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Magyar Telekom announces 2005 interim results: improvement in the second quarter driven by Hungarian mobile, consolidation impact of Telekom Montenegro

Budapest, August 11, 2005

Magyar Telekom (Reuters: NYSE: MTA.N, BSE: MTEL.BU and Bloomberg: NYSE: MTA US, BSE: MTELEKOM HB), the leading Hungarian telecommunications service provider, today reported its consolidated financial results for the first six months of 2005, according to International Financial Reporting Standards (IFRS). The second quarter consolidated income statement includes, for the first time, the results of Telekom Montenegro Group (TCG), while the company’s balance sheet has been consolidated in Magyar Telekom's accounts as of March 31, 2005.

Key points:

  • Revenues grew slightly, by 0.7% to HUF 299.9 bn (EUR 1,211.9 m) in H1 2005 over the same period in 2004. The higher mobile and data transmission revenues were offset by a combined decline in revenues from domestic and international traffic. However, the consolidation impact of TCG’s revenues since Q2 2005 had a positive effect.
  • EBITDA fell by 1.6% to HUF 124.1 bn, with an EBITDA margin of 41.4% .
  • Gross additions to tangible and intangible assets were HUF 34.1 bn. The portion relating to the fixed line segment reached HUF 15.7 bn with mobile at HUF 18.4. bn. Within this, HUF 2.7 bn was spent on UMTS-related investment.
  • Following the change in IFRS rules, amortization of goodwill has been discontinued from January 1, 2005 onwards, and impairment testing is now carried out on an annual basis. In 2004, depreciation and amortization expenses of Magyar Telekom Group included HUF 13.9 bn of goodwill amortization. In addition, in Q1 2004 the Westel brand name impairment charge relating to the rebranding of Westel to T-Mobile Hungary amounted to HUF 4.4 bn. As a result of this, in H1 2005, depreciation and amortization fell to HUF 56.0 bn from HUF 68.4 bn a year earlier.
  • Fixed line segment: external revenues (after elimination of inter-segment revenues) fell by 4.6% to HUF 162.5 bn as increased data transmission (mainly ADSL) revenues only partially offset the decline, primarily in traffic revenues. EBITDA amounted to HUF 62.6 bn (a 3.8% fall) and the EBITDA margin on external revenues was 38.5%
  • Mobile segment: external revenues grew by 7.8% to HUF 137.4 bn driven by voice revenues and   enhanced services revenues and subscription fees. EBITDA amounted to HUF 61.5 bn (a 0.8% increase) with the EBITDA margin on external revenues reaching an impressive 44.8%
  • Group operating profit grew 18.1% to HUF 68.1 bn , mainly driven by a decline in depreciation and amortization as well as a reduction in the cost of equipment sales and employee-related expenses. Net income increased from HUF 30.3 bn (EUR 118.3 m) to HUF 41.4 bn (EUR 167.2 m).
  • Net cash from operating activities decreased to HUF 92.8 bn due to the combined impact of the decline in EBITDA, an increase in working capital requirements (driven mainly by a change in trade payables) and the severance payments made in the first half of 2005. Net cash utilized in investing activities increased to HUF 78.4 bn, mainly driven by the acquisition of the majority stake in TCG. Net cash used in financing activities was HUF 4.2 bn, primarily due to increased borrowing as a result of the TCG transaction and the dividend payment, the majority of which was paid in June 2005.
  • Net debt grew by HUF 59.4 bn compared to the end of December 2004, driven by the impact of the dividend payment and the TCG transaction.   The net debt ratio (net debt to net debt plus equity plus minority interests) increased to 38.5% at the end of June this year (34.6% at the end of June 2004).

Elek Straub, Chairman and CEO commented: “The improvement of our results in the second quarter of 2005 was mainly due to a better Hungarian mobile performance, reflecting our focus on enhanced services, higher usage, and the success of cost cutting initiatives. EBITDA margin improved at the Hungarian fixed operations in the first half of the year. Traffic revenue declined but broadband revenues grew and cost reduction remained a key focus. The closing number of employees fell by over 20% at the parent company level. Outside of our domestic operations, it is important to note that we closed the offer to acquire the remaining shares in the Telekom Montenegro Group. As a result, our stake in the company grew to 76.5%. TCG reported HUF 6.1 bn in revenues in the second quarter of 2005 with an EBITDA of HUF 0.6 bn. This resulted in an EBITDA margin of 10.6% including the HUF 1.3 bn severance provision made in June 2005. Without this item, the EBITDA margin stood at 31.1%. As well as delivering growth via the acquisition of TCG, we maintained a very competitive dividend yield in the Hungarian and regional context with a dividend payment that equalled last year’s amount of HUF 70 per share.”

Hungarian fixed line operations: focus on headcount efficiency and broadband program
Revenues before elimination declined by 6.8% to HUF 143.5 bn with an EBITDA margin of 37.3%. Domestic and international traffic revenues combined declined by 23.9%, mainly from traffic loss to fixed line competitors and mobile substitution, which resulted in lower volumes. The lower mobile termination rates and discounts provided in our packages contributed to the revenue decline. However, leased line and data revenues grew further, by 20.9% as the number of installed ADSL lines increased. The increased mobile substitution and the entry of a new competitor in voice telephony accelerated the decline in the total number of fixed lines (down 2.7% at end-June compared to the same period in 2004). The strong focus on improving efficiency is reflected in the lines per employee ratio, which reached 433 at parent company level. Customised tariff packages at the parent company represented 62% of the total number of lines, with over 1.7 million lines at the end of the second quarter of 2005. Magyar Telekom’s Internet subsidiary, T-Online Hungary, reported HUF 12.8 bn in revenues in H1 2005 against HUF 9.1 bn in the same period of 2004. The Company maintained its leading position among ISPs in the dial-up market with a market share of approximately 43%.

International fixed line operations: cost cutting to preserve profitability, consolidation impact of Telekom Montenegro
Revenues before elimination grew by 7.6% to HUF 25.0 bn in H1 2005. EBITDA was HUF 9.1 bn with an EBITDA margin of 36.5%. Maktel’s fixed line business registered a decline in revenues as mobile substitution caused the revenue-generating customer base to shrink. The results were also affected by lower usage and an unfavourable foreign exchange movement. However, thanks to severe cost controls across the whole company, all expense lines improved, resulting in a strong EBITDA margin at MakTel’s fixed line business of 45.5%. Telekom Montenegro ‘s fixed line operations brought HUF 4.2 bn in revenues, whilst the EBITDA loss was HUF 0.4 bn due to a severance provision of HUF 1.3 bn made in Q2 2005.

Hungarian mobile operations: improved performance in the second quarter of 2005
Revenues before elimination grew by 3.5% as a result of higher enhanced service revenues and slightly higher traffic revenues. EBITDA amounted to HUF 51.8 bn with an EBITDA margin of 39.5%. In the second quarter, T-Mobile Hungary improved its profitability, driven by the focus on value-added services and usage growth, as well as cost cutting initiatives. Operating profit increased strongly, by 31.2% to HUF 35.2 bn as the vast majority of the write-off relating to the Westel rebranding was accounted for in the first quarter of 2004. The proportion of postpaid customers continued to increase to 30.1% of the total customer base, compared to 26.9% at the end of Q2 2004. Average acquisition cost per customer fell sharply, by 30.1% to HUF 7,187, reflecting lower subsidies in both prepaid and postpaid segments. When calculating subscriber acquisition cost, we include the connection margin (SIM card cost less the connection fee) and the sales related equipment subsidy and agent fee. Monthly average revenue per user (ARPU) declined. The introduction of new packages encouraged an increase in usage, although the discounts offered combined with the impact of regulatory changes and the extensive use of the closed user group offers resulted in downward pressure on ARPU. Nevertheless, in the second quarter, ARPU grew for the first time in a year and was stable over Q2 2004 at HUF 5,039. MOU (monthly average minutes of use per subscriber) grew to 120 in H1 2005 reflecting the improved price elasticity. The churn rate of postpaid customers was successfully maintained at the low level of 10.6% in H1 2005. The churn rate in the prepaid segment was 18.4% in H1 2005.

International mobile operations: margin preserved despite competition in Macedonia; consolidation of Monet in Montenegro
Revenues before elimination grew strongly by 16.5% to HUF 18.6 bn in H1 2005. EBITDA was HUF 9.7 bn with an EBITDA margin of 52.0%. Maktel’s wireless business produced slight revenue growth in a growing market characterised by strong tariff competition. In addition, the currency movements had a negative impact on the results. Profitability improved as Mobimak produced an impressive EBITDA of HUF 8.7bn with an EBITDA margin of 53.6%. The results of the international mobile operations also contained those of   Monet, the mobile subsidiary of Telekom Montenegro, which posted revenues of HUF 2.4 bn and an EBITDA of HUF 1.0 bn (EBITDA margin: 41.2% in Q2 2005).

About Magyar Telekom
Magyar Telekom is the principal provider of telecom services in Hungary. Magyar Telekom provides a broad range of services including telephony, data transmission, value-added services, and through its subsidiary T-Mobile Hungary is Hungary's largest mobile telecom provider. Magyar Telekom also holds a 100% stake in Stonebridge Communications AD, which controls MakTel, the sole fixed line and its subsidiary Mobimak, the leading mobile operator in Macedonia. Magyar Telekom has a majority stake in Telekom Montenegro (TCG). TCG Group provides fixed, mobile and Internet services in Montenegro. Key shareholders of Magyar Telekom as of June 30, 2005 include MagyarCom Holding GmbH (59.21%), owned by Deutsche Telekom AG. The remainder, 40.79% is publicly traded.

This investor news contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore should not have undue reliance placed upon them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors are described in, among other things, our Annual Report on Form 20-F for the year ended December 31, 2004 filed with the U.S. Securities and Exchange Commission.

For detailed information on Magyar Telekom’s H1 2005 results please visit our website or the website of the Budapest Stock Exchange (www.bse.hu)

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