Investor Releases

Difficult economic environment continues to put pressure on revenues; cost efficiency remains the key priority

Budapest, November 5, 2009 00:00

Magyar Telekom (Reuters: NYSE: MTA.N, BSE: MTEL.BU and Bloomberg: NYSE: MTA US, BSE: MTELEKOM HB), the leading Hungarian telecommunications service provider, today reported its consolidated financial results for the first nine months of 2009, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Revenues were down by 4.4% to HUF 480.6 bn (EUR 1,693.4 m) in the first nine months of 2009 over the same period in 2008. The revenue decline reflects the reversal of provisions related to fixed to mobile traffic revenues booked in the amount of HUF 8.5 bn in the second quarter of 2008. Excluding the provision reversal, revenues were down by 2.8% as a result of a decrease in both fixed and mobile voice revenues and fixed line internet revenues in Hungary. These declines were partly offset by the higher revenue contribution of the international subsidiaries driven by the translation impact of the weakening forint, as well as by growth in mobile internet and TV revenues.
• EBITDA declined by 5.4% to HUF 202.3 bn , with an EBITDA margin of 42.1% in the first nine months of 2009. Underlying EBITDA, which is EBITDA excluding investigation-related costs, severance payments and accruals, and related provision reversals, decreased by 6.6% to HUF 206.5 bn with an underlying EBITDA margin of 43.0%. Excluding the reversal of provisions in the amount of HUF 8.5 bn related to fixed to mobile traffic revenues booked in 2008, EBITDA was down by 2.9% in the first nine months of 2009 compared to the same period in 2008.

Details of special influences (HUF bn)	Q3 2008	YTD 2008	Q3 2009	YTD 2009
Investigation-related costs	0.5	3.9	1.5	5.1
Severance payments and accrulas	1.2	3.3	0.3	1.3
Severance related provision reversals	0	0	-2.2	-2.2
Total Special Influence	1.7	7.2	0.4	4.2

• Profit attributable to equity holders of the company ( net income ) decreased by 16.1%, from HUF 80.4 bn (EUR 324.5 m) to HUF 67.4 bn (EUR 237.6 m). In addition to lower EBITDA, the decline was also due to higher net financial expenses partly offset by lower depreciation and amortization expenses, as well as lower income tax in the first nine months of 2009. Net financial expenses rose driven by higher interest rates and the enlarged loan portfolio. Depreciation expenses decreased due to the extension of the useful life of a number of assets during 2008 and beginning of 2009. Income taxes declined as a result of the new Macedonian tax regime, under which no current and deferred taxes should be accounted until the dividend has been paid out of net income.
• Net cash generated from operating activities decreased from HUF 153.8 bn to HUF 147.7 bn. The lower EBITDA and higher interest charges were partly offset by the lower level of income tax paid.
• Investments in tangible and intangible assets (CAPEX) increased by HUF 13.6 bn to HUF 71.5 bn in the first nine months of 2009 compared to the same period of last year mainly driven by the increase in satellite TV subscriptions and the fibre network rollout, while the weakening of the forint also inflated this year’s spending. Of the total CAPEX, HUF 20.2 bn is related to the Consumer Services Business Unit, HUF 2.1 bn to the Business Services Business Unit, HUF 2.0 bn to Group Headquarters, HUF 35.9 bn to the Technology Business Unit, while in Macedonia and Montenegro the CAPEX spending was HUF 8.3 bn and HUF 2.7 bn, respectively.
• Net debt increased from HUF 271.2 bn to HUF 284.3 bn by the end of September 2009 compared to the end of September 2008 level. The net debt ratio (net debt to net debt plus total equity) was 32.3% at the end of September 2009.

Christopher Mattheisen, Chairman and CEO commented: “In the third quarter, Magyar Telekom continued to face strong headwinds across all segments resulting from the recessionary economic environment and the government’s austerity measures. Customer behavior, from both a corporate and residential perspective, was characterized by an increased retrenchment towards telecom spending, leading to further pressure on traditional voice revenues.
To mitigate the impacts of this unfavorable operating environment, we implemented several countermeasures over the past quarters that have now started to bear fruit. In line with our strategic goal to strengthen Magyar Telekom’s position as a fully integrated service provider, we increased our presence in the TV market via our satellite TV and IPTV sales, and reinforced our market leadership in the SI/IT segment. Consequently, we have managed to improve our positions in these segments, while sustaining market shares in our core markets.
Despite the decline in revenue, third quarter underlying EBITDA was broadly stable compared to the same period last year with an EBITDA margin of over 44% thanks to our strong commitment to improving cost efficiency within the Group. In addition, we made further progress in increasing headcount productivity and have reached an agreement with the trade unions on the wage development, headcount reduction and decrease in additional employee allowances at the parent company for 2010. As a result, Total Workforce Management related costs will be reduced by HUF 6.5 bn in 2010 compared to the 2008 level, which represents a reduction of more than 5% over the two year period.
Looking forward to the rest of the year, we maintain our target of around 2% revenue decline; however, we expect current trends, such as the significant reduction in private consumption and heavily scaled back spend by corporates, to continue to put strong pressure on our top line. Furthermore, strengthening of the forint may also have an adverse impact on our results by lowering the contribution of our international subsidiaries. We also maintain guidance of up to a 5% contraction in underlying EBITDA and nominally flat CAPEX.”

Q3 2009 results analyis

Group

• Revenues declined by 4.2% in Q3 2009 compared to the same quarter in 2008. The unfavourable economic environment resulted in lower retail voice revenues across all markets, while cuts in the Hungarian mobile termination rates caused mobile wholesale revenues to decline. These could not be offset by the increasing TV revenues and the higher contribution of the Macedonian subsidiary driven by the translation impact caused by the weaker forint.
• EBITDA increased by 2.4%. However, excluding the special influences EBITDA was down 0.6% in the third quarter of 2009. As a result of our cost cutting measures, visible in both employee related expenses and in other cost items such as marketing expenses, we were able to offset the decline in revenues. EBITDA was also supported by the lower outpayments to mobile operators due to the cut in the mobile termination rate.

Consumer Services Business Unit (CBU)

Revenues before intersegment elimination fell by 5.6% to HUF 81.0 bn and EBITDA declined by 1.8% to HUF 48.0 bn in Q3 2009 compared to the same period of last year. EBITDA margin rose from 57.0% to 59.3% in the third quarter of 2009, thanks to our efficiency improvement efforts that could more than counterbalance the margin dilution related to the changing revenue mix. CAPEX amounted to HUF 5.2 bn in the third quarter with a significant portion related to satellite TV and IPTV sales.

• Fixed line revenues declined by 5.8% in Q3 2009, driven mostly by the reduction in voice revenues as mobile substitution and migration towards different IP-based solutions resulted in increased churn in our customer base, putting pressure on traffic volume and average tariff levels. In addition, although the number of broadband customers continued to increase reaching 576,000, internet revenues decreased by 7.5%, reflecting the declining prices and the increasing migration towards lower priced packages. TV related revenues grew further thanks to the solid demand for our TV products. The number of total TV customers was close to 584,000 by the end of September with growth mostly driven by our satellite TV service, while demand for IPTV also strengthened.
• Mobile revenues recorded a decline of 5.3% to HUF 48.2 bn in the third quarter. Although T-Mobile’s residential customer base decreased compared to end-September last year, mainly due to the increased churn of inactive customers and cancellations of multiple SIM cards, T-Mobile was still able to slightly increase its market share to 44.2% of total SIM cards by end-September 2009. In addition to a decline in the customer base, usage also showed a negative trend, driven by the lower consumer disposable income. As average tariff levels decreased compared to the same period last year and mobile termination rates were reduced effective from January 2009, ARPU showed an 8.0% decrease year-on-year.

Business Services Business Unit (BBU)

Revenues before intersegment elimination were down by 8.0% to HUF 39.0 bn while EBITDA decreased by 7.2% to HUF 20.4 bn. Consequently, the EBITDA margin rose from 51.9% to 52.4% in Q3 2009. The moderate improvement in the EBITDA margin was due to the implemented efficiency improvement measures that could partly offset the revenue decline.

• Fixed line revenues were down by 12.8% reflecting the recessionary impacts in the Hungarian economy which lead to rationalization and cost cutting initiatives at our key corporate clients and a reduction in their telecommunications spending. As a result, both voice and internet customer numbers decreased, while usage also declined driven by mobile substitution, resulting in lower voice and internet revenues.
• Mobile revenues decreased by 2.4%. The above-mentioned recessionary impacts had a similar effect on the mobile spending of our corporate clients. Consequently, churn remained high whilst average tariff levels continued to decline in the third quarter of this year. Although non-voice revenues are rapidly increasing (23.3% of corporate client ARPU) thanks to the increasing mobile broadband usage, ARPU was still down by 16.5% in the first nine months of this year compared to the same period of last year.
• SI/IT revenues declined by 11.2% in the third quarter of 2009. The decline was driven by the lower investment levels, both at the private and the public sector, in response to the current economic environment.  

Macedonia

In Macedonia, revenues were up by 12.0% in Q3 2009 with EBITDA increasing by 4.5%. However, excluding the strong FX impact (the forint weakened on average by 14.0% to the Denar in the third quarter 2009 against the same period last year), revenues were down by 1.8%, and EBITDA declined by 8.3%, mainly driven by increased mobile equipment sales in relation to retention campaigns. EBITDA margin declined from 58.3% to 54.5% in the third quarter reflecting the intensifying competition in all segments.

• Fixed line revenues declined by 10.6% in local currency terms, driven by increasing competition from alternative and mobile operators. The intense competitive pressure coupled with the unfavourable economic environment resulted in an elevated annual churn rate and a further decline in outgoing traffic volumes. The voice revenue decline was partly offset by growing internet and IPTV revenues driven by the expanding customer base.
• Mobile revenues were up by 5.6% in local currency terms thanks to the growing customer base and improving customer mix. Whilst usage also increased, it could not counterbalance competition driven tariff reductions that led to a decline in ARPU levels. Non-voice revenues also increased and should gain further impetus from the 3G services launched in June this year.

Montenegro

Revenues of the Montenegrin subsidiary were up by 2.0% driven by the weakening of the Hungarian forint against the euro (the forint weakened on average by 14.1% to the euro in the third quarter). EBITDA was up by 65.6% due to the HUF 0.9 bn headcount-reduction related severance expense in the third quarter of 2008, while in the third quarter of 2009 aHUF 1.0 bn provision (created in Q1 2007) related to litigation in connection with a voluntary redundancy program was reversed. In local currencies, revenues declined by 10.6% and EBITDA, excluding severance expenses and the provision reversal, was down by 13.0% with an EBITDA margin of 39.9%.

• Fixed line revenues declined by 1.8% in local currency terms in Q3 2009 driven by lower voice retail revenues, mostly offset by increasing internet and TV revenues. The decrease in voice revenues was caused by the high mobile substitution. Since the entrance of the third mobile operator, competition in the mobile market intensified, driving mobile tariffs down and leading to decreasing mobility premiums. On the other hand, both internet and TV revenues grew considerably thanks to the strong increases in the number of ADSL and IPTV customers.
• Mobile revenues were down by 17.9% in local currency terms in Q3 2009. Major elements of the decline were the fallout in visitor revenues caused by the negative impact of the economic recession on tourism in Montenegro as well as the fierce competition generated by the third mobile operator. Furthermore, despite strong growth in the mobile customer base, retail voice revenues declined driven by lower usage and a decrease in tariff levels. These trends were somewhat mitigated by the increase in non-voice revenues, supported by the higher customer base and growing number of mobile internet users.

Technology Business Unit (TBU)

Technology Business Unit is a cost centre responsible for the operations and development of the mobile and fixed network as well as IT management. Network and IT related investments are also generated by TBU. Revenues at TBU increased by 5.2% to HUF 2.7 bn and EBITDA increased by 11.9% to HUF -10.5 bn. CAPEX amounted to HUF 10.5 bn in Q3 2009, mainly driven by the rollout of the fibre optic network and improvements in the cable and mobile broadband networks.

Group Headquarters

Revenues before intersegment elimination were down by 11.4% to HUF 34.3 bn. The revenue decline was mainly driven by lower wholesale revenues, especially within mobile revenues, reflecting the 15% cut in mobile termination rates since the beginning of this year. EBITDA increased to HUF -3.0 bn driven by savings in the employee-related expenses and the reversal of the HUF 1.2 bn severance provision that more than offset the increase in investigation-related expenses (HUF 1.5 bn in Q3 2009 against HUF 0.5 bn in Q3 2008).

As previously disclosed, in the course of conducting their audit of Magyar Telekom’s 2005 financial statements, PwC identified two contracts the nature and business purposes of which were not readily apparent to them. In February 2006, the Company’s Audit Committee retained White & Case (the “independent investigators”), as its independent legal counsel, to conduct an internal investigation into whether the Company had made payments under those, or other contracts, potentially prohibited by U.S. laws or regulations, including Foreign Corrupt Practices Act (“FCPA”) or internal Company policy. The Company’s Audit Committee also informed the U.S. Department of Justice (“DOJ”), the U.S. Securities and Exchange Commission (“SEC”) and the Hungarian Supervisory Financial Authority (“HSFA”) of the internal investigation.
Based on the documentation and other evidence obtained by it, White & Case preliminarily concluded that there was reason to believe four consulting contracts entered into in 2005 were entered into to serve improper objectives, and further found that during 2006 certain employees had destroyed evidence that was relevant to the investigation. White & Case also identified several contracts at our Macedonian subsidiary that could warrant further review. In February 2007, our Board of Directors determined that those contracts should be reviewed and expanded the scope of the internal investigation to cover these additional contracts and any related or similarly questionable contracts or payments. In May 2008, the independent investigators provided us with a “Status Report on the Macedonian Phase of the Independent Investigation.” In the Status Report, White & Case stated, among other things, that “there is affirmative evidence of illegitimacy in the formation and/or performance” of six contracts for advisory, marketing, acquisition due-diligence and/or lobbying services in Macedonia, entered into between 2004 and 2006 between us and/or various of our affiliates on the one hand, and a Cyprus-based consulting company and/or its affiliates on the other hand, under which we and/or our affiliates paid a total of over EUR 6.7 million. The internal investigation is continuing into these and other contracts and certain related issues identified by the independent investigators.
In 2007, the Supreme State Prosecutor of the Republic of Montenegro informed the Board of Directors of Crnogorski Telekom, our Montenegrin subsidiary, of her conclusion that the contracts subject to the internal investigation in Montenegro included no elements of any type of criminal act for which prosecution would be initiated in Montenegro.
Hungarian authorities also commenced their own investigations into the Company’s activities in Montenegro. The Hungarian National Bureau of Investigation (“NBI”) has informed us that it closed its investigation of the Montenegrin contracts as of May 20, 2008 without identifying any criminal activity.
On March 28, 2009, the NBI informed the Company that, based on a report received by it, it had begun a criminal investigation into alleged misappropriation of funds relating to payments made in connection with the Company's ongoing internal investigation into certain contracts entered into by members of the Magyar Telekom group and related matters. On September 21, 2009, the NBI informed the Company that it had extended the scope of its investigation to examine possible misuse of personal data of employees in the context of the internal investigation. The NBI has requested from the Company materials and information relating to such payments. The Company is cooperating with the ongoing NBI investigation.
United States authorities commenced their own investigations concerning the transactions which are the subject of our internal investigation, to determine whether there have been violations of U.S. law. The Ministry of Interior of the Republic of Macedonia has also issued requests to our Macedonian subsidiaries, requesting information and documents concerning certain of our subsidiaries’ procurement and dividend payment activities in that country (together with U.S. investigations, and the ongoing NBI investigation, the “Government investigations”). During 2007, the U.S. authorities expanded the scope of their investigations to include an inquiry into our actions taken in connection with the internal investigation and our public disclosures regarding the internal investigation.
By letter dated February 27, 2009 addressed to counsel to the Audit Committee, the DOJ requested that the Audit Committee pursue all reasonable avenues of investigation prior to completing and issuing a final report of the internal investigation, including investigation into matters recently identified to counsel for the Audit Committee by the DOJ. The DOJ recognized that a delay in the completion of the report may result from investigation into these matters. The DOJ also requested that the Audit Committee refrain from disseminating any such final report until further notice from the DOJ because of the DOJ's concern that such dissemination could interfere with the DOJ's investigation. The Company, its Board of Directors, and its Audit Committee continue to support the internal investigation and the continuing cooperation with and assistance to the Governmental investigations, as being in the best interests of the Company and its shareholders. In its February 27 letter, the DOJ stated that the internal investigation has been of assistance to the DOJ and that such assistance will be taken into account in determining the appropriate disposition of this matter by the DOJ, if any.
According to an extract of a press conference published on the official web site of the Macedonian Ministry of Interior on December 10, 2008, the Organized Crime Department of the Ministry submitted files to the Basic Public Prosecution Office of Organized Crime and Corruption in Macedonia, with a proposal to bring criminal charges against four individuals, including three former Magyar Telekom Group employees. According to that public information, these individuals are alleged to have committed an act of “abuse of office and authorizations” in their position in Makedonski Telekom by concluding five consultancy contracts with Chaptex Holdings Ltd in the period 2005-2006 for which there was allegedly no intention nor need for any services in return.
We cannot predict when the internal investigation or the ongoing Government investigations will be concluded, what the final outcome of those investigations may be, or the impact, if any, they may have on our financial statements or results of operations. We cannot predict what impact, if any, these investigations will have on each other.  Government authorities could seek criminal or civil sanctions, including monetary penalties, against us or our affiliates, as well as additional changes to our business practices and compliance programs.
Magyar Telekom incurred HUF 5.1 bn expenses relating to the investigation in the first three quarters of 2009, which are included in other operating expenses of Group Headquarters.
Neither the Audit Committee nor its counsel has been able to provide sufficient information to the Company's independent auditors relating to the matters under independent internal investigation, or concerning the impact, if any, of such issues on the financial statements of Magyar Telekom. In the absence of such information, the independent auditors have not been in the position to perform their quarterly review (in accordance with International Standard on Review Engagements 2410). In addition, the Audit Committee has indicated that it cannot evaluate the Company's financial statements for the Third Quarter.  If the underlying issues are not resolved, the publication and timing of the Company's future financial statements could be affected.

About Magyar Telekom

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 business activities of Magyar Telekom are managed by two business units: Consumer services (the home-related services brand T-Home and the mobile communications brand T-Mobile) and Business services (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, 2008 filed with the U.S. Securities and Exchange Commission.