Last update: 25.08.2024 04:47 (GMT+3)
EESTI TELEKOM
COMMENTARY TO FINANCIAL RESULTS
COMMENTARY TO FINANCIAL RESULTS, 9M 2001
18 October 2001
THE FINANCIAL RESULTS OF THE FIRST NINE MONTHS OF 2001
‘The first year in full competition’
Eesti Telekom, the leading provider of telecommunication
services in Estonia, today announces its results for the
nine month period ending 30 September 2001.
Financial highlights
9 months 9 months Change, %
2001 2000
Total revenues, mEEK 3,199 2,951 8
EBITDA, mEEK 1,501 1,600 -6
EBITDA margin, % 47 54
EBIT, mEEK 721 885 -19
EBIT margin, % 23 30
Profits before taxes, 744 876 -15
mEEK
Net profits for the 713 871 -18
period
EPS, EEK 5.19 6.34 -18
No. of A- shares 137,383,178 137,383,178
Investments, mEEK 738 863 -14
Net gearing, % -1.5 -4.4
Commenting on these financial results, Chairman, Jaan
Männik, stressed:
“These are complicated times for the world economy as a
whole, and also for the telecommunications sector.
Despite this, the Eesti Telekom Group has remained in
good health”
For further information, please contact:
Krister Björkqvist +372
6272 465
CFO
CHAIRMAN’S STATEMENT
Estonia is usually treated as an emerging market. For the
economy as a whole, this kind of approach is reasonable.
However, when we look at the telecommunications sector,
we find a fully liberalised market, developed
technologies and services in both the fixed and mobile
communication areas, high mobile phone penetration, and
developing data communications. Based on these
indicators, it seems much more reasonable to compare the
Estonian telecommunications market with Western European
markets instead of with those of emerging economies.
Therefore, in this analysis, the financial results of the
Eesti Telekom group shall be assessed on this very basis.
Considering the current economic situation, I find Eesti
Telekom to be in good financial condition. Our balance
sheet has an advantageous structure with hardly any
borrowings. Net gearing is close to zero. We have been
moderate in taking risks. At the same time, we have paid
out high dividends, dividend yield is close to 10.
Revenues, expenses and profits
The first nine months of 2001 ended for the Eesti Telekom
group with total revenues of 3,199 mln kroons, operating
expenses of 1,698 mln kroons, and a net profit of 713 mln
kroons. Compared to the same period last year, total
revenues have increased by 8%, operating expenses have
increased by 26%, and net profits have decreased by 18%.
All three financial indicators have been influenced by
several unusual factors:
Ų An insolvent company, OÜ Albufent, had filed a law
suit against AS Eesti Telefon in the amount of 55 mln
kroons. On 6 February 2001, OÜ Albufent submitted an
application to the Tallinn City Court to unconditionally
drop the claim against AS Eesti Telefon. On 19 February
2001, the Tallinn City Court issued a decree ending the
proceedings in the aforementioned case. But over the
years, AS Eesti Telefon had built up a monetary reserve,
amounting to 46 mln kroons, to deal with this claim.
Since the case was dismissed, the company was now able to
release this sum through the profit and loss account.
Ų On 11 April 2001, AS Eesti Telefon concluded an
agreement for the sale of shares to Eniro Eesti AS. In
accordance with the agreement, AS Eesti Telefon sold 60%
of its subsidiary AS Teabeliin to Eniro Eesti AS, a
subsidiary of Eniro AB. The sales price of the shares was
43.5 mln Estonian kroons. The capital gain from the
transaction, in the amount of 32 min kroons, is accounted
as revenue from subsidiaries.
Ų In accordance with IAS 12, the principles of
accounting for the income tax calculated on dividends
have changed. Until now, income tax on dividends was
subtracted from the retained profits. Starting in 2001,
the tax is accounted through the profit and loss account.
To ensure accurate comparability, the financial
statements for 2000 have been adjusted accordingly.
Ų New interconnection agreements concluded at the
beginning of 2001 between Eesti Telefon and mobile
operators have had an influence on the nine month total
revenues and expenses of both the Eesti Telefon Group
and the EMT Group.
The nine month financial results for the Eesti Telefon
Group have been strongly influenced by the full
liberalisation of the fixed communications market on 1
January 2001, and several regulatory measures applied to
the parent company. The total revenues of the Group, for
the nine month period, were 2,197 mln kroons, which is an
increase of 9%, if compared to the same period last year.
However, the majority of the growth resulted from the
abovementioned unusual factors. Among the main revenue
categories of AS Eesti Telefon, domestic call revenues
grew by 3%, revenues from mobile communications by 21%,
and dial-up revenues by 48%, compared to the same period
last year. Revenues from data communications and
Internet connections grew by 136%. Revenues from
international calls fell by 46%, and main line revenues
by 7%. During the last three months, Eesti Telefon’s
voice communications market share has stabilised. At the
end of September, the company estimated its market share
of total call minutes, domestic call minutes, and mobile
minutes to be to be 91%, 91%, and 76% respectively.
Eesti Telefon estimated its market share of international
call minutes to be 71%. Since the end of June, the market
share has stabilised.
To compensate for falling revenues from traditional voice
communications, Eesti Telefon has made a powerful entry
into the rental services and IT solutions market. Based
on the ASP (Applications Service Provider) business
model, the company offers analytical software Atlas
Oraakel, communication and teamwork solution Atlas
Maestro, Internet-based time-scheduling application Atlas
E-administrator, Web-based accounting software rental
service B24, rental of e-shopping applications, IP-based
voice communication solutions, and call-handling systems.
The operating expenses of the Eesti Telefon Group were
1,499 mln kroons, up by 410 mln kroons or 38%, of which
increase in interconnection expenses amounts to 343 mln
kroons. Since the beginning of the year, number of
employees at Eesti Telefon Group has been reduced by 250
people. Due to reduction compensation, it has had a
negative effect on operating expenses of the year. In the
future, positive impact is expected. The net profits of
the Eesti Telefon Group amounted to 149 mln kroons, down
by 59%.
Total revenues of the EMT Group are growing continuously.
For instance, the total nine month revenues of the Group
amounted to 1,626 mln kroons, up by 282 mln kroons or
21%, of which increase in interconnection revenues
amounts to 213 kroons. The fastest growing components of
revenue are still the revenues from SMS and prepaid call
cards. A recent promotion campaign for Simpel prepaid
cards, as well as seasonal factors, have helped to
attract new customers, and to encourage the more active
use of the service. As of the end of September 2001, EMT
had a total of 376 thousand customers, of whom 125
thousand (33.3%) were prepaid customers and 251 thousand
were contractual clients. The estimated market share of
EMT, based upon the number of customers, was 55.5-56.5%.
As a result of promotional activities, the September ARPU
of 436 kroons per customer was somewhat lower than the
corresponding figure three months earlier, but still
higher than the ARPU of 398 kroons in December 2000.
The operating expenses of the EMT Group were 807 mln
kroons, up by 165 mln kroons or 26%, of which increase in
interconnection fees amounts to 113 mln kroons. The
EBITDA of the Group amounted to 819 mln kroons (a growth
of 17%). During the third quarter, an increase in the
EBITDA margin appeared, reaching 52% (a nine month margin
of 50%). The net profit for the period was 595 mln
kroons, up by 17%, compared to the same period in 2000.
Balance sheet and cash flow
At the end of September, the total assets of the Eesti
Telekom Group amounted to 4,147 mln kroons, down by 3%.
But the share of long-term assets, in the total assets of
the Group, has risen. On the equity and liabilities
side, the share of interest bearing liabilities has
fallen. In July 2001, Eesti Telekom repurchased bonds,
which had been issued a year ago, in the amount of 100
mln kroons. Since the beginning of the year, Eesti
Telekom Group has paid back long-term loans in the amount
of 89 mln kroons. At the end of the third quarter, the
net gearing of the Eesti Telekom Group was –1.5%.
The total cash flow of the Group was –414 mln kroons.
This negative cash flow resulted primarily from financial
outflows in the total amount of –976 mln kroons,
including dividend payout of 756 mln kroons and the
repayment of interest bearing liabilities. Cash flow from
investment activities totalled –620 mln kroons, and cash
flow from operating activities totalled 1,183 mln kroons.
Investments
The Eesti Telekom group invested 738 mln kroons in the
first nine months of 2001, 14% less than in 2000. There
has been a reduction in both Eesti Telefon’s and EMT’s
investments.
378 mln kroons were invested by the Eesti Telefon Group
during the period being studied. The number of main lines
per 100 inhabitants was 35.5 at the end of September 2001
(301 lines per employee). The digitalisation rate has
reached 73.2%. The marked increase of ADSL-connections
has continued. By the end of September, 13.8 thousand
ADSL connections were installed, 30 times more than the
previous year. By the end of 2001, Eesti Telefon expects
the number of ADSL connections to grow to 17 thousand, or
1.3 connections per 100 inhabitants. Since it is not
technically possible to provide ADSL connections
everywhere in Estonia, and not every client uses Internet
long enough for the ADSL-connection to pay off, a new
Internet service called Atlas Weekend was launched by
Eesti Telefon in September. For a monthly fee, the
service provides an unlimited Internet connection, with
no call set-up charge or minute fee on weekends and
public holidays.
Resulting from changes in the business environment, the
Supervisory Council of Eesti Telefon approved a decrease
in planned investments of 100 to 200 mln kroons in 2001.
The aim of this reduction is to increase the
profitability of Eesti Telefon. After the reduction, the
total investments, in 2001, for the Eesti Telekom Group
totalled 1.1-1.2 bln kroons.
To increase its efficiency, Eesti Telefon has also
decided to sell 17 office buildings and technical
facilities with a total area of 21,500 square metres.
Most of these premesis are telephone relay stations,
which have become obsolete as a result of digitalisation.
Also, the current head-office of the company will be put
up for sale. Eesti Telefon expects to save 5 mln kroons
per year by cutting operating expenses by this sale.
So as to promote higher efficiency, and so as to be able
to concentrate on its main activities, Eesti Telefon will
turn over all its customer service activities to Hallo!,
a chain store belonging to AS Telefonipood, a 100%
subsidiary of Eesti Telefon. At the same time, the number
of customer service places which Eesti Telefon offers
will be doubled to 39.
309 mln kroons were invested by the EMT Group. One of the
most important events of the first nine months of 2001
was the launching of the GPRS network, as a commercial
endeavour, on 1 July 2001. EMT was thereby the first
operator in Estonia to launch a GPRS. The service can be
made use of everywhere in Estonia where GSM is available.
During the first three months, EMT has received positive
feedback from its GPRS customers. The number of clients
is still limited, but the number of new users is growing
constantly. One obstacle slowing down expansion has been
the lack of handsets. Nokia’s introduction of the 8310
handset should solve this problem.
EMT intends to support the development of GPRS in many
ways. For instance, a promotional campaign has been
launched that allows surfing at lower rates during night
hours. A strategic partnership agreement with Delfi of
Microlink, the largest Internet portal in Estonia, was
concluded in August. The agreement will be the basis for
the joint development of mobile Internet solutions. In
May, a Mobile Applications Initiative Centre was opened
at Tallinn Technical University in co-operation with EMT.
The centre, the first of its kind in Estonia, is a mobile
communications testing environment ideal for personnel
training and product development. In this setting, new
GPRS and UMTS networks can be designed. In order to be
ready for the challenges presented by new technological
developments, the cornerstone for EMT’s new technology
centre was laid in March. GPRS, and in the future, third
generation UMTS equipment, will be located at this centre
which will be ready by November this year.
EMT treats GPRS as an intermediate stage from GSM to
UMTS. The Ministry of Roads and Communications is
preparing the necessary legislation for issuing third
generation mobile phone service licenses. Among other
things, these amendments to the Telecommunications Act
will establish the principles for holding a license
competition, will authorise the appropriate government
agency to establish the rules and regulations for holding
the competition and determine the participation fees. The
Ministry believes that the competition will be officially
announced in either December 2001 or January 2002. It is
expected that four licenses will be issued in Estonia on
the basis of a “beauty contest”. The expected launch of
the third generation technology will be in 2003-2004.
Regulatory issues
The nine month financial results of Eesti Telekom have
been influenced by some unexpected developments in the
regulatory system. Government regulatory activities will
likely continue to play an important role in the future.
On 13 February 2001, the Estonian Parliament adopted an
amendment to the Telecommunications Act, which set the
upper limits for interconnection service fees (effective
until 31 December 2001) that the major operators could
charge. Eesti Telekom considers the stipulating of
limits for interconnection service fees (in addition to
the cost-based pricing requirement) to be unjustified and
unfair. Eesti Telefon filed suit to overturn an 18 April
ruling of the Communications Board that forced Eesti
Telefon to reduce the interconnection service fees which
Eesti Telefon was charging other operators, so that they
would be in accordance with the amendment. Eesti Telefon
also requested that the Communications Board ruling be
suspended for the duration of the case, which the Court
refused to do. The case will next be heard by the
Superior Court. Since no leeway has so far been granted,
Eesti Telefon has started to follow the ruling by
discounting its cost-based interconnection service fees.
New interconnection contracts have already been concluded
with some operators, and more contracts are in the
process of being concluded. Eesti Telefon estimates that
these new interconnection contracts will influence this
year’s finacial results negatively by about 18 mln
kroons. Eesti Telefon’s application to have the Board
ruling suspended is again being argued in Court shortly.
As a response to the amendment, Eesti Telefon changed the
classification of and tariffs for calls on 1 April 2001.
As of that date, local and trunk calls were replaced by
national calls with unitary tariffs. Following the
recommendations of the National Communications Board,
methodologies for the calculation of end-customer and
interconnection costs were unified. The same tariffs
became effective for all Estonian operators. The
Competition Board reacted on 24 April 2001, by ruling
that, in accordance with the Competition Act, Eesti
Telefon must cancel these new tariffs. Lower tariffs were
recommended by the Competition Board for the service
calculated on the bases of justified pricing, traditional
proportions between the price-rise and the CPI growth
rate, and acceptable return on equity. The Competition
Board also filed a case against Eesti Telefon in the
Administrative Court. The maximum fine, in case Eesti
Telefon loses the case, is 125.3 mln kroons, or 5% of
the net sales of the company in 2000.
The position of Eesti Telefon is that their tariffs are
justified and cost-based. The company presented its case
in Court on 23 May 2001. The Court is expected to make
its judgement in October.
On 14 September 2001, the Communications Board notified
EMT and Eesti Telefon of the Board’s intention to
classify them, in 2002, as firms which control a major
market segment.
As in the current year, Eesti Telefon would be classified
as a company with a significant share of the market in
the sphere of general fixed telephone services, permanent
connection services, and interconnection services. EMT
would be classified as a company with a significant share
of the market in the sphere of general interconnection
and general mobile phone services. According to the
Telecommunications Law, EMT has until 19 November 2001 to
argue this classification decision, which EMT intends to
do, since it finds that its activities do not in any way
hinder or endanger free competition and the rapid
development of the mobile phone system in Estonia.
The Communications Board has to make a final decision
regarding these classifications by 1 December 2001, at
the latest. If the Board still decides to classify EMT as
a company with a significant share of the market, it will
mean that additional regulations will be imposed upon
EMT’s interconnection services and cost-based pricing
system. This would have a negative impact on the
financial results of the whole Eesti Telekom Group. The
exact extent of this negative impact is difficult to
predict at the moment, but the first rough estimates
indicate that the negative effect on the net profits of
2002 could be as much as 100-250 mln kroons.
Estonian Parliament has introduced the implementation act
of law of property act which stipulates the right of way
issues for Eesti Telefon. We have not reserved any
potential amounts to be paid to the landowners.
Annual General Meeting
The Annual General Meeting of the shareholders of AS
Eesti Telekom took place 23 May 2001. The meeting
approved Annual Report 2000 and the allocation proposal
for the net profit. It was decided to pay the owners of
A-shares ordinary dividends of 4.00 kroons per share (in
total, 550 mln kroons, or 49% of the net profit of 2000).
Also, an “extraordinary dividends” payment of 1.50
kroons per share (in total, 206 mln kroons) to the owners
of A-shares was decided. The owner of B-share was
entitled to 10,000 kroons of the dividends.
The Annual General Meeting also authorised AS Eesti
Telekom to acquire, within one year (up until 23 May
2002), up to 5% of the A-series shares of AS Eesti
Telekom.
Kadri Lensment
Management Assistant
6 311 212