Telekom Austria Group Reports an Increase in Net Profit of Almost 20% despite a Persistently Challenging Environment

The Telekom Austria Group (VSE: TKA, OTC US: TKAGY) today announced its results for the first quarter ending March 31, 2013.

• Group revenues almost stable, declining by 0.6% to EUR 1.05 billion in Q1 2013
• Net profit rose by 18.4% to EUR 55.5 million
• The Austrian and Bulgarian markets continued to be restrained, while the Croatian segment remained stable thanks to the fixed net business
• Belarus, Slovenia, the Republic of Serbia and the Republic of Macedonia all recorded favorable results performance in the period under review
• EBITDA comparable declined by 6.8% to EUR 336.9 million
• The operating result (EBIT) increased by 5.2% to EUR 117.8 million
• Mobile subscriber numbers grew by 1.2 million (5.8% including YESSS!) despite strong competition, while fixed net access lines showed a slight increase to 2.62 million
• Impact of regulatory measurements: In the first quarter of 2013 alone, revenues and EBITDA comparable dropped by EUR 20.9 million and EUR 11.5 million respectively
• The outlook for the full year 2013 confirmed

*) As of the first quarter of 2013 the definition for the calculation of mobile broadband customers was changed in Bulgaria and Belarus to include solely data-only tariffs, in Croatia to exclude M2M customers. Previous quarters were adjusted retrospectively.
**) EBITDA excluding effects from restructuring and impairment tests

In Q1 2013, the Telekom Austria Group reported total revenues of EUR 1,049.0 million, a decline of 0.6% compared to Q1 2012. Group EBITDA comparable declined by 6.8% to EUR 336.9 million compared to the same period of the previous year. Despite lower amortization and depreciation charges as well as low interest expense, net profit increased by 18.4% to EUR 55.5 million in the period under review.

“Despite an on-going challenging business environment, we have started the year by producing a solid set of results for the first quarter of 2013. With relatively stable revenues and net profit, we are seeing some positive signs. As a technology leader, our 4G/LTE technology guarantees us a pole position for the future and we continue to focus on increasing operating efficiencies in order to counteract competitive and macroeconomic pressure”, said Hannes Ametsreiter, CEO Telekom Austria Group, commenting on the development in Q1 2013.

Business Development in Q1 2013
Due to tough competition and stringent regulatory measures, revenues in the Austrian and Bulgarian segments declined by 3.7% to EUR 680 million and by 15.8% to EUR 97.5 million respectively. The Belarusian Segment and the segment ‘Additional Markets’ (Slovenia, Republic of Serbia, Republic of Macedonia and Liechtenstein) reported an increase in revenues of 35.6% to EUR 81.6 million and of 9.9% to EUR 108.7 million respectively compared to the previous year. The Croatian segment showed stable development thanks to the favorable performance of the fixed net business, revenues dropping by 0.5% to EUR 92.1 million. Thus the increase in revenue in Belarus and in the segment ‘Additional Markets’ could almost entirely compensate for the declines in Austria and Bulgaria.

In the period under review, group EBITDA comparable showed a different picture: higher operating expenses in Q1 2013 were in line with the corporate strategy and the sale of high-quality end-devices in Austria, Belarus and the segment ‘Additional Markets’. As a result, EBITDA comparable dropped by 15.3% to EUR 206.8 million in Austria, while EBITDA comparable margin at the group level declined from 34.3% in Q1 2012 to 32.1% in Q1 2013.

Considerably lower operating expenses in Bulgaria could not compensate for the negative effects of more than 15% decline in revenues on EBITDA comparable, which dropped by 19.8% to EUR 39.4 million. In Belarus, EBITDA comparable showed an increase by 68.2% to EUR 39.5 million despite higher costs. In the segment ‘Additional Markets’, EBITDA comparable rose by 14.6% to a total of EUR 28.9 million. In Croatia, EBITDA comparable increased by 6.9% to EUR 29.3 million thanks to a number of positive one-of effects as a result of stable revenue and cost development.

“The Telekom Austria Group seeks to counteract the persisting pressure on margins by putting in place a number of internal efficiency-enhancing programs. In addition, we have adopted a set of effective measures to safeguard our revenue streams: we decided to strengthen our position as premium provider, retaining our customers with high-value end-devices. This will inevitably lead to an increase in operating costs over the short term, but will also contribute to safeguarding important revenue streams at least over the midterm“, said Hans Tschuden, CFO and Deputy Chairman of the Management Board of the Telekom Austria Group, explaining the current corporate price policy.

Regulatory Framework and Economic Environment Remain Challenging
The weak economic situation in certain operating countries as well as intensive competition in all major markets of the Group are posing unprecedented challenges, resulting in considerable downward pressure on prices. In addition, regulation-induced reductions of interconnection rates and roaming tariffs continue to impact revenues, especially in those segments that have to adjust to the EU gliding path for mobile termination rates. In the period under review, the negative impact of regulation on group revenues amounted to EUR 20.9 million. Thus, almost half (46.7%) of the decline in group EBITDA was attributable to regulatory measures.

Going forward, the economic success of the Telekom Austria Group will largely depend on its ability to safeguard its operating margins by increasing cost efficiency and to generate new revenue streams by opening up new business areas and further expanding its market shares.
In Q1 2013, capital expenditures increased by 2.2% to EUR 149.0 million compared to the same period of the previous year. Capital expenditures in Bulgaria were reduced by over 50% to EUR 11.1 million thanks to stringent cost cutting measures. In Austria, capital expenditures increased by 9% to EUR 102.1 million compared to the previous year’s level partly due to the acquisition of YESSS! and other assets.

At the end of March 2013, total headcount of the Telekom Austria Group amounted to 16,498 employees (full-time equivalents), remaining well under the previous year’s level, while, slightly exceeding the corresponding figure at year-end 2012.

Outlook for the Full Year 2013 Confirmed
The results for the first three months of the year under review confirmed the expectations for the full year 2013 of the Telekom Austria Group. Going forward, the management board expects results to continue to be negatively impacted by a number of external factors such as highly competitive markets, stringent regulatory measures and macroeconomic headwinds. On the Group’s major operating markets like Austria, Bulgaria and Croatia, price pressure in the mobile business will be further exacerbated by intensive competition. In the domestic market, this will drive further fixed-to-mobile substitution, posing considerable obstacles to initiatives such as new data tariffs for the fixed net business. In addition, regulatory requirements will continue to impact the operating business.

In the CEE area, customer demand and pricing levels will be impacted further by negative macroeconomic developments. In future, markets such as Belarus or the Republic of Serbia will continue to be exposed to foreign exchange volatility.

The management of the Telekom Austria Group intends to meet these challenges through its successful convergence strategy and a clear focus on the high-value customer segment in its mature mobile markets. In its mobile only markets, the Telekom Austria Group will concentrate on achieving its growth targets. Moreover, the further improvement of its operating excellence will continue to be a key focus going forward. This is reflected, for instance, in the planned reduction of costs of at least EUR 100 million gross for the full year 2013.

The Telekom Austria Group confirms its outlook for the full year 2013 and expects group revenues to amount to approximately EUR 4.1 billion and capital expenditures to reach approximately
EUR 700 million, excluding any investments for licenses, further spectrum auctions and acquisitions. Pursuing a conservative financial policy based on a solid investment-grade rating BBB (stable) will continue to be a top strategic priority for the Telekom Austria Group. Furthermore, the achievement of a net debt to EBITDA comparable ratio of roughly 2.0x over the midterm is also integral part of this strategy. For the business year 2013, the management of the Telekom Austria Group plans to distribute a dividend of 5 Eurocents per share.

This outlook is based on constant currency exchange rates for all operating markets of the Group and does not include any effects of hyperinflation accounting for the Belarusian segment.
 
Operating Developments in the Single Segments

A1, Austria
In the Austrian segment, the first quarter 2013 continued to be characterized by intensive competition and the trend towards cheap ‘all-in’ tariffs and highly subsidized end-devices. Revenues declined by 3.7% to EUR 680.0 million, with the revenue contribution from YESSS! which was fully consolidated for the first time in the period under review, amounting to EUR 11.6 million. This decline in revenues on the domestic market was driven, among other things, by lower monthly fee and traffic revenues as a result of customer migration to ‘all-in’ tariffs as well as by lower roaming revenues. Regulatory effects accounted for almost 32% or EUR 8.3 million of this decline in revenue in the first quarter of the year.

Following the closing of the acquisition of YESSS! at the beginning of 2013, the company was fully consolidated as of January 2013. With the integration of the customer base of YESSS!, almost 90% of which is made up of prepaid subscribers, A1 mobile customer base increased by 15.1% to 6,084,600 subscribers in Q1 2013 compared to the same period of the previous year, while the market share rose to 43.8%. Mobile broadband customers, including YESSS! grew by 19.0% to 909,000 at the end of March 2013 compared to end of March 2012. In the mobile business, average revenues per users (ARPU) dropped from EUR 18.5 in Q1 2012 to EUR 15.5 in the period under review. This decline is mainly attributable to a lower ARPU of the newly consolidated subscriber base of YESSS!, the migration to ‘all-in’ tariff schemes as well as to regulatory effects. As a result, new tariff structures for the no-frills brand bob and the premium brand A1 were introduced in January and April 2013.

The fixed net business showed a stable development. Within Q1 2013 the amount of access lines slightly dropped by 1.260 lines (net) and broadband net additions amounted to 50,000 lines. With an increase in subscriber numbers of 10% to 225,200 customers compared to the previous year, A1 TV continued to show solid growth. Average revenues per line (ARPL) increased by 1.2% to EUR 32.2. In addition, in Q1 2013 convergent offerings continued to be a key focus of the company’s operating strategy, with the number of product bundles slightly increasing to 1,040,700 packages.
As a result of lower revenues combined with higher operating expenses, EBITDA comparable declined by 15.3% to EUR 206.8 million in Q1 2013 compared to the same period of the previous year.

Mobiltel, Bulgaria
The Bulgarian segment experienced a highly challenging market environment. As a result of the overall weak economic situation, the changing ownership structure of Mobiltel’s competitors as well as the sale of a fourth mobile license, the competitive landscape in Bulgaria is expected to remain challenging. Therefore, going forward, Mobiltel will also strongly focus on convergence and the high-value customer segment.

Revenues in Q1 2013 dropped by 15.8% to EUR 97.5 million. This decline is predominantly attributed to the gradual reductions of interconnection charges, which became effective as of July 2012 and January 2013 respectively. All in all, 60.5% or EUR 11.1 million of this decrease in revenues in Q1 2013 is attributable to regulatory effects. Despite lower operating expenses, this decline in revenue led to a decrease in EBITDA comparable by 19.8% to EUR 39.4 million.

In Q1 2013, Mobiltel strengthened its focus on value-oriented customer management based on a new customer segmentation and was able to slightly increase its contract customer base to 3,834,300 subscribers compared to the previous year. Total mobile customer numbers decreased by 1.5% to 5,402,700 in the period under review, with the market share declining to 45.9%. Compared to end of March 2012, mobile broadband customers (only data cards) increased by 29.4%. Fixed net access lines showed a positive development in Q1 2013, increasing by 22.3% to 162,100 lines mainly driven by fixed net broadband.

Vipnet, Croatia
In Croatia, Vipnet succeeded in maintaining its position in Q1 2013 against the backdrop of negative framework conditions such as macroeconomic headwinds and a highly competitive market environment. The European Commission revised its growth forecast for the Croatian economy downwards. In order to counteract price pressure, at the beginning of March, Vipnet introduced a new tariff structure consisting of SIM-only basic packages with different options on a contract base.

By focusing on the high-value segment, Vipnet was able to increase its mobile contract customer base by 6.1% as well as the total share of contract customers compared to the previous year, whereas, in the prepaid segment, customers continued to defect. Therefore, total customer numbers declined by 4.4% to 1,878,200 in the period under review. In the fixed net business, access lines, especially broadband lines, showed a favorable development in the first three months of the current business year, increasing by 15.7% to 172,100 lines compared to the same period of the previous year. Within the framework of its convergence strategy, Vipnet acquired satellite TV provider Digi TV in March 2013.

In Q1 2013, revenues in the Croatian segment remained almost unchanged amounting to EUR 92.1 million. Price pressure in the mobile business led to a further reduction of average revenues per user (ARPU). Average revenue per fixed line (ARPL) fell from EUR 24.0 in Q1 2012 to EUR 23.4 in the current quarter as a result of the acquisition of Digi TV with a lower average revenue per customer. ARPL-relevant revenues, however, increased by 11.7% to EUR 11.7 million in the first quarter of 2013, driven mainly by the higher number of broadband access lines. Thanks to numerous one-off effects, EBITDA comparable rose by 6.9% to EUR 29.3 million.

velcom, Belarus
In Q1 2013, velcom continued to profit from price increases, which were implemented by the company in March, August and November 2012 as a response to the hyperinflationary environment of the country. In the period under review, inflation and foreign exchange rate fluctuations were limited. Revenues rose by 35.6% to EUR 81.6 million mainly due to price increases. All in all, additional reasons behind this success were increased usage and a strong demand for smartphones. As a result, ARPU grew by 30.3% to EUR 4.8 in Q1 2013.

In the period under review, velcom increased its mobile customer base by 3.9% to 4,818,000 subscribers and its market share to 43.6%. These increases are mainly due to contract customer net additions as a result of the very popular smartphones’ offers.

Despite an increase in operating expenses and a negative foreign exchange rate effect of EUR 1.3 million, EBITDA comparable exceeded the previous year’s level by 68.2% totaling EUR 39.5 million. In the local currency, this increase in EBITDA comparable amounted to 73.8%.

Si.mobil, Slovenia
Despite a challenging macroeconomic environment and a competitive market landscape, Si.mobil was able to continue to pursue its successful multi-brand strategy in Q1 2013, defending its market share of 30.0%. Mobile customer numbers amounted to 669,600 at the end of March 2013, an increase of 4.1% compared to the end of March 2012. In the period under review, revenues rose by 5.5% to EUR 49.2 million and EBITDA comparable increased by 6.1% compared to the previous year.

Vip mobile, Republic of Serbia
In Q1 2013, Vip mobile succeeded in considerably expanding its customer base thanks to its strategic orientation towards the contract customer segment. Total mobile subscriber numbers grew by 13.8% to 1,903,500 customers. Mobile broadband subscribers rose by 24.3%, also contributing to an increase in the market share.

A higher contract customer base led to higher revenues, which had a positive impact on the segment’s total turnover despite negative foreign exchange rate effects of EUR 1.5 million. As a result, total segment revenues increased by 14.5% to EUR 42.6 million. Due to the growing contract customer base, ARPU increased to EUR 7.1 and EBITDA comparable rose by 46.7% to EUR 15.0 million. This figure also includes a negative foreign exchange rate effect of EUR 0.5 million.

Vip operator, Republic of Macedonia
In the period under review, Vip operator was able to further consolidate its market position as the second-largest operator with a market share of 28.1%. Although the entire mobile market contracted in Q1 2013, Vip operator recorded an increase (7.8%) in customer numbers to 626,500.

The higher share of contract customers resulted in an increase in revenues of 12.5% to EUR 15.3 million in Q1 2013 compared to the previous year’s level. Average revenues per user (ARPU) also registered a growth of 4.4% to EUR 7.5. EBITDA comparable declined by 39.1% to EUR 1.8 million due to a significant increase in operating expenses for high-value end-devices as well as higher interconnection charges.