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Annual Report 2016

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Rostelecom:

#ATimeofOpportunity

Customers expect from digital technologies not only to have more functionality and competitive advantages, but also to simplify the process of using all services, offer actions that are understandable to any person. Digital services and devices should not distract from life, from important things, as no one wants to waste the time on formalities and understanding complex procedures, because time is the biggest value.

#ATIMETOVALUE
#ATIMETOUNITE
#ATIMETOLEAD
#ATIMETOACHIEVE
#ATIMETOCOMPLY
#ATIMETOSHARE

We value your time by creating and bundling the most advanced digital services that deliver the expected “result” to every customer – be it experiences or emotions... so you could have an exciting, quality time the way you want it – for as long as you want it

Download section
"COMPANY PROFILE"

We unite people by providing them with high-quality convenient digital services for comfortable life and effective business management

Download section
"STRATEGIC REVIEW"

We are the indisputable leader in most of our markets, consistently strengthening our competitive edge

Download section "OPERATIONAL HIGHLIGHTS"

Our digital segment has shown a steady growth as we proceed with our programme of business transformation and migration to a new business model of an integrated digital service provider

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"FINANCIAL PERFORMANCE"

We strive to comply with best practice in corporate governance to meet the highest standards in shareholder rights protection

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"CORPORATE GOVERNANCE"

We distribute most of our free cash flow to pay out dividends, thus delivering high shareholder returns

Download section "INFORMATION FOR SHAREHOLDERS AND INVESTORS"

Letter from the President

In 2016, we strengthened Rostelecom’s leadership in the traditional and digital segments and continued to steadily grow our priority, high-growth lines of business. In line with our strategy, the share of Rostelecom’s revenue from sales of digital and content services increased considerably in 2016, reaching 44%.

In the reporting year, not only did we maintain steady growth rates in Rostelecom’s traditional business but we also actively expanded into new, high-potential areas. Our corporate segment remained the key growth driver for the Company’s revenue in 2016 by tripling its sales of new products. The segment also increased the share of broadband subscribers on fibre-based tariff plans by 41%.

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from the President

Key Highlights

Operational

Financial

Social

Fixed broadband base, million
Revenue, RUB m
Investment in training, RUB m
201612.3
201511.6
201411.2
2016297,446
2015297,355
2014298,937
2016452.6
2015353.6
2014347.2
Pay TV base, million
OIBDA, RUB m
Payroll expenses, RUB m
20169.3
20158.6
20148.0
201696,772
2015100,839
2014102,467
201666,018
201567,184
201465,862
Number of commercial data centre racks
Free cash flow (FCF), RUB m
Environmental expenditure, RUB m
20164,130
20153,900
20142,800
201613,298
201521,962
201427,313
2016128.8
2015129.7
2014130.6
Download section "OPERATIONAL HIGHLIGHTS"
Download section
"FINANCIAL PERFORMANCE"
Download section "Sustainability"

Business Model:

Integrated provider of digital services

RESOURCES

Production assets
Intellectual capital
Social capital and goodwill
Employees
Finance
Natural resources

MISSION

Rostelecom creates more opportunities for people and organisations by providing services and supporting projects and initiatives, which are important for society.

STRATEGY

  • Edge on technology in IP networks

  • Differentiated offerings

  • Customer service in line with best practice

  • Organisational and cultural transformation

  • Operational excellence

PILLARS:

  • Geographic coverage

  • Technology-driven growth

  • Comprehensive approach

  • Sustainability

JOINT VENTURES:

  • Tele2

  • Digital TV

OPERATIONS:

OUTCOMES

Services and products
  • Cash flow
  • Achievement of targets and KPIs
Intellectual property
  • Better internal efficiency
  • Stronger brand and reputation
Expertise and know-how
  • Knowledge and technology
  • Social effect
Waste management and pollution control
  • Environmental protection
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"Business Model"

Growth Strategy:

Our mission it to provide people with high-quality convenient digital services for comfortable life and effective business management

Our ambition is to become an integrated provider of digital services

VISION:
BUILDING
A DIGITAL
RUSSIA
44% – share of digital services in revenue in 2016
60% – target for share of digital services in revenue by 2020

FIXED-LINE BUSINESS

Fixed-line business

STRATEGIC PRIORITIES:

  • Technology leadership
  • Differentiated offerings
  • Customer service excellence
  • Organisational transformation
  • Operational excellence

NEW STRATEGIC AREAS OF FOCUS:

  • Data centres
  • Cloud services
  • ОТТ
  • IToT
  • Geodata

Фиксированная связь

Фиксированная связь

ПРИОРИТЕТЫ СТРАТЕГИИ:

  • Технологическое лидерство
  • Дифференцированные продукты
  • Лучший клиентский сервис
  • Организационная трансформация
  • Повышение эффективности

НОВЫЕ СТРАТЕГИЧЕСКИЕ НАПРАВЛЕНИЯ:

  • Дата-центры
  • Облачные сервисы
  • ОТТ-видеосервисы
  • Индустриальный интернет
  • Геоданные

Mobile Business

Mobile business (Tele2)

Goal:

  • Service provider of choice
  • Best ROI
  • Employer of choice

STRATEGIC AREAS OF FOCUS:

  • Completely unique, attractive, simple and honest offers
  • Loyalty programmes and digital partner services
  • Leadership in efficiency
  • Time to market

Мобильная
связь

Мобильная связь (Tele2)

ЦЕЛИ:

  • Лучшая сервисная компания
  • Лучший возврат инвестиций
  • Лучший работодатель

СТРАТЕГИЧЕСКИЕ НАПРАВЛЕНИЯ:

  • Уникальное, выгодное, простое и честное предложение
  • Программы лояльности и цифровые партнерские сервисы
  • Лидерство по эффективности
  • Скорость запуска коммерческих
    проектов

CYBER SECURITY

Being the largest backbone operator, the Company provides a very important service of traffic monitoring and protection against DDoS attacks. DDoS-attacks are one of the most widespread ways to disrupt the operation of websites and online services. Our online facilities involved in projects of such scale as USE or the Direct Line with the Russian President, are tested on an annual basis for their ability to sustain such attacks. Rostelecom's Center for Cyber Security already serves 7 out of 10 largest Russian banks, as well as companies from other industries.

VIDEO SURVEILLANCE

With its expertise and experience, unique for Russia, the Company is well positioned to implement remote online or offline video streaming projects of any complexity. In 2016, Rostelecom organised video surveillance at locations where the Unified State Exam (USE) was held, and at polling stations during the elections to the Russian State Duma.

MEDIA

Digital TV, a joint venture of Rostelecom and VGTRK, is the top player in the thematic TV market by audience share: the company’s projects account for c. 30% among Russian viewers who watch off-air channels every day on average.

CLOUD SERVICES

While the global IT market is stagnating, the cloud segment keeps growing at a rapid pace. Private companies and government structures migrate to cloud-based services in a bid to improve own performance and cut capital expenses. Rostelecom is among those who have pioneered the Russian market of cloud-based services. For several years, Rostelecom has been offering its customers access to a number of cloud-based SaaS, PaaS, and IaaS services via the National Cloud Platform.

DATA CENTRES

Rostelecom gained the lead in the data centre market, holding 4,130 racks in data cneters. Rostelecom offers its data centre customers a broad range of services, including both classic collocation products, and advanced cloud-based services. Rostelecom guarantees high security of data centres at the physical and informational levels.

INDUSTRIAL INTERNET OF THINGS

Rostelecom’s strategic goal in the IIoT market is to become the first Russian platform player who supports the IIoT market by offering new digital services via a proprietary IT infrastructure platform, while designing single-industry and crossindustry business processes. Rostelecom defined key sectors, such as electric utilities, oil production, machine building and agriculture.The strategic partnership agreement to implement the Industrial Internet of Things and other innovative technologies signed between Gazprom Neft and Rostelecom in 2016 is an example of mutually beneficial relationships in the area.

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"Growth Strategy"

Investment Hotspot

Russia’s telecommunications industry is attractive for both long-term and short-term investors. Building on its strong competitive advantages, Rostelecom benefits from stable cash flows and demonstrates solid operational performance despite unfavourable macroeconomic conditions and fast-paced advances in technology and evolving customer preferences.

Short-term drivers

  • Inflation slowdown to 5.4% in 2016 and 4.1% by 2019 – lower cost of debt and expenses in RUB terms
  • Rouble appreciation by 17% against the US dollar in 2016 – cheaper imports and better financial performance in USD terms

Long-term drivers

  • Improvements in investment climate
  • Economic diversification and lower reliance on commodity prices – higher demand for high-tech products and services
  • Digitalisation of the economy – Russian Government’s focus on the development of digital products and services
  • Population growth to 150 million people by 2030 – customer base expansion

Short-term drivers

  • Lower sensitivity to adverse market changes –
    sustainable revenues
  • Smaller wallet share of telecoms expenses –
    stable market position
  • Ability to accumulate expertise and quality assets
    via acquisitions
  • Higher penetration – subscriber base expansion

Long-term drivers

  • Fourth Industrial Revolution, IIoT and 5G – growing
    market size
  • Demand shifting towards digital products and VAS – opportunities to capture new revenue pools and grow ARPU

Short-term drivers

  • Leadership in Broadband (38% market share) and IPTV (69% market share) + CAPEX of RUB 61.9 billion in 2016 – technology edge
  • More than 32 million households connected to fibre – leadership in B2C
  • FCF of RUB 13.3 billion and net profit of RUB 12.2 billion – strong financial performance supporting strategic development
  • Progressive dividend policy – at least 75% of FCF, but not less than RUB 45 billion in 2015–2017
  • Share option plan – employees incentivised to drive the Company’s value

Long-term drivers

  • Presence in high-potential markets – differentiated offerings to grow ahead of the market
  • Loyal customer base and company’s focus on customer service excellence – higher customer satisfaction
  • Organisational transformation – higher employee engagement and revenue per employee ratio
  • Focus on efficiency – cost reduction
  • Real estate portfolio – proceeds from asset disposals and lower maintenance costs
  • Venture capital fund – investments in start-ups
  • Strategic investments in joint ventures with Tele2 Russia and VGTRK – development of converged products
  • R&D – driving competitive edge in technology
  • Government as a customer – nation-wide government-sponsored projects
COUNTRY
INDUSTRY
COMPANY
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"Investment Hotspot"

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