Investor News

Strong market position maintained, but difficult economic environment puts increasing pressure on EBITDA

Budapest, August 9, 2012 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 of 2012, in accordance with International Financial Reporting Standards (IFRS).

• Revenues increased by 1.3% in the second quarter of 2012 compared to the same period of 2011, from HUF 143.6 bn to HUF 145.5 bn. The significant increase in SI/IT and energy resale revenues more than offset the decline in fixed and mobile voice revenues. Growing TV, mobile Internet and mobile equipment sales revenues also contributed to higher revenues. The international subsidiaries combined showed a broadly flat revenue performance in the second quarter thanks to the positive translational effect of the depreciation in the Hungarian forint: the forint weakened on average by 10.4% relative to the Macedonian Denar, and by 10.5% relative to the Euro in the second quarter of 2012 compared to the same period in 2011.
• EBITDA increased by 11.4%, from HUF 44.6 bn to HUF 49.6 bn reflecting the HUF 10.4bnprovision created relating to the settlement of the DOJ and SEC investigations accounted for the second quarter of 2011. EBITDA margin was 34.1% in the second quarter. Underlying EBITDA, excluding investigation-related costs and provisions, severance expenses and the telecom tax, decreased by 9.0%, from HUF 61.8 bn to HUF 56.2 bn in the secondquarter year-on-year. Underlying EBITDA margin was 38.7% in Q2 2012 compared to 43.0% in the same period last year. The decline in margin reflects an increasing contribution of the low margin energy resale and SI/IT revenues, as well as increased equipment subsidies, while high-margin voice revenues continued to decline.
• Employee-related expenses increased by HUF 1.7 bn in the second quarter compared to the same quarter a year before, as the previously leased labour force related to call center, customer care and customer experience services became permanent employees of Magyar Telekom as of April 2012. Accordingly, the group headcount increased by around 1,700 by June-2012. The insource caused a HUF 1.8 bn increase in employee-related expenses in the second quarter and, parallel to that, the same decline in other operating expenses.
• Net financial expenses declined from HUF 8.1bn to HUF 7.3bn. Although interest expenses on the loan portfolio increased reflecting higher interest rates and increased debt amount, this impact was offset by the HUF 1.1bn interest expense booked in the second quarter of last year in relation to the SEC/DOJ settlement charges.
• Income tax expense declined by39.6%from HUF 5.2bn in Q2 2011 to HUF 3.1bn in Q2 2012 despite a higher level of profit before tax, due to lower deferred tax expense and the provision in relation to the SEC/DOJ settlements accounted for last year, part of which was not tax deductible.
• Profit attributable to owners of the parent company ( net income ) increased from HUF 4.4 bn to HUF 10.7 bn, reflecting the higher EBITDA and lower income tax expense.
• Net cash generated from operating activities decreased by HUF 31.9 bn, from HUF 95.5 bn to HUF 63.6 bn in the first half 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 half of 2012 in connection with the settlement of the SEC and DOJ investigations. On the other hand, out of this amount HUF 11.5bn was provided for in the first half of 2011. Higher interest payments (due to the higher interest rate and increased debt level) and income tax paid also contributed to this decline.
• Investment in tangible and intangible assets (CAPEX) increased by HUF 13.5 bn, from HUF 26.7 bn to HUF 40.2 bn in the first half of 2012 compared to the same period last year due principally to the 900 MHz spectrum license fee in the amount of HUF 10.9 bn, higher spending for 3G/LTE rollout in Hungary and higher investments in Macedonia for 3G and fiber optic networks. In H1 2012, Telekom Hungary accounted for HUF 32.0 bn of total CAPEX, while HUF 1.8 bn is related to T-Systems Hungary. In Macedonia and Montenegro, CAPEX was HUF 4.3 bn and HUF 2.0 bn respectively in the first half of 2012.
• Free cash flow (operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets) declined by HUF 55.9 bn in the first half year-on-year, from HUF 63.8 bn to HUF 8.0 bn in the first half of 2012. In addition to lower underlying EBITDA, it was the higher CAPEX and CAPEX creditor, as well as the acquisition of a cable company that were the main drivers behind this decline.
• Net debt increased from HUF 295.1 bn att he end of June 2011 to HUF 324.2 bn by the end of June 2012. The net debt ratio (net debt to total capital) was 39.3% at the end of June 2012.
   

Christopher Mattheisen, Chairman and CEO commented:
“Group revenues in the second quarter of 2012 increased again, thanks to continued strong momentum in SI/IT and energy service revenues, supported by further growth in demand for mobile broadband and interactive TV services and strong smartphones sales. In our businesses, we have been able to maintain our market shares, and in some cases even grow them. We believe this paves the way for further growth once the economic environment improves.
However, increasingly negative trends in the Hungarian economic environment and regulatory impacts continued to adversely affect our traditional voice revenues. As such, positive expectations for a slow recovery in Hungary anticipated at the start of the year have dissipated. Household finances remain stretched as incomes are decreasing in real terms, unemployment remains at record high levels and the unfavourable change in the exchange rate has inflated the monthly loan instalments. As a result, telecommunication spending in Hungary came under increasing pressure accelerating the decline in our traditional voice revenues in the second quarter. As our growth businesses could not fully compensate for the fallout of high-margin voice revenues, our underlying EBITDA in the second quarter declined by 9% year-on-year.
For the full year, we maintain our target of a 4-6% decline in underlying EBITDA. We have implemented wide and deep cost cutting measures from the second half of 2012, not only on G&A items, but also on marketing, subsidies and agent fees. The fixed and mobile price increase to be launched from the autumn will also assist in achieving our EBITDA target. Despite the worsening EBITDA trends, outlook for our revenues looks more positive. For the first half of the year, revenues increased by 2% compared to the first half of 2011, comfortably exceeding our guidance of flat to a maximum decline of 2% for the full year.”

Investigations into certain consultancy contracts 

As previously disclosed, the Company’s Audit Committee conducted an internal investigation regarding certain contracts relating to the activities of the Company and/or its affiliates in Montenegro and Macedonia that totalled more than EUR 31 million. In particular, the internal investigation examined whether the Company and/or its Montenegrin and Macedonian affiliates had made payments prohibited by U.S. laws or regulations, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). The Company has previously disclosed the results of the internal investigation. For further information regarding the internal investigation, see the Company’s annual report for the year ended December 31, 2011. 

The Company’s Audit Committee informed the U.S. Department of Justice (the “DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) of the internal investigation. The DOJ and the SEC commenced investigations into the activities that were the subject of the internal investigation. 

On December 29, 2011, the Company announced that it had entered into final settlements with the DOJ and the SEC to resolve the DOJ’s and the SEC’s investigations relating to the Company. The settlements concluded the DOJ’s and the SEC’s investigations. The Company disclosed the key terms of the settlements with the DOJ and the SEC on December 29, 2011. On January 6, 2012 the Company paid a criminal penalty of USD 59.6 million (HUF 14,712 million) pursuant to the settlement with the DOJ and on January 23, 2012 the Company paid USD 25.2 million for disgorgement of profits and USD 6.0 million of prejudgment interest (HUF 7,366 million in total) pursuant to the settlement with the SEC, totalling USD 90.8 million (HUF 22,078 million) paid with respect to the settlements with the DOJ and the SEC. 

The aggregate amount of USD 90.8 million payable by the Company in settlement of the DOJ’s and SEC’s investigations was fully provided for before the end of 2011. 

In addition to the DOJ’s and the SEC’s investigations, the Ministry of Interior of the Republic of Macedonia, the Montenegrin Supreme State Prosecutor, the Hungarian Central Investigating Chief Prosecutor’s Office and the First Instance Prosecutor’s Office of Athens commenced investigations into certain of the activities that were the subject of the internal investigation. These governmental investigations are continuing, and the Company and/or its relevant subsidiaries continue to cooperate with these investigations. 

Magyar Telekom incurred HUF 17,485 million operating expenses relating to the investigations in 2011 (HUF 1,294 million legal costs and HUF 16,191 million provision for the settlements) included in the Hungary segment, and additional losses and expenses of HUF 5,666 million included in the net financial results (HUF 1,119 million interest expense and HUF 4,547 million foreign exchange loss).

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.