If I told you that the long-distance telephone business is not only a cash cow but also an extremely profitable and growing sector -- one, in fact, that sports double-digit net margins and triple-digit growth rates -- what would you say? If you're a current or former shareholder of AT&T
Fair enough. And I admit that with AT&T and MCI both sporting negative profit margins and negative growth, my assertion does look suspect at first glance. But then, I wasn't talking about American telecoms. I was talking about Russia's national long-distance provider, Rostelecom
The major profit driver was a 19% increase in revenues. Magnified by reduced (non-cash) depreciation charges, and by administrative and maintenance costs, that increase translated into a 129% jump in operating profits and a 980% surge in net profits. If you fear that the company is skimping on maintenance to artificially inflate its operating results, well, that doesn't appear to be the case. Rostelecom confirmed in its press release that its modernization program is ongoing, with capital expenditures climbing by 44% over fiscal 2003 to reach $156 million, a figure that is projected to increase by another 47% in fiscal 2005.
As for the massive difference between the increase in net profits and operating profits, that appears to have resulted mostly from the company's cutting loose its incredibly unprofitable RTC-Leasing subsidiary, a venture that had cost Rostelecom more than 3.1 billion rubles in net losses last year.
Investors brave enough to consider investing in telecom might want to give Rostelecom a look. In contrast to the "mature" (one might even say "senior") U.S. long-distance market, Russia's still looks barely out of its teens. Since fewer than half of all Russian households have telephones, phone usage -- and, by extension, long-distance calling -- is almost guaranteed to increase. If Rostelecom can continue managing its expenses as well as it did this year, profits can be expected to increase in tandem.
Fool contributor Rich Smith does not own shares in any company mentioned.