AS Eesti Telekom FINANCIAL RESULTS 07.02.07 Consolidated Interim Report of AS Eesti Telekom for the IV Quarter and whole year 2006 MOST SIGNIFICANT FINANCIAL INDICATORS Q4 Q4 Chang 12M 12M Chang 2006 2005 e, % 2006 2005 e, % Net sales, 99.1 89.3 11.0 368.4 329.7 11.7 million EUR EBITDA, million 32.8 32.1 2.0 140.7 137.4 2.4 EUR EBITDA margin, % 33.1 35.9 38.2 41.7 EBIT, million EUR 25.2 19.5 29.5 106.0 89.3 18.6 EBIT margin, % 25.4 21.8 28.8 27.1 EBT, million EUR 25.8 20.0 28.8 108.6 91.8 18.3 Net profit for 25.8 20.0 28.8 84.7 69.5 21.9 period, million EUR EPS, EUR 0.19 0.15 28.0 0.61 0.50 21.5 CAPEX, million 14.0 15.2 -8.0 49.3 37.5 31.7 EUR Net gearing, % -33.5 -41.2 ROA, % 28.8 24.4 ROE, % 43.4 36.7 CHAIRMAN’S STATEMENT Financial Results Sales revenues, operating expenses and profit Financial results of the last quarter of 2006 were affected by several circumstances. One of them was an end to the effect of adding the new subsidiaries, AS MicroLink Eesti and AS MicroLink. The given enterprises were acquired by Elion Enterprises on 31 October 2005. Therefore, the turnover resulting from the acquisition of the enterprises only affected the results for the first month of the last quarter in 2006. Another circumstance is reclassification leasing claims related to some long term DigiTV and Internet access contracts which was done retrospectively in the last quarter of 2006 (look also Elion Group). The strongest contribution to the increase in sales revenues in the fourth quarter was made by mobile communications. The growth was primarily caused by increased volumes of call minutes. An increasingly discernible positive influence on sale revenues was manifested by mobile data communications—by the end of the year, the number of data communications users had increased to over 110,000. By the end of the year, there were already 15,000 3G users. During the past year, the increase of the client base as a whole was also positive. If, in the first half of 2006, the growth of the client base significantly decelerated, then the situation in the second half changed, and during the year as a whole, 82,000 (net) active SIM cards were added, the same number as in 2005. By the end of the year, Ratemobiil—the special package directed at the users of Rate.ee—had attracted 35,000 clients. AS EMT acquired a 51% share of OÜ Serenda Invest that manages Rate.ee in April of 2006. Currently we can say that the investment decision was correct, since EMT has significantly strengthened its market position among young people and introduced entirely new mobile services to the market. The sales revenues for fixed communications in the past quarter remained at the same level as the last quarter of 2005. At the same time, changes in the revenue structure continued. Revenues from voice communications also continued to decrease in the fourth quarter. However, the decrease was compensated by revenues in various fields of activity. For one thing, revenues earned from connection services increased. Elion, which entered the television transmission market in 2005, became the preferred provider of digital television transmission during 2006, and the addition of triple-solution clients significantly exceeded the company’s own projections. A record number of permanent Internet connection clients were added during the year. On the other hand, sales revenues were added by the provision of IT services which became a separate business activity. In the fourth quarter of 2006, the group’s revenues from the retailing and wholesaling of telecommunications, IT, and TV equipment increased by 51% compared to the same period in 2005. The growth was mainly related to the reclassification of leasing claims. In the last quarter of 2006, the Eesti Telekom Group operating expenses increased by 16% reaching 66.8 million euros (4th quarter 2005: 57.8 million euros). The additional operating expenses are related primarily to increasing volumes of merchandise procured for sale (incl. reclassification of leasing). The second source of growth for operating expenses has been mobile communications, where the increasing minute volumes passing through the network have been accompanied by greater interconnection fees. At the same time, the increase in mobile communications costs has been slowed by an improvement in the clients’ payment behavior, which has allowed significantly reduce the provisions made to cover accounts receivable in the last quarter of 2006. Compared to the same period of 2005, the operating expenses for fixed communications have decreased slightly. Eesti Telekom Group fourth quarter EBITDA increased by 2% compared to the same period in 2005, reaching 32.8 million euros (4th quarter 2005: 32.1 million euros). The EBITDA margin decreased to 33.1% (4th quarter 2005: 35.9%). In the fourth quarter, Eesti Telekom Group depreciation was 7.6 million euros, which is 40% less than a year earlier (4th quarter 2005: 12.6 million euros). The majority of the decrease in depreciation resulted from the implementation of new depreciation rates. At the beginning of 2006, TeliaSonera established new uniformly applied useful life spans for fixed assets in its 100% subsidiaries. Based on thorough analysis, the Eesti Telekom Group also decided to implement the depreciation periods proposed by TeliaSonera (with some changes based on local circumstances) in the Eesti Telekom Group starting on 1 May 2006. The depreciation already calculated on fixed assets was not adjusted in connection with the establishment of the new periods. The remaining useful life of existing fixed assets will be adjusted. The second important factor affecting the drop in depreciation was the moderate investments made during the past year. The Eesti Telekom Group earned an EBIT of 25.2 million euros (4th quarter 2005: 19.5 million euros). The group’s (net) financial revenues remained at the same level as the same period in 2005, reaching 0.6 million euros. The net profit for Eesti Telekom Group in the fourth quarter of 2006 was 25.8 million euros (4th quarter 2005: 20.0 million euros). The EPS earned was 0.19euros (4th quarter 2005: 0.15 euros). The consolidated sales revenues for the Eesti Telekom Group in 2006 reached 368.4 million euros, increasing 12% compared to 2005 (2005: 329.7 million euros). More than one third the additional sales revenues came from the mobile communications field. For the year, a significant contribution was also made by fixed communications, for which external sales revenues grew by almost 200 million euros. The principal growth factor was the addition of revenues from new subsidiaries. Sales revenues from trading grew 30% during the year. In 2006, the group’s operating costs expenses 231.4 million euros (2005: 192.8 million euros). The majority of the increase in operating expenses is related to the increased volumes of commercial activities. The operating expenses for mobile and fixed communications have also increased by over ten percent. The consolidated EBITDA for 2006 was 140.7 million euros (2005: 137.4 million euros). The EBITDA margin decreased slightly, reaching 38.2% in 2006 (2005: 41.7%). The reason for the decrease in the margin was the greater ratio of fields of activity with lower profitability—IT services and trading—in 2006 sales revenues. The depreciation in 2006 was 34.7 million euros (2005: 48.1 million euros). In the past year, the Group earned an EBIT of 106.0 million euros (2005: 89.3 million euros). In one year, the financial revenues (net) increased by 0.2 million euros reaching 2.6 million euros. In 2006, in connection with larger dividends, the amount of income tax paid on dividends also increased by 1.6 million euros, reaching 23.9 million euros. The Eesti Telekom Group earned a net profit of 84.7 million euros in 2006 or 0.61 euros per share (2005: 69.5 million euros or 0.50 euros per share). Balance sheet and cash flows As of 31 December 2006, the Eesti Telekom Group total assets were 307.8 million euros (31 December 2005: 297.8 million euros). In one year, the group’s non-current assets increased by 21.7 million euros. The growth of the non-current assets is based on greater investments by the group’s enterprises this year. During the past year, the current assets decreased by 11.6 million euros, whereas the cash and cash equivalents and short-term investment declined by 18.0 million euros. The reason for the reduction in cash and short-term investments is a dividend payment that was 8.8 million euros larger, increased dividend income tax, and an increase in investments. As of 31 December 2006, the group’s equity was 263.2 million euros (as of 31 December 2005: 258.2 million euros). On the one hand, equity was also reduced by the dividend payment that was larger than in 2005. On the other hand, equity was increased by a net profit that was 15.2 million euros larger than in 2005. As of 31 December 2006, the long-term liabilities of Eesti Telekom Group totaled 0.5 million euros (as of 31 December 2005: 0.4 million euros) and short-term liabilities totaled 41.8 million euros (31 December 2005: 38.2 million euros). At the end of the year, provisions totaling 2.3 million euros had been made. The group’s net debt at the end of 2006 was -88.4 million euros and net gearing was -33% (31 December 2005: -106.3 million euros and -41%). In 2006, the cash flow from operations for the Eesti Telekom Group was 121.6 million euros (2005: 128.2 million euros). The cash flow into investment activities in 2006 was 48.8 million euros (2005: 49.6 million euros). In one year, cash flow into the acquisition of tangible and intangible fixed assets increased, reaching 49.2 million euros in the past year (2005: 35.4 million euros). The cash flow into financial activities was 79.5 million euros in 2006 (2005: 72.3 million euros), including 79.4 million euros (2005: 70.5 million euros) that was paid out in dividends. Fixed-communications (Elion Group) Q4 Q4 Chang 12M 12M Chang 2006 2005 e, % 2006 2005 e, % Net sales, 51.4 46.3 10.8 187.1 165.2 13.2 million EUR EBITDA, million 11.6 13.8 -15.7 56.4 56.4 0.0 EUR EBITDA margin, 22.6 29.7 30.1 34.1 % EBIT, million 7.3 7.9 -7.4 37.3 31.6 17.8 EUR EBIT margin, % 14.2 17.0 19.9 19.1 EBT, million 7.3 8.1 -9.3 37.8 32.7 15.9 EUR Net profit for 7.3 8.1 -9.3 30.2 24.6 22.9 period, million EUR CAPEX, million 6.6 11.1 -40.1 31.8 25.2 25.8 EUR ROA, % 20.0 17.9 ROE, % 31.3 22.7 One principal factor behind Elion’s results is the end of the effect created by the acquisition of MicroLink Eesti. In the last quarter, only the results for October were influenced by the addition of revenues from new subsidiaries. The second principal factor that strongly influenced the quarterly result is change in accounting principle of equipment leased to customers. In April 2006, Elion came out with its DigiTV offer. Equipment provided to customers signing long-term DigiTV contracts was accounted as operational lease. The same principle was used in case of customers who used the “crazy offer” campaign for signing long-term Internet access contracts. A suggestion was made by the auditors that equipment of the kind should be accounted as finance lease and not as operating lease. At the end of 2006, Elion decided to reclassify the equipment. As a result, net sales of the fourth quarter were increased retrospectively by 3.9 million euros. Operating expenses were increased by 6.5 million euros (incl. 0.4 million euross accounted previously as depreciation). The EBITDA was down by 2.6 million euros and net profit by 2.1 million euros. As by its essence, reclassification of leasing is a periodization issue, then the decrease in profit in 2006 leads to higher profit in the next years and the total impact on profit will be zero. If the influence of the acquisition of the MicroLink Group companies and reclassification of lease were deducted from the Elion Group last quarter results for 2006, the increase in sales revenues would have been close to zero. Of the Elion Group’s principal fields of activity, the fastest growth in the last quarter of 2006 was demonstrated by monthly fees for integrated solutions. This year, the revenues in the given field of activity exceeded the results of the last quarter of 2005 by 78%. The increase was caused by the continued popularity of integrated solutions among the customers. One of the motivating forces is DigiTV that is offered as one component of the triple solution. The technical problems that occurred in the fall of 2006 were solved by the beginning of the last quarter, and by the end of the year, the total of DigiTV subscribers increased to 28,400, by growing by 10,000 during the quarter (30 September 2006: 18 400). During the past quarter, the theme packages offered the customers were supplemented. In November, at the DigiExpo Fair in Tallinn, remote video rental, which enables users to order films and programs directly from the TV screen, was demonstrated to the visitors for the first time. In February 2007, the first HD TV channel in Estonia and the Baltic States, Voom HD should reach the viewers. During the last quarter, Elion permanent Internet connections achieved the fastest growth rate of the year—15,700 new connections were added during three months. The rapid increase in connections was supported by the acquisition of Norby Telecom’s private client service business by Elion in November of 2006. By the end of 2006, the company had 141,700 permanent connection clients (30 September 2006: 126,000, 31 December 2005: 108,000). Since, in the past year, Elion concentrated primarily on offering integrated solutions, then the revenues from monthly fees earned from connection services decreased by 31%, compared to the last quarter of 2005. In addition to integrated solutions, the decrease was also caused by the increase in the ratio of Korterimaja Internet customers in the client base. The number of Elion voice interfaces1 remained stable in the last quarter of 2006, and as of 31 December 2006, the company had 463,900 interfaces (30 September 2006: 468,076; 31 December 2005: 458,450). The stabilization of the number of voice interfaces during 2006 was caused by the company’s active efforts to maintain clients and find new customers. Various client segments have also been offered different solutions to meet their needs. Therefore, a campaign for a discount package targeting price-sensitive clients was organized during the last quarter. The addition of new integrated solution users has also added voice interfaces, since telephone connections are a component of both double and triple packages. However, the amount of monthly fees earned from voice communications connections still dropped 12% compared to the same period in 2005, since the ratio of packages with low monthly fees has increased among connections. In the last quarter of 2006, Elion Group revenues from IT services decreased by 25% compared to the last quarter of 2005. The drop in the fourth quarter was caused by an incorrect intra-company posting of revenue accounts in the third and fourth quarters of 2006. Starting in June, a part of the account settlements related to MicroLink Eesti and Elion Enterprises were incorrectly recognized as external turnover. In November, these transactions were reclassified as internal turnover. Since the entire amount was recognized in fourth quarter revenues, this resulted in a decrease in revenues compared to the same period in 2005. In the fourth quarter of 2006, the decrease in call revenues earned from end consumers continued. Compared to the same period in 2005, the revenues earned from local calls decreased by 16%. The reduction in revenues from local calls is caused primarily by the free calls provided to users of various call or integrated solutions. The revenues earned from international calls decreased by 18%. The revenues for calls made from fixed-line telephones to mobile networks decreased by 6%. In the last quarter, other voice communications revenues, including revenues earned from interconnection fees and call transit, remained at the same level as the last quarter of 2005. Elion estimates its market share for call minutes initiated from fixed-line networks to be 83% (December 2006: 85%). The market share of local call minutes 85% (December 2006: 86%), international call minutes, 65% (December 2005: 66%), call minutes made to mobile phones, 70% (December 2005: 72%), and dial-up minutes, 97% (December 2005: 97%). The Communications Board has disclosed the draft of a resolution for the declaration of undertakings with significant market power in the telephone network interconnection services market for domestic consultation. In the market for call initiation, it is planned to declare only Elion Enterprises as an undertaking with significant market power; while the specific telephone networks Elion, Elisa, Starman, STV, Televõrgu AS, Telset, Tele2, Norby, Top Connect, RIKS, and ViaTel would be declared in the call termination market; and in the transit market, Elion and Elisa would be declared. There are plans to establish obligations for access, non-discrimination, transparency, and price controls, as well as cost accounting for the undertakings with significant market power. The revenues earned from the retail sales of telecommunications, IT, and TV equipment increased in the last quarter, as is typical of the end of the year. In addition to the seasonal factor, sales were affected by reclassification of leasing. During the last quarter of 2006, Elion Group operating expenses were 40.4 million euros (4th quarter 2005: 32.5 million euros). The changes that took place in the components of individual operating costs reflect the developments that took place in sales revenues. Thus, in comparison to the same period in 2005, the greatest increase was in costs related to connection fees. Costs for goods procured for retail sale also were up, compared to the same period in 2005. The main reason for the growth was reclassification of leasing. The rapid growth of wages in Estonia as a whole also affected Elion. The personnel costs in the fourth quarter were 15% higher than in the same period of 2005. At the same time, the number of Elion employees has also increased by 6%. The number of employees has primarily increased in the fastest- growing subsidiaries of the group—Elion Esindus and MicroLink Eesti. Employees were also added in connection with the takeover of the private client business from Norby Telecom. The costs related to Elion call services remained at the same level as the last quarter of 2005. However, the costs related to providing call services to end consumers decreased, although the costs related to interconnection services and call transit increased. The Elion Group EBITDA in the fourth quarter was 11.6 million euros, which was at the same level with the same period of 2005 (4th quarter 2005: 13.8 million euros). The EBITDA margin was 22.6%. Elion Group depreciation decreased by 27% on the year to 4.3 million euros (4th quarter 2005: 5.9 million euros) in the last quarter of 2006. The reduction in depreciation was caused by the implementation of new depreciation norms starting in May of 2006 (the effect on depreciation is approximately -0.4 million euros per month). The EBIT of the Elion Group in the fourth quarter was 7.3 million euros, which was 9% less than in the last quarter of 2005 (4th quarter 2005: 7.9 million euros). The financial revenues (net) in the last quarter of 2006 were 0.06 million euros (4th quarter 2005: 0.2 million euros). The net profit of the Elion Group in the fourth quarter was 7.3 million euros (4th quarter 2005: 8.1 million euros). In the last quarter of 2006, the Elion Group invested 6.6 million euros (4th quarter 2005: 11.1 million euros). Majority of the investments went into the development of client solutions—expanding the permanent connection network, enabling digital TV reception, and for several cooperation projects designed to improve the communications possibilities of local governments in various parts of Estonia. Almost a quarter of the investments were used to develop the backbone network. Elion Group sales revenues for 2006 were 13% greater than sales revenues in 2005. As far as the year as a whole, the consolidation of MicroLink Eesti manifested a significant influence on the increase of sales revenues. For the year, faster growth was also demonstrated by revenues earned from the monthly fees for integrated services, which increased by 68%. Retail sales revenues for merchandise increased by 45%, or more than 9.5 million euros. The annual growth of sales revenues from IT services was 25%. During the year, revenues earned from monthly Internet and voice communications connections decreased. In 2006, the operating expenses of the Elion Group reached 134.2 million euros (2005: 109.7 million euros), increasing 23% on the year. Almost half of the additional operating costs resulted from the greater volumes of retail sales merchandise. Other growth factors affecting operating expenses were costs related to personnel and interconnection fees, as well as call transit. Elion Group EBITDA was 56.3 million euros in 2006 (2005: 56.3 million euros). The EBITDA margin dropped somewhat, reaching 30.1% in 2006 (2005: 34.1%). The decrease in the margin was caused by an increase in the ratio of fields of activity with low profitability in the turnover. Depreciation dropped during the year by 23% to 19.1 million euros (2005: 24.7 million euros). During the past year, the Elion Group earned EBIT of 37.3 million euros (2005: 31.6 million euros). In 2006, Elion EBT was 37.8 million euros (2005: 32.7 million euros). In connection with the reduction in the income tax rate, the costs for income taxes paid on dividends reached 7.6 million euros (2005: 8.1 million euros). In 2006, the Elion Group earned a net profit of 30.2 million euros (2005: 24.6 million euros). During the year, 31.8 million euros (2005: 25.2 million euros) was invested into fixed assets. At the end of 2006, the Elion Group employed 1,757 workers (2005: 1,663). At the beginning of 2007, the litigation between Elion Enterprises and Elion Mobiilsideteenuste AS was resolved. On 5 December 2005, Elisa Mobiilsideteenused filed an action against Elion Enterprises for the payment of unpaid interconnection fees and the penalties calculated thereon in the amount of 753 thousand euros. The reason for the action was the claim that Elion had applied the incorrect call termination fee for the Elisa mobile network. Since, in the period 1 January 2005 to 1 August 2005, an interconnection contract between Elion and Elisa Mobiilsideteenused was lacking, and therefore a contractual price was also lacking, Elion applied the principle of receiving a reasonable price, i.e. payment that includes a reasonable profit. On 15 January 2007, the Harju County Court passed judgment, according to which Elion must pay 0.639 million euros to Elisa for the unrealized interconnection fees. Elion had taken into account the possible payment obligation and it will not affect the company’s business activities. At the same time, Elion has never disputed the interconnection fees as such, but it did not agree with the amount of the fees. Therefore, Elion is satisfied with the court resolution, which recognized the fact that the interconnection fees demanded by Elisa were too high and assigned a lower price. Mobile communications (EMT Group) Q4 Q4 Chang 12M 12M Chang 2006 2005 e, % 2006 2005 e, % Net sales, 60.2 51.4 17.0 223.8 196.8 13.8 million EUR EBITDA, million 21.7 18.7 16.6 86.0 82.3 4.5 EUR EBITDA margin, % 36.2 36.3 38.4 41.8 EBIT, million EUR 18.5 12.0 55.6 70.4 58.9 19.6 EBIT margin, % 30.8 23.2 31.5 30.0 EBT, million EUR 18.8 12.1 55.3 71.3 59.5 19.8 Net profit for 18.8 12.1 55.3 55.0 45.3 21.4 period, million EUR CAPEX, million 7.3 4.1 80.7 17.5 12.2 44.0 EUR ROA, % 46.9 38.9 ROE, % 78.2 63.7 The growth rate of EMT Group sales revenues remained rapid in the last quarter of 2006. Thanks to the increase in retail sales typical of the end of the year, the growth rate of revenues for the group even increased compared to the third quarter, reaching 17 percent. The increase of revenues from principal activities is related primarily to an increase in the number of call minutes. In 2006, the number of call minutes initiated from the EMT network increased approximately 20% compared to 2005. The greater number of call minutes, in turn, resulted from an increase in the number of clients, as well as the more active use of call services by the customers. As of the end of December 2006, AS EMT had 759 thousand active SIM-cards, which is 82 thousand more than at the end of 2005 (31 December 2005: 677 thousand). Throughout the year, the company maintained its 47% market share. The number of contractual clients remained stable throughout the year. During the last quarter, 6 thousand contractual SIM-cards were added; as of 31 December 2006, the number of active cards had increased to 433 thousand (31 December 2005: 406 thousand). If, as far as pre-paid cards, the beginning of 2006 started passively, and the first half of the year ended with a decline in the number of active SIM-cards, then at the end of summer, the negative trend reversed and the number of pre- paid cards again started an increase, which continued until the last quarter of the year. During the fourth quarter, 32 thousand active pre-paid cards were added and the total number of cards grew to 326 thousand (31 December 2005: 271 thousand). The principal portion of the growth in the number of pre-paid cards again resulted from Ratemobiil. On April 5, 2006, AS EMT acquired 51% of the shares of Serenda Invest OÜ. Serenda Invest OÜ owns the trademark Rate and also administers Rate.ee, Estonia’s most popular Internet communications environment for young people. In the summer of 2006, AS EMT introduced Ratemobiil, a special mobile package oriented to Rate.ee users, which, by the end of the year, had already acquired tens of thousands of users. A discount campaign by Simpel, EMT’s oldest pre-paid card, has become a tradition at the end of the year, and at the end of this year, attracted thousands of new customers for the service. Based on the rapid increase in the number of pre-paid cards in the second half of 2006, the ratio of pre-paid cards among the total number of active EMT cards also increased, reaching 42% by the end of December (31 December 2005: 39%). In addition to the increase in the client base, the number of call minutes used per client also increased. Despite the fact that the average rate per minute in the Estonian market continued to drop, the increase in the client base and number of call minutes compensated for the drop in rates, and the revenues earned from domestic call services (including the fees for packages that allow for a certain number of call minutes for a monthly fee) increased in the fourth quarter by 4% compared to the same period in 2005. Together with the increase in the number of call minutes initiated from the EMT network, the number of terminated minutes in the EMT network has also increased at approximately the same rate. Since the litigation between the Communications Board and mobile communications operators Elisa Mobiil and Tele2 Eesti regarding declaring the given operators undertakings with significant power continued throughout the fourth quarter of 2006, the termination fees of all the operators remained unchanged at 0.16 euros per minute. Therefore, the increase in the number of terminated call minutes was accompanied by a significant, over 10%, increase in interconnection revenues. An increase in the number of mobile messages has been traditional for the fourth quarter and end of the year. At the end of 2006, the increase was especially brisk, and the number of SMS messages more than doubled, and the number of MMS messages grew by over 25%. Since Ratemobiil clients could still send messages for free during the fourth quarter, then the increase in revenues earned from messages in the fourth quarter of 2006, remained more modest than the same period in 2005, while still reaching 19%. In December 2006, AS EMT earned revenues of 20.45 euros per customer (September 2006: 21.67 euros, December 2005: 20.71 euros). The average monthly revenue per customer in 2006 was 21.22 euros, which is 1% less than in 2005. The fourth quarter was also successful for EMT Esindused and MWS, the companies in the EMT Group that deal with the sale of merchandise. Compared to the last quarter of 2005, sales revenues increased by 44%, and increases took place in sales to both retail consumers and other companies in the Eesti Telekom Group. EMT Group operating expenses in 2006 remained modest compared to previous quarters, reaching 16%. One of the factors that caused a more modest increase in operating costs in the fourth quarter was the reduction in the seasonality of marketing activities. If, in 2005, numerous marketing campaigns and discount sales took place in the last quarter, in 2006, these were spread more evenly throughout the year, and therefore, a sharp increase in marketing costs did not occur in the last quarter. The other circumstances that affected the increase of operating expenses were the adjustment of provisions and reserves at the end of the year. During 2006, the customers’ payment behavior improved significantly, whereby the provision for doubtful debts was reduced. If, in the last quarter of 2005, the reserve for employees’ bonuses in the EMT Group was increased in connection with the improved financial results at the end of the year, then the 2006 results were more in line with the company’s projections, whereby the provisions for the bonus reserve was more even distributed over the year and an increase at the end of the year did not occur. The sales revenues and operating costs grew at the same rate, and also brought the EBITDA to a 17% increase. The EBITDA for the fourth quarter of 2006 was 21.7 million euros (4th quarter 2005: 18.7 million euros). The EBITDA margin in the fourth quarter was 36.2%, which was the same level as the margin for the fourth quarter of 2005. The aforementioned change in provisions also had a significant influence on maintaining the level of the margin, as opposed to the previous quarters of 2006. EMT Group depreciation declined by 52% in the fourth quarter of 2006, reaching 3.2 million euros (4th quarter 2005: 6.7 million euros). Starting in May of 2006, the EMT Group implemented new depreciation rates, the influence of which is approximately -0.3 million euros per month. The EMT Group EBIT increased in the fourth quarter by 56%, reaching 18.5 million euros (4th quarter 2005: 12.0 million euros). In the last quarter, the group earned financial revenues (net) of 0.3 million euros (4th quarter 2005: 0.2 million euros). EMT Group net profit was 18.8 million euros (4th quarter 2005: 12.1 million euros). The EMT Group invested 7.3 million euros in the last quarter of 2006 (4th quarter 2006: 4.1 million euros). The principal portion of the investments went into the expansion of the 2G and 3G networks and guaranteeing service quality even under conditions of rapid user growth. During the last quarter, in compliance with the requirements of the International Financial Reporting Standards, a 1.2-million-euros reserve was established to cover possible expenses to restore the rented land under operator towers after the end of the rental period. The EMT Group sales revenues increased by 14% in 2006 compared to 2005. For the year, the greatest additional revenues were received from interconnection services, domestic calls, and the sale of merchandise. The group’s operating costs increased by 20%. The increase in operating costs resulted primarily from the increase in procurement costs of merchandise, and increases in interconnection and roaming fees. In 2006, the EMT Group earned EBITDA of 86.0 million euros, which was 5% more than 2005 (2005: 82.3 million euros). The EBITDA margin decreased in a year from 42.8% to 38.4%. The decrease in the margin was caused by the increase in the ratio of commercial activities with a lower profitability than principal activities in the consolidated sales revenues. EMT Group depreciation declined by 33% during the year. The decline was caused by the implementation of new depreciation rates as well as the modest investments made during previous years. Thanks to a strong financial position, EMT Group financial revenues (net) in 2006 reached 0.8 million euros (2005: 0.6 million euros). Due to larger dividends paid by the parent company, the income tax amount increased in 2006, reaching 16.2 million euros (2005: 14.1 million euros). The EMT Group earned a net profit of 55.0 million euros (2005: 45.3 million euros). During the year, 17.5 million euros (2005: 12.2 million euros) was invested in fixed assets. At the end of 2006, EMT Group employed 551 workers (2005: 507). Ownership structure of AS Eesti Telekom In the fourth quarter of 2006, the participation of Deutsche Bank Trust Company in AS Eesti Telekom dropped below 10% (10.01% at the end of the third quarter 2006). The Deutsche Bank Trust Company represents the accounts of owners of AS Eesti Telekom GDRs listed on the London Stock Exchange. On 11 November 2006, the Riigikogu passed the Estonian Development Fund Act. The goal of the Development Fund is to stimulate and support changes in the Estonian economy that should help to update the economy, guarantee the growth of exports, and create new jobs that require high qualifications. Upon its establishment, the Development Fund will be given at least 3% of the AS Eesti Telekom shares that belong to the state. The Development Fund may use the resources received from dividends or from the sale of the shares for investment activities. As of 31 December 2006, the AS Eesti Telekom shares had not been transferred to the Development Fund. As of the end of 2006, 19.1% of the AS Eesti Telekom shares could be freely traded. Almost half the freely tradable shares had been converted to GDRs. AS of 31 December 2006, the 10 largest shareholders in AS Eesti Telekom were: Participat Number of ion securities Baltic Tele AB 74,110,079 53.7207% Ministry of Finance / State 37,485,100 27.1721% Treasury Deutsche Bank Trust Company 12,505,821 9.0652% Skandinaviska Enskilda Banken AB 2,238,107 1.6224% clients ING Luxembourg S.A. 1,491,330 1.0810% Morgan Stanley Co International 1,191,442 0.8636% Equity clients Danske Bank clients 1,017,063 0.7372% Trigon New Europe Small Cap Fund 645,240 0.4677% Bank Austria Creditanstalt AG 579,526 0.4201% clients The Northen Trust Company 470,000 0.3407% On 6 February, an extraordinary general meeting of the AS Eesti Telekom shareholders took place. Baltic Tele AB applied for the convening of the general meeting in connection with internal structural changes in its parent company, TeliaSonera AB. The given structural changes caused changes in the work assignments of some of the Supervisory Board members of AS Eesti Telekom who are employed by TeliaSonera AB, whereby the Supervisory Board members’ performance of their duties might be rendered difficult. Therefore, Baltic Tele AB applied to have the given individuals replaced on the AS Eesti Telekom Supervisory Board. The extraordinary shareholders’ general meeting resolved the following: to recall AS Eesti Telekom Supervisory Board members, Erik Hallberg, Bengt Andersson, and Hans Tuvehjelm; to consider the given individuals as being recalled and their authorizations terminated as of the passing of the resolution; to elect Terje Christoffersen, Jörgen Latte, and Anders Gylder as new members of the AS Eesti Telekom Supervisory Board; to consider the given individuals to be elected and the term of the Supervisory Board member’s authorization to be valid from the passing of the resolution to 18 May 2007. Definitions Net debt—Long- and short-term debt, less cash and cash equivalents and short-term investments ROA – Return on Assets—Net profit for the rolling four quarters, expressed as percentage of average total assets ROE – Return on Equity—Pre-tax profit for rolling four quarters, expressed as percentage of average equity IV QUARTER CONSOLIDATED INCOME STATEMENT In thousand of euros (EUR) IV Quarter IV Quarter 2006 2005 Restated Net sales 99,134 89,325 Cost of production (58,868) (53,826) Gross profit 40,266 35,499 Sales, administrative, and research & (15,499) (16,646) development expenses Other operating revenues 621 and expenses 446 Operating profit 25,213 19,474 Net income / (expenses) from associated (91) (6) companies Other net financial items 687 576 Net profit for the 25,809 20,044 period Attributable to: Equity holders of the parent 25,649 20,044 Minority interest 160 - 25,809 20,044 Earnings per share for profit attributable to the equity holders of the parent during the reporting period (expressed in EUR per share) Basic earnings per share 0.19 0.15 Diluted earnings per share 0.19 0.15 EBITDA 32,766 32,114 Depreciation, amortization and write- (7,553) (12,640) downs CONSOLIDATED 2006 INCOME STATEMENT In thousand of euros (EUR) 2006 2005 Restated Net sales 368,425 329,744 Cost of production (208,015) (189,073) Gross profit 160,410 140,671 Sales, administrative, and research & (58,086) (51,896) development expenses Other operating revenues 563 and expenses 3,658 Operating profit 105,982 89,338 Net income / (expenses) from associated companies 12 29 Other net financial items 2,609 2,415 Profit before tax 108,603 91,782 Income tax on dividends (23,863) (22,274) Net profit for the period 84,740 69,508 Attributable to: Equity holders of the parent 84,448 69,498 Minority interest 292 10 84,740 69,508 Earnings per share for profit attributable to the equity holders of the parent during the reporting period (expressed in EUR per share) Basic earnings per share 0.61 0.50 Diluted earnings per share 0.61 0.50 EBITDA 140,683 137,447 Depreciation, amortization and write- (34,701) (48,109) downs CONSOLIDATED BALANCE SHEET In thousand of euros (EUR) 31 December 31 December 2006 2005 ASSETS Non-current assets Property, plant and equipment 130,022 117,209 Intangible fixed assets 13,681 10,654 Investments in associates 1,102 189 Other financial fixed assets 7,736 2,823 Total non-current 152,541 130,875 assets Inventories 9,120 5,552 Trade and other receivables 56,713 53,490 Short-term investments 68,057 80,953 Cash and cash equivalents 20,733 25,919 Total 154,623 165,914 Assets classified as held-for-sale 665 1,007 Total current assets 155,288 166,921 TOTAL ASSETS 307,829 297,796 EQUITY AND LIABILITIES Capital and reserves attributable to equity holders of the parent Share capital 88,169 88,169 Share premium 22,753 22,753 Statutory legal reserve 8,817 8,817 Retained earnings 58,672 68,923 Net profit for the period 84,448 69,498 Total capital and 262,859 258,160 reserves attributable to equity holders of the parent Minority interest 321 74 Total equity 263,180 258,234 Provisions Provisions for pension 561 498 Other provisions 1,753 500 Total provisions 2,314 998 Interest-bearing liabilities Long –term liabilities 200 369 Short-term liabilities 175 203 Total interest bearing liabilities 375 572 Non-interest-bearing liabilities Long-term liabilities 329 - Current liabilities 41,631 37,992 Total non-interest- 41,960 37,992 bearing liabilities Total liabilities 42,335 38,564 TOTAL EQUITY AND 307,829 297,796 LIABILITIES CONSOLIDATED CASH FLOW STATEMENT In thousand of euros (EUR) 2006 2005 Operating activities Net profit for the period 84,740 69,508 Adjustments for: Depreciation, amortisation and impairment of fixed and 34,701 48,109 intangible assets (Profit) / loss from sales and discards of fixed assets (2,814) (483) Net (income) / expenses from associated companies (12) (29) Provisions 1,288 257 Financial items 1,144 4,310 Income tax on dividends - (3) Miscellaneous non-cash items (652) (1,212) Cash flow before change in 118,395 working capital 120,457 Change in current receivables 2,783 (1,431) Change in inventories (3,565) 2,503 Change in current liabilities 3,985 6,674 Change in working capital 3,203 7,746 Cash flow from operating 121,598 activities 128,203 Investing activities Intangible and tangible fixed assets acquired (49,203) (35,402) Intangible and tangible fixed assets divested 3,170 1,122 Shares, participations and (6,199) operations acquired (18,793) Shares, participations and - 14,941 operations divested Net change in interest- 14,093 receivables short maturities (5,602) Loans granted (11,480) (6,064) Repayment of loans granted 771 174 Cash flow from investing activities (48,848) (49,624) Cash flow before financing activities 72,750 78,579 Financing activities Proceeds from non-convertible - 132 debts Repayment of borrowings - (884) Repayment of finance lease (135) (1,005) liabilities Dividends paid (79,352) (70,547) Cash flow used in financing activities (79,487) (72,304) Cash flow for the year (6,737) 6,275 Cash and cash equivalents at beginning of year 27,507 21,178 Cash flow for the year (6,737) 6,275 Effect of foreign exchange rate changes (37) 54 Cash and cash equivalents at end of period 20,733 27,507 _______________________________ 1 The users of VoIP services and active users of call services Hille Võrk AS Eesti Telekom, CFO +372 6 311 212 hille.vork@telekom.ee