General Success of Starman continued for the first nine months of the year. The company maintained its strong position in the spheres of cable-TV and the internet and further strengthened its position in the telephony market. Starman is currently offering the best bundled triple play service in the home user sector. The triple play service is now available to the majority of the company's customers. Through its cable network, Starman is currently represented in most of Estonia's major cities, predominantly in densely populated areas. In December 2006, the product portfolio of Starman was supplemented with a DTT (digital terrestrial television) service. ZUUMtv, which was positioned separately, is transmitted through air and Starman's cable network is not used for delivering this product. ZUUMtv is expected to attract a considerable number of new customers in the near future, especially in those regions of Estonia where Starman was not present thus far. A consortium of financial investors led by Bancroft Private Equity LLP acquired a majority holding in Starman at the end of 2007. At the moment, Baltic Moontech Investments Holding AS representing the above financial investors holds a total of 9,361,627 shares in Starman, i.e. 71.72% of the company's share capital. Given the current structure of shareholders, delisting of the company from the Tallinn Stock Exchange will probably be applied for in the near future. Starman Group's total revenue for the first nine months of 2008 amounted to 16.6 million euros, representing a 25% increase compared to the same period a year ago. EBITDA for the first nine months of 2008 amounted to 5.4 million euros and net profit attributable to shareholders from ordinary business operations to 2.5 million euros - respectively an 18% and a 30% increase compared to the same figures last year. The good performance is built on the company's successful long-term activities relating to traditional services, where the best-ever results were achieved both in terms of volume and profitability. As expected, the starting ZUUMtv had a negative impact on Starman's profit figures. A drop of 1.3 million euros in EBITDA - Starman's main performance indicator - is directly attributable to ZUUMtv, plus certain indirect costs whose amount cannot be determined precisely as they were allocated to a number of different products. The negative impact of ZUUMtv on the financial results of the Group is anticipated to continue also in the near future. However, in the long run the new product is expected to strengthen the company's market position and profitability. Financial ratios A selection of ratios for evaluating the economic activities in the first nine months of 2008: -------------------------------------------------------------------------------- | | 2006 | 2007 | 9 months | | | | | 2008 | -------------------------------------------------------------------------------- | Sales increase | 25% | 19% | 25% | -------------------------------------------------------------------------------- | EBITDA margin | 40% | 33% | 32% | -------------------------------------------------------------------------------- | Gross margin | 21% | 13% | 13% | -------------------------------------------------------------------------------- | Net margin | 19% | 13% | 10% | -------------------------------------------------------------------------------- | Revenue/average assets | 0.72 | 0.73 | 0.81 | -------------------------------------------------------------------------------- | | | | | -------------------------------------------------------------------------------- | Equity ratio | 58% | 57% | 55% | -------------------------------------------------------------------------------- | Debt to equity | 0.56 | 0.57 | 0.59 | -------------------------------------------------------------------------------- | Debt/EBITDA | 1.19 | 1.41 | 1.28 | -------------------------------------------------------------------------------- | Investments/EBITDA | 0.83 | 1.15 | 0.97 | -------------------------------------------------------------------------------- | | | | | -------------------------------------------------------------------------------- | Current ratio | 1.09 | 0.91 | 1.15* | -------------------------------------------------------------------------------- | Invoice turnover rate (annual) | 20.0 | 21.5 | 22.2 | -------------------------------------------------------------------------------- Definitions: Sales increase = increase compared to the same period last year EBITDA = operating profit + depreciation and amortisation EBITDA margin = EBITDA / total revenue Gross margin = operating profit / total revenue Net margin = net profit attributable to shareholders / total revenue Revenue / average assets - for comparison purposes, the revenue for the first nine months of 2008 has been multiplied by 4/3 Equity ratio = equity / total assets Debt = borrowings + long-term borrowings Debt / EBITDA - for comparison purposes, EBITDA for the first nine months of 2008 has been multiplied by 4/3 Current ratio = current assets / current liabilities Invoice turnover rate = revenue for the period / accounts receivable at the end of the period; for comparison purposes, revenue for the first nine months of 2008 has been multiplied by 4/3 * As to this ratio, it should be borne in mind that because of the special nature of the accounting principles applied in preparing this report, only loans repayable within the current financial year are recognised as short-term borrowings under current liabilities (i.e. in the case of nine months, loan payments due within the following three months) unlike the year-end figures where all loans repayable within the following year are recognised as short-term borrowings. Consequently, the current ratio for nine months is somewhat overestimated vis-à-vis the year-end figures. Upon eliminating this difference from the figures of the first nine months of 2008, the current ratio amounts to 0.80. Group structure Starman Group consists of AS Starman being the parent company and, starting from October 2006, Eesti Digitaaltelevisiooni AS being a subsidiary company. 66% of shares in Eesti Digitaaltelevisiooni AS are held by Starman and 34% of the shares by AS Levira. The financial results of Eesti Digitaaltelevisiooni AS have been consolidated into the Group report on a line-by-line basis, separately indicating the minority share. Revenue and expenses Traditionally, cable television and internet services contributed the majority of Starman's total revenue for the first nine months of 2008, accounting for 43% and 30% of total revenue, respectively. The share of telephony service was 16% and that of the DTT service, growing much faster than the others services, was 6%. Revenue from cable television services increased 18% compared to the first nine months of 2007. Organic growth in the market has mostly been achieved at the expense of price increase in recent years. In the first quarter of 2008 the prices of Starman's cable television services further approached those of countries with a similar living standard. In addition to the regular price increase, the ARPU (average revenue per user) is also supported by structural changes. As regards structural changes, the triple packages that do not contain smaller programme ranges and the new possibilities such as digital television should be mentioned. At the end of September 2008, the company had a total of 137 thousand cable television customers, 6.9% of which were digital television users. The number of cable television customers at the end of September exceeded the last year's relevant figure by 3.4%, quite a good result given the saturated market and tightened competition. The increase in customer numbers in the second quarter of 2008 resulted primarily from the expansion of the cable network. In the first quarter of 2008 Starman launched its own television channel called Neljas. During its short time of operation the channel has achieved the targets set, the most important of them being enhancement of the range of products offered to customers. Regardless of that, Starman decided to focus on its core activities and the channel was sold to a local media group, Kalev Meedia, in October 2008. The change in the channel's ownership does not affect the customers. Revenue from the internet services increased 13% in comparison with the first nine months of 2007. At the end of September 2008, the company had 52 thousand internet customers - a 17% increase compared with the same period a year ago. Starman maintained its position as the market leader of broadband internet for private customers in its footprint. In line with the general impacts of the market, the ARPU continued to show a downward trend. However, lately there has been a certain deceleration of the decline rate - the average figure for the first nine months of 2008 dropped 6% compared to the same figure a year ago. Starman's popular triple packages in which the internet services are cheaper have a major impact on the internet ARPU. However, the supporting influence of the triple packages on other services and, hence, also on the average aggregate revenue per user cannot be disregarded. As expected, the period of accelerated growth of the telephony service has ended; however, the revenue for the first nine months of 2008 has still increased 16% in comparison with the same period a year ago. As at the end of September 2008 the company had 49 thousand telephony clients, i.e. 27% more than at the same time last year. The ARPU of the telephony service, which has been quite stable in the past, has been declining significantly from the beginning of 2007. A similar trend continued in the first nine months of 2008 - the period's average figure decreased 13% compared to the last year's relevant figure. Starman views its cable television, internet and telephony services as a single integrated service. Since the provision of the integrated service has remained a part of the corporate strategy for a long period of time, and the services are designed to support each other, a separate analysis of the respective segments might not give the most accurate picture. In the first nine months of 2008, the average aggregate revenue from the given services per client was 14% higher in comparison with the same period a year ago. Important positive developments regarding ZUUMtv occurred at the beginning of 2008. By now, eight Estonian-language TV channels, including the three main local channels, are available on the digital platform. The fact that not all of the main local channels were available on the digital platform affected the whole of the first year of operation of ZUUMtv, constituting a major divergence from the initial business plan. Given also the positive developments relating to the fact that the switchover to digital broadcasting will take place two years earlier, not in 2012 as first planned, Eesti Digitaaltelevisiooni AS has much better chances of making up for the initial setback. Revenue from the DTT service was up 5.1 times on the first nine months of the previous year, with growth in the third quarter being 29% compared to the second quarter. In September 2008 the DTT service already constituted 8.2% of the company's total revenue, and this share is expected to increase significantly in the near future. At the end of September 2008, Eesti Digitaaltelevisiooni AS had 21 thousand customers and ZUUMtv covered 97% of Estonian households. In comparison with previous years, the relative importance of the sale of goods and materials has significantly increased. The threefold increase in the first nine months of 2008, compared to the same period a year ago, is attributable to the substantial growth of the DTT market. It should be borne in mind, however, that the sale of goods and materials is merely an ancillary activity for the company, which is meant to support its principal activity, and therefore it cannot be regarded as a separate source of revenue. Starman's operating expenses amounted to 11.2 million Euros in the first nine months of 2008, having grown 29% in comparison with the same period in 2007. The fact that the growth in operating expenses was somewhat faster than the growth in revenue is clearly attributable to ZUUMtv - when eliminating the direct costs relating to this newly launched product, the increase in operating expenses would amount to 12%. The impact of ZUUMtv is most notable among expenses reported under “Services purchased” which include the transmission charge payable to Levira as a major expense item. The amount of the transmission charge depends primarily on coverage, and therefore its impact on profit figures after the product has just been introduced and customer figures are far from the company's long-term targets is quite substantial. Due to the operation of Starman's own TV channel, the growth in programme costs has been much greater than the growth in revenue. Of major expense items, transportation expenses (increases in the price of fuel and insurance, and new vehicles added to the fleet), office expenses (a need for more office space due to an increase in the number of employees), and personnel expenses have also shown fast growth compared to the same period a year ago. However, in respect of certain expense items growth figures have been quite modest and in some cases even negative. A decrease in expenses related to the rental of communication ducts should also be mentioned. These expenses have a further potential from previous periods (see Note 14 for more details). In the first nine months of 2008, personnel expenses increased 30% year on year. As regards personnel expenses, it should be noted that this indicator includes 81% of the total wage fund, since the remainder is capitalised in accordance with the corporate accounting rules. The average number of employees was 273 in the first nine months of 2008 (225 in the first nine months of 2007). As at 30 September 2008, the company employed 285 people. Part-time employees accounted for 24% of the staff. The average number of employees translated to the full employment equivalent was 234 in the first nine months of 2008, up 18% compared to the same figure a year ago. The latter figure grew mainly in the second quarter of 2008 in connection with the expansion of the cable network and a continuing decrease in some outsourced services. As to expenses related to asset valuation, the provision for bad debts amounted to 107 thousand euros, i.e. 0.7% of the turnover for the period (0.4% in the first nine months of 2007). Loss of inventories and discounts totalled 71 thousand euros in the first nine months of 2008 (30 thousand euros in the first nine months of 2007). Both figures are still rather modest, their notable growth being a result of the overall economic downturn. EBITDA for the first nine months of 2008 amounted to 5.4 million euros. When eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to an excellent 45%. Hence, the first nine months of 2008 were record-breaking in terms of profitability of traditional services, compared to similar periods in previous years. Depreciation costs increased 20% in comparison with the first nine months of 2007. Owing to the extensive investing activities carried out in recent years, the depreciation costs continued to have a considerable impact on the profit figures. However, a deceleration of the growth of depreciation costs can be noted for the first time in recent years. Considering the fact that traditional services have reached a mature stage, the continuation of this trend could only be hindered by an successful growth in the sphere of the DTT service. The net profit attributable to shareholders for the first nine months of 2008 amounted to 1.6 million Euros. The result for minority shareholders - their share in the loss of Eesti Digitaaltelevisiooni AS - was 0.7 million euros negative. The net profit was adversely influenced by expenses not related to ordinary business operations, which amounted to 0.8 million euros (see Notes 3, 8 and 11 for more details). Balance sheet, investments and financing In the first nine months of 2008, Starman's investments in non-current assets amounted to 5.2 million euros, being equal to the relevant figure in the same period a year ago. The company made the following investments: 2.7 million euros in cable network renovation and construction, 1.3 million euros in STBs (incl. 1.2 million euros for provision of ZUUMtv), 0.5 million euros in internet equipment (incl. 0.5 million in Head-Ends), 0.3 million euros in telephone modems, and 0.4 million euros in other spheres. Among investments in the cable network, projects aiming at network expansion are even more notable than last year. While a few years ago work aimed at the modernisation and enhancement of the data communication capability of the existing network constituted a major part of network investments, the relative share of that particular type of network investments has diminished, given the high level already achieved. As at 30 September 2008, Starman's network covered 278 thousand households with 265 thousand - i.e. 95% - of the households being served by a network with the data communication facility (as at 30 September 2007 the comparable figures were 261 thousand, 242 thousand and 93%, respectively). The most significant network investment in the first nine months of 2008 was the acquisition of cable networks from AS NOM. As a result, the coverage of Starman's network now includes Paldiski and Kohila; in addition, the market position was strengthened in Kristiine district in Tallinn, and in Kadrina. The acquisition of these out-of-date networks temporarily reduced the share of Starman's network with data communication capacity. However, the company started upgrading the networks right away. Part of the work has already been completed and all customers connected to this network will be able to use all the major telecommunication services offered by Starman already in the near future. As regards other major network investments, network expansion projects in Tallinn, particularly in the Kalamaja district, in Haapsalu and Võru as well as projects aimed at enhancement of the network's data communication capability and expansion of the state-of-the-art network in Kuressaare, Paide and Valga should be mentioned. Investments in telephone modems and STBs are directly related to the growth in the number of customers. Investments in internet equipment primarily enhanced quality in the environment of ever growing data communication volumes. Starman's balance sheet structure continues to be characterised by high capitalisation, a relatively low debt level and a sufficient liquidity. In the first nine months of 2008 mainly the company's own resources were used for financing. External funding increased by 0.8 million euros, accounting for about 16% of the company's investments in non-current assets in the period. The high level of inventories as at 30 September 2008 is mainly due to the network investment projects to be launched in the near future and the STBs designated for the ZUUMtv offer included in the balance sheet of Eesti Digitaaltelevisiooni AS. Considering the delivery schedule of the STBs designated for the ZUUMtv offer and the anticipated market capacities for the new product, the level of these inventories will probably remain high also in the future. Rändy Hütsi Member of the Management Board +372 677 9977 Additional information: AS Starman interim report for 9 months of 2008
EXPLANATORY MEMORANDUM TO THE INTERIM REPORT OF AS STARMAN'S GROUP FOR THE FIRST NINE MONTHS OF 2008
| Source: Starman
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