COMMENTS TO THE INTERIM REPORT FOR 12 MONTHS OF THE YEAR 2006
General
Success of Starman continued in 2006. 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.
In the fourth quarter the product portfolio of Starman was supplemented with a
DTT (digital terrestrial television) service. The service is supplied under a
separate trademark by the company named Eesti Digitaaltelevisiooni AS, which was
established in cooperation with AS Levira. The ZUUM trademark was introduced in
November and the product was launched at the end of the year. From that date
Starman is offering digital television services under two separate trademarks
using two different technologies. While digital television services have been
offered under the Starman trademark already since autumn 2005, the ZUUMtv is
expected to attract a considerable number of new clients especially in those
regions of Estonia, where Starman was not present thus far.
In 2006, the company achieved its best ever financial results. Such a good
performance can be attributed to both successful investments and sales
activities in earlier periods as well as to skilful cost management. With the
continued supply of only well-established services the results would have been
even better. The launch of the new product in the fourth quarter entailed
substantial additional costs amounting to approximately 0.3 million EUR. The
negative impact of the starting 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.
Starman's total revenue in 2006 amounted to 15.1 million EUR representing a 24%
increase in comparison with the same period of the last year. EBITDA in 2006
amounted to 6 million EUR and the net profit attributable to shareholders to 2.8
million EUR, exceeding the relevant figures of the previous year 1.5 and 1.9
times, respectively. The net profit attributable to shareholders amounted to 0.5
million EUR in the fourth quarter. Besides ZUUMtv the profit for the quarter was
influenced by the autumn sales involving various special offers for other
services. Success of the autumn sales expanded clientele and thus created better
premises for the increase of revenue in the near future.
Financial ratios
A selection of ratios for evaluating the economic activities in the year 2006:
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| | 2004 | 2005 | 2006 |
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| Sales increase | 44% | 26% | 25% |
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| EBITDA margin | 32% | 33% | 40% |
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| Gross margin | 12% | 15% | 21% |
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| Net margin | 10% | 12% | 19% |
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| Revenue/average assets | 0.68 | 0.67 | 0.72 |
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| | | | |
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| Equity ratio | 51% | 54% | 58% |
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| Debt to equity | 0.73 | 0.69 | 0.56 |
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| Debt/EBITDA | 2.08 | 1.76 | 1.19 |
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| Investments/EBITDA | 2.15 | 1.16 | 0.83 |
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| | | | |
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| Current ratio | 0.82 | 0.67 | 1.09 |
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| Invoice turnover rate (annual) | 18.5 | 20.2 | 20.0 |
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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
Equity ratio: equity / total assets
Debt = borrowings + long-term borrowings
Current ratio: current assets / current liabilities
Invoice turnover rate:
period sales / accounts receivable at the end of period
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.
The former subsidiaries of Starman - AS Levi Kaabel, Tallinna Kaabeltelevisiooni
AS and AS Telset Telecommunications Group, whose financial results have been
consolidated in those of the Group already from June 2004 and with whom the
merger agreement was signed in May 2005, were deleted from the Commercial
Register in March 2006.
Revenue and expenses
Traditionally, cable television and internet services contributed the majority
of Starman's total revenue for 2006, accounting for 47% and 35% of the total
revenue, respectively. Increasingly emerging telephone services accounted for as
much as 16% of the total revenue for the financial year.
Revenue from the cable television services increased by 15% in comparison with
the year 2005. Organic growth of the market in recent years has mostly been
achieved at the expense of price increase. At the beginning of 2006 the prices
of Starman's cable television services further approached those of the 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. In the second quarter of 2006, a new service
provider - Elion Ettevõtted AS - entered the market by launching its digital
television services. Starman has been active in the highly competitive cable
television market for a long time already. Over this time, the company has
managed to develop a strong product range including digital television services
already since autumn 2005. The new service provider has not affected the
Starman's clientele. At the end of December 2006, the company had a total of 132
thousand cable television customers, 4.0% of which were digital television
users.
Revenue from the internet services increased 9% year-on-year. At the end of
December 2006, the company had 39 thousand internet customers, representing a
26% increase in comparison with the same period a year ago. Starman maintained
its position of the leading broadband provider among the private customers in
the regions where the company is present. The current market trend towards
higher speeds continues. In the second quarter of this year, some products were
launched which far surpassed the actual needs of the majority of home users.
Starman keeps a close eye on the market developments and maintains its position
at the forefront of the home user sector in terms of speeds. In line with the
general impacts of the market, the ARPU continued to show a downward trend, with
the average figure decreasing 14% in comparison with the average of 2005.
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 continued to grow rapidly with the revenue exceeding that of
the previous year 3.3 times. As of the end of December 2006 the company had 30
thousand telephone clients, i.e. 1.8 times more than at the same time last year.
The average ARPU of the telephone services decreased 2% in comparison with 2005.
Starman views its cable television, the internet and telephone 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, separate analysis of the respective
segments might not provide the most accurate overview. In 2006, the total
revenue from the given services per client was 25% higher than in 2005.
The launch of the ZUUMtv at the end of the year did not practically have any
impact on the Group revenues. At the end of December, Eesti Digitaaltelevisiooni
AS had 1.1 thousand customers. Expanding coverage, which by the end of 2007 is
anticipated to reach 97% of the Estonian households, and the improving selection
of programmes foster expectation of a substantial increase in the number of
customers. For Starman, the supply of the new service is similar to the supply
of current services, except the transmission services to be supplied by Levira.
In 2006, the operating expenses of Starman amounted to 9.1 million EUR,
representing a 12% growth year-on-year. For the majority of expense items, the
rate of growth in expenses was smaller than the increase in revenue. A notable
65% increase in marketing expenses should be attributed to the launch of the
ZUUMtv, tight competition and the company's sustained belief in its growth
potential. As regards personnel expenses consideration should be given to the
fact that the relative share of the company's own activities as opposed to
outsourcing has increased in the case of several functions. Therefore, the
relative share of outsourced services has declined, which is also manifested in
a decrease of several expenditure items year-on-year.
The personnel expenses grew 19% year-on-year. Upon evaluation of personnel costs
it should be borne in mind that the given figure encompasses 88% of the
company's total payroll whilst the rest is capitalised in accordance with the
corporate accounting rules. The average number of employees in 2006 was 210. As
of 31 December 2006, the company employed 222 people representing a 7% (14
people) increase in comparison with the end of 2005. The staff has mostly grown
on account of part-time employees - at the beginning of 2006 part-time employees
formed 9% of the staff but at the end of the year already 16% of the staff. At
the end of 2006, the number of employees translated to the full employment
equivalent was 199, which is 3% (5 people) higher than at the end of 2005; the
average number of employees translated to the full employment equivalent in 2006
was 194.
As to expenses related to asset valuation, the provision for bad debts amounted
to 57 thousand EUR, i.e. to just 0.4% of the period turnover like in 2005. Such
a sound level of provisions can be attributed besides efficient credit risk
management to overall favourable situation in economy. In 2006, losses and
discounts of inventories amounted to 64 thousand EUR (in 2005, to 72 thousand
EUR).
EBITDA of 2006 amounted to 6 million EUR resulting in the excellent EBITDA
margin of 40%. Besides the aggressive growth of telephone services, such a high
margin was also upheld by efficient cost management. As a result of the launch
of the ZUUMtv and autumn sales campaigns the EBITDA margin fell to 34% in the
fourth quarter.
Depreciation costs increased by 30% in comparison with the year 2005. 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 2006 amounted to 2.8 million
EUR. Result for minority shareholders - their share from Eesti
Digitaaltelevisiooni AS loss - was 0.05 million EUR negative. By making the
profit figure comparable with the figure of 2005, i.e. eliminating the income
tax in the sum of 0.08 million EUR, the profit of Starman would be double
compared to 2005.
Balance sheet, investments, financing
In 2006, Starman's investments into fixed assets amounted to 5 million EUR (in
2005, to 4.7 million EUR), of which 1.2 million were invested in the fourth
quarter. The company made the following investments: 2.2 million EUR in cable
network renovation and construction, 0.75 million EUR in telephone modems, 0.72
million EUR in internet equipment (incl. 0.6 million EUR in Head-Ends), 0.45
million EUR in analogue cable television Head-Ends, 0.3 million EUR in STBs
(incl. 0.12 million EUR for provision of ZUUMtv) and 0.5 million EUR 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. While at the end of 2005 Starman covered 247 thousand households with
198 thousand - i.e. 80% - of the households being served by a network with the
data communication facility, the respective numbers as of 31.12.06 were 251
thousand and 225 thousand (the data communication capability increased to 90%).
Investments in the telephone modems and STBs are directly related to the growth
in the number of customers. Investments into 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. For the
first time in the last three years the cash flows from principal activity in
2006 outstripped the investment needs, wherefore the total amount of debt
remained practically unchanged (having grown by 0.13 million EUR in comparison
with the end of the year 2005) and 0.3 million EUR dividend payment was made to
shareholders. Against the background of notably improved profitability the debt
amount has fallen to a quite conservative level. However, the company's
investment plans remain extensive.
Whereas, on the one hand, the creditworthiness of the company has recently
improved considerably and, on the other hand, attractive investment plans are
still in the perspective (e.g. the DTT service), Starman's current external
financing conditions were revised in cooperation with lenders. At the end of
September, the company had the majority of its current debts refinanced. As a
result, the present average term of debt of 5 years extended to 7 and some of
the collaterals were released. In addition, the average interest rate decreased
considerably from the previous typical rate of 6-months' EURIBOR +2% to
6-months' EURIBOR + 1%.
High level of inventories as of 31 December 2006 is mainly due to the value of
STBs designated for the ZUUMtv offer amounting to 0.5 million EUR 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 12 months of the year
2006
