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Investor Releases

Magyar Telekom 2007 interim results: acquisition-driven top line growth with solid underlying profitability and healthy operating cash flow

Budapest, August 9, 2007

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 2007, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

  • Revenues grew by 5.0% from HUF 312.8 bn to HUF 328.4 bn (EUR 1,311.7 m) in H1 2007 over the same period last year. Growth in mobile, internet and SI/IT revenues compensated for the lower fixed line voice revenues. The consolidation of KFKI Group, T-Systems Hungary and Dataplex contributed HUF 11.5 bn to Group revenues in H1 2007.  
  • EBITDA was broadly stable at HUF 128.7 bn, with an EBITDA margin of 39.2%. Group EBITDA excluding investigation-related costs (HUF 1.9 bn) and headcount reduction-related severance payments and accruals (HUF 7.3 bn) was HUF 137.9 bn with an EBITDA margin of 42.0%.
  • Gross additions to tangible and intangible assets were HUF 28.3 bn, of which HUF 12.2 bn related to the T-Com segment, HUF 14.3 bn to T-Mobile (within this, HUF 4.1 bn was spent on mobile broadband investment in Hungary), HUF 0.8 bn to T-Systems and HUF 1.0 bn to Headquarters and Shared Services.
  • Profit attributable to equity holders of the company (net income) decreased by 7.5% , from HUF 36.9 bn (EUR 141.8 m) to HUF 34.2 bn (EUR 136.4 m) as taxes on income increased due to the introduction of the solidarity tax and higher deferred taxes.
  • Net cash from operating activities grew strongly from HUF 93.8 bn to HUF 121.7 bn. This was the combined result of broadly stable EBITDA, significantly lower working capital requirements (driven mainly by a change in trade receivables) and reduced tax payment thanks to the utilization of tax benefits. Net cash used in investing activities fell from HUF 67.1 bn to HUF 21.5 bn, mainly driven by lower gross additions to tangible and intangible assets (capex) and lower spending on purchase of subsidiaries and business units. Capex decreased as a result of project delays and the HUF 6.5 bn TETRA investment accounted in H1 2006. Cash used for purchase of subsidiaries decreased from HUF 25.0 bn (acquisition of Dataplex, Orbitel, iWIW and 10% treasury share purchased by MakTel) to HUF 0.7 bn (acquisition of Mobilpress and gaining majority ownership in T-Systems Hungary). Net cash used in financing activities significantly increased, reflecting the dividends paid to shareholders in January and May 2007 for 2005 and 2006 financials, respectively.
  • Net debt increased to HUF 301.4 bn , reflecting the increase in loans for financing dividend payments and the acquisition of KFKI in H2 2006. The net debt ratio (net debt to net debt plus total equity) was 35.1% at end-June 2007.

Christopher Mattheisen, Chairman and CEO commented: “I am pleased to report close to 4% top-line growth and 1.6% EBITDA growth in the second quarter of this year compared to the same period of last year. Despite the difficult macroeconomic environment we are on track to achieve our targets for this year. In the T-Com segment we face higher churn levels and further tariff erosion in Hungary, although these were mainly offset by expanding broadband revenues and good performance of the Montenegrin operations. In the mobile business, the stable Hungarian operations, while impacted by the reduced mobile termination rates, were supported by growing contributions from the international subsidiaries and TETRA services. The consolidation of SI/IT companies ensured revenue growth in the T-Systems segment and stabilised EBITDA levels.
As communicated earlier, we are continuously working to improve the operational cost structure and headcount productivity within the Group as well as leveraging new, integrated revenue opportunities. As part of these efforts, we have already initiated some integration steps. According to the decision of the Extraordinary General Meeting held in June, Emitel and the access business of T-Online will be merged into the parent company. Within the T-Systems segment we started to simplify the organisational structure by reducing the number of subsidiaries. Restructuring and headcount reductions at the network division have also started; the majority of the severance-related expenses accounted in the second quarter in the T-Com segment relates to this. Furthermore, we are going to announce our detailed and broader restructuring plans in the autumn.”

T-Com
Revenues before elimination fell by 1.6% to HUF 77.1 bn in Q2 2007 over the same period in 2006 and EBITDA margin decreased to 38.1%.

  • T-Com Hungary reported a revenue decline of 1.2% to HUF 61.7 bn driven by mobile substitution and traffic loss to alternative and cable competitors. Internet revenues grew by 22.0% to HUF 13.3 bn thanks to the continuous increase in the number of ADSL and cable broadband customers. The total number of broadband connections was close to 653,000 at end-June 2007, while strong mobile substitution and competition from cable operators resulted in a decline in the total number of fixed lines (down 4.8% at end-June 2007 compared to a year ago). Headcount reduction-related expenses amounted to HUF 2.7 bn in the second quarter, mainly relating to the restructuring at the network division. As a result, EBITDA was down by 10.3% to HUF 22.5 bn and EBITDA margin was 36.5%.
  • In Macedonia , fixed line revenues decreased by 11.4% to HUF 9.9 bn, reflecting lower voice traffic due to strong mobile substitution and the emerging fixed line competition, as well as unfavourable FX movements. This decrease was partly offset by increasing internet-related revenues. EBITDA increased by 2.3% and EBITDA margin was up to 48.9% in Q2 2007.
  • Revenues of T-Com Crna Gora increased by 15.6% to HUF 5.6 bn in the second quarter of 2007. Decreasing domestic voice traffic was more than offset by increasing international traffic revenues, mainly reflecting the classification of Serbian traffic as international following the independence of Montenegro since June 2006. EBITDA increased by 30.8% to HUF 2.0 bn and EBITDA margin was up to 35.8%.

T-Mobile
Revenues before elimination grew by 4.5% to HUF 85.0 bn; EBITDA margin was 44.1%.

  • T-Mobile Hungary showed a revenue increase of 1.3% to HUF 69.0 bn as the healthy growth in the customer base and expanding value added service revenues were offset by a decrease in wholesale voice revenues, driven by the cut in mobile termination fees in February 2007. Although the increase in value added service revenues and usage continues, ARPU showed a 4.4% decrease due to the declining tariffs and the 15% cut in termination rates. Average acquisition cost per new customer increased by 9%, reflecting the higher subsidies for postpaid customers and 3G/HSDPA enabled devices. As a result of the efforts made here, the customer mix improved further reaching a postpaid ratio of 36.6% at the end of the second quarter. EBITDA was HUF 29.7 bn with an EBITDA margin of 43.0%.  
  • T-Mobile Macedonia reported a revenue growth of 8.8% to HUF 10.3 bn in a growing market characterised by strong tariff competition. The continuously decreasing tariff level was offset by the improving customer mix and the strong, 25.8% increase in usage, resulting in a slight growth in ARPU levels. EBITDA margin reached a strong 55.6%.  
  • Mobile revenues of T-Mobile Crna Gora increased by 39.9% to HUF 4.5 bn in Q2 2007, driven by expanding tourism, higher international traffic revenues and increased mobile termination rates. Market penetration increased to 141% at end of June, mainly reflecting the extended availability of SIM cards since October 2006. EBITDA margin was 36.0% in Q2 2007.  
  • Pro-M , the TETRA service company, reported HUF 1.6 bn mobile service revenues and HUF 0.5 bn EBITDA in Q2 2007.

T-Systems
Revenues before elimination increased by 14.4% as the consolidation effect of the new subsidiaries offset the declining traditional voice revenues. KFKI Group and T-Systems Hungary contributed HUF 5.8 bn revenues and HUF 0.9 bn EBITDA in Q2 2007. Excluding the new subsidiaries, revenues decreased by 20.7%, driven by the continuous pressure on voice tariffs and increasing mobile substitution. The segment’s EBITDA decreased by 3.1% and EBITDA margin was 20.7% in Q2 2007.

Headquarters and Shared services
Revenues before elimination were down by 9.0% driven by lower marketing and real estate services, partly compensated by higher security service revenues. EBITDA decreased by 3.7% to HUF -5.1 bn.

As previously disclosed, in the course of conducting their audit of our 2005 financial statements, PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. identified two contracts the nature and business purposes of which were not readily apparent. In February 2006, our Audit Committee initiated an independent investigation into this matter. In the course of the investigation, two further contracts entered into by Magyar Telekom Plc. were potentially raising concerns. To date, the independent investigators have been unable to find sufficient evidence to show that any of the four contracts under investigation resulted in the provision of services to us or to our subsidiaries under those contracts of a value commensurate with the payments we made under those contracts. The independent investigators have been unable to determine definitively the purpose of the contracts, and it is possible that the purpose may have been improper. The independent investigators further identified several contracts at our Macedonian subsidiary that could warrant further review. In February 2007, our Board of Directors determined that those contracts should be reviewed and expanded the scope of the independent investigation to cover these additional contracts and related transactions. We have approved and are currently implementing certain remedial measures designed to enhance our internal controls to ensure compliance with Hungarian and U.S. legal requirements and NYSE listing requirements. As previously reported, the investigation delayed the finalization of our 2005 financial statements, and as a result we and some of our subsidiaries have failed and may fail to meet certain deadlines prescribed by U.S., Hungarian and other applicable laws and regulations for preparing and filing audited annual results and holding annual general meetings. We have to date been fined HUF 13 million as a consequence of these delays. We have notified the Hungarian Financial Supervisory Authority, the U.S. Securities and Exchange Commission and the U.S. Department of Justice of the investigation, are in regular contact with these authorities regarding the investigation and are responding to inquiries raised by and the investigations being conducted by these authorities. The U.S. Department of Justice has recently expanded the scope of its investigation to include the actions taken by the Company in response to the findings of and issues raised by the Company’s internal investigation and a related subpoena and further informal document requests have been issued.

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, value-added, IT and system integration services. Magyar Telekom owns the majority of the shares of MakTel, the sole fixed line operator and its subsidiary T-Mobile Macedonia, the leading mobile operator in Macedonia. Magyar Telekom has a majority stake in Crnogorski Telekom. This Group provides fixed, mobile and Internet services in Montenegro. Key shareholders of Magyar Telekom as of June 30, 2007 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, 2006 filed with the U.S. Securities and Exchange Commission.