Era undeterred by heavy 1999 loss, costly strategy
Polska Telefonia Cyfrowa's (Era GSM) announcement last week that it lost zl. 122.5 million ($31.41 million) in 1999 surprised no one. Analysts had anticipated the red ink to be the result of the mobile telephone company's rapid expansion.
The company attributed the result to foreign exchange losses caused by the weakening zloty. Era has long-term foreign debt issues in tranches of o300 million and $150 million. In 1999, the company had additional senior debt, which consisted of DM 237.7 million and zl. 570 million ($139 million). With all of its revenue in zloty, the company has to bear the brunt of the difference in the currencies when the zloty slumps.
"I don't think (the net loss) will mean a whole lot because with mobile companies in the early stages of development, nobody really looks at the net losses as indicators of the financial health of the company," said Jan Sudol, a telecoms analyst at Donaldson, Lufkin and Jenrette in London. "They're concerned about the number of subscribers, market share and the growth of earnings before interest, depreciation and taxes. It only means the company is rapidly growing its subscribers."
Despite last year's net loss, Era posted total revenue of zl. 2.59 million ($664,000), an increase of zl. 981,250 ($280,357) from 1998, according to the company's financial report. The company's main source of revenue was airtime, consisting primarily of charges for calls that originate or terminate in Era's network, the report said. Other sources of revenue included monthly service fees, service activation fees and the sale of telephones and accessories.
Era posted a net profit of zl. 5.5 million ($1.57 million) in 1998, and a net loss of zl. 120.4 million ($41.51 million) in 1997. Sudol said Era benefited from positive movement in the exchange rate in 1998, which limited the company's financial expenses.
As of Dec. 31, 1999, Era had about 1.75 million total subscribers, of whom approximately 1.39 million were billed subscribers and 365,000 were pre-paid, giving Era a market share of 44.7%, according to the company's report. Two weeks ago, Era had 2 million subscribers.
Stanislaw Majewski, Era's financial director, said at the press conference that he expected to see positive net figures for 2000, but did not elaborate. The company said it would try to hedge against foreign exchange differences this year to protect itself from losses like those suffered in 1999.
"What was reported by (Era) is not atypical for rapidly growing mobile operators," Sudol said. He said the company should be able to recover in 2000 "assuming that there's no turnover of subscribers" with the entrance of a third GSM competitor, PTK Centertel (Idea). He added that it would be difficult to project the zloty's direction this year.
Era was formed in December 1995 and received a 900 GSM operating license from the government in 1996. In August 1999, the company was granted a nationwide GSM 1800 license, which allowed it to substantially increase the number of calls its network could handle, particularly in urban areas.
Piotr Wozniak, an analyst at CDM Pekao Securities, said he was confident Era would recover this year because the company has refinanced some of its debt into zloty. His firm is forecasting that Era will earn a net profit of zl. 200 million ($50 million), he said.
The financial report also said the company experienced a gross loss of zl. 332.2 million ($85.18 million) on telephone and accessory sales in 1999, which was offset by an increase in gross profit from service revenue and fees of zl. 599 million ($153.6 million), reflecting strong growth in Era's subscriber base. "As a general matter, we do not intend to achieve positive overall margins on sales of telephones and accessories," the report said.
In the especially competitive mobile market, companies must spend more on subsidizing the costs of handsets as part of promotions to gain new subscribers, analysts said. "Typically, handsets in Poland are subsidized (by mobile operators)," Sudol said. "If one mobile company grows faster, it must subsidize more of the cost of the handsets, and this drives up operational expenses ahead of revenue."
Majewski said that the mobile phone business would become more competitive shortly as Polkomtel (Plus GSM) and Centertel, Era's two competitors in Poland, boost their efforts to increase subscribers. He said Era's strategy will also continue to involve increasing its subscriber base. "Our strategy is designed for the long term, and it is no secret that ... this is costly," Majewski said.
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