Budapest, August 5, 2010 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 half of 2010, in accordance with International Financial Reporting Standards (IFRS).
Highlights:
Christopher Mattheisen, Chairman and CEO commented:
“During the second
quarter, the difficult operational environment continued to put pressure on our
performance. Nevertheless, we continued to execute our strategy aimed at
positioning Magyar Telekom as the leading integrated operator in Hungary.
We introduced our first quadruple-play packages to the residential segment,
which were well received by customers. In addition, we successfully concluded
two acquisitions, of a cable and an IT company, in line with our expansion
strategy. Thanks to this disciplined approach in executing our strategy, our
market shares on the different markets remained unchanged and in some cases even
increased further. We strengthened our market leader positions on both mobile
voice and mobile internet markets, while we were the only major TV provider that
managed to increase its market share in the recent difficult period and that
brought us closer to our goal of becoming the market leader on the TV market as
well.
Furthermore, the 1
st
of July marked the implementation of the change in the Company’s management
structure. We believe that this structural change will be beneficial in further
enhancing our operating efficiency and in supporting the Company’s transition
from a traditional fixed and mobile service provider to a more innovative
communications, entertainment and information services company. In addition, this
organizational change allows us to react with greater speed to changes in the
market place and the wider economic environment, thus protecting our leading
positions in the market.
Based on a Government resolution, the new
Government plans to deliver HUF 20 billion of savings related to their 2010
budget for national asset management also including IT and telecommunication services.
As a result of the requested price allowances, we expect a potential negative
impact of around HUF 5-7 billion on both our revenue and EBITDA lines. Although
we expect the economic indicators which drive demand
for our services to start to show signs of recovery towards the end of the year,
the above-mentioned government initiative will cause our full year revenue
and EBITDA to decline more than previously forecasted. Consequently, we now
project a 6-8% revenue and 7-9% underlying EBITDA decline for 2010.
Therefore, to
reflect our strong focus on free cash flow generation, we have decided to cut
our CAPEX target for this year. Instead of the originally planned 5% decline,
we now intend to reduce CAPEX by approximately 10% compared to last year’s
spending
[1]
.”
1
The
comparable figures for 2009 are: revenues of HUF 644.0 bn, underlying
EBITDA of HUF 262.8 bn and CAPEX of HUF 101.9 bn.
Revenues before inter-segment elimination
fell by 2.9% to HUF 78.2 bn and EBITDA increased by 0.7% to HUF 45.9 bn in the second quarter of 2010
compared to the same period of 2009. EBITDA margin increased to 58.6%, as our
disciplined efficiency improvements more than offset the negative revenue
impact.
Revenues before inter-segment elimination
were down by 4.7% to HUF 39.7 bn
while EBITDA decreased by 5.2% to HUF
18.7 bn in the second quarter of 2010. The EBITDA margin was held broadly flat
at 47.2%, as the higher portion of revenues coming from the lower margin SI/IT
services was largely offset by our cost cutting measures.
In Macedonia, revenues decreased by 8.7%
to 19.6 bn in the second quarter of 2010 compared to the same period in 2009, with
EBITDA declining by 10.0%. Excluding the FX impact (the Hungarian forint strengthened
on average by 5.1% compared to the Macedonian Denar in the second quarter),
revenues were down by 3.7% and EBITDA declined by 5.1%. The EBITDA margin
declined to 56.9% compared to 57.7% in the corresponding period of last year,
reflecting the pressure that intensifying competition is putting on prices,
both in the fixed line and mobile segments.
Revenues of the Montenegrin
subsidiary were down by 10.3% to HUF
7.8 bn in the second quarter of 2010 compared to the same period in 2009, with
EBITDA declining by 2.9%. However, excluding the FX impact (the Hungarian
forint strengthened on average by 4.9% against the Euro in the second quarter
of 2010 against the same quarter in 2009), revenues declined by 5.7%, while
EBITDA was up by 2.1%. The increase in EBITDA was primarily driven by the tough
cost efficiency measures that were implemented, particularly with respect to
the recovery of receivables, marketing expenses and technological support costs.
The EBITDA margin improved from 33.8% to 36.6%. At the same time, in Q2 2010 it
was determined that a number of prepaid mobile fill-up vouchers had been
misappropriated at Crnogorski Telekom. Accordingly, we reversed previously
recognized revenues of EUR 0.8 million and recognized a provision of EUR 0.4
million in relation to VAT and other costs associated with the misappropriated
vouchers, resulting in a negative EBITDA impact totaling EUR 1.2 million.
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 this Business Unit. Revenues at the Technology Business Unit declined
by 22.3% to HUF 2.1 bn while the EBITDA
loss narrowed by 4.4% to HUF -10.8
bn. CAPEX amounted to HUF 9.9 bn
in the second quarter of 2010.
Revenues
before inter-segment elimination were down by 10.8% to HUF
29.7 bn. The revenue decline was mainly driven by lower wholesale revenues,
especially within mobile revenues, reflecting the 16% cut in mobile termination
rates since the beginning of 2010. EBITDA loss widened to HUF -5.5 bn, as the decline in
revenues and increased employee-related expenses could only be partly offset by
the lower level of voice-related payments and other operating expenses.
In the course of conducting their audit
of the Company’s 2005 financial statements, PricewaterhouseCoopers, the
Company’s auditors, 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, 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
the U.S. Foreign Corrupt Practices Act (“FCPA”) or internal Company policy. The
Company’s Audit Committee also informed the United States Department of Justice
(“DOJ”), the United States
Securities and Exchange Commission (“SEC”) and the Hungarian Financial
Supervisory Authority of the internal investigation.
Based on the documentation and other
evidence obtained by it, White & Case preliminarily concluded that there
was reason to believe that 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 warranted 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.
For further information about the
internal and governmental investigations, please refer to the Company’s
quarterly reports for the first, second and third quarters of 2009 and the
first quarter of 2010 furnished under cover of Form 6-K and the Company’s
annual report on Form 20-F for the year ended December 31, 2009.
On December 2, 2009,
the Audit Committee provided the Company’s Board of Directors with a “Report of
Investigation to the Audit Committee of Magyar Telekom Plc.” dated November 30,
2009 (the “Final Report”). The Audit Committee indicated that it considers
that, with the delivery of the Final Report based on currently available facts,
White & Case has completed its independent internal investigation.
The Final Report includes the following
findings and conclusions, based upon the evidence available to the Audit
Committee and its counsel:
• The
information obtained by the Audit Committee and its counsel in the course of
the investigation “demonstrates intentional misconduct and a lack of commitment
to compliance at the most senior levels of Magyar Telekom, TCG, and Makedonski
Telekom during the period under investigation.”
• As previously
disclosed, with respect to Montenegrin contracts, there is “insufficient
evidence to establish that the approximately EUR 7 million in expenditures made
pursuant to four consultancy contracts ... were made for legitimate business
purposes”, and there is “affirmative evidence that these expenditures served
improper purposes.” These contracts were not appropriately recorded in the
books and records of the Company and its relevant subsidiaries. As previously
disclosed, the Company has already reclassified, in the Company’s financial
statements, the accounting treatment relating to certain of these contracts to
more accurately account for these expenditures.
• As previously
disclosed, there is evidence that certain former employees intentionally
destroyed documents relating to activities undertaken in Macedonia by the Company and its
affiliates.
• Between 2000
and 2006 a
small group of former senior executives at the Company and the Company’s
Macedonian affiliates, authorized the expenditure of approximately EUR 24
million through over twenty suspect consultancy, lobbying, and other contracts
(including certain contracts between the Company and its subsidiaries on one
hand, and affiliates of a Cyprus-based consulting company on the other hand).
The Final Report concludes that “the available evidence does not establish that
the contracts under which these expenditures were made were legitimate.”
• “The evidence
shows that, contrary to their terms, a number of these contracts were
undertaken to obtain specific regulatory and other benefits from the government
of Macedonia. The Companies generally received the benefits sought and then
made expenditures under one or more of the suspect contracts. There is evidence
that the remaining contracts were also illegitimate and created a pool of funds
available for purposes other than those stated on the face of the agreements.”
• In entering
into these contracts and approving expenditures under them, the former senior
executives knowingly caused, structured, or approved transactions that shared
most or all of the following characteristics:
• intentional circumvention of internal controls; • false and misleading Company documents and records;
• lack of due diligence concerning, and failure to monitor performance
of, contractors and agents in circumstances carrying a high risk of corruption;
• lack of evidence of performance; and
• expenditures that were not for the purposes stated in the contracts
under which they were made, but rather were intended to obtain benefits for the
Companies that could only be conferred by government action.
The Final Report states that “the
Investigation did not uncover evidence showing receipt of payments by any
Macedonian government officials or political party officials.” However, the
Audit Committee’s counsel did not have access to evidence that would allow it
to identify the ultimate beneficiaries of these expenditures.
Nothing in the Final Report implicates
any current senior executive or Board member of the Company in connection with
any wrongdoing.
As previously disclosed, the Company has
taken remedial measures to address issues previously identified by the
independent investigation. These measures included steps designed to revise and
enhance the Company’s internal controls as well as the establishment of the
Corporate Compliance Program.
Due to these measures, no modifications
to the Corporate Compliance Program were viewed as necessary in response to the
Final Report. This conclusion has been discussed with the Audit Committee and
the Audit Committee has not made recommendations either relating to the
Company’s compliance program or internal controls.
The Company is continuing to assess the
nature and scope of potential legal remedies available to the Company against
individuals or entities that may have caused harm to the Company.
As previously announced, the DOJ, the SEC
and the Ministry of Interior of the Republic
of Macedonia have
commenced investigations into certain of the Company’s activities that were the
subject of the internal investigation. Further, in relation to certain activities that were the subject of the
internal investigation, the Hungarian Central Investigating Chief Prosecutor’s
Office has commenced a criminal investigation into alleged corruption with the
intention of violating obligations in international relations and other alleged
criminal offenses. Also, as previously announced, the Hungarian National Bureau
of Investigation (“NBI”) has begun a criminal investigation into alleged
misappropriation of funds relating to payments made in connection with the
Company’s ongoing internal investigation and the possible misuse of personal
data of employees in the context of the internal investigation. These
governmental investigations are continuing, and the Company continues to
cooperate with those investigations.
The Company, through its external legal
counsel, has recently engaged in discussions with the DOJ and the SEC regarding
the possibility of resolving their respective investigations as to the Company
through negotiated settlements. The Company has not reached any agreement
with either the DOJ or the SEC regarding resolution of their respective
investigations, and discussions with both agencies are continuing. We may be
unable to reach a negotiated settlement with either agency. Any resolution of the investigations could
result in criminal or civil sanctions, including monetary penalties and/or
disgorgement, against the Company or its affiliates, which could have a
material effect on the Company’s financial position, results of operations or
cash flows, as well as require additional changes to its business practices and
compliance programs. The Company cannot predict or estimate whether or
when a resolution of the DOJ or SEC investigations will occur, or the terms,
conditions, or other parameters of any such resolution, including the size of
any monetary penalties or disgorgement, the final outcome of these
investigations, or any impact such resolution may have on its financial statements
or results of operations. Consequently,
the Company has not made any provisions in its financial statements as of June
30, 2010 with respect to the investigations.
Magyar Telekom incurred HUF
1.4 bn expenses relating to the investigations in the first half of 2010, which
are included in other operating expenses of Group Headquarters.
Magyar Telekom recently
became aware of misstatements at T-Mobile Macedonia relating to the recognition
of certain deferred (prepaid) revenues for the first and second quarters of
2010, the years ended December 31, 2007, 2008 and 2009, and periods prior to
2007. Based on the results of the internal review to date, in light of the
known amount of the misstatements and the lack of any indication that senior
Magyar Telekom executives directed or knew of the misstatements, the Company
has reached the conclusion that the misstatements were immaterial to the
Company’s previously reported consolidated financial statements and are
immaterial to the Company’s current consolidated financial statements and to
its prior assessment that internal controls over financial reporting were
effective. The Company has adjusted the
remaining balance sheet misstatement in the current period.
The Company has extended its
internal review to other accounts in relation to T-Mobile Macedonia. The Company has informed its Audit Committee,
its independent external auditor, the DOJ and the SEC of the commencement of
the internal review relating to T-Mobile Macedonia. We cannot predict when the
internal review will be concluded, what the final outcome of the review will
be, or the further impact, if any, the review may have on our previously issued
or future financial statements or results of operations and on our prior
assessment that internal controls over financial reporting were effective.
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
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, 2009
filed with the U.S. Securities and Exchange Commission.
In addition to
figures prepared in accordance with IFRS, Magyar Telekom also presents non-GAAP
financial performance measures, including, among others, EBITDA, EBITDA margin,
underlying EBITDA, underlying EBITDA margin and net debt. These non-GAAP
measures should be considered in addition to, but not as a substitute for, the
information prepared in accordance with IFRS. Non-GAAP financial performance
measures are not subject to IFRS or any other generally accepted accounting
principles. Other companies may define these terms in different ways. For further
information relevant to the interpretation of these terms, please refer to the
chapter “Reconciliation of pro forma figures”, which is posted on Magyar
Telekom’s Investor Relations webpage at www.telekom.hu/investor_relations.
First half 2010 results of Magyar Telekom
(PDF, 289.9 kB)
Financial and operating statistics
(XLS, 130.5 kB)
Reconciliation of pro forma figures
(XLS, 57 kB)
Presentation on second quarter 2010 results
(PDF, 220 kB)
Transcript of the Q2 2010 Results Conference Call
(PDF, 57.5 kB)