Magyar Telekom Tavkozlesi : results for the fourth quarter of 2016

Budapest,February 22, 201718:00

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

Highlights:

• Total revenue for Q4 2016 declined by 13.2% year-on-year to HUF 158.8 billion , mostly as a result of the partial exit from the energy business along with lower SI/IT and fixed line revenues. Similar factors were behind the 8.2% fall in total revenue to HUF 602.7 billion for the full year 2016, alongside the sharp cut in the Mobile Termination Rate (MTR) that came into effect in Hungary on April 1, 2015 and negatively impacted like-for-like Q1 2016 results. In terms of breakdown by geography for the full year, revenues remained roughly stable in Macedonia whilst both the Hungarian and Montenegrin operations witnessed declines. Mobile revenues in Q4 2016 increased by 1.4% year-on-year to HUF 82.2 billion as higher mobile data and equipment revenues offset shrinking voice, SMS and other revenues. With regards to the full year 2016 results, mobile revenues increased by 1.9% to HUF 319.9 billion for similar reasons except that other mobile revenues were largely stable over the 12 month period. Fixed line revenues decreased by 7.2% year-on-year to HUF 52.0 billion in Q4 2016 as the sustained positive momentum in TV was offset by declines elsewhere (voice, broadband, equipment, wholesale and other revenues). The fall in fixed line revenues was most pronounced in Montenegro, with declines less marked in Hungary and Macedonia. With regards to the full year 2016, fixed line revenues were lower by 2.3% at HUF 207.2 billion (FY 2015: HUF 212.0 billion), with higher broadband and TV revenues unable to match the declines in revenues from voice retail, equipment (lower TV and laptop sales), data and wholesale along with the effects from the deconsolidation of Origo . SI/IT revenues declined by 30.2% and 15.1% to HUF 23.1 and HUF 68.7 billion for Q4 2016 and full year 2016, respectively. The principal factor behind the decline was a significant decrease in the number and size of public contracts awarded to Magyar Telekom, following the conclusion of a seven-year EU funding cycle in 2015 and the consequent temporary stemming of EU fund inflows into Hungary, which was only in part compensated for by new contracts (mainly related to the public sector). Furthermore, 2015 SI/IT revenues were also boosted by large one-off projects in both Macedonia and Montenegro that were not repeated in 2016. Energy Service revenues decreased by 88.0% year-on-year to HUF 1.5 billion in Q4 2016, due to transfer of the B2B energy business into the joint venture (E2) with MET Holding AG with effect from January 1, 2016. Full year 2016 energy service declined by 86.2% to HUF 6.8 billion (FY 2015: 49.3 billion) because of the same reason and also affected by the planned exit from the residential gas market as of August 1, 2015. It is still our intention to exit the residential electricity business, and we expect this will happen sometime in Q3 2017.
• Direct costs decreased by 27.5% year-on-year to HUF 59.2 billion in Q4 2016, 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. The same drivers led to the 21.1% decline to HUF 196.9 billion for full year 2016 (FY 2015: HUF 249.4 billion). Gross profit decreased slightly versus Q4 2015 to HUF 99.6 billion in Q4 2016. Within Hungary, the improvement in SI/IT margins and bad debt expenses was more than matched by the decline in voice and fixed wholesale revenues, as well as higher other direct costs. In Macedonia, gross profit improved by 1.7% year-on-year to HUF 9.4 billion in Q4 2016 due mainly to significant direct cost savings; whilst in Montenegro, we witnessed a 10.5% decline, driven by the decreases in both voice and fixed broadband revenues coupled with higher cost of mobile equipment sale in line with increased equipment revenues, as well as higher commission costs. In terms of full year 2016, gross profit remained largely flat at HUF 405.8 billion (FY 2015: HUF 407.0 billion) as a result of the lower direct costs offsetting the 8.2% fall in overall revenues. Indirect costs improved by 2.9% year-on-year to HUF 55.8 billion in Q4 2016, mainly due to a decline in employee-related expenses partly offset by higher other operating expenses at our Hungarian operations. At the same time, indirect costs for full year 2016 declined by 5.0% to HUF 208.7 billion (FY 2015: HUF 219.7 billion) thanks to the same reasons, also supported by the one-off gains related to the Origo sale and the real estate transaction (Infopark Building G).
• EBITDA remained unchanged year-on-year at HUF 43.8 billion in Q4 2016, as lower direct costs compensated for lower revenues, leading to broadly stable gross profit; whilst savings in employee-related expenses and lower severance payment more than offset the increase in other operating expenses. The improved level of EBITDA in Hungary was largely matched by declines in both Macedonia and Montenegro. On a full year 2016 basis, Group EBITDA improved significantly by 5.2% to HUF 197.0 billion (FY 2015: 187.3 billion) boosted by the one-off profits in other operating income.
• Depreciation and amortization expenses increased by 2.7% year-on-year in Q4 2016 to HUF 32.6 billion,and by 3.2% for the full year 2016 to HUF 117.5 billion (FY 2015: HUF 113.8 billion). Software activation related to the new billing and CRM (customer relationship management) systems contributed to this rise in depreciation costs in both Hungary and Montenegro on both a quarterly and a full year basis. Furthermore, capitalization of the recently acquired mobile frequencies and content rights at Crnogorski Telekom (Montenegro) was also a factor behind these higher costs. Helping to offset these rises was an extension of the useful economic lives of the optical cable assets in Macedonia which led to a 16.6% and 6.2% fall in deprecation at this unit in Q4 and FY 2016, respectively.
• Net profit for the period improved by HUF 16.4 billion vs. Q4 2015 to HUF 20.5 billion in Q4 2016 , aslower operating profits and a higher net financial loss were more than offset by the one-time income tax gain. For full year 2016, net profit improved by 81.4% to HUF 57.2 billion (FY 2015: HUF 31.5 billion), besides the one-off income tax item also driven by higher operating profit and a lower net financial loss due to a decline in interest expenses.
• Net financial loss deteriorated to HUF 7.5 billion in Q4 2016 (vs. Q4 2015: HUF 5.6 billion). The result was due to unfavourable change of HUF/EUR exchange rates (unchanged rates in Q4 2015 vs. 0.6% weakening in Q4 2016) and higher financial transactional losses more than offsetting improvement in other interest expenses. On a full year 2016 basis, the net financial loss narrowed HUF 26.8 billion (vs. FY 2015: 28.2 billion), primarily due to lower average interest rates, driven by favourable changes in the market conditions, and lower average levels of net debt.
• Income tax expense decreased by HUF 19.1 billion and HUF 18.2 billion on quarterly and full year basis to HUF 16.8 billion and HUF 4.4 billion gain, respectively. The main reason for this change was the reduction in the corporate income tax rate from 19% to a flat rate of 9% as of 1 January, 2017, which was reflected in the Q4 2016 deferred tax position. As a result, the amount of deferred tax liabilities declined by HUF 16.8 billion year-on-year.
• Profit attributableto non-controlling interests remained unchanged (at HUF 0.8 billion) on a quarterly and declined on a full year basis to HUF 2.9 billion (FY 2015: HUF 3.8 billion). The latter was due to the lower profits for the period generated by the international subsidiaries.
• Net debt stood at HUF 376.6 billion as at 31 December 2016, a decrease of 8.0% compared to 12 months previously. Meanwhile, the net debt ratio (net debt to total capital) improved to 39.3% at end-2016 (end-2015: 42.9%), driven by this reduction in the net debt (short-term loans and other borrowings) coupled with a higher equity component driven by the improvement in this year's profit.
• Free cash flow increase to HUF 50.0 billion (+87.1% compared to 2015) reflects higher EBITDA, lower interest payments and one-off profits despite the incremental severance payout and a higher Capex spending, as well as increase in the amount of Capex creditor paid.

Christopher Mattheisen, CEO commented:

'In 2016, with regards to revenue and EBITDA, we have outperformed on our previously announced guidance, whilst managing to reach our 50 billion forint free cash flow target a year earlier than expected. Our total revenues came to 602.7 billion forint for the full year with EBITDA at 197.0 billion forint. This outperformance was driven by a favorable fourth quarter in Hungary, where our increased marketing activities and higher level of subsidies led to a better than anticipated uplift to sales of both mobile handsets and data packages. Growth in EBITDA was also supported by rise in profitability at our SI/IT services in Hungary due to a strategic focus on higher margin projects.

Looking ahead to 2017, we are facing several competitive and regulatory risks to growth, such as the expected entry of Digi into the mobile market, further cuts in the EU roaming rates and the ongoing obligation to register prepaid SIMs; while both the prepaid and business mobile segments are likely to remain very tight. At the same time the fixed line market is experiencing increasingly competitive regional 3Play offers, a situation undoubtedly intensified by the rollout of optical networks by Digi and UPC, with the latter having only recently started to do so. However, as an integrated operator, we believe that we are well positioned to address these challenges in Hungary in terms of maximizing the telecommunication share of the household spending wallet by further expansion of our 4Play Magenta 1 subscriber base, a bundled offering that largely differentiates us from our competitors.

At the same time however, we do not assume that our results will remain immune to these headwinds. Stripping out any contribution from our Montenegrin business, whose sale was finalised in January this year, we now expect revenues to decrease to around 560 billion forints to reflect the negative competitive and regulatory impacts. Our aim is to offset these revenue pressures however, along with the non-recurrence of one-off profits from the sale of Infopark (building G) and Origo, through seeking additional operational efficiencies, such that excluding these one-off gains we expect EBITDA to remain largely stable at around 182 billion forints. Despite Capex (excluding spectrum acquisitions and annual frequency fee capitalizations) for 2016 being higher than originally planned, we still expect it to decline to around 85 billion forint in 2017. Although we still expect to continue with our fixed network investments in Hungary in terms of providing high speed internet access, coupled with further investments in our mobile network, both these programs will be less capital intensive than in the preceding two years. Furthermore, as we are nearing the completion of a number of efficiency enhancing projects, Capex related to the IP migration and other IT projects will accordingly be lower.

Based on the current operating and regulatory environment and outlook, we expect the Company to pay HUF 25 dividend per share in relation to 2017 earnings, keeping a stable dividend level compared to 2016 earnings. This is subject to the Board of Directors' future proposal to the General Meeting which will be submitted in due course, once all necessary information is available and all prerequisites to making such a proposal are met.'

For detailed information on Magyar Telekom's Q4 and full year of 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).