Dialog – Operating Results Improve, Rs. 6 Bn. Provision for Transition to NGN

100% Next Generation Network to Cut Future Network Costs

Dialog Telekom PLC announced on Thursday, 13 August, the financial results for the quarter ended 30 June 2009. In tandem with operating results the Company announced a further step in its on-going cost reduction programme, featuring a one-off network modernisation step to achieve a 100% Next Generation Network (NGN) Core Network, which in turn required a special provision for impairment.

The operational performance of Dialog Telekom PLC (the “Company”/“Dialog”) signaled a 14% increase in operating profit normalised for exceptional charges (EBITDA) on an adjacent Quarter-on-Quarter basis, consolidating the upward performance trend set in the previous (first) quarter. Revenues grew 3% QoQ while Direct costs and Operating costs excluding depreciation and exceptional charges reduced by 2% and 3% respectively on adjacent quarter basis.

Dialog Telekom Group Chief Executive, Dr. Hans Wijayasuriya stated that network modernisation presented a strategic opportunity to reduce operating costs in the future, supplementing other cost reduction measures adopted by the Company. He further stated that the incremental investment required to achieve a 100% NGN Core Network was modest at around Rs 485 Million (USD 4.2 Million) since the Company had commenced its transition to a NGN based Core Network in 2006. Dr. Wijayasuriya stated that the Company is focused on exploiting operational and structural opportunities to re-scale its cost structure and regain profitability, enabling the delivery of attractive returns to shareholders.

The Company’s Chief Executive Dr. Hans Wijayasuriya explained that NGNs provide technologically progressive operators with the opportunity to de-scale operating costs by a significant margin, while also reducing future capital expenditure and carrying values of core network assets due to the over 80% reduction in per-subscriber core network capital costs. The modernisation of Dialog’s core network which is already 62% NGN, is slated to deliver a positive impact of Rs. 1.5 Bn. to the Company’s P&L on an annualised basis going forward, and is further supported by an Internal Rate of Return (IRR) in excess of 100% and a payback period of less than one calendar year from the point of commissioning. Dialog’s NGN core network will support the Company’s 6 Mn. strong and rapidly growing subscriber base in addition to enabling a host of advanced subscriber features and convergence opportunities.

The network modernisation phase of the Company’s cost rescaling programme will be carried out in tandem with a range of other operational cost rescaling initiatives. These initiatives have hitherto succeeded in driving tangible cost reductions and corresponding improvements in operating margins over successive quarters. The Company carried out a rescaling of human resource costs pertaining to executive and management cadre during April and May 2009. A total of 335 members from the executive and management cadre opted for the voluntary resignation scheme resulting in an annualised saving of Rs. 443 Mn. in pay roll costs and over Rs. 100 Mn. in associated employee maintenance costs. Early manifestation of corresponding savings is evident in Q2 2009, with an 11% reduction in manpower costs on QoQ basis.

The Company recorded revenue of Rs. 7,969 Mn. during Q2 2009, an increase of 3% relative to the preceding quarter. Revenue growth was driven in the main by aggressive subscriber acquisition initiatives which saw the Company’s subscriber base reach 5.99 Mn. representing a 25% growth YoY and a 2% growth relative to Q1 2009. Notwithstanding QoQ improvement, Company revenue dropped by 5% YoY relative to the 1H of 2008 on the backdrop of aggressive price cutting across the industry.

The Company however continues to be successful in securing its industry revenue share and a growing proportion of new market additions not withstanding price competition. As announced earlier this week Dialog became the first mobile operator in the country to extend its GSM network to the newly liberated areas in the Northern Province with flagship coverage milestones at Kilinochchi and Mullaitivu taking the Company’s base station count to 1,500 - significantly ahead of competition. Ongoing Network expansion in the Northern and Eastern Provinces offers significant forward growth opportunities in revenue and subscriber additions. Dialog is well poised to capitalize on the growth opportunities being the first mobile operator to cover the region. Undisputed coverage leadership, excellence in customer service and a cutting edge portfolio of value-added services continue to be cornerstones of the Company’s leadership position in Sri Lanka’s mobile industry.

In terms of cost management the Company made significant headway in de-scaling its operating cost structure. Total operating costs excluding exceptional charges reduced by 3% QoQ and by 10% on a two quarter comparison. EBITDA normalised for exceptional items improved by 14% relative to Q1 2009 to reach Rs. 2,118 Mn., recording a robust 27% EBITDA margin up 3% points from the previous quarter. The Company made an exceptional provision of Rs. 410 Mn. to accommodate intercompany receivables from its media subsidiary Dialog Television. The said provision is however negated at Group level consolidation. EBITDA inclusive of exceptional charges was recorded at Rs. 1.65 Bn., 24% up relative to the immediately preceding quarter. In line with operational improvements, Company operating cash flows increased four-fold in 1H of 2009 compared to 1H of 2008 to record at Rs. 5,101 Mn. - driven in the main by improvements in working capital.

The Company continued to contribute significantly to GoSL revenues with the remittance of direct and indirect levies amounting to Rs. 1.98 Bn., up 12% QoQ from the corresponding figure of Rs. 1.77 Bn. in Q1 2009. The impact on the Profit and Loss Statement due to these GoSL levies recorded at approximately Rs. 945 Mn.

Non-operating costs excluding exceptional items arising from one-off and non-recurring charges totaled to Rs. 2.3 Bn. – 11% down on a QoQ basis. Accordingly normalised PAT was recorded at negative Rs. 5 Mn., an improvement of 99% relative to the normalised figure of negative Rs. 598 Mn. recorded in the previous quarter.

Non-operating costs inclusive of exceptional items were recorded at Rs. 9.1 Bn. in Q2 2009 inclusive of charges on account of network modernisation and equipment obsolescence provisions. EBITDA recorded at Rs. 1.65 Bn. was accordingly diluted to a NPAT of negative Rs. 7.25 Bn. – reflecting a significant dilution on a QoQ basis.

The Dialog Group (the “Group”) performance is derived from the consolidation of its subsidiaries, Dialog Broadband Networks (Pvt) Ltd (“DBN”) and Dialog Television (Pvt) Ltd (“DTV”). The Group recorded consolidated revenue of Rs. 8,751 Mn. for Q2 2009, an increase of 4% relative to the adjacent quarter and a decline of 5% YoY. Group costs excluding depreciation exhibited 4% reduction relative to the adjacent quarter on a normalised basis.

Normalised Group EBITDA recorded an improvement of 25% QoQ and was recorded at Rs. 2,069 Mn. (cumulative Rs. 3,722 Mn. for 1H of 2009). Group PAT inclusive of all nonrecurring charges was recorded at negative Rs. 7,668 Mn. (cumulative of negative Rs. 9,537 Mn. for 1H of 2009), while normalised Group PAT was computed at negative Rs. 579 Mn. – a 56% improvement on QoQ basis.

Group operating cash flows recorded at Rs 4,912 Mn, increased two-fold during 1H of 2009 compared with 1H of 2008 driven mainly by growth in revenues and improvements in working capital.

DTV continued to deliver robust growth and capture market and revenue share in the Pay Television sector. Pay TV subscribers increased by 5% relative to Q1 2009 fuelling revenue growth of 12% during the same period. DTV recorded a negative EBITDA of Rs. 81 Mn. in Q2 2009, an improvement of 48% relative to Q1 2009 - signifying consolidation of northward performance trends exhibited over previous quarters.

Fixed line and broadband services operated by DBN recorded revenue of Rs. 556 Mn., an increase of 1% relative to Q1 2009. DBN’s fixed line & broadband subscriber base was recorded at 182,000 as at the end of Q2 2009. DBN’s performance includes a non recurring charge of Rs. 257 Mn. on account of project financing costs pertaining to the company’s Fibre Optic Network Project. When normalized to exclude the aforereferenced non-recurring item, DBN EBITDA is recorded at negative Rs. 17 Mn. an 83% improvement on a QoQ basis.