General Success of Starman continued in the first quarter of 2008. 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 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 the first quarter of 2008 amounted to 5.3 million euros, representing a 22% increase compared to the same period a year ago. EBITDA for the first quarter of 2008 amounted to 1.8 million euros and net profit attributable to shareholders to 0.9 million euros - respectively a 10% and 8% increase compared to the first quarter of the previous 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 0.5 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 2008: -------------------------------------------------------------------------------- | | 2006 | 2007 | 2008 Q1 | -------------------------------------------------------------------------------- | Sales increase | 25% | 19% | 22% | -------------------------------------------------------------------------------- | EBITDA margin | 40% | 33% | 34% | -------------------------------------------------------------------------------- | Gross margin | 21% | 13% | 15% | -------------------------------------------------------------------------------- | Net margin | 19% | 13% | 17% | -------------------------------------------------------------------------------- | Revenue/average assets | 0.72 | 0.73 | 0.80 | -------------------------------------------------------------------------------- | | | | | -------------------------------------------------------------------------------- | Equity ratio | 58% | 57% | 59% | -------------------------------------------------------------------------------- | Debt to equity | 0.56 | 0.57 | 0.52 | -------------------------------------------------------------------------------- | Debt/EBITDA | 1.19 | 1.41 | 1.12 | -------------------------------------------------------------------------------- | Investments/EBITDA | 0.83 | 1.15 | 0.79 | -------------------------------------------------------------------------------- | | | | | -------------------------------------------------------------------------------- | Current ratio | 1.09 | 0.91 | 1.02* | -------------------------------------------------------------------------------- | Invoice turnover rate (annual) | 20.0 | 21.5 | 25.4 | -------------------------------------------------------------------------------- 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 2008 has been multiplied by 4 Equity ratio = equity / total assets Debt = borrowings + long-term borrowings Debt to EBITDA - for comparison purposes, EBITDA for the first quarter of 2008 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 2008 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 2008, the current ratio amounts to 0.91. 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 As usual, cable television and internet services contributed the majority of Starman's total revenue for the first quarter of 2008, accounting for 45% and 30% of total revenue, respectively. The share of telephony service was 17% and that of the DTT service, growing much faster than the others services, was 5%. Revenue from cable television services increased 18% compared to the first quarter 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 March 2008, the company had a total of 133 thousand cable television customers, 6.1% 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 1.1%, quite a good result given the saturated market and tightened competition. In the first quarter of 2008 Starman launched its own television channel called Neljas. Only Starman's customers can view the channel whose aim is to enhance the range of products offered to customers. Revenue from internet services was up 13% on the first quarter of 2007. At the end of March 2008, the company had 49 thousand internet customers, representing a 21% 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. However, lately there has been a certain deceleration of the decline rate - the average figure of the first quarter of 2008 dropped 5% 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 quarter of 2008 has still increased 20% in comparison with the same period a year ago. As at the end of March 2008 the company had 45 thousand telephony clients, i.e. 36% more than at the same time last year. The ARPU of the telephony service, which has been quite stable in first years, has been declining significantly from the beginning of 2007. A similar trend continued in the first quarter of 2008 - the quarter's average figure decreased 11% 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 quarter of 2008, the average aggregate revenue from the given services per customer was 12% 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 possible positive developments relating to the fact that the switchover to digital broadcasting will take place 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 8.9 times on the first quarter of 2007; compared to the fourth quarter of 2007, the growth was 64%. In March 2008 the DTT service already constituted 6.1% of the company's total revenue, and this share is expected to increase significantly in the near future. At the end of March 2008, Eesti Digitaaltelevisiooni AS had 12.5 thousand customers and ZUUMtv covered 97% of Estonian households. Starman's operating expenses amounted to 3.5 million euros in the first quarter of 2008, having grown 30% compared to the same period in 2007. 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 15%. 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. In relation to the launch 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), internet traffic expenses (a steady growth in the volumes of data used by customers), personnel and office expenses (a need for more office space due to an increase in the number of employees) 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. While the reduction in marketing expenses in comparison with the first quarter of 2007 can be regarded as somewhat accidental, as to the rental of communication ducts, for instance, a considerable reduction in the charges payable to Elion Ettevõtted AS compared to 2007 can be expected (for further information, see Note 14). In the first quarter of 2008, personnel expenses rose 29% 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 258 in the first quarter of 2008 (222 in the first quarter of 2007). As at 31 March 2008, the company employed 261 people. Part-time employees accounted for 18% of the staff. The average number of employees translated to the full employment equivalent was 227 in the first quarter of 2008, up 15% compared to the same figure a year ago. The latter figure has not changed notably in comparison with December 2007. As to expenses related to asset valuation, the provision for bad debts amounted to 29 thousand euros, i.e. just 0.6% of the turnover for the period (0.8% in the first quarter of 2007). Losses and discounts of inventories totalled 23 thousand euros in the first quarter of 2008 (18 thousand euros in the first quarter of 2007). EBITDA for the first quarter of 2008 amounted to 1.8 million euros. When eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to an excellent 46%. Hence, the first quarter of 2008 was record-breaking in terms of profitability of traditional services. Besides the fact that today's main services have moved to a mature phase, seasonal factors also contributed to the excellent results, for it is usual that the first quarter is good in terms of profitability. Depreciation costs increased 20% compared to the first quarter 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 extremely successful growth in the sphere of the DTT service. The net profit attributable to shareholders for the first quarter of 2008 amounted to 0.9 million euros. The result for minority shareholders - their share in the loss of Eesti Digitaaltelevisiooni AS - was 0.22 million euros negative. Balance sheet, investments and financing In the first quarter of 2008, Starman's investments in fixed assets amounted to 1.4 million euros, representing a 28% decrease compared to the same period a year ago. One quarter is too short a period to assess the volume of investments, and the reduction in investments should be regarded as accidental. The company made the following investments: 0.8 million euros in cable network renovation and construction, 0.3 million euros in STBs (incl. 0.3 million euros for provision of ZUUMtv), 0.1 million euros in telephone modems, 0.1 million euros in internet equipment (incl. 0.1 million in Head-Ends), and 0.1 million euros in other spheres. Just as in previous year, 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. 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 is diminishing, given the high level already achieved. As at 31 March 2008, Starman's network covered 268 thousand households with 254 thousand - i.e. 95% - of the households being served by a network with the data communication facility (as at 31 March 2007 the comparable figures were 253 thousand, 231 thousand and 91%, respectively). As regards Starman's major network investments in the first quarter of 2008, the continuation of network expansion projects in the Kalamaja region in Tallinn, in Haapsalu and Võru as well as projects aimed at enhancement of the network's data communication capability in Kuressaare and Valga should be mentioned; in addition, network modernisation was started in Paide. 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. As to financing, the company's own resources were used in the first quarter of 2008 since external funding decreased to a certain extent (by 0.3 million euros). The level of inventories decreased by 0.3 million euros in the first quarter of 2008; however, the level was still rather high as at 31 March 2008, mainly owing to the network expansion projects to be launched in the near future. As at 31 March 2008, the number of STBs designated for the ZUUMtv offer included in the balance sheet of Eesti Digitaaltelevisiooni AS was rather small due to the cyclical nature of their delivery schedule. Yet, considering the long delivery schedule of the STBs and the anticipated market capacities for the new product, the level of these inventories will probably be rather high in the future. Rändy Hütsi Member of the Management Board +372 677 9977 Additional information: AS Starman interim report for 2007
EXPLANATORY MEMORANDUM TO AS STARMAN'S INTERIM REPORT OF THE GROUP FOR THE FIRST QUARTER OF 2008
| Source: Starman
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