Budapest, November 5, 2009 00:00
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 2009, in accordance with International Financial Reporting Standards (IFRS).
Highlights:
| Details of special influences (HUF bn) | Q3 2008 | YTD 2008 | Q3 2009 | YTD 2009 |
| Investigation-related costs | 0.5 | 3.9 | 1.5 | 5.1 |
| Severance payments and accrulas | 1.2 | 3.3 | 0.3 | 1.3 |
| Severance related provision reversals | 0 | 0 | -2.2 | -2.2 |
| Total Special Influence | 1.7 | 7.2 | 0.4 | 4.2 |
Christopher Mattheisen, Chairman and CEO commented:
“In the third quarter, Magyar
Telekom continued to face strong headwinds across all segments resulting from
the recessionary economic environment and the government’s austerity measures.
Customer behavior, from both a corporate and residential perspective, was
characterized by an increased retrenchment towards telecom spending, leading to
further pressure on traditional voice revenues.
To mitigate the impacts of this
unfavorable operating environment, we implemented several countermeasures over
the past quarters that have now started to bear fruit. In line with our
strategic goal to strengthen Magyar Telekom’s position as a fully integrated
service provider, we increased our presence in the TV market via our satellite
TV and IPTV sales, and reinforced our market leadership in the SI/IT segment.
Consequently, we have managed to improve our positions in these segments, while
sustaining market shares in our core markets.
Despite the decline in
revenue, third quarter underlying EBITDA was broadly stable compared to the
same period last year with an EBITDA margin of over 44% thanks to our strong
commitment to improving cost efficiency within the Group. In addition, we made
further progress in increasing headcount productivity and have reached an
agreement with the trade unions on the wage development, headcount reduction
and decrease in additional employee allowances at the parent company for 2010. As
a result, Total Workforce Management related costs will be reduced by HUF 6.5 bn in 2010 compared to the 2008 level,
which represents a reduction of more than 5% over the two year period.
Looking forward to the rest
of the year, we maintain our target of around 2% revenue decline; however, we
expect current trends, such as the significant reduction in private consumption
and heavily scaled back spend by corporates, to continue to put strong pressure
on our top line. Furthermore, strengthening of the forint may also have an
adverse impact on our results by lowering the contribution of our international
subsidiaries. We also maintain guidance of up to a 5% contraction in underlying
EBITDA and nominally flat CAPEX.”
Revenues before intersegment elimination fell by 5.6% to HUF 81.0 bn and EBITDA declined by 1.8% to HUF 48.0 bn in Q3 2009 compared to the same period of last year. EBITDA margin rose from 57.0% to 59.3% in the third quarter of 2009, thanks to our efficiency improvement efforts that could more than counterbalance the margin dilution related to the changing revenue mix. CAPEX amounted to HUF 5.2 bn in the third quarter with a significant portion related to satellite TV and IPTV sales.
Revenues before intersegment elimination were down by 8.0% to HUF 39.0 bn while EBITDA decreased by 7.2% to HUF 20.4 bn. Consequently, the EBITDA margin rose from 51.9% to 52.4% in Q3 2009. The moderate improvement in the EBITDA margin was due to the implemented efficiency improvement measures that could partly offset the revenue decline.
In Macedonia, revenues were up by 12.0% in Q3 2009 with EBITDA increasing by 4.5%. However, excluding the strong FX impact (the forint weakened on average by 14.0% to the Denar in the third quarter 2009 against the same period last year), revenues were down by 1.8%, and EBITDA declined by 8.3%, mainly driven by increased mobile equipment sales in relation to retention campaigns. EBITDA margin declined from 58.3% to 54.5% in the third quarter reflecting the intensifying competition in all segments.
Revenues of the Montenegrin subsidiary were up by 2.0% driven by the weakening of the Hungarian forint against the euro (the forint weakened on average by 14.1% to the euro in the third quarter). EBITDA was up by 65.6% due to the HUF 0.9 bn headcount-reduction related severance expense in the third quarter of 2008, while in the third quarter of 2009 aHUF 1.0 bn provision (created in Q1 2007) related to litigation in connection with a voluntary redundancy program was reversed. In local currencies, revenues declined by 10.6% and EBITDA, excluding severance expenses and the provision reversal, was down by 13.0% with an EBITDA margin of 39.9%.
Technology Business Unit is a cost centre responsible for the operations and development of the mobile and fixed network as well as IT management. Network and IT related investments are also generated by TBU. Revenues at TBU increased by 5.2% to HUF 2.7 bn and EBITDA increased by 11.9% to HUF -10.5 bn. CAPEX amounted to HUF 10.5 bn in Q3 2009, mainly driven by the rollout of the fibre optic network and improvements in the cable and mobile broadband networks.
Revenues before intersegment elimination were down by 11.4% to HUF 34.3 bn. The revenue decline was mainly driven by lower wholesale revenues, especially within mobile revenues, reflecting the 15% cut in mobile termination rates since the beginning of this year. EBITDA increased to HUF -3.0 bn driven by savings in the employee-related expenses and the reversal of the HUF 1.2 bn severance provision that more than offset the increase in investigation-related expenses (HUF 1.5 bn in Q3 2009 against HUF 0.5 bn in Q3 2008).
As previously disclosed, in
the course of conducting their audit of Magyar Telekom’s 2005 financial
statements, PwC identified two contracts the nature and business purposes of
which were not readily apparent to them. In February 2006, the Company’s Audit
Committee retained White & Case (the “independent investigators”), as its
independent legal counsel, to conduct an internal investigation into whether
the Company had made payments under those, or other contracts, potentially
prohibited by U.S. laws or regulations, including 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 (“HSFA”) of the
internal investigation.
Based on the documentation
and other evidence obtained by it, White & Case preliminarily concluded
that there was reason to believe four consulting contracts entered into in 2005
were entered into to serve improper objectives, and further found that during
2006 certain employees had destroyed evidence that was relevant to the
investigation. White & Case also 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 internal investigation to cover these additional
contracts and any related or similarly questionable contracts or payments. 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 internal investigation is
continuing into these and other contracts and certain related issues identified
by the independent investigators.
In 2007, the Supreme State
Prosecutor of the Republic of Montenegro informed the Board of Directors of Crnogorski
Telekom, our Montenegrin subsidiary, of her conclusion that the contracts
subject to the internal investigation in Montenegro included no elements of any
type of criminal act for which prosecution would be initiated in Montenegro.
Hungarian authorities also
commenced their own investigations into the Company’s activities in Montenegro.
The Hungarian National Bureau of Investigation (“NBI”) has informed us that it
closed its investigation of the Montenegrin contracts as of May 20, 2008
without identifying any criminal activity.
On March 28, 2009, the NBI
informed the Company that, based on a report received by it, it had begun a
criminal investigation into alleged misappropriation of funds relating to
payments made in connection with the Company's ongoing internal investigation
into certain contracts entered into by members of the Magyar Telekom group and
related matters. On September 21, 2009, the NBI informed the Company that it
had extended the scope of its investigation to examine possible misuse of
personal data of employees in the context of the internal
investigation. The NBI has requested from the Company materials and
information relating to such payments. The Company is cooperating with the
ongoing NBI investigation.
United States authorities
commenced their own investigations concerning the transactions which are the
subject of our internal investigation, to determine whether there have been
violations of U.S. law. The Ministry of Interior of the Republic of Macedonia
has also issued requests to our Macedonian subsidiaries, requesting information
and documents concerning certain of our subsidiaries’ procurement and dividend
payment activities in that country (together with U.S. investigations, and the
ongoing NBI investigation, the “Government investigations”). During 2007, the U.S.
authorities expanded the scope of their investigations to include an inquiry
into our actions taken in connection with the internal investigation and our
public disclosures regarding the internal investigation.
By letter dated February
27, 2009 addressed to counsel to the Audit Committee, the DOJ requested that
the Audit Committee pursue all reasonable avenues of investigation prior to
completing and issuing a final report of the internal investigation, including
investigation into matters recently identified to counsel for the Audit
Committee by the DOJ. The DOJ recognized that a delay in the completion of the
report may result from investigation into these matters. The DOJ also requested
that the Audit Committee refrain from disseminating any such final report until
further notice from the DOJ because of the DOJ's concern that such
dissemination could interfere with the DOJ's investigation. The Company, its
Board of Directors, and its Audit Committee continue to support the internal
investigation and the continuing cooperation with and assistance to the
Governmental investigations, as being in the best interests of the Company and
its shareholders. In its February 27 letter, the DOJ stated that the internal
investigation has been of assistance to the DOJ and that such assistance will
be taken into account in determining the appropriate disposition of this matter
by the DOJ, if any.
According to an extract of
a press conference published on the official web site of the Macedonian
Ministry of Interior on December 10, 2008, the Organized Crime Department of
the Ministry submitted files to the Basic Public Prosecution Office of
Organized Crime and Corruption in Macedonia, with a proposal to bring criminal
charges against four individuals, including three former Magyar Telekom Group
employees. According to that public information, these individuals are alleged
to have committed an act of “abuse of office and authorizations” in their
position in Makedonski Telekom by concluding five consultancy contracts with
Chaptex Holdings Ltd in the period 2005-2006 for which there was allegedly no
intention nor need for any services in return.
We cannot predict when the
internal investigation or the ongoing Government investigations will be
concluded, what the final outcome of those investigations may be, or the
impact, if any, they may have on our financial statements or results of
operations. We cannot predict what impact, if any, these investigations
will have on each other. Government
authorities could seek criminal or civil sanctions, including monetary
penalties, against us or our affiliates, as well as additional changes to our
business practices and compliance programs.
Magyar Telekom incurred HUF
5.1 bn expenses relating to the investigation in the first three quarters of
2009, which are included in other operating expenses of Group Headquarters.
Neither the Audit Committee
nor its counsel has been able to provide sufficient information to the
Company's independent auditors relating to the matters under independent
internal investigation, or concerning the impact, if any, of such issues on the
financial statements of Magyar Telekom. In the absence of such information, the
independent auditors have not been in the position to perform their quarterly
review (in accordance with International Standard on Review Engagements 2410).
In addition, the Audit Committee has indicated that it cannot evaluate the
Company's financial statements for the Third Quarter. If the underlying issues are not resolved,
the publication and timing of the Company's future financial statements could
be affected.
About Magyar Telekom
Magyar Telekom is Hungary's principal provider of telecom services. It provides a full range of telecommunications and infocommunications (ICT) services including fixed line and mobile telephony, data transmission and non-voice as well as IT and systems integration services. The business activities of Magyar Telekom are managed by two business units: Consumer services (the home-related services brand T-Home and the mobile communications brand T-Mobile) and Business services (T-Systems brand). Magyar Telekom is the majority owner of Makedonski Telekom, the leading fixed line and mobile operator in Macedonia and it holds a majority stake in Crnogorski Telekom, the leading telecommunications operator in Montenegro. Magyar Telekom's majority shareholder (59.21%) is MagyarCom Holding GmbH, fully owned by Deutsche Telekom AG.
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
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and we undertake no obligation to update publicly any of them in light of new
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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, 2008
filed with the U.S. Securities and Exchange Commission.