2006 FIRST QUARTER FINANCIAL RESULTS
27.4.2006
ČESKÝ TELECOM, a. s., is pleased to announce its unaudited financial results for the first quarter of 2006. These results are consolidated and prepared according to International Financial Reporting Standards.
ČESKÝ TELECOM’s Group Highlights
Revenues of CZK 14.8 billion (+0.5%)
Operating costs of CZK 7.8 billion (+ 0.8%)
OIBDA of CZK 7.2 billion (+ 0.9%), OIBDA margin of 48.9%
Operating income of CZK 3.0 billion (+ 24.8%)
Net Income of CZK 2.1 billion (+ 23.1%)
Net gearing at 2.8% (- 20.8 p.p.)
Capex of CZK 1 billion
Free Cash Flow of CZK 3.3 billion (- 13.7%)
Group Headcount 10,116 (- 9.3%)
Consolidated Financial Statements
Revenues, operating costs and OIBDA
Consolidated revenues (business and recurring revenues) reached CZK 14.8 billion in the first quarter of 2006, 0.5% up yoy, and confirmed the improving trend, which have been seen from the second half of 2005. Total consolidated operating costs reached CZK 7.8 billion, up by 0.8% yoy. Similarly to the same period of the previous year, the amount of one-off items included in the results for the first three months of 2006 was negligible. The consolidated OIBDA amounted to CZK 7.2 billion, up by 0.9% yoy with OIBDA margin (OIBDA over Business revenues) at 48.9%, compared to 48.5% in the first quarter of 2005.
Depreciation and Amortization
Consolidated depreciation and amortization in the first three months of 2006 amounted to CZK 4.2 billion, down by 11.3% yoy. The significant decrease is a result of low CAPEX in recent years and changes in certain intangible assets amortization.
Operating Income, Income before taxes and Net income
Consolidated operating income and consolidated income before taxes went up by 24.8% yoy and 27.8% yoy and reached CZK 3 billion and CZK 2.9 billion respectively in the first quarter of 2006, at the back of decrease of the consolidated depreciation and amortization. Consolidated net income amounted to CZK 2.1 billion, up by 23.1% yoy.
Capex
Similarly to the previous reporting periods, the major investments were made in the growth areas in the first quarter of 2006. Total consolidated CAPEX amounted to CZK 972 million, 36.7% up yoy. While CAPEX in fixed line business increased by 17% yoy to CZK 470 million and was spent largely into ADSL advancement, CAPEX in Eurotel increased by 61.4% to CZK 502 mil., mainly due to the investments made in UMTS network. Despite increased CAPEX due to accelerated rollout of ADSL in the first quarter of 2006 compared to the same period of 2005, we confirm our 2006 full year guidance of CAPEX/Revenues ratio at 10 to 12%.
Free Cash Flows
The total amount of free cash flows generated by the ČESKÝ TELECOM Group reached CZK 3.3 billion in the first quarter of 2006.While operating cash flows remained stable yoy, accelerated investments into growth areas resulted into seasonally higher investments cash outflows and overall free cash flows by 13.7% lower compared to the first quarter of 2005.
Debt levels
ČESKÝ TELECOM Group’s consolidated debt (long-term and short-term) amounted to CZK 9.6 billion at 31 March 2005, the same as at the end of 2005 and down by 58.0% compared to the same day last year. This number represents gross leverage of 9.9% and net leverage of 2.8% compared to 25.3% and 23.6% at the end of March 2005.
Fixed Line Business Overview*
Our activities in the fixed line business in the first quarter of 2006 were primarily focused on development and marketing of new Internet and data services. This helped us to actively respond to the increasing demand from our customers for broadband Internet, data and other value added services. Thus revenues from broadband Internet, data and other telco services accounted for 23.2% of the business revenues in the first quarter of 2006, compared to 21.5% in the same period of the previous year. At the same time, we continued to concentrate on revenue retention in traditional voice and data services.
Revenues
Total revenues (business and recurring revenues) in fixed line business went down by 4.9% yoy to CZK 7.7 billion in the first quarter 2006. Business revenues decreased by 5.5% to CZK 7.5 billion, driven mainly by a decline in traditional voice services which had not been fully compensated by the increase in broadband Internet based services, data and value added services.
The overall number of ČESKÝ TELECOM’s fixed lines amounted to 3,073 thousand at the end of March 2006, down by 7.1% compared to 31 March 2005. PSTN lines recorded a 6.9% decrease and reached 2.6 million, while number of ISDN channels went down by 8.5% to 441 thousand. As a result, revenues from monthly subscriptions and connection charges decreased by 7.1% to CZK 2.8 billion.
Revenues from traditional voice services (communication traffic and interconnection) declined in total by 4.6% yoy to CZK 2.6 billion. Revenues from communication traffic declined by 16.3% yoy to CZK 1.4 billion. This is a result of lower voice traffic generated by ČESKÝ TELECOM’s customers in the first quarter of 2006, which decreased by 6.1% yoy. Fixed to mobile substitution, lower number of the fixed lines and increased competition are the main drivers behind the decreasing voice traffic.
Interconnection revenues increased by 13.4% to CZK 1.2 billion in the first quarter of 2006, mainly due to growth in revenues from international operators, as a result of higher international transit traffic.
Revenues from the broadband services amounted to CZK 576 million in the first quarter of 2006, up by 47.7% yoy. From this, CZK 492 million represented revenues from retail broadband and CZK 84 million from wholesale services. ČESKÝ TELECOM recorded 64 thousand net adds to ADSL connections in the first quarter of 2006 compared to 26 thousand net adds in the first quarter of 2005.This progressive increase was supported by successful marketing campaign launched on 1 February 2006 when ČESKÝ TELECOM introduced its offer of four times increased speed of broadband connections for unchanged price. From that day, ČESKÝ TELECOM took on average 8 thousand orders per week with a record number of 10,000 orders in 10th week, while in 2005 the average number of orders per week reached 6,000. Until the end of March, ČESKÝ TELECOM fulfilled about 80% of the orders made during two months of the new offer. The average number of installations per week reached 6,000 in the first quarter of 2006 compared to 4,200 orders in the same period of 2005. A record number of installations was recorded during the 11th week, when the company completed 10,000 of them. The total number of ADSL connections reached 338 thousand at 31 March 2006, compared to 274 thousand at the end of 2005. Out of the total connections, ČESKÝ TELECOM’s retail customers represented 84%.
Revenues from dial up (narrowband) Internet decreased by 50.4% yoy to CZK 192 million. Dial up Internet traffic went down by 53.4% yoy to 455 million minutes in the first quarter of 2006, as a result of continuing dial up traffic migration to ADSL broadband Internet access and other fast Internet service alternatives.
Revenues from data services decreased by 5.3% yoy to CZK 1 billion, mainly due to decline in revenues from leased lines, which went down by 10.3% yoy to CZK 609 million. Data network services increased by 2.6% yoy and reached CZK 440 million due to the growth of IP Connect and IP VPN connections and introduction of new ADSL based data services.
Equipment revenues amounted to CZK 158 million, down by 11.2% yoy. Revenues from IT services and business solutions reached CZK 108 million in the first quarter of 2006 compared to CZK 24 million in the same period of 2005.
OPEX
The fixed line operating costs (excluding non-recurring items) went down by 2.6% yoy in the first three months of 2006 and amounted to CZK 4.2 billion. The controllable operating costs (costs of subcontracts) decreased even by 8.7% yoy and confirmed the management’s effort to realize further cost efficiencies.
Supplies expenses grew by 13.9% yoy to CZK 1.7 billion. Interconnection costs increased slightly by 3.8% to CZK 1.2 billion, cost of goods sold went up by 13.7% to CZK 83 million as a result of increased activity in broadband services, while other supplies increased by 67% to CZK 369 million.
Personnel costs, including headcount reduction costs, amounted to CZK 1.2 billion, down by 12.2% yoy as a result of decrease in ČESKÝ TELECOM’s headcount by 12.2% yoy to 7,572 at the end of March 2006. The productivity measured by number of fixed lines per employee improved by 5.8% yoy to 406 lines at the end of the period.
The cost of subcontracts (external services) decreased in total by 8.7% yoy and reached CZK 1.3 billion in the first quarter of 2006. Out of this cost category, the reduction is reported in all items except utilities (material and energy) supplies, which increased by 7.5% yoy to CZK 158 million, and marketing and sales which went up by 32% yoy to CZK 202 million. Network & IT repairs and maintenance decreased by 12.6% yoy to CZK 403 million and rentals, buildings and vehicles costs reached CZK 198 million almost the same as in the first quarter of 2005. Other subcontract costs including consultancy fees went down by 32.5% yoy to CZK 257 million.
Taxes, comprising taxes other than income tax, fees and provisions decreased by 29% yoy to CZK 49 million.
OIBDA of ČESKÝ TELECOM including business revenues, other revenues, non-recurring revenues and costs amounted to CZK 3.5 billion in the first quarter of 2006, down by 6.1% yoy, representing an OIBDA margin (OIBDA over business revenues) of 46.9%, compared to 47.2% in the first quarter of 2005.
* ČESKÝ TELECOM standalone, i.e. excluding minor subsidiary companies, before consolidation adjustments
Mobile Business Overview*
Results of Eurotel in the first quarter of 2006 confirmed its strong financial and operational performance. Similarly to the fixed line business, main efforts focused on the offer of the new data, Internet and value added services including content, while improving the attractiveness of traditional voice packages.
Revenues
This trend is clearly reflected in changing Eurotel’s revenue structure. Total business revenues of Eurotel increased by 6.5% yoy and amounted to CZK 7.5 billion. Data revenues (revenues from value added services and Internet & Data) accounted for 21.2% of service revenues in the first quarter of 2006 compared to 19.1% in the same period of the previous year. Non-SMS data made 8.2% of service revenues in the first quarter of 2006 compared to 6.9% in the same period of the previous year.
Eurotel’s revenues from voice services (monthly fees, traffic and interconnection) increased in total by 3% yoy to CZK 5.5 billion.
The total number of Eurotel’s customers amounted to 4,695 thousand at the end of March 2006, which represents an 8.5% yoy increase. The net additions reached 19 thousand in the first three months of 2006, while Eurotel loss 68 thousand customers in the same period of 2005. The number of contract customers (GSM, CDMA and NMT) reached 1,643 thousand, up by 498 thousand yoy, which represents a 43.5 % 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 97 thousand in the first quarter of 2006, compared to 87 thousand in Q1 2005. The contract customers accounted for 35% of the total customer base, compared to 26.5% at the end of March 2005 and 33% at the end of 2005. Successful migration of pre-paid customers to contract services played an important role in the growth of the contract customer numbers.
Decrease in number of prepaid customers was substantially influenced by migrations of customers from prepaid to contract segment, as a result of Eurotel marketing activities in this area. Total number of prepaid customers amounted to 3,052 thousand at the end of March 2006, which shows a decrease by 129 thousand (4.1%) compared to the same date of the previous year. 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 31 March 2006 amounted to 2,771 thousand, down by 5.8% yoy.
The blended monthly average churn rate amounted to 2.2% in the first quarter of 2006, compared to 2.4% in the same period of the previous year.
Revenues from monthly fees increased by 12.3% yoy to CZK 1.6 billion as a result of significant growth in contract customers base.
Traffic revenues decreased by 1.3% yoy to CZK 2.6 billion, while the traffic usage increased by 22.4% yoy in the first three months of 2006. 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 1.3 billion in the first quarter of 2006, up by 1.7% yoy, mainly due to higher volume of incoming traffic.
In the first three months of 2006, blended ARPU reached CZK 490 compared to CZK 484 in the first quarter of 2005. Contract ARPU reached CZK 996 in the first quarter of 2006 compared to CZK 1,237 in the same period of the previous year, while prepaid ARPU decreased from CZK 233 to CZK 226 in the same period. Average MOU per subscriber recorded a positive development in the first quarter of 2006 with 96 minutes, up from 83 minutes in the same period of the previous year and 92 minutes in 2005.
The total revenue from value added services (including SMS, MMS and content) increased by 15.0% yoy to CZK 1.1 billion. Eurotel customers sent and received in total 690 million SMS in the first quarter of 2006 , up by 15.4% yoy.
Revenues from Internet and Data recorded a 23.9% yoy increase and reached CZK 378 million. At the end of March 2006, the total number of Eurotel Data Express customers amounted to 79 thousand (up by 36 thousand yoy) and total number of Eurotel Data Nonstop customers was 68 thousand (up by 9.7% yoy).
Higher number of sold handsets led to a 13.3% yoy increase in the equipment sales (including connection fees) to CZK 384 million.
Other business revenues (IT services and other revenues) increased by 85% to CZK 74 million.
OPEX
Total operating costs of Eurotel increased by 4.8% yoy to CZK 4 billion in the first quarter of 2006, mainly as a result of increase in supplies expense. On the other hand, the controllable operating costs (costs of subcontracts) decreased by 6.9% yoy.
Supplies expenses, which comprise interconnection and roaming, cost of goods sold and other supplies reached CZK 2.4 billion, 11.2% up yoy. The major item in this category relates to interconnection and roaming costs, which amounted to CZK 1.5 billion, 11.6% up yoy due to higher off-net outgoing traffic. Cost of goods sold increased by 2.9% and amounted to CZK 742 million. Other purchases and cost of sales increased by 75.9% to CZK 146 million.
The number of Eurotel’s employees as of 31 March 2006 amounted to 2,483, almost same as at the end of March 2005 and at the end of 2005. The staff costs decreased by 10.5% yoy to CZK 441 million.
The cost of subcontracts in Eurotel decreased by 6.9% yoy to CZK 972 million in the first three months of 2006. Marketing and sales expenses decreased by 1.7% to CZK 413 million. Network & IT repairs and maintenance went down by 24.4% yoy to CZK 170 million. Cost of rentals, buildings and vehicles amounted to CZK 193 million, down by 4.5% yoy. Utilities supplies went up by 39.2% and reached CZK 71 million. Other subcontracts (consultancy fees and other) amounted to CZK 125 million, down by 14.4% yoy.
Taxes comprising taxes other than income tax, fees and provisions amounted to CZK 178 million in the first quarter of 2006, which represents a 64.8% yoy increase.
OIBDA of Eurotel reached CZK 3.6 billion in the first quarter of 2006 representing a 8.3% yoy increase with an OIBDA margin of 47.9%, up by 0.8 p.p. yoy.
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 Group of operating companies, including recently acquired one of the European leading mobile operator, O2. 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.
New range of convergent product offering and integrated customer service and resulting synergies will be achieved via proposed integration of ČESKÝ TELECOM and Eurotel into the new telecommunication company Telefónica O2 Czech Republic, which was communicated at the beginning of March 2006. The integrated organization is expected to become effective in mid-2006 after the approval by shareholders at Annual General Meeting held on 27th April 2006 and all required preparatory and legal steps have been completed. The new company will use the O2 brand for all customer segments, with Telefónica endorsement in all communications. The Group’s management expects net present value of the synergies related to fixed-mobile integration to reach EUR 375 to 450 million, in addition to EUR 250 million of synergies resulting from ČESKÝ TELECOM Group being a part of Telefónica Group.
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.
* Eurotel standalone, before consolidation adjustments
For further information, please contact:
MARTIN ŽABKA
Press Spokesman
Tel: +420 271 463 359
Fax: +420 271 469 896
e-mail: tiskovy.odbor@ct.cz
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 for being one of the domestic capital market's most transparent firms in terms of providing information. Based on an open vote of specialists, members of the press and a nine-member committee, ČESKÝ TELECOM placed first in 2003, just as it did in 2001.
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.
