Magyar Telekom Tavkozlesi : results for the second quarter of 2018

Budapest,August 8, 201818:00

Magyar Telekom today reported its consolidated financial results for the second quarter and first half of 2018, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

• Total revenues (excluding the impact of IFRS 15 adoption) increased by 9.2% year-on-year to HUF 167.7 billion in Q2 2018 and by 7.9% to HUF 317.3 billion in the first half of 2018 compared to the same period in 2017.Revenue growth was primarily driven by a strong increase in SI/IT revenues along with further increases in equipment sales and mobile data usage. Mobile revenues (excluding IFRS 15 impacts) increased by 5.1% year-on-year to HUF 83.7 billion in Q2 2018 and by 4.9% year-on-year to HUF 161.4 billion in the first half of 2018 , as both mobile data and equipment sales revenues continued to expand dynamically. Fixed line revenues (excluding IFRS 15 impacts) were 5.4% higher year-on-year at HUF 50.8 billion in Q2 2018 and 6.5% higher at HUF 101.9 billion in the first half of 2018. Rising equipment sales, TV and broadband retail service revenues were among the key drivers behind this increase. System Integration (SI) and IT revenues grew by 36.2% year-on-year to HUF 33.2 billionin Q2 2018 , resulting in a year-on-year revenue growth of 30.0% for the first half of 2018. Growth continued to be driven by Hungarian public sector projects, with a major PC delivery completed for the education sector along with other hardware and software deliveries for different public institutions. In Macedonia, the increase in SI/IT revenues was driven by the higher volume of customized solutions projects. Energy Services were discontinued following the exit from the residential segment of the electricity market, as of November 1, 2017.
• Direct costs (excluding IFRS 9 and 15 impacts) increased by 19.0% year-on-year, to HUF 74.6 billion in Q2 2018 (by 15.6% year-on-year to HUF 133.7 billion in H1 2018),driven by higher SI/IT and equipment costs, in line with the growth delivered in the related revenue lines. Interconnect costs increased by 13.8% year-on-year to HUF 5.3 billion in Q2 2018, reflecting increased mobile traffic in Hungary which led to higher payments to domestic mobile operators, while interconnect costs in Macedonia remained broadly unchanged. SI/IT service related costs increased by 40.9% year-on-year to HUF 25.3 billion in Q2 2018, driven by the strong growth in related projects and an increasing ratio of infrastructure delivery projects in the sales mix. Bad debt expenses deteriorated by HUF 0.5 billion year-on-year to HUF 2.0 billion in Q2 2018. This trend was driven primarily by an individual impairment as well as the absence of positive effects from the temporary improvement in factoring results that was recorded in the base period in Hungary. This could not be offset by the improvements recorded in Macedonia through one-offs and write downs in the base period. In the first half of 2018, bad debt expenses remained stable year-on-year, as the aforementioned deterioration was offset by a year-on-year improvement in the first quarter thanks to a temporary improvement related to factored trade receivables in Hungary. Telecom tax rose by 4.0% year-on-year to HUF 6.6 billion in Q2 2018, as a result of increased mobile traffic in Hungary, both in the retail and business segments. Other direct costs increased by 14.4% year-on-year, to HUF 35.4 billion in Q2 2018, primarily due to an increase in the cost of equipment sales in line with higher sales, and an increase in Hungarian roaming outpayments.
• Gross profit (excluding IFRS 9 and 15 impacts) grew by 2.5% year-on-year to HUF 93.1 billion in Q2 2018 and by 2.9% year-on-year to HUF 183.6 billion in H1 2018, as the strong increase in revenues outweighed pressure on direct margins stemming from higher equipment subsidies and margin dilution in SI/IT services.
• Indirect costs (excluding IFRS 9 and 15 impacts) improved by 2.1% year-on-year in Q2 2018 and by 1.6% year-on-year in H1 2018 to HUF 42.1 billion and to HUF 90.7 billion respectively, thanks to savings in other operating expenses. Employee-related expenses remained stable year-on-year at HUF 20.1 billion in Q2 2018. The unfavourable impacts of insourcing trainees in the Hungarian operation and the 5% average wage increase at the Company was counterbalanced by a lower average regular employee headcount. Other operating expenses improved by 4.6% year-on-year to HUF 23.1 billion in Q2 2018. Savings in marketing, maintenance and HR-related material expenses compensated for higher fees related to the rental of local state-of-the-art cable networks. Other operating income decreased by HUF 0.3 billion year-on-year in Q2 2018, reflecting the lower income from brand fee received from the E2 energy joint venture. In the first half of 2018 other operating income remained stable year-on-year, with the aforementioned decline offset by year-on-year increases in the first quarter, reflecting one-off accrual reversals in Q1 2018 related to lapsed unbilled liabilities.
• EBITDA (excluding IFRS 9 and 15 impacts) grew by 6.6% year-on-year to HUF 51.0 billion in Q2 2018 (and by 7.8% versus H1 2017 to HUF 92.9 billion in H1 2018), as a result of a combined impact of the improved gross profit and savings on other operating expenses.
• Depreciation and amortization expenses increased by 5.3% year-on-year to HUF 29.0 billion in Q2 2018 and by 4.8% to HUF 55.9 billion in H1 2018, driven by shortened useful lives of customer connections related network elements.
• Profit for the period from continuing operations (excluding IFRS 9 and 15 impacts) grew by 42.1% year-on-year to HUF 15.5 billion in Q2 2018 and by 55.1% to HUF 24.4 billion in H1 2018 , as the combined effect of higher EBITDA and lower net financial expenses more than offset the increase in D&A expenses. Net financial expenses improved by 45.3% year-on-year to HUF 3.0 billion in Q2 2018, primarily reflecting the unrealized gains recorded in relation to the fair valuation of derivatives in Q2 2018 that was driven by the 5.1% weakening of the EUR-HUF exchange rate. Income tax expenses decreased by 13.0% year-on-year, to HUF 3.4 billion in Q2 2018, driven by temporary correction items that levels out on an annual basis but offset the impact of the year-on-year increase in profit before tax.
• Profit attributable to non-controlling interests (excluding IFRS 9 and 15 impacts), increased to HUF 1.0 billion in Q2 2018 and to HUF 1.8 billion in H1 2018, thanks to the improved performance of our Macedonian operation.
• 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 IFRS5, 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 increased from HUF 309.6 billion at the end of 2017 to HUF 324.0 billion at the end of June 2018 with the net debt ratio (net debt to total capital) up to 35.3%, reflecting the dividend payment in May 2018.
• Free Cash Flow increase as higher EBITDA, lower capex payments and declining acquisition costs offset higher payments to handset suppliers.

Tibor Rékasi, CEO commented:

'I am delighted to report a strong performance across all our business lines in the second quarter of 2018. Growth rates achieved in System Integration and IT revenues and equipment sales, played a particularly important role in delivering a 9.2% year-on-year increase in Group revenues.

In Hungary, we witnessed continued growth in demand for mobile data, increased uptake of smart devices. Our flexible postpaid offering facilitated successful pre- to postpaid migration, further supporting our mobile data revenue growth and delivering a 7% year-on-year increase in ARPU.

In line with our strategy, we maintained a strong focus on growing our high-speed internet network with steady progress towards our coverage target of 300,000 additional households in 2018. The benefits of these efforts are reflected in the positive trajectory of our high-speed internet and TV revenues for the quarter. In addition to positive market dynamics, the strong growth in equipment sales reflects our successful efforts to meet customer needs by introducing the possibility of purchasing mobile devices for fixed services and vice versa.

With FMC as a focal point of our strategy, during the second quarter, we took action to further enhance the attractiveness of our Magenta 1 offer by doubling the mobile data allowance for these customers. We remain the only operator in Hungary that can meet a household's entire telecommunications needs and will continue to leverage this competitive advantage going forward.

In System Integration and IT, the highest revenue growth in recent years at 36.2% year-on-year was primarily achieved by delivering a high volume of hardware and software contracts with a lower profit margin. Whilst this achievement had limited impact on profitability it allowed us to reinforce our relationship with a wide range of customers and secure longer term contracts. Group performance during the quarter was further supported by the continued turnaround in Macedonia. Both revenues and EBITDA improved thanks to solid performance across all business lines.

Based on higher than anticipated revenue growth in the second quarter, we expect our full year revenue to be higher than our original guidance at around HUF 630 billion. All other elements of the original guidance remain unchanged as the increase in revenue is largely due to revenue streams such as equipment sale and SI/IT performance that are lower margin serving to secure our customer base and set us up for the future rather than result in an immediate return.'

Public guidance:

*excluding Crnogorski Telekom financials and the transaction price of the disposal of the majority ownership
** including IFRS 9 & 15 impacts
*** changed from around 600 billion