General
The success of Starman continued in 2007. Telephony service 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 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.
In September, an important era for Starman came to an end when the investment
fund Royalton Capital Investors, which had been the company's key shareholder
for about seven years, sold the second and last part of its shares. While the
first part was sold in June 2005 in an IPO process, which valued the company at
43.7 million euros, the share price offered to all shareholders in the takeover
bid exceeded that of the IPO by almost 72%, the aggregate value of the company
thus amounting to 74.8 million euros. This deal certifies Starman's current
success and good prospects for the future. After having acquired the initial
54.04% of the company's shares, a consortium of financial investors led by
Bancroft Private Equity LLP has acquired more shares in both the mandatory
takeover bid and a number of separate market transactions. At the moment, Baltic
Moontech Investments Holding AS representing the above financial investors holds
a total of 8,505,727 shares in Starman, i.e. 65.16% of the company's share
capital. Given the current structure of shareholders, delisting of the company
from Tallinn Stock Exchange will probably be applied for in the near future.
Starman Group's total revenue for 2007 amounted to 18.0 million euros,
representing a 19% increase on the same period a year ago. EBITDA for 2007
amounted to 6.0 million euros and net profit attributable to shareholders to 2.4
million euros - respectively a 1% and 15% decrease 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 1.6 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.
The results for the fourth quarter were affected by seasonal factors, for it is
usual that a number of special offers are made in the autumn which result in a
decline in profitability. At the same time, success of the autumn sales expanded
the company's 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 2007:
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| | 2005 | 2006 | 2007 |
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| Sales increase | 26% | 25% | 19% |
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| EBITDA margin | 33% | 40% | 33% |
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| Gross margin | 15% | 21% | 13% |
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| Net margin | 12% | 19% | 13% |
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| Revenue/average assets | 0.67 | 0.72 | 0.73 |
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| | | | |
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| Equity ratio | 54% | 58% | 57% |
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| Debt to equity | 0.69 | 0.56 | 0.57 |
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| Debt/EBITDA | 1.76 | 1.19 | 1.41 |
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| Investments/EBITDA | 1.16 | 0.83 | 1.15 |
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| | | | |
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| Current ratio | 0.67 | 1.09 | 0.91 |
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| Invoice turnover rate (annual) | 20.2 | 20.0 | 21.5 |
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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 = revenue for the
period / accounts receivable at the end of the 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.
Management changes
In relation to having a new majority owner, an extraordinary general meeting of
the company's shareholders was held on 25 October 2007. At the meeting, it was
decided to remove some of the supervisory board members, to elect Tamas Szalai,
Fred Martin and Krisztina Havas as new members of the supervisory board, and to
re-elect the supervisory board members Indrek Kuivallik and Rain Lõhmus for an
additional term of three years. From now on, Starman's supervisory board will
have five members instead of the former seven.
Revenue and expenses
Traditionally, cable television and internet services contributed the majority
of Starman's total revenue for 2007, accounting for 45% and 33% of the total
revenue, respectively. Telephony service, growing faster than the latter two,
accounted for 17% of the total revenue for the period. The digital terrestrial
television (DTT) service has no notable effect on the revenue yet.
Revenue from the cable television services increased 14% in comparison with the
year 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. At the end of December 2007, the company had a
total of 133 thousand cable television customers, 5.8% of which were digital
television users. The number of cable television customers at the end of
December exceeded the last year's relevant figure by 1.1%, quite a good result
given the saturated market and tightened competition.
Revenue from the internet services increased 12% year-on-year. At the end of
December 2007, the company had 48 thousand internet customers, representing a
22% increase in comparison 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, with the average figure of 2007 dropping 11%
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. In the second half of the year, a slowdown of the internet ARPU's
decrease rate could be observed.
Of the three primary services, the telephony service continues to show the best
growth figures, although the growth rate has somewhat decelerated, with the
revenue for 2007 having increased 32% in comparison with the same period a year
ago. As at the end of December 2007, the company had 43 thousand telephony
clients, i.e. 41% more than at the same time last year. The ARPU of the
telephony service, which has been quite stable so far, has been declining
significantly from the beginning of 2007. The average ARPU for 2007 decreased
15% when compared to the corresponding figure of the previous year.
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, separate analysis of the respective segments
might not give the most accurate picture. In 2007, the average aggregate 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 the coverage area and improving the selection of programmes. The
coverage area changed notably in the second quarter; by the end of the quarter
ZUUMtv covered as much as 93% 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 digitally. At the end of December, Eesti
Digitaaltelevisiooni AS had 10 thousand customers and ZUUMtv covered 97% of
Estonian households.
Starman's operating expenses amounted to 12.1 million euros in 2007,
representing a 32% growth year-on-year. The fact that the operating expenses
grew faster than the revenue is primarily attributable to ZUUMtv - when
eliminating the direct costs relating to this newly launched product, the
increase in operating expenses would amount to 14%. The impact of ZUUMtv is most
notable among expenses reported under “Services purchased” which include the
transmission charge payable to Levira 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. In
addition to the impact of ZUUMtv, the annual increase of marketing expenses by
40% resulted from the continuing aggressive competition in promoting of
telecommunications services. Of major expense items, expenses on the rental of
communication ducts (a growth of 34%) and personnel expenses have also shown
fast growth compared to the same period a year ago. All in all, despite the
pressure on several input prices due to fast-growing salaries, the company has
been quite successful in managing the growth in operating expenses.
Personnel expenses increased 24% 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 231 in 2007 (as compared to 210 in 2006). As
at 31 December 2007, the company employed 256 people. Part-time employees
accounted for 19% of the staff. The average number of employees translated to
the full employment equivalent was 203 in 2007, having grown only 5% compared to
the same figure a year ago. While the number of employees translated to the full
employment equivalent remained stable at just below 200 during the first nine
months of 2007, the fourth quarter witnessed a significant growth and, by the
end of December, the relevant figure had risen to as much as 226. The rise in
the number of employees is related to both the expected increase in business
volumes and a reduction of certain outsourced activities.
As to expenses related to asset valuation, the provision for bad debts amounted
to 65 thousand euros, i.e. to merely 0.4% of the period turnover just like year
ago. In 2007, losses and discounts of inventories amounted to 48 thousand euros
(in 2006, to 64 thousand euros).
EBITDA for the year 2007 amounted to 6.0 million euros. When eliminating the
direct influence of ZUUMtv, the EBITDA margin would amount to an excellent 43%.
Hence, 2007 was record-breaking in terms of profitability of traditional
services.
Depreciation costs increased 27% in comparison with the year 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 2007 amounted to 2.4 million
euros. The result for minority shareholders - their share in the loss of Eesti
Digitaaltelevisiooni AS - was 0.7 million euros negative. When assessing profit
figures, one should note that the results include the income tax expenditure of
0.17 million euros related to disbursement of dividends.
Balance sheet, investments and financing
In 2007, Starman's investments in fixed assets amounted to 6.8 million euros,
representing a 37% increase on the last year's figure. The company made the
following investments: 3.2 million euros in cable network construction and
renovation; 1.1 million euros in STBs (incl. 0.9 million for provision of
ZUUMtv), 0.8 million euros in internet equipment (incl. 0.6 million euros in
Head-Ends); 0.6 million euros in telephone modems; 0.5 million euros in analogue
cable television Head-Ends; and 0.7 million euros in other spheres.
When compared to earlier years, projects aiming at network expansion are notable
among investments in the cable network. There are still some locations in
Estonia where cable network expansion should be feasible, given the company's
current success in providing telecommunications services. In addition to the
usual trend of moving along with real estate developments in Tallinn and its
surroundings, the company made investments in, e.g., Tapa, Kadrina, Võru, Pärnu,
and Haapsalu in 2007. While work aimed at the modernisation and enhancement of
the data communication capability of the existing network is continued, the
relative share of that particular type of network investments is diminishing,
given the high level already achieved. As at 31 December 2007, Starman's network
covered 266 thousand households with 251 thousand - i.e. 94% - of the households
being served by a network with the data communication facility (as at 31
December 2006 the comparable figures were 251 thousand, 225 thousand and 90%,
respectively). At the beginning of 2007 cable networks in Rapla and Kehra were
upgraded to support data communication, and in the second half of the year
respective work was started in Kuressaare and Valga; minor network modernisation
works continued also in Tallinn and Ida-Virumaa.
Investments in 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. As regards cable television equipment, a substantial part
of investments is also attributable to the network expansion mentioned above.
Starman's balance sheet structure continues to be characterised by high
capitalisation, a relatively low debt level and a sufficient liquidity. As to
the company's financing needs, dividend payments amounting to 0.7 million euros
made at the beginning of July had to be considered besides the investments to be
made in fixed assets. While mainly the company's own resources were used for
financing in 2007, external funding was increased by 1.2 million euros as well.
The high level of inventories as at 31 December 2007 is mainly due to the
network expansion 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 2007
