Rostelecom seeks mobile momentum with 3G and LTE

Rostelecom has commercially launched 3G networks in 21 Russian regions alongside one LTE network in Sochi, and said it is making good progress toward establishing future growth areas for the company.

In its statement for the first half and second quarter of 2013, when it reported higher profits than expected for the second quarter, the Russian state-run operator did not comment on previous reports that it plans to set up a separate management unit to drive mobile growth, or use its 450 MHz network for LTE. However, the operator said it believes it now "has the ingredients in place" to achieve sustainable growth in future.

The operator will certainly face stiff competition on the Russian mobile market, with rivals MTS, MegaFon and VimpelCom all pushing ahead with their own mobile data strategies, including LTE.

"2013 is a transitional year for the company, and according to our forecasts, we will see slight revenue growth by the year-end, with margins expected in the range of 36-39 per cent," CFO Kai-Uwe Mehlhorn said in a statement. "We are now establishing areas of future growth, but it will take some time before this growth is realised."

Mobile services will clearly be a future focus for the operator, alongside its fixed broadband and pay-TV base: "Due to the relatively recent launch of our 3G networks, penetration among our subscribers for mobile data services is still at a low level, and revenue from data services is limited," added Mehlhorn, who also noted that "management initiatives have already begun to have a positive effect on the business."

The company said it increased the number of its mobile subscribers by 2 per cent to 13.8 million in the second quarter compared to the year ago period, although revenue from mobile communications services was down by 5 per cent at 9.939 billion rubles (€225 million or $300 million).

In terms of its overall results, Rostelecom reported lower profit in the second quarter of 2013 due to the cost of launching the 3G networks and increased provision for bad debts, but was able to beat analysts' forecasts. Net profit fell by 3 per cent year-over-year to €165 million in the second quarter, or by 31 per cent to €310 million in the first six months.

Rostelecom also cut spending by two thirds to €159 million while net debt fell 7 per cent to €4 billion.

"Profit came higher than expected as the company slowed down capital spending and thereby cut financial costs," Alexander Vengranovich, an analyst at Otkritie Capital in Moscow, told Bloomberg. "What matters more is how Rostelecom will expand in mobile."

Reuters noted that the second-quarter net profit result beat an analysts' forecast of €143 million. Revenue increased by 1 per cent to 77 billion rubles €1.7 billion in the second quarter, but was 5 per cent down year-over-year in the first six months at €3.5 billion.

"There is a great deal of work to do in improving financial results of the company, but we are pleased with the early progress we are making. The company's reorganisation is almost completed," Rostelecom President Sergey Kalugin said in a statement. "We are finalising the details of our strategy, which will be submitted to the board, and it will focus on accelerating the upgrade of our network infrastructure, improving customer experience and developing products that will distinguish Rostelecom from competition and deliver sustainable growth--Rostelecom now certainly has the ingredients in place to deliver this."

For more:
- see this Rostelecom statement
- see this Reuters article
- see this Bloomberg article

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