Investor News

Budapest, November 6, 2014 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 third quarter and first nine months of 2014, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Revenues declined moderately in the third quarter of 2014 compared to the same period of 2013, from HUF 158.3 billion to HUF 157.5 billion. The decline in voice and SI/IT revenues was mitigated by a combination of increased mobile internet and TV revenues and higher mobile equipment sales.
• Gross margin declined by 1.4%, from HUF 104.6 billion to HUF 103.1 billion , due to a higher bad debt expense related to receivables from equipment sales as well as from the waiver of HUF 0.9 billion of receivables due from a major T-Systems customer.
• Employee-related expenses increased by HUF 2.8 billionin the third quarter of 2014 compared to the same period last year primarily driven by the HUF 3.7 billion severance expense related to the Parent Company headcount reduction program in contrast to the HUF 1.5 billion expense booked a year earlier.
• EBITDA declined by 5.2%, from HUF 51.9 billion to HUF 49.2 billion ,owing primarily to higher bad debt and severance expenses.
• Depreciation and amortization expenses declined from HUF 27.4 billion to HUF 25.0 billion as the higher amounts of depreciation and amortization in Hungary (relating to spectrum licenses, as well as the capitalization of the annual frequency fees), were more than offset by the extension of the useful lives of assets such as radio equipment.
• Net financial expenses declined from HUF 9.2 billion to HUF 6.6 billion primarily due to lower charges upon FX translation where the Hungarian forint remained broadly stable against the Euro during Q3 2014 in contrast to Q3 2013 when the Hungarian forint weakened by 1.1% resulting in an FX loss.
• Income tax expense increased from HUF 4.4 billion in Q3   2013, to HUF 5.8 billion in Q3 2014. The primary reason for the increase is the repeated amendment in the Macedonian profit tax law in August 2014 that reinstated the profit tax at a rate of 10% with retrospective application from January 2014. Previously, Magyar Telekom had been recognizing a deferred tax expense in proportion to its level of ownership, expected to fall due on dividend declaration; however, due to the change in the law, we had to recognize an additional tax expense of ca. HUF 0.8bn that related to the minority's share of ownership. In addition, HUF 1.0 billion deferred tax was recognized in the books of the Macedonian subsidiaries, primarily related to the difference between the tax and book value of fixed assets.
• Profit attributable to the owners of the parent company (net income) increased from HUF 9.3 billion to HUF 10.7 billion as the decline in EBITDA was offset by both lower depreciation and amortization and net financial expenses.
• Net cash generated from operating activities increased by HUF 21.4 billion year-on-year, from HUF 76.7 billion in the first nine months of 2013 to HUF 98.1 billion in the first nine months of 2014. This increase is driven by an improved working capital performance reflecting the HUF 13 billion lower increase in installment sales in 2014 than in 2013, and the net positive operating cashflow impact from the reverse factoring of vendor invoices (albeit offset by correspondingly higher levels of financing cash outflows on repayment of these reverse factored vendor invoices).
• Investment in tangible and intangible assets (CAPEX) decreased by HUF 63.8 billion in the first nine months of 2014 compared to the same period last year, from HUF 117.4 billion to HUF 53.6 billion. The significant decrease is primarily attributable to the fact that costs related to the newly purchased frequency licenses have not been booked in Q3 2014.  In contrast, Q3 2013 CAPEX included fees paid for the extension of frequency licenses in Hungary, amounting to HUF 38 billion in addition to the capitalization of the present value of the related future annual frequency fees which amounted to HUF 17.3 billion. Excluding these and the HUF 3.1 billion Macedonian spectrum license fee in 2013, CAPEX decreased by HUF 5.7 billion, from HUF 59.3 billion in the previous period to HUF 53.6 billion for the first nine months of 2014 – this was primarily driven by a change in the IPTV set-top box rental contracts  resulting in financial lease CAPEX in 2013. In the first nine months of 2014, Telekom Hungary accounted for HUF 44.3 billion of total CAPEX while T-Systems Hungary accounted for HUF 2.6 billion. In Macedonia and Montenegro, CAPEX was HUF 4.0 billion and HUF 2.9 billion, respectively. § 
• Free cash flow (operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets and repayment of other financial liabilities) increased by HUF 17.0 billion, from HUF 7.2 billion in the first nine months of 2013 to HUF 24.2 billion in the first nine months of 2014. The improvement was primarily due to the aforementioned slowdown in the growth of instalment sales of equipment.§ 
• Net debt rose fromHUF 368.2 billion at the end of September 2013 to HUF 418.4 billion at the end of September 2014, reflecting the HUF 58.65 billion frequency license liability but not yet including the ca. HUF 39 billion related to the capitalization of the present value of the future annual frequency fees, which will be booked in Q4 2014. The net debt ratio (net debt to total capital) rose to 44.6% during the quarter.

Christopher Mattheisen, CEO commented:
“I am pleased to report that we have closed a successful quarter. In the Telekom Hungary segment, in addition to increasing mobile usage, we also continued to increase our total number of subscribers and improved our customer mix in favor of postpaid subscribers. This trend, coupled with stable termination rates and a strong increase in mobile internet usage, led to a 4% increase in mobile ARPU. At the same time, we recorded growth in our market shares in both the fixed internet and TV segments. All of these positive developments led to a higher gross margin in the Telekom Hungary segment.

At T-Systems Hungary, restructuring of internal processes as part of our efficiency enhancing initiatives resulted in a lower volume of internal services. In addition, the lower number of infrastructure and equipment projects resulted in a 17% revenue decline.

In Macedonia, the main development is the announcement of the merger of two competitors, ONE and VIP. The closing of the transaction remains subject to a confirmatory due diligence of ONE and approval by the Macedonian authorities. If approved, we expect this transaction to reshape the competitive environment in the Macedonian telecoms market.

In Montenegro, our performance was negatively affected by the weak tourist season and regulatory pressure. 

Despite posting only a slight decline in Group revenues, higher employee-related costs in Hungary driven by an increased level of severance expenses led to a 5% decline in EBITDA. 

I would also like to highlight some significant achievements. First, I am pleased to report that we have now received the frequency licences which enable Magyar Telekom to use the frequency blocks which were acquired during the recent tender process. We have also expanded our population-based nationwide outdoor 4G coverage to 73%, while at the same time increasing the nominal download speed of 4G mobile internet up to 150 Mbit/s. We believe that this is a very important milestone in the implementation of Digital Hungary, and plan to continue further network developments that will allow us to reach 93% population-based 4G coverage by the end of 2015. We are also pleased to note that the Hungarian government has retracted its initial proposal for an internet tax.”

This investor news may contain 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 Reports for the year ended December 31, 2013 available on our website at https://www.telekom.hu.