Bundling strategy and retention efforts bearing fruit

Budapest, August 8, 2013 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 second quarter and first half of 2013, in accordance with International Financial Reporting Standards (IFRS).

• Revenues increased by 7.9% in the second quarter of 2013 compared to the same period of 2012, from HUF 145.5 billion to HUF 156.9 billion. Revenue development reflects the significant increase in revenues both from energy services and mobile equipment sales, the growing revenues from SI/IT services and the improving underlying performance of Telekom Hungary.
• EBITDA increased slightly by 0.3%, from HUF 49.6 billion to HUF 49.8 billion, while EBITDA margin was 31.7% compared to 34.1% in the same period last year. The margin decline reflects the increasing contribution of the lower margin retail energy, equipment sale and SI/IT revenues, partially offset by lower operating costs and operating taxes.
• Employee-related expenses increased by HUF 0.5 billionin the second quarter compared to the same period last year primarily driven by the more intense workload with less holidays taken. At the same time, the impact of the average 4% wage increase at Telekom Hungary effective from April this year was offset by the lower headcount.
• Income tax expense increased from HUF 3.1 billion in Q2 2012 to HUF 3.9 billion in Q2 2013. Higher income taxes were the result of higher operating profit and also the recognition of additional deferred tax liabilities related to our Macedonian holding subsidiary, Stonebridge, as its liquidation procedure is expected to be ceased, due to the currently existing unfavourable tax impacts of liquidations in Macedonia.
• Profit attributable to the owners of the parent company (net income) increased from HUF 10.7 billion to HUF 12.2 billion primarily due to lower financial expenses and lower depreciation and amortization expenses driven by the lower fixed asset base. Financial expenses declined from HUF 7.3 billion in Q2 2012 to HUF 6.5 billion in Q2 2013 primarily driven by lower FX losses and lower interest rates that offset the increase in our net debt level. § 
• Net cash generated from operating activities decreased by HUF 22.1 billion year-on-year, from HUF 63.6 billion in H1 2012 to HUF 41.5 billion in H1 2013. The deterioration is driven by the HUF 12.4 billion lower EBITDA year-on-year mainly reflecting the HUF 7.3 billion utility tax expense booked in Q1 2013 coupled with unfavourable movements in working capital. Although working capital was hit by the HUF 20.7 billion settlement charge in connection with the SEC and DOJ investigations in H1 2012, this impact was counterbalanced by a number of items adversely impacting working capital in H1 2013. These are the deferred payment options offered for equipment contracts, lower amount of unpaid special, telecom and utility tax as well as higher outpayments to suppliers. The decline was partially mitigated by the decline in interest payments that was due to the HUF 1.4 billion one-off payment in Q1 2012 in relation to the SEC and DOJ fine and lower interest payments on our loans.
• Excluding the 900 MHz spectrum license fee (paid in Q1 2012 amounting to HUF 10.9 billion), investment in tangible and intangible assets (CAPEX) increased by HUF 11.3 billion in the first half, from HUF 29.3 billion to HUF 40.6 billion. The increase is due principally to the higher investments in relation to the integrated CRM and billing system development as well as the change in the rented IPTV set-top box contracts from operating to financial lease resulting in HUF 7.2 billion increase in CAPEX. The latter, however, was coupled with the same amount of improvement in adjustments to cash purchases thus overall neutral on the cash flow. In H1 2013, Telekom Hungary accounted for HUF 33.9 billion of total CAPEX and T-Systems Hungary HUF 1.0 billion. In Macedonia and Montenegro, CAPEX was HUF 4.4 billion and HUF 1.3 billion, respectively.
• Free cash flow (operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets) deteriorated by HUF 4.1 billion in H1 2013 from HUF 8.0 billion to HUF 3.8 billion as the lower operating cash flow was partly mitigated by the lower cash CAPEX. The latter is the combined impact of slightly higher book capex offset by the significant improvement in adjustments to cash purchases.
• Net debt rose from HUF 324.2 billion at the end of H1 2012 to HUF 342.6 billion at the end of H1 2013. The net debt ratio (net debt to total capital) rose to 41.8% during the quarter, reflecting the dividend payment in May.

Christopher Mattheisen, CEO commented:
“I am very proud of our performance in the second quarter of 2013, as we continue to benefit from sustained growth. In Hungary, besides further strengthening our market position across all key segments, thanks to our retention efforts, we have managed to minimize churn in the high margin fixed voice segment and limit ARPU erosion in the mobile business. We strongly believe that these developments in some of our most important KPIs validate our strategy of bundling various services and equipment with core telecommunication services. These operational improvements are reflected in our financial results: we saw an 8 per cent increase in Group revenues year-on-year thanks to continued strong results in equipment sales, energy services and SI/IT revenues.

Our profitability also reflects improving results for the Hungarian residential business, where both direct margin and EBITDA have increased in the second quarter. This promising trend, coupled with our continued cost discipline, has led to a stable Group EBITDA performance in the second quarter of 2013 compared to a year earlier. 

Market conditions in Macedonia remain challenging, with the aggressive pricing practices of our competitors continuing to put pressure on our revenues and profitability. That being said, we have seen some recent positive developments in this market: despite the competition, we have been successful in stabilizing our mobile voice market share at above 48%, while our Macedonian subsidiary successfully acquired new frequency blocks on 800 MHz and 1800 MHz spectrums for a total of EUR 10.3 million. This is a very important investment in the future, as it will enable us to provide superfast mobile data services through 4G technology to our customers in Macedonia from the end of 2013.

In recent quarters, we have faced EBITDA margin dilution driven by increasing demand for lower margin SI/IT services and a strong take-up of equipment bundles. As these services continue to both boost revenues and support overall profitability, it is a strategy we plan to pursue going forward. Consequently, for the full year, we expect revenues to increase compared to our previous guidance of flat performance. Regarding our EBITDA guidance, we reiterate the 9-12 per cent decline that was announced following the modification in the telecommunication tax at the end of June, while we are still aiming for a CAPEX (excluding any spectrum acquisition costs) of approximately 5 per cent less than last year.”

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, 2012, 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.