EESTI TELEKOM

COMMENTARY TO FINANCIAL RESULTS



COMMENTARY TO FINANCIAL RESULTS, Q2 2001



19 July 2001









               FIRST HALF-YEAR RESULTS OF 2001

            ‘The first year in full competition’

                              

Eesti  Telekom,  the  leading provider of  telecommunication

services in Estonia, today announces its results for the six

months ended 30 June 2001.





Financial highlights



                            6 months     6 months  Change, %

                                2001         2000

Total revenue, mEEK            2,117        1,947          9

EBITDA, mEEK                   1,016        1,031         -1

EBITDA margin, %                  48           53           

EBIT, mEEK                       495          555        -11

EBIT margin, %                    23           29           

Profit before tax, mEEK          531          544         -2

Net   profit  for   the          499          541         -8

period

EPS, EEK                        3.64         3.94         -8

No of A- shares          137,383,178  137,383,178          0

Investments, mEEK                481          570        -16

Net gearing, %                     2          -14           





Commenting on the results the Chairman, Jaan Männik, said:



"Eesti  Telekom has succeeded to maintain its  profitability

level  in  the  fully  liberalised market.  Competition  and

regulatory measures are expected to put increasing  pressure

on the margins."







For further information please contact:



Krister Björkqvist                       +372  6272  465

CFO



Hille Võrk                               +372  6272  460

Financial Manager



CHAIRMAN’S STATEMENT



Eesti  Telekom  has succeeded to maintain its  profitability

level  in  the  fully  liberalised market.  Competition  and

regulatory measures are expected to put increasing  pressure

on the margins.





Revenue, expenses and profit



The  first  half-year of 2001 ended for Eesti Telekom  group

with total revenue of 2,117 mln kroons and net profit of 499

mln  kroons.  Compared to the same period last  year,  total

revenue  were  up  by 9% and net profit  down  by  8%.  Both

revenue and net profit were influenced by some extraordinary

factors:



*    An insolvent company, OÜ Albufent had initiated a court

     case  against AS Eesti Telefon in the amount of 55  mln

     kroons. On February 6, 2001, OÜ Albufent submitted to the

     Tallinn City Court an application to drop unconditionally

     the claim against AS Eesti Telefon. On February 19, 2001,

     the  Tallinn  City  Court issued a decree  to  end  the

     proceedings in the aforementioned case. Over years, AS Eesti

     Telefon had built up a reserve amounting to 46 mln kroons

     against the claim, which the company was now able to release

     through the profit and loss account.

*    On April 11, 2001, AS Eesti Telefon, signed an

     agreement on 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. 32 mln kroon capital gain from the

     transaction is accounted as revenue from subsidiaries.

*    In accordance with IAS 12, the principles of accounting

     for the income tax calculated on dividends has changed.

     Until now, income tax on dividends was subtracted from the

     retained profits. Starting from 2001, the tax is accounted

     through profit and loss account. 2000 statements have been

     adjusted to ensure comparability.

*    New interconnection agreements concluded between Eesti

     Telefon and mobile operators in the beginning of 2001 have

     had a positive influence on the total revenue and expenses

     of the period of both Eesti Telefon Group and EMT Group.



Total  revenue  from  fixed  network  communications  (Eesti

Telefon  Group) in the first half-year of 2001  amounted  to

1,504  mln  kroons, increasing by 11%. The main circumstance

affecting the result of the segment has been the opening  of

competition  on the fixed voice communications  market  from

January 1, 2001. International calls tariffs have fallen  up

to ten times. At the same time, there has not been a notable

fall   in   the   price  payable  to  other  (international)

operators. As a result, revenue from the service has  fallen

but  expenses related to it have remained the same.  By  the

end of the first half-year, Eesti Telefon estimated its loss

of  the  market share to be 29% (by number of outgoing  call

minutes).  Still,  thanks  to  several  bonus  packages  and

discounts   Eesti  Telefon’s  market  share  seems   to   be

stabilised.  Revenue from international calls in  the  first

half-year  of 2001 were 43% lower than the same period  last

year.  There has been less intensive competition on domestic

calls market. As at the end of June, Eesti Telefon estimated

its market share to be 93%. Revenue from the service was  5%

higher than last year. Revenue from calls to mobile networks

was  down  by 34%, compared to the first-half of  2000.  The

company estimated its market share to be 76%.



To  compensate for the loss of revenue from the  traditional

voice communication services, Eesti Telefon has entered  the

market  with several new products and services in  the  data

communication  and software solutions area. In  co-operation

with a world leading software company SAS, analysis software

is  offered  for  business clients.   In  June,  a  software

solution  for  communication and teamwork was launched  that

enables  clients  to  implement  the  most  recent  software

solutions  with  very limited investments. Also  from  June,

Eesti Telefon in co-operation with AS Privador introduced  a

solution  named  Secure  Distant Working  for  Atlas,  which

enhances  considerably the usage of home or mobile  offices.

The new solution enables a secure and confidential access to

documents, databases, and e-mail and web applications of the

local network of a company. In May the company installed the

first Internet kiosk in Estonia.



Total  expenses of Eesti Telefon group amounted to  998  mln

kroons,  up by 36%. Personnel expenses of the group grew  by

7%.  Total  number of employees of the parent company  Eesti

Telefon has fallen to 1,797.



Profit  from operations before depreciation amounted to  506

mln  kroons  (margin 34%), down by 18%. Net profit  for  the

period was 147 mln kroons, down by 39%.



Total revenues from mobile communications (EMT group) in the

first half-year of 2001 amounted to 1,056 mln kroons, up  by

23%.  The fastest growing component of revenue in the  first

half  of  2001 was SMS revenue that has doubled compared  to

the  same  period  last  year.  New  possibilities  for  SMS

communications (SMS from Internet portals, SMS to television

shows, etc.) should guarantee popularity and growth for  the

service also for the coming periods. Unfortunately, share of

SMS  revenue  in  total  revenue is  still  quite  moderate.

Another  influencing factor behind the  revenue  growth  was

increase   in   total  call  minutes.  Several   promotional

activities have accelerated the increase in the client-base.

Total number of EMT’s customers grew by 34.3 thousand during

the  first six months of 2001 reaching 361.7 thousand by the

end  of  June. The number of prepaid card users grew  by  10

thousand  reaching 118.4 thousand. As other Estonian  mobile

operators  haven’t released their end June customer  numbers

yet,  market share of EMT can only be estimated to be around

55.5-56.6%. Despite several reductions in minute tariffs  of

EMT’s  call  packages  and promotional campaigns  that  were

organised,  monthly  ARPU in June was higher  in  comparison

with the end of the first quarter or December 2000 (469, 466

and 398 kroons per month respectively).



Total  expenses of EMT group amounted 534 mln kroons, up  by

25%. Mobile communications EBITDA was 552 mln kroons (margin

49%), up by 21%. 381 mln kroons were earned as net profit.



Investments



Eesti  Telekom group invested 481 mln kroons  in  the  first

half-year of 2001 (2000: 570 mln kroons).



292  mln  kroons were invested by Eesti Telefon  group.  The

number of main lines per 100 inhabitants was 35.7 at the end

of  June 2001 (285 lines per employee). Digitalisation  rate

has reached 72.2%.



Data communications remain to be an investment priority  for

Eesti Telefon. The number of ADSL connections at the end  of

June was 11 thousand corresponding to the penetration of 0.8

lines per 100 inhabitants.



There  was an essential expansion in volume of international

Internet connections of Eesti Telefon in the first half-year

of  2001. In March, the direct Internet transit volume  with

Sweden  doubled  raising  the total  international  Internet

transit volume of the company to 84 Mb/sec. From June 1, the

premier   pan-European  carrier’s  carrier,   Pangea   Ltd.,

provides a wholly-owned pan-European network connection into

and out of Estonia, lifting the total international Internet

transit volume by additional third to 150 Mb/sec.



Quality  and security of the data communications are equally

important  for Eesti Telefon as quantitative characteristics

of the connections. A new server accommodation corresponding

to  high security requirements was opened on June 20,  2001.

The  accommodation  shall  guarantee  maintenance  of  Eesti

Telefon customers’ data even under extreme circumstances.



Development  of  telecommunication solutions  for  corporate

customers  has continued. Medical institutions  are  turning

into  an important client for Eesti Telefon. In addition  to

communication solutions for two hospitals and an outpatients

clinic  launched  in earlier periods, a  new  5  mln  kroons

solution  for the Tallinn Central Hospital was completed  in

April  this year. The solution comprises telephone, computer

and   security   systems  of  the  six  hospital   buildings

connecting  into  a  network 450  phones  and  200  computer

terminals.   In   June,  a  voice  and  data  communications

solutions was completed for the Läänemaa Hospital connecting

100 phones and 50 computer terminals. In longer perspective,

the  kind  of  solutions could be developed also  for  other

hospitals, drug stores and medical centres for both internal

and communicating to each other.



Launching  the  pilot project of an IP-based  call  handling

system for a shipping company Tallink is another example  of

a  new solution. The aim of this solution is to connect  the

operators  of the company working in different  offices  and

port  terminals,  starting with Estonia and continuing  with

Finland and Sweden.





139  mln kroons were invested by EMT group. The majority  of

the  investments went into the construction and  improvement

of  base stations, and exchanges. Technical testing of  GPRS

network  took place during the first half-year of  2001.  On

July  1,  2001,  EMT  put  GPRS, as the  first  operator  in

Estonia, into commercial use. GPRS can be used everywhere in

Estonia where GSM is available. Data transfer speed of  GPRS

is  currently up to 53 Kb/sec depending upon the  phone  and

network load. The speed will increase in the future.



EMT  treats GPRS as an intermediate stage from GSM to  UMTS.

Distribution of UMTS licenses in Estonia is expected in  the

first  half  of  2002.  A proposal was  made  by  a  special

commission  to  the government of Estonia not  to  sell  the

third  generation licenses in Estonia in an auction  but  to

organise  a “beauty contest”. The proposal is to issue  four

licenses  to  participants of the contest  corresponding  to

certain  criteria. No detailed information on  the  criteria

has been published yet.



In  order to be ready for challenges of the new technologies

the  cornerstone was set for EMT’s new technology centre  in

March.  GPRS,  and in the future the third  generation  UMTS

equipment,  will  be located at the technology  centre.  The

total  value  of the technology equipment will approximately

amount  to half a billion Estonian kroons. 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 for training and development  purposes.

This  environment  enables the modelling of  GPRS  and  UMTS

networks.  The  aim  of the centre is  to  develop  specific

software  for mobile operators that could be implemented  in

Estonia as well as abroad. EMT invested 1.4 mln kroons  into

the project.



As  both subsidiaries of Eesti Telekom group have associated

their  future  with  data  communications  area,  they  also

decided  to  participate  in  a joint  project  of  Estonian

entrepreneurs and the government named “Look @  World”.  The

project   is  aimed  at  supporting  the  use  of  Internet,

improving the quality of life in Estonia and the competitive

position  of  the  state  in Europe.  An  intention  of  the

participants is to boost Internet penetration in Estonia  to

74  per  cent,  thus  taking Estonia past  Finland  in  that

category  in  three years. Both Eesti Telefon and  EMT  will

invest 30 mln kroons into the project during the next  three

years.



Regulatory issues



Estonia has only a very limited history of acting as a fully

liberal    telecommunications   market.   Regulations    and

supervisory mechanisms are still in development stage. As  a

consequence, regulatory issues have been in focus during all

the period under review.



On  February  13, 2001, the Estonian Parliament adopted  the

Amendment Act to the Telecommunications Act stipulating  for

operators with significant market power the upper limits for

interconnection charges effective until December  31,  2001.

In  May,  the  Legal  Chancellor of  Estonia  expressed  his

opinion  on  the  issue. He found the Amendment  Act  to  be

constitutional and in public interests as it supports market

competition  through access network of Eesti Telefon.  Eesti

Telekom,  however,  still considers stipulating  limits  for

interconnection  charges  (in  addition  to  the  cost-based

pricing  requirement) to be unjustified treatment  of  Eesti

Telefon. Implementation of the limits would in the short run

reduce  profit of Eesti Telekom group and its value for  the

shareholders.  In  the long run, should  the  limits  remain

effective  for a longer period than just until  the  end  of

2001,  investments  into  development  of  telecommunication

network will be reviewed, this could have an impact  on  the

development of entire telecommunications sector in Estonia.



As  a  response to the Amendment Act, Eesti Telefon  changed

classification and tariffs of its calls from April 1,  2001.

As  of  this  date, local and trunk calls were  replaced  by

national   calls   with  unitary  tariffs.   Following   the

recommendations   of  the  National  Communications   Board,

methodologies   for   calculation   of   end-customer    and

interconnection costs were unified. The same tariffs  became

effective   for   all  Estonian  operators.   The   National

Communications  Board  has confirmed  that  the  methodology

behind the new tariffs is in accordance with the laws.



Reaction  from  the Competition Board followed  the  changes

made  by  Eesti  Telefon. On April 24, 2001,  based  on  the

Competition  Act, a prescript was made to Eesti  Telefon  to

cancel  the tariffs of 0.34 kroons per minute at peak hours,

0.28 kroons per minute at off-peak hours and 0.14 kroons per

minute  at night effective from April 1, 2001. Lower tariffs

were  suggested  by the Competition Board  for  the  service

calculated   on  bases  of  justified  pricing,  traditional

proportions between the price-rise and the CPI growth  rate,

and  acceptable return on equity. The Competition Board  has

also  sent a claim to the Administrative Court. The  maximum

fine, in case Eesti Telefon will lose the case, is 125.3 mln

kroons – 5% of the net sales of the company in 2000.



The  position  of  Eesti Telefon is that  tariffs  0.14-0.34

kroons  per minute are justified and cost-based. An auditing

company  KPMG audited the cost calculation system  of  Eesti

Telefon.  The  Communications Board  has  not  disputed  the

system.  Eesti  Telefon  has followed  requirements  of  the

Telecommunications Act and disagrees with the  precept.  The

company disputed the precept and the claim in Court  on  May

23, 2001.  The reading of the case is expected in August.



Estonian Parliament has introduced the implementation act of

the  law of property act which stipulates the right  of  way

issues  for  Eesti Telefon. We are in process of calculating

the amounts to be paid to the landowners, if any.



At the end of 2000, Eesti Telefon was recognised as the only

undertaking with significant market power in Estonia. In May

2001, a letter was presented to the Communications Board  by

the   Competition  Board  according  to  which  EMT  is   an

undertaking  dominating  the mobile  phone  services  market

since  it controls over 40 per cent of the turnover  of  the

said  market  and  its  dominating position  enables  it  to

operate in the market to an appreciable extent independently

of   competitors.  The  determination  as   an   undertaking

dominating  the  market does not mean the  determination  as

undertaking  with significant market power pursuant  to  the

Telecommunications  Act. The Communications  Board  has  not

determined EMT as undertaking with significant market  power

in  accordance  with the procedures prescribed  for  by  the

Telecommunications  Act. However,  EMT  plans  to  meet  the

representatives  of  the  Communications  Board  and   other

authorities to explain its position.



The   events   described  above  indicate  that   regulatory

activities  are  about to become one of the  most  important

factor  affecting development and financial  performance  of

Eesti   Telekom  group.  Participation  in  developing   the

regulatory  environment  has  become  a  priority  of  Eesti

Telekom.



Annual General Meeting of shareholders



Annual  General Meeting of shareholders of AS Eesti  Telekom

took  place  on  May 23, 2001. The meeting  approved  Annual

Report  2000 and the allocation proposal of the net  profit.

It  was  decided  to pay to the owners of A-shares  ordinary

dividends 4.00 kroons per share (in total 550 mln kroons  or

49%   of   the  net  profit  of  2000).  Also,  payment   of

“extraordinary  dividends” 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 dividends.



The  General Meeting authorised AS Eesti Telekom to  acquire

within  one year up to 5 per cent of the shares of  A-series

of AS Eesti Telekom. The management of AS Eesti Telekom sees

two possible reasons for the repurchase:



  1.    The repurchase could take place if the price of  the

     shares of the company falls to unreasonably low level, by

     the opinion of the management and the council. In this case

     the repurchase would support the share price. In accordance

     with the laws of Estonia, the shares acquired could be kept

     as treasury stock for only one year and thereafter must be

     expropriated.

2.   The repurchase could be arranged for M&A purposes.



Timo  Virtanen  was  elected to  be  a  new  member  of  the

supervisory council of Eesti Telekom where he replaced Mikko

Pirinen.  Remaining  nine members of the  council  were  re-

elected  for  one  more  term. Aare Tark  continues  as  the

chairman of the council.



The  meeting appointed Villu Vaino from AS Deloitte & Touche

Audit to audit Eesti Telekom in 2001.





Hille Võrk

Financial manager

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