Rostelecom — Earnings Release 2018

Mar 12, 2019

12-March-2019 / 10:02 MSK Dissemination of a RegulatoryAnnouncement that contains inside information according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group. The issuer is solely responsible for the content of this announcement.

ROSTELECOM ANNOUNCES ITS IFRS FINANCIAL AND OPERATING RESULTS FOR THE FOURTH QUARTER AND FULL YEAR OF 2018

DIGITAL SEGMENT CONTRIBUT ION UP TO 5 7% OF TOTAL REVENUE IN 4Q 2018

Moscow, Russia - March 12, 2018 - Rostelecom PJSC (MOEX: RTKM, RTKMP; OTCQX: ROSYY), the largest digital service provider in Russia, today announces its consolidated financial results for the fourth quarter and the full year of 2018 prepared in accordance with IFRS [1],[2] .

KEY ACHIEVEMENTS

• Meeting guidance on key financial indicators for 2018;
• 2018 revenue gr owth of 5 % year-on-year ;
• The digital segment's [3] contribution to total revenue reached ^{5 7} % in 4Q 2018;
• Consistently high growth rates in FTTx Broadband clients (+6%) and in IPTV subscribers (+9%), while ARPU continues to grow in our core broadband and IPTV segments;
• Increase in revenues from VAS and cloud services of 42% in 2018, as ^a result of "Smart City" projects, Internet video broadcasting, the development of data centre services and the promotion of cloud services;
• OIBDA [4] grew by 4% to RUB 100.9 bilion in 2018;
• Net profit increased by 7 % to RUB 15 .0 bilion in 2018.

FOURTH QUARTER 2018 KEY FINANCIAL HIGHLIGHTS

• Revenue grew by 4% to RUB 87 .3 bilion compared to the fourth quarter of 201 7 ;
• OIBDA grew by 2% to RUB 26.0 bilion;
• OIBDA margin of 29.8% compared to 30.5% in the fourth quarter of 2017;
• Net profit of RUB 2.4 bilion compared to RUB 4.2 bilion in the fourth quarter of 2017 ;
• CAPEX [5] increased by 48% to RUB 27 .3 bilion ( 31.3% of revenue) from RUB 18 .5 bilion ( 21.9% of revenue) in the fourth quarter of 201 7 ;
• Free Cash Flow (FCF) of RUB 18.1 [6] bilion compared to RUB 17.3 bilion in the fourth quarter of 2017;
• Net debt [7] increased by 3% since the beginning of the year to RUB 186.7 bilion, resulting in ^a Net Debt/OIBDA ratio of 1.9x.

RUB million	4Q 2018	4Q 2017	change, y-o-y
Revenue	87,257	84,113	4%
OIBDA	26,038	25,628	2%
OIBDA margin %	29.8%	30.5%	-
Operating Income	8,167	9,312	(12 %)
Operating margin %	9.4%	11.1%	-
Net Income	2,351	4,169	(44%)
% of revenue	2.7%	5.0%	-
Capital Expenditure	27,287	18,462	4 8 %
% of revenue	31.3%	21.9%	-
Net debt		186,712 181,594	3%
Net debt/ annualised OIBDA	1.9	1.9	-
FCF	18,063	17,283	780

Key figures for 4Q 2018, RUB mln

FULL YEAR 2018 FINANCIAL HIGHLIGHTS

• Revenue increased by 5% to RUB 320.2 bilion compared to the ful year of 2017;
• OIBDA increased by 4% to RUB 100.9 bilion compared to the ful year of 2017 ;
• OIBDA margin of 3 1.5 % and at ^a comparable level to the ful year of 2017 ;
• Net profit increased by 7 % to RUB 15 .0 bilion compared to the ful year of 2017 ;
• CAPEX in creased by 20% year-on-year to RUB 73.2 bilion ( 22.9% of revenue) from RUB 60.8 bilion (19 .9% of re venue) in 2017 ;
• Free Cash Flow (FCF) of RUB 14.8 bilion compared to RUB 20.4 bilion for the ful year 2017 .

Key figures for the full year of 2018, RUB mln

320,239 305,329 5%
100,900 96,688 4%
31.5% 31.7% -
35,800 37,885 (6%)
11.2% 12.4% -
15,012 14,050 7%
4.7%

% of revenue	4.7%	4.6%	-
Capital Expenditure	73,179	60,752	20%
% of revenue	22.9%	19.9%	-
Net debt	186,712	181,594	3%
Net debt/ annualised OIBDA	1.9	1.9	-
FCF	14,751	20,385	(5 ,6 34 )

Mikhail Oseevskiy, President of Rostelecom, commented:

2018 was ^a milestone year for Rostelecom. We started to implement our 2022 strategy, with ^a strong focus on improv ing our products and services ecosystem, enhancing efficiency, the further modernisation of our technological platform, and of course, the development of our team.

H uge st rides have been made in expanding and developing our digital products, entering new markets, launching the biometric platform, improving digital solutions for medicine and education sectors, and advancing our cybersecurity capabilities. Today, we don't just develop products and services, we stimulate emotions, create opportunit ies for education and health care, we cultivate ^a sense of security and we free up our clients' time by helping them streamline business processes . We help clients of any scale to grow their business, and support the government in providing improved services to its citizens.

Together with our brand refresh, which was ^a milestone event for us last year, we introduced ^a range of new digital products and tariff lines , in respons ^e to market changes and Rostelecom's priorities.

O ^{u r} brand-new service and multimedia platform Wink wa ^s recently added to our private client ecosystem, marking an evolutionary stage in the development of IPTV, which is today popular among milions of families across the entire country. Wink is ^a truly comprehensive platform, comprising of ^a mobile app, ^a website and ^a Smart TV app, more than 200 TV channels and more than 12 thousand films and episodes already available to Rostelecom's clients, as wel as ^a set of value add ed services including NPVR and Parent al control option s.

Products in our new tariff line were developed and named around the need of the typical family: "For Internet", "For Safety", "For Fun", "Al together" and "Gaming". We have also improved our product offering with exclusive tariff plans. One of the latest developments is the launch of the "Cloud" tariff, together with Yandex, which offers high speed internet access and massive cloud storage capacity on Yandex.Disk, that is growing monthly by 1tb.

For entrepreneurs, we launched an updated platform "Plus Account" that ensures high speed Internet connectivity and mobile communication, with extra services also available, including ^a Hosted PBX, SMS advertising, Wi-Fi, video surveilance and TV for business.

Last year, ^{w e} carried out many success ful projects. One of them was video surveilance at the presidential election in Russia, where thousands of Rostelecom engineers in mobile teams oversaw the seamless functioning of our systems, once again reinforcing our competence, excelence and professionalism, as wel as Rostelecom's status ^{a s a} credible partner . In 2018, we completed another large-scale project to connect healthcare centres to the Internet , demonstrat ing our capability to run complex infrastructure programmes across the entire country. Public funding enabled us to further expand the number of highspeed connections in remote areas, ^{a n} d we also completed construction of an underwater sector of the fibre-optic communication line in Kuril Islands. The JV with Nokia marks another significant event last year and represents an important milestone when it comes to setting the backdrop for developing innovative technologies, as does the launch of the 5G pilot sites for ^a new generation 5G network located in Skolkovo, the State Hermitage museum and Innopolis.

Our growing digital segment gained further momentum , which now contribute ^s more than 55% to our total revenue. Growth in our subscriber base coupled with higher ARPU, led to ^a significant increase in revenues from our core pay-TV and broadband segments, where we are leaders in the market . Additional products and services that we actively promote are in growing demand, and we also registered ^a twofold growth in revenues from Corporate TV and national Wi-Fi services. T he Information security segment grew fourfold , and the number ^o f " Smart Home " ecosystem subscriber base grew by sixteen time s, resulting in ^a 24-fold growth in revenues.

The achievements listed above represent only some of our recent achievements. O ur digital transformation has transformed the business and contributed to ^a very solid financial performance in 2018. Our revenue grew by 5%, while OIBDA increased by 4%, and net income - by 7%. Overal, we delivered ^a strong performance, and wil continue to expand our digital business segments and improve efficiency.

I am delighted to reflect on ^a year that confirms Rostelecom's transformation into ^a dynamic and courageous digital player. We are maintaining our strong leadership in the market, our core objective of pursuing sustainable and accretive growth is enhancing shareholder value, which is reinforced by attractive dividend returns."

Sergey Anokhin, Senior Vice-President of Rostelecom and CFO of Rostelecom, added:

" The results in 2018 underpin our positive outlook for Rostelecom and our potential to pursue further grow in our digital segment. In addition to expanding our digital footprint, we are introducing measures that are improving internal efficiency . We expect our performance to continue to improve across al key financial indicators and we are therefore set ting ourselves the folowing targets for 2019: revenue and OIBDA growth of at least 2.5 %, and CAPEX in the range of RUB 65 to RUB 70 bilion, taking into account RUB 7 bilion of regulatory CAPEX and excluding the implementation of government programmes " .

Number of subscribers (million):			4Q 2018 4Q 2017 change, y-o-y	3Q 2018	change, y-o-y
Internet access	13.0	12.9	1%	13.0	0 .1%
B2C: Broadband	12.0	12.0	0 .4%	12.0	0 .02%
B2B: Broadband + VPN	1.0	0.9	6%	1.0	1%
Pay TV	10.2	9.8	4%	10.1	1%
Incl. IPTV	5.3	4.8	9%	5.1	3%

KEY OPERATING HIGHLIGHTS

MVNO subscribers	1.2	0.8	43%	1.1	12%
Local telephony services	17.4	19.1	(9%)	17.8	(3%)

Total subscriber base

• 1. The total number of Internet subscribers grew by 1% to 13.0 million in the fourth quarter of 2018, compared to the corresponding period of last year;
• 1. The number of pay-TV subscribers grew by 4% to 10.2 million households compared to the corresponding period of last year; The number of IPTV subscribers increased by 9% to 5.3 million;
• 1. The MVNO subscriber base increased by 43% to reach 1.2 million users;
• 1. The number of local telephony subscribers decreased by 9% to 17.4 million.

Subscriber base in the household segment

KEY EVENTS RELATING TO FY2018 AND AFTER THE END OF THE REPORTING PERIOD

Business news

• Rostelecom continues to develop and expand its range of products and services:
• In September 2018, Rostelecom announced its new positioning and brand;
• Rostelecom launched "Wink", an OTT multimedia platform: by the end of 2018 the application was downloaded by more than 1.2 million users on mobile and SmartTV gadgets;
• The Company launched Rostelecom Lyceum, a platform that will enhance the quality, safety and availability of supplementary education in Russia;
• As part of its information security offering:
  • Rostelecom launched a single platform based on a high-tech Telco Cloud solution;
  • Rostelecom launched a commercial cyberattack monitoring and management centre;
  • As a result, revenues from information security services grew by 4 times in 2018;
• In partnership with Yandex, Rostelecom launched a new "Cloud" tariff plan with high speed Internet access (of up to 250 Mbps) and increased cloud storage capacity on Yandex.Disk (with a +1Tb monthly addition);
• As part of the "Gaming" tariff plan development, Rostelecom improved connectivity with game servers and Internet speed increased to 800 Mbps. A number of gaming options were improved in some famous computer games, including in World of Warplanes (a special fighter aircraft Yak-3T) by Wargaming; Warface by Games.Mail.ru; Blade and Soul, Point Blank, Lineage2 and AION by 4Game;
• As part of the "Smart Home" ecosystem:
  • Rostelecom extended its product line through the launch of 9 new types of cameras and 6 new smart periphery devices;
  • Rostelecom launched a mobile app with a new interface and a dashboard functionality;
  • Complementary services were introduced, including home security systems (together with Golfstream), and installation;
  • The fresh "Under control" package now includes a motion sensor, a door sensor, an RGB lamp and a socket;
  • Rostelecom introduced a package offer, comprised of Broadband and Video Surveillance services.
  • As a result, Rostelecom's "Smart Home" client base grew by 16 times in 2018, which translated to a 24 times increase in revenues;
• In B2B/G segments, Rostelecom increased product functionality and expanded its product offering for "Hosted PBX", "Web conferencing", "Managed communication services", "National Wi-Fi", "Virtual Data Centre", and "Information security";
• Within the MVNO project:
  • The IPTV traffic was reset;
  • A number of convergent services were launched in Saint-Petersburg, Komi and Chelyabinsk;
  • Rostelecom introduced a number of attractive roaming options for travelling clients;
  • The Company introduced the possibility to purchase a landline number in addition to a main mobile number in an additional 16 cities, which increased total enrolment across 200 localities;
  • Voice interconnect was upgraded in the Chuvash Republic, and voice traffic routing plans were expanded in Kaluga, Vologda, Kaliningrad, Petrozavodsk and Krasnodar. This led to fewer missed calls and increased quality of voice communication;
  • Rostelecom launched two new functions for its mobile users: "Call me back" and "Recharge my account".
  • As a result, Rostelecom's MVNO client base increased to 1.2 million clients, which has placed Rostelecom first in the virtual mobile operators sector, with a market share of 56%[8];
• Rostelecom continues to grow its digital segment:
• The number of pay-TV clients exceeded 10 .2 million clients (including 5.3 million of IPTV users), and the number of Broadband clients reached 13 million;
• The number of commercial racks in Rostelecom's data centres grew by 11% to 5,870. This translated in a more than 20% revenue increase in the data centre segment in 2018;
• The Public Services Portal recorded 86 million users, twice as many as in 2017;
• Revenues from "Smart City" projects grew by 46% in 2018;
• More than two-fold increase in revenues from the "Corporate TV" service in 2018;

• The number of National Wi-Fi hotspots increased to 27,500. This generated a two-fold growth in revenues from this service in 2018;

• Rostelecom became a leader in cloud video surveillance for businesses with 25,000 IP-cameras connected across more than 10,000 organizations in all Russian regions, which resulted in a nearly 40% growth in revenues in this segment in 2018;

• The "Antivirus" services revenues increased almost two and half times in retail segment in the last 12 months;
• Rostelecom launched the Unified Biometric System, one of the key elements of the remote identification mechanism, that provides remote access to financial services for citizens;
• Rostelecom launched pilot sites for a new generation 5G network located in Innopolis in the Republic of Tatarstan, the State Hermitage museum in Saint-Petersburg and Skolkovo in Moscow;
• A 5G network-based test infrastructure for unmanned vehicles was launched in Skolkovo;
• Rostelecom successfully provided video surveillance during the presidential election in Russia on 18 March 2018;
• Rostelecom successfully delivered video surveillance of the Unified State Exam;
• Rostelecom provided video surveillance on the Single Voting Day at 10,510 district electoral committees and 871 territorial committees, in 11,381 offices in total, under federal and regional contracts;
• The integrated spatial information platform ("Geodata Information System" (GIS) "Zemlya" (the Earth), developed by Rostelecom, was launched in Russia's Arkhangelsk region.
• Rostelecom signed or renewed a number of large contracts, including agreements with Rosreestr (The Federal Service for State Registration, Cadastre and Cartography), Russia's Pension Fund, the Federal Bailiffs Service, Pochta Rossii (Russian Mail), the Moscow region Electoral Committee, the Voronezh region Communications Department, Moscow City Department for Competitive Policy, Mosenergosbyt, SAP, Huawei, VTB, Rosselkhozbank (Russian Agricultural Bank), Rosneft, Transneft, X5 Retail group and others;
• Rostelecom completed the setting up of a corporate data communication network for Pochta Rossii (Russian Mail), encompassing 37,000 postal service hubs, including more than 15,000 Pochta Bank's service points;
• Rostelecom secured almost 80% of Tele2's ILD traffic;
• Rostelecom substantially upgraded the voice interconnects which allowed to transmit more than 90% of Tele2's DLD traffic pass through Rostelecom's network;
• The underwater sector construction of the fibre-optic communication line in Kuril Islands was successfully completed;
• Three transcontinental channels of 100Gbps were launched from Europe to China through Mongolia;
• The capacity of the Transit Europe-Asia (TEA) was upgraded up by 1Tb/s from Europe to China and to Japan;
• Three-fold growth in revenues from the O2O project (infrastructure operator) in 2018;
• Sales to regional operators increased by 6% in 2018 as part of the "Top-7 Interaction" programme.

Other news

• Rostelecom presented its 2022 Strategy and a new dividend policy for 2018-2020;
• Dividends for 2017 were paid at the rate of RUB 5.05 per ordinary share, and for 9 months of 2018 dividends were paid at the rate of RUB 2.5 per ordinary share;
• Rostelecom invested in mobile operating system developer Sailfish (Aurora);
• Acquisition of 100% of shares in Solar Security, a technological leader in information security (IS) target monitoring and operational management;
• Acquisition of Start2Com, one of the leading developers of settlements and maintenance solutions;
• Launch of a joint venture (JV) with Nokia to develop innovation technologies;
• Launch of a JV with the National Media Group, to be able to produce and purchase content, jointly develop new channels and distribute proprietary and third-party channels;
• Sberbank and Rostelecom increased the capital of the JV for management of commercial property to RUB 10.4 billion;
• Completion of one of the Central Telegraph buildings sale on Nikitsky lane for RUB 2 billion;
• The Analytical Credit Rating Agency (ACRA) confirmed an AA(RU) credit rating with a stable outlook;
• Fitch Ratings confirmed a BBB- issuer default rating (IDR) with a stable outlook;
• Rostelecom issued bonds in March 2018 for a total amount of RUB 10 billion at a coupon rate of 7.15% p.a.

OPERATING REVIEW

Revenue analysis

Revenue structure by services

RUB million		4Q 2018 4Q 2017			change 12M 2018 12M 2017	change
Broadband	21,335	18,139	18%	80,042	70,785	13%
TV services	9,145	7,069	29%	34,464	27,348	26%
Fixed telephony	16,948	19,151	( 12%)	69,983	78,445	( 11%)
Wholesale services	20,455	20,407	0%	79,593	77,525	3%
Rent of channels	2,505	2,365	6%	9,582	9,437	2%
Interconnect and traffic transit services	8,340	9,133	( 9%)	33,256	33,253	0%
VPN	6,148	5,609	10%	23,433	21,981	7%
Rent and maintenance of telecommunications infrastructure	3,462	3,299	5%	13,322	12,855	4%

Total	87,257	84,113	4%	320,239	305,329	5%
Other non-telecommunications services	2,165	2,997	( 28%)	7,179	8,359	( 14%)
Other telecommunications services	4,004	6,327	( 37%)	12,076	16,854	( 28%)
VAS and cloud services	13,204	10,023	32%	36,902	26,013	42%

Revenue structure by customer segments

RUB million		4Q 2018 4Q 2017			C hange 12M 2018 12M 2017	change
Residential customers	35,315	35,193	0%	137,745	136,304	1%
Corporate customers / Government customers	36,427	32,989	10%	121,509	109,209	11%
Operators	14,366	14,781	( 3%)	56,389	55,061	2%
Other	1,147	1,150	0%	4,595	4,756	( 3%)
Total	87,257	84,113	4%	320,239	305,329	5%

In the fourth quarter of 2018, revenue increased by 4% to RUB 87.3 billion, compared to the fourth quarter of 2017, as a result of the following factors:

• an 18% increase in revenue from broadband services due to a higher number of subscribers, higher ARPU, as well as the application of new IFRS standards;
• a 32% increase in revenue from VAS and cloud services, mainly due to proceeds from the development of "Smart City" projects, the promotion of cloud services, and the development of data-centres;
• a 29% increase in revenue from pay-TV services due to growth in the IPTV subscriber base, higher ARPU, as well as the application of new IFRS standards;

In full year of 2018, revenue increased by 5% to RUB 320.2 billion, compared to the twelve months of 2017, as a result of the following factors:

• a 42% increase in revenue from VAS and cloud services, mainly due to the development of "Smart City" projects, the promotion of cloud services, the development of data-centres and video surveillance services;
• a 13% increase in revenue from broadband services due to subscriber base growth, higher ARPU, projects to connect healthcare centres (by RUB 1.6 billion in 2018), as well as the application of new IFRS standards;
• a 26% increase in revenue from pay-TV services due to growth in the IPTV subscriber base, higher ARPU, as well as the application of new IFRS standards;
• a 3% increase in revenue from wholesale services due to the growth of all segment constituents, including additional proceeds from Tele2 Russia.

Operating income analysis

Operating expenses structure

RUB million	4Q 2018	4Q 2017	change	12M 2018	12M 2017	change
Personnel costs	(26,120)	(24,928)	5%	(97,350)	(93,381)	4%
Depreciation, Amortization and impairment losses	(16,713)	(15,444)	8%	(60,329)	(56,628)	7%
Interconnection charges	(15,826)	(14,769)	7%	(58,293)	(52,762)	10%
Materials, repairs and maintenance, utilities	(7,778)	(8,266)	( 6%)	(26,183)	(25,926)	1%
Gain on the disposal of PPE and intangible assets	4,843	3,863	25%	7,184	5,344	34%
Impairment loss of financial assets measured at amortized cost	(655)	(158)	315%	(4,057)	(2,776)	46%
Other operating income	2,964	3,856	( 23%)	13,579	13,444	1%
Other operating expenses	(19,805)	(18,955)	4%	(58,990)	(54,759)	8%
Total operating expenses	(79,090)	(74,801)	6%	(284,439)	(267,444)	6%

In the fourth quarter of 2018, operating expenses increased by 6% compared to the corresponding period of 2017 and amounted to RUB 79.1 billion, largely due to the following factors:

• an 8% increase (of RUB 1.3 billion) in depreciation, amortization and impairment losses, mainly due to the application of new IFRS standards;
• a 5% increase (of RUB 1.2 billion) in personnel costs, mainly due to an increase in the number of employees within the digital business segments, as well as due to additional accruals on non-state pension plan;
• a 7% increase (of RUB 1.1 billion) in interconnection charges, mainly due to higher expenditure on channels and equipment lease, as a result of higher income from corporate and state clients.

In the twelve months of 2018, operating expenses increased by 6% compared to the corresponding period of 2017 and amounted to RUB 284.4 billion due to the following factors:

• a 10% increase (of RUB 5.5 bln) in interconnection charges, mainly due to higher expenditure on interconnect and traffic transit services, accompanied by an increase in corresponding income, including from large scale corporate and state clients, a nd synergies with Tele2 within the network infrastructure;
• an 8% increase (of RUB 4.2 bln) in other operating expenses, mainly due to video surveillance services provided during the presidential election in Russia in the first quarter of 2018, equipment supplies within B2B/G projects, as well as higher expenses on the promotion of services;
• a 7% increase (of RUB 3.7 bln) in depreciation, amortization and impairment losses, mainly due to new IFRS standards application;
• a change in allowance for the share options programme (of RUB 1.3 billion) due to its expansion.

Operating profit decreased by 12% year-on-year to RUB 8.2 billion in the fourth quarter of 2018, compared to the corresponding period of 2017. Operating profit decreased by 6% year-on-year to RUB 35.8 billion in the twelve months of 2018, compared to the twelve months of 2017.

OIBDA for the fourth quarter of 2018 increased by 2% year-on-year to RUB 26.0 billion. OIBDA for the twelve months of 2018 increased by 4% to RUB 100.9 billion. The OIBDA dynamics was influenced by revenue growth, gains from real-estate disposal as well as the above-mentioned changes in operating costs.

The OIBDA margin in the fourth quarter of 2018 was 29.8% compared to 30.5% in the fourth quarter of 2017. OIBDA margin reached 31.5% in the twelve months of 2018 compared to 31.7% in the corresponding period of 2017.

Net Income Analysis

In the fourth quarter of 2018, profit before tax decreased by 46% to RUB 2.8 billion, compared to the corresponding period in 2017. In the twelve months of 2018, profit before tax increased by 3% to RUB 19.4 billion.

These dynamics were influenced in the fourth quarter of 2018 by the following factors:

• lower operating profit;
• decline in associated companies' financial results, mainly due to the write-off of goodwill relating to a previously acquired asset;
• higher financial expenses due to higher interest payments and the application of new IFRS standards;

The increase in profit before tax for the twelve months of 2018 can be attributed to improved financial results of the associated companies, namely Tele2 Russia.

Income tax in the fourth quarter of 2018 decreased by 57% to RUB 0.4 billion. Income tax in the twelve months of 2018 decreased by 9% to RUB 4.4 billion.

The effective income tax rate stood at 16% in the fourth quarter of 2018, and 23% in the twelve months of 2018 compared to the 20% rate set by the Tax Code. A higher effective income tax rate in the twelve months of 2018 was driven by the non-deductible expenses for taxation purposes.

Net profit decreased by 44% in the fourth quarter of 2018 and totalled RUB 2.4 billion, and increased by 7% to RUB 15.0 billion in the twelve months of 2018.

Financial review

Net operating cash flow in the fourth quarter of 2018 increased by 35% and amounted to RUB 39.0 billion, compared to the corresponding period of 2017, and increased by 8% to RUB 77.2 billion in the twelve months of 2018. The increase in net operating cash flow in the fourth quarter and the twelve months of 2018 was mainly due to changes in working capital. Improved working capital in the fourth quarter in 2018 was partly driven by a decrease in account receivables for the "Smart City" projects and settlements with operators. Improved working capital in the twelve months of 2018 was partly driven by changes in accounts payable and other liabilities, related to the development of working capital management policy,

Cash outflow for investments in non-current assets increased by 48% to RUB 27.3 billion in the fourth quarter of 2018. Excluding state programmes, this figure increased by 27% to RUB 20.3 billion (23.3% of revenue). Cash outflow for investments in non-current assets increased by 20% to RUB 73.2 billion in the twelve months of 2018. Excluding state programmes, this figure increased by 6% to RUB 59.0 billion (18.4% of revenue). These trends were driven by increased capital expenditure on programmes, financed by the State. The increase in CAPEX excluding state programmes was influenced by the development of video surveillance platform in Moscow city.

Free cash flow in the fourth quarter of 2018 totalled RUB 18.1 billion compared to RUB 17.3 billion in the corresponding period of 2017. Free cash flow in the twelve months of 2018 totalled RUB 14.8 billion compared to RUB 20.4 billion in the corresponding period of 2017.

Free Cash Flow (RUB, billion)

As at December 31, 2018, the Group's total debt increased by 7% compared to the beginning of the year and amounted to RUB 204.3 billion. Over 99% of the Group's total debt was rouble-denominated as at December 31, 2018.

As at December 31, 2018, the Group's net debt increased by 3% compared to the beginning of the year and amounted to RUB 186.7 billion. The net debt /OIBDA ratio stood at 1.9x for the 12 months 2018.

OTHER INFORMATION: CONFERENCE CALL

Rostelecom's management will hold a conference call and webcast today at 5.00 PM (Moscow), 3.00 PM (CET), 2.00 PM (UK) and 10.00 AM (NYT). To participate in the conference call, please dial:

UK/ International:	+44 (0) 330 336 9411
USA:	+1 929-477-0402
Russia:	+7(495) 646 9190

Confirmation Code (ENG): 2312815 Confirmation Code (RUS): 7295863

A webcast of the conference call will only be available in English. To access the webcast please follow the link: https://webcasts.eqs.com/rostelecom20190312.

A replay of the conference call will be available on the Company's website https://www.company.rt.ru/ir/results_and_presentations/financials/IFRS/2018/4/.

* * *

APPENDICES

• 1. Reconciliation of OIBDA;
• 1. IFRS 9, 15 and 16 standards application;
• 1. Statement of Comprehensive Income for the twelve months of 2018;
• 1. Statement of Cash Flows for the twelve months of 2018;
• 1. Statement of Financial Position for the twelve months of 2018.

APPENDIX 1: RECONCILIATIONOFOIBDA

OIBDA is a non-U.S. GAAP and non-IFRS financial measure, which the Company defines as operating income before depreciation and amortisation as well as some certain expenses. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, including our ability to finance capital expenditures, acquisitions and other investments and our ability to incur and service debt.

The following indicators are not taken into account in the calculation of OIBDA:

• Expenses related to the long-term management incentive programme, implying accruals in personnel costs line starting from Q2, 2014;
• Expenses related to non-government pension insurance starting from the third quarter of 2018.

Comparable indicators in 2017 and last period of 2018 were reviewed under the applied methodology, starting from the third quarter of 2018.

RUB million		4Q 2018 4Q 2017		change 12M 2018 12M 2017		change
Operating income	8,167	9,312	( 12%)	35,800	37,885	(6%)
Plus amortisation	16,713	15,444	8%	60,329	56,628	7%
Plus expenses related to the long-term management incentive programme	886	938	(6%)	3,638	2,344	55%
Plus expenses related to non-government pension insurance	272	(66)	-	1,133	(170)	-
OIBDA	26,038	25,628	2%	100,900	96,688	4%
OIBDA margin, %	29.8%	30.5%		31.5%	31.7%

APPENDIX 2: IFRS 9, 15 and 16 STANDARDS APPLICATION

The Group initially adopted IFRS 9, 15 and 16 using the modified retrospective approach starting from the first quarter of 2018.

The key changes related to the application of these standards are listed below:

* Expenses related to the operating leases have been capitalized and are reflected in the accounting balance sheet under the title "Right-of-use assets (RoU)". The RoU related liabilities are reflected in relative balance lines under same titles;

* The expenses related to the conclusion and implementation of contracts with customers have been capitalized and are reflected under "Revenue from Contracts with Customers";

* Assets for contracts with customers in arrears on payments for services rendered, but yet not invoiced, were excluded from the accounts receivable balance;

* Revenues from the sale of goods or provision of services of not sufficient individual value to customers, have been deferred;

• * Recurring advances, containing the financing component, have been discounted;
• * Impairment provisions of financial assets are recognised on the basis of expected credit losses.

APPENDIX 3: Statement of Comprehensive Income for the twelve months of 2018

	Year ended 31 December
	2018	2017*
Revenue	320,239	305,329
Operating expenses
Wages, salaries, other benefits and payroll taxes	(97,350)	(93,381)
Depreciation, amortization and impairment losses	(60,329)	(56,628)
Interconnection charges	(58,293)	(52,762)
Materials, utilities, repairs and maintenance	(26,183)	(25,926)
Gain on disposal of property, plant and equipment and intangible assets	7,184	5,344
Impairment loss of financial assets measured at amortized cost	(4,057)	(2,776)
Other operating income	13,579	13,444
Other operating expenses	(58,990)	(54,759)
Total operating expenses, net	(284,439)	(267,444)
Operating profit	35,800	37,885
Share of net profit/(loss) of associates and joint ventures	(91)	(2,692)
Finance costs	(17,275)	(17,350)
Other investing and financial gain, net	1,602	941
Foreign exchange (loss)/gain, net	(597)	122
Profit before income tax	19,439	18,906
Income tax expense	(4,427)	(4,856)
Profit for the year	15,012	14,050
Other comprehensive income/(loss)
Other comprehensive income/(loss) to be reclassified to profit or loss in subsequent periods
Share of other comprehensive income of associates	22	-
Exchange differences on translation of foreign operations	428	(110)
Net other comprehensive loss to be reclassified to profit or income/(loss) in subsequent periods	450	(110)
Other comprehensive income/(loss) not to be reclassified to profit or loss in subsequent periods
Remeasurement of defined benefit pension plans	(180)	545
Income tax on remeasurement of defined benefit pension plans	36	(109)
Net other comprehensive income/(loss) not to be reclassified to profit or loss in subsequent periods	(144)	436
Other comprehensive income for the year, net of tax	306	326
Total comprehensive income for the year	15,318	14,376
Profit attributable to:
Equity holders of the Group	14,154	13,697
Non-controlling interests	858	353
Total comprehensive income attributable to:
Equity holders of the Group	14,491	14,017
Non-controlling interests	827	359
Earnings per share attributable to equity holders of the Group - basic (in roubles)	6.23	6.09
Earnings per share attributable to equity holders of the Group - diluted (in roubles)	6.09	5.99

* The Group initially adopted IFRS ¹⁵ and IFRS ¹⁶ using the modified retrospective approach. Under this approach, the comparative information is not restated. The Group applied IFRS 9 from 1 January 2018 and has not restated comparative information for 2017 for financial instruments under the IFRS

APPENDIX 4: Statement of Cash Flows for the twelve months of 2018

	Year ended 31December
	2018	2017
Cash flows from operating activities
Profit before tax	19,439	18,906
Adjustments to reconcile profit before tax to cash generated from
operations
Depreciation, amortization and impairment losses	60,329	56,628
Gain on disposal of property, plant and equipment and intangible assets	(7,184)	(5,344)
Impairment loss of financial assets measured at amortized cost	4,057	2,776
Loss fromassociates and joint ventures	91	2,692
Finance costs excluding finance costs on employee benefit obligations	17,180	17,026
Other investing and financial gain, net	(1,602)	(941)
Foreign exchange loss/(gain), net	597	(122)
Share-based motivation program	3,500	2,309
Increase in accounts receivable and contract assets	(8,634)	(5,078)
Decrease in employee benefits	(353)	(66)
(Increase)/(decrease) in inventories	(1,414)	232
Increase in accounts payable, provisions and accrued expenses	13,377	3,963
Decrease in other assets	(4,245)	(1,917)
Decrease in other liabilities	3,995	1,229
Cash generated from operations	99,133	92,293
Interest paid	(18,174)	(17,548)
Income tax refund	230	1,825
Income tax paid	(3,945)	(4,801)
Net cash from operating activities	77,244	71,769
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets	(73,179)	(60,752)
Proceeds fromsale of property, plant and equipment, intangible assets
and assets held for sale	10,097	9,368
Acquisition of financial assets	(7,351)	(12,762)
Proceeds fromdisposals of financial assets	5,296	11,574
Interest received	589	637
Subsidy fromGovernment	3,641	772
Dividends received	95	6
Purchase of subsidiaries and business, net of cash acquired	(4,064)	(218)
Proceeds fromdisposal of subsidiaries, net of cash disposed	80	347
Acquisition of equity accounted investees	(4,386)	(2,430)
Net cash used in investing activities	(69,182)	(53,458)
Cash flows from financing activities Sale of treasury shares	-	1
Purchase of treasury shares	-	(981)
Proceeds frombank and corporate loans	579,949	522,157
Repayment of bank and corporate loans	(564,785)	(519,403)
Proceeds frombonds	10,000	20,000
Repayment of bonds	(11,209)	(20,642)
Repayment of vendor financing payable	(15)	(9)
Repayment of other non-current financing liabilities	(1)	(7)
Options settlement repayments	-	(4,896)
Proceeds fromnon-controlling shareholders of subsidiaries	24	-
Repayment of lease liabilities	(4,034)	(118)
Acquisition of non-controlling interest	-	(2,318)
Dividends paid to shareholders of the Group	(11,547)	(12,195)
Dividends paid to non-controlling shareholders of subsidiaries	(226)	(190)
Net cash used in financing activities	(1,844)	(18,601)
Effect of exchange rate changes on cash and cash equivalents	47	(152)
Net increase/(decrease) in cash and cash equivalents	6,265	(442)
Cash and cash equivalents at beginning of the year	3,815	4,257
Cash and cash equivalents at the end of the year	10,080	3,815

APPENDIX 5: Statement of Financial Position for the twelve months of 2018

	31 December 2018	31 December 2017*
Assets
Non-current assets Property, plant and equipment	373,839	348,430
Investment properties	172	159
Goodwill and other intangible assets	66,246	59,820
Right of use assets Trade and other accounts receivable	21,205 7,346	- 8,352
Investments in associates and joint ventures	69,982	65,879
Other financial assets Other non-current assets	1,950 4,667	1,600 4,352
Deferred tax assets	863	647
Contract assets	501	-
Contract costs Total non-current assets	12,323 559,094	- 489,239
Current assets Inventories	7,631	6,169
Contract assets	9,511	-
Trade and other accounts receivable	44,189	47,813
Prepayments Prepaid income tax	4,380 984	3,455 159
Other financial assets	7,487	5,963
Other current assets Cash and cash equivalents	2,856 10,080	2,619 3,815
Asset classified as held for sale	554	997
Total current assets	87,672	70,990
Total assets	646,766	560,229
Equity and liabilities Equity attributable to equity holders of the Group Share capital	93	93

Share capital Additional paid-in capital Treasury shares Retained earnings and other reserves Total equity attributable to equity holders of the Group	93 115 (60,419) 307,234 247,023	93 91 (65,556) 311,494 246,122
Non-controlling interests Total equity	3,930 250,953	3,242 249,364
Non-current liabilities Loans and borrowings Lease liabilities Employee benefits Deferred tax liabilities Accounts payable, provisions and accrued expenses Other non-current liabilities Total non-current liabilities	174,371 16,855 4,675 38,411 3,090 21,142 258,544	166,660 - 4,733 35,681 2,233 6,383 215,690
Current liabilities Loans and borrowings Lease liabilities Accounts payable, provisions and accrued expenses Income tax payable Other current liabilities Total current liabilities Total liabilities	29,908 4,791 88,530 644 13,396 137,269 395,813	24,712 - 60,666 1,162 8,635 95,175 310,865
Total equity and liabilities	646,766	560,229

* The Group initially adopted IFRS ¹⁵ and IFRS ¹⁶ using the modified retrospective approach. Under this approach, the comparative information is not restated. The Group applied IFRS 9 from 1 January 2018 and has not restated comparative information for 2017 for financial instruments in the scope of IFRS 9.

PJSC Rostelecom is the largest digital service provider, operating in all segments of the telecommunications market and covering millions of households in Russia.

Rostelecom is an undisputable leader of the broadband and pay-TV markets in Russia with over 13.0 million fixed-line broadband subscribers and over 10.2 million pay-TV subscribers, over 5.3 million of which are subscribed to Rostelecom's IPTV services.

In the twelve months of 2018, the Group generated RUB 320.2 billion of revenues, RUB 100.9 billion of OIBDA (31.5% of revenue) and RUB 15.0 billion of net income.

The Group is a market leader in providing telecommunications services to government bodies and corporates of all levels.

Rostelecom is an important innovator that provides solutions in the field of E-Government, cloud computing, healthcare, education, security and housing & utility services.

The Group's stable financial position confirmed by its credit ratings. Rostelecom was assigned 'BBB-' and 'BB+' international credit ratings by Fitch Ratings and Standard&Poor's respectively, and AA(RU) by ACRA.

* * *

Certain statements in this press release are forward-looking statements within the meaning of the U.S. federal securities laws and intended to be covered by the safe harbours created thereby.

Those forward-looking statements include, but are not limited to:

• Assessment of PAO Rostelecom's ( the Company ) future operating and financial results as well as forecasts of the present value of future cash flows and related factors;
• The Company's plans to take ownership stake ^s in other organisations;
• the Company's anticipated capital expenditures and plans to construct and modernize its network;
• the Company's expectations as to the growth in demand for its services, plans relating to the expansion of the range of its services and their pricing;
• the Company's plans with respect to improving its corporate governance practices;
• the Company's expectations as to its position in the telecommunications market and forecasts on the development of the market segments within which the Company
• operates; economic outlook and industry trends;
• the Company's expectations as to the regulation of the Russian telecommunications industry and assessment of impact of regulatory initiatives on the Company's activity;
• other statements regarding matters that are not historical facts.

Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially fromthose expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include:

• risks relating to changes in political, economic and socialconditions in Russia as well as changes in global economic conditions;
• risks relating to Russian legislation, regulation and taxation, including laws, regulations, decrees and decisions governing the Russian telecommunications industry, securities industry as well as currency and exchange controls relating to Russian entities and their official interpretation by regulatory bodies;
• risks relating to the Company, including the achievement of the anticipated results, levels of profitability and growth, ability to create and meet demand for the Company's services including their promotions, and the ability of the Company to remain competitive in ^a liberalized telecommunications market;
• technological risks associated with the functioning and development of the telecommunications infrastructure, technological innovations as well as the convergence of technologies;
• other risks and uncertainties. For ^a more detailed discussion of these and other factors, see the Company's Annual Report and the Company's other public filings.

Many of these factors are beyond the Company's ability to control or predict. Given these and other uncertainties, readers are cautioned not to place undue reliance on any of the forward-looking statements contained herein or otherwise. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements (which are made as of the date hereof) to reflect events or circumstances upon the annual report publication or to reflect the occurrence of unanticipated events, except as may be required under applicable laws.

[1] International financial reporting standards.

[3] The digital segment comprises broadband, pay-TV, VPN, VAS and cloud services.

[4] Here and below, please refer to Attachment 1 of this statement for a full definition of OIBDA. Note that the company changed the methodology of OIBDA calculation since 3q 2018 by excluding expenses related to non-government pension insurance. Historical OIBDA numbers for 2018 and relevant periods of 2017 were recalculated in line with the renewed methodology.

[7] Here and below, Net Debt is calculated as total debt less cash, cash equivalents and short-terminvestments (other financial assets).

[8] Based on TMT ^C onsulting data

^[2] The Group initially adopted IFRS 9, 15 and 16 using the modified retrospective approach starting fromthe first quarter of 2018. Please refer to Attachment 2. The 2017 numbers are presented here without implementation of the given standards.

^[5] Here and below, capital expenditure ("CAPEX") comprises cash spent on fixed assets and intangible assets.

^[6] Here and below starting from2018 free cash flow is FCF is calculated as free cash flow fromoperating activity minus CAPEX, plus proceeds fromselling fixed assets and intangible assets, plus interest received. FCF for Q4 & FY 2017 are presented as reported in a corresponding period.

LEICode: 2534001D752JPNM0H170 Sequence No.: 7778 EQS News ID: 786347

End ofAnnouncementEQS News Service