General Success of Starman continued in the first half-year 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 half-year 2008 amounted to 10.7 million euros, representing a 22% increase compared to the same period a year ago. EBITDA for the first half-year 2008 amounted to 3.5 million euros and net profit attributable to shareholders from ordinary business operations to 1.7 million euros - respectively an 12% and 27% increase compared to the first half 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 1.0 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 half-year 2008: -------------------------------------------------------------------------------- | | 2006 | 2007 | 2008 H1 | -------------------------------------------------------------------------------- | Sales increase | 25% | 19% | 22% | -------------------------------------------------------------------------------- | EBITDA margin | 40% | 33% | 33% | -------------------------------------------------------------------------------- | Gross margin | 21% | 13% | 13% | -------------------------------------------------------------------------------- | Net margin | 19% | 13% | 8% | -------------------------------------------------------------------------------- | Revenue/average assets | 0.72 | 0.73 | 0.79 | -------------------------------------------------------------------------------- | | | | | -------------------------------------------------------------------------------- | Equity ratio | 58% | 57% | 54% | -------------------------------------------------------------------------------- | Debt to equity | 0.56 | 0.57 | 0.63 | -------------------------------------------------------------------------------- | Debt/EBITDA | 1.19 | 1.41 | 1.36 | -------------------------------------------------------------------------------- | Investments/EBITDA | 0.83 | 1.15 | 1.01 | -------------------------------------------------------------------------------- | | | | | -------------------------------------------------------------------------------- | 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 half-year 2008 has been multiplied by 2 Equity ratio = equity / total assets Debt = borrowings + long-term borrowings Debt to EBITDA - for comparison purposes, EBITDA for the first half-year 2008 has been multiplied by 2 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 half-year 2008 has been multiplied by 2 * 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 half-year, loan payments due within the following six 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 half-year is somewhat overestimated vis-à-vis the year-end figures. Upon eliminating this difference from the figures of the first half-year 2008, the current ratio amounts to 0.86. 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 half-year 2008, accounting for 45% and 30% of total revenue, respectively. The share of telephony service in total revenues for the half-year was 16% and that of the DTT service, growing much faster than the others services, was 6%. Revenue from cable television services increased by 17% compared to the first half-year 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 June 2008, the company had a total of 137 thousand cable television customers, 6.2% of which were digital television users. The number of cable television customers at the end of June exceeded the last year's relevant figure by 3.9%, which is 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. Only Starman's customers can view the channel whose aim is to enhance the range of products offered to customers. Revenue from internet services increased by 12%, compared to the first half of the previous year. At the end of June 2008, the company had 51 thousand internet customers - a 19% increase compared to 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 of the first half-year 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 half-year 2008 has still increased 17% in comparison with the same period a year ago. As of the end of June 2008 the company had 48 thousand telephone clients, i.e. 31% more than at the same time last year. The ARPU of the telephony service, which had been quite stable earlier, has been declining significantly from the beginning of 2007. A similar trend continued in the first half-year 2008 - the half-year's average figure decreased 12% 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 half-year 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 2 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 5.4 times on the first half-year of the previous year, with growth in the second quarter being 50% compared to the first quarter. In June 2008 the DTT service already constituted 7.1% of the company's total revenue, and this share is expected to increase significantly in the near future. At the end of June 2008, Eesti Digitaaltelevisiooni AS had 16.5 thousand customers and ZUUMtv covered 97% of Estonian households. Starman's operating expenses amounted to 7.2 million euros in the first half-year 2008, having grown 28% compared to the same period in the previous year. The fact that the operating expenses grew faster than the revenue is attributable to ZUUMtv to a notable extent - when eliminating the direct costs relating to this newly launched product, the increase in operating expenses would amount to 13%. 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), 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 of 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 half-year 2008, personnel expenses increased 28% 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 268 in the first half-year 2008 (223 in the first half-year 2007). As at 30 June 2008, the company employed 287 people. Part-time employees accounted for 25% of the staff. The average number of employees translated to the full employment equivalent was 231 in the first half-year 2008, up 16% compared to the same figure a year ago. The figure grew 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 67 thousand euros, i.e. just 0.6% of the turnover for the period (0.4% in the first half-year 2007). Losses and discounts of inventories totalled 46 thousand euros in the first half-year 2008 (28 thousand euros in the first half-year 2007). EBITDA for the first half-year 2008 amounted to 3.5 million euros. When eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to an excellent 45%. Hence, the first half-year 2008 was record-breaking in terms of profitability of traditional services when compared to similar periods in previous years. Depreciation costs increased by 19%, compared to the first half-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. 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 half-year 2008 amounted to 0.9 million euros. The result for minority shareholders - their share in the loss of Eesti Digitaaltelevisiooni AS - was 0.4 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 half-year 2008, Starman's investments in fixed assets amounted to 3.6 million euros, representing a 4% decrease compared to the same period a year ago. The company made the following investments: 2.0 million euros in cable network construction and renovation; 0.7 million euros in STBs (incl. 0.68 million for provision of ZUUMtv), 0.3 million euros in internet equipment (incl. 0.27 million euros in Head-Ends); 0.2 million euros in telephone modems; and 0.3 million euros in other spheres. Among investments in the cable network, projects aiming at network expansion stand out even more than in the previous 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 is diminishing, given the high level already achieved. As at 30 June 2008, Starman's network covered 276 thousand households with 260 thousand - i.e. 94% - of the households being served by a network with the data communication facility (as at 30.06.07 the comparable figures were 258 thousand, 237 thousand and 92%, respectively). In the first half-year 2008, the acquisition of cable networks from AS NOM was the major network investment. 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 the out-of-date network temporarily reduced the share of Starman's network with data communication capacity; however, the company has started to upgrade the network and customers receiving the signal from the network will be able to use all the major telecommunication services of Starman in the near future. As regards major network investments, the continuation of network expansion projects in Tallinn, particularly in the Kalamaja district of Tallinn, 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. As to financing, mostly the company's own resources were used in the first half-year 2008. External funding increased by 1.2 million euros which accounted for approximately one-third of investments in fixed assets during the period. The high level of inventories as at 30 June 2008 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 first half-year 2008
EXPLANATORY MEMORANDUM TO THE INTERIM REPORT OF AS STARMAN'S GROUP FOR THE FIRST HALF-YEAR 2008
| Source: Starman
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