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Investor Releases

Magyar Telekom first quarter 2006 results: impressive top line growth, solid cash-flow generation

Budapest, May 11, 2006

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 three months of 2006, in accordance with International Financial Reporting Standards (IFRS). From the second quarter of 2005, the consolidated income statement includes 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.

Highlights:

  • Reported revenues grew by 6.7% to HUF 153.3 bn (EUR 602.3 m) in Q1 2006 over the same period last year. The higher mobile, internet and interconnection-related revenues compensated for the lower outgoing traffic revenues. The consolidation of TCG’s revenues in Q1 2006 contributed HUF 6.4 bn to Group revenues. Without the consolidation effect of TCG, Group revenues grew 2.3%.
  • Reported EBITDA increased by 4.9% to HUF 62.0 bn, with an EBITDA margin of 40.5%. Without the impact of TCG, EBITDA was HUF 59.4 bn with an EBITDA margin of 40.4%.
  • Gross additions to tangible and intangible assets were HUF 19.0 bn. The portion relating to the fixed line segment reached HUF 7.6 bn with mobile at HUF 11.4 bn. Within the mobile segment, HUF 2.2 bn was spent on UMTS-related investments and HUF 4.0 bn on the EDR project.
  • Fixed line segment : external revenues (after elimination of inter-segment revenues) increased by 3.7% to HUF 82.0 bn, mainly as increased internet broadband and interconnection-related revenues offset the decline, primarily in outgoing traffic revenues. EBITDA amounted to HUF 30.3 bn and the EBITDA margin on external revenues was 36.9%.
  • Mobile segment : external revenues increased by 10.5% to HUF 71.2 bn driven by voice revenues and enhanced services revenues. EBITDA amounted to HUF 31.7 bn with the EBITDA margin on external revenues reaching a strong 44.6%.
  • Profit attributable to equity holders of the company (net income) increased by 5.5% , from HUF 18.0 bn (EUR 73.3 m) to HUF 18.9 bn (EUR 74.5 m).
  • Net cash from operating activities grew to HUF 42.8 bn due to the combined impact of the growth in EBITDA, the lower interest paid and a decrease in working capital requirements (driven mainly by a change in trade receivables). Net cash utilized in investing activities fell to HUF 28.1 bn, mainly driven by the TCG acquisition in Q1 2005.
  • Net debt decreased by HUF 18.8 bn compared to the end of December 2005, driven by the loan repayment during the first quarter of 2006. The net debt ratio (net debt to net debt plus equity plus minority interests) fell to 30.6% at end-March 2006 (33.1% at end-2005).

Elek Straub, Chairman and CEO commented: “The key driver of the impressive Group-level top line growth in the first quarter were our international activities, helped by the Hungarian mobile business. In the Hungarian mobile market, we were able to increase profitability, reaching a strong 40% EBITDA margin, despite a slight decrease in our market share. At the end of February, the Court of Registry registered the merger of Magyar Telekom and T-Mobile Hungary, completing the merger process. In the Hungarian fixed line business, customer retention played an important role. The number of flat rate solutions grew, reflecting our focus on access revenues, whilst the successful ADSL sales campaign contributed to continued growth in internet revenues. The improvement in productivity, despite fixed line erosion, is reflected in parent company lines per employee ratio of over 500 at end-February 2006, allowing us to reach our public target earlier than planned. International operations in Macedonia and Montenegro drove healthy Group revenue and EBITDA growth. Despite the delay to the General Meeting, the Board of Directors considers a dividend payment for 2005 in line with last year’s level to be reasonable, based on a review of unaudited 2005 financial statements.”

Hungarian fixed line operations: robust growth in broadband connections, lines per employee ratio target met earlier than planned
Revenues before elimination fell by 2.5% to HUF 69.8 bn in Q1 2006 over the same period in 2005 with an EBITDA margin for the quarter at 33.8%. Domestic and international traffic revenues combined declined by 21.0%, mainly due to mobile substitution and traffic loss to fixed line competitors, despite broadly stable local and increased domestic long distance traffic. In addition, lower mobile termination rates and discounts provided in our packages contributed to the revenue decline. At the same time, internet revenues grew by 18.8% as a result of a significant increase in the number of installed ADSL lines. The total number of broadband connections (mainly ADSL and cable) exceeded 400 thousand at end-March 2006. The strong mobile substitution and number portability, both in the business and residential segments, resulted in a continuous decline in the total number of fixed lines (down 5.0% at end-March 2006 compared to a year ago). The strong focus on improving efficiency is reflected in the lines per employee ratio of 501 at parent company level at the end of February, reaching our end-2006 public target earlier than planned. Customised tariff packages at parent company represented 78% of the total number of lines, with over 1.8 million lines at the end of the first quarter of 2006.

International fixed line operations: strong EBITDA margin, consolidation impact of TCG
Revenues before elimination grew by 50.1% to HUF 15.8 bn in Q1 2006, reflecting the consolidation impact of Telekom Montenegro. EBITDA increased to HUF 6.7 bn with an EBITDA margin of 42.4%. MakTel’s fixed line business revenues grew by 5.3%, reflecting a favourable foreign exchange movement (4.3%), growing international incoming traffic and internet-related revenues. The results were also affected by lower traffic revenue driven by lower usage. EBITDA showed an impressive growth of 18.5%, and EBITDA margin reached 49.1%. Telekom Montenegro’s fixed line operations contributed HUF 4.2 bn to Group revenues in the first quarter of 2006, whilst the EBITDA contribution was HUF 1.4 bn.

Hungarian mobile operations: healthy EBITDA margin, clear market leadership preserved
Revenues before elimination grew by 4.1% to HUF 65.4 bn in Q1 2006 as a result of higher enhanced service revenues, and to a lesser extent, higher traffic and access revenues. EBITDA was HUF 26.1 bn with an EBITDA margin of 39.9%, reflecting lower employee-related expenses and cost of equipment sales. Average acquisition cost per customer fell by nearly 22% in the first quarter, due to reduced 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. Although the introduction of new packages generated higher usage and growth in value added services, the discounts offered, combined with the impact of regulatory changes and the extensive use of closed user group offers, resulted in a broadly stable ARPU (monthly average revenue per user). MOU (monthly average minutes of use per subscriber) grew to 129 in the first quarter of 2006, indicative of the improved price elasticity.

International mobile operations: improving Monet’s profitability, robust EBITDA margin at Mobimak
Revenues before elimination grew strongly by 42.7% to HUF 10.9 bn in Q1 2006, primarily driven by the consolidation impact of Monet. EBITDA was HUF 5.6 bn with a high EBITDA margin of 51.9%. MakTel’s mobile business reported 8.0% revenue growth in a growing market characterised by strong tariff competition. EBITDA at Mobimak was HUF 4.4 bn with an impressive EBITDA margin of 53.7%. The results of the international mobile operations also included those of Monet, the mobile subsidiary of Telekom Montenegro, which posted revenues of HUF 2.6 bn and an EBITDA of HUF 1.2 bn in Q1 2006.

As disclosed on April 26, 2006 and March 30, 2006, as well as in the full-year 2005 results announcement made on February 13, 2006, the Company is still inquiring into certain consultancy contracts, totalling approximately HUF 700 million, to determine whether they have been entered into in violation of company policy or applicable law or regulation. This inquiry, which is being conducted by an independent law firm and supervised by the Audit Committee, is still ongoing and it is at this point still too early to determine its outcome. Pending the outcome of the investigation, the Board of Directors of Magyar Telekom has decided to suspend certain employees. The Company has notified the Hungarian Financial Supervisory Authority, the U.S. Securities and Exchange Commission and the U.S. Department of Justice of the investigation and is in contact with these authorities regarding the investigation. The Company is committed to complying fully with the requirements and requests of these and other authorities with jurisdiction over it. No assurance can be given that, as a result of the investigation, the audited financial statements for 2005 and financial statements for any other period will not vary from those published prior to the completion of the investigation.

About Magyar Telekom
Magyar Telekom is the principal provider of telecom services in Hungary. Magyar Telekom provides a broad range of services including traditional fixed line and mobile telephony, data transmission and value-added services. Magyar Telekom owns 51% of the shares of MakTel, the sole fixed line operator and its subsidiary Mobimak, the leading mobile operator in Macedonia. Magyar Telekom has a majority stake in Telekom Montenegro. TCG Group provides fixed, mobile and Internet services in Montenegro. Key shareholders of Magyar Telekom as of March 31, 2006 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.