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Magyar Telekom Q1 2007 results: solid underlying performance boosted by growing system integration & IT contribution

Budapest, May 10, 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 three months of 2007, in accordance with International Financial Reporting Standards (IFRS).

Starting from this 1Q07 flash report, Magyar Telekom will change its previously applied segment disclosure as a result of the change in the management structure of Group. Reported segments are consistent with information used by management for internal reporting and monitoring purposes. The segments are based on the business lines (T-Com, T-Mobile, T-Systems and Headquarter and shared services), which include both Hungarian and foreign activities. In addition, the Company’s secondary format for reporting segment information is geographical segments. The T-Com segment includes the fixed line operations in Hungary, Macedonia and Montenegro, as well as the alternative and wholesale operations in Romania, Bulgaria and Ukraine. The T-Mobile segment consists of the mobile operations in Hungary, Macedonia and Montenegro; Pro-M’s TETRA services are also consolidated here. T-Systems segment includes the corporate services in Hungary. The Headquarters and Shared services segment performs strategic and cross-divisional management functions for the Magyar Telekom Group, as well as real estate, marketing, security, procurement, human resources and accounting services, mainly for internal services within the Group. The sum of the financial results of the four segments presented below does not equal to the group financial results because of intersegment eliminations.

Highlights:

  • Revenues grew by 6.1% from HUF 151.9 bn to HUF 161.1 bn (EUR 638.4 m) in Q1 2007 over the same period last year. The higher mobile, internet and SI/IT revenues compensated for the lower fixed line outgoing traffic revenues. The consolidation of KFKI, T-Systems Hungary and Dataplex contributed HUF 5.6 bn to Group revenues in Q1 2007.
  • EBITDA decreased by 1.7% to HUF 63.0 bn, with an EBITDA margin of 39.1%. Group EBITDA excluding investigation-related costs (HUF 0.9 bn) and headcount reduction-related severance payments and accruals (HUF 4.0 bn) was HUF 67.9 bn with an EBITDA margin of 42.1%.
  • Gross additions to tangible and intangible assets were HUF 9.4 bn, of which HUF 4.8 bn related to the T-Com segment, HUF 4.0 bn to T-Mobile (within this, HUF 1.0 bn was spent on mobile broadband investment) and HUF 0.5 bn to T-Systems.  
  • Profit attributable to equity holders of the company (net income) decreased by 16.1% , from HUF 18.9 bn (EUR 74.5 m) to HUF 15.9 bn (EUR 63.0 m), driven by higher income taxes.
  • Net cash from operating activities grew strongly from HUF 43.6 bn to HUF 57.3 bn as the lower EBITDA and higher tax paid was offset by lower interest paid and a decrease in working capital requirements (driven mainly by a change in trade payables). Net cash utilized in investing activities fell from HUF 28.8 bn to HUF 25.0 bn, mainly driven by the Orbitel acquisition in Q1 2006. Net cash from financing activities significantly increased, reflecting the dividend paid to shareholders in January 2007 for 2005 financials.
  • Net debt increased to HUF 283.2 bn, reflecting the increase in loans for financing acquisitions and dividend payment for 2005 financials paid in January 2007. The net debt ratio (net debt to net debt plus total equity) was 31.7% at end-March 2007.

Christopher Mattheisen, Chairman and CEO commented: “The key drivers of the solid Group-level top line growth in the first quarter were the consolidation impact of our recently acquired companies in the Hungarian IT & system integration sector and revenues related to the TETRA service. EBITDA slightly decreased due to the increased costs driven by the investigation- and headcount reduction-related expenses. For the first time, our segmental results are presented using our new reporting structure, which offers better visibility of our businesses and is consistent with internal reporting and monitoring. In the T-Com segment, our focus remains on customer retention and broadband expansion. In the Hungarian market, we have doubled the speed of the ADSL packages since the beginning of the year and introduced naked ADSL in March to further boost broadband penetration. As a result, the broadband customer number and internet revenues continued to show strong growth. In the T-Mobile segment, despite the high penetration and intense competition, we were able to maintain our clear market leadership in Hungary. Despite the negative impact of the cut in mobile termination fees on our revenues, mobile revenues increased thanks to the higher traffic and increasing importance of mobile broadband services. The revenue contribution of our international mobile subsidiaries also grew. The strong growth of T-Systems segment revenues reflects the consolidation of the new subsidiaries, KFKI and T-Systems Hungary as well as the impact of new outsourcing agreements.”

T-Com
Revenues before elimination fell by 2.3% to HUF 75.3 bn in Q1 2007 over the same period in 2006 and EBITDA margin decreased to 40.6%.  

  • Hungarian fixed line revenues declined by 2.4%, mainly due to mobile substitution and traffic loss to alternative and cable competitors. Internet revenues grew by 22.8% thanks to the significant increase in the number of ADSL and cable broadband customers. The total number of broadband connections exceeded 628,000 at end-March 2007, although strong mobile substitution and strong competition from cable operators resulted in a decline in the total number of fixed lines (down 4.2% at end-March 2007 compared to a year ago). EBITDA was down by 3.0% to HUF 24.9 bn and EBITDA margin was slightly up to 40.9%.
  • In Macedonia , fixed line revenues decreased by 3.7% to HUF 10.2 bn, reflecting lower voice traffic due to strong mobile substitution and the emerging fixed line competition. This decrease was partly offset by increasing internet-related revenues. EBITDA decreased by 0.9% and EBITDA margin was up to 50.5% in the Q1 2007.
  • In Montenegro , fixed line revenues increased by 3.2% to HUF 4.4 bn in the first quarter of 2007, as increasing wholesale and broadband revenues successfully offset the eroding retail voice traffic. EBITDA decreased significantly due to provisions created for employees leaving the company and related pending legal cases. As a result, the EBITDA margin decreased to 12.9%. Excluding the above provisions, EBITDA margin was broadly flat with 34%.

T-Mobile
Revenues before elimination grew by 7.6% to HUF 80.8 bn; EBITDA margin was 42.7%.

  • T-Mobile Hungary showed a revenue increase of 4.1% thanks to the healthy growth in the customer base and growing focus on value added services, despite a decrease in wholesale voice revenues, driven by the mobile termination fee cut in February 2007. Although the increase in value added service revenues and usage continues, ARPU showed a 3.3% decrease due to the declining tariffs and the cut in the termination rates. Average acquisition cost per new customer increased by 5%, reflecting the higher subsidies for postpaid customers and 3G/HSDPA enabled devices. As a result, the customer mix improved further reaching a postpaid ratio of 35.7% at the end of the first quarter. EBITDA was HUF 27.9 bn with an EBITDA margin of 41.8%.
  • T-Mobile Macedonia reported 12.6% revenue growth in a growing market characterised by strong tariff competition. Although the tariff level is continuously decreasing, the positive shift in customer mix and improving usage resulted in a 4.5% increase in ARPU. EBITDA margin reached a strong 54.4%.
  • Montenegrin mobile revenues increased by 23.1% in Q1 2007, as both customer base and usage significantly increased, helped by the increasing mobile substitution. Market penetration increased to 135% at end of March, mainly reflecting the extended availability of SIM cards since October 2006. EBITDA margin was 28.0% in Q1 2007 due to severance payment related expenses.
  • Pro-M , the TETRA service company, reported HUF 1.7 bn mobile service revenues and HUF 0.6 bn EBITDA in Q1 2007.

T-Systems
Revenues before elimination increased by 36.4% driven by the consolidation effect of the new subsidiaries. KFKI and T-Systems Hungary contributed HUF 5.3 bn revenues and HUF 0.7 bn EBITDA in the first quarter of 2007. The positive trend in revenues was supported by new outsourcing agreements and the governmental electronic tax filing project. Excluding the new subsidiaries, revenues decreased by 3.8%, driven by the continuous pressure on voice tariffs and increasing mobile substitution. The segment’s EBITDA was flat and EBITDA margin was 23.1% in Q1 2007.

Headquarters and Shared services
Revenues before eliminations were down by 8.5% driven by lower marketing and real estate service revenues. EBITDA decreased by 21.3% to HUF -6.2 bn due to higher employee related expenses driven by severance expenses.

As previously disclosed, in the course of conducting their audit of our 2005 financial statements, PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. (“PwC”) 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 these authorities.

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 March 31, 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, 2005 filed with the U.S. Securities and Exchange Commission.