Press Releases

Budapest, August 2, 2017 18:00

Magyar Telekom today reported its consolidated financial results for the second quarter and first half of 2017, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Total revenues increased by 8.9% year-on-year to HUF 153.5 billion in Q2 2017 (Q2 2016: HUF 141.0 billion). This is largely due to strong growth in SI/IT revenues coupled with higher equipment sales. These factors are also behind the 5.3% revenue rise to HUF 294.0 billion in H1 2017 vs. H1 2016. Mobile revenues grew by 4.1% year-on-year to HUF 79.6 billion in Q2 2017, as increased mobile data and equipment revenues in both Hungary and Macedonia offset the decline in voice revenues. These trends resulted in a 3.4% increase in mobile revenues in the first half of 2017 compared to H1 2016. Fixed line revenues declined by 2.1% year-on-year to HUF 48.2 billion in Q2 2017 and by 1.9% to HUF 95.7 billion in H1 2017 compared to the first half of 2016, as higher TV and equipment revenues were offset by the decline in voice retail and broadband retail revenues. System Integration and IT (SI/IT) revenues rose sharply to HUF 24.4 billion in Q2 2017 (up by HUF 10.5 billion year-on-year) due to the acceleration of EU fund inflows to Hungary boosting typically high volume software and hardware delivery projects. This also resulted in SI/IT revenues of HUF 41.5 billion in the first half of 2017 (increase of HUF 12.3 billion vs. H1 2016). Energy service revenues decreased by 9.6% year-on-year to HUF 1.3 billion in Q2 2017 due to the lower electricity customer base and expiry of remaining gas universal contracts. Driven by the same factors, H1 2017 energy service revenues declined to HUF 2.9 billion (down 23.0% compared to H1 2016). As announced on July 31, 2017, the Company has decided to exit from the residential segment of the electricity market with effect from November 1, 2017.
• Direct costs increased by 28.4% year-on-year to HUF 62.7 billion, mostly owing to the significant increase in SI/IT and equipment sales costs, in parallel to the related revenue rises. This also resulted in a 17.4% increase in direct costs in the first half of 2017 (to HUF 115.6 billion) vs. H1 2016. Interconnect costs decreased by 3.8% year-on-year to HUF 4.7 billion in Q2 2017 due to lower fixed traffic in both Hungary and Macedonia as well as the cut in Macedonian mobile termination rates. SI/IT service related costs rose to HUF 18.0 billion in Q2 2017, from 7.4 billion in Q2 2016, in line with the related revenue increases. Bad debt expenses improved by 29.7% year-on-year to HUF 1.5 billion in Q2 2017, thanks to enhanced Hungarian collection and credit check processes. Telecom tax increased by 3.9% year-on-year to HUF 6.4 billion in Q2 2017, driven by higher fixed and mobile voice traffic, encouraged by the growing popularity of flat packages in both segments. Other direct costs went up by HUF 4.1 billion year-on-year to HUF 30.9 billion in Q2 2017, due to an increase in the cost of equipment sales in Hungary (in line with a higher volume of smartphone and TV set sales) and higher Hungarian TV content related costs, mainly attributable to the new content fee introduced in July 2016.
• Gross profit declined by 1.5% year-on-year in Q2 2017 to HUF 90.8 billion and by 1.3% in H1 2017 compared to H1 2016 to HUF 178.4 billion, due to a shift in revenue mix towards lower gross margin services.
• Indirect costs improved by 1.1% year-on-year to HUF 43.0 billion in the second quarter of 2017, thanks to savings in other operating expenses. In H1 2017, indirect costs increased by 7.0% to HUF 92.2 billion compared to H1 2016 figures, due to the absence of positive one-off items (the sale of Origo and Infopark Building G). Employee related expenses remained stable year-on-year at HUF 20.1 billion in Q2 2017. Higher employee numbers resulted in increased employee related expenses at the Hungarian operations. However, in Macedonia there was a decline with similar volume due to the absence of one-off severance costs compared to Q2 2016, in relation to outsourcing of the network operation to Ericsson. H1 2017 employee related expenses decreased by 1.0% vs. H1 2016 to HUF 39.5 billion as the higher expenses in Hungary were offset by the lower severance expenses and savings related to the Macedonian network operation outsourcing. Other operating expenses were 1.5% lower year-on-year, amounting to HUF 24.2 billion in Q2 2017, thanks to cost saving measures resulting in lower advisory, HR-related and material costs. However, comparing H1 2017 to H1 2016, other operating expenses increased by 1.4% to HUF 47.3 billion, as in the first quarter, cost saving initiatives did not fully offset increased rental fees related to the sale and subsequent leaseback of Infopark (Building G) and rental of local state-of-the-art cable networks which did not impact the comparison from the second quarter onwards.Other operating income increased by 8.0% to HUF 1.3 billion in Q2 2017 thanks to higher income from brand fee received from the E2 energy joint venture. H1 2017 other operating income declined by HUF 5.7 billion compared to H1 2016, owing to the HUF 5.1 billion one-off profits realized on the Infopark and the Origo sale in Q1 2016.
• EBITDA decreased by 1.8% to HUF 47.9 billion in Q2 2017, driven by the decline in gross profit that was partly mitigated by an improvement in indirect costs. For H1 2017, the decline was 8.9%, as the gross profit decline was coupled with the absence of one-off gains related to sale of Origo and Infopark (Building G) realized in Q1 2016.
• Depreciation and amortization expenses increased by 2.6% year-on-year in Q2 2017 and by 2.1% in H1 2017 vs. H1 2016 to HUF 27.6 billion and HUF 53.3 billion, respectively. The increase is related to software activation related to the new billing and CRM system in Hungary.y
• Profit for the period from continuing operations improved by 2.1% year-on-year to HUF 10.9 billion in Q2 2017, as lower operating profit was offset by a decline in net financial and income tax expenses. For H1 2017, profit for the period from continuing operations declined by 26.1% to HUF 15.7 billion compared to H1 2016, reflecting the absence of one-off profit items which boosted Q1 2016 results. Operating profit declined to HUF 20.3 billion in Q2 2017, reflecting lower EBITDA coupled with higher depreciation and amortization expenses. Net financial results improved by 7.6% year-on-year to a loss of HUF 5.5 billion in Q2 2017, driven by a decline in interest expense thanks to lower average interest rates and lower total amount of loans outstanding. The lower interest expense was partly offset by higher losses on the fair valuation of derivatives; during Q2 2017 the HUF remained mostly unchanged against the EUR, compared to a 0.64% weakening during Q2 2016. Income tax expense declined by 27.3% year-on-year to HUF 3.9 billion in Q2 2017 reflecting the reduction in the Hungarian corporate income tax rate as well as the lower withholding tax related to the dividend declaration of Stonebridge.
• Profit attributable to non-controlling interests increased to HUF 0.6 billion in Q2 2017 and to HUF 1.4 billion in H1 2017 thanks to the improvement in profitability in Macedonia.
• Profit from discontinued operation: In January 2017, the Company signed a share purchase agreement with Hrvatski Telekom d.d. for the sale of the Company’s entire 76.53% shareholding in Crnogorski Telekom A.D., for a total consideration of EUR 123.5 million (HUF 38.5 billion). The transaction closed in January 2017. Consequently, in accordance with IFRS 5, the results and cash flows of the Montenegrin operations are presented as discontinued operations for both the comparative and the current period. (For further details please see section 2.2.3)
• Net debt decreased by 5.1% year-to-date to HUF 357.4 billion (end of 2016: HUF 376.6 billion) with a net debt ratio (net debt to total capital) of 39.1%, reflecting the payment received from the sale of Crnogorski Telekom in Q1 2017, but also Magyar Telekom’s dividend payment in Q2 2017.
• Free Cash Flow from continuing operations decreased to HUF 10.7 billion mainly reflecting the comparison figure in the first half of 2016, which was boosted by one-off gains (from the sale of Origo and Infopark Building G) of HUF 11.3 billion.

Christopher Mattheisen, CEO commented:

“Group revenues continued to grow strongly in the second quarter of 2017, up by 8.9% compared to the same period last year. However,EBITDA declined 1.8%, as successfully implemented cost saving measures did not fully offset gross profit pressures. Nevertheless, there were a number of notable achievements in the period that I would like to bring to your attention.Within our Hungarian operations, our new postpaid mobile portfolio, launched at the end of March, has been well received by the market; in excess of 300,000 subscribers have migrated over to this new plan. Amongst these early movers, we have witnessed significantly higher data allowance subscriptions that have helped to drive average usage levels up by around 50% and led to an increase in overall ARPU levels. Thanks to the flexibility provided by this new scheme combined with increased retention activities in relation to prepaid registration, 50% more of our prepaid customers migrated to postpaid packages in the second quarter compared to previous quarters. Our performance in the prepaid registration process has exceeded our original expectations; we have secured over 95% of our prepaid revenues.

During the quarter, we continued the roll-out of the Company’s high speed internet network that now reaches over 2.9 million Hungarian households. As a direct consequence of the various initiatives introduced to increase fixed service subscriber numbers and capitalize on our upgraded network, we now have more than 600 thousand customers connected to our high speed internet network, whilst the number of TV customers exceeds 1 million. One example of such an initiative is the launch of a new brand, ‘Flip’, which is available in certain areas in Hungary where Magyar Telekom is typically not the preferred choice. Flip offers one very attractively priced 3Play package without any loyalty contract in exchange for simplified, online and self-care focused customer service.

In System Integration and IT, we have almost doubled our revenues year-on-year. This was primarily driven by the material uptick in the number of EU funded projects, which tend to be hardware and software heavy contracts, albeit at significantly lower profit margins. However, we expect that these projects will be the catalysts to capture a number of higher margin IT contracts going forward, as we build upon these newly established customer relationships and fixed asset investments.

In Macedonia, positive trends witnessed in the previous quarters continued. In the mobile segment, despite the cut in mobile termination rates, ARPU continued to improve, thanks to expansion of the postpaid subscriber base coupled with significant uptake in mobile broadband usage. Stripping out the impact of the severance expense booked in Q2 2016, EBITDA stabilised in the second quarter this year.

Based on the encouraging trends we have observed in the first half of the year, including strong performance of the Hungarian SI/IT segment and the high demand for fixed and mobile equipment, we envisage that revenue for the full year 2017 will be higher than originally guided, at around 580 billion forint. All other elements of the original guidance remain unchanged as the increase in revenue is largely due to additional revenue streams that are lower margin, serving to establish and consolidate customer relationships rather than result in an immediate return.”

Public guidance*:

*excluding Crnogorski Telekom financials and the transaction price of the disposal of th majority ownership
** changed from around HUF560 billion