Rostelecom announces its IFRS financial and operating results for the first quarter of 2020

Revenue growth of 10%; 12% increase in OIBDA[1]; mobile revenue up 16%

Moscow, Russia – May 19, 2020 - Rostelecom PJSC (MOEX: RTKM, RTKMP; OTCQX: ROSYY), the largest digital integrated service provider in Russia, today announces its consolidated financial results for the first quarter of 2020 prepared in accordance with IFRS[2], with an overview also provided on how on the Company has responded to the COVID-19 pandemic, and what impact it is having on the business.

In accordance with the accounting policy of the Group, the acquisition of Tele2 Russia has been recognized as a business combination under common control. According to this method the merger of businesses arising from a transfer of entity stakes under common control of the Group’s shareholders, is presented as if the merger took place in the earliest period of the statements, or, if later, effective from the date that common control was put into effect; for this purpose comparatives are revised. Rostelecom’s consolidated financial statements for 2019 have therefore been revised to incorporate Tele2 Russia’s performance as if the acquisition had been completed on 1 January 2019.

COVID-19

The unprecedented situation caused by the COVID-19 (coronavirus) pandemic has created a dynamic and intense environment for people and organizations around the world, including Rostelecom’s employees and clients. Amid constraints around physical movement, the stability of ICT infrastructure and the prevalence of digitalization are playing an increasingly important role. As a company of strategic importance to the Russian Federation, it is essential that Rostelecom continues to provide reliable services to support the Russian economy, millions of Russian families that require our infrastructure as well as a significant number of organizations across the country.

To ensure business continuity and to enable Rostelecom to navigate the impact of COVID-19, Rostelecom has taken the following actions.

• Protecting employees
  • Starting from March 16, 2020, a work from home policy has been implemented to limit the majority of office employees’ exposure to the virus without compromising their ability to remain connected, productive and to work securely. This has required adding extra capacity and technology equipment to permit a large-scale transition. To date, around 60,000 employees have been working from home. All staff have been provided with remote access to their workplaces, corporate mail, IT systems and smart solutions for audio and video conferencing. IT infrastructure has been re-organized, partially based on the Company’s internal network and owned programmes such as Tionix Virtual Desktop (VDI), located in Rostelecom’s data centers.
  • On-site staff responsible for the continuity of business processes and front-line employees have been provided with sets of personal protective equipment, including masks, gloves and sanitizers.
  • Continuous monitoring systems have been put in place to ensure occupational safety and to protect the health protection of our people and their families.
  • A permanent remote working policy is under development for after the Covid-19 pandemic. The initiative will generate more attractive working conditions for staff and allow significant cost savings on office rent and maintenance going forward.
• Ensuring business resilience
  • Complex organizational and technical measures have been developed to ensure that national telecommunications infrastructure remains resilient. The investment programme has been recalibrated to support priority projects, such as improving the strength and capacity of networks and IT infrastructure in response to pent-up demand in consumer broadband caused by self-isolation restrictions. Going forward, this will provide a strong buffer for the increase in client base and traffic.
  • Internal business processes have been transformed to accelerate the digitalisation of operations, including the shift to electronic signatures and paperless operations.
  • Rostelecom’s crisis action planning and response was formulated on the basis of a set of COVID-19 scenarios that reflect economic developments and impact on all client groups, including businesses, individual customers and state clients. The forecasted reduction in economic activity across a number of business streams, including SMEs, complimentary services for people and certain state projects might have certain impact on Rostelecom’s business growth. At the same time, this potential negative effect will be counterbalanced by the anticipated significant growth in B2B and B2G demand for digital solutions for remote working, online learning and other services.
  • These forward-looking scenario planning models currently assume no job cuts thanks to the optimization of OpEx and the deferral of other non-critical investment projects.
  • In the current environment, the management team has been focusing on the Company’s performance, ensuring that it maintains a reasonable level of debt and ensuing that it is able to meet it dividend commitments as stated in the Company’s dividend policy.
  • The Company will present revised guidance under the new perimeter of consolidation over the coming reporting periods, as the industry is still experiencing a high level of uncertainty regarding self-isolation, the scope of government aid provided to households and industries hit by the pandemic and the its macro-economic implications.
• Supporting clients
  Rostelecom has adapted its product line to respond to the pandemic, ensuring that it remains a strategic and reliable digital partner to its key client audiences.
  • for SMEs Rostelecom:
    • lifted the blocking of certain services with zero account
    • added 100 extra minutes of mobile connectivity and 10Gb of Internet capacity for existing clients
    • introduced a 60-day test period for mobile and virtual telephony for new clients.
  • Rostelecom also developed a set of services for remote working for large clients, including:
    1. access to public and corporate resources based on broadband, VPN and virtual data;
    2. reliable and seamless connection based on Hosted PBX, 8-800 toll free numbers and mobile services; and
    3. remote control and information security services.
  • A brand-new heat-detection solution was introduced based on thermal imaging cameras and software that can be integrated with any corporate system. The service has been introduced by a number of companies, including ALROSA;
  • A new “Dedicated virtual conference room” product was developed that provides companies with the possibility to roll out an owned virtual server with all the software required for their needs;
  • Audio and video conferencing capacity was more than doubled;
  • The “Rostelecom Liceum” digital service was commissioned and developed for primary school students. The service is available for RUB 1 across all Russian regions providing access to two platforms “School” and “Development”;
  • Rostelecom started to support the public COVID-19 information contact centre стопкоронавирус.рф, which provides guidance to support people during the coronavirus pandemic;
  • Free access to five best culture and art TV channels was provided and a collection of more than 5000 national and international movies, series, kids, entertainment and educational content on the digital platform Wink;
  • maximum Internet speed capacity was increased for those who work and study from home;
  • for Tele2 Russia mobile clients:
    • Hotline traffic limits were reset and access was provided to the public COVID-19 information contact centre стопкоронавирус.рф;
    • provided free access to messengers to those stranded abroad;
    • Extra data added to the data plans of those following guidelines around self-isolation.

Key achievements

• Revenue grew by 10% year-on-year;
• Mobile services grew by 16% year-on-year;
• Sales in digital services increased by 63% year-on-year;
• OIBDA grew by 12%;
• Free Cash Flow (FCF)[3] improved more than twofold.

First quarter 2020 financial highlights

• Revenue grew by 10% to RUB 121.6 billion;
• OIBDA up by 12% to RUB 47.1 billion;
• OIBDA margin grew by 0.7 p.p. to 38.7%;
• Net profit increased by 1% to RUB 7.7 billion;
• CAPEX[4] excluding state programmes decreased by 15% to RUB 22.0 billion (18.1% of revenue) compared to 1Q 2019;
• Free Cash Flow (FCF) improved more than twofold to RUB (5.9) billion; and
• Net debt[5] increased by 18% since the beginning of the year to RUB 392.8 billion, resulting in a Net Debt/OIBDA ratio of 2.2x.

Key figures for 1Q 2020, RUB mln

Mikhail Oseevskiy, President of Rostelecom:

"Rostelecom Group's consolidated results for the first quarter of this year reflect the first contribution from the full integration of Tele2 Russia. Together, we have managed to increase revenue and OIBDA by 10% and 13% respectively. We are also seeing continuous growth in net income and have increased FCF more than twofold. The main goals of consolidating 100% of Tele2 Russia into Rostelecom are already being realized and we are getting closer to creating Russia’s largest integrated provider of digital services, capable of significantly improving financial performance, strengthening and consolidating our leading position in the Russian telecommunications, IT and other high-tech industries. The management greatly appreciates the contribution of the most rapidly growing mobile operator in the world[6] to the group’s overall performance. Prospects for its continuing success and development are also good.

Despite the strong results generated by the first months of our new integrated business by the end of the first quarter, like the majority of companies around the world, we are facing unprecedented challenges associated with the Covid-19 pandemic. At the same time, as a modern high-tech company, which has undergone a huge path of digital transformation, the transition to remote working wasn’t challenging for us. We have invested heavily to ensure that employees whose tasks are unable to be carried out remotely, such as ensuring that our network infrastructure and vital facilities are running smoothly, are able to do so safely.

In addition to securing the safety of all employees, the Company's main goal has been to help clients adapt to a new reality by providing them with convenient digital solutions that enable them to quickly restructure their operations. This has enabled the work of state and corporate clients to continue operating on-line with minimal interruption. We have quickly adjusted to the needs of all types of customers, offering them service packages that meet the challenges of this new paradigm.

Today, humanity is going through perhaps one of the most difficult periods in its new history, and a long period of recovery is ahead of us. Together, we are capable of making it through the challenging times ahead. As a provider of digital solutions, we will make this time for our customers less painful. We will minimise the impact of the crisis and will help unleash their potential, reframed against the context of the new realities of our market. Together, we will come out of the crisis stronger with greater efficiency and resilience.

Crisis is a time of great change and opportunity. My colleagues and I on the Rostelecom management team see prospects for further long-term growth for the Company. Changes in lifestyles and business approaches, associated with the need for a rapid and mass transition of people to online communication and offline remote work, will strengthen the role of telecommunications and IT companies in the economy. This trend gives added impetus to the development of technologies and communication networks. Data processing and storage infrastructure also gains importance to help absorb an avalanche of traffic while providing sufficient bandwidth, network stability, and most importantly - to provide a wide range of popular digital services to the population, business, the State."

Vladimir Kirienko, First Vice-President of Rostelecom:

"We had a good start to the year, supported by the expansion of the digital segment and the success of Tele2 Russia's mobile business. The beginning of spring was a time of serious testing and intensive work to support clients during a period of reconfiguration of their daily lives and business processes due to the spread of Covid-19. In response to the pandemic, Rostelecom offered clients a special package of services to help them operate without any interruption. These are proven and effective solutions that enable business processes to continue in the new environment. Rostelecom's range of remote access solutions and information resources includes Internet access services, virtual private networks (VPNs) and secure remote access solutions. These are accompanied by virtual data center services, and DDoS attacks mitigation.

One of many initiatives to have been well received includes unique intelligent systems that provide high-precision remote monitoring of people's body temperature using thermal imaging. This service will be in high demand after the pandemic is over. We are introducing this service turnkey, and it has already been purchased by a number of large enterprises, including Alrosa, one of the leaders in the world diamond mining industry. We have also delivered digital services to retail customers, specifically to citizens who face the challenges presented by self-isolation. These customers require highly reliable Internet connectivity, dependable mobile and fixed communications to enable them to pursue online learning, self-development and obtain critical public services remotely. As a socially responsible company, during the pandemic, Rostelecom has provided free access to a large library of content, increased connection speeds as much as possible, and granted deferrals of payments. Our digital solutions enable us to help citizens, businesses and the State to function despite the challenges presented by the spread of coronavirus infection.

The self-isolation regime is forcing people and business to function digitally. As a conduit for such solutions, Rostelecom is ready to help clients transition operations after the pandemic is over to ensure that online activity is convenient, efficient and uninterrupted when it is needed the most."

Sergey Anokhin, Senior Vice President and Chief Financial Officer:

"The opening months of 2020 delivered strong financial results and a good backlog of business for the rest of the year. In response to the pandemic, the company has developed several scenarios when it comes to how we will respond to the developing situation in the economy, how the corporate economic activity may vary, and what the population and state institutions will require. An action programme for each of the scenarios has been adopted. We are expecting a decline in economic activity in a number of areas, which may cause growth in Rostelecom's business to slow. At the same time, we are also seeing a significant increase in the demand for digital services and solutions relating to the digitalization of infrastructure from large corporations, as well as the introduction of digital solutions for remote working and learning. Demand is coming from both the public and private sectors, opening up additional opportunities and growth triggers for Rostelecom. But we also see a high level of uncertainty regarding on-going self-isolation, the scope of government aid to the households and industries hit by the crises and how macro indicators are going to develop. Taking account of these factors, Rostelecom will update the market on the guidance under the new perimeter of consolidation in the coming reporting periods. To ensure business processes remain in continuity and financial stability, Rostelecom has digitalized its interaction with financial partners. This has enabled us to mitigate the impact of the outbreak on our plans to attract financing, seal leasing deals, and use the full range of other financial instruments available on the market. To ensure our resilience in the new environment, we have adapted the ways we analyze and report on liquidity monitoring and forecast, inventories and supply chains management and financial controls across all business units. The above mentioned measures, along with the promotion of paperless operations and introduction of digital signature both internally within the Group and externally with clients and counterparties, has ensured the seamless shift to the new reality without losing pace and compromising our business development plans.”

Key operating highlights

Fixed-line business

Mobile business

1. The total number of Internet subscribers among households grew by 1% to 12.2 million in the first quarter of 2020 compared to the corresponding period of last year; ARPU was RUB 397.
2. The total number of B2B Internet and VPN subscribers increased by 6% year-on-year to 1.1 million; ARPU grew by 3% year-on-year to RUB 3,368.
3. The number of pay-TV subscribers grew by 3% to 10.5 million households compared to the corresponding period of last year with ARPU of RUB 257, up 3% year-on-year;
   • The number of IPTV subscribers increased by 6% to 5.7 million with ARPU of RUB 319.
4. The number of active mobile users grew by 36.1% year-on-year while mobile data traffic jumped by 69%; at the same time churn of cellular customer base decreased by 0.7pp to 8.6%.
5. The number of local telephony subscribers decreased by 10% to 15.3 million.

Press release on 1q 2020 financial results