Press Releases

Budapest, May 13, 2020 17:30

Magyar Telekom today reported its consolidated financial results for the first quarter of 2020, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

T otal revenues remained broadly stable year-on-year at HUF 159.3 billion in Q1 2020 , as increases in telecommunication service revenues in both Hungary and North Macedonia were offset by a decline in Hungarian System Integration and IT sales.

 ▪  Mobile revenues increased by 3.9% year-on-year to HUF 88.1 billion in Q1 2020 , as the continued increase in mobile data revenues more than offset the decline in voice revenue witnessed in both countries.

▪  Fixed line revenues remained stable year-on-year at HUF 52.8 billion in Q1 2020 , as higher broadband and TV revenues were offset by the decline in equipment sales and other revenues.

▪  System Integration (SI) and IT revenues declined by 14.2% year-on-year to HUF 18.4 billionin Q1 2020. Revenues in Hungary contracted due to lower income from Hungarian public and corporate sector projects. SI/IT revenues in North Macedonia increased considerably, reflecting a recovery in public sector demand, mainly in the fields of customized solution projects, cloud computing and internet protection.

Direct costs increased slightly year-on-year, to HUF 67.1 billion in Q1 2020, as lower SI/IT related costs were offset by increases in interconnect costs and telecom taxes (both reflecting higher usage levels).

▪  Interconnect costs increased by 10.3% year-on-year to HUF 5.3 billion in Q1 2020, reflecting increased off-network mobile voice and SMS traffic in both countries, which led to higher payments to domestic mobile operators.

▪  SI/IT service related costs declined by 14.6% year-on-year to HUF 12.8 billion in Q1 2020, driven by a lower volume of projects.

▪  Bad debt expenses deteriorated by HUF 0.6 billion year-on-year to HUF 2.7 billion in Q1 2020. This was the combined result of a higher bad debt expense due to the COVID-19 pandemic, as well as the release of certain customers from a loyalty period, partly mitigated by the favorable aging of mobile receivables at the Hungarian operation.

▪  Telecom tax was up 3.9% year-on-year at HUF 6.5 billion in Q1 2020, reflecting an increase in mobile voice traffic in both business and residential segments, driven by social distancing measures implemented in Hungary in response to the COVID-19 pandemic.

▪  Other direct costs increased by 3.1% year-on-year to HUF 39.8 billion in Q1 2020, primarily due to an increase in TV content outpayments, which were further amplified by the weakening of the forint against the euro and could only be partially offset by lower equipment costs .

Gross profit remained stable year-on-year at HUF 92.2 billion in Q1 2020 , as further improvements in telecommunication service revenue trends were offset by lower SI/IT results and increases in bad debt and telecom tax expenses.

Indirect costs remained broadly unchanged year-on-yearat HUF 45.8 billionin Q1 2020 , as savings in employee related expenses were offset by lower other operating income.

▪  Employee-related expenses improved by 1.8% year-on-year to HUF 22.2 billion in Q1 2020, as higher severance expenses in relation to headcount reduction programs in Hungary and North Macedonia, were offset by savings at the Hungarian operation thanks to the continuous decline in the company’s headcount.

▪  Hungarian utility tax remained stable at HUF 7.2 billion in Q1 2020, reflecting the combined impact of an increase in the length of the taxable network (mostly due to the refinement of the cable network records and network acquisitions) offset by the positive effects of Magyar Telekom’s tax credit relating to its new network investments and upgrades that enable internet access of at least 100 Mbps.

▪  Other operating expenses improved moderately year-on-year to HUF 16.8 billion in Q1 2020, as general saving measures, most prominently on advisory costs, offset the negative FX impact from the weakening of the forint.

Other operating income was HUF 0.6 billion lower year-on-year at HUF 0.3 billion in Q1 2020. The decline reflects the absence of accrual releases of over 5 years positively impacting Q1 2019 results coupled with one-off correction unfavorably effecting Q1 2020.

EBITDA remained flat year-on-year at HUF 46.4 billion in Q1 2020 , as a result of stable gross profits and indirect costs. EBITDA AL improved moderately by 1.1% year-on-year to HUF 40.9 billion driven by lower IFRS 16 related D&A and interest expense due to reassessment and modification events.

Depreciation and amortization (D&A) expenses decreased by HUF 0.1 billion year-on-year to HUF 33.7 billion in Q1 2020.

Profit for the period declined from HUF 4.0 billion in Q1 2019 to negative HUF 0.8 billion in Q1 2020, as the forint weakened significantly against the euro, leading to a deterioration in net financial results.

▪  Net financial results deteriorated HUF 5.3 billion year-on-year to HUF 11.0 billion in Q1 2020, reflecting the considerable 8.6% decline in the EUR-HUF exchange rate in the period. This resulted in a large increase in FX losses recorded in relation to lease liabilities as well as trade payables.

▪  Income tax expenses decreased from HUF 3.1 billion in Q1 2019 to HUF 2.5 billion in Q1 2020, while profit before tax declined from HUF 7.1 billion to HUF 1.7 billion. Revenue generation in the Group’s business is typically more stable than profit, which can fluctuate significantly as a result of seasonal impacts. As local business tax is based on revenues and represents a substantial portion of income taxes, the scale of decline in tax expenses is lower than that in profit.

Profit attributable to non-controlling interests decreased by 11.4% year-on-year to HUF 0.8 billion in Q1 2020 ,as higher D&A expenses offset the increases in EBITDA leading to lower profits in the North Macedonian operation.

Negative free cash flow in the amount of HUF 18.3 billion was driven by seasonal factors such as high payments to suppliers, coupled with utility tax and income tax payments and a negative foreign exchange (FX) impact stemming from the weakening of the forint.

 

Tibor Rékasi, CEO commented:

“Our main focus since the outbreak of the coronavirus has been on the swift implementation of measures to safeguard the health and safety of both our employees and customers. We have introduced strict social distancing across the Group and, at this time, around 80% of our employees are working remotely. While the majority of our points of sale remain open, we have significantly limited traffic within stores. Our call centers and online support services are successfully handling the resulting increased volumes of customer requests. In an effort to support our customers during this challenging period, we are also providing free mobile data and TV content, a range of attractively priced laptops and tablets, free voice usage for the most vulnerable in our society as well as payment restructuring for customers in financial difficulties.

Digitalization has been of vital importance in these times of unprecedented crisis and our networks are playing a critical role in keeping businesses and families connected. To ensure the reliability and security of our networks, we continue to invest in our infrastructure. The rollout of our fiber network remains a key priority and capex dedicated to such investments has doubled versus the first quarter of 2019. Since acquiring spectrum licenses related to 5G and mobile broadband services, we commenced commercial 5G services in early April and intend to steadily expand our coverage over the coming months.

Despite the negative impact of the COVID-19 pandemic towards the end of the quarter, thanks to continued focus on executing our commercial and strategic priorities, we delivered broadly stable total revenues and EBITDA year-on-year. Looking ahead, while the precise impact of the current crisis on our financial performance remains uncertain, as a telecommunications provider, demand for our services remains strong. Since the start of the pandemic, we have seen higher voice and data traffic across our fixed and mobile networks and a lower level of international roaming. At the same time, demand for IT services has been shaped by social distancing measures with projects facilitating digitalization of businesses among the most sought-after. These projects, while of great significance longer term, have a lower contribution to our profitability today. We also expect our profitability to be affected by higher expenses driven by increased usage levels and the weakening of the forint. To mitigate the impact of such trends on our performance we intend to pursue further cost optimization measures that will support us in our efforts to reach our targets for the full year.

Given the high level of uncertainty regarding the duration of the restrictions and its impact on the economy, we will continue to closely monitor the impact of the pandemic on our operations and provide further updates to all our stakeholders as the situation evolves.”