2005 AUDITED FINANCIAL RESULTS
23.2.2006
ČESKÝ TELECOM, a. s., is pleased to announce its audited financial results for the fiscal year 2005. These results are consolidated and prepared according to International Financial Reporting Standards.The results of 2005 excluding the impact of one off charges and accounting policy changes made in 2005 show improvement in revenues trend in the second half of 2005, returning to growth in Q4. Similarly the consolidated EBITDA increased by 3% and 4% yoy in Q3 and Q4 respectively. The presented statutory results are influenced by several accounting policy changes made in 2005, which are commented in detail below.
“We are pleased to report the improving trends in ČESKÝ TELECOM Group’s performance in 2005, in both fixed line and mobile segment. When compared to 2004 pro-forma results restated for the impact of accounting policy changes, the consolidated revenues and EBITDA show growth in the second half of 2005. These results prove that our strategy of innovation and strong marketing support of range of new services, including high speed broadband based Internet and fast mobile data services, while at the same time protecting the traditional revenue sources, was successful”, said Jaime Smith, CEO and Chairman of the Board of Directors.
Change in accounting policy
During 2005, ČESKÝ TELECOM made several changes in its accounting policy, which impacted its results in fixed line segment and consequently consolidated results. Application of these changes had an immaterial impact on mobile business results. Changes relate to revenue recognition of the connection fees related to the activation of the fixed line for all periods starting 1996, and treatment of the premium rate numbers revenue (“color lines”). In previous periods, the Company had recognized activation fees in full in the income statement upon connection of the customers to the network in the respective accounting period. Based on the accounting policy introduced in 4th quarter 2005, connection fees are deferred and recognized in the income statement over the estimated average remaining customer relationship period. Revenues from the premium rate numbers (“color lines”) are now recognized only at the amount of the net margin, compared to previously applied accounting where we recognized gross revenues and the cost related to payment to premium content providers.
As the result of the accounting policy changes made in Q4 2005, the revenues from connection fees increased by CZK 606 million in 2005 while netting of “color lines” decreased revenues and costs by CZK 253 million in 2005, with no impact on EBITDA and decreased retained earnings by CZK 1.4 billion as at the end of 2005.
To provide more relevant disclosure of individual income statement items we assumed reporting structure close to Telefónica structure and we adjusted the structure of income statement and both ČESKÝ TELECOM and Eurotel standalone revenues and opex accordingly in 2005. Newly presented parameter of OIBDA is comparable with previously reported EBITDA with the exception of the impairment charge which is now included within OIBDA while before it was reported below the depreciation and amortization line. The impairment charge in 2005 represents a one-off depreciation charge relating to the changed estimates of the economic life of certain equipment in the fixed line business and intangible assets (brand names and trade marks) acquired by the purchase of the remaining share in Eurotel in 2003. It has not impacted the cash flow of the Group.
To allow for relevant year on year comparison of 2005 and 2004 results, in addition to IFRS statements, we restated 2004 results, on a pro-forma basis, to include accounting policy changes as if they were applied in 2004. The results in the table below are presented under the original reporting structure.
| CZK in mil. | 2004 Actual | 2004 Restated | Difference |
|---|---|---|---|
| Revenues | 62,141 | 62,175 | 34 |
| Operating expense | (33,076) | (32,737) | (339) |
Consolidated Financial Statements
Revenues, operating costs and OIBDA
Consolidated revenues (business and recurring revenues) reached CZK 61 billion in 2005, 0.8% down yoy, but they increased by 1.0% yoy in Q4. Total consolidated operating costs reached CZK 32.7 billion, up by 0.2% yoy, with a 5.2% and 0.3% yoy decrease in Q3 and Q4. The impairment charge reached CZK 1.3 billion in 2005, while in 2004 the amount was negligible. The consolidated OIBDA amounted to CZK 27.3 billion, down by 6.9% yoy. OIBDA excluding the impairment charge would decrease by 2.6% yoy. The reported OIBDA margin (OIBDA over Business revenues) reached 44.9%, compared to 48.2% in 2004. OIBDA margin excluding impairment charge would reach 47.0% in 2005.
Depreciation and Amortization
Consolidated depreciation and amortization in 2005 amounted to CZK 17.8 billion, down by 14.3% yoy. The significant decrease is a result of low CAPEX in recent years and changes in goodwill and certain intangible assets amortization.
Operating Income, Income before taxes and Net income
Consolidated operating income and consolidated income before taxes went up by 11.0% yoy and 7.2% yoy and reached CZK 9.5 billion and CZK 8.7 billion respectively in 2005, at the back of decrease of the consolidated depreciation and amortization. Consolidated net income amounted to CZK 6.2 billion, up by 9.0% yoy.
Capex
ČESKÝ TELECOM continued its conservative investment policy in 2005. The major investments were made in the growth areas (Internet, data services, UMTS). Total consolidated CAPEX amounted to CZK 6.1 billion, 5.2% up yoy. While CAPEX in fixed line business decreased by 12.1% yoy to CZK 2.2 billion, CAPEX of Eurotel increased by 19.0%, mainly due to the investments made in UMTS network.
Free Cash Flows
The total amount of free cash flows generated by the ČESKÝ TELECOM Group reached CZK 18.7 billion, down by 4.1% yoy, mainly as a result of decrease in OIBDA
Debt levels
ČESKÝ TELECOM Group’s consolidated debt amounted to CZK 9.4 billion at 31 December 2005, down by 63.0% compared to the same period last year. This number represents gross leverage of 10% and net leverage of 6%. Significant cash flows generated by both ČESKÝ TELECOM and Eurotel and distribution of Eurotel’s retained earnings to ČESKÝ TELECOM enabled the reduction of consolidated debt by CZK 16.1 billion in the course of 2005. This reduction is related mainly to the repayment of the acquisition financing of the purchase of the remaining 49% of Eurotel in November 2003. In Q3, ČESKÝ TELECOM also repaid CZK 4 billion of domestic bonds, issued in July 2002.
Fixed Line Business Overview*
The activities in the fixed line business in 2005 focused mainly on development and marketing of new Internet and data services. This allowed us to respond to increasing demand among our customers for broadband Internet, data and other value added services. Thus revenues from Internet, broadband, data and other telco services accounted for 26% of the business revenues in 2005, the same as in the previous year.
Revenues
Total revenues (business and recurring revenues) in fixed line business went down by 4.5% yoy to CZK 32.3 billion in 2005, while they decrease by 2.6% yoy in Q4. Business revenues decreased by 3.1% to CZK 31.9 billion, driven mainly by a decline in traditional voice services which had not been fully compensated by the increase in recently introduced broadband Internet based services, data and value added services.
The overall number of ČESKÝ TELECOM’s fixed lines amounted to 3,126 thousand at the end of 2005, down by 7.2% compared to 2004. PSTN lines recorded a 7.0% decrease and reached 2.7 million, while number of ISDN channels went down by 8.7% to 449 thousand. As a result, revenues from monthly subscriptions and connection charges decreased by 3.7% to CZK 11.8 billion.
Revenues from traditional voice services (communication traffic and interconnection) declined in total by 5.2% yoy to CZK 10.9 billion in 2005. Revenues from communication traffic declined by 19.5% yoy to CZK 6.2 billion. This is a result of lower voice traffic generated by ČESKÝ TELECOM’s customers in 2005, which decreased by 14.8% compared to 2004. Fixed to mobile substitution, lower number of the fixed lines and increased competition are the main drivers for the decreasing voice traffic.
Interconnection revenues increased by 23.2% to CZK 4.7 billion in 2005, mainly due to growth in revenues from international operators, as a result of the extension of international carrier transit services provided in the Central and Eastern Europe market space.
Revenues from the broadband services amounted to CZK 1.8 billion in 2005, up by 84.9% yoy. From this, CZK 1.5 billion represented revenues from retail broadband and CZK 283 million from wholesale services. ČESKÝ TELECOM recorded 173 thousand net adds to ADSL connections in 2005. The net adds of ADSL connections in 2H 2005 reached 111 thousand compared to 62 thousand in 1H 2005, as a result of successful pre Christmas campaign. The total number of ADSL connections reached 274 thousand at 31 December 2005, compared to 101 thousand at the end of 2004. Out of the total connections, ČESKÝ TELECOM’s retail customers represented about 80%. O2 Internet Express services are now available in 1,322 locations in the Czech Republic representing potential coverage of more than 90% of fixed lines operated by ČESKÝ TELECOM.
Revenues from dial up (narrowband) Internet decreased by 44.9% yoy to CZK 1.2 billion. Dial up Internet traffic went down by 41.7% yoy to 2,818 million minutes in 2005, as a result of dial up traffic migration to ADSL broadband Internet access and other fast Internet service alternatives.
Revenues from data services decreased by 0.9% yoy to CZK 4.4 billion, mainly due to decline in revenues from leased lines, which went down by 4.5% yoy. Data network services increased by 5.2% yoy and reached CZK 1.7 billion in 2005 due to the growth of IP Connect and IP VPN connections and introduction of new ADSL based data services.
Equipment revenues amounted to CZK 771 million, up by 5.2% yoy, reflecting the increased commercial activities in this area. Revenues from IT services and business solutions reached CZK 231 million in 2005 compared to CZK 79 million in 2004.
OPEX
The fixed line operating costs (excluding non-recurring items) went down by 4.6% in 2005 compared to 2004 and amounted to CZK 17.4 billion. They decreased by 6.0% yoy in Q4. The controllable operating costs (operating costs excluding supplies expenses) decreased even by 8.4% yoy in 2005 and confirmed the management’s effort to increase cost efficiencies.
Supplies expenses grew by 2.4% in 2005 to CZK 6.6 billion. Interconnection costs increased by 6.7% to CZK 4.9 billion, cost of goods sold went up by 11.1% to CZK 401 million while other supplies decreased by 13.5% to CZK 1.3 billion.
Personnel costs, including headcount reduction costs, amounted to CZK 5.7 billion, down by 0.9% yoy. The number of ČESKÝ TELECOM’s employees was reduced by 14% yoy in 2005 and reached 7,524 at the end of 2005. The operational efficiency measured by number of fixed lines per employee improved by 8.5% yoy to 415 lines as at the end of 2005.
The cost of subcontracts (external services) decreased in total by 7.0% yoy and reached CZK 4.9 billion in 2005. Out of this cost category, the reduction is reported in all items except utilities (material and energy) supplies, which amounted to CZK 468 million, the same as in 2004. Marketing and sales went down by 8.9% yoy to CZK 774 million, network & IT repairs and maintenance by 10.3% yoy to CZK 1.5 billion and rentals, buildings and vehicles costs by 5.4% yoy to CZK 828 million. Other subcontract costs including consultancy fees went down by 5.2% yoy to CZK 1.3 billion.
Taxes, comprising taxes other than income tax and provisions decreased by 70.3% yoy to CZK 246 million in 2005.
OIBDA of ČESKÝ TELECOM including business revenues, other revenues, non-recurring revenues and costs and impairment charge amounted to CZK 14.2 billion in 2005, down 8.9% yoy, representing an OIBDA margin (OIBDA over business revenues) of 44.5%. OIBDA excluding the impact of impairment would reach CZK 14.7 billion, down 5.9% yoy and OIBDA margin would reach 46% in 2005.
Mobile Business Overview*
In the competitive environment of the Czech mobile market, Eurotel confirmed its strong financial and operational performance in 2005. At the end of 2005, Eurotel won back its leadership position in total number of subscribers, mainly due to strong figures in Q4. Similarly to the fixed line business, the customers in the mobile market also continue to demand data, Internet and value added services including content.
Revenues
This trend is clearly reflected in changing Eurotel’s revenue structure. In 2005, total business revenues of Eurotel increased by 2.0% yoy and amounted to CZK 30 billion, while they grew by 4.2% yoy in Q4.
Eurotel’s revenues from voice services (monthly fees, traffic and interconnection) increased in total by 0.2% yoy to CZK 22.8 billion.
The total number of Eurotel’s customers at the end of 2005 amounted to 4,676 thousand, which represents a 6.4% increase compared to the end of 2004. Eurotel thus regained overall # 1 position at 2005 YE, primarily thanks to the record breaking growth of the number of contract customers. Eurotel’s attractive Christmas campaign helped to increase its customer base by 187 thousand in Q4, which is more than the number added by the two competitive operators together.
At the end of 2005, Eurotel recorded 1,546 thousand contract customers (GSM, CDMA and NMT), up by 488 thousand yoy, which represents a 46.0 % growth. Despite the fact that SIM card penetration has been continuously growing and reached 112% of the population at the end of 2005, the net additions of contract customers reached 158 thousand in Q4, compared to 118 thousand in Q3 and 66 thousand in Q4 2004. The contract customers accounted for 33% of the total customer base, compared to 24% at the end of 2004. Successful migration of pre-paid customers to contract services played an important role in the growth of the contract customer numbers. In addition, by the end of 2005, 641 thousand of contract customers subscribed for the new tariffs, which Eurotel introduced on 1 February 2005. Out of this total number, 202 thousand represented new customers of Eurotel, 269 thousand existing contract customers migrating from other tariffs and 170 thousand migrated from prepaid services.
Total number of prepaid customers amounted to 3,130 thousand at the end of 2005, which shows a decrease by 205 thousand (6.2%) compared to the end of 2004. This decrease was substantially influenced by significant migrations of customers from prepaid to contract segment, as a result of Eurotel marketing activities in this area. Under the methodology, which defines a prepaid customer as customer generating revenue in the last 3 months, the number of Eurotel’s prepaid customers at the end of 2005 amounted to 2,770 thousand, down by 6.8% yoy.
Revenues from monthly fees increased by 10.6% yoy to CZK 5.9 billion as a result of significant growth in contract customers base.
Traffic revenues decreased by 3.0% yoy to CZK 11.3 billion, while the total usage traffic increased almost by 10% yoy in 2005. The reason is higher share of contract customers with monthly packages, which include free minutes and market pressure on revenue per minute. The increased voice traffic can be attributed to increasing number of customers and success of usage stimulation activities.
Interconnection revenues amounted to CZK 5.5 billion in 2005, down by 3.0% yoy, due to decreased interconnection rates charged to other operators.
A continuous increase in multiple SIM card users together with lower ARPU generated by new customers had a negative impact on the blended ARPU. In 2005, ARPU reached CZK 510 compared to CZK 526 last year and CZK 503 in the first half of 2005. Average MOU per subscriber was 92 minutes in 2005, up from 90 minutes in 2004.
The total revenue from value added services (including SMS, MMS and content) increased by 4.1% yoy to CZK 4.1 billion. Eurotel customers sent and received in total 2,519 million SMS in 2005, up by 9.9% yoy.
Revenues from Internet and Data recorded a 97.5% increase in 2005 and reached CZK 1.4 billion. At the end of 2005, the total number of Eurotel Data Express (an unlimited high-speed Internet access service based on CDMA technology) customers amounted to 70 thousand (up by 40 thousand yoy) and total number of Eurotel Data Nonstop (unlimited mobile Internet access service based on GPRS technology) customers was 67 thousand (up by 14% yoy).
Lower number of sold handsets led to a 9.5% yoy decrease in the equipment sales (including connection fees) to CZK 1.6 billion. Lower sales of handsets were influenced by increasing proportion of customers taking a benefit of more advantageous tariff in return for commitment to stay with Eurotel for a specific time period.
Other business revenues (IT services and other revenues) decreased by 37.4% to CZK 176 million.
Operating costs of Eurotel increased by 4.8% yoy to CZK 16.8 billion, with a 6.9% yoy increase in Q4, which was caused by higher subsidies for new contract customers.
Supplies expenses, which comprise interconnection and roaming, cost of goods sold and other supplies reached CZK 9.6 billion in 2005, 0.7% up yoy. The major item in this category relates to interconnection and roaming costs, which amounted to CZK 5.8 billion, 4.7% up yoy. Similarly to the equipment sales, the cost of goods sold decreased in 2005 and amounted to CZK 3.3 billion, down by 6.3% yoy. Other purchases and cost of sales increased by 7.1% to CZK 495 million.
The number of Eurotel’s employees as of 31 December 2005 amounted to 2,490, almost same as at the end of 2004. The staff costs increased by 27.2% yoy to CZK 2.2 billion, as a result of one-off items posted in Q2 which were commented in 1H 2005 earnings announcement.
The cost of subcontracts in Eurotel increased by 3.3% yoy to CZK 4.3 billion in 2005. Marketing and sales expenses increased by 12.1% to CZK 1.9 billion, mainly due to the growth of commissions. Network & IT repairs and maintenance went down by 6.0% yoy in 2005 to CZK 878 million. Cost of rentals, buildings and vehicles amounted to CZK 809 million in 2005, up by 0.9% yoy. Utilities supplies went up by 10.6% in 2005 and reached CZK 208 million. Other subcontracts (consultancy fees and other) amounted to CZK 545 million, down by 6.5% yoy.
Taxes comprising taxes other than income tax, fees paid to the regulator and provisions amounted to CZK 668 million in 2005, which represents a 16.2% yoy increase.
OIBDA of Eurotel reached CZK 12.9 billion in 2005, which represents a 5.5% yoy decrease with an OIBDA margin of 42.8%. The OIBDA margin before one-off items reached 45% in 2005.
Outlook for 2006
In 2006, the ČESKÝ TELECOM Group will continue to actively address the changes and trends in the Czech telecommunication market, specifically in the areas of broadband, Internet, data and value added services. The primary goal of our activities is to best meet our customer needs and to enable them to effectively use our services for the competitive price. At the same time, ČESKÝ TELECOM Group will continue to concentrate on revenue retention in voice and traditional data services areas.
As a result of the new ownership structure, ČESKÝ TELECOM Group can achieve a number of tangible material benefits emanating from its close interaction with Telefónica. The commercial and underlying technical development leading to introduction and marketing of the new services and products (e.g. UMTS, IPTV, IP based value added services, content, integrated business solutions), further operational efficiencies facilitated by process and organizational redesign based on sharing the best practice, synergies in the purchasing leading to decreased cost of resources and opex and capex savings, are the key areas of experience sharing and cooperation with the new majority shareholder. Several areas are already in the execution phase, specifically IPTV (based on Telefonica’s Imagenio product), purchasing of broadband and UMTS technology and range of broadband based value added services. ČESKÝ TELECOM Group is the only integrated telecommunication provider in the Czech Republic covering both, fixed and mobile segment, which represents additional benefit for its customers.
The key strategic effort of the management is to maintain its leading position in the Czech telecommunication market. The main aspects of financial management of the ČESKÝ TELECOM Group will remain focused on above average OIBDA margins, efficient CAPEX levels and strong free cash flows. We expect to stop the decline of both revenues and OIBDA in 2006 and reach the same levels as in 2005.
Martin Zabka
Spokesperson
ČESKÝ TELECOM, a. s., member of the Telefónica Group is the leading telecommunications company in the Czech Republic. Through its subsidiary company Eurotel Praha, spol. s r.o., it also has a significant presence in the Czech mobile services market. Further information about the firm and the services it offers is available at www.telecom.cz, which was rated as BestWeb 2003 in the WebTop100 survey.
Signum Temporis has consistently awarded
ČESKÝ TELECOM ranks among the most prominent firms on the Czech capital market in terms of capitalization and trading volumes. Its shares are also traded on the London Stock Exchange in the form of GDRs. ČESKÝ TELECOM\'s credit rating is the highest a Czech corporation can receive from top international rating agencies.
About Telefónica
Telefónica is one of the largest telecommunications companies in the world in terms of market capitalisation. Its activities are centered mainly on the fixed and mobile telephony businesses with broadband as the key tool for the development of both.
The company has a significant presence in 19 countries and a customer base that amounts more than 180 million accesses around the world. Telefónica has a strong presence in Latin America, where the company focuses an important part of its growth strategy.
Telefónica is a 100% listed company, with more than 1.5 million direct shareholders. Its share capital currently comprises 4,921,130,397 ordinary shares traded on the Spanish Stock Market (Madrid, Barcelona, Bilbao and Valencia) and on those in London, Paris, Frankfurt, Tokyo, New York, Lima, Buenos Aires and São Paulo.
