Krasnodar, August 1, 2006 – Southern Telecommunications Company (“UTK”) (RTS: KUBN, KUBNP; MICEX: UTEL, UTELP; ADR OTC: STJSY, KUE FRA)], the principal fixed-line telecommunications provider for Russia’s Southern Federal District, today announced its financial results for the first half of 2006 in accordance with Russian Accounting Standards (RAS).

• Revenue for the first half of 2006 amounted to RUR 8,373.8 mln (USD 303.2 mln) [1], a decrease of 3.4% over the comparable period in 2005.
• Revenue from value-added services [2] increased to RUR 832.2 million representing a year-on-year increase of 28.2%, and now accounts for 10.5% of total telecom revenues (versus 7.6% in the first half of 2005).
• 1H2006 EBITDA [3] increased  26% year on year to RUR 3,290.1 million (USD 119.13 million).
• Number of main telephone units grew by 18.45 thousand in the first half of  2006.

In the first half of  2006 UTK generated a total revenue of RUR 8,373.8 million representing a 3.4%-decrease over the first half of 2005. Revenue from telecommunications services  decreased by 7.2% to RUR 7,927.4 mln. Revenue structure showed a stable trend in revenue share growths from local telephony and value-added services. Based on 1H 2006 results long-distance and local telephony accounted for 15.4 % and 53.2% of the Company’s telecom revenues, respectively.

As before, the growth of the Company’s revenues from telecommunication services was due to network development and the increase in local tariffs from September 2005.

Revenues from local telephone services increased by 19.5% over 1H2005 to RUR 4,215.9 million. In the first half of  2006 18.45 thousand main telephone units were added to  the Company’s subscriber base, including 15.26 thousand units  - in the urban telephone network (TN). As of July 1, 2006 the number of main telephone units operated by UTK amounted to 4,033 thousand, 2,993 thousand of which being part  of the urban TN and 1,040 thousand - of the rural TN.

Revenues from domestic, intrazone and international long-distance telecommunication services [4] decreased 61 % to RUR 1,217.6 mln in the period. The volume of outgoing long-distance traffic in 1H 2006 stood at 459 mln minutes (- 47.1%), including 459 mln minutes of intrazone traffic.

H1 2006 revenues from value-added services increased by 28.2% to RUR 832.2 mln and accounted for 10.5% of total telecom revenues compared to 7.6% in 1H 2005. Revenues from Internet services grew by 59.5%, from VPN (virtual private networks) services by 52.9%. Internet services sales were supported by strong usage growth: Internet traffic for the reporting period increased by more than 1.8 times to 468 Tb, connection time via dial-up access to the Internet was up 44%  to 25.1  million hours.

Revenues from Russia’s telecom operators (excluding revenues from value-added services) increased by 44.5% to 1,376.8 million rubles. Revenues from other telecom services have changed slightly: 284.9 million rubles in 1H 2006 versus 289.1 million rubles in the second half of 2005.

 

SEGMENTAL ANALYSIS OF REVENUES:

RUR mln	1H 2006	1H 2005	Change, %
1. Revenues from usual activities :
Operating revenue	8,373.8	8,670.0	-3.4
Revenue from telecom services, including:	7,927.4	8,544.8	-7.2
Telecom revenues by kinds of services:
Local telephony, including.	4,215.9	3,528.0	19.5
Urban telephone network UTN	3,301.9	2,751.2	20.0
Rural telephone network RTN	914.0	776.8	17.7
domestic, intrazone and international long-distance telecommunication services	1,217.6	3,125.9	-61.04
Value-added services, including:	832.2	649.1	28.2
Internet	670.9	420.7	59.5
VPN	152.6	99.8	52.3
Revenues from telecom operators	1,376.8	952.7	44.5
Other telecom services [5]	284.9	289.1	-1.45
Revenues from telecom services by customer segment:
households	4,162.3	5,057.3	-17.7
Business sector	3,074.5	2,794.6	10.0
Budget-funded organizations	690.6	692.9	-0.3
2. Results from other operating activities	186.1	168	10.77
3. Results from other non-sales activities	69.5	161.7	-57.0
4. Extraordinary  revenues	0.5	1.8	-72.2

1H 2006 operating expenses decreased 9.2% to RUR 5,963.5 mln. Expenses on wages and salaries and other social payments to employees (43.1% ), depreciation charges (21.6%) and material expenses (11.6%) accounted for major part of operating expenses.

The main contributors to the growth in operating costs in the period were the growth of depreciation charges due to active 2004 investment program, increases in the electricity and public utilities tariffs.

The growth of depreciation charges by 13.9% to RUR 1,285.9 mln was attributable to a major increase in fixed assets in operation during 2004 as a result of the rapid expansion of UTK’s subscriber base, the process of network digitization, construction of Internet access nodes.

Due to network digitization, optimization of organizational structure and staff cuts, the number of employees on payroll decreased by 6.4% over 1H 2005 to 35.8 thousand people.

The growth of other expenses by 13.77% to RUR 1,317.4 million was due to the increase in rent charges, the growth of expenses for maintenance and repairs of the Company’s buildings and facilities as well as  for protection and insurance of the Company’s property.

 

SEGMENTAL ANALYSIS OF EXPENSES:

RUR mln	1H 2006	1H 2005	Change, %
1. Operating Expenses:	5,963.5	6,570.7	-9.24
Salaries and wages	2,062.7	2,025.1	1.86
Social insurance	522.4	497.3	5.04
Depreciation and amortization	1,285.9	1,128.9	13.9
Material expenses, electricity & energy costs	715.5	687.7	4.0
Payments to Rostelecom	33.0	1,000.6	-96.7
Taxes	8.7	14.5	-40.0
Other costs [6]	1,335.5	1,216.7	9.76
2.  Other operating expenses, including	1,526.8	1,975.8	-22.7
Interest expense	1,084.0	1,214.3	-10.7
Other operating expenses	442.8	761.5	-41.85
3. Non-sales expenses	218.8	185.6	17.89
4. Extraordinary expenses	5.2	14.3	-63.6

1H 2006 EBITDA increased 26.01% year on year to RUR 3,290.1 mln. Operating profit grew 14.81% over 1H 2005 to RUR 2,410.3  mln. Operating margin was up 4.6 percentage points in the period reaching 28.8%.

The Company’s policy aimed at business efficiency growth allowed to improve the following business efficiency indicators: total revenue per 1 employee increased  by 3.18% to 233.6 thousand rubles, operating profit per one line grew  12.8% over 1H 2005 to 596.4 rubles,  number of lines per 1 employee was up 8.68% to 112.7 lines.

1H 2006 UTK`s capital expenditures decreased by 70.6% to RUR  538.9 mln compared to RUR 1.834.1 mln in 1H 2005.  Fixed assets put into service decreased by 60.85% to RUR 679.1  mln.

 

KEY FINANCIAL HIGHLIGHTS:

Description	Measure unit	1H 2006	1H 2005	Change, %
Revenue	RUR mln	8,373.80	8,670.0	-3.42
Operating costs	RUR mln	5,963.50	6,570.70	-9.24
Operating profit	RUR mln	2,410.30	2,099.3	14.81
Operating margin, %	%	28.78	24.2	4.58
EBITDA	RUR mln	3,290.10	2,610.9	26.01
Profit before tax (PBT)	RUR mln	920.30	267.6	243.91
Profit before tax margin	%	15.43	4.1	11.33
Net profit	RUR mln	657.20	106.7	515.93
Business efficiency indicators:
revenue per line	RUR ths	2 071.9	2 183.5	-5.11
revenue per employee*	RUR ths	233.6	226.4	3.18
Lines per employee*	lines	112.7	103.7	8.68
Operating profit per line	RUR	596.4	528.7	12.8

* employees on payroll

During 1H 2006 18.4  ths telephone lines were put into operation in UTK networks, 15.2 ths of them  - in urban TN and 3.2 ths in rural TN. As a result, UTK`s total installed capacity as of July 1, 2006 stood at  4,033 ths lines, including 3,496  ths lines in residential sector.

Digitization level of UTK local network rose by  3.36 percentage points over 1H 2005 reaching 63.14%, including 67.72% in urban telephone network. Digitization level of the Company’s intrazone network was 95.3% as of July 1, 2006, being the highest among Russia’s inter-regional telecoms.

MAIN OPERATIONAL HIGHLIGHTS :

Description	Measure unit	1H 2006	1H 2005	Change, %
Average number of employees on payroll	People	35,847	38,297	-6.4
Sales results:
Long-distance traffic including	Mln minutes	459	922	-50.23
DLD and intrazone traffic	Mln minutes	459	868	-47.10
ILD traffic	Mln minutes	-	55	-
IP-telephony traffic	Mln minutes	-	44.40	-
Internet traffic, dial-up	Mln hours	1,506.00	1,043.23	44.36
Internet traffic, xDSL	Tb	468.00	259.46	80.37
Increase in number of main telephone units in urban and rural telephone networks including	units	18,452.00	43,786	-57.9
Urban TN	units	23,278	15,258.00	52.56
Total number of main telephone units in urban and rural TNs	Ths units	4,033.4	3,971.9	1.55
Telephone penetration in urban and rural TNs	sets/100 inhabitants	21.80	21.4	1.88
Investment program:
Capex	RUR mln	538.90	1,834.1	-70.7
Fixed assets put in operation	RUR mln	679.10	1,734.72	-60.86
Network development:
Installed capacity growth including	ths  ??	48 180	78 347	-38.5
replacement	ths  ??	28 573	24 154	18.3
In urban TN	ths    ??	30 673	52 843	-41.95
Total installed capacity of urban and rural telephone networks	ths    ??	4,272	4,174.2	2.34
Level of equipped capacity of urban and rural TNs	%	94.97	95.75	-,0.78
Local network digitization (urban and rural TNs)	%	63.14	59.78	3.36
Including  urban TN	%	67.72	64.79	2.93
Intrazone network digitization	%	95.30	89.73	5.57

 

Full text of UTK’s financial statements for the first half of 2006 can be viewed on the corporate web site www.stcompany.ru in the section “Financial reports”.

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[1]  Figures are provided at the Central Bank of Russia exchange rate of USD 1 for the 1st quarter of 2006 = 27.618 rubles.

[2] Value-added services rendered by "UTK" PJSC include: VPN services on the basis of MPLS and other technologies; services of data transmission; Internet access services (hardwired IP-connection, dial-up access, xDSL-based broadband access, wireless access on the basis of Wi-Fi technology); digital cable TV services (IPTV); services of multimedia and multi-service networks based on HFC, Ethernet to the home and other technologies; video telephony and  video conferencing; intelligent services (on the basis of SCP-SSP); content services (including on the basis of Call-centers); Hosting and Co-location services.

[3] EBITDA  includes Earnings Before Interest, Taxes, Depreciation and Amortization.

[4] From January 1, 2006 "UTK" PJSC provides intrazone telephone connections.

[5] Other telecom services rendered by "UTK" PJSC include: wired radio, radio communications, radio broadcasting.

[6]  Other costs included in operating expenses are overheads, administrative expenses, advertising expenses, expenditures on research engineering and experimental development, payments to Gossvyaznadzor, postal expenses.