Investor News

Budapest, August 7, 2014 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 and first half of 2014, in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

Highlights:

• Revenues decreased by 3.3% in the second quarter of 2014 compared to the same period of 2013, from HUF 156.9 billion to HUF 151.8 billion. The decline is the result of lower fixed and mobile voice revenues coupled with lower revenues from energy services: the latter driven by an 11% cut in the regulated retail prices for both gas and electricity as from November 2013, followed by a further cut of 6.5% in gas prices from April 2014.
• EBITDA declined moderately by 0.3%, from HUF 49.8 billion to HUF 49.6 billion , as the rise in the telecom tax charge (itself driven by the increase in the tax rates payable on non-private individual subscriber accounts) was mostly mitigated by an expansion in the gross margins of energy and SI/IT services, as well as a reduction in employee related expenses.
• Depreciation and amortization expenses declined from HUF 25.5 billion to HUF 24.5 billion , as the higher levels of depreciation and amortization in Hungary (relating to the extended and newly-purchased spectrum licenses, as well as the capitalization of the annual frequency fees), were counterbalanced by the extension of the useful lives of assets such as radio equipment.
• Net financial expenses increased from HUF 6.5 billion to HUF 7.8 billion. This increase is primarily due to the higher net FX losses (including fair valuation of FX derivatives), asduring Q2 2014, the HUF weakened by 1.0% against the EUR, whereas during Q2 2013 it had strengthened by 3.0%. The negative impact of higher overall debt levels was offset by lower average interest rates.
• Income tax expense increased from HUF 3.9 billion in Q2 2013 to HUF 4.8 billion in Q2 2014 despite a slightly lower profit before tax. This increase is primarily due to the growing share of overall profits that is attributable to our Hungarian operations at the expense of our international subsidiaries’ as the Hungarian operations are subject to higher income tax rate. In addition, the higher level of deferred tax expense in Q2 2014 is on account of the consolidation effect of foreign exchange movements as in Q2 2014 the HUF weakened by 1.0% against the EUR compared to the 3.0% strengthening in the equivalent period of 2013. Other income taxes (including the local business tax and the innovation fee) remained broadly stable at around HUF 2.0 billion.
• Profit attributable to the owners of the parent company (net income) decreased from HUF 12.2 billion in the second quarter of 2013 to HUF 11.6 billion in the second quarter of 2014 , a reflection of the broadly stable EBITDA coupled with both higher financial and income tax expenses for the period.
• Net cash generated from operating activities increased by HUF 14.7 billion, from HUF 41.5 billion in the first half of 2013 to HUF 56.2 billion in H1 2014. This increase is driven by improvements in working capital (also reflecting the factoring of vendor invoices in 2013) that was partly mitigated by higher income tax payments. The increase in the income tax payment is due to a change in the Macedonian income tax law which introduced a 10% profit tax charged on dividend declarations in Macedonia regardless of the geographical domicile of the dividend recipient, effective from January 2014. As such, income tax paid that related to our Macedonian subsidiaries was higher by HUF 1.8 billion in H1 2014 compared to a year earlier.
• Investments in tangible and intangible assets (Capex) decreased from HUF 40.6 billion in H1 2013 to HUF 33.3 billion in H1 2014 , primarily a reflection of the change in the rented IPTV set-top box contracts from an operating to a financial lease basis that resulted in a one-off HUF 7.2 billion increase in Capex for H1 2013.In H1 2014, Telekom Hungary accounted for HUF 29.3 billion of total Capex and HUF 1.2 billion is associated to T-Systems Hungary. In Macedonia and Montenegro, Capex was HUF 1.7 billion and HUF 1.2 billion, respectively.§ 
• Free cash flow (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 3.1 billion in H1 2013 to HUF 0.7 billion in H1 2014 . The improvement inoperating cash flow was offset by higher cash Capex reflecting higher payments to Capex creditors in H1 2014 compared to a year earlier, and higher levels of repayment of other financial liabilities, principally factored vendor invoices, coupled with the 2014 payment of the periodic frequency fees.§ 
• Net debt rose from HUF 347.1 billion at the end of Q2 2013 to HUF 374.6 billion at the end of Q2 2014. The net debt ratio (net debt to total capital) was 42.5% at the end of Q2 2014.

Christopher Mattheisen, CEO commented:
“The positive trends that we saw in the Hungarian market in the first quarter of 2014 were sustained into the second quarter and our leading market position was strengthened further. At the same time, ARPU developments were also promising, particularly if viewed on a household basis thanks to the continued growth in the average number of fixed and mobile services taken up per household.

Group revenues, however, declined by 3% in the second quarter. This was mainly due first to lower energy revenues, driven predominantly by lower regulated retail prices; and secondly, lower equipment sales, a reflection of what we believe to be a temporary saturation in the segments targeted. The persistent competitive challenges in Macedonia and the macroeconomic and regulatory headwinds in Montenegro also negatively impacted the revenue performance.

Despite lower revenues, our gross margin improved in the quarter thanks to improvement in the energy and SI/IT margin, while EBITDA was also supported by lower employee costs, reflecting last year’s efficiency enhancing measures. In order to further increase efficiency we established an agreement with the trade unions to reduce headcount by 1,700 by the end of 2015.

Looking ahead to the rest of this year, we expect revenue and Capex to be in line with our previously stated guidance, and EBITDA to come in better than expected. The raising of EBITDA guidance is predominantly driven by our efforts to improve gross margin, along with the slight improvement that we are witnessing in the household spending power in Hungary, supporting our upsell efforts and demand for higher margin services such as mobile voice and TV. Consequently, we now expect EBITDA to decline by no more than 3% compared to the 2013 level. Whilst we anticipate continued pressure on our free cash flow during the remainder of 2014, we hope to see significant improvement in this respect from 2015 onwards.”

This investor news may contain 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 Reports for the year ended December 31, 2013 available on our website at https://www.telekom.hu.