Investor News

Budapest, November 7, 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 third quarter and first nine months of 2013, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Revenues increased by 5.4% in the third quarter of 2013 compared to the same period of 2012, from HUF 150.1 billion to HUF 158.3 billion. This growth reflects the significant increase in revenues both from energy and SI/IT services as well as higher equipment sales revenues.
• EBITDA declined by 8.2%, from HUF 56.6 billion to HUF 51.9 billion , owing to the HUF 6.2 billion decrease in other operating income reflecting the HUF 3.7 billion gain realized on the real estate transaction in Macedonia and the HUF 1.6 billion gain relating to the sale of Pro-M, both recorded in the third quarter last year. Impacts of these were partially mitigated by lower operating taxes.
• Employee-related expenses increased by HUF 1.4 billionin the third quarter compared to the same period last year primarily driven by the HUF 1.3 billion severance expense in Macedonia related to the 10% headcount reduction completed by the end of September. At the same time, the impact of the average 4% wage increase at Magyar Telekom Plc. effective from April this year was mostly offset by the lower headcount.
• Depreciation and amortization expenses rose from HUF 26.5 billion to HUF 27.4 billion due to increased amortization of licenses.
• Net financial expenses increased from HUF 5.2 billion to HUF 9.2 billion primarily due to higher net FX losses as during Q3 2013, HUF weakened by 1.1% against the EUR resulting in FX loss while during Q3 2012, HUF strengthened by 1.6% leading to FX gain.
• Income tax expense decreased from HUF 5.9 billion in Q3 2012 to HUF 4.4 billion in Q3 2013 in line with the lower profit before tax resulting from lower EBITDA and higher depreciation and amortization and financial expenses. At the same time, other income taxes (including the local business tax and the innovation fee) remained stable at HUF 2.0 billion as the basis for their calculation is the statutory gross margin, not profit before tax. Consequently, the effective tax rate for Q3 2013 stood at 28.9%.
• Profit attributable to the owners of the parent company ( net income ) decreased from HUF 14.8 billion to HUF 9.3 billion primarily due to the lower profit before tax.
• Net cash generated from operating activities decreased by HUF 30.2 billion year-on-year, from HUF 105.4 billion in the first nine months of 2012 to HUF 75.3 billion in the first nine months of 2013. The deterioration is driven by the HUF 17.1 billion lower EBITDA year-on-year coupled with unfavorable movements in working capital. Although working capital last year was negatively impacted by the HUF 20.7 billion settlement charge in connection with the SEC and DOJ investigations, this impact was counterbalanced by items adversely impacting working capital this year such as the deferred payment options offered for equipment contracts and a higher level of inventories. In addition, the positive one-off effect of the sale of Pro-M last year distorts comparison.
• Investment in tangible and intangible assets (CAPEX) increased by HUF 46.6 billion in the first nine months of 2013 compared to the same period last year, from HUF 70.9 billion to HUF 117.4 billion. The significant increase is primarily attributable to the extension of frequency licenses in Hungary in Q3 2013, amounting to HUF 38 billion, and the acquisition of the 4G license in Macedonia for HUF 3.1 billion. These were coupled with the capitalization of the present value of the future annual frequency fees – related to the recent relevant agreements and changes in the related regulations – amounting to HUF 17.3 billion. Excluding these, as well as the 900 MHz spectrum license fee booked in Q1 2012 that came to HUF 10.9 billion, CAPEX decreased slightly, from HUF 60.0 billion in the previous period to HUF 59.1 billion for the first nine months of 2013. The impact of the HUF 10.7 billion non-cash CAPEX accounted for in Q3 2012 in relation to the Macedonian real estate exchange transaction was mostly offset by higher investments in relation to the development of the integrated CRM and billing system, as well as the change in accounting for rented IPTV set-top box contracts from an operational to a financial lease basis. At the same time, CAPEX relating to the financial lease contracts was offset by an equivalent improvement in adjustments to cash purchases, resulting in an overall neutral impact to the free cash flow; while the spectrum license extension fees will only be paid in Q4 2013 and consequently, did not impact on the free cash flow in the first nine months of 2013.
  In the first nine months of 2013, Telekom Hungary accounted for HUF 103.4 billion of total CAPEX while T-Systems Hungary accounted for HUF 2.2 billion. In Macedonia and Montenegro, CAPEX was HUF 10.0 billion and HUF 2.0 billion, respectively.
• Free cash flow (operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets) deteriorated by HUF 35.9 billion in the first nine months of 2013 compared to the same period last year, from HUF 44.8 billion down to HUF 8.9 billion. This was due to the lower operating cash flow and the proceeds from the sale of Pro-M improving last year’s performance.
• Net debt rose from HUF 296.8 billion at the end of September 2012 to HUF 365.3 billion at the end of September 2013. The net debt ratio (net debt to total capital) rose to 42.7% during the quarter, partly reflecting the increased financial liabilities recognized for the future annual frequency fees.

Christopher Mattheisen, CEO commented:
“In the third quarter of 2013, Magyar Telekom saw further positive developments which give grounds for optimism. In the Hungarian residential segment, we were able to reduce further the level of fixed voice churn and limit ARPU erosion, thanks to the favorably positioned bundled offers which not only include the traditional core telecommunication services but also equipment, such as television sets, along with gas and electricity services. I am also extremely pleased that following the changes in the relevant legislations (as previously announced) we are able to pursue our strategy regarding the energy offerings under the current conditions. We now expect annual revenues from our energy service provided to the universal and competitive segment to total around HUF 46 billion this year. At the same time, within the Hungarian residential mobile market, we have reached a very important milestone with the launch of full flat rate portfolios which will undoubtedly elevate competitive pressures. Notwithstanding this, it is currently our view that on account of our outstanding value proposition, including having Hungary’s most extensive LTE network, we will be able to contain effectively the risks that will stem from these pressures.

In addition to the above, our quarterly financial performance that saw revenues increase by 5%, was also a reflection of our strong growth in IT revenues, among others, due to the successful tendering for projects such as the data center migration of Allianz.

We were able to stabilize the direct profit, while the 8% decline in reported EBITDA is largely a reflection of the non-recurrence of one-off items that positively impacted performance last year.

Looking ahead to the remainder of the year, we maintain our increasing revenue guidance and EBITDA target of a 9%-12% decline; however, we now expect this decline in EBITDA to be towards the better end of this range. We are also reiterating our CAPEX guidance of around a 5% decline, excluding both the cost of spectrum acquisitions and the capitalization of the present value of the future annual frequency fees.”

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.