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Investor Releases

Magyar Telekom first nine months 2007 results: on track to meet full year targets

Budapest, November 8, 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 nine months of 2007, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

  • Revenues grew by 2.7% from HUF 490.3 bn to HUF 503.6 bn (EUR 2,007.7 m) in the first nine months of 2007 over the same period last year. Growth in mobile, broadband and SI/IT revenues compensated for the lower fixed line voice and TETRA revenues. The consolidation of KFKI Group, T-Systems Hungary and Dataplex contributed HUF 18.8 bn to Group revenues in the period under review.  
  • EBITDA was up by 2.1% to HUF 203.0 bn, with an EBITDA margin of 40.3%. Group EBITDA excluding investigation-related costs (HUF 3.7 bn) and severance payments and accruals (HUF 8.2 bn including headcount reduction-related and a portion attributable to contractual termination expense of key managers) was HUF 214.9 bn with an EBITDA margin of 42.7%.
  • Gross additions to tangible and intangible assets were HUF 49.9 bn.   Of this, HUF 22.0 bn related to the T-Com segment, HUF 24.5 bn to T-Mobile (within this, HUF 8.7 bn was spent on mobile broadband investment in Hungary), HUF 1.5 bn to T-Systems and HUF 1.9 bn to Headquarters and Shared Services.  
  • Profit attributable to equity holders of the company (net income) decreased by 1.5% , from HUF 60.3 bn to HUF 59.4 bn (EUR 236.9 m) due to higher deferred and local taxes, as well as taxes on income increased due to the introduction of the solidarity tax.  
  • Net cash generated from operating activities grew strongly from HUF 150.5 bn to HUF 176.3 bn. Beside the slight increase in EBITDA, the main drivers behind this development were the significantly lower working capital requirements (driven mainly by a change in trade receivables related to the TETRA service) and reduced tax payment thanks to the utilization of tax benefits. Net cash used in investing activities fell from HUF 98.8 bn to HUF 38.6 bn, mainly driven by lower gross additions to tangible and intangible assets (capex) and lower spending on purchase of subsidiaries and business units. Cash used for purchase of subsidiaries decreased from HUF 34.9 bn (mainly for the acquisition of KFKI, Dataplex and the 10% treasury share purchase of MakTel) to HUF 1.8 bn (T-Systems Hungary and Mobilpress acquisition). 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 274.2 bn , reflecting the increase in loans for financing dividend payments. The net debt ratio (net debt to net debt plus total equity) accordingly was up from 26.4% at the end of September last year to 32.2% at end-September 2007.

Third quarter 2007 results: strong cost control leads to improved profitability

Christopher Mattheisen, Chairman and CEO commented: “The third quarter financials reflect our efforts to improve cost efficiency within the Group with the EBITDA margin – excluding investigation- and headcount reduction-related expenses – reaching 44.0%. EBITDA was further supported by the acquisitions in the SI/IT segment and the TETRA services, showing 6% growth over the third quarter of last year. Looking at the segment results, the T-Com segment in Hungary shows a slowdown in revenue losses thanks to the broadband revenue growth, while cost reductions resulted in slight EBITDA increase. The T-Mobile segment was heavily supported by the good performance of the international subsidiaries, while cost cutting efforts were also visible at the Hungarian operations. At T-Systems, the new acquisitions ensured EBITDA growth despite continuous decline in voice revenues.
In addition to achieving strong financial results, during the third quarter we were able to reach important decisions regarding our new management structure and headcount efficiency improvements, ensuring our competitiveness in the longer term. The details of the new operational structure, which will focus on customer segments, are being finalised, and will be introduced from the beginning of 2008. The structure of our financial disclosure, however, will remain the same for the next year. Finally, in line with our strategy to create value through acquisition, we have decided to participate in the privatization process of Telekom Slovenije. We filed an indicative offer on 15th of October and I am pleased that we have been shortlisted for the due diligence process.”

T-Com
Revenues before elimination fell by 3.6% to HUF 78.3 bn in Q3 2007 over the same period in 2006 while EBITDA margin increased to 42.5%.

  • T-Com Hungary reported a revenue decline of 4.3% to HUF 60.9 bn driven by decreasing voice revenues as increasing competition from mobile, alternative and cable operators caused a reduction in traffic and average tariff levels. Internet revenues were up by 19.1% 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 exceeded 680,000 at end-September 2007, while strong mobile substitution and competition from cable operators resulted in a decline in the total number of fixed lines (down 5.3% at end-September 2007 compared to a year ago). Thanks to strict cost control, EBITDA was up by 2.2% to HUF 25.7 bn and EBITDA margin was 42.2%.  
  • In Macedonia , revenues decreased by 12.6% to HUF 10.2 bn, reflecting lower voice traffic due to strong mobile substitution and the emerging fixed line competition, as well as unfavourable FX movements (the Hungarian Forint on average strengthened by 8.8% to the Macedonian Denar). International wholesale traffic was especially impacted by competition from alternative operators. As a result, EBITDA decreased by 19.4% and EBITDA margin was down to 45.3% in Q3 2007.
  • Revenues of T-Com Crna Gora increased by 18.5% to HUF 7.3 bn in the third quarter of 2007. The strong increase in international retail and wholesale traffic revenues was driven by the increasing mobile penetration and by the classification of Serbian traffic as international following the independence of Montenegro. Domestic voice traffic decreased due to the increasing mobile substitution. EBITDA was up by 24.4% to HUF 2.9 bn and EBITDA margin was 39.9%.

T-Mobile
Revenues before elimination declined by 5.5% to HUF 92.1 bn; EBITDA margin was 46.4%.

  • T-Mobile Hungary showed a revenue increase of 1.1% to HUF 72.4 bn as the healthy growth in the customer base and expansion of value added service revenues were offset by a decline 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 4.8% decrease due to the declining tariffs and the 15% cut in termination rates. Average acquisition cost per new customer increased by 12%, reflecting the higher subsidies for postpaid customers and 3G/HSDPA enabled devices. The customer mix improved further reaching a postpaid ratio of 36.9% at the end of the third quarter. EBITDA was HUF 32.1 bn with an EBITDA margin of 44.3%.  
  • T-Mobile Macedonia reported revenue growth of 5.4% to HUF 11.8 bn in a growing market characterised by strong tariff competition. The improving customer mix and the strong, 22% increase in usage was offset by the continuously decreasing tariff level and the unfavourable FX impact, resulting in a 3% decline in ARPU levels. EBITDA was HUF 6.7 bn and margin reached a strong 56.8%.  
  • Mobile revenues of T-Mobile Crna Gora increased by 37.5% to HUF 6.3 bn in Q3 2007, driven by expanding tourism, higher international traffic revenues and increased mobile termination rates. Market penetration increased to 185% at the end of September driven by the extended availability of SIM cards and the entrance of the third mobile competitor. EBITDA margin was 56.6% in Q3 2007.  
  • Pro-M , the TETRA service company, reported HUF 1.9 bn revenues in Q3 2007 compared to HUF 10.2 bn in the same period of 2006. The revenue decline is due to the fact that in the third quarter of last year sale of network elements reached HUF 9.8 bn, while in the same period this year it only amounted to HUF 0.5 bn. At the same time service revenues reached HUF 1.4 bn and EBITDA was HUF 0.4 bn in the period.

T-Systems
Revenues before elimination increased by 46.9% to HUF 19.9 bn as the consolidation effect of the new subsidiaries offset the declining traditional voice revenues. KFKI Group and T-Systems Hungary contributed HUF 7.6 bn revenues and HUF 0.6 bn EBITDA to the segment results in Q3 2007. Excluding the new subsidiaries, revenues decreased by 4.6%, driven by the continuous pressure on voice tariffs and increasing mobile substitution. The segment’s EBITDA increased by 9.0% to HUF 3.5 bn and EBITDA margin was 17.6% in Q3 2007.

Headquarters and Shared services
Revenues before elimination were down by 3.8% to HUF 5.7 bn driven by lower marketing service revenues. EBITDA decreased by 22% to HUF -5.3 bn due to headcount reduction-related expenses of HUF 0.7 bn and higher investigation-related expenses (HUF 1.8 bn in Q3 2007 compared to HUF 1.3 bn in Q3 2006).

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 leading 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 September 30, 2007 include MagyarCom Holding GmbH (59.21%), owned by Deutsche Telekom AG. The remaining 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.