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Budapest, May 6, 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 first quarter of 2011, in accordance with International Financial Reporting Standards (IFRS).
| Details of special influences, telecom tax and EBITDA performance (HUF bn) |
Q1 2010 | Q1 2011 |
| Investigation-related costs | 0.5 | 0.4 |
| Severance payments and accruals | 1.0 | 1.5 |
| Telecom tax | 0 | 6.3 |
| Total Special Influence | 1.5 | 8.2 |
| Reported EBITDA | 57.7 | 53.2 |
| Underlying EBITDA | 59.2 | 61.5 |
Christopher Mattheisen, Chairman and CEO commented:
“Our
performance during the first quarter this year reflects the slow macro-economic
recovery we are experiencing. Looking at the Hungarian market, we continue to
see promising signs with slightly higher consumer spending, increased mobile
usage and lower churn both in the fixed and the mobile segment. However, strong
competition and saturated core markets continue to put pressure on our business
performance. Besides our continued focus on TV offerings and bundling, we have
a new strategic initiative in the fixed voice segment. We launched a new flat
fixed voice package at the beginning of this year called “Hoppá”. With this
package all Hungarian fixed line and T-Mobile numbers can be called unlimited
for a fixed monthly tariff. This unique offering in the Hungarian telecom
market has already shown positive results: 15% of fixed customers have already
migrated to the new package and 85% of these customers have signed a 2-year
loyalty contract. Going forward, although in the short term the new package
will cause a dilution in ARPU levels despite the already visible higher usage
levels, in the longer term we expect a positive impact on fixed voice churn
through these loyalty contracts. We have also managed to significantly decrease
the ratio of residential 1Play customers from 63% to 55% in the preceding 12
months.
Revenues
in the first quarter declined by 3.3% while underlying EBITDA was up by 3.8%
compared to an extremely weak first quarter in 2010 when the operational
performance of Magyar Telekom troughed. Although the results were also helped
by real estate sales in Hungary, the savings in employee-related and other
operating expenses clearly had a positive influence on our profitability. Excluding
the real estate sales, underlying EBITDA still increased by 1.5%. Looking
ahead, we reiterate our guidance and project a revenue decline of 3-5% and 4-6%
underlying EBITDA decline for 2011. We intend to cut Capex by approximately 5%
compared to last year’s spending.”
Hungary
Segment
Revenues before inter-segment elimination fell by 3.4% to HUF 101.1 bn and EBITDA increased by 9.5% to HUF 38.3 bn in the first quarter of 2011 compared to the first quarter of 2010. The EBITDA margin grew from 33.4% to 37.9% driven by the lower employee related expenses and other operating expenses which was mainly due to efficiency improvements. These, coupled with lower levels of voice related payments, reflecting the lower traffic volume and the cut in the Hungarian mobile termination rates in December 2010 offset the decline in high margin voice revenues. The EBITDA increase was also driven by real estate sales in the first quarter of 2011 that generated a net profit of HUF 1.4 bn and accounted for within other operating income.Underlying EBITDA increased by 7.9% compared to the extremely weak Q1 2010 which was when the recession peaked. The underlying EBITDA margin was 44.0%.
T-Systems
Segment
Revenues before inter-segment elimination were down by 4.4% to HUF 28.1 bn while EBITDA decreased by 3.9% to HUF 3.9 bn in the first quarter of 2011. The EBITDA margin was 13.7%. Excluding special influences, underlying EBITDA was down by 3.1%, while the margin increased to 17.5%, reflecting the considerable efforts made to improve efficiency in light of the drop in high-margin voice revenues.
Macedonia
In Macedonia, revenues decreased by 6.8% to HUF 17.1 bn in the first quarter of 2011 compared to the same period in 2010, with EBITDA increasing by 9.3%. The depreciation in the Hungarian forint had a slight positive effect on the revenue contribution from international subsidiaries (the Hungarian forint weakened on average by 0.7% compared to the Macedonian Denar in the first quarter of 2011 over 2010). The EBITDA increase was driven by two one-off items booked in Q1 2010: a provision of HUF 0.6 bn relating to a legal case and HUF 0.9 bn of other operating expenses in relation to the implications of the final report on the internal investigation. Stripping these one-off expense items out from the Q1 2010 figures, the underlying EBITDA declined by 6.8%, while underlying EBITDA margin remained flat at 54.2% reflecting the intense competition putting pressure on prices mainly in the mobile segment.
Montenegro
Revenues of the Montenegrin subsidiary decreased slightly by 1.2% to HUF 7.4 bn in the first quarter of 2011 compared to the same period in 2010, with EBITDA increasing by 3.4%. The FX changes (the Hungarian forint weakened on average by 1.0% against the Euro in the first quarter of 2011 compared to the same quarter in 2010) had a slight positive impact on the revenue contribution of our Montenegrin subsidiary. The increase in EBITDA was driven by cost cutting achievements. Underlying EBITDA increased by 3.4% and the underlying EBITDA margin improved from 36.2% to 37.9%.
Measurement
differences
Please note that Group EBITDA is HUF 1.8
bn higher than the sum of segment EBITDAs in Q1 2010 due to two major items
which were included in Group results in 2009, but have only been reflected in
segment results in Q1 2010. As segment results are prepared earlier than Group
results, differences occur at times when certain items are booked after the
segment results have been prepared. These are then immediately reflected in
Group results, but are not included in segment results until the next financial
period.
Due to the implications of the final
report on the internal investigation, other operating expenses in the amount of
HUF 0.9 bn were booked in relation to the Macedonian subsidiary. While
2001-2006 results at Group level were restated to reflect this expense, at
segment level it was booked only in Q1 2010. Consequently, Group level expenses
in Q1 2010 do not include this expense. Secondly, a write-off on receivables in
the amount of HUF 0.8 bn was included at Group level in Q4 2009, while at the
Hungary segment (previously HQ) it was booked in Q1 2010.
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. In addition, the Montenegrin Supreme State Prosecutor is
also investigating the activities of
the Company that were the subject of the internal investigation and has
requested information from the Company in relation to the relevant contracts.
These governmental investigations are continuing, and the Company continues to
cooperate with these investigations.
As 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 March 31, 2011 with
respect to the investigations.
Magyar Telekom incurred HUF 0.4
bn expenses relating to the investigations in the first quarter of 2011, which
are included in other operating expenses of the Hungary segment.
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 Hungarian business activities of Magyar Telekom are managed by two segments: Hungary (the home-related services brand T-Home and the mobile communications brand T-Mobile) and T-Systems (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, 2010 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.