Press releases

Budapest, February 23, 2012 00:00

Magyar Telekom today reported its consolidated financial results for the full year of 2011, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Revenues were down by 2.0% in 2011, from HUF 609.6 bn to HUF 597.6 bn . Retail voice revenues, both fixed and mobile witnessed a decline but this was mostly offset by growing TV, mobile Internet, and System integration/IT revenues. Energy resale also contributed substantially to the increase in other fixed line revenues, while increasing smartphone sales generated higher mobile equipment sales revenues.
• EBITDA declined by 7.9%, from HUF 213.0 bn to HUF 196.1 bn, with an EBITDA margin of 32.8%. Underlying EBITDA , excluding investigation-related costs and provisions, severance expenses and the special telecom tax, decreased by 1.3% to HUF 245.0 bn . Underlying EBITDA margin was 41.0% in 2011 compared to 40.7% in 2010. This slight increase reflects the cost-cutting measures shown in employee-related and other operating expenses (excluding the HUF 16.2 bn provisions booked in connection with the SEC/DOJ agreement).

Details of special influencesand EBITDA performance (HUF bn)*	Q4 2010	FY 2010	Q4 2011	FY 2011
Investigation-related costs	0,3	2,3	0,7	17,5
Severance expenses	4,0	6,1	4,0	6,1
Telecom tax	27,0	27,0	6,3	25,4
Total Special Influence	31,2	35,3	11,0	48,9
Reported EBITDA	26,0	213,0	46,7	196,1
Underlying EBITDA	57,3	248,3	57,7	245,0

*Numbers may not add up due to rounding.

• Magyar Telekom has been subjected to a special telecom tax charged on the company’s annual revenues, retrospectively from January 1, 2010. As this was only introduced in Q4 2010, the impact of the tax was only seen in the Q4 results of both the Group and its segments in 2010 . However, the reported EBITDA of the Hungarian segments (Telekom Hungary and T-Systems Hungary) now includes the special telecom tax for all the quarters in 2010 and 2011 and enables a more accurate comparison of the year-on-year performance of these segments.
• On June 24, 2011 the Board of Directors of Magyar Telekom approved an agreement in principle with the staff of the U.S. Securities and Exchange Commission (the “SEC”) to settle its investigation relating to the Company. In light of this agreement in principle with the SEC and the ongoing negotiations with the Department of Justice (the “DOJ”), the Company recognized provisions in connection with these investigations in Q2 and Q3 of 2011. (In Q2 HUF 11.5 bn was provided for, while in Q3 an additional HUF 8.2 bn provision was created.) On December 29, 2011 Magyar Telekom entered into a final settlement with the DOJ and the SEC . The aggregate amount payable by the Company in settlement of the DOJ’s and SEC’s investigations is USD 90.8 million (HUF 21.9 bn) and was fully provided for by the end of 2011.

Details of investigation expenses (HUF bn)*	Q4 2010	FY 2010	Q4 2011	FY 2011
Legal Costs	0,3	2,3	0,4	1,3
Provisions within Other operating expenses			0,4	16,2
Provisions within Net financial results			1,8	5,7
Total provision			2,2	21,9

*Numbers may not add up due to rounding.

• Depreciation and amortization increased by 31.8% in 2011 compared to 2010. The main reason for the increase is that Magyar Telekom recognized an impairment loss of HUF 31.4 bn from the goodwill on the Macedonia segment based on the fair value less cost to sell calculations. The main reason for the impairment is a 15-25% reduction in the 10-year revenue growth plans of the Macedonia segment prepared in 2011, compared to the plans prepared a year before. This was due to the unfavorable economic environment and fiercer than expected mobile competition resulting in significant pricing pressure and increasing level of handset subsidies.
• Income tax expense increased significantly to HUF 27.5 bn due to tax law changes in Hungary. In Q4 2010, Magyar Telekom booked a one-off tax income of HUF 14.6 bn, driven by a change in the Hungarian corporate tax law which reduced the Hungarian corporate tax rate from 19% to 10% effective from 2013. In November 2011, the tax law was changed again so that instead of a universal 10% corporate tax rate, the 19% rate remains effective from 2013 on annual tax bases exceeding HUF 500 million. Consequently, the one-off decrease in deferred tax liabilities recognized in Q4 2010 was reversed in Q4 2011, increasing the income tax expense of the Group by HUF 15.0 bn.
• Profit attributable to owners of the parent company (net income) declined from HUF 64.4 bn to HUF -7.5 bn . Although underlying EBITDA declined only slightly, the three one-off items, the provisions related to the settlement with the SEC and DOJ, the impairment loss related to the Macedonia segment and the higher income tax expense due to changes in the Hungarian tax law resulted in a net loss for 2011.
• Net cash generated from operating activities increased by HUF 4.1 bn to HUF 168.8 bn . The lower underlying EBITDA and the lower other cashflows from operations (mainly reflecting realized FX losses) was more than offset by an increase in liabilities carried as working capital (excluding the amounts payable for the settlement with the SEC and DOJ) and lower interest paid.
• Investment in tangible and intangible assets (CAPEX) decreased by HUF 8.0 bn to HUF 83.8 bn in 2011 compared to 2010. Telekom Hungary accounted for HUF 65.6 bn of total CAPEX while HUF 4.3 bn is related to T-Systems Hungary. In Macedonia and Montenegro, CAPEX was HUF 10.0 bn and HUF 4.1 bn, respectively.
• Free cash flow (operating cash flow and investing cash flow adjusted for proceeds from / payments for other financial assets) increased by HUF 14.5 bn to HUF 92.0 bn in 2011 compared to HUF 77.5 bn in 2010. Operating cash flow was HUF 4.0 bn higher year-on-year, which was further helped by lower CAPEX and higher real estate sales.
• Net debt decreased from HUF 289.4 bn at the end of 2010 to HUF 288.4 bn by the end of 2011. The net debt ratio (net debt to total capital) was 34.1% at the end of 2011.

Christopher Mattheisen, Chairman and CEO commented: “In 2011, revenues and underlying EBITDA declines were more moderate than expected and we have outperformed on our previously announced guidance of declines of 3-5% and 4-6%, respectively. The 2% revenue decline for 2011 was driven by a more favorable than anticipated market environment both in the traditional telco and SI/IT services, while the 1.3% decline in underlying EBITDA was primarily due to our strong focus on cost efficiency, coupled with higher margins in the SI/IT business compared to the previous year. Capex for 2011, which was down by 8.7% versus 2010, was also ahead of our anticipated saving of 5%.
In fixed line revenues, we had strong support from the energy resale business, which together with the Hoppá flat rate package and the bundling offers, resulted in a significant improvement in the fixed line churn level from last year. The Christmas period was strong in terms of handset sales and upgrades, as customers’ interest in smartphones with data packages attached remains undiminished. IPTV was also an important revenue driver as the growth in the number of our customers was coupled with stronger usage of our value added services. The strong performance of the SI/IT business in the last two quarters of 2011 also surpassed our previous expectations, where we had higher revenues after several quarters when businesses were reluctant to spend on IT projects.
For 2012, however, expectations for a deteriorating economic environment potentially leading to a recession, together with fears over the level of declines in disposable income are strengthening and we do not expect our results to remain immune to these headwinds. In addition, while our initiatives for finding new revenue sources are now showing results and we expect a degree of Group-level revenue stabilisation for the full year, the new ancillary revenue streams have lower profitability and are expected to dilute our profit margins. Therefore, although we foresee revenues to be in the range of flat to a maximum decline of 2% year-on-year, underlying EBITDA is expected to deteriorate by 4-6% in 2012. CAPEX, excluding spectrum acquisitions, is expected to remain in line with 2011 to support our ongoing network modernisation and internal projects to improve efficiency.”

Q4 2011 results analysis

Group

• Revenues were up by 1.6% in Q4 2011 compared to the same quarter in 2010. While the fixed voice revenue erosion slowed down, reflecting our retention efforts, energy resales already have resulted in significant revenue growth in Q4 2011. TV and non-voice mobile revenues show continuous growth along with increased mobile equipment revenues thanks to the strong smartphone sales. SI/IT revenues were up significantly driven by some major project wins.  These were partly offset by lower mobile voice wholesale revenues in Hungary affected by the termination fee cut introduced in December 2010.
• EBITDA was up by 79.4% mainly as the telecom tax in 2010 was accounted for fully in the fourth quarter of that year. Underlying EBITDA increased by 0.8% in the fourth quarter of 2011 thanks to cost cutting initiatives aimed at reducing marketing and material and maintenance expenses. Underlying EBITDA margin was 36.2% in Q4 2011, compared to 36.5% in Q4 2010.

Telekom Hungary Segment

Revenues before inter-segment elimination were up by 0.5% to HUF 111.4 bn and EBITDA was down by 6.1% to HUF 28.8 bn in the fourth quarter of 2011 compared to the same quarter of 2010. The EBITDA margin was down from 27.7% to 25.9% driven by the dilution impact of energy resales. Underlying EBITDA declined by 2.9% and the underlying EBITDA margin was 34.6%.

• Fixed line revenues increased by 2.2% to HUF 49.7 bn in Q4 2011. Although fixed voice revenues have continued to decline, the retention impact of the energy resale and bundled offers, as well as the Hoppá package can be clearly seen as the churn rate slowed down to 5% instead of the 9% seen a year earlier. Also, the decline in fixed line internet revenues bottomed-out and showed a 0.5% increase, while growth in TV revenues remained strong at 6.3%. The total number of TV customers grew by 6.5% in the past year, with strong migration from cable TV to the IPTV service. The strong growth in other fixed line revenues is driven by the retail energy resales. The number of points of delivery (gas and electricity together) reached 35,000 by the end of the year and generated HUF 2.9 bn revenues in Q4 2011, up from HUF 0.4 bn in Q4 2010. (Full-year energy resales revenues reached HUF 4.5 bn in 2011, compared to only HUF 0.4 bn in 2010.)
• Mobile revenues were down by 1.1% to HUF 61.4 bn in the fourth quarter. The slight increase in the customer base, higher usage and the steady increase in the portion of postpaid customers could not counterbalance the decline in tariff levels. Voice wholesale revenues were negatively impacted by the 16% cut in mobile termination fees effective from December 2010. The number of mobile broadband subscriptions was up by 71.0% helped by the strong demand for smartphones. Accordingly equipment sales revenues were up by 16.9% with the average acquisition cost down by 2.5% year-on-year. Non-voice revenues were only up by 2.1% due to lower content revenues. T-Mobile’s market share, based on active customers, was 45.4% at the end of the year up from 44.8% a year earlier.

T-Systems Hungary Segment

Revenues before inter-segment elimination were up by 12.9% to HUF 37.2 bn. EBITDA was up by 48.7% to HUF 5.9 bn in the fourth quarter of 2011 and the EBITDA margin was 15.9%. Underlying EBITDA increased by 18.8% to HUF 6.9 bn. The underlying EBITDA margin of 18.6%, up from 17.7% in the fourth quarter of 2010, reflected our efforts to improve efficiency in light of the drop in high-margin voice revenues.

• Fixed line revenues were down by 11.4% to HUF 7.5 bn driven by lower usage and continued erosion of our customer base, principally caused by mobile substitution, coupled with significant price pressure. Voice revenues declined by 11.4%.
• Mobile revenues were down by 11.3% to HUF 8.4 bn, driven by the decrease in other mobile revenues compared to the high levels seen in the fourth quarter of 2010 as the one-off negative financial impacts of the Governmental measures announced in August 2010 (and booked in Q3 2010) were partly reversed in the fourth quarter of 2010. Voice revenues too declined by 6.7%, as declining average tariff levels and lower levels of usage could not be offset by the increase in our customer base.
• SI/IT revenues were up by 42.0% to HUF 21.3 bn in the fourth quarter of 2011. While the restrictive measures imposed by the government are still blocking any new public IT deals, Q4 2011 revenues have benefitted from the contribution of some large infrastructure projects starting to come onstream in the corporate segment.

Macedonia

In Macedonia, revenues increased by a modest 0.9% to HUF 19.0 bn in the fourth quarter of 2011 compared to the same period in 2010, with EBITDA up by 4.4%. The depreciation of the Hungarian forint had a positive effect on the segment’s contribution to Group results (on average, the Hungarian forint weakened by 9.3% against the Macedonian denar in the fourth quarter of 2011compared to 2010). The decline in revenue and EBITDA in local currency terms was due to the intense competition within the mobile market, resulting in significant pricing pressure which could not be offset by savings in employee related expenses.

• Fixed line revenues in local currency terms were down by 8.7%. The strong decline in voice retail revenues was coupled with lower wholesale and data revenues.
• Mobile revenues in local currency terms were down by 6.8% due to the fiercely competitive environment in Macedonia. The competition driven tariff reductions put pressure on ARPU which declined by 5.8% despite higher usage. Nevertheless, T-Mobile Macedonia’s market share has stabilized at 50.0% and remains the clear market leader. Non-voice revenues were up by 7.9% in local currency terms driven by higher content revenues.

Montenegro

Revenues of the Montenegrin subsidiary were up by 4.2% to HUF 8.4 bn in the fourth quarter of 2011, driven by favorable FX movements (on average, the Hungarian forint weakened by 9.3% against the euro in the fourth quarter of 2011 compared to the same quarter in 2010). Underlying EBITDA was up by 11.9% to HUF 2.9 bn and the underlying EBITDA margin increased from 32.1% to 34.5% due to significant cost cuts within other operating expenses and lower receivables provisions thanks to better collection.

• Fixed line revenues in local currency terms were down by 2.2% in the fourth quarter of 2011. The decrease in retail voice revenues was due to increased mobile substitution and discounts offered in flat-rate packages. The voice wholesale revenue decline was driven by decreased incoming and transit traffic from international operators. However, both Internet and TV revenues increased, driven by a strong focus on bundled services.
• Mobile revenues in local currency terms were down by 7.6%. Voice retail revenues declined driven by the lower number of customer numbers, while wholesale revenues were negatively impacted by two cuts in interconnection tariffs from April and November 2011. Growth in non-voice revenues could only partly offset these declines.

For detailed information on Magyar Telekom’s Q4 2011 results please visit our website ( www.telekom.hu/investor_relations) or the website of the Budapest Stock Exchange ( www.bse.hu).

Investigations into certain consultancy contracts

As previously disclosed, the Company’s Audit Committee conducted an internal investigation regarding certain contracts relating to the activities of the Company and/or its affiliates in Montenegro and Macedonia that totaled more than EUR 31 million. In particular, the internal investigation examined whether the Company and/or its Montenegrin and Macedonian affiliates had made payments prohibited by U.S. laws or regulations, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). The Company has previously disclosed the results of the internal investigation. For further information regarding the internal investigation, see the Company’s annual report for the year ended December 31, 2010.

The Company’s Audit Committee informed the U.S. Department of Justice (the “DOJ”) and the U.S. Securities and Exchange Commission (the “SEC”) of the internal investigation. The DOJ and the SEC commenced investigations into the activities that were the subject of the internal investigation.

On December 29, 2011, the Company announced that it had entered into final settlements with the DOJ and the SEC to resolve the DOJ’s and the SEC’s investigations relating to the Company. The settlements concluded the DOJ’s and the SEC’s investigations. The Company disclosed the key terms of the settlements with the DOJ and the SEC on December 29, 2011. On January 6, 2012 the Company paid a criminal penalty of USD 59.6 million (HUF 14,712 million) pursuant to the settlement with the DOJ and on January 23, 2012 the Company paid USD 25.2 million for disgorgement of profits and USD 6.0 million of prejudgment interest (HUF 7,366 million in total) pursuant to the settlement with the SEC, totaling USD 90.8 million (HUF 22,078 million) paid with respect to the settlements with the DOJ and the SEC.

The aggregate amount of USD 90.8 million payable by the Company in settlement of the DOJ’s and SEC’s investigations was fully provided for before the end of 2011.

In addition to the DOJ’s and the SEC’s investigations, the Ministry of Interior of the Republic of Macedonia, the Montenegrin Supreme State Prosecutor and the Hungarian Central Investigating Chief Prosecutor’s Office commenced investigations into certain of the activities that were the subject of the internal investigation. These governmental investigations are continuing, and the Company and/or its relevant subsidiaries continue to cooperate with these investigations.

Magyar Telekom incurred HUF 17,485 million operating expenses relating to the investigations in 2011 (HUF 1,294 million legal costs and HUF 16,191 million provision for the settlements) included in the Hungary segment, and additional losses and expenses of HUF 5,666 million included in the net financial results (HUF 1,119 million interest expense and HUF 4,547 million foreign exchange loss).