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Investor Releases

Magyar Telekom first nine months 2008 results: focus on efficiency and repositioning

Budapest, November 6, 2008
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 2008, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

  • Revenues were down by 0.2% to HUF 502.8 bn (EUR 2030.1 m) in the first nine months of 2008 over the same period in 2007. Fixed line voice retail revenues decreased due to increasing competition coming from cable, mobile and alternative operators. Fixed line wholesale revenues were also down in all three markets, in Hungary mainly driven by the integration of international voice wholesale traffic by Deutsche Telekom since the beginning of this year. Declining fixed line voice revenues were partly offset by growth in mobile, SI/IT and internet revenues. Revenues were also supported by the reversal of provisions related to fixed to mobile traffic revenues in the amount of HUF 8.5 bn accounted in the second quarter of this year.
  • EBITDA was up by 5.4% to HUF 213.8 bn, with an EBITDA margin of 42.5%. Group EBITDA excluding investigation-related costs, severance payments and accruals increased by 2.9% year-on-year. (Investigation-related costs came to HUF 3.9 bn in the first nine months of 2008 against HUF 3.7 bn in the same period of 2007; severance payments and accruals, including headcount reduction-related costs and a portion attributable to contractual termination expense of key managers, were HUF 3.3 bn in the first nine months of 2008 and HUF 8.2 bn in the same period of 2007.) EBITDA margin without these special influences was 44.0%. The savings generated from the headcount reduction are reflected in the improved profitability, which was also helped by the reversal of provisions related to fixed to mobile traffic revenues in the amount of HUF 8.5 bn in the second quarter and by the Macedonian real estate sales with HUF 1.3 bn gain in the first quarter of 2008.
  • Profit attributable to equity holders of the company ( net income ) increased by 35.3% , from HUF 59.4bn (EUR 236.9 m) to HUF 80.4 bn (EUR 324.5 m). Besides higher EBITDA, the increase was also due to lower depreciation and net financial expenses in the first nine months of 2008.
  • Net cash generated from operating activities decreased from HUF 176.3 bn to HUF 153.8 bn. The higher EBITDA was offset by increased working capital requirements, mainly driven by the use of provisions related to the headcount reduction program and the reversal of provisions related to fixed to mobile traffic revenues. Net cash used in investing activities increased from HUF 38.6 bn to HUF 53.7 bn due to higher gross additions to tangible and intangible assets (capex). Net cash used in financing activities decreased significantly, from HUF 103.4 bn to HUF 76.2 bn as 2007 figures also include the dividends paid to shareholders in January 2007 for 2005 financials and the related financing requirement.
  • Additions to tangible and intangible assets increased from HUF 49.9 bn to HUF 60.7 bn. Of this, HUF 29.4 bn is related to the T-Com segment, HUF 27.1 bn to T-Mobile (within this, HUF 8.0 bn was spent on mobile broadband investment in Hungary), HUF 1.3 bn to T-Systems and HUF 2.9 bn to Group Headquarters and Shared Services.
  • Net debt decreased slightly from HUF 274.2 bn to HUF 271.2 bn by the end of September 2008. The net debt ratio (net debt to net debt plus total equity) was stable and stood at 32.3% at end-September 2008.

Christopher Mattheisen, Chairman and CEO commented: “While the first half of 2008 was dedicated to exploiting the potential from efficiency improvements, the third quarter was marked by a very focused marketing presence in line with our rebranding campaign launched in Hungary in September. The T-Home rebranding was coupled with an intensive advertising campaign and the introduction of several new offers in the Hungarian market. The increased promotional efforts are necessary to retain our customers in the fixed line segment and further increase the number of broadband customers, both in the fixed line and mobile markets. The integration of our operations, effective since the beginning of this year, has enabled us to exploit our unique position in the Hungarian market and launch bundled packages including triple play and fixed-mobile offers. We also launched the 3G-enabled iPhone with great success in August. Additionally, the recently announced fibre rollout program financed as part of our normal capex plans will help us to further improve the quality of our product offering in the future.
Although the third quarter results already reflect the difficulties we face in all our markets, we maintain our flat revenue target announced for this year and are revising our underlying EBITDA target (EBITDA excluding investigation- and headcount-reduction related expenses) upwards from a slight decline to flat compared to 2007. Both revenues and underlying EBITDA include the reversal of provisions related to fixed to mobile traffic revenues accounted in the second quarter this year.”

Q3 2008 results analysis

Group:

  • Revenues were down by 4.6% to HUF 167.1 bn in the third quarter of 2008 over the same period of last year. Retail fixed voice revenues are continuing to decrease driven by fixed to mobile substitution, while fixed wholesale revenues were down significantly both in Hungary and Montenegro (in Hungary this was mainly due to the integration of international voice wholesale traffic by Deutsche Telekom since beginning of this year). Driven by lower mobile termination rates in Hungary and increased competition in our international mobile markets, as well as unfavourable FX movements, mobile revenues also slightly decreased.
  • EBITDA decreased by 6.4% to HUF 69.5 bn and EBITDA margin was 41.6% in Q3 2008. Excluding the severance expenses (HUF 1.2 bn in Q3 2008 and HUF 1.0 bn in Q3 2007) and the investigation-related costs (HUF 0.5 bn in Q3 2008 and HUF 1.8 bn in Q3 2007), EBITDA was down by 7.5% and EBITDA margin was 42.6%. In addition to lower revenues, other operating costs increased, driven by the higher marketing expenses of the new campaigns.
  • Net income was up by 5.8% to HUF 26.7 bn as lower EBITDA was compensated by decreased depreciation and amortization expenses as well as lower income taxes. Depreciation expenses decreased by 17.1% in the third quarter due to the extension of the useful life of certain network assets from July 1, 2008.

T-Com

Revenues before elimination fell by 9.4% to HUF 71.0 bn in Q3 2008 compared to the same period last year, while EBITDA margin was 40.9%.

  • T-Com Hungar y reported a revenue decline of 6.8% to HUF 56.7 bn in Q3 2008. The decline was driven by decreasing voice revenues, with increasing competition primarily from mobile and cable operators causing a continuous reduction in traffic and average tariff levels. Internet revenues were also slightly down, reflecting the slowdown in ADSL customer growth and the decline in average broadband price levels. The total number of broadband connections was close to 749,000 at end-September 2008, while the aforementioned competition resulted in an accelerated decline in the total number of fixed lines (down 8.6% at end-September 2008 compared to a year ago). Declining revenue-related payments and employee-related expenses could not offset the lower revenues; EBITDA was down by 7.3% to HUF 23.8 bn and EBITDA margin was 41.9%.
  • In Macedonia , revenues decreased by 7.2% to HUF 9.5 bn, as higher internet, data and equipment revenues could not offset the lower voice traffic revenues. Both retail and wholesale voice revenues declined due to increasing mobile substitution and competition from alternative operators. In addition, the unfavourable impact of FX movements further decreased HUF-denominated revenues and EBITDA (the HUF on average strengthened by 5.6% to the MKD over the period). EBITDA, as a result, was flat at HUF 4.6 bn and EBITDA margin was 48.8% in Q3 2008.
  • Revenues of T-Com Crna Gora were down by 35.4% to HUF 4.7 bn in Q3 2008. The decline in retail and wholesale traffic revenues was mainly driven by mobile substitution and significantly lower transit traffic from the mobile competitor Promonte. Revenues were also negatively influenced by the unfavourable impact of FX movements (the HUF on average strengthened by 5.8% to the EUR over the period). Although internet and data revenues continue to show a strong increase, they were only partially able to offset the declining voice revenues. EBITDA was down significantly to HUF 0.6 bn, which was also driven by headcount reduction-related severance expenses of HUF 0.9 bn accounted in the third quarter. EBITDA margin was 11.9% in Q3 2008.

T-Mobile

Revenues before elimination decreased by 2.5% to HUF 89.7 bn in the third quarter this year compared to the same period in 2007; EBITDA margin was 44.9%.

  • T-Mobile Hungary showed a slight revenue decrease of 0.6% to HUF 72.0 bn in the third quarter, as the growth in the customer base and expansion of value added service revenues could not offset the decline in wholesale voice revenues due to the cut in mobile termination rates in January 2008 and the lower retail revenues driven by continuously decreasing average tariff levels also due to the roaming regulation. T-Mobile Hungary maintained its market leader position with 43.8% share of total SIM cards at end-September 2008. Despite the continued rise in value added service revenues and usage, ARPU showed a 9.7% decrease year-on-year due to the declining tariff levels, the cut in mobile termination rates and roaming tariffs and the higher inactive ratio. Average acquisition cost per new customer decreased by 4.2% to HUF 6,550. The population-based coverage of our HSDPA network reached 63% by the end of September. EBITDA decreased by 2.7% to HUF 31.2 bn and EBITDA margin was 43.4% in the third quarter of 2008.
  • T-Mobile Macedonia reported a revenue decline of 5.5% to HUF 11.2 bn mainly due to the unfavourable impact of FX movements. The strong growth in the customer base and the improving customer mix were able to mostly offset the 15.9% decline in ARPU, which resulted from the continuous tariff decreases after the entrance of the third mobile operator. EBITDA decreased by 5.9% to HUF 6.3 bn and EBITDA margin was 56.5% in Q3 2008.
  • Revenues of T-Mobile Crna Gora decreased by 10.2% to HUF 5.6 bn in Q3 2008. Due to the market entry of the third mobile operator in Montenegro, tariff levels and international traffic decreased significantly. In addition, the unfavourable impact of FX movements had a further impact on the results. ARPU was down by 16.3% in the first nine months of 2008, driven by new offers with lower tariff levels and bundled minutes. EBITDA decreased by 34.1% to HUF 2.3 bn and EBITDA margin was 41.5% in Q3 2008.
  • Revenues of Pro-M , the TETRA service company, accounted HUF 1.5 bn in the third quarter of 2008. EBITDA was HUF 0.4 bn and the EBITDA margin reached 28.4% in the third quarter of 2008.

T-Systems

Revenues before elimination declined by 4.8% to HUF 18.9 bn. Due to the postponement of some major projects, SI/IT revenues were down by 2.5% in the third quarter of 2008, while voice revenues further declined mainly due to mobile substitution. Thanks to the integration efforts and improved operational efficiency, EBITDA was up by 32.2% to HUF 4.6 bn and EBITDA margin was 24.5% in Q3 2008. EBITDA was also helped by a one-time correction of earlier classification of costs by transferring voice-related payments from T-Systems to T-Com in the amount of HUF 0.5 bn in the third quarter.

Group Headquarters and Shared services

Revenues before elimination were down by 4.4% to HUF 5.5 bn. EBITDA increased by 16.7% to HUF -4.4 bn due to lower investigation-related expenses this year (HUF 0.5 bn in Q3 2008 compared to HUF 1.8 bn in Q3 2007) and the headcount reduction related severance expenses of HUF 0.7 bn accounted in Q3 2007.

As previously disclosed, in the course of conducting their audit of Magyar Telekom’s 2005 financial statements, PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. (“PwC”) identified two contracts relating to the operation of Magyar Telekom Group (“the Company”) in Montenegro, the nature and business purposes of which were not readily apparent to them. In February 2006, the Company’s Audit Committee retained White & Case, as its independent legal counsel, to conduct an internal investigation into whether the Company or any of its subsidiaries had made payments under those, or other contracts, potentially prohibited by U.S. laws or regulations, including the Foreign Corrupt Practices Act (“FCPA”), or internal Company policy. The Company’s Audit Committee also informed the U.S. Department of Justice (“DOJ”), the U.S. Securities and Exchange Commission (“SEC”) and the Hungarian Supervisory Financial Authority of the internal investigation.
PwC initially raised concerns regarding two consultancy contracts entered into in 2005 by our Montenegrin subsidiaries, Crnogorski Telekom and T-Mobile Crna Gora. The initial scope of the internal investigation involved review of these two contracts. Early in the investigation, two additional consultancy contracts entered into by Magyar Telekom in 2005, were also called into question by the investigating law firm. As a result, our Audit Committee expanded the scope of the internal investigation to cover these contracts and related activities.
In December 2006, the investigating law firm delivered an Initial Report of Investigation to the Audit Committee and the Board of Directors. As of the date of the Initial Report, the independent investigators were unable to find sufficient evidence to show that any of the four contracts subject of the internal investigation of the Company’s Montenegrin operations resulted in the provision of services to the Company or to our subsidiaries under those contracts of a value commensurate with the payments the Company made under those contracts. As of the date of the Initial Report, the independent investigators were unable to determine definitively the purpose of those contracts, and it is possible that the contracts may have been entered into for an improper purpose, and in particular may have been in violation of the FCPA, other U.S. laws or regulations, and/or internal Company policy. The Audit Committee, through its counsel, has informed the DOJ and the SEC of these initial findings.
The independent investigators also identified several additional contracts entered into by our Macedonian subsidiary that warranted further review. In February 2007, the Company’s Board of Directors and Audit Committee determined that those contracts and any related or similarly questionable contracts or payments, should be reviewed, and the Board and Audit Committee expanded the scope of the internal investigation to cover those matters. The internal investigation is continuing. In May 2008, the independent investigators provided us with a “Status Report on the Macedonian Phase of the Independent Investigation.” In the Status Report, White & Case stated, among other things, that “there is affirmative evidence of illegitimacy in the formation and/or performance” of six contracts for advisory, marketing, acquisition due-diligence and/or lobbying services in Macedonia, entered into between 2004 and 2006 between us and/or various of our affiliates on the one hand, and a Cyprus-based consulting company and/or its affiliates on the other hand, under which we and/or our affiliates paid a total of over EUR 6.7 million.  
The Company and the internal investigating law firm are in regular contact with the Hungarian Financial Supervisory Authority, the Hungarian National Bureau of Investigation, the law enforcement authority of the Republic of Macedonia, the DOJ and the SEC, regarding the internal investigation. These U.S., Macedonian and Hungarian authorities have opened their own investigations concerning at least the transactions which are the subject of the Company’s internal investigation, to determine whether there have been violations of U.S., Macedonian and/or Hungarian law (the “Government investigations”).
During 2007, the DOJ and the SEC expanded the scope of their investigations to include inquiry into the actions taken by the Company in connection with the internal investigation and the Company’s public disclosures regarding the internal investigation. From May 2008 to date, the Ministry of Interior of the Republic of Macedonia has requested information and documents concerning procurement and dividend payment activities in Macedonia of Magyar Telekom’s Macedonian subsidiaries.
The Hungarian National Bureau of Investigation has informed us that it has closed its investigation as of May 20, 2008 without identifying any criminal activity.
The Company is committed to cooperating with these investigations by responding to requests for documents and information from these authorities to the fullest extent allowed under applicable law.
The Company cannot predict when the internal investigation or the Government investigations will be concluded, what the final outcome of those investigations may be, or the impact, if any, they may have on the Company’s financial statements or results of operations. Government authorities could seek criminal or civil sanctions, including monetary penalties, against Magyar Telekom, as well as additional changes to its business practices and compliance programs.  
As a consequence of the internal investigation, the Company has suspended a number of employees, including senior officers of the Company and of certain subsidiaries, respectively, whose employment have since been terminated. The Crnogorski Telekom Board of Directors has also been replaced as a result of the internal investigation.  
Magyar Telekom incurred HUF 3.9 bn expenses relating to the investigation in the first three quarters of 2008, which are included in other operating expenses in the Group Headquarters and Shared services (“GHS”) segment.

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 Makedonski Telekom, 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, 2008 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, 2007 filed with the U.S. Securities and Exchange Commission.