Significant growth in operating results for 1997

NETCOM'S YEAR END REPORT 1997 NETCOM SYSTEMS AB ("NETCOM") ANNOUNCES SIGNIFICANT GROWTH IN OPERATING RESULTS FOR 1997 41 % Increase in Operating Revenues 54 % Increase in Operating Profit After Depreciation New York and Stockholm - Monday January 9, 1998 - NetCom Systems AB ("NetCom") (Nasdaq : NECSY), the leading alternative provider of telecommunication services in Scandinavia, today announced financial results for 1997. The results exclude the results of the fourth quarter of the associated company NetCom ASA*. FINANCIAL HIGHLIGHTS (in MSEK) 1997* 1996 % Change Operating Revenue 4,036 2,872 41 Operating Profit Before depreciation and 1,001 652 54 amortization 392 254 54 After depreciation and amortization Gain after financial 14 (287) - items but before exceptional items** Gain for the year after 58 248 - tax*** * NetCom ASA, an associated undertaking has not finalized its accounts and only results for the first nine months ended September 30, 1997 have been incorporated. The statutory accounts will incorporate the results for the full twelve months of the associate undertaking. ** The 1997 figure excludes a deferral to the first quarter of 1997 of MSEK (38) relating to NetCom ASA's fourth quarter of 1996 financial results. The 1996 comparative figure excludes an exceptional gain of MSEK 316 relating to the initial public offering of NetCom ASA. The financial costs include a non-recurring cost of MSEK 45 in connection with the refinancing. *** The 1997 figures includes a deferral to the first quarter of 1997 of MSEK (38) relating to NetCom ASA's fourth quarter of 1996 financial results. The 1996 comparative figure includes an exceptional gain of MSEK 316 relating to the initial public offering of NetCom ASA. The figures also include a net tax income of MSEK 82 in 1997 and 242 MSEK in 1996. The financial costs include a non- recurring cost of MSEK 45 in connection with the refinancing. FINANCIAL AND OPERATING HIGHLIGHTS NetCom continues to experience significant growth within its operations. Operating revenue in 1997, increased by 41 % to MSEK 4,036; Substantial increase in operating profit both before and after depreciation and amortization, up approximately 54 %; Comviq had a record: 810,000 subscribers (inclusive of prepaid) at December 31, 1997, an increase of 74 %; Tele2 had 313,000 fixed telephony customers at the year end, an increase of 65 %; Tele2 A/S in Denmark increased fixed telephony customers by 229 % to 115,000 in 1997; At the end of 1997 the Norwegian telecom market was deregulated. Within less than four weeks, Tele2 Norge AS announced 25,000 telephony customers. In January 1997, NetCom was listed on the Nasdaq Stock Exchange, and in March a new issue was carried out. It raised MSEK 220. Anders Björkman, President and CEO stated, "In 1997 NetCom experienced accelerated growth as a result of significant levels of demand for services across the group due to a number of innovative new product launches. We continue to develop the combination of services across operations as a generator of future revenue growth and remain confident that the Group will continue to experience rapid rates of growth in 1998." REORGANIZATION In 1997, NetCom announced the implementation of a new operational structure for its business. This initiative followed the integration of Kabelvision with Tele2 in the first quarter of 1997. In the second quarter of 1997, the integration of the operations of Comviq GSM and Tele2 started. This was followed by a reorganization of the marketing and sales functions. Under the new structure, NetCom will have one marketing and sales organization for each of the following; the corporate market and the private and small business market. The new structure will allow NetCom to more efficiently meet market demand in each of these individual sectors. Due to the integration of the operations, Comviq GSM AB and Kabelvision KB have been included in Tele2 AB. The restructuring will create operating efficiencies for the group in the combination of services across operations and will also drive future revenue growth. It will also allow the Company to increase penetration rates in its markets and take advantage of both strong technology and market expertise to further strengthen its competitive position. REFINANCING During the third quarter of 1997, the Company started the process of refinancing and on November 5, 1997, the Company announced it had agreed with CIBC Wood Gundy and Westdeutsche Landesbank to jointly arrange and syndicate a SEK 5,000 million structured facility for NetCom. The general syndication was launched in January 1998. The seven year facility provides NetCom with additional loan facilities of SEK 1,200 million. The remaining SEK 3,800 million will be utilized to pay down existing group debt in Comviq, Tele2 and Kabelvision. The refinancing is an important step in the restructuring of NetCom's operations and will allow the Group to move from a project financing basis on a subsidiary level to more efficient and flexible financing for the group as a whole. REVIEW OF OPERATIONS Financial Results for the twelve months ended December 31, 1997 Operating revenues for the 12 months ended December 31, 1997, were MSEK 4,036, an increase of 41 % compared to the MSEK 2,872 reported in the same period of 1996. The increase in operating revenues was fueled by strong volume growth in the major operating companies. Comviq contributed MSEK 2,095 to group operating revenue, an increase of 35 % over the MSEK 1,551 reported in 1996. Tele2 increased operating revenue by 29 % to MSEK 1,686 from MSEK 1,312 reported in 1996. NetCom's 100% ownership in Kabelvision was consolidated from November 1996, compared to its treatment as an associate before then. Kabelvision contributed revenues of MSEK 241 for 1997. Operating profit before depreciation and amortization in 1997 increased by 54 % to MSEK 1,001 from MSEK 652 reported in 1996. The operating profit margin before depreciation and amortization, increased marginally to 25 % in 1997 from 23 % reported in 1996. In 1997, operating profit after depreciation and amortization increased by 54 % to MSEK 392 from MSEK 254 reported in 1996. The operating profit margin after depreciation and amortization, increased to 9.7 % in 1997 from 8.8 % in 1996. Comviq's contribution to group operating profit after depreciation and amortization was MSEK 444, an increase of 106 % in one year. Tele2 reported operating profit after depreciation and amortization of MSEK 211, an increase of 38 % in one year. NetCom ASA has not yet published its financial results for 1997, hence share of losses of the associated company is for the nine month period ended September 30, 1997. In that period, NetCom ASA made a total loss of MNOK 137 compared to a loss of MNOK 273 in the nine months ended September 30, 1996. The net interest expense and other financial items in 1997 amounted to MSEK (310), compared to MSEK (342) in 1996. The 10 % improvement reflects the lower interest rates on debt outstanding during the period. The financial costs include a non-recurring cost of MSEK 45 in connection with the refinancing. The net gain reported for 1997 amounted to MSEK 58, or a profit of SEK 0,66 per share, compared with a net gain of MSEK 248 or SEK 2,78 per share in 1996. The figures include a deferral to the first quarter of 1997 of MSEK (38) relating to NetCom ASA's fourth quarter of 1996 financial results. There was also an exceptional gain of MSEK 316 reported in the comparative figures for 1996 relating to the initial public offering of NetCom ASA during the period. The net profit reported in 1997 reflects the improving profitability of Comviq. NetCom's total assets at December 31, 1997 increased to MSEK 8,693 compared to MSEK 7,527 reported in 1996, reflecting the continued level of investment in the group's core operations. Financial Results for the three months ended December 31, 1997 Operating revenues for the three months ended December 31, 1997 increased by 39 % to MSEK 1,175 compared to MSEK 843 for the three months ended December 31, 1996. Operating profit before depreciation and amortization increased by 126 % to MSEK 233 in the fourth quarter of 1997 compared to MSEK 103 in the comparable period of 1996. Operating profit after depreciation and amortization increased to MSEK 74 in the fourth quarter of 1997 compared to MSEK (22) in the three months ended December 31, 1996. The net gain after tax for the fourth quarter of 1997 was MSEK 33 compared to MSEK 104 for the fourth quarter of 1996. The financial costs include a non-recurring cost of MSEK 45 in connection with the refinancing. Net tax income in the fourth quarter of 1997 was MSEK 63 compared to MSEK 242 in the three months ended December 31, 1996. NetCom ASA has not yet published its financial results for 1997, hence the net gain for the fourth quarter of 1997 excludes NetCom's proportional share in NetCom ASA. Comviq GSM Comviq continued to grow rapidly and contributed over 52 % of group operating revenue in the 12 months ended December 30, 1997. Total subscribers for the 12 month period were 810,000 representing an increase of 74 % on the 466,000 subscribers reported at December 31, 1996. Within the 344,000 net new subscribers reported, 228,000 were prepaid card subscribers. Since the launch of the prepaid card in the first quarter of 1997 to December 31, 1997 a total of 297,000 prepaid cards have been sold to retailers. Retail commission levels have remained stable during the year and the annual churn rate excluding prepaid customers was approximately 20 %, compared to approximately 30 % for the 1996 financial year. Net new subscribers in the fourth quarter totaled 155,000, a substantial increase on the 52,000 reported in the comparable period of 1996. NetCom continues to invest in its cellular infrastructure to meet the growing demand for cellular services across its markets Strong subscriber growth continues to be fueled by the introduction of new marketing initiatives. In the first quarter of 1997, Comviq were first in the Swedish market to launch a prepaid service. The initial results for 1997 have been encouraging. The launch of a prepaid service has allowed the company to explore new distribution channels and to penetrate new market segments. This has allowed access to customers denied normal cellular subscriptions due to credit constraints. A significant level of demand has also been created by those customers who purchase prepaid cards for private and corporate use in order to control their individual telephone costs. In September, Comviq launched a new service called IQ Epost which enables Comviq subscribers to send and receive Internet e- mail correspondence to and from their GSM phones without the need for any additional programs or equipment. In November, Comviq launched the highly successful Joker subscription. This made it sometimes cheaper for the first time in Sweden to make calls from a mobile phone than from a fixed telephone line. In 1997, Comviq also lowered its tariff rates and increased the functionality of its prepaid card. Comviq customers can now make international calls and utilize a simple answering service facility. Tele2 In 1997, Tele2 continued to show significant growth and accounted for 42 % of group operating revenue. Operating margins at Tele2 were on an improving trend in the fourth quarter of 1997 compared to the third quarter, due to strong volume growth. At December 31, 1997, Tele2 had 313,000 customers, representing an increase of 65 % on the 190,000 customers reported in 1996. Tele2 had 263,000 dial-up Internet customers at December 31, 1997, representing an increase of 158 % on the 102,000 customers reported in the comparative period of 1996. Response times for Internet service have remained fast due to powerful transmission capacity and there is potential to increase capacity to meet future increases in demand levels. Dial-up Internet customers can now access up to ten individual e-mail addresses attached to their account allowing whole families to access Tele2's Internet service. On November 5, 1997 Tele2 announced the launch of an Internet telephony service, the first to be commercially tested in Sweden. Under the brand name Call2Web, Tele2 plans to offer one thousand customers the facility of making calls from Sweden to the United States of America using a fixed telephony line. This offers customer the advantage of utilizing the Call2Web service without the need for any special equipment. The price of an Internet call during the test period will be substantially lower than the price of an ordinary fixed line telephone call. NetCom launched two GSM subscriptions for corporate customers under the brand name Tele2Mobil in November, to satisfy demand for solutions that provide fixed and mobile telephony. In December Tele2 in association with ViaSat, launched an Internet service which will provide households in the Nordic countries who have a parabola antenna with the ability to receive Internet transmission at a speed of 200 - 300 kbps. Streamed sound and video transmissions can be transmitted at an even higher speed, of up to 800,000 kbps. In the first nine months of 1997, Cable TV sales remained slow. However, in the fourth quarter of 1997, sales showed an improving trend as a consequence of telemarket sales initiatives focused on increasing penetration rates. Tele2 A/S, Denmark In October 1997, Tele2 A/S changed its name from NetCom Systems Danmark A/S. Tele2 A/S is Denmark's largest privately owned company for fixed telephony with 115,000 customers as at December 31, 1997, an increase of 229 % in 1997. Market share in the international telephony market is over 10 %. Call volumes increased substantially over the year as Tele2 A/S aggressively rolled out the same services as Tele2 in Sweden. In May, NetCom purchased a commercial Internet operation from the Danish state to become one of the leading Internet suppliers in Denmark. The operation has been renamed UNI2 and is now a division of Tele2 A/S. UNI2 supplies Internet services to both the private and public sectors with a market share of approximately 40.0% of the business segment. Tele2 A/S had approximately 20,000 dial-up Internet customers at December 31, 1997. In December, Tele2 A/S launched the first secure web hotel in Denmark. The web hotel solution has a safe financial transaction feature which uses the international SET standard for encryptions. SET is the only standard accepted by PBS, the clearing central for Danish banks. Prior to the launch of this service, local Internet providers were unable to guarantee secure financial transactions on line. Tele2 Norge AS On January 1, 1998, a more than one-hundred year monopoly on public telecom services was lifted in Norway. Since the deregulation, Tele2 Norge has launched its 1502 service which is also the prefix the subscribers dial to make a phone call on Tele2 Norge's network. Within less than four weeks, Tele2 Norge AS announced 25,000 new telephony customers, which exceeded budgeted expectations of about 11,000 customers for the same period. On September 19, 1997, Tele2 Norge re- launched its dial-up Internet service to private customers, Connect2Internet. As a result of two successful marketing campaigns, subscribers increased significantly. On December 31, 1997, Tele2 Norge had sold approximately 25,000 Internet subscriptions. NetCom ASA NetCom ASA has not yet published its financial results for 1997. However, significant progress was made in the nine months to September 30, 1997. Revenues increased significantly as a result of customers making both greater and longer calls. Customers also increasingly use supplementary services. The number of subscribers increased in the third quarter of 1997 by 34,825 for a total of 372,892. For the same period, both the annual churn rate and the retailer commissions decreased. In the first nine months of 1997, operating revenues were MNOK 1,206 compared to MNOK 722 for the comparative period of 1996. Operating loss after depreciation and amortization in the first months of 1997, amounted to MNOK (6,3), compared to a loss of MNOK (156) in the comparative period of 1996. In September, NetCom ASA launched the first prepaid card for mobile telephone users in Norway, under the brand name NetCom Kontant. The card has been a great success, particularly amongst younger customers. NASDAQ QUOTATION, NEW ISSUE AND CONVERSION OF CONVERTIBLE DEBENTURES For the purpose of increasing interest in the company's shares in the USA and to attain higher liquidity of the shares outside Sweden, NetCom was listed on the Nasdaq Stock Exchange in the USA in January 1997. To strengthen the capital base before making the current new investments, particularly in Denmark and Norway, a new issue was carried out in the first quarter of 1997, which raised MSEK 220. This new issue of 2 million B shares was primarily aimed at international investors. The offering was made in conjunction with a secondary offering by Industriförvaltnings AB Kinnevik of convertible debentures converted into 6,000,000 B shares. FINANCIAL SUMMARY Solidity The group's solidity (defined as the group's equity capital, including the convertible debenture loan expressed as a percentage of total assets) was 37 % in 1997 and 39 % in 1996. Liquidity The group's liquid assets, including unused credit facilities, amounted to MSEK 1,499 at December 31, 1997, compared to MSEK 837 for same period of 1996. Net borrowings The group's net borrowings (defined as all interest-bearing liabilities excluding convertible debenture loan, less interest- bearing assets) amounted to MSEK 3,542 at December 31, 1997, compared to MSEK 3,031 in 1996. Average interest rate The average interest rate for the twelve month period ended December 31, 1997 was approximately 6.3 %, compared to 8.6 % in the same period of 1996 (calculated as interest expense expressed as a percentage of average interest-bearing liabilities, excluding convertible debenture loan and interest thereon). Capital expenditure The group's capital expenditure during 1997 amounted to MSEK 1,084, and MSEK 1,016 in 1996. Comviq accounted for MSEK 486 and Tele2 MSEK 439 of the groups total capital expenditure. The comparable figures for 1996 were MSEK 492 and MSEK 420 respectively. Depreciation and Amortization The group's depreciation and amortization charge for 1997 was MSEK 609 compared to MSEK 398 in 1996. This reflects increased investment in the Company's asset base during the period. Comviq accounted for MSEK 243 and Tele2 MSEK 183 of the group depreciation and amortization charge. The comparable figures for 1996 were MSEK 214 and MSEK 133 respectively. Share structure The number of shares at December 31, 1997, were 103,094,691 and on a fully diluted basis were 103,850,246. The comparable figures for 1996 were 88 294 691 and 101 850 246 respectively. Parent Company At the parent company level, the loss after financial items but before dividend from subsidiaries for 1997 was MSEK 39 compared to a loss of MSEK (3) in 1996. In 1997, there was also the conversion of the convertible debenture of 12,800,000 B-shares and a new issue of 2,000,000 B-shares, this resulted in an increase in the equity of the parent company of MSEK 836. Investments in 1997 amounted to MSEK 350 compared to MSEK 484 in the corresponding period of 1996. MISCELLANEOUS A year-end report including NetCom ASA's full-year figures included, will be released on February 24, 1998. Interim Report January - March 1998 NetCom's interim report for the period January to March 1998 will provisionally be released on May 11, 1998. Annual Report The annual report will be published at the beginning of April at a date yet to be confirmed. It will be available at the company's office at the following address: NetCom Systems, Skeppsbron 18, P.O. Box 2094, 103 13 Stockholm. Annual General Meeting The annual general meeting will provisionally be held on May 14, 1998, at 1.00 p.m. at Gamla Stans Bryggeri, Tullhus 2 on Skeppsbrokajen, Stockholm. Dividend The Board of directors proposes that no dividend will be paid for the fiscal year of 1997. NetCom Systems AB was founded in 1993 and is the leading alternative provider of telecommunications services in Scandinavia. The group is engaged in the GSM cellular- telecommunications industry, operating under the brand names of Comviq GSM AB, in Sweden and its listed affiliate, NetCom ASA, in Norway. In the business areas of public telecommunications, Internet and data communications services, the group operates under the brand name of Tele2 AB, in Sweden and its subsidiaries Tele2 A/S in Denmark and Tele2 Norge AS in Norway. The group also operates in the cable-TV service sector. The company is listed both on the Stockholm Stock Exchange on the O list and on the Nasdaq Stock Market under the symbol NECSY. CONTACTS Anders Björkman Telephone: + 46 8 562 640 00 President and CEO, NetCom Systems AB, Sweden Jörgen Latte Telephone: + 46 8 562 640 00 CFO, NetCom Systems AB, Sweden Samantha Drover Telephone: + 44 171 408 00 20 Director of Investor Relations, London Stockholm, February 9, 1998 The Board of Directors of NetCom Systems CONSOLIDATED INCOME STATEMENT (MSEK) 1997 1996 Operating revenue 4,036 2,872 Operating expenses (3,850) (2,694) Other revenues 217 86 Other expenses (11) (10) Operating Profit 392 254 Share of losses of (68) (199) associated companies* Non-recurring items** (38) 316 Net interest and other (310) (342) financial expenses*** Loss/gain after financial (24) 29 items Taxes**** 82 242 Minority interest - (23) Gain for the year 58 248 Earnings per share after tax0.66 SEK2.78 SEK and after full conversion * NetCom ASA, an associated undertaking has not finalized its accounts and only results for the first nine months ended September 30, 1997 have been incorporated. The statutory accounts will incorporate the results for the full twelve months of the associate undertaking. ** The 1997 figure relates to a deferral to the first quarter of 1997 of NetCom ASAs fourth quarter of 1996 financial results. The 1996 comparative figure includes an exceptional gain of MSEK 316 relating to the initial public offering of NetCom ASA. *** Includes the expensing of one off interest costs in 1997 totaling MSEK 45 associated with loan agreements preceding the refinancing of the total group. **** In the year ended 1996, deferred tax assets increased significantly as a result of the ownership structure of companies within the Group, which increased the ability to utilize tax losses carried forward. The tax income of 1997 includes a deferred tax income mainly relating to NetCom ASA and also to the sale of shares in SCD Invest AB. REVIEW OF THE GROUP (MSEK) 1997* 1996 Operating revenue by business area Comviq GSM AB 2,095 1,551 Tele2 AB 1,686 1,312 Kabelvision 241 42 Other operations, operations 277 40 abroad included Parent company 3 -- Group adjustments, for (266) (73) internal sales Total 4,036 2,872 Operating profit by business area Comviq GSM AB 444 216 Tele2 AB 211 153 Kabelvision (9) (7) Other operations, operations (121) (57) abroad included Parent company (60) (25) Group adjustments, (73) (26) depreciation Total 392 254 Gain after financial items Comviq GSM AB 214 (72) Tele2 AB 154 103 Kabelvision (37) (19) Other operations, operations (137) (71) abroad included Parent company (39) (3) Shares of loss in associated (68) (199) companies** Non-recurring items*** (38) 316 Group adjustments, (73) (26) depreciation Total (24) 29 * Figures are stated prior to the inclusion of several companies into Tele2 AB. ** NetCom ASA, an associated undertaking has not finalized its accounts and only results for the first nine months ended September 30, 1997 have been incorporated. The statutory accounts will incorporate the results for the full twelve months of the associate undertaking. *** The 1997 figure includes NetCom's proportional share of NetCom ASA's results for the nine month period ended September 30, 1997. The 1996 comparative includes a twelve month figure for NetCom ASA relating to the financial year September 1995 to September 1996. The 1996 comparative figure also includes an exceptional gain of MSEK 316 relating to the initial public offering of NetCom ASA. CONSOLIDATED BALANCE SHEET (MSEK) 1997 1996 DecemberDecember 31 31 Fixed assets Intangible assets 1,707 1,889 Property, plant and 4,583 3,880 equipment Financial investments* 633 624 6,923 6,393 Current assets Materials and supplies 9 11 Current receivables 1,182 903 Cash 579 220 1,770 1,134 Total assets 8,693 7,527 Shareholders' Equity Restricted equity 4,037 3,267 Non-restricted equity (872) (991) 3,165 2,276 Minority interest 2 2 Long-term liabilities Interest-bearing liabilities 4,146 3,412 Convertible debenture loan 37 647 Interest-free liabilities - 10 4,183 4,069 Short-term liabilities Interest-bearing liabilities 4 69 Interest-free liabilities 1,339 1,111 1,343 1,180 Total equity and liabilities 8,693 7,527 * The figures include deferred tax of MSEK 576 and MSEK 489 respectively. Shares in associated companies is based on NetCom ASA's results for the nine month period ended September 30, 1997. When NetCom ASA publishes its financial results for 1997, NetCom will adjust the value of the share of associated companies. CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (MSEK) 1997 1996 Full Full Year Year Cash flows provided by 411 610 operating activities Investing activities (1,084) (1,016) Financing activities 1,032 602 Net increase in cash 359 196 Cash at beginning of year 220 24 Cash at end of year 579 220 PARENT COMPANY'S STATEMENT OF CHANGES IN FINANCIAL POSITION (MSEK) 1997 1996 FullFull Year Year Cash flows provided by (83) 123 operating activities Investing activities (350) (484) Financing activities 432 398 Net change in cash (1) 37 Cash at beginning of year 37 -- Cash at end of year 36 37 Back to press releases