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Optical components

Golden Telecom's Fiber Handshake

Russian alternative operator Golden Telecom Inc. (Nasdaq: GLDN) is planning to build further city-to-city fiber optic networks to bypass incumbent long-distance operator Rostelecom.

The operator's CEO, Alexander Vinogradov, announcing the operator's fourth-quarter and 2003 financial results, said the current construction of an intercity fiber network between Moscow and Nizhny Novgorod is only the first stage of construction, with the company planning to build fiber links to other major business centers (see Golden Telecom Reports 2003, Q4).

He added that it is uncertain whether Golden will build any other links with fellow Russian operators. The link between Moscow and Nizhny Novgorod (about 250 miles east of Moscow) is being built in partnership with two of the country's main mobile operators, Mobile TeleSystems OJSC (MTS) (NYSE: MBT) and JSC Vimpel-Communications (VimpelCom) (NYSE: VIP) at a total cost of $8.6 million, of which Golden's share will be $2.9 million.

The three operators, each of which will have its own cable of 32 fiber pairs laid along the route, are supplying their own electronics and are sharing the housing and access facilities along the route. The network is due to become operational in the second half of this year.

"Building with partners saves a lot of money," said Vinogradov, "as most of the cost is in digging the route rather than the electronics and fiber."

Golden expects that initial route to pay for itself within two years, as the volume of traffic it handles continues to increase from organic growth and from taking on the traffic from recent acquisitions (see Russia's Golden Opportunity).

The carrier, though, is keeping the identity of its vendors to itself and didn't return calls or emails on the subject. It has a strong relationship with Nortel Networks Corp. (NYSE/Toronto: NT), which refused to comment on whether it was involved; and it's previously sourced fiber from Corning Inc. (NYSE: GLW) for its metro network expansion (see Russians Pick Nortel Optical Ethernet).

Any network expansion will be funded from the carrier's cashflow, stated CFO David Stewart. The operator could take on board some debt, he added, "but we would probably only do that if a sizeable acquisition opportunity became available." The operator finished 2003 with just $8 million of debt.

Capital expenditures for 2004 will be in the region of $85 million to $95 million, about 17 per cent of total revenue, which is expected to be between $510 million and $530 million. Operating income is projected to be between $105 million and $110 million for 2004.

That's a monster leap from 2003's total revenues of $360.5 million (up 81 percent from 2002) and 2003 operating income of $69.7 million (up 122 percent on 2002). Net income for 2003 was $55.4 million, an increase of 86 percent over the previous year.

And Golden had such a successful fourth quarter, with revenues of $111.3 million and net income of $18.2 million, that the carrier announced its first-ever quarterly dividend of 20 cents per share. This dividend "is not a one-off special payment... Others can be expected in the future," said Stewart, who added that the improved financial performance allowed Golden to make this payment "without impacting our aggressive expansion plans."

Stewart did warn of some upcoming charges related to recent acquisitions that could affect the bottom line during a number of quarters this year. This slight uncertainty, and some lower operating margins in the carrier's Ukrainian business as the result of a regulatory ruling, dampened the overall positive outlook, and Golden's share price ended Thursday down 90 cents, about 2.5 percent, at $34.49.

The carrier expects the change in the Ukraine business, following the abolition of "receiving party pays" charges, to be offset by higher call volumes, while the acquisition-related charges should only amount to 2 or 3 million dollars.

— Ray Le Maistre, International Editor, Boardwatch

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