Svyazinvest: New Growth Opportunities

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Svyazinvest New Growth Opportunities
Deputy General Director of OAO Svyazinvest
K.V.Belyaev June, 2005
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Svyazinvest new growth opportunities
I. OAO Svyazinvest in the telecommunications
sector
II. VAS development
III. Corporate reform and business optimization
IV. Natural monopoly status and tariff regulation
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JSC Svyazinvest group structure

• Company history
• Svyazinvest foundation 18 September, 1995
• Sale of a 25 1 share stake to Mustcom July
  1997
• Regional consolidation of companies 72
  regional telecom operators were merged into 7
  mega-regionals in 2000-2002

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Svyazinvest Companies Geography
JSC CenterTelecom 6.2 m lines in service market
cap 813 mn
JSC Uralsvyazinform 3.8 m lines in service
market cap 1,568 mn
JSC North West Telecom 3.6 m lines in service
market cap 688 mn
JSC South Telecom 3.8 m lines in service market
cap 444 mn
JSC Dalsvyaz 1.2 m lines in service market cap
171 mn
JSC Sibirtelecom 3.8 m lines in service market
cap 995 mn
JSC VolgaTelecom 4.3 m lines in service market
cap 1,274 mn
JSC Rostelecom extensive backbone network covers
virtually all Russias territory. Its total
length approaches 200,000 km. The companys
market capitalization stands at 1,963 mn
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Svyazinvest major economic indicators, 2004
Revenue and operating expense
Operating income
7.6
6.4
USD, bn
USD, bn
5.7
1.82
4.9
1.56
4.9
1.28
3.8
3.6
0.99
2.8
2002
2003
2004
2005 (estimate)
2003
2002
2004
2005 (estimate)
Revenue Expense
Installed capacity
36.0
34.9
Lines, mn
33.0
31.3
2002
2003
2004
2005 (estimate)
data include JSC MGTS figures
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Svyazinvest new growth opportunities
I. OAO Svyazinvest in the telecommunications
sector
II. VAS development
III. Corporate reform and business optimization
IV. Natural monopoly status and tariff regulation
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OAO Svyazinvest possesses substantial resources
to expedite VAS development

• Infrastructure of Svyazinvest companies is unique
• Svyazinvest companies have significant subscriber
  bases and access to end users
• Svyazinvest companies geography spans the entire
  territory of the Russian Federation
• Svyazinvest companies marketing strategy sees
  the roll out of multi-service networks as a major
  priority
• Svyazinvest companies test facilities serve as
  platforms to try out new equipment for
  multi-service networks

Development of multi-service networks will boost
electronic commerce, facilitate consolidation of
branches and business partners into a single
information environment
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Intelligent networks
Pre-paid universal card
Intelligent platforms of various levels are used
by all mega-regional companies
Televoting
Services
Extra-pay services
OAO Rostelecom provides intelligent services
Russiawide
Hot lines
In 2004, companies revenue generated from
intelligent services rose 50 y-on-y
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Development of multi-media services

• broadband Internet access
• video-on-demand (VOD)
• Internet-Protocol TV (IPTV)

• Services for residential customers

Svyazinvest companies, running NGN are able to
provide new intelligent multi-media services

• virtual private networks (VPN)
• virtual leased lines (VLL)
• IP Centrex
• virtual private voice networks
• video- and audio- conferences
• IP-contact center

Services for businesses
OAO Uralsvyazinform was the first in Russia to
build a commercial network based on NGN
technology
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Internet-Services and IP-Telephony
Revenues from Internet-services and IP-telephony
Internet traffic, TB
1 868
156
USD, mn
1018
91
61
597
2002
2003
2004
2002
2003
2004
2005 revenues from Internet and IP-telephony
guidelines are 260 mn
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Svyazinvest holds a strong position in regional
cellular market
Subscriber base growth (GSM-standard)
Regional subscriber bases (01.04.05)
2 367
1 908
subscribers, th
subscribers, th
1 200
01.01.02
01.01.03
01.01.05
01.04.05
01.01.04
Urals
Sibirea
Volga

• Svyazinvest provides cellular services in 20
  regions of the Russian Federation.
• Svyazinvest subsidiaries and affiliates pursue
  the policy of cellular business consolidation and
  its integration with the fixed-line business.
• In 2004 revenues from cellular services amounted
  to 519 mn, up 40 against 2003.

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Integration of fixed and mobile communications
new development opportunities
OAO Uralsvyazinform is consolidating its
subsidiary GSM assets, aiming to converge
traditional and value-added services
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Growing investments in VAS development in 2005
Dynamics of investments in VAS
Investment plan breakdown
464,0
USD mn
USD 239 mn
298,6
USD 661 mn
159,6
USD 371 mn
USD 464 mn
2003
2005, target
2004
Development of infrastructure
Traditional telephony

• Share of investments in development of VAS will
  double to reach 27 of the total investments.
• Payback period will be 3-4 years.

Other
VAS and IT technologies
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Svyazinvest new growth opportunities
I. OAO Svyazinvest in the telecommunications
industry
II. VAS development
III. Corporate reform and business optimization
IV. Natural monopoly status and tariff regulation
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ERP system implementation results
Comprehensive financial management
Efficient human resources management
Effective procurement management
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Unified billing system implementation results
The first phase of the billing system
transformation is being successfully completed
Major results
- Existing billing systems and processes at all
companies have been assessed
- Terms of Reference for automated billing
systems have been worked out
- A 4-year high-level plan has been drawn up
- An in-depth model implementation plan has been
designed for all companies of the holding
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Operating risk management

• to establish an operating risk management system,
  allowing to forecast risks and reduce risk losses
  in RTO business processes

Objective

• to identify and estimate risks of a process at
  RTOs
• to uncover and rectify defects in the internal
  control systems and to work out control
  procedures to confine, minimize or eliminate the
  outcome of risk events
• to create a system to monitor business processes
  in order to detect risks of a process and to take
  the necessary measures

Tasks

• Reduction of financial losses through
  minimization, localization and removal of risk
  events
• Gaining additional financial benefits by
  improving management system

Results
OAO Sibirtelecom and OAO STC are implementing
pilot projects key approaches to risk management
of a process have been developed, internal audit
department structures have been modified
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Headcount optimization
Lines per employee and local network
digitalization rate
Number of employees
Employees, th
Lines/employee

102
95
85
56.0
77
51.1
43.8
37.5
43,8
The program of headcount optimization is under
way in Svyazinvest Group of companies
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Svyazinvest new growth opportunities
I. OAO Svyazinvest in the telecommunications
sector
II. VAS development
III. Corporate reform and business optimization
IV. Natural monopoly status and tariff regulation
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The need has arisen to review natural monopoly
criteria
natural monopoly is market situation where
from the technological point of view demand is
met more effectively in the absence of
competition and there are no close substitutes
for the goods produced by the natural monopoly
holder
Criterion ? 1 absence of competition
A drop in Svyazinvest revenue mix share points to
a high level of competition on Russias telecom
market
Criterion ? 2 no close substitutes for goods
Dynamics of mobile communications in Russia
Dynamics of installed capacity at RTOs
Mobile cannibalization can be observed on the
telecom market mobile communications ousts
fixed-line one
Law On Natural Monopolies
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Tariffs for local telephone services
Average monthly rate, USD
18.0
17.0
Average monthly rate for mega-regional companies
is 6,9 per line
15.8
12.5
11.4
8.7
7.8
6.9
6.9
6.3
6.0
5.7
STC
VolgaTelecom
Centertelecom
Sibirtelecom
NWT
Uralsvyazinform
Dalsvyaz
Cesky-Telecom
Matav
TPSA
Lietuvos Telecomas
Lattelekom
Average monthly rate in Russia is still about 50
lower than in Central and Eastern Europe, and is
60 lower than in Western Europe.
CeskyTelecom, Matav, Lietuvos Telecomas,
Lattelekom Company estimates
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The need to finetune regulatory policies

• To enable the holdings companies to work out
  flexible tariff plans for different customer
  categories (that will become possible after the
  RF Government adopts the resolution On State
  Regulation of Tariffs for Public
  Telecommunications and Postal Services

• To recognize competition in the fixed-line
  sector in large Russian cities and to release
  these markets from tariff regulation

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Thank you!