Press Releases

Budapest, August 12, 2004 00:00

Since liberalization competition on the telecommunications market has been growing continuously which results in carriers making increasingly cheap offers on the market. To further strengthen Matáv's competitiveness and enable offering even more competitive solutions to its customers Matáv's medium-term strategy focuses on efficiency improvement. The company's management is committed to implementing a Value Creation Program with the following key elements: exploiting Group synergies, improving organic performance and capturing acquisition-driven growth opportunities. To implement this Matáv has elaborated a comprehensive market-oriented program ensuring improving the performance of LoBs, with special regard to fixed-line access preservation, broadband internet growth, improving mobile profitability and breakthrough cost reduction. As a result of the program the Group EBITDA margin will exceed 40% in 2005-2006 and single-digit revenue growth will be achieved in 2005 and 2006.

Since becoming a listed company in 1997 Matáv has maintained its dominant position - even in the increasingly strong competition that followed telecommunications market liberalization - in the domestic fixed-line business, successfully expanded through acquisitions into mobile and international operations and this way continuously produced solid financial results. Over the past few months a thorough analysis of the Matáv Group's activities, financial and competitive position has been carried out, and the findings have been used to define Matáv's medium-term strategic plans and targets for 2005-2006.


Organic performance improvement strategy

Management has developed a comprehensive, market-oriented program covering operational improvement in every LoB.

Halt and reverse erosion of the fixed-line customer base

Hungary's fixed-line access base has been declining for a number of years. Through a combination of active promotion and the introduction of a set of competitive new products churn has been successfully stopped. Matáv's fixed-line business will continue the aggressive launch strategy of new products that will make the use of analog lines more attractive. New bundled reduced-price internet access products will be offered to the customers in the first phase of revitalization of the fixed-line business. These will be followed by new innovative voice solutions and content service related products leveraging the Matáv Group's improving and expanding broadband access platform. Fixed-line growth initiatives will be launched in Matáv's ownership concession areas as well as in non-Matáv areas.

Drive continued radical increase in ADSL penetration

In 2003, Matáv tripled Hungary's ADSL access base and by the end of the year its ADSL customer base topped 100,000 and the target for the end of this year is to reach 200,000 customers. ADSL is the key enabler to defend the fixed-line access base. Continued promotions, a new differentiated product range and broadband-specific content services will generate strong increases in demand, while careful pricing will allow optimal subscriber and profit growth. As a result, Matáv's ADSL customer base is expected to exceed 400,000 by 2006.

Defend leading position in the mobile market

The Matáv Group's mobile business unit, T-Mobile Hungary Rt. (T-Mobile) is the leading mobile provider in the country with a market share of around 47%. The competitive environment in mobile is intense, with competitors continuing to market aggressively to gain market share, so T-Mobile has elaborated a detailed strategy to defend its dominant position, based on four major initiatives:

- T-Mobile has a clear pricing strategy to respond efficiently to competitors' moves while avoiding unnecessary price reductions. In this way market share and market value are both preserved.

- T-Mobile uses a state-of-the-art customer value management system to identify the value created by each customer. This is an essential tool of the system to defend customers, target customer segments and micro-segments in a market that is approaching saturation. Customer value-based service and proactive sales are used by T-Mobile to extract maximum value from its customer base while optimizing retention and acquisition costs.

- T-Mobile has a high percentage of postpaid customers in its portfolio with higher voice traffic and long-term loyalty contracts, and marketing initiatives (e.g. handset upgrades, loyalty program, etc.) are designed to preserve this advantage.

- The rebranding of the company allows T-Mobile Hungary to access the global product portfolio of T-Mobile. Management will use these to strengthen the company's competitive position and make its offering more attractive to customers with innovative products. A wide range of content-driven non-voice products and attractive roaming schemes will be the first offering to demonstrate the additional customer benefits of rebranding.

Improve MakTel's cost-efficiency to realize breakthrough savings

Management has also developed a Value Creation Program for Matáv's international subsidiary MakTel Group. The program will deliver efficiency improvement through improving the attractiveness of our offers and sales execution quality in the fixed-line residential business, capturing further growth in the continuously expanding mobile market, while implementing a major restructuring and organizational rationalization of the MakTel Group.

Continue improving the Matáv Group's internal efficiency

Competition is becoming more intense in the domestic telecommunications market, providers continuously offer newer and cheaper calling plans. Matáv will also make efforts to enable its customers to choose from the widest possible range of promotional calling plans and make cheaper phone calls. However this requires improvement of the Matáv Group's efficiency, reduction of its costs and rationalization of its organization, including headcount rationalization.

A set of specific operational efficiency targets is in place, including a workforce efficiency improvement at the parent company increasing Matáv's fixed-lines/employee ratio above 500 by the end of 2006 (a ratio that corresponds to the Western European best practice indicators). Based on preliminary estimates the 2004 cost of headcount rationalization at the parent company will be approximately HUF 16 bn. In addition, the headcount of the existing subsidiaries will also be trimmed by an average 17.3% with an estimated cost of a further HUF 6.7 bn. The number of management positions reduced will be greater than the average headcount reduction rate to further improve efficiency. In addition to organizational measures, management will pursue opportunities for further significant savings in Group-wide procurement-related synergies. We expect to remove HUF 19.5 bn from the Group's cost structure by 2006 as a combined result of headcount reduction and headcount-related cost cutting initiatives. In parallel, our ongoing efforts to reduce costs in all cost categories will continue. Negotiations on the headcount rationalization are now being conducted with the interest organizations.


Exploit integration and DT Group synergies

Matáv's position as a integrated telecom company within the Deutsche Telekom (DT) Group will allow the company to create additional shareholder value by taking advantage of the synergies to reduce costs, capture new revenues and improve its competitive positions.

One significant element of synergies with DT divisions is the joint venture of T-Systems Hungary (TSH). TSH forms a stable partnership between Matáv and T-Systems International (TSI), which will bring additional value through expansion in the outsourcing and synchronous integration markets and the capture of additional international carrier traffic. Matáv has an agreement with TSI to provide international network and carrier services in South-Eastern Europe region through establishing Points of Presence (PoPs) in the respective countries. We have already established the first international PoP in Romania, a PoP in Bulgaria will be opened before the end of 2004. Additional PoPs in Serbia and in the Ukraine are also planned.

The financial area will set up a financial Shared Service Center (SSC) on January 1, 2005 that will integrate the financial-accounting processes of Matáv and its subsidiaries. This new business solution has already been integrated by numerous foreign and domestic companies in their practice and is being successfully used to merge existing parallel activities in various units.


Acquisition driven growth strategy

The third element in the Value Creation Program is value-accretive acquisition-driven growth strategy. Growth through further value-enhancing acquisitions remains Matáv's priority in the future.

We look for acquisition targets, which meet the following criteria:
- The target company should be located in the South-Eastern region of Europe.
- The target company should have good earnings potential in a growing market.
- The transaction cannot be dilutive on EBITDA level.
- The target company should be a telco with a very strong position in the relevant markets.
- Matáv looks for majority ownership or at least a controlling stake.
- Country and regulatory risk should be at an acceptable level.
- Restructuring potential is advantageous.

Matáv Group's presence in the region, track record in managing mobile providers as well as integrated carriers, and proven ability to manage the regulatory environment and successfully restructure monopoly players to market driven carriers all position Matáv very well to repeat the successful MakTel value creation story in other countries. As a first step, we will participate in the privatization process for Montenegro Telecom (TCG).

Matáv will only carry out acquisitions that increase shareholder value. If targets with attractive value creation opportunities do not emerge, the company will further increase its dividend payment while maintaining the net debt ratio between 30% and 40% as set in the dividend policy.


Financial impact

The organic growth and integration steps will improve the financial performance of the Matáv Group. The cumulative impact of these steps will deliver low single-digit revenue growth in 2005 and 2006. Group EBITDA margin will exceed 40% in both 2005 and 2006 (before restructuring charges). In respect of 2004, Matáv maintains its public guidance set earlier, so the EBITDA margin will be around 40% without the restructuring related costs. Regarding gross additions to tangible and intangible assets Matáv aims to reduce its CAPEX to Sales ratio to below 15% from 2005 (without potential acquisitions and UMTS spending). Matáv remains fully committed to its dividend policy as announced in 2003.