Magyar Telekom results for the fourth quarter of 2017

Magyar Telekom results for the fourth quarter of 2017

Budapest, February 21, 2018 18:00

Magyar Telekom reported its consolidated financial results for the fourth quarter and the full year of 2017, in accordance with International Financial Reporting Standards (IFRS).

Highlights:

Total revenues for Q4 2017 increased by 6.3% year-on-year to HUF 161.4 billion , attributable to the significant growth in SI/IT, equipment and mobile data revenues that more than offset the decline in fixed and mobile retail voice and energy revenues. Factors driving these movements were similar to those behind the 6.4% increase in total revenues to HUF 610.9 billion for the full year 2017. A breakdown by geography shows revenue for the full year 2017 grew by 7.3% in Hungary, while the Macedonian operation witnessed a 3.0% decline.

Mobile revenues in Q4 2017 increased by 5.9% year-on-year to HUF 83.3 billion as higher mobile data and equipment revenues more than offset the decline in voice revenues both in Hungary and Macedonia. With regards to the full year 2017 results, mobile revenues increased by 5.4% to HUF 322.7 billion for similar reasons.

Fixed line revenues increased by 5.3% year-on-year to HUF 51.5 billion in Q4 2017 at the Group level. The improvement was driven by the Hungarian operations' results where higher equipment and TV revenues more than offset the continuing structural decline in voice revenues. In Macedonia, the sustained positive momentum in TV was offset by declines elsewhere (voice, broadband, equipment and wholesale revenues). With regards to the full year 2017, fixed line revenues increased to HUF 196.1 billion, up from HUF 193.8 billion in 2016 for similar reasons.

SI/IT revenues increased by 15.7% year-on-year to HUF 26.4 billion in Q4 2017, and by 30.0% to HUF 87.5 billion in full year 2017. The increase was primarily driven by the acceleration of EU fund inflows into Hungary after the temporary drop witnessed in 2016, leading to strong growth at the Hungarian operation. At the same time, System Integration and IT revenues fell in Macedonia as a number of major public sector projects witnessed some delays following a period of political uncertainty.

Energy Service revenues decreased by 78.4% year- on- year to HUF 0.3 billion in Q4 2017 and by 32.1% to HUF 4.6 billion in full year 2017. The sharp decline reflects the expiry of the last remaining gas universal contracts and the exit from the residential segment of the electricity market which came into effect on November 1, 2017.

Direct costs increased by 14.8% for Q4 2017 year-on-year to HUF 72.1 billion , primarily due to higher SI/IT and equipment sales costs which were in line with rises in the related revenue. The same drivers led to the 15.7% increase in direct costs for the full year 2017 to HUF 245.8 billion, from HUF 212.4 billion in 2016.

Interconnection costs remained broadly unchanged at HUF 4.9 billion in Q4 2017 as higher mobile traffic which led to increased payments to domestic mobile operators in Hungary was offset by lower interconnection expenses in Macedonia reflecting the MTR cuts in December 2016. For the full year 2017, interconnection costs declined by 3.8% to HUF 18.9 billion, as the above impacts were coupled with a decline in outpayments related to the termination of some wholesale activities at our Romanian subsidiary.

SI/IT service related costsincreased by 33.2% to HUF 18.7 billion in Q4 2017, in line with the related revenue increases.

Energy service related costsdecreased by 57.9% to HUF 0.7 billion in Q4 2017, as a result of the exit from the residential segment of the electricity market with effect of November 1, 2017.

Bad debt expenseswere lower by 49.5% at HUF 0.9 billion in Q4 2017, reflecting the lower rates of impairment applied to the Hungarian mobile operations due to the improved rates of collection.

Other direct costsincreased by 17.3% to HUF 40.3 billion in Q4 2017 primarily due to the higher costs of mobile equipment, accessories and other equipment sales, in line with the higher sales volumes recorded in both Hungary and Macedonia, together with an increase in Hungarian roaming outpayments.

Gross profit improved marginally to HUF 89.3 billion in Q4 2017 year-on-year as the improvement in the level of bad debt expenses was mostly offset by the lower SI/IT gross margin and higher equipment and roaming related outpayments. For the full year 2017, gross profit improved 1.0% to HUF 365.1 billion, from HUF 361.6 billion in 2016, as the strong increase in revenues more than offset the decline in overall gross margin.

Indirect costs declined slightly by 0.4% to HUF 47.1 billion in Q4 2017year-on-year , as the decline in other operating expenses compensated for the higher severance costs. For the full year 2017, indirect costs were 3.0% higher year-on-year, at HUF 179.4 billion, due to the absence of positive one-off items (the sale of Origo and Infopark Building G) that occurred in 2016.

Employee related expenses increased by 7.6% to HUF 22.1 billion in Q4 2017 due to higher severance expense relating to the Hungarian headcount reduction coupled with an increase in the average number of Group employees resulting in higher wage costs.

Other operating expenses improved by 6.2%, amounting to HUF 27.5 billion in Q4 2017, thanks to cost saving measures implemented during the year resulting in lower HR-related, material and marketing costs. For the full year 2017 however, other operating expenses remained broadly stable at HUF 98.5 billion as the positive impacts from these cost saving measures were matched by an increase in rental fees and maintenance costs.

Other operating income remained stable at HUF 2.5 billion in Q4 2017 as lower income from real estate sales was compensated by higher brand fee income emanating from the E2 energy joint venture. However, for

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