Budapest, February 24, 2011 00:00
Magyar Telekom (Reuters: MTEL.BU and Bloomberg: MTELEKOM HB), the leading Hungarian telecommunications service provider, today reported its consolidated financial results for the full year of 2010, in accordance with International Financial Reporting Standards (IFRS).
| Details of special influences, telecom tax and EBITDA performance (HUF bn) |
Q4 2009 | FY 2009 | Q4 2010 | FY 2010 |
| Investigation-related costs | 1.3 | 6.4 | 0.3 | 2.3 |
| Severance payments and accruals, provision reversals | 8.3 | 7.4 | 4.0 | 6.1 |
| Total Special Influence | 9.6 | 13.8 | 4.3 | 8.4 |
| Telecom tax | 0 | 0 | 27.0 | 27.0 |
| EBITDA | 46.8 | 249.1 | 26.0 | 213.0 |
| Underlying EBITDA, also excluding telecom tax | 56.4 | 262.8 | 57.3 | 248.3 |
Christopher Mattheisen, Chairman and CEO commented:
“We
are pleased to report that our revenue and underlying EBITDA, also excluding
telecom tax, registered more moderate declines than the previously guided 6-8%
and 7-9% drop for 2010. Revenues were down by 5.3% and EBITDA, defined above,
declined by 5.5%, which resulted in an almost flat EBITDA margin thanks to the
strong focus on cost efficiency. In line with our target, our CAPEX decreased
by 10% year-on-year as a result of savings of HUF 10 bn. Despite a telecom tax
advance payment of HUF 28 bn, our free cash flow declined by only HUF 5 bn.
These results also support our view that the Hungarian economy has started to
recover and we continue to see positive signs in customer spending.
The
promising trends can mostly be observed in the Hungarian residential market:
mobile usage clearly increased in 2010 and churn due to non-payment
significantly declined in the last quarters. The number of mobile subscribers
returned to growth in 2010 after a slight drop in 2009. The growth in the
number of TV customers and mobile internet subscribers remains unbroken. In
addition, we successfully implemented further cost cutting measures, notably in
employee-related and other operating expenses. The stronger than expected
results are, however, also driven by the lower than expected impact of
government austerity measures in 2010. As indicated earlier, rather than taking
one big hit in 2010, the impact will be spread over several years.
The
above trends and impacts make us believe that our revenues will decline by 3-5%
and the EBITDA by 4-6% this year, excluding special influences and the telecom
tax. In addition, we are aiming for a further around 5% reduction in CAPEX
spending.”
Group
Consumer Services Business Unit (CBU)
Revenues before inter-segment elimination fell by 1.3% to HUF 80.8 bn and EBITDA increased by 1.4% to HUF 42.3 bn in the fourth quarter of 2010 compared to the last quarter of 2009. The EBITDA margin grew from 51.0% to 52.4% driven by the lower employee related expenses which was mainly thanks to efficiency improvements and only partly due to lower severance-related expenses. Underlying EBITDA declined by 0.8% and the underlying EBITDA margin was 53.2%.
Business Services Business Unit (BBU)
Revenues before inter-segment elimination were down by 10.0% to HUF 42.7 bn while EBITDA decreased by 11.3% to HUF 17.6 bn in the fourth quarter of 2010. The EBITDA margin was 41.3%. Excluding special influences, underlying EBITDA was down by 13.6% and the margin declined to 43.2%, reflecting the strong drop in high-margin voice revenues.
Macedonia
In Macedonia, revenues decreased by 0.8% to HUF 18.8 bn in the fourth quarter of 2010 compared to the same period in 2009, with EBITDA increasing by 19.7%. Excluding the FX impact (the Hungarian forint weakened on average by 2.0% compared to the Macedonian Denar in the fourth quarter), revenues were down by 2.8% and EBITDA was up by 17.3%. Consequently, the EBITDA margin improved from 39.8% to 48.0% in the fourth quarter compared to the corresponding period of last year. This reflected the cost saving measures and the lower provisions in the fourth quarter of 2010.
Montenegro
Revenues of the Montenegrin subsidiary increased slightly by 0.8% to HUF 8.1 bn in the fourth quarter of 2010 compared to the same period in 2009, with EBITDA declining by 18.8%. Excluding the FX impact (the Hungarian forint weakened on average by 2.6% against the Euro in the fourth quarter of 2010 compared to the same quarter in 2009), revenues declined by 1.7%, while EBITDA was down by 20.8%. The strong EBITDA drop was primarily driven by higher employee-related expenses due to an unfavorable Supreme Court decision regarding pension contributions, and due to higher other operating expenses related to higher provisions for receivables, higher maintenance and marketing expenses. The EBITDA margin fell from 39.8% to 32.1%.
Technology Business Unit
Revenues at the Technology Business Unit declined by 12.9% to HUF 2.2 bn while the EBITDA loss was HUF -12.0 bn. CAPEX amounted to HUF 17.3 bn in the fourth quarter of 2010.
Group Headquarters
Revenues before inter-segment elimination were down by 9.9% to HUF 31.2 bn. The revenue decline was mainly driven by lower wholesale voice revenues, especially within mobile revenues, reflecting two 16% cuts in mobile termination fees in January and December 2010, respectively. EBITDA loss came to HUF -33.5 bn as HUF 26.2bn of telecom tax (of the total of HUF 27.0 bn) was accounted at the Headquarters. Excluding the telecom tax, EBITDA improved to HUF -7.3 bn mainly as a result of lower severance related payments and lower investigation costs in Q4 2010 compared to the same period of 2009.
Investigations into
certain consultancy contracts
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.
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. In addition,
the Montenegrin Supreme State Prosecutor is now also investigating the activities of the Company’s Montenegrin
subsidiary that were the subject of the internal investigation and has
requested information from the Company’s Montenegrin subsidiary in relation to
the relevant contracts. These governmental investigations are continuing, and
the Company continues to cooperate with those investigations.
A previously disclosed, the Company, through its
external legal counsel, is 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 December 31, 2010 with respect to the investigations.
Magyar
Telekom incurred HUF 2.3 bn expenses relating to the investigations in 2010, which are included in other operating expenses
of Group Headquarters.
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.