Significant achievements in challenging environment, on track to meet full year revenue and EBITDA guidance

Budapest, November 8, 2012 07:00

Magyar Telekom (Reuters: MTEL.BU and Bloomberg: MTELEKOM HB), the leading Hungarian telecommunications service provider, today reported its consolidated financial results for the third quarter of 2012, in accordance with International Financial Reporting Standards (IFRS).

• Revenues decreased by 1.3% in the third quarter of 2012 compared to the same period of 2011, from HUF 152.1 bn to HUF 150.1 bn. The decline in fixed and mobile voice revenues coupled with lower SI/IT revenues could not be offset by the significant increase in revenues from energy services and growing TV, mobile internet and mobile equipment sales revenues generated by higher smartphone sales.
• EBITDA increased by 9.7%, from HUF 51.6 bn to HUF 56.6 bn , owing mainly to the HUF 5.7 bn increase in other operating income. This was mainly driven by a real estate transaction in Macedonia, where four old buildings were replaced with a new one in the third quarter of 2012, resulting in a gain of HUF 3.7 bn. The sale of Pro-M during the quarter also contributed to the increase. These, coupled with strict cost control measures, offset the negative impact of the new telecom tax which was introduced in July 2012. EBITDA margin was 37.7% in the third quarter of 2012. Underlying third quarter EBITDA, excluding investigation-related costs and provisions, severance expenses and the special and new telecom taxes, increased by 5.4%, from HUF 64.0 bn to HUF 67.4 bn , year-on-year. Underlying EBITDA margin was 44.9% in Q3 2012 compared to 42.0% in the same period last year.
• Employee-related expenses increased by HUF 0.9 bn in the third quarter compared to the same period last year, as the previously temporary labour force related to call center customer care and customer experience services became permanent employees of Magyar Telekom as of April 2012. This led to anincrease of around 1,700 in the Group headcount.
• On May 18, 2012 the Parliament of Hungary adopted an act imposing a telecommunication tax on service providers for fixed and mobile voice and mobile SMS/MMS services , effective from July 1, 2012 for an indefinite period of time. The tax imposed on fixed and mobile usage amounts to HUF 2 per minute and HUF 2 per SMS/MMS which resulted in a tax liability of HUF 4.4 bn in Q3 2012 for Magyar Telekom Group, accounted as other operating expenses. The tax payment in Q3 2012 amounted to HUF 1.5 bn, as these payments are due two months after the period they relate to.
• Net financial expenses increased from HUF 4.2 bn to HUF 5.2 bn , as interest expenses on the loan portfolio increased, reflecting higher average debt levels and rise in interest rates. In addition, the positive impact of the forint strengthening in Q3 2012 was offset by the unfavorable movements of the HUF and EUR yields, resulting in higher fair valuation losses on our derivatives.
• Income tax expense declined by 12.7%from HUF 6.7 bn in Q3 2011 to HUF 5.9 bn in Q3 2012 , despite a higher level of profit before tax. In Q3 2011, the effective tax rate was 28.7% as the provision recognized in Q3 2011 in connection with the U.S. Securities and Exchange Commission (the “SEC”) and the U.S. Department of Justice (the “DOJ”) fine was not considered tax deductible. In Q3 2012, the main driver behind the 23.6% effective tax rate was the high effective tax rate on the Pro-M transaction, which was a result of differences between HAR and IFRS accounting treatment of the transaction. In addition, the local business tax paid by the Group are calculated based on statutory gross margin, thus the increase in the indirect cost elements due to the new telecom tax resulted in a higher effective tax rate compared to the previous quarters in 2012.
• Profit attributable to owners of the parent company ( net income ) increased from HUF 13.3 bn to HUF 14.8 bn , resulting from the higher EBITDA.
• Net cash generated from operating activities decreased by HUF 28.8 bn, from HUF 134.2 bn to HUF 105.4 bn in the first nine months of 2012 compared to the same period last year.The decline is mainly driven by changes in working capital as the Company paid HUF 22.1 bn in the first nine months of 2012 in connection with the settlement of the SEC and DOJ investigations. The decline was partly offset by working capital improvement relating to the Pro-M transaction. Higher interest payments (due to the higher debt level and somewhat higher interest rate) and income tax paid also contributed to the lower net cash generated from operating activities.
• Investment in tangible and intangible assets (CAPEX) increased by HUF 27.0 bn, from HUF 43.9 bn to HUF 70.9 bn in the first nine months of 2012 compared to the same period last year, due principally to the 900 MHz spectrum license fee (amounting to HUF 10.9 bn), higher spending for the 3G/LTE rollout in Hungary and higher investments in Macedonia mainly related to the real estate exchange transaction. The book CAPEX accounted for the new building is HUF 10.7 bn; however, the trade-in value of the old buildings is HUF 6.9 bn and the difference is to be paid in six annual instalments. In the first nine months of 2012, Telekom Hungary accounted for HUF 46.1 bn of total CAPEX and T-Systems Hungary HUF 2.9 bn. In Macedonia and Montenegro, CAPEX was HUF 18.5 bn and HUF 2.8 bn, respectively, in the first nine months of 2012.
• Free cash flow (operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets) declined by HUF 41.0 bn in the first nine months year-on-year, from HUF 85.7 bn to HUF 44.8 bn . In addition to lower operating cash flow and higher CAPEX, the real estate sales in Q1 2011also contributed to the decline. This was partly offset by the proceeds from the sale of Pro-M in 2012.
• Net debt increased from HUF 272.4 bn at the end of September 2011 to HUF 296.8 bn at the end of September 2012. The net debt ratio (net debt to total capital) was 36.4% at the end of September 2012.

Christopher Mattheisen, Chairman and CEO commented:
“In the third quarter, Magyar Telekom faced increasing recessionary pressures which were reflected in declining household consumption and reduced business spending. Despite these headwinds, we have made significant progress in our operational activities as demonstrated by the growth of our fixed and mobile broadband, TV and mobile voice customer bases, and the fact that we have maintained our market position in all segments. These are significant achievements given the current challenging market environment.
As well as focusing on retention in our fixed voice business and promoting our interactive TV service through all our platforms, we continued to exploit the opportunities in retail gas and electricity services. Since the nationwide launch of our energy service in April, an encouraging increase in customer numbers has supported this heightened market demand. In addition to this, our ongoing focus on smartphone marketing activities resulted in further sales and penetration growth in our customer base. At the end of September, we further expanded our smartphone portfolio and were the first operator in Hungary to introduce the new iPhone 5.
Third quarter underlying EBITDA increased by 5.4% compared to the same period last year, with a strong EBITDA margin of 44.9%. In Macedonia, we completed an efficiency review of our real estate assets, selling four of our existing buildings and purchasing a single modern one, and the sale of our Pro-M subsidiary also contributed to better EBITDA performance. Moreover, we have begun to realise the benefits of our widespread and deep cost-cutting measures implemented in the second half of 2012, which have further contributed to the good results.
I would also like to highlight the fact that we have reached an agreement with the trade unions on wage development and headcount reduction at our parent company for 2013. Based on these measures, our goal is to reduce Total Workforce Management (TWM) related costs* by HUF 5.8 bn in 2013 compared to 2011, representing a 5.6% decline over the two year period.
Looking forward to the rest of the year, although we expect market conditions to remain challenging, we maintain our revenue target of flat to -2% and an underlying EBITDA target of a 4-6% decline. Due to the real estate transaction in Macedonia, we now expect CAPEX to be approximately HUF 90 bn, excluding spectrum acquisitions in 2012, compared to our previous expectation for flat CAPEX year-on-year. However, as we are required to pay only the value difference between the new and old Macedonian buildings, and in six yearly instalments, the impact on this year’s cash flow is expected to be insignificant.”  

* excluding severance and capitalized employee expenses

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 financial statements for the year ended December 31, 2011, available on our website at https://www.telekom.huwhich have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union. 

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.