Telekom Austria Group Increases Net Income to EUR 110 Million despite Challenging Market Environment

• Revenues dropped by 3.4% to EUR 4.18 billion and EBITDA comparable declined by 11.6% to EUR 1.29 billion
• Full-year results were impacted by regulatory effects, competitive intensity and the economic situation
• Regulation-induced revenue declines amounted to EUR 122.1 million in 2013
• Total gross savings of EUR 118.1 million were achieved in the year under review
• Group net income increased by 5.5% to EUR 109.7 million
• Mobile communications showed customer growth of 2.5% to over 20 million subscribers group-wide
• A1 is the only European incumbent operator to report fixed line customer growth
• A1 with historically low churn with contract subscribers  
• Group investments increased to more than two billion Euros in 2013
• Total investments of EUR 1.03 billion in the Austrian spectrum auction
• Roughly EUR 400 million in the acquisition of YESSS! after purchase price adjustments
• Regular investments of EUR 649.6 million
• Investments in best frequency infrastructure and fast network rollout 
• Outlook for 2014: roughly 3% revenue decline, CAPEX stable at approximately
  EUR 700 million, proposed dividend of 5 Eurocent

Telekom Austria Group's Key Data

¹⁾ In 2013, the calculation of customers in Austria, Bulgaria, Belarus and Croatia were changed. Previous quarters were adjusted retrospectively. 
²⁾ EBITDA excluding effects from restructuring and impairment tests

In the year under review, Telekom Austria Group's business performance continued to be marked by intense competition both in the fixed line and mobile communications markets. Price pressure remained high. Furthermore, regulatory constraints continued to have a negative effect on revenues and earnings. This mainly applied to termination rates and roaming charges in mobile communications. The Telekom Austria Group counteracted these external factors with the successful implementation of its convergence strategy, a clear focus on high-value customers, innovative products and services as well as strict cost management.

In mobile communications, the Telekom Austria Group posted an increase in customer numbers of 2.5% to almost 20.1 million subscribers in 2013. Austria enjoyed the strongest growth with a surge of roughly 535,300 customers, primarily as a result of the acquisition of the no-frills provider YESSS!, followed by the Republic of Serbia, with total net additions of 157,800. Belarus also developed well, with an increase of 147,000 customers.

In the fixed line business, total net additions amounted to 34,000 lines at the Group level, which corresponds with a growth of 1.3% to 2.6 million access lines. In 2013, A1 in Austria was the only Western European incumbent operator to increase its fixed line customer base, reporting total net additions of 1,600 lines.

Hannes Ametsreiter, CEO Telekom Austria Group, commented upon the results for the full-year: "2013 was not only an eventful year for us but also a successful one. We invested over 2 billion Euros in the future of the Telekom Austria Group, EUR 1 billion alone in the acquisition of Austrian frequency spectrum. In addition to the purchase of YESSS! along with five other acquisitions in Croatia, we were the only incumbent operator in Western Europe to report fixed line customer growth. Furthermore, we were able to achieve a solid operating performance and increase net income despite a difficult market situation. This shows that strategically the Telekom Austria Group is on the right track. Thus, we will continue along this path also in 2014."

Telekom Austria Group's Business Development

In the 2013 financial year, the Telekom Austria Group reported a decline in revenues of 3.4% to EUR 4.18 billion as a result of competitive price pressure and regulatory cuts in termination and roaming rates. Higher revenues in Belarus and the 'Additional Markets' segments were offset by declines in Austria, Bulgaria and Croatia. The Telekom Austria Group's international segments accounted for 37.2% of total revenues (36.7% in the previous year).

Telekom Austria Group focused on the ongoing optimization of operating efficiency and strict cost management in 2013 as well, with gross cost savings totaling EUR 118.1 million. As a result, operating expenses remained virtually stable at EUR 2,983.7 million, despite a considerable increase in material expenses resulting from the strategic focus on the high-value customer segment. Personnel costs rose slightly by 1.5% to EUR 845.9 million due to one-off effects and a headcount reduction at Group level.

EBITDA comparable declined by 11.6% in the 2013 financial year to EUR 1,287.4 million. Belarus and the 'Additional Markets' segment saw increases of 25.3% and 18.1% respectively, which could not, however, offset the reductions in EBITDA comparable in Austria (-17.5%), Bulgaria (-23.5%) and Croatia (-13.9%). As a result, the EBITDA comparable margin dropped to 30.8% in the year under review.

The financial result of the Telekom Austria Group amounted to EUR 187.4 million in the reporting year, which corresponds to an improvement of 11.9% compared to the previous year. Tax expenses amounted to EUR 80.4 million compared to EUR 140.4 million in 2012, mainly as a result of lower latent tax expenses.

Against this backdrop, the Telekom Austria Group reported an increase in net income to EUR 109.7 million for the 2013 reporting year – an increase of 5.5% compared to the previous year.

Regulation-Induced Revenue Losses Totaled EUR 122 Million in 2013 Alone

In 2013 alone, declines in revenues due to the EU regulatory burden totaled EUR 122.1 million. Between 2013 and 2016, the negative impact of EU regulation on the Telekom Austria Group's roaming and interconnection revenues will amount to approximately EUR 290 million.

Expensive Frequency Auction in Austria

Austria's biggest frequency auction to date ended on October 21, 2013. For a total sum of EUR 1,030 million, A1 Telekom Austria AG acquired 50% of all available frequency blocks. The company acquired two thirds of the total available 800 MHz frequency band, which is of crucial importance for rural areas. This will not only secure the best possible network coverage for the A1 customer base going forward but also help to safeguard the company's strategic position as market leader thanks to a fast network rollout. The group subsidiaries in Croatia, Slovenia and the Republic of Macedonia also acquired frequency rights in 2013. In the coming years, further spectrum prolongation and auction processes will take place in these and other markets of the Telekom Austria Group.

Equity Base Improved, Debt Level Increased Following Frequency Auction

Hans Tschuden, CFO and Deputy Chairman of the Telekom Austria Group, said about the full-year results for 2013: "With the acquisition of YESSS! and the Austrian frequency auction in 2013, we hit an all-time high, investing a total of EUR two billion. Considering the resulting high capital requirements, we were able to find an incredibly cost-effective financing solution. Based on a hybrid bond issuance and net income totaling EUR 109.7 million, we succeeded in almost doubling our equity base."

In 2013, Telekom Austria Group's total investments almost tripled compared to the previous year. EUR 1.030 billion was invested in the Austrian frequency auction and EUR 400 million was spent on the acquisition of YESSS! after purchase price adjustments. The remaining EUR 649.6 million was spent on regular capital expenditures.

In the reporting year, Telekom Austria Group's net debt increased by 13.8% to EUR 3,695.8 million mainly driven by the frequency auction in Austria. As a result, the ratio of net debt to EBITDA comparable climbed from 2.2x in the previous year to 2.9x at the end of 2013. Dividend payments for the 2012 reporting year amounted to EUR 22.2 million. The rise in equity from EUR 819.1 million to EUR 1,512.6 million was essentially due to the issue of the EUR 600 million hybrid bond as well as to the net income of roughly EUR 109.7 million. This also entailed a rise in the equity ratio as of December 31, 2013 to 19.2%, from 11.3% in the previous year.

Despite a significant decline in EBITDA comparable, the cash flow from operating activities increased by 0.3% to EUR 1,051.6 million in the reporting year. This was offset by lower working capital requirements, which could compensate for the decline in operating cash flow.

Telekom Austria Group Outlook for the Full-Year 2014

Telekom Austria Group's outlook for the full-year 2014 reflects the management's confidence in achieving its ambitious targets, even though the overall market environment remains challenging. The continued implementation of the turnaround strategy is expected to yield further results, targeting enhanced profitability and revenue inflection in the mid-term. A number of recent developments support the success of this strategy.

For the full-year 2014, the management of the Telekom Austria Group expects revenues to decline by roughly 3% and capital expenditures, excluding frequency auctions and acquisitions, to show a stable development, amounting to approximately EUR 700 million.

Operating Developments in the Single Segments

A1, Austria

In the 2013 business year, A1 experienced revenue losses as a result of competitive price pressure and regulatory cuts in termination and roaming rates. The management countered these negative factors with a clear focus on the high-value customer segment, the implementation of its convergence strategy and strict cost management. The Austrian market environment continued to be characterized by intensive competition, which A1 sought to address by means of tariff adjustments in the no-frills segment and a fundamental change in the tariff structure for the premium segment. In both cases, the company endeavored to take account of the trend towards greater data usage. Further, A1 selectively addressed high-value customers in order to successfully defend its highest income segment. Convergent product packages were also a central element of the operational strategy in 2013, with the aim of counteracting the ongoing substitution of fixed line voice telephony with mobile communications. Other external factors such as regulatory intervention in the area of roaming as well as termination rate cuts in July 2012 and November 2013 also had a negative effect on revenues. A historically low churn with A1 contract subscribers was reported.

In October 2013, A1 succeeded in laying the foundations to protect its substantial lead in the Austrian mobile market going forward by acquiring 2 x 70 MHz (Up- and Download) of spectrum in the Austrian multiband auction. 2 x 20 MHz were bought in the crucially important 800-MHz frequency band. Total expenses amounted to EUR 1.03 billion. In the year under review, A1's total investments in Austria amounted to EUR 1.51 billion including the costs incurred due to the frequency auction.

In 2013, Orange Austria was taken over by Hutchison 3G Austria. In the course of this transaction, A1 Telekom Austria AG acquired the mobile provider YESSS! in addition to frequencies, base stations and intellectual property rights from Orange Austria for a total sum of approximately EUR 400 million after purchase price adjustments. As a result of the acquisition of YESSS!, the Austrian segment saw a 10.3% increase in mobile customers to roughly 5.7 million mobile subscribers. In line with this development, A1's market share increased by 4.7 percentage points to 42.6%.

Supported by growth of 5.9% in fixed line broadband lines, A1 showed a slight increase in fixed access lines, reporting 1,600 net additions, with total fixed line customers amounting to 2.3 million in 2013. A1 TV also posted an increase of 7.7% to 235,700 customers.

However, the operational successes described above were not enough to compensate for the negative effects of price competition and regulatory measures; hence the Austrian segment reported a drop in revenues of 4.6% to EUR 2,658.6 million for 2013. The decline in EBITDA comparable of 17.5% to EUR 745.3 million is mainly attributable to higher handset subsidies, which led to higher operating expenses.

As a result of customer migration to All-in tariffs, regulatory intervention and the integration of the YESSS! customers described above, average monthly revenues per mobile user (ARPU) fell by 14.3% to EUR 16.1. Average monthly revenues per fixed access line (ARPL) dropped by 2.5% to EUR 31.3 in 2013.

While headcount in the Austrian segment was reduced by 3.0% to 8,804 full-time employees as of December 31, 2013, personnel costs remained relatively stable. Restructuring expenses amounted to EUR 45.2 million in the year under review.

M-Tel, Bulgaria

The market environment in Bulgaria was again marked by a weak economy in 2013, which had a negative impact on demand and customers' purchasing power. Furthermore, business performance was impacted by intensive competition and stringent regulatory measures.

In the year under review, M-Tel reported a reduction in customer numbers of 7.4% to 4.2 million mobile subscribers, which is mainly attributable to the prepaid segment. As a result, M-Tel's market share also declined from 42.1% to 39.0%, although the company still holds the market leader position. The constant rise in data usage led to a further increase in mobile broadband customers by 30.5% to over 192,900. The fixed line business saw a total increase of 1.4% to just under 159,900 access lines.

The reporting year was characterized by negative effects in the form of a further decline in the price level and cuts in national and international termination rates as of, July 1, 2012, January 1, 2013 and July 1, 2013. In spite of the rising significance of data traffic as well as rising revenues from IPTV and the sale of equipment, total revenues declined by almost 15% to EUR 399.4 million, of which EUR 41.7 million was due to regulatory effects. This was also reflected in a reduction in average monthly revenue per mobile user (ARPU) by 11.2% to EUR 6.3. Average monthly revenue per access line (ARPL) also dropped by 3.9% to EUR 13.5. However, fixed line revenues increased by 10.7% to EUR 26.2 million.

To counteract the difficult operating environment, M-Tel's management successfully focused on effective cost measurements in the reporting year. Despite these efforts, EBITDA comparable fell by 23.5% to EUR 158.6 million.

Vipnet, Croatia

Vipnet attempted to counteract the generally low price level with a strong focus on the high-value customer segments and was able to establish itself over its Croatian competitors. The strategic focus also centered upon the continuation of the convergence strategy through the acquisition of the satellite TV provider Digi TV and of four cable network operators, among other things. The fixed line business continued to develop well and offset declines in the mobile communications business in the first half of the year. In the second half of the year, Croatia's accession to the EU and the related regulatory constraints in the areas of roaming and interconnection fees had a negative impact on business performance.

In the year under review, the total number of mobile customers declined by 4.0% to roughly 1.8 million, whereas the share of contract customers increased to 45.1%. Owing to the focus on the high-value segment, market share fell by one percentage point to 37.3%. The number of fixed access lines rose by 18.4% to 193,100. This figure also encompasses the company's broadband access lines, which rose by 25.9% to 109,200 in the reporting year.

Revenues for 2013 declined by 7.4% to EUR 389.2 million. Average monthly revenue per mobile user (ARPU) declined by 5.9% to EUR 11.6 and average monthly revenue per fixed access line (ARPL) decreased by 5% to EUR 22.7. However, Vipnet reported a total increase in fixed line revenues of 10.8%. EBITDA comparable fell by 13.9% to EUR 117.6 million in the reporting year.

velcom, Belarus

While the macroeconomic environment in Belarus remained relatively stable in the year under review, the Belarussian Ruble depreciated 13.3% against the Euro over the course of the year. In Belarus, accounting for hyperinflationary economies has been applied since 2011. In 2013, the inflation rate declined slightly to approximately 16.6% compared to the previous year.

velcom met these challenges in 2013 with the ongoing optimization of tariffs and its equipment portfolio. Tariffs were adjusted in March, July and November 2013 to counteract currency and hyperinflation effects. Furthermore, the company focused on optimizing operating expenses and disconnecting them from currency effects.

In the year under review, total mobile customer numbers increased by 3.1% to 4.95 million. The number of mobile broadband customers rose by 8.4% to roughly 246,500. Due to the high competitive intensity, velcom's market share fell slightly to 42.5% (2012: 43.5%). After hyperinflationary adjustments and despite a negative currency translation effect of EUR 50.9 million, revenues increased by 10.1% to EUR 331.7 million in the reporting year. Thanks to the strong demand for smartphones and tablets as well as lower operating expenses, EBITDA comparable increased by 25.3% to EUR 155.9 million.

Si.mobil, Slovenia

In a highly competitive market environment, Si.mobil increased its subscriber base by 2.5% to almost 679,200 customers in 2013. Market share remained stable at 30.0%. In the reporting year, revenues were virtually constant at EUR 198.9 million (-0.4% compared to 2012). As a result of the increase in the no-frills segment, the average monthly revenue per mobile user (ARPU) declined by 8.6% to EUR 19.9. As a result of the reduced operating expenses and other operating income, EBITDA comparable rose by 8.3% to EUR 62.8 million, the highest value ever.

Vip mobile, Republic of Serbia

In the Republic of Serbia, Vip mobile continued to grow in 2013 and increased its mobile customer base by 8.5% to more than 2.0 million subscribers. The share of contract customers rose by more than three percentage points to 50.8% as of the end of 2013. The market share climbed to 21.1%.

The improvement in the share of contract customers led to an increase in revenues by 13.9% to EUR 182.6 million. As a result, average monthly revenue per mobile user (ARPU) also increased by 4.0% to EUR 7.4. Higher operating expenses were more than offset thanks to Vip mobile's positive market development: EBITDA comparable rose significantly by 30.6% to EUR 64.0 million in the year under review.

Vip operator, Republic Macedonia

In the Republic of Macedonia, the number of mobile customers fell to roughly 629,700 as of year-end 2013 due to customer migration from multi-SIM to All-in tariffs. The company's market share increased by approximately 0.7 percentage points to 28.0%.

Revenues rose by 7.5% year-on-year to EUR 64.9 million. This was mainly attributable to the expanding contract customer base and higher national traffic volumes. ARPU increased by 5.2% to EUR 7.9. Despite higher operating expenses, Vip operator's EBITDA comparable considerably improved, increasing by 21.4% to EUR 14.7 million in the year under review.