General
Success of Starman continued in the first quarter of 2007. Telephone services
rendered a considerable additional impact on the strong market position in the
spheres of cable-TV and the internet. 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 last year, the product
portfolio of Starman was supplemented with a DTT (digital terrestrial
television) service. ZUUMtv, which was positioned separately, is based on a
different technological platform and Starman's cable network is not used for
delivering this product. ZUUMtv is expected to attract a considerable number of
new customers already in the near future, especially in those regions of Estonia
where Starman was not present thus far.
Starman Group's total revenue for the first quarter of 2007 amounted to 4.3
million euros, representing a 17% increase compared to the same period a year
ago. EBITDA for the first quarter of 2007 amounted to 1.6 million euros and net
profit attributable to shareholders to 0.2 million euros - respectively an 8%
and 15% increase compared to the first quarter of the previous year. Such a good
performance is built on the company's successful long-term activities relating
to traditional services. As expected, the starting ZUUMtv had a negative impact
on Starman's profit figures. A drop of 0.3 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
quarter of 2007:
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| | 2005 | 2006 | Q1 2007 |
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| Sales increase | 26% | 25% | 17% |
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| EBITDA margin | 33% | 40% | 38% |
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| Gross margin | 15% | 21% | 18% |
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| Net margin | 12% | 19% | 20% |
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| Revenue/average assets | 0.67 | 0.72 | 0.74 |
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| | | | |
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| Equity ratio | 54% | 58% | 57% |
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| Debt to equity | 0.69 | 0.56 | 0.55 |
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| Debt/EBITDA | 1.76 | 1.19 | 1.17 |
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| Investments/EBITDA | 1.16 | 0.83 | 1.21 |
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| | | | |
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| Current ratio | 0.67 | 1.09 | 1.23* |
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| Invoice turnover rate (annual) | 20.2 | 20.0 | 23.8 |
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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
quarter of 2007 has been multiplied by 4
Equity ratio = equity / total assets
Debt = borrowings + long-term borrowings
Debt to equity - for comparison purposes, EBITDA for the first quarter of 2007
has been multiplied by 4
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 quarter of 2007
has been multiplied by 4
* 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 the first quarter,
loan payments due within the following nine 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 the first quarter is somewhat
overestimated vis-à-vis the year-end figures. Upon eliminating this difference
from the figures of the first quarter of 2007, the current ratio amounts to
1,13.
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 line-by-line separately indicating the
minority share.
Revenue and expenses
As usual, cable television and internet services contributed the majority of
Starman's total revenue for the first quarter of 2007, accounting for 47% and
33% of total revenue, respectively. Telephone services, growing faster than the
latter two, made up 17% of the total revenue for the first quarter. The digital
terrestrial television (DTT) service had practically no effect on the revenue
yet.
Revenue from cable television services increased 14% compared to the first
quarter of 2006. Organic growth in the market has mostly been achieved at the
expense of price increase in recent years. In the first quarter of 2007 the
prices of Starman's cable television services further approached those of
countries with a similar living standard but still remain rather low. 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. As to the digital television
service launched in autumn 2005, a major improvement was introduced in the first
quarter of 2007 when the company piloted a video on demand service. The service
is currently going through a test phase with nearly 500 customers - it was taken
to market cautiously, being still under constant development. At the end of
March 2007, the company had a total of 132 thousand cable television customers,
4.3% of which were digital television users. The number of cable television
customers at the end of the quarter exceeded the last year's relevant figure by
1.5%, quite a good result given the saturated market and tightened competition.
Revenue from internet services was up 9% on the first quarter of 2006. At the
end of March 2007, the company had 41 thousand internet customers, representing
a 24% growth year on year. 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, with
the average figure of the first quarter of 2007 dropping 13% compared to the
last year's relevant figure. Starman's popular triple packages in which the
internet services are cheaper have a growing 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.
Telephone services continue to grow rapidly, although the growth rate has
somewhat decelerated, with the revenue for the first quarter of 2007 having
increased 42% in comparison with the same period in 2006. As of the end of March
2007 the company had 33 thousand telephone clients, i.e. 57% more than at the
same time last year. There has been a decline in the ARPU of the telephone
services lately, partly due to the fact that the services are being offered on
more and more favourable terms in the post subscription phase.
Starman views its cable television, internet and telephone services as a single
integrated service. Since 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, separate analysis of the respective segments
might not give the most accurate picture. In the first quarter of 2007, the
total revenue from the given services per client was 14% higher in comparison
with the same period a year ago.
ZUUMtv was launched with content slightly weaker than planned. Eesti
Digitaaltelevisiooni AS is trying to make up for the initial setback by
expanding coverage and improving the selection of programmes. As at the end of
April the coverage area has indeed grown substantially covering already 83% of
Estonian households. Although the relevant figure was 60% at the launch of the
product, it encompassed mainly densely populated areas such as Tallinn and Tartu
where the traditional cable television is more economically feasible and where
the potential of ZUUMtv is thus relatively modest. While until now the three
main local channels were available to ZUUMtv clients in analogue format, then
from the end of April the first of them - Eesti Televisioon - is available via a
digital platform. At the end of March, Eesti Digitaaltelevisiooni AS had 3.6
thousand customers.
Starman's operating expenses amounted to 2.7 million euros in the first quarter
of 2007, having grown 23% compared to the same period in 2006. The fact that the
operating expenses grew faster than the revenue can mostly be attributable to
ZUUMtv - when eliminating the direct costs attributable to this newly launched
product, the increase in operating expenses would amount to 7%. The influence of
ZUUMtv is most notable under “Purchased services” and “Marketing expenses”.
Under “Purchased services”, a transmission charge payable to Levira has been
recorded as a new 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. Of major expense items,
expenses on the rental of communication ducts (a growth of 47%) and personnel
expenses have also grown faster compared to the same period a year ago. All in
all, despite the pressure on several input prices due to skyrocketing salaries,
the company has been quite successful in managing the growth in operating
expenses.
In the first quarter of 2007, personnel expenses rose 25% year on year. As
regards personnel expenses, we must take into consideration that the given
indicator includes 81% of the total wage fund, since the remainder is
capitalised under the corporate accounting rules. The average number of
employees was 222 in the first quarter of 2007 (202 in the first quarter of
2006). As of 31 March 2007, the company employed 225 people. The staff has
mostly grown on account of part-time employees - while at the end of the first
quarter of 2006 part-time employees formed 11% of the staff, a year later they
accounted for 17% of the staff. The average number of employees translated to
the full employment equivalent was 197 in the first quarter of 2007, up 3%
compared to the same figure a year ago.
As to expenses related to asset valuation, the provision for bad debts amounted
to 34 thousand euros, i.e., 0.8% of the turnover for the period. Loss of
inventories and discounts totalled 18 thousand euros in the first quarter of
2007.
EBITDA for the first quarter of 2007 amounted to 1.6 million euros. When
eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to as
much as 46%. Hence, the first quarter of 2007 was record-breaking in terms of
profitability of traditional services. Besides the fact that telephony service
has moved to mature phase, seasonal factors also contributed to excellent
results, for it is usual that the first quarter is good in terms of
profitability.
Depreciation costs increased 28% compared to the first quarter of 2006. Owing to
the extensive investing activities carried out in recent years, the depreciation
costs continued to have a considerable impact on the profit figures.
The net profit attributable to shareholders for the first quarter of 2007
amounted to 0.9 million euros. The result for minority shareholders - their
share in the loss of Eesti Digitaaltelevisiooni AS - was 0.1 million euros
negative.
Balance sheet, investments and financing
In the first quarter of 2007, Starman's investments in fixed assets amounted to
2.0 million euros. The company made the following investments: 0.7 million euros
in cable network renovation and construction, 0.4 million euros in internet
Head-Ends, 0.3 million euros in STBs (incl. 0.3 million euros for provision of
ZUUMtv), 0.2 million euros in analogue cable television Head-Ends, 0.1 million
euros in telephone modems, and 0.2 million euros in other spheres.
Upgrading and enhancement of the data communication capability of the existing
network continued to make up the majority of the investments in the cable
network. However, in comparison with earlier years, more projects aimed at
network expansion were launched. While at the end of 2006 Starman covered 251
thousand households with 225 thousand - i.e. 90% - of the households being
served by a network with the data communication facility, the respective numbers
as of 31.03.2007 were 253 thousand and 231 thousand (the data communication
capability increased to 91%). Investments in the telephone modems and STBs are
directly related to the growth in the number of customers. Investments in the
internet and cable television 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. The
larger-than-usual share of cash in the balance sheet as of 31.03.2007 is to be
regarded as of a somewhat incidental nature and is associated with payments for
investments already made and to be made in the near future. The level of
“Payables” in the balance sheet is higher than usual for a similar reason. The
high level of inventories as of 31.03.2007 is mainly due to the value of STBs
designated for the ZUUMtv offer amounting to 0.7 million euros in the balance
sheet of Eesti Digitaaltelevisiooni AS. Considering the anticipated market
capacities for the new product and the delivery schedule of the STBs 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 the I quarter of the year
2007
