Press Releases

Budapest, May 12, 2005

Increase in net income, market leading positions maintained in spite of intense competition in all segments

Highlights:
- Revenues fell slightly, by 1.7% to HUF 143.6 bn (EUR 585.8 m) in Q1 2005 over the same period in 2004 as the higher mobile and data transmission revenues were offset by a combined decline in revenues from domestic and international traffic.
- EBITDA declined by 6.4% to HUF 59.1 bn, with an EBITDA margin of 41.2%.
- Gross additions to tangible and intangible assets were HUF 12.4 bn, of which the portion relating to the fixed line segment reached HUF 5.8 bn, with mobile at HUF 6.6 bn.
- Following the change in IFRS rules, amortization of goodwill has been discontinued from January 1, 2005 onwards and impairment testing is now carried out on an annual basis. In 2004, depreciation and amortization expenses of Magyar Telekom Group included HUF 13.9 bn of goodwill amortization. In addition, in Q1 2004 the Westel brand name impairment charge relating to the rebranding of Westel to T-Mobile Hungary amounted to HUF 4.4 bn. As a result of these, in Q1 2005, depreciation and amortization fell to HUF 27.3 bn from HUF 36.6 bn a year earlier.
- Fixed line segment: external revenues fell by 6.7% to HUF 79.2 bn as increased data transmission (mainly ADSL) revenues only partially offset the decline, primarily in traffic revenues; EBITDA amounted to HUF 30.9 bn (an 8% fall) and EBITDA margin on external revenues was 39.1%.
- Mobile segment: external revenues grew by 5.1% to HUF 64.5 bn driven by voice revenues, enhanced services revenues and subscription fees. EBITDA amounted to HUF 28.2 bn (a 4.7% decline) and EBITDA margin on external revenues reached 43.7%.
- Group operating profit grew 19.6% to HUF 31.8 bn, mainly driven by a decline in depreciation and amortization as well as a reduction in employee-related expenses and cost of equipment sales. Net income increased from HUF 14.1 bn (EUR 54.1 m) to HUF 18.0 bn (EUR 73.3 m).
- Net cash from operating activities decreased to HUF 34.6 bn due to the combined impact of the decline in EBITDA and the severance payments made in Q1 2005. Net cash utilized in investing activities increased to HUF 51.5 bn. The growth is chiefly explained by the acquisition of the majority stake in Telekom Montenegro (TCG). Net cash used in financing activities was HUF 26.4 bn, mainly explained by increased borrowing as a result of the TCG transaction.
- Net debt grew by HUF 20.2 bn compared to the end of December 2004, driven by the TCG transaction. The net debt ratio (net debt to net debt plus equity plus minority interest) increased to 33.3% at the end of March this year.

Elek Straub, Chairman and CEO commented: "At the beginning of 2005, the impact of competition became stronger in both the fixed and mobile businesses. New, combined offers appeared in the market and aggressive marketing campaigns have been seen from the Hungarian fixed line competitors in the last months. Both the Hungarian and Macedonian mobile markets have been characterised by strong tariff competition. This has put a limitation on mobile top line growth and has also negatively impacted our fixed businesses, for example increasing the Hungarian fixed line churn. However, at the same time, as a result of successful measures to increase workforce efficiency in the fixed segment, the lines per employee ratio at the parent company grew from 352 in Q1 2004 to 415 in Q1 2005. To bring a new impetus to the Hungarian fixed line business, we are accelerating our broadband program, and have set a new, higher target: we now intend to reach 600,000 broadband customers by the end of 2006. Looking ahead this year, we are convinced that the rebranding of Matáv and the full introduction of the 'T' brand portfolio will be successful in further deepening integration among the businesses. The start-up of 3G services will also support the focus on enhanced services in mobile communication. In line with our stated strategy, we have completed the acquisition of the majority stake in Telekom Montenegro and are now on track to modernise the company and exploit the synergies made possible by the co-operation with the Magyar Telekom Group".


Hungarian fixed line operations: focus on workforce efficiency, acceleration of the broadband program

Revenues before elimination fell by 6% to HUF 71.8 bn with an EBITDA margin at 37%. Domestic and international traffic revenues combined declined by 21.7% mainly due to lower volumes and price discounts. At the same time, driven by the strong growth in installed ADSL numbers and increased Internet subscribers, leased line and data revenues continued to increase, rising by 22.5%. Due to the intensified pricing-driven mobile substitution, the total number of fixed lines declined in the first quarter of 2005 (a fall of 1.5% at end-March compared to the same period in 2004). The lines per employee ratio reached 415 at parent company level. Customised tariff packages represented over 60% of the total number of lines with 1.7 million lines at the end of the first quarter of 2005. ADSL rollout successfully continued, reaching 224,037 lines at the parent company by the end of March this year. Magyar Telekom's Internet subsidiary, T-Online Hungary, maintained its leading position among ISPs in the dial-up market with a market share of approximately 43% and a total of 277,884 Internet subscribers at the end of March 2005 (up by 21.6% year-on-year).


International fixed line operations: cost control to preserve profitability

Revenues before elimination fell by 14.5% to HUF 10.1 bn in Q1 2005 driven by a lower revenue-producing customer base and lower usage, also unfavourably impacted by foreign exchange changes. EBITDA was HUF 4.4 bn with an EBITDA margin of 43.7% reflecting the successful strict cost control. The closing number of employees fell by nearly 24% at the end of the first quarter compared to a year ago due to the restructuring efforts, which resulted in a lines per employee ratio of 252. Fixed line penetration in Macedonia stood at around 28%. The closing number of fixed lines fell by 3% due to the impact of the two-way disconnected customers. PSTN subscribers fell to 561,406 but ISDN channels grew by 10.2% to 41,708. MakTel remained the country's leading Internet service provider; its subscriber base at the end of the first quarter of 2005 increased to 70,011 (vast majority dial-up), a rise of 32.4% year-on-year.


Hungarian mobile operations: stable position in a highly competitive market

Revenues before elimination grew by 2.8% as a result of higher enhanced service revenues and slightly higher traffic revenues. EBITDA amounted to HUF 24.2 bn with EBITDA margin at 38.5%. Operating profit grew strongly by 54.4% to HUF 15.9 bn as the vast majority of the write-off relating to the Westel rebranding was accounted for in the first quarter of 2004. T-Mobile Hungary maintained its leading position in a highly competitive market with 45.9% market share, while GSM penetration was 87.4% at end-March 2005. T-Mobile Hungary's customer base exceeded 4.0 million at the end of Q1 2005. The proportion of postpaid customers continued to increase to 29.4% of the total customer base, compared with 26.4% at the end of Q1 2004. Average acquisition cost per customer fell strongly, by 26.7% to HUF 7,884 in Q1 2005 from HUF 10,763 a year earlier, reflecting lower subsidies in both prepaid and postpaid segments. When calculating subscriber acquisition cost, we include the connection margin (SIM card cost less the connection fee) and the sales related equipment subsidy and agent fee. MOU (monthly average minutes of use per subscriber) grew to 113 in Q1 2005 from 107 a year earlier. Blended ARPU (monthly average revenue per user) declined by 3.1% to HUF 4,653; within this, postpaid ARPU decreased to HUF 10,754 and prepaid ARPU was HUF 2,142. The introduction of new packages encouraged an increase in usage, although the discounts offered combined with regulatory impacts resulted in downward pressure on ARPU. The enhanced services revenue (mainly SMS) grew to HUF 663 (14.3% of total ARPU), from HUF 601 (12.5% of total ARPU) in the same period last year. The churn rate of postpaid customers was successfully maintained at low level of 11.2% in Q1 2005. The churn rate in the prepaid segment was 16.8% in Q1 2005.


International mobile operations: strong EBITDA preserved

Revenues before elimination - in Macedonian denar - grew by 3.2% but due to the foreign exchange impact, fell by 2.6% in Forint terms to HUF 7.6 bn in Q1 2005. EBITDA stood at HUF 4 bn with an impressive EBITDA margin of 52.4% reflecting the continued efficiency. Mobile penetration in Macedonia grew strongly to above 51% against 33% at end-Q1 2004. The mobile customer base grew by 37.5% to 777,048, with Mobimak's mobile market share standing at around 74% at end-March 2005.