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. Last Updated: 07/27/2016

Incentive Plan Bites Into Telecom Profit

Golden Telecom said first-quarter net profit dropped by one-third because of the costs of a management incentive scheme.

Management said Tuesday that it was taking steps to eliminate the earnings volatility caused by its so-called stock appreciation rights scheme, known as SAR.

Net profit to generally accepted accounting principles fell to $12.6 million, down 36 percent from the prior quarter and 33 percent from the same period one year earlier, the company said.

"The results came in below analysts' expectations due to the costs of the incentive scheme," said Anna Kurbatova, a telecoms analyst at Aton, a brokerage.

Shares in Golden Telecom, the country's largest independent fixed-line operator, sank on the U.S. Nasdaq market.

Chief executive Jean-Pierre Vandromme said during a conference call that the company planned to switch to an options-based incentive scheme that would have less of a distorting impact on Golden Telecom's quarterly earnings.

Stripping out the impact of SAR to give a better picture of underlying profitability, net profit was $23.5 million, still down 28 percent on the fourth quarter of 2006 and below an average forecast of $26.6 million in a Reuters poll of 10 analysts.

Analysts covering the fast-growing telecoms sector in the region tend to look at results quarter on quarter. Compared with one year earlier, adjusted net profits were down by 15 percent.

Revenue in the seasonally weak first quarter was up 2 percent quarter on quarter and up 44 percent at $255.7 million from one year earlier, just shy of market expectations.

Analysts had been looking for a pickup in sales growth after Golden Telecom set up long-distance and international operations in Russia from Jan. 29 and Wi-Fi services in Moscow from Feb. 1.

But they expressed concern that the costs of rolling out Golden Telecom's network under its "Fiber to the Building" program to cities with a combined population of 65 million -- as well as Wi-Fi services -- were higher than expected.

"These results were a disappointment -- especially margins," said Konstantin Belov, a telecoms analyst at UralSib.

Golden Telecom's earnings before interest, tax, depreciation and amortization were $65.6 million on an adjusted basis, down from $70.4 million in the fourth quarter and below a consensus forecast of $67.9 million.

The adjusted EBITDA margin fell to 26 percent from 28 percent and compared with a forecast of 26.2 percent.

Golden Telecom reiterated its full-year guidance for revenue growth of 35 percent to 40 percent. It also forecast that capital expenditure would be about 20 percent of revenue and EBITDA would grow 30 percent to 35 percent, after adjusting for stock appreciation rights costs.

Golden Telecom is 29 percent owned by Alfa Group, 20 percent by Norway's Telenor and 11 percent by Rostelecom. The rest is in free float.