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Investor Releases

2004 full year results: financial targets met, leading positions maintained despite regulatory and competitive pressure

Budapest, February 11, 2005

Matáv (NYSE: MTA.N and BSE: MTAV.BU), the leading Hungarian telecommunications service provider, today reported its consolidated financial results for the full year of 2004, according to International Financial Reporting Standards (IFRS).

Highlights:

  • Revenues fell slightly, by 1.0% to HUF 601.4 bn (EUR 2,389.7 m) in 2004 compared to 2003 as the higher mobile and data transmission revenues and higher equipment sales were offset by a decline in revenues from domestic and international traffic, and lower other usage.
  • Reported EBITDA declined by 11.0% to HUF 222.9 bn, with a reported EBITDA margin of 37.1%. Restructuring charges and additional employee benefits relating to future terminations were HUF 20.7 bn, within this restructuring charges amounted to HUF 20.2 bn. Excluding restructuring charges, EBITDA was HUF 243.1 bn with the EBITDA margin of 40.4%.
  • Gross additions to tangible and intangible assets excluding the UMTS licence fee and the impact of the investment tax credit were HUF 84.9 bn. (Including these items the amount was HUF 95.2 bn.) Of the HUF 84.9 bn, the portion relating to the fixed line segment reached HUF 40.4 bn, with mobile (excluding the HUF 17.1 bn UMTS related licence fee) at HUF 33.8 bn and MakTel reporting HUF 10.7 bn.
  • According to the change in the IFRS rules, amortization of goodwill will be discontinued from 1 January 2005 onwards and impairment testing will be carried out on an annual basis. In addition for all goodwill arising on acquisitions on or after 31 March 2004, no amortization was accounted for in 2004. Depreciation and amortization expenses of Matáv Group included HUF 13.9 bn as goodwill amortization in 2004.
  • Fixed line segment: revenues fell by 7.0%; reported EBITDA margin was 28.4% . Fixed segment Q4 results include a HUF 16.7 bn restructuring charge, excluding this item, EBITDA margin was 33.9%.
  • Mobile segment: revenues grew by 3.5%, EBITDA margin was 39.4% in 2004. T-Mobile Hungary kept its position with a market share of 46.2% and over 4 million subscribers at the end of 2004.
  • International segment: revenues fell by 2.4% with a reported EBITDA margin of 49.1%. MakTel's third quarter results included a HUF 3.3 bn severance payment; excluding this charge, EBITDA margin reached a strong 54.0% in the full year 2004.
  • Group operating profit reduced to HUF 85.3 bn mainly driven by a 24.5% increase in employee related expenses related to the restructuring of the Group (predominantly at Matáv Rt and MakTel) and a 7.3% increase in depreciation and amortization. Net income declined to HUF 34.6 bn (EUR 137.6 m).
  • Net cash from operating activities decreased to HUF 189.8 bn due to the combined impact of the decline in EBITDA and higher interest paid. Net cash utilized in investing activities increased to HUF 100.8 bn. This was due to higher gross additions to tangible and intangible assets (primarily at the mobile segment as a result of the UMTS licence fee) together with higher investments in subsidiaries and associates (T-Systems Hungary, purchase of additional minority stakes in Stonebridge) and partly offset by increased proceeds from real estate sales. Net cash used in financing activities was HUF 72.1 bn, mainly explained by the higher dividend paid at the parent company and increased borrowing as a result of this.
  • Net debt has been reduced by HUF 8.5 bn since the end of December 2003 and the net debt ratio (net debt to net debt plus equity plus minority interest) stood at 32.9% compared to 31.6% at the end of 2003.

Elek Straub, Chairman and CEO commented: "In 2004, the regulatory and competitive environment became more stringent; both fixed and mobile interconnection fees were further reduced. Our competitors used the opportunities offered by carrier selection and number portability to raise the pressure in both the residential and the business segment. The arrival of a new entrant in the residential segment also served to increase competition there. However, despite these factors, the Group was able to meet all of its public targets and guidance. In the fixed line segment, by the end of the year, we not only succeeded in minimising churn but we were even able to slightly increase the number of residential PSTN lines. The target of installing over 200,000 ADSL lines by the end of 2004 was also met. In the mobile business, having been awarded a UMTS licence, the development of the third generation network can commence. Let me also mention that the rebranding of Westel to T-Mobile Hungary was a real success. Our international subsidiary continued to operate well, delivering an above 50% EBITDA margin in 2004 excluding restructuring charges. Looking to the future, I would like to reiterate our mid-term targets announced last August and set some new targets for 2005. For the coming year, we expect low single digit revenue growth with an EBITDA margin above 40% (without restructuring charges and potential acquisitions). Gross additions to tangible and intangible assets will remain below HUF 105 bn including HUF 15 bn UMTS investment spending but excluding potential acquisitions. Finally I would like to confirm that we are right on track in the headcount rationalisation program according to the framework set in 2004, aiming to reach above 500 lines per employee ratio by end of 2006 at the parent company."

Fixed line: Success in line preservation and in the broadband program

Fixed line revenues fell by 7.0% to HUF 301.7 bn with the reported EBITDA margin at 28.4%. These results were, however, hit by the restructuring charge in the amount of HUF 16.7 bn made in Q4 as part of the headcount rationalisation at the fixed line segment, primarily at the parent company. Excluding these charges, EBITDA margin reached 33.9% in 2004. Domestic and international traffic revenues combined declined by 15.9% mainly due to lower volumes and price discounts. However, as a result of the strong growth in installed ADSL numbers and increased Internet subscribers, leased line and data revenues continued to increase, rising by 20.8%. In line with our stated target for the fixed segment, the total number of lines was broadly stabilised. Moreover, after many years of decline, the closing number of residential lines slightly grew in 2004 compared to 2003 reflecting the success of our efforts in line preservation. The lines per employee ratio reached 365 at parent company level. Customised tariff packages represented around 58% of the total number of lines with nearly 1.7 million lines at the end of the fourth quarter 2004. ADSL became a real mass market product, having reached 203,654 lines by end of 2004. Matáv's Internet subsidiary, Axelero, maintained its leading position among ISPs in the dial-up market with a market share of approximately 42% and a total of 266,020 Internet subscribers at the end of December 2004 (up by 26.3% year-on-year).

Mobile: Healthy financials, successful rebranding, preserved leading position

Mobile revenues grew by 3.5% as a result of higher traffic, enhanced service revenues and equipment sales. EBITDA increased by 9.2% to HUF 103.7 bn and the EBITDA margin was 39.4%. In 2004 the restructuring charges amounted to HUF 0.1 bn at T-Mobile Hungary. Operating profit grew only by 2.0% as the vast majority of the write-off relating to the Westel rebranding was accounted for in the first quarter of 2004. T-Mobile Hungary maintained its leading position in a highly competitive market with 46.2% market share, while GSM penetration was 86.4% at end-December 2004. T-Mobile Hungary's customer base exceeded 4.0 million at the end of Q4 2004. The proportion of postpaid customers increased to 28.9% of the total customer base, compared with 26.1% at the end of Q4 2003. Average acquisition cost per customer fell by 16.8% to HUF 10,275 in Q1-Q4 2004 from HUF 12,353 a year earlier. 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. MOU (monthly average minutes of use per subscriber) grew slightly to 115 in Q1-Q4 2004 from 114 a year earlier. Blended ARPU (monthly average revenue per user) declined by 6.0% to HUF 4,945; within this, postpaid ARPU decreased to HUF 11,828 and prepaid ARPU was HUF 2,380. The introduction of new packages encouraged a slight increase in usage, although the discounts offered combined with regulatory impacts resulted in downward pressure on ARPU. The enhanced services revenue (mainly SMS) grew to HUF 612 (12.4% of total ARPU), from HUF 585 (11.1% of total ARPU) in the same period last year. The churn rate of postpaid customers was successfully maintained at the relatively low level of 11.9% in 2004. The churn rate in the prepaid segment was 17.4% in 2004.

International: strong EBITDA preserved

Overall, international revenues fell by 2.4% to HUF 68.4 bn in Q1-Q4 2004. Although revenues from mobile telecommunications services increased, subscription charges as well as traffic revenues fell. Reported EBITDA was HUF 33.6 bn with an EBITDA margin of 49.1%. However, excluding the severance payment made in Q3 in the amount of HUF 3.3 bn as part of the headcount rationalisation at the company, EBITDA margin reached a strong 54.0% in 2004. The closing number of employees fell by 20.4% to 2,799 at the end of the fourth quarter due to the restructuring efforts. Fixed line penetration in Macedonia stood at around 29%, and mobile penetration grew further to nearly 49% against 29% at end-Q4 2003. The number of fixed line channels grew to 625,858, up by 1.1% from the previous year's figure. Within this, analog subscribers fell slightly to 583,776. At the same time, ISDN channels grew by 21.9% to 42,082 and the mobile customer base grew by 43.7% to 752,462. MakTel's mobile market share stood at 76% at end-December 2004. MakTel remains the country's leading Internet service provider; its dial-up subscriber base at the end of the fourth quarter of 2004 increased to 64,944, a rise of 32.4% year-on-year.

About Matáv

Matáv is the principal provider of telecom services in Hungary. Matáv 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. Matáv also holds 100% stake in Stonebridge Communications AD, which controls MakTel, the sole fixed line and its subsidiary Mobimak, the leading mobile operator in Macedonia. Key shareholders of Matáv as of December 31, 2004 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, 2003 filed with the U.S. Securities and Exchange Commission.

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