Operating & financial review

Our financial performance in 2014 reflects sustained growth in our key markets that allowed us to manage the structural changes caused by ongoing stagnation of fixed telephony. As a result, we demonstrated stable organic revenues growth from our core fixed-line segment. In 2014 the Company’s consolidated financial results were impacted by the transformation of Rostelecom business resulted from a demerger of our mobile assets into newly established JV with Tele2 Russia. Broadening our customer base in broadband and pay TV services and proactive development of new services were among key drivers supported our top line. Improved efficiency of operations, reduced leverage and significantly strengthened quality and coverage of our network enabled to increase financial stability of the Company.


When analysing the full-year 2014 results, it is important to consider the separation of results from continuing operations and discontinued operations (in accordance with IFRS 5) based on the creation of a joint venture (“JV”) with Tele2 Russia completed in August 2014.

The transfer of Rostelecom’s mobile assets to the JV with Tele2 Russia had the following impact on the Company’s consolidated results:

  • The consolidated results for the full year 2014 include the operating results of the Company’s mobile subsidiaries for the first three months of 2014 (January-March), and CJSC RT-Mobile results for the first seven months of the year (January-July);
  • In the third quarter of 2014 after the deal with Tele2 Russia was completed, Rostelecom received a one-off gain of RUB 22 billion reflecting fair valuation of investments into the JV.


  • Revenue, OIBDA margin and CAPEX were in line with management guidance for 2014;
  • Revenue from continuing operations grew by 3% year-on-year to RUB 298.9 billion;
  • OIBDA amounted to RUB 102.5 billion compared to RUB 104.1 billion in 2013;
  • OIBDA margin of 34.3% compared to 35.8% in 2013;
  • Capital expenditure of RUB 53.8 billion (18.0% of revenue), a 2% year-on-year increase (CAPEX represented 18.2% of revenue in 2013);
  • FCF increased by 27% year-on-year to RUB 21.9 billion;
  • Net debt reduction of 18% year-on-year to RUB 171.1 billion;
  • Net income of RUB 13.2 billion compared to RUB 26.7 billion in 2013, due mainly to the paper revaluation of financial instruments and goodwill revaluation in 2014, as well as the high base effect in 2013, linked to the deconsolidation of JSC GlobalTel; whereas consolidated net income rose by 57% to RUB 37.8 billion.

FY2014 Financial summary

  FY 2014 FY 2013  YoY change (continuing operations)YoY change (consolidated results)
RUB million From continuing operations Effect from discontinued operations Consolidated results (Total) From continuing operations Effect from discontinued operations Consolidated results (Total)
Revenue 298,937 11,980 310,917 290,736 34,968 325,704 3% (5%)
OIBDA 102,467 2,909 105,376 104,148 9,134 113,282 (2%) (7%)
OIBDA margin, % 34.3% - 33.9% 35.8% - 34.8%    
Operating income 39,994 2,897 42,891 45,234 (366) 44,868 (12%) (4%)
Operating margin, % 13.4% - 13.8% 15.6% - 13.8%    
Net income 13,182 24,625 37,807 26,686 (2,555) 24,131 (51%) 57%
% of revenue 4.4% - 12.2% 9.2% - 7.4%    
Capital expenditure 53,810 3,856 57,666 52,894 15,593 68,487 2% (16%)
% of revenue 18.0% - 18.5% 18.2% - 21.0%    
Net debt 171,135 0 171,135 207,884 9,426 217,310 (18%) (21%)
Net debt/annualized OIBDA ratio 1.7 - 1.6 2.0 - 1.9    


  • The number of broadband subscribers grew 6% year-on-year to 11.2 million subscribers;
    • The B2C subscriber base grew by 7% to 10.5 million, while the number of subscribers connected by fibre optic increased by 29% year-on-year to 5.2 million (46% of the subscriber base).
  • The number of pay TV subscribers grew by 6% year-on-year to 8.0 million;
    • The number of IPTV subscribers increased by 24% to 2.7 million.
  • The number of local telephony subscribers decreased by 8% year-on-year to 24.4 million as a result of changes in end-users’ preferences in how telephone calls are made and the migration of the corresponding traffic to mobile and VoIP operators’ networks.
  • Mobile subscriber base dynamics can be attributed to the deconsolidation of mobile assets following the completion of the deal to create a JV with Tele2 Russia.

FY2014 Operating summary

Number of subscribers (million) 2014 2013 % change, y-o-y
Broadband Internet 11.2 10.6 6%
     Residential 10.5 9.8 7%
     Corporate clients 0.7 0.7 2%
Pay TV 8.0 7.5 6%
     IPTV 2.7 2.2 24%
Local telephony services 24.4 26.5 (8%)
Mobile communication services 0.0 14.8 -


The Company reported a 3% y-o-y increase in revenue from continuing operations to RUB 298.9 billion in 2014 (the consolidated revenue decreased by 5%). This was influenced by the following:

  • 8%, or RUB 4.5 billion, growth from broadband services and 21%, or RUB 2.5 billion, growth from pay TV services due to an increased subscriber base;
  • 11%, or RUB 2.9 billion, from interconnection and traffic transit services (additional volumes from other operators to Rostelecom’s networks);
  • an increase in other revenues due to the switching to selling rather than leasing out customer-premises equipment, with additional income generated from video surveillance projects and proceeds generated from renting out company infrastructure

The revenue growth was partially offset by a decline in revenues from Local, DLD/ILD and Intra-zone telephony services, which primarily reflected on-going changes in usage patterns for traditional fixed-line services.

Revenue (RUB billion)

Revenue from mobile services in 2014 decreased due to the deconsolidation of our mobile subsidiaries, which were transferred to the JV with Tele2 Russia.

Revenue structure by services

RUB million 2014 2013 % change, y-o-y
Local telephony services 80,528 87,323 (8%)
Intra-zone telephony services 14,669 17,128 (14%)
DLD/ILD telephony services 14,561 17,100 (15%)
Interconnection and traffic transit services 29,344 26,450 11%
Broadband Internet 60,364 55,867 8%
Pay TV 14,458 11,927 21%
Data services (VPN, wholesale Internet) 24,399 22,661 8%
Rent of channels 11,761 11,093 6%
Other revenue 48,853 41,187 19%
Total revenue from continuing operations 298,937 290,736 3%
Effect of discontinued operations 11,980 34,968 -
Mobile services 13,991 39,195 -
Other (2,010) (4,227) -
Total consolidated revenue 310,917 325,704 (5%)

Revenue structure by customer segments

RUB million 2014 2013 % change, y-o-y
Residential customers 136,345 136,665 0%
Corporate customers 71,662 71,141 1%
Governmental customers 48,804 45,336 8%
Operators 42,126 37,594 12%
Total revenues from continuing operations 298,937 290,736 3%
Effect from discontinuing operations 11,980 34,968 -
Total consolidated revenue 310,917 325,704 -5%


Operating expenses structure (excluding amortization)

RUB million 2014 2013 % change, y-o-y
Personnel costs (89,929) (85,798) 5%
Interconnection charges (47,429) (42,420) 12%
Materials, repairs and maintenance, utilities (25,828) (26,260) (2%)
Other operating income 12,950 15,228 (15%)
Other operating expenses (48,084) (47,338) 2%
Total operating expenses from continuing operations (198,320) (186,588) 6%
Effect of discontinued operations (9,071) (25,834) -
Total consolidated operating expenses (207,391) (212,422) (2%)

Operating expenses excluding depreciation and amortisation for the full year 2014 rose by 6% year-on-year to RUB 198.3 billion, due to the following:

  • An increase in interconnection charges, accompanied by a rise in the corresponding revenues;
  • An increase in personnel costs due to accruals related to management’s long-term incentive program, approved in March 2014 as well as the insourcing of some functions; and
  • A decrease in other operating incomes due to one-off bonuses from equipment suppliers received in 2013.

The Company’s operating income fell by 12% year-on-year to RUB 40.0 billion in 2014.

Depreciation and amortisation expenses increased by 3% year-on-year to RUB 60.6 billion for the full year of 2014. This was largely due to the recognition of a goodwill impairment loss, caused by a review of long-term forecasts for a number of subsidiaries. This was mainly a result of an increased discount rate due to the unfavourable economic conditions and adverse situation in the financial markets.

In 2014, OIBDA totalled RUB 102.5 billion compared to RUB 104.1 billion in 2013 resulting in the OIBDA margin of 34.3%. OIBDA was mainly impacted by:

  • The increased presence of the growing, but lower margin, broadband and pay TV segments in the revenue structure;
  • The lagged impact of initiatives taken by management to optimise operating expenses are having on the Company’s financial results.

Above any other event, the deconsolidation of Rostelecom’s mobile subsidiaries, which were transferred to the JV with Tele2 Russia, following the completion of the first and second stages of the deal, had the most influence on operating expense, OIBDA and operating income dynamics in 2014.

Consolidated OIBDA (RUB billion)
& OIBDA margin (%)

Fixed-line OIBDA (RUB billion)
& OIBDA margin (%)


In 2014 profit before tax from continuing operations decreased by 42% year-on-year to RUB 20.4 billion. This was mainly due to:

  • a paper loss due to the revaluation of financial instruments;
  • a decrease in operating income, including the recognition of an impairment loss due to the revaluation of goodwill.

In 2014, income tax contributions decreased by 14% year-on-year and totalled RUB 7.2 billion, largely reflecting the changes in profit before income tax. The effective income tax rate was 35% for the full year, compared to the 20% rate specified by the Tax Code. The higher effective tax rate in 2014 resulted from a future tax rate increase on dividends from 9% to 13% on the legislative level, which is applied to income received from investing in associated companies, as well as was a result of expenses which were not deductible for tax purposes.

Net profit from continuing operations for 2014 amounted to RUB 13.2 compared to RUB 26.7 billion in 2013.

The Group’s consolidated net profit rose by 57% year-on-year to RUB 37.8 billion for the full year of 2014, reflecting a one-off gain from the completion of the deal with Tele2 Russia.

Consolidated Net Income (RUB billion) & Net Income margin (%)

Fixed-line Net Income (RUB billion)
& Net Income margin (%)


Consolidated net operating cash flow decreased by 7% year-on-year to RUB 79.5 billion in 2014. Consolidated free cash flow grew by 27% year-on-year to RUB 21.9 billion. The increased FCF level together with higher construction volumes is a result of proactive approach to procurement efficiency and investment program optimisation.

Net cash used in investing activities amounted to RUB (21.1) billion. This was largely due to the receipt of funds from closing the first stage of the deal to create a JV with Tele2 Russia (due to the repayment of intra-group debt of subsidiary companies which was transferred to the JV). Consolidated cash outflow in investments to non-current assets fell by 1% year-on-year in the fourth quarter of 2014 to RUB 21.5 billion, and decreased by 16% year-on-year to RUB 57.7 billion in 2014. The investment dynamics were partly affected by management’s policy of improving the effectiveness of investment activities, including optimising tender procedures and relationships with suppliers.

The changes in net cash received from financing activities related to decreased volumes of mandatory share buybacks in 2014 compared to 2013.

Free Cash Flow (RUB billion)


At the end of 2014, the Group’s total debt decreased by 17% and amounted to RUB 190.0 billion, which was partly due to the transfer of some debt to the JV with Tele2 Russia, as well as the repayment of a number of loans. More than 99% of the Group’s total debt was rouble-denominated as at December 31, 2014. As at December 31, 2014, the Group’s consolidated net debt amounted to RUB 171.1 billion with a net debt/ OIBDA ratio of 1.6x.

Total debt structure as at December 31, 2014 (by rate, by currency)

Total debt by maturity as at December 31, 2014 (excl. interest payments), %

My Annual Report

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