on Form 10-K for the year ended December 31, 2006.
Non-GAAP Measures
In addition to the results reported in accordance with accounting principles generally accepted in the United
States (“GAAP”) included throughout this press release, the Company has provided information regarding
income from continuing operations, EBITDA, operating income, operating margins, net income and net
income per share, all without costs associated with SARs and Stock Options, which are non-GAAP financial
measures.
Management believes that the non-GAAP financial measures used in this press release are useful to both
management and investors in their analysis of the company’s financial position and results of operations.
Management uses EBITDA as the primary basis to evaluate the performance of each of its reportable
segments. Further, management uses EBITDA for planning and forecasting in future periods.
Management believes EBITDA is a meaningful measure of performance as it is commonly utilized by
investors to analyze operating performance and entity valuations. Management, the investment community
and the banking institutions routinely use EBITDA, together with other measures, to measure operating
performance in our industry.
EBITDA should not be considered a substitute for the reported results prepared in accordance with GAAP and
should not be considered as an alternative to net income as an indicator of our operating performance or to
cash flows as a measure of liquidity. These non-GAAP measures should not be considered as a substitute for
reported results prepared in accordance with GAAP. These non-GAAP financial measures, as determined and
presented by the Company, many not be comparable to related or similarly titled measures reported by other
companies.
Set forth in the following pages are attachments that reconcile these non-GAAP financial measures, if
applicable, to the most directly comparable financial measures calculated and presented in accordance with
GAAP.
|
