Investor News

Revenue target raised; utility tax and higher proportion of lower margin revenues compressing EBITDA margins

Budapest, May 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 first quarter of 2013, in accordance with International Financial Reporting Standards (IFRS).

• Revenues increased by 6.8% in the first quarter of 2013 compared to the same period of 2012, from HUF 146.6 billion to HUF 156.6 billion. The significant increase in revenues from energy services and the growing revenues from SI/IT, mobile non-voice services and fixed and mobile equipment sales more than offset the voice revenue declines suffered in Hungary and Macedonia.
• EBITDA declined by 24.3%, from HUF 51.6 billion to HUF 39.0 billion, with an EBITDA margin of 24.9% compared to 35.2% in the same period last year. This decrease reflects the HUF 7.3 billion accounted in relation to the utility tax as well as the increasing contribution of the lower margin retail energy, equipment sale and SI/IT revenues, coupled with the continued decline of high-margin voice revenues.
• Employee-related expenses increased by HUF 1.4 billion in the first quarter compared to the same period last year driven by the higher headcount, as the previously outsourced labour force related to call center customer care, sales and customer experience services became permanent employees of Magyar Telekom as of April 2012. Excluding this impact, employee related expenses declined reflecting the effect of headcount reduction program.
• Income tax expense decreased from HUF 3.7 billion in Q1 2012 to HUF 3.6 billion in Q1 2013. The sharp rise in the effective tax rate is mostly due to the booking in Q1 2013 of the utility tax as the local business tax and the innovation fee paid by the Group are calculated based on statutory gross margin and not on the profit before tax. Further reasons of the higher effective tax are two items that increased the deferred taxes by a total of HUF 1.3 billion. Firstly, the weakening of the forint against the denar during the first quarter of 2013 led to the appreciation of Stonebridge’s book value, secondly, the decrease of the statutory reserve in Macedonia from 20% to 10% resulted in increased distributable reserves, which will be subject to withholding tax once distributed.
• Profit attributable to owners of the parent company ( net income) decreased from HUF 13.0 billion to HUF 1.7 billion. The decline is the combined result of the lower direct margin, and the HUF 7.3 billion utility tax.
• Net cash generated from operating activities decreased by HUF 9.3 billion year-on-year, from HUF 22.3 billion to HUF 13.0 billion. The deterioration is driven by the HUF 12.5 billion lower EBITDA which was partly mitigated by improvement in working capital and lower interest payments.The negative impact on the working capital of the HUF 20.7 billion settlement charge paid in Q1 2012 in connection with the SEC and DOJ investigations was partly counterbalanced by the adverse impacts of the deferred payment options offered for equipment contracts, the strongly seasonal nature of the gas service increasing receivables as well as higher outpayments to suppliers. The decline in interest payments was due to the HUF 1.4bn paid in Q1 2012 in relation to the SEC and DOJ fine and timing difference in interest payments on our loans.
• Excluding the 900 MHz spectrum license fee (amounting to HUF 10.9 billion in Q1 2012), investment in tangible and intangible assets (CAPEX) increased by HUF 3.8 billion in the first quarter, from HUF 12.9 billion to HUF 16.7 billion , due principally to the higher investments in relation to the integrated CRM and billing system development. In Q1 2013, Telekom Hungary accounted for HUF 13.5 billion of total CAPEX and T-Systems Hungary HUF 0.3 billion. In Macedonia and Montenegro, CAPEX was HUF 2.3 billion and HUF 0.6 billion, respectively.
• Free cash flow (operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets) improved by HUF 7.8 billion in Q1 2013 from HUF -15.2 billion to HUF -7.4 billion . The lower operating cash flow and higher CAPEX was counterbalanced by the HUF 10.9 billion paid for the 900 MHz spectrum license fee in Q1 2012 and the lower payments to capex creditors (adjustments to cash purchases) in 2013.
• Net debt decreased slightly from HUF 283.6 billion at the end of Q1 2012 to HUF 282.9 billion at the end of Q1 2013. The net debt ratio (net debt to total capital) was 35.2% at the end of Q1 2013.

Christopher Mattheisen, Chairman and CEO commented:
“Our performance in the first quarter of 2013 bears testimony that our strategy, which is based on retention and cross-selling, is appropriate for the challenging environment that we currently operate in. The majority of the 6.8% growth in group revenues was derived from the rapidly expanding non-core telecom businesses such as retail energy, SI/IT and equipment resale. These businesses, by their very nature, attract lower margins than traditional telecommunication services, but demonstrably augment our customer retention rates: fixed voice churn has now decreased to around 3% per annum while our market share continues to expand in the fixed internet and TV markets. I am also particularly proud that as the largest player, we have increased our mobile voice market share to a level not seen since 2004, and that we have maintained the strong growth momentum of the last two years in mobile broadband revenues and smartphone penetration. Thanks to the outstanding revenue generation in the first quarter and based on my current expectations regarding the environment, I now expect the full year revenues to be approximately flat compared to our previous guidance of flat to -3%.

Our EBITDA decreased by 24.3% in the first quarter as opposed to the 4-7% decline targeted for the full year; however, the principal reason for this underachievement has been the booking in the first quarter of the full year amount of the utility tax. In addition, the regulatory changes in the energy market effective from January 2013 led to a negative energy margin. We are currently still in discussions regarding potential changes that may allow us to maintain our services in the universal segment. Based on our current knowledge, we expect our retail energy business to generate at least 40 billion forint of revenues in 2013.

In April, the first phase of a large-scale CRM and billing project has just been successfully installed which, excluding the 900 MHz spectrum license fee that was accounted for in the first quarter of 2012, led to an increase in our Capex spending for the current quarter. This next generation system, unique in size and complexity in Europe’s telecommunications industry, will allow us to realize further corporate synergy opportunities and seek further improvements in efficiency and reductions in operating costs once full functionality is reached by the end of 2014.”

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.