OTE Reports Q2 Results

Net income fell by 61.8% to €45M in Q2, attributed to continuing drop in fixed-line revenues

August 26, 2004

7 Min Read

ATHENS, Greece -- Hellenic Telecommunications Organization SA (ASE: HTO)(NYSE:OTE - News):

  • Operating revenues up 6% on strong mobile sales (Cosmote, Globul), sound Romtelecom performance

  • Continuing difficulties in Greek fixed-line: slower revenue erosion but market share loss and further increase in operating expenses

  • Severe action plan required to reverse slide, control costs and restore leadership - management program to be unveiled in fourth quarter

Hellenic Telecommunications Organization SA (ASE: HTO)(NYSE:OTE - News), the Greek full-service telecommunications provider, today announced consolidated unaudited results (prepared under US GAAP) for the quarter ended June 30, 2004.

Commenting on the quarter, Mr. Panagis Vourloumis, Chairman and CEO, noted:

"OTE's results in the second quarter highlight the contrast between the poor performance of our Greek fixed-line activities and our successes in mobile, at Cosmote and Globul in particular, and in Romania. The deterioration of OTE's domestic competitive position in fixed-line and the continuing rise in operating expenses in the face of a shrinking revenue base reinforce the need for drastic actions aimed at bolstering revenues and cutting costs. On the revenue side, we are accelerating the introduction of broadband, a transforming technology in which we are late. And we are going to implement long overdue changes throughout the organization, above and beyond the required headcount reductions. To succeed, our plans will require radical shifts in the way the Greek authorities and the unions deal with OTE. But I am confident that they will see, that OTE urgently needs these changes - and hope to be able to present our plans in the fourth quarter of this year."


Operating Revenues

OTE's Operating Revenues increased by 5.7% in the three months ended June 30, 2004 to EUR 1,304.6 million. This is largely due to the continued strong performance in mobile telephony, both in Greece and abroad. Higher revenues from Cosmote and, to a lesser extent, Globul offset the decline in revenues from Greek fixed-line operations. The continuing decline in Greek fixed-line telephony revenues is due to the combined effect of reduced traffic and prices as well as the decision by the telecommunications regulator (NTPC), to impose reductions on leased lines and interconnection tariffs.

Operating Expenses

Payroll and Employee Benefits increased by 2.9% to EUR 309.6 million in the second quarter of 2004. In Greek fixed-line operations, payroll and employee benefits decreased slightly to reach EUR 203.0 million.

There were no Voluntary Retirement Costs for the second quarter of 2004, as the charges taken in the first quarter cover most of the estimated Voluntary Retirement Plan cost for 2004.

Payments to International Operators increased by 7.6% to EUR 47.9 million. Payments to domestic telephony operators (Mobile and Fixed-line Operators) increased by 5.6% to EUR 164.8 million. These payments do not include payments to Cosmote, but include payments from Cosmote to other mobile operators.

Depreciation and Amortization increased by 7.6%, to EUR 257.6 million in the second quarter of 2004. This increase reflects significant infrastructure investments completed in 2003 at Globul, Cosmofon and HellasSat, as well as projects related to the 2004 Athens Olympic Games.

Other Operating Expenses increased by 16.3% to EUR 331.2 million, reflecting significant increases in repairs & maintenance, provisions for doubtful accounts and third party fees.

Operating income before depreciation and amortization

For the second quarter of 2004, OTE Group Operating income before depreciation and amortization, including RomTelecom, amounted to EUR 451.1 million, or 34.6% of operating revenues. The drop in margin, from 39.4% in the comparable quarter last year, primary reflects the deterioration of operating performance in Greek fixed-line operations.

Net Income

Net Income for the three months ended June 30, 2004 reached EUR 45.0 million, down 61.8% from net income of EUR 117.7 million in last year's second quarter. This fall is mainly attributed to the continuing drop in fixed-line revenues in Greece and the slow progress in the area of operating cost reduction.

Cash Flow

Cash provided by operating activities amounted to EUR 445.3 million for the three months ended June 30, 2004.

Capital Expenditure

Capital expenditure in the second quarter of 2004 totaled EUR 295.2 million, and EUR 473.1 million for the first half of 2004.


At June 30, 2004, OTE Group gross debt amounted to EUR 3,241.4 million, down 1.2% compared to December 31, 2003.

OTE estimates that its share of the Greek fixed-line market, as measured in call minutes, stood at approximately 85% in June 2004.

Fixed-line operating revenues dropped by 4.9% in the second quarter of 2004 to EUR 729.3 million. This decline is due to lower traffic volume and the new tariff structure introduced to meet heightened competition, partly offset by an increase in revenues from monthly rentals and special projects.

Despite fixed-to-mobile substitution, the total number of installed lines remained roughly unchanged in the second quarter of the year, as a 3% drop in PSTN lines was more than offset by an increase of nearly 19% in ISDN lines. In late June, OTE introduced a package targeting owners of vacation homes, aimed at reducing the switch to mobile phone use among seasonal residential users.

OTE is addressing the delays that have affected the deployment of its ADSL offering and taking steps to accelerate installation time and boost demand. The company expects to meet its 50,000 ADSL customer target by the end of 2004, and will make a significant push to raise broadband usage closer to levels recorded in other European countries.

The decline in total traffic, as measured in call minutes, slowed down during the period as compared to the first quarter of the year. However, aggressive competitive actions, made possible in part by regulatory decisions, continue to depress traffic, market share and revenues.

As announced last quarter, OTE is vigorously contesting leased line and interconnection tariffs imposed by the regulator, and expects a resolution of this dispute until the end of the year.

Total operating expenses increased by 7.3% compared to the second quarter of 2003 reaching EUR 675.2 million, mainly influenced by the growth of Other Operating Expenses.

In the second quarter of 2004, Other Operating Expenses showed an increase of 28.2% in comparison to the corresponding quarter of 2003. This was mainly due to additional advertising costs supporting a number of new products and services as well as the Olympic Games sponsorship, increased provision for doubtful accounts, higher commissions to Audiotex providers, and increased third party fees.

In the six months ending June 30, 2004, Net Working Capital for the Domestic Fixed-line business (including bad debt, excluding intra-group transactions and cash) declined substantially as a percentage of revenue compared to the same period of 2003, at 23.7% versus 25.3% last year (Greek GAAP). These are the lowest Net Working Capital requirements of the Domestic Fixed-line business for over three years, and are the result of a concerted 12-month effort of improving billing efficiency, collections effectiveness, payables management and inventory control. In particular, Days Sales Outstanding (including VAT) have decreased significantly since the seasonally high Q1 and reached last year's levels at 106, Days Payables Outstanding increased substantially from 108 last year to 132 and inventories, though still higher than June 2003, have reduced by 8% since end-2003, following the continued roll-out of the Olympic Projects. Further reduction of Net Working Capital is expected through 2004, especially through lower DSO, as improved credit control and collections management begin to influence OTE's receivables.


OTE expects the trends of the first six months of the year to continue in the second half, with strong top-line performance in mobile and, to a lesser extent, at Romtelecom not sufficient to offset weakness in Greek fixed-line operations. The Company will pursue its efforts to obtain reversal of regulatory decisions concerning wholesale tariffs.

For the short and medium term profits are expected to remain low. The longer-term outlook will depend on the ability of the management to carry out the reforms it is planning. If so, by mid 2005 the positive results will be visible at the bottom line. Unlike profits, cash flow will remain healthy because of very high depreciation charges. There is no plan to materially increase debt.


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