Press Releases

Budapest, November 9, 2016 18:00

Magyar Telekom today reported its consolidated financial results for the third quarter of 2016, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Total revenues revenues declined by 4.7% year-on-year to HUF 150.6 billion in Q3 2016 , mostly as a result of partial exit from the energy business, lower SI/IT revenues and a decline in fixed line revenues. Excluding the contribution of SI/IT and energy businesses, core like-for-like telco revenues increased by 1.2% in Q3 2016, due to higher mobile revenues. Total revenues decreased by 6.3% to HUF 443.8 billion in the first nine months of 2016 compared to the same period of 2015, driven by the above-mentioned factors. Mobile revenues in Q3 2016 increased by 4.5% year-on-year to HUF 82.7 billion as higher mobile data and equipment revenues offset shrinking voice retail and SMS revenues. Mobile revenues in 9M 2016 increased by 2.1% year-on-year as a result of above-mentioned trends and the Mobile Termination Rate (MTR) cut in Hungary which negatively affected Q1 2016 revenues. Fixed line revenues decreased by 3.7% to HUF 50.8 billion in Q3 2016 as improvement in TV and other revenues was offset by the decline in voice retail, equipment, data and wholesale revenues. We witnessed a moderate decline in Hungary and a more substantial drop at both foreign subsidiaries. 9M 2016 fixed line revenues remained roughly stable year-on-year at HUF 155.2 billion, against the decline in Q3 2016, driven by a revenue surplus from the GTS acquisition, which offset the effects of the Origo deconsolidation. SI/IT revenues declined by 6.2% to HUF 15.7 billion due to lower revenues compared to Q3 2015 in all segments. In Hungary, the impact of fewer public projects due to lower EU fund inflows was partly mitigated by revenues generated from the financial sector, while in Macedonia and Montenegro two large projects boosted last year’s revenues. 9M 2016 SI/IT revenues declined by 4.8% year-on-year to HUF 45.6 billion, primarily due to lower incoming EU funds. Energy revenues decreased to HUF 1.5 billion from HUF 9.4 billion in the same period of 2015, due to exit from the residential gas business as of August 1, 2015 and transfer of the B2B energy business into the joint venture (E2) with MET Holding AG as of January 1, 2016. 9M 2016 energy service revenues declined to HUF 5.3 billion from HUF 36.7 billion in the same period of 2015, driven by the above-mentioned factors. We do not expect to exit the residential electricity business before March 2017.
• Direct costs decreased by 12.1% to HUF 47.3 billion, mainly due to a sharp decline in energy service related costs and lower SI/IT related costs, which compensated for the increase in other direct costs. Direct costs for 9M 2016 declined by 17.9% year-on-year to HUF 137.6 billion, as a result of the same drivers. Interconnect costs improved by 2.5% to HUF 5.8 billion in the third quarter driven by lower volume of traffic in both Macedonia and Montenegro, resulting in lower payments to domestic and international operators. Interconnect costs in the first nine months of 2016 decreased by 12.7% year-on-year to HUF 16.5 billion due to the MTR cut which affected the first quarter. SI/IT service related costs declined by 13.6% in Q3 2016, in line with lower SI/IT revenues across the Magyar Telekom Group footprint. The SI/IT gross margin registered an improvement compared to both Q3 2015 and the first nine months of last year. Energy service related costs declined by 85.5% against both Q3 2015 and the first nine months of 2016 (in line with exit from the residential gas business and transfer of the B2B energy business into the joint venture (E2) with MET Holding AG). Bad debt expenses improved by 4.1% year-on-year to HUF 1.9 billion in Q3 2016, as a result of favorable aging of bills in the enterprise segment, as well as the positive effect of liquidity checks and factoring in the residential mobile business in Hungary. At the same time, bad debt expenses improved in Macedonia as a result of a recently launched collection campaign, while in Montenegro, bad debt expenses increased due to lower collection efficiency. 9M 2016 bad debt expenses deteriorated by 7.5%  year-on-year,  owing to a significantly  higher amount of impairment losses charged in all segments compared to the first nine months of 2015. Other direct costs went up by HUF 3.3 billion to HUF 29.2 billion due to a higher cost of mobile equipment and accessories sales, driven by third party export transactions and launch of the new iPhone7, partly offset by savings on fixed device related costs due to lower TV, tablet and notebook sales.
• Gross margin slightly decreased versus Q3 2015, but remained stable versus 9M 2015 at HUF 103.4 billion and HUF 306.2 billion, respectively. Improving SI/IT margins and bad debt expenses were counterbalanced by higher other direct costs, due to increased mobile equipment sales in Hungary compared to Q3 2015. In Macedonia, gross margin slightly improved in Q3 2016 thanks to significant direct cost savings, while in Montenegro, we witnessed a 3.5% decline, mainly driven by a decline in revenues.
• Indirect costs improved by 10.4% year-on-year in Q3 2016 , mainly due to a decline in employee-related expenses at the MT-Hungary segment. At the same time, indirect costs for 9M 2016 declined by 5.7% year-on-year, where one-offs related to the Origo sale and the real estate transaction (Infopark) offset the increase in other operating expenses. Employee-related expenses improved by HUF 5.6 billion to HUF 19.7 billion, driven by the much lower severance expenses of HUF 0.1 billion booked in Q3 2016 (Q3 2015: HUF 4.6 billion), as well as savings resulting from the 2014/2015 headcount reduction program in Hungary. Furthermore, employee-related expenses significantly improved at both foreign subsidiaries, thanks to the outsourcing of network planning and maintenance to Ericsson. Hungarian sector specific taxes decreased by 6.6% to HUF 6.0 billion in Q3 2016 due to the lower telecommunication tax expense as a result of changing customer behavior. In the first nine months of the year, telecommunication tax expenses decreased by 4.4% to HUF 18.3 billion compared to the same period last year. At the same time, Magyar Telekom recognized a utility tax expense of HUF 7.3 billion, HUF 0.4 billion lower than in the first nine months of 2015. The primary reason for this decline is the five-year utility tax credit granted to Magyar Telekom Group on 25 June 2015, related to the new network investments and upgrades aimed at providing internet access at the speed of at least 100 MB/s. Secondly, in the first quarter of 2016, there was a utility tax expense decrease due to the refinement of the taxable network records compared to the first quarter of 2015. Other operating expenses improved by 2.0% to HUF 24.5 billion in Q3 2016, driven by the Hungarian segment, where lower marketing expenses and other contracted services costs compensated for higher expenses in Macedonia and Montenegro, which were mainly due to increased maintenance costs in relation to the outsourcing projects. At the same time, other operating expenses in 9M 2016 grew by HUF 4.3 billion (+6.1%), because of higher advisory fees related to the Digital Welfare Program, increased marketing expenses and sponsorship activities. Furthermore, maintenance costs connected to the parallel operation of legacy and next generation IT platforms increased, while there were rental costs related to the sale of Infopark and rental costs of some local state-of-the-art cable networks. Other operating income declined by HUF 0.8 billion due to lower income from network construction works in Hungary in Q3 2016, and a real estate sale in the same period of 2015 in Montenegro. On the other hand, other operating income in 9M 2016 grew by HUF 4.6 billion due to the HUF 5.1 billion one-off profits realized on the Infopark and the Origo sale in Q1 2016.
• EBITDA improved by 10.0% year-on-year to HUF 53.8 billion in Q3 2016, as lower direct costs compensated for lower revenues, leading to a broadly stable gross margin, while savings due to the headcount reduction program and outsourcing and the lower severance payment resulted in significant improvement in employee-related expenses. The increasing EBITDA in Hungary was supported by a higher EBITDA in Macedonia, while in Montenegro the decline was only 3.8% year-on-year. 9M 2016 EBITDA increased by 6.7%, driven by the same trends, and was further boosted by the one-off profits in other operating income, which compensated for higher other operating expenses.
• Depreciation and amortization expenses increased by 8.1% year-on-year in Q3 2016 to HUF 29.9 billion, resulting in an increase of 3.5% to HUF 84.9 billion for 9M 2016. Software activation related to the new billing and Customer Relationship Management systems caused higher depreciation costs in 2016 in both Hungary and Montenegro.
• Profit for the period improved by 28.8% to HUF 13.6 billion in Q3 2016 driven by higher EBITDA, improving net financial results and lower income tax. Profit for the period in 9M 2016 rose by 33.7% year-on-year. Net financial loss narrowed from HUF 7.1 billion in Q3 2015 to HUF 6.8 billion in Q3 2016. The result was primarily due to lower average interest rates (driven by favorable changes in the market conditions and decreasing amount of loans), as well as exchange gains on loans, accounts payable and receivables offsetting lower gains on derivatives. 9M 2016 net financial loss narrowed to HUF 19.3 billion, also supported by gains on the fair valuation of derivatives. Income tax expense decreased by 2.9% against Q3 2015, as decline in energy suppliers’ tax offset the effect of higher revenues compared to the same period of 2015. On the other hand, income tax expenses increased by 7.6% in the first nine months of the year, driven by the withholding tax related to the dividend declaration of Stonebridge in Q2 2016. Profit attributable to non-controlling interests declined both versus Q3 2015 and 9M 2015, to HUF 1.2 billion and HUF 2.2 billion, respectively, due to lower profit for the period generated by international subsidiaries.
• At HUF 398.7 billion, net debt improved by 6.4% compared to the end of September 2015, and by 2.6% compared to year end 2015. Meanwhile, the net debt ratio (net debt to total capital) improved from 42.9% at the end of December 2015, to 41.6% , driven by a reduction in short- and long-term borrowings combined, coupled with higher equity driven by improvement in this year’s profit. Magyar Telekom’s dividend policy seeks to maintain its net debt ratio within the 30%-40% range. With the net debt ratio on a downward trajectory, we expect it to reach the targeted 30%-40% range in the coming years.
• Free cash flow overall increased from HUF 16.9 billion in 9M 2015 to HUF 29.8 billion in 9M 2016 driven by higher EBITDA, lower interest paid, the GTS transaction last year, as well as one-offs related to the Origo and Infopark sale. At the same time, more CAPEX spending due to the Montengrin frequency acquisition partly offset the previously described positive effects.

Christopher Mattheisen, CEO commented:

“I am pleased to report a 1.2% improvement in our core telco revenues during the third quarter of 2016 driven by mobile equipment and data revenue growth, as well as an increase in TV revenues. The 4.7% decline in our total revenues was primarily driven by the restructuring of our energy business and a temporary slowdown in EU fund inflows which affected SI/IT revenues. Group EBITDA for the quarter grew by 10.0% year-on-year, mainly due to a combination of underlying revenue growth, lower severance related expenses, improving SI/IT gross margin and actual savings from the headcount reduction program implemented over the past two years.

Our performance in Hungary was supported by the reversal of the EBITDA decline in Macedonia to a 1.9% gain, as the mobile market stabilized. In Montenegro, despite continued regulatory and competitive pressures, the decline in EBITDA decelerated to only 3.8% in the third quarter, largely due to our focus on cost efficiency.

The popularity of our 4Play Magenta 1 offer has helped to improve our performance in the high-end segment in both Hungary and international subsidiaries. By the end of September this year, we reached almost 100 thousand Magenta 1 subscribers in Hungary alone. As an integrated service provider, with an integrated IP network and highly valued brand, we are in a very advantageous position to maximise the telecommunication share of household wallet spend through further growth in the number of both 3Play and 4Play subscribers.

Our confidence for the full year is reflected in our decision to raise 2016 revenue and EBITDA targets to around 595 billion and around 193 billion forint, respectively. We no longer expect Digi to enter the mobile market in 2016 whilst household spending power in Hungary is on the rise. Our revenues will also continue to be supported by contribution from residential electricity services, which we do not plan to withdraw before March 2017. We reiterate our CAPEX guidance (excluding any spectrum acquisitions and annual frequency fee capitalization) for 2016 and previously stated targets for 2017.”

For detailed information on Magyar Telekom's Q3 2016 results please visit our corporate website ( www.telekom.hu/about_us/investor_relations) or the website of the Budapest Stock Exchange ( www.bse.hu).