Budapest, November 4, 2015 18:00

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 2015, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Revenues in the third quarter of 2015 rose by 0.3% year-on-year from HUF 157.5 billion to HUF 158.0 billion , as a result of increased revenues at both Hungarian segments partly offset by declining revenues at our Macedonian and Montenegrin subsidiaries. Mobile revenues decreased by 4.4% compared to the same period of last year, driven by a reduction in mobile voice retail and wholesale revenues following the sharp decrease in Mobile Termination Rates (MTRs) in Hungary as from April 1, 2015, as well as a decline in mobile equipment sales. However, mobile data revenues over this period increased significantly due to growth in the subscriber base and increased rates of usage. Despite a decline in fixed voice and data retail revenues, overall Fixed line revenues increased by 2.0% driven by growth in fixed broadband, TV and equipment revenues and the acquisition of GTS Hungary as of April 1, 2015. System Integration (SI) and IT revenues increased by 16.5% due to new major projects in Hungary and in Macedonia coming on stream in Q3 2015. Similar to the second quarter of 2015, SI/IT revenues improved across all segments in this period. Energy revenue growth of 7.9% was underpinned by the business sub-segment, with the increased number of electricity points of delivery helping to drive higher electricity sales; conversely the number of gas delivery points significantly decreased due to the decision to exit from the residential gas market as of July 31, 2015.
  Looking at the Hungarian operations overall, total revenues slightly increased in the period compared to the third quarter of 2014, mainly boosted by the outstanding SI/IT performance of T-Systems, which was partly offset by a decline in mobile revenues. In Macedonia, the rate of revenue decline continued to decelerate, down by 1.8% quarter over quarter compared to the 6.6% and 4.6% declines witnessed in the preceding two quarters. Both fixed and mobile revenues continued their decline in the face of regulatory pressures and fierce competition in Montenegro.
• Total direct costs decreased in Q3 2015 by 1.2% to HUF 53.8 billion , principally driven by interconnection costs falling 33% following the cut in MTRs as from April 1, 2015. Bad debt expenses also improved owing to a significant impairment loss from a major T-Systems customer recognized in Q3 2014 that was not repeated this year. Partly offsetting these cost savings though were increases in SI/IT and energy service related costs, in line with the higher sales revenues in both business lines. The gross margin increased slightly from HUF 103.1 billion to HUF 104.2 billion resulting from lower direct costs and slightly higher revenues quarter over quarter.
• EBITDA in Q3 2015 slightly decreased by 0.6% quarter over quarter to HUF 48.9 billion , driven by higher other operating expenses due to higher marketing, outsourcing and maintenance costs, partially offset by higher other operating income resulting from compensation received for own network construction works. Total employee-related expenses decreased by 2.2% despite the ca. HUF 1.0 billion higher severance costs thanks to recurring core savings that derive from the headcount reduction program.
• Depreciation and amortization expenses went up by 10.6% to HUF 27.7 billion in Q3 2015 , driven by higher amortization of telecom licenses linked to the new frequency rights acquired in Q4 2014, as well as software activation of the new billing and SAP system.
• Net financial expenses increased by 7.6% from HUF 6.6 billion in Q3 2014 to HUF 7.1 billion Q3 2015 , primarily due to the increase of interest charge on the present value of the annual frequency fees recognized as a financial liability in Q4 2014.
• Income tax expense significantly decreased from HUF 5.8 billion to HUF 3.5 billion quarter over quarter. The difference is mainly due to the reinstatement of the profit tax in Macedonia that took place in August 2014, following amendments to the profit tax law. The remaining shrinkage is in line with the decrease of the pre-tax results of the Group. Year over year, income tax expense decreased by HUF 4.1 billion to HUF 11.5 billion in Q3 2015, in 2014 also negatively affected by the changes in the Macedonian tax law, amounting to an average normal effective tax rate of 30% similar to the previous years.
• Profit attributable to the owners of the parent company (net income) decreased from HUF 10.7 billion to HUF 9.3 billion ; although EBITDA was largely stable, the primary causes of the fall were due to the rise in depreciation and amortization expenses, and to a lesser degree net financial expenses, although a decrease in income tax helped to dampen their impacts.
• Investments in tangible and intangible assets (CAPEX) increased by HUF 6.3 billion to HUF 59.9 billion as of September 30, 2015 driven by enhanced spending on the Hungarian fixed High Speed Internet (HSI) roll-out plan as part of the Digital Hungary program. In the first three quarters of 2015, Telekom Hungary accounted for HUF 49.6 billion of the total CAPEX, with HUF 3.4 billion allocated to T-Systems Hungary. The Macedonian and Montenegrin operations accounted for HUF 4.9 billion and HUF 2.0 billion of the CAPEX, respectively.
• Free cash flow (FCF defined as operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets and repayment of other financial liabilities) declined from HUF 24.2 billion as of end-September 2014 to HUF 16.9 billion in the same period of 2015. Operating cash flow improved by HUF 8.9 billion mostly due to higher EBITDA and positive change due to lower tax payments in Macedonia in 2015, due to the tax law amendments in 2014, which brought the payment of the dividend related taxes earlier in 2014. Total investing cash flow for the first nine months of 2015 amounted to HUF 77.3 billion, up by HUF 19.0 billion compared to the same period of 2014, due to the costs of the GTS Hungary acquisition and increased CAPEX related to the HSI roll-out program.
• Net debt rose from HUF 418.4 billion at the end of the third quarter of 2014 to HUF 425.7 billion by end-September 2015; however, this is a significant decrease on the HUF 447.2 billion of net debt reported at the end of the second quarter of 2015. The year-on-year increase primarily reflects the frequency license payments and the capitalization of the present value of the future annual frequency fees in Q4 2014. The net debt ratio (net debt to total capital) of 43.9% at the end of the third quarter of 2015 compares favorably to the 45.6% as at the end of the second quarter, and we expect this deleverage trend to continue.

Christopher Mattheisen, CEO commented:
“I am pleased to report that we have managed to sustain the positive momentum in our operations. After managing to turn around our revenue, margins and most latterly EBITDA in recent years, we have also managed to return to positive Free Cash Flow generation this quarter which will serve as cornerstone for the resumption of dividend payments after this year’s earnings. We believe that we have secured our market positions by being a strong integrated fixed and mobile service provider and continuing the next generation network developments across all segments. We have launched our Quad-Play offer, called Magenta1 in Hungary and in Macedonia to maximize the telecommunication share of the household spending wallet. Whilst at the same time, we have maintained our focus on costs in order to become a leaner and more efficient company. The headcount reduction program has continued in Hungary and our strategic goal has not changed with regard to product and process simplification, including moving more of our customer servicing online.
Our EBITDA performance improved by 3% year on year for the first nine months of this year. It was achieved not only through increasing the gross margin, mainly as a result of higher revenues and a lower level of bad debts, but also through achieving significant recurring savings in employee related expenses. This is even after booking approximately half of the planned one-off Hungarian severance expense of around 8 billion forints in the third quarter; we expect to book the second half of this amount in the fourth quarter this year. Looking ahead to the rest of this year, building on our performance year to date and the fact that we do not foresee any major changes in the Hungarian mobile market, we feel comfortable that we will be able to match approximately the EBITDA reported for 2014. This is an improvement on our previous guidance which was for up to a 3% decline.
The Group Capex for the first nine months of 2015 was almost 60 billion forints as we accelerated the Hungarian fixed High Speed Internet roll-out program, in conjunction with the continuing PSTN replacement program. However, the vast majority of the planned next generation fixed access investment is still ahead of us, so we expect a significant increase in the fourth quarter. Our Capex guidance for this year remains at 105 billion forints.
In terms of our Group financial targets, we maintain our revenue and Capex guidance but now feel sufficiently comfortable to raise our EBITDA guidance to be approximately in line with what was reported for 2014.”

2015 public guidance

*excluding spectrum acquistions and annual frequency fee capitalization

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, 2014, 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 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.