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