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Budapest, November 10, 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 nine months of 2011, in accordance with International Financial Reporting Standards (IFRS).
Details of special influences, telecom tax and EBITDA performance (HUF bn) |
Q3 2010 | 9M 2010 | Q3 2011 | 9M 2011 |
Investigation-related costs and provisions | 0.7 | 2.0 | 5.7 | 16.7 |
Severance expenses | 0.6 | 2.1 | 0.4 | 2.1 |
Telecom tax | 0 | 0 | 6.3 | 19.0 |
Total Special Influence | 1.3 | 4.1 | 12.4 | 37.9 |
Reported EBITDA | 67.4 | 186.9 | 51.6 | 149.4 |
Underlying EBITDA | 68.7 | 191.1 | 64.0 | 187.3 |
Details of investigation expenses (HUF bn) | Q3 2010 | 9M 2010 | Q3 2011 | 9M 2011 |
Legal Costs | 0.7 | 2.0 | 0.2 | 0.9 |
Provisions within Other operating expenses | 5.5 | 15.8 | ||
Provisions within Net financial results | 2.7 | 3.8 | ||
Total provision | 8.2 | 19.6 |
Christopher Mattheisen, Chairman and CEO commented:
“The
third quarter results highlight several positive trends in the fixed line,
mobile and IT businesses. In the fixed line segment, we have seen the benefits
of our flat rate Hoppá package, introduced at the start of this year, coming
through with fixed line churn reduced to 6% at the end of September compared to
9% one year ago. Our increased promotion of bundled packages as well as the
energy offers also contributed positively to the results. In the residential
mobile segment, we have continued to increase our voice market share and saw a
sharp increase in the number of mobile broadband subscriptions. The proportion of sales now made up by smartphones
has reached almost 70% in the postpaid segment and while we expect this to
contribute positively to revenue as customers increase data usage, we have however,
seen a corresponding rise in our subsidy costs. In the SI/IT segment, we were able to reverse some
of the negative revenue trends seen in previous quarters thanks to some infrastructure
projects at KFKI in the corporate segment. Trends in the public sector remain
weak, and we have seen no positive uplift in IT spending. Despite the challenging
economic climate, we have been able to slow third quarter revenue deterioration
to 1.7% (the average decline for the first 6 months of the year was 3.9%). However,
we have been unable to prevent a fall in underlying EBITDA due to a change in the
revenue mix (increased contribution of lower margin SI/IT revenues) and the
increased level of handset subsidies. Despite this fall, underlying EBITDA margins
for the quarter remained at a healthy level of around 42%.
For
the full year, we remain cautious due to the deteriorating economic indicators,
while the competitive environment is also expected to strengthen as we approach
the year end. We welcome the introduction of the new iPhone 4S and several
tablets in our stores, although of course we expect there to be a corresponding
rise in the level of handset subsidies for the fourth quarter. Despite this, we
have maintained our guidance for revenue decline of 3-5%, a 4% decline in underlying
EBITDA and CAPEX reduction of approximately 5% for 2011.”
Revenues before inter-segment elimination fell by 2.6% to HUF 106.3 bn, EBITDA was down 20.0% to HUF 33.4 bn and EBITDA margin was 31.4% in the third quarter of 2011. Excluding special influences, which mainly includes the special telecom tax and the investigation-related costs and provisions, underlying EBITDA was down by 7.5% to HUF 44.7 bn in the third quarter of 2011 compared to the third quarter of 2010. The underlying EBITDA margin declined from 44.3% to 42.1% driven by the reduction in high-margin voice revenues coupled with increased handset subsidies.
Revenues before inter-segment elimination were up 16.1% to HUF 30.8 bn. EBITDA was up 62.9% to HUF 4.3 bn in the third quarter of 2011 and the EBITDA margin was 13.8%. Excluding special influences, which mainly includes the special telecom tax, underlying EBITDA increased by 35.7% to HUF 5.3 bn. The underlying EBITDA margin of 17.3%, up from 14.8% in the third quarter of 2010, reflected efforts to improve efficiency in light of the drop in high-margin voice revenues while last year’s results were also negatively impacted by the Governmental measures announced in August 2010.
In Macedonia, revenues decreased by 12.4% to HUF 18.2 bn in the third quarter of 2011 compared to the same period in 2010, with EBITDA down 13.4%. The appreciation of the Hungarian forint had a negative effect on revenue contribution (on average, the Hungarian forint strengthened by 3.9% against the Macedonian denar in the third quarter of 2011 compared with 2010). The EBITDA decline is due to the intense competition within the mobile market, resulting in significant pricing pressure and increasing level of handset subsidies; both these factors could not be offset by a fall in other operating expenses.
Revenues of the Montenegrin subsidiary were down by 4.7% to HUF 9.1 bn in the third quarter of 2011, however the decline was mainly caused by unfavorable FX changes (on average, the Hungarian forint strengthened by 3.9% against the euro in the third quarter of 2011 compared to the same quarter in 2010). EBITDA declined by 11.3% to HUF 3.7 bn and the EBITDA margin deteriorated from 43.1% to 40.1% mostly due to higher handset subsidies, higher marketing and maintenance costs.
Investigations into
certain consultancy contracts
As previously disclosed, the
Company’s Audit Committee conducted an internal investigation regarding certain
contracts relating to the activities of the Company and/or its affiliates in
Montenegro and Macedonia that totaled more than EUR 31 million. In particular,
the internal investigation examined whether the Company and/or its Montenegrin
and Macedonian affiliates had made payments prohibited by U.S. laws or
regulations, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). The
Company has previously disclosed the results of the internal investigation. For
further information regarding the internal investigation, see the Company’s
annual report for the year ended December 31, 2010.
The United States Department
of Justice (the “DOJ”), the United States Securities and Exchange Commission
(the “SEC”) and the Ministry of Interior of the Republic of Macedonia commenced
investigations into certain of the 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’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 these investigations.
On June 24, 2011, Magyar
Telekom announced that its Board of Directors had approved an agreement in
principle with the staff of the SEC to resolve the SEC’s investigation relating
to the Company through a settlement. Pursuant to the agreement in principle,
the Company, without admitting or denying the allegations against it, would
consent to a U.S.
court order permanently enjoining it from any future FCPA violations and pay
disgorgement and a conditional civil penalty. The agreement in principle
reflects the SEC staff’s consideration of the Company’s self-reporting,
remediation and cooperation with the SEC’s investigation. The agreement in
principle is not a final settlement of the SEC’s investigation. While the
Company’s Board of Directors has approved the terms of a final settlement, the
final settlement remains subject to approval by the SEC and a U.S. District
Court.
The Company continues to
engage in discussions with the DOJ regarding the possibility of resolving the
DOJ’s investigation of the Company through a negotiated settlement. The Company
may be unable to reach a negotiated settlement with the DOJ. Any resolution of
the DOJ investigation could result in criminal sanctions, including monetary
penalties, 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 program. The Company cannot predict
whether or when a resolution of the DOJ investigation will occur, or the terms,
conditions, or other parameters of any such resolution.
In light of the ongoing
negotiations with the DOJ, the Company has increased the amount of the
provision recognized in connection with these investigations to HUF 19.6 bn
(USD 90.8 million) in the third quarter of 2011. However, the amount of any
payment obligation upon final settlement or other resolution of these
investigations may differ from the amount of the provision.
In addition to the
provision, Magyar Telekom incurred HUF 0.9 bn expenses relating to the investigations
in the first three quarters of 2011, which are included in other operating
expenses of the Telekom 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: Telekom Hungary (the home-related services brand T-Home and the mobile communications brand T-Mobile) and T-Systems Hungary (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.