Letter from the President

Dear Shareholders,

2014 was the first 12 months of our updated strategy, which is transforming Rostelecom into a high-technology service provider.

Despite the challenging economic environment faced by many companies across all industries, the facts and figures show that the management team is fulfilling its obligations and we are meeting our key performance targets by consistently implementing our vision and strategy for the business.

Our results for 2014 show that we slightly exceeded market expectations and we have fully fulfilled our outlook for key financial indicators:

  • Annual revenue in the fixed segment rose by nearly 3% - reduced income from telephones were compensated by revenue growth in digital services, particularly fibre optic broadband and IPTV;
  • OIBDA margin in the fixed business stood at 34.3%;
  • Annual consolidated net profit grew by 57%;
  • The debt burden fell by 18% and is at a comfortable level for the Company.

The early completion of our deal to establish a joint venture with Tele2 Russia has also had a positive impact on our financial results. We continue to develop the mobile business together with our strategic partners, which enables us to focus on our core fixed business and manage our resources more effectively.

I would also like to stress the progress Rostelecom has made with regard to improving client service, a significant point of pressure for any service company. We have done so by successfully implementing a strategic project to develop an integrated call centre. As a result, the number of repeat calls to third line support halved over the last year, with customers’ issues being solved three times more quickly at second line support. In addition, the share of trouble tickets handled by technical support without needing to make on-site visits has doubled. We have caught up with our competitors in practically all areas of customer service and in some cases we are outperforming them. This is our main qualitative shift.

Our customer experience and the level of service we provide correlates directly with the quality of our network, which is why modernising our infrastructure is one of our main areas of focus. In 2014, we provided an additional 6.6 million households with access to fibre optic networks, taking the total number of customers connected to fibre optic up to 25 million. We now have a solid technical foundation to continue to develop our business for many years to come. The project we are implementing to eliminate the digital divide, which involves laying more than 200,000 kilometres of fibre optic lines to serve 13,800 remote settlements in Russia, is providing additional impetus to the development of our technological advantage.

Our packaged services are also growing in popularity as we seek to better address the needs of our customers. Rostelecom has widened its product portfolio and is offering its customers new products, including Russia’s first national TriplePlay promotion and the Multiscreen service.

In addition to growing our top-line, broadening our technical expertise and improving customer experience, we also had to actively improve the efficiency of our business in 2014. By improving our procurement policy, we managed to achieve savings of RUB 16.8 billion last year. We are also working on streamlining our organisational structure. Some departments are being consolidated to reduce the layers of management in the business and to increase all departments’ responsibility for their net result, with a segmented approach also being introduced to improve commercial performance. This new structure will reduce administrative and managerial staff by up to 15%, which will enable Rostelecom to save a further RUB 4 billion per year.

The high level of service Rostelecom provided during the Sochi 2014 Winter Olympics as its General Telecommunications Partner led to the Company being awarded new state contracts, including video surveillance projects for the Unified State Exam and regional elections. Rostelecom also signed a RUB 168 billion ten-year contract with the Federal Communications Agency (Rossvyaz) to provide universal communications services aimed at bridging the digital gap.

Last, but certainly by no means least, Rostelecom has also devoted time and resource to strengthen its position in fast-growing market segments, which is an important part of our vision to transform Rostelecom into a high-technology service provider. At the end of 2014, we formed a partnership with the All-Russia State Television and Radio Broadcasting Company (VGTRK) to produce and distribute pay-TV channels. At the start of 2015, we also completed a deal to acquire a controlling stake in SafeData Group, which strengthens Rostelecom’s presence in the data storage and processing, traffic exchange service and content delivery markets.

In addition to the activities the Company is already working on, Rostelecom will face new issues and challenges in 2015, particularly those related to the macroeconomic situation. However, the main challenge we have to contend with in 2015 is how to make our business much more effective and to meet the targets we set in our strategy in order to create additional value for our shareholders.

Yours sincerely,
Sergey Kalugin

My Annual Report

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