EESTI TELEKOM

COMMENTARY TO THE FINANCIAL RESULTS

18.11.99

 

COMMENTARY TO AS EESTI TELEKOM FINANCIAL RESULTS 09/1999

 

Estonian  Telecom, the leading provider of a range of 

telecommunication services in Estonia, today announces its results 

for the nine months ended September 30 1999.

 

Highlights

 

Ų Revenue up 15% to 2,616 mln kroons

Ų EBITDA up  20% to 1,385  mln kroons

Ų EBITDA margin 53%

Ų Net profit 492 mln kroons

Ų Earnings per share up 21% to 4,24 kroons

Ų Net gearing 9,4%

 

 

CHAIRMAN'S STATEMENT

 

Rapid development of telecommunication services has continued in 

Estonia making it possible for Estonian Telecom Group to maintain 

high growth rates. Total revenue of the Group in the nine months 

increased by 15 % to 2,616 mln kroons (1998: 2,274). Evolution of 

the new communication areas: mobile communications and data 

services have been especially impressive. Total revenue of Estonian 

Mobile Telephone Company reached 1,177 mln kroons growing by 16%. 

Total revenue of Estonian Telephone Company amounted 1,803 mln 

kroons growing by 14%. 

 

Operating Expenses

 

The Group has kept the increase in operating expenses lower than 

the revenue growth leading to improved operating margin. Operating 

expenses of the Group amounted to 1,231 mln kroons. Operating 

margin has risen to 53% compared to 51% in nine months of 1998.

 

Operating expenses of Estonian Telephone Company increased by 12% 

to 997 mln kroons. The company has reduced its number of employees 

to 3,002 by the end of September (3,305 in the beginning of 1999) 

resulting in only 7% increase in personnel expenses. Reduction in 

the number of employees is expected to continue.

 

Operating expenses of Estonian Mobile Telephone Company only 

increased by 8% compared to 16% revenue growth.  

 

Depreciation and Amortisation

 

In the period under review, depreciation and amortisation increased 

by 146 mln kroons or 29% compared with the same period in 1998 and 

amounted to 658 mln kroons.

 

Depreciation of Estonian Telephone Company amounted to 491 mln 

kroons (growth by 27%). The company continued revaluation of its 

real estate objects. During 9 months the revaluation amounted to 49 

mln kroons (55 mln kroons in 9 months of 1998). The relatively high 

growth is a result of extensive investments of  last years and from 

changes made into accounting principles by the company in 1999.

 

Depreciation of Estonian Mobile Telephone Company for the period 

was 168 mln kroons, 33% increase on the previous period, year on 

year. This is an effect of the extensive capital expenditure made 

in 1998.

 

Taxation

 

The amount of income tax in the first nine months of the year was 

110 mln kroons (effective tax rate 16%). All companies of the group 

benefited from the incentives in the Income Tax Law, allowing capex 

incurred outside Tallinn and adjacent counties to be 

tax-deductible.

 

Profit

 

Net profit of Estonian Telecom Group amounted to 492 mln kroons. 

Restructuring of the Group which took place in the 1st half of 1999 

makes it impossible to compare net profits of the period with the 

result of the corresponding period of 1998.

 

                          Estonian   Estonian    Estonian

                           Telecom  Telephone  Mobile Telephone

                                      Company    Company

Profit after tax, mEEK         575        248        339

margin, %                     21,9       13,8       28,8

growth, yoy, %                11,9        2,7       20,5

EBIT, mEEK                     727        316        443

margin, %                     27,8       17,5       37,6

growth, yoy, %                13,5        2,4       21,6

EBITDA, mEEK                  1385        806        611

margin, %                     52,9       44,7       51,9

growth, yoy, %                20,2       16,2       24,5

 

 

Earnings per share of Estonian Telecom Group in the first nine 

months of 1999 increased 21% to 4,24 kroons (3,49 kroons in nine 

months of 1998).

 

Investments

 

Total investments of Estonian Telecom Group amounted to 702 mln 

kroons.

 

Total capital expenditure of Estonian Telephone Company in the 

first nine months of 1999 amounted to 487 mln kroons (466 mln 

kroons in 1998). 147 mln kroons were invested outside Tallinn and 

Harju County and income tax allowances are applied in respect of 

those investments. The largest investment projects in 1999 have 

been RAS-1000, development of a radio-link telephone connections, 

and  establishment of exchanges in Tartu and Tallinn. 

 

By the end of September, the number of main lines per 100 

inhabitants reached 34,9 and digitalisation rate was 53,7%. The 

waiting list had decreased to 47 thousand applicants.

 

Capital expenditure of Estonian Mobile Telephone company amounted 

to 212 mln kroons. During the first nine months of 1999, the number 

of radio channels and base stations in GSM network increased by 

26,7% and 19,5% respectively. In 1999, the company's investment 

priority is quality of the network coverage in rural and urban 

areas and development of additional services. By the end of 

September, the coverage of GSM network by territory had increased 

to 98% from its end-1998 level of 95%.

 

Changes in the Share Capital

 

The Restructuring Agreement, concluded in December 1998 between the 

Estonian Government; Telia AB and Sonera Holding B.V, stated the 

share capital of Estonian Telecom was to be raised to EEK 

1,373,832,780.  The Payment Settlement Agreement was signed on 

March 24, 1999 and 63,883,178 new shares were issued.  The  shares 

were exchanged for all the shares of Estonian Mobile Telephone 

Company and Estonian Telephone Company owned by Telia, Sonera and 

Baltic Tele AB.

 

 

Changes in the Management Board

 

On 27 August, the Council of Estonian Telecom passed a resolution 

to recall Tarmo Amer from the Management Board as of 1 September. 

At the same meeting the Council appointed Krister Björkqvist as a 

new member of the Management Board. Krister Björkqvist worked in 

the Finnish telecommunications company Sonera since June 1999. 

During 1990- June 99 Mr. Björkqvist was a Vice President of the 

Finnish multinational Huhtamäki Group, working in different 

businesses around the World and in Finland, being responsible for 

finance and business control. Krister Björkqvist's responsibility 

in Estonian Telecom is financial management, including 

establishment of the Group's Treasury functions, improvement of 

internal control and risk management systems and optimising the 

capital structure of Estonian Telecom Group. He is also responsible 

for investor relations of the Group.

 

Year 2000

 

Operating subsidiaries of Estonian Telecom started their Y2000 

Compliance programs in 1997. By 1 September 1999 Estonian Mobile 

Telephone Company achieved full compliance of its operating 

systems. By 1 October 1999 full Y2000 compliance was achieved in 

Estonian Telephone Company. All Y2000 Compliance projects of the 

Group have been under continuous supervision of the Management 

Board of Estonian Telecom. Our belief is that, in all areas subject 

to our will, Estonian Telecom is able to guarantee both technical 

and organisational readiness for millennium in both Estonian 

Telephone Company and Estonian Mobile Telephone Company.

 

Opening up Estonian telecommunication market

 

The exceptional rights of Estonian Telephone Company that have kept 

the other companies from providing trunk and international call 

services will be in force until December 31, 2000. The new 

Telecommunication Law is expected to be passed in the Parliament by 

the end of 1999 to regulate the market in a competitive 

environment. Estonian Telecom and its subsidiaries have  followed 

discussions over the draft and by our expectations, the Law will 

harmonise Estonian communications market with EU requirements and 

create possibilities for fair competition.

 

 

SUBSIDIARY OVERVIEW

 

Estonian Mobile Telephone Company ("EMT")

 

The total revenue of Estonian Mobile Telephone Company for the nine 

months amounted 1,177 mln kroons and net profit was 339 mln kroons.

 

The continuing growth in number of clients that started with the 

launch of the prepaid telephone card SIMPEL in December 1998, has 

remained strong throughout the nine months period. The company has 

won 78,000 new customers, about two thirds of them use SIMPEL. 

Total number of customers by the end of the period had increased to 

229,600.

 

This increasing share of prepaid customers in the total number of 

clients of EMT has meant lower revenue per user. Accompanying lower 

expense per user as well as improved efficiency of the company have 

made it possible to maintain high growth ratios as well as margins. 

However, as reduction of the share of the voice traffic is a 

general trend for the sector, the company continues the emphasis on 

development of other mobile phone based services. 

 

In alliance with Optiva Bank a new SMS-based product was launched 

in July that makes it possible for a client to read the balance of 

his accounts with the bank. 

 

First GSM-trade project in Estonian is about to be started by EMT 

in October. A strategic partner of Estonian Telecom, Sonera was the 

World's first company to offer the possibility to enclose payments 

for goods and services to clients' monthly bills. In Estonia the 

pilot project of GSM-trade will be launched in co-operations with 

Coca-Cola that allows to pay for beverages by mobile phone.

 

A co-operation agreement between ETM and Ericsson is ready to be 

signed that will make EMT the World's first operator to offer 

services based on Ericsson Mobile Positioning System. The 

approximate cost of the project is about 13-15 mln kroons, up to 

half of it will be financed by EMT. The first product based on the 

system will be positioning emergency calls originated from mobile 

phones to '112' rescue centres. 

 

The company makes efforts to start offering Wireless Application 

Protocol (WAP) based services in the first quarter of 2000.

 

To reward our clients loyalty, private individuals using 

contract-based packages of EMT were offered the possibility to 

purchase a mobile phone at 5-15% discounted price in September. 

 

 

Estonian Telephone Company ("ETC")

 

Total revenue of Estonian Telephone Company for the nine months 

amounted to 1,803 mln kroons and net profit was 246 mln kroons.

 

Call revenue formed 61% of  the net sales. Share of local call 

revenue has  risen by 1% and share of international call revenue 

has fallen by 1.5% in comparison with the structure of 1998. 

Resulting from rapid growth of mobile phone users, mobile call 

revenue formed 22.9% of the nine months net sales of ETC. Share of 

monthly fees was 16.3%, subscription fees 1.4%, leased lines 5.5%, 

data services 2.1% and other revenue 13.9%.

 

In the last three months there has been intensified competition 

between data service providers. Main competitors of Estonian 

Telephone Company - Tele 2 and Microlink started offering free 

dial-up connections. Tele 2 also launched online service based on 

their cable TV network. Estonian Telephone Company responded to the 

challenge with the withdrawal of fees from its dial-up services  

and preparing a new product for online-clients. Atlas Status Light 

will be a twenty-four hours, 64Kb/sec Internet connection with 

improved security-parameters targeted to business clients. The 

company intends to maintain high quality standards of its services 

even in conditions of rapid customer growth. Additional capacity 

has been installed and the company has potential for further 

widening its dial-up centres. ISDN connections are offered to 

customers which make it possible to have multiple simultaneous 

connections and raise speed of transmission to 128 Kb/sec. 

 

The company has also developed the largest Internet searching 

system in Estonia NETI with more than 10 000 WWW info-sites and 

addresses to more than 300 000 public WWW-pages.

 

A new stage in integrating different areas of telecommunication 

services will be Internet-Telephone. ETC is preparing a pilot 

project of the service which is likely to be launched late 1999. 

Offering wider applications is planned for year 2000. Internet 

Telephone will be the company's first step in integrating visual 

and audio communications in Internet. 

 

To be ready for termination of  exceptional right on 1 January 

2001, the company has prepared proposals for future re-balancing 

fixed call tariffs. To eliminate cross-subsidising between services 

and customer groups, fees for private clients are planned to be 

lifted  and fees for business clients to be lowered. Also, the rise 

of local call tariffs and reduction of trunk and international call 

tariffs are expected. Resulting from Concession Agreement, the 

changes and their implementation are subject to the Government's 

approval.

 

To mitigate the impact of re-balancing and retain private clients 

when the market opens for competition, ETC has prepared several 

service-packages for private individuals differentiating by monthly 

and minute fee levels. These packages will be introduced along with 

the new tariffs and they should make it possible for private 

clients to optimise their expenditure of fixed telephone services

 

 

 

NOTES

1. Consolidated Interim financial statements for the nine months of 

1999 are in accordance with the International Accounting Standards 

(IAS).

 

2. The comparative nine-month figures for 1998 have been adjusted 

compared  to the nine-month financial statements prepared last 

year. The most significant adjustment concerns reduction of income 

tax from the initially estimated EEK 133.6 million to EEK 83.9 

million in line with the actual  tax burden for 1998.

 

3.    Calculations concerning revenue and expenses of International 

transactions have been changed in the consolidated accounts.  Until 

1999, net results of quarterly international settlements were 

shown.  Starting from 1999, gross method based on the amounts of 

minutes of outgoing from Estonia and incoming into Estonia 

international calls is in use.  Respective changes have been made 

into the statements of 1998 to make them comparable: net sales and 

operating expenses on materials, consumables, supplies and services 

were increased by 171,217 th. Estonian Kroons.

 

4. The EEK 160 million increase in current receivables results 

mostly from transfer to the gross method in international 

settlements and the increase in receivables arising from the income 

tax paid on dividends distributed  by subsidiaries.

 

5. The Estonian parliament has been submitted an Income Tax Bill, 

which, if adopted, will change group taxation principles 

considerably proving  beneficial in the long term. Instead of the 

taxation of corporate income, the Bill foresees taxation of 

dividend distributions, fringe benefits,  representation costs and 

other disbursements that may be treated as concealed profit 

distributions.

 

To date, the Bill has not been voted on and its adoption and final 

wording are uncertain. Therefore, the nine-month financial 

statements do not reflect its impact. If the Bill is passed in a 

more or less unchanged form, both the deferred income tax asset and 

liability will have to be  written off and most of the EEK 90 

million income tax receivable arisen from the distribution of 

dividends at Estonian Telephone Company will have to be  expensed.

 

Commenting on the results the Chairman, Toomas Sõmera, said:

'Rapid development of telecommunication services has continued in 

Estonia making it possible for Estonian Telecom Group to maintain 

high growth rates. Evolution of the new communication areas: mobile 

communications and data services have been especially impressive.'

 

 

For further information please contact:

 

 

Raul Kalev

Investor Relations / Estonian Telecom			

+ 372 646 0220

 

Hille Vork	

Financial Manager / Estonian Telecom			

+372 627 2460

 

Tim Thompson / Nicola Cronk

Buchanan Communications					

0171 466 5000