Telekom Austria Group Reports Improved EBITDA Margin for Q1 2014 Despite Decline in Revenues

• Regulatory effects and a challenging market environment had a negative impact on revenues and earnings in the period under review
• Group revenues dropped by 7.0% to EUR 976 million in Q1 2014
• Almost two thirds of revenue decline attributable to regulatory effects (EUR 44 million)
• Group EBITDA decreased by only 5.0% to EUR 320 million thanks to declining costs
• Turnaround strategy showed first signs of success: EBITDA margin improved from 32.1% to 32.8%
• Net income totaled almost EUR 41 million in Q1 2014
• The "Additional Markets" segment continued to show significant growth
• Total cost savings of EUR 100 million are planned for the 2014 business year
• The outlook for 2014 was confirmed without any changes

Telekom Austria Group's Key Data

*) EBITDA excluding effects from restructuring and impairment tests

We knew that the 2014 business year was going to be difficult. The numerous remedial measures, which we put in place in the first quarter 2014 to improve our earnings power, will bear fruit in the further course of the year.

Hannes Ametsreiter

CEO Telekom Austria Group and A1

 

In the first quarter 2014, the market environment was marked once again by strong headwinds due to intensive competition, further strong regulatory intervention and a persistently challenging economic situation in Central and Eastern Europe. As a result, Telekom Austria Group's revenues declined by 7.0% to EUR 975.9 million in the first three months of 2014 compared to the same period of the previous year. However, thanks to considerably reduced costs, EBITDA comparable (excluding effects from restructuring and impairment tests) decreased by only 5.0% to EUR 319.9 million. Net income totaled EUR 40.8 million (-26.5%) in the period under review.

"We knew that the 2014 business year was going to be difficult. The numerous remedial measures, which we put in place in the first quarter 2014 to improve our earnings power, will bear fruit in the further course of the year. Nevertheless, we are already seeing the first signs of improvement in our markets and the increase in EBITDA margin demonstrates that we are on the right track with our strategy," said Hannes Ametsreiter, CEO Telekom Austria Group and A1, commenting upon the financial results of the Group.

Telekom Austria Group's Business Development
In the first quarter 2014, group revenues dropped by 7.0% to EUR 975.9 million mainly due to a decline in revenues of EUR 65.9 million in the Austrian segment compared to the same period of the previous year. Revenues also fell in Bulgaria and Croatia, whereas the "Additional Markets" segment showed positive development, with both Slovenia and the Republic of Serbia reporting revenue increases.

Reduced handset subsidies in Austria and lower interconnection charges could mitigate the negative effects of the decline in revenues on group EBITDA comparable, which fell by 5.0% to EUR 319.9 million year-on-year. Excluding currency conversion effects, mainly attributable to the Belarusian segment, group EBITDA comparable would have declined by only 2.2%. In the period under review EBITDA margin increased by 0.7 percentage points to 32.8% driven by cost savings mainly in Austria. Due to a lower EBITDA comparable, the operating result for the first quarter 2014 declined by 17.4% to EUR 97.4 million and net income fell by 26.5% to EUR 40.8 million year-on-year.

Group capital expenditures dropped by one third from EUR 149.0 million in the previous year to EUR 99.4 million in the first quarter 2014. The previous year's figure was higher because part of the Yesss! acquisition had been booked as capital expenditure in the first quarter 2013 and due to lower tangible assets in Austria. Total headcount for the Group declined by 2.5% to 16,090 employees (full-time equivalents) as of 31 March 2014. In Austria, the number of employees dropped by 3.7% to 8,895 people.

Hans Tschuden, CFO and Vice Chairman of the Telekom Austria Group, said about the Q1 2014 results: "We will seek to counteract intensive competition in our operating markets and further regulatory intervention with an additional cost-saving program of roughly EUR 100 million. At the same time, the first results of our turnaround strategy make us confident that we will succeed in improving our earnings power moving forward."

Telekom Austria Group Outlook for the Full-Year 2014
Telekom Austria Group's outlook for the full-year 2014 remained unchanged and 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 turnaround in the midterm. 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 expenditure, 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 first quarter 2014, A1 continued to pursue its strategy based on a consistent focus on profitability and support of the high-value customer base with a view to mitigating competitive and regulatory pressure. By means of the announced adjustments to current mobile communications and fixed line tariff schemes, the company was able to tackle the necessary network investments. As these adjustments will come into effect starting from the second quarter 2014, positive revenue contributions remained limited in the quarter under review. Lower handset subsidies for new customers had an immediate positive effect on profitability, and the churn rate continued to remain low.

Total mobile subscribers declined by 3.4% to 5.65 million in the first quarter 2014 compared to the same period in the previous year. This decline was mainly attributable to a decrease in prepaid and no-frills customers in the residential customer segment. As a result, market share dropped from 42.9% in Q1 2013 to 42.1% in Q1 2014. In the period under review, fixed access lines continued to register a slight increase to 2,287.7 million, with fixed line broadband net additions showing a favorable development by 24,700 lines in comparison to Q4 2013.

In the period under review, revenues in the Austrian segment dropped by 9.7% to EUR 614.1 million compared to the previous year mainly due to lower monthly fee and traffic revenues, lower interconnection revenues and lower equipment revenues. Lower revenues from customer roaming also contributed to this decline and a decrease in fixed line call minutes by 12.9% had a further negative effect on revenues. In addition, the company registered interconnection revenue losses of EUR 23.5 million compared to the previous year following the Austrian Regulatory Authority's (RTR) reduction of termination charges from Eurocent 2.1 to Eurocent 0.8 in November 2013.

However, the implemented cost-saving measures led to a considerable slowdown in the decrease of EBITDA comparable compared to previous quarters. As a result, EBITDA comparable dropped by 5.8% to EUR 194.8 million in the first quarter 2014 compared to the same period of the previous year. Thus domestic EBITDA margin rose from 30.4% in the first quarter 2013 to 31.7% in the period under review.

Due to the effects mentioned above, average monthly revenues per mobile user (ARPU) fell from EUR 16.1 in the first quarter 2013 to EUR 15.2 in the first quarter 2014, while the average monthly revenue per fixed access line (ARPL) dropped by 5.0% to EUR 30.6 year-on-year.

Mobiltel, Bulgaria

In the first quarter 2014, the political and macroeconomic situation in Bulgaria appears to have stabilised. Nevertheless, overall performance continued to be negatively impacted by competitive and regulatory pressure as a result of cuts in termination rates carried out in July 2013 and January 2014. The new management team mainly concentrated on counteracting this pressure with strict cost management and a further focus on value generation in both the mobile communications and fixed line business. As a result of the promotion of fixed line broadband services based on attractively priced product packages, Mobiltel could profit from its convergent positioning. On 3 April 2014 the Bulgarian operator prolonged its existing frequency spectrum in the 900MHz and 1,800MHz bands for another 10 years for EUR 30.6 million.

In the period under review, Mobiltel's mobile customer base decreased by 6.6% to 4.1 million compared to the previous year. This decrease is mainly attributable to the decline in prepaid customer numbers. In the first quarter 2014, revenues dropped by 6.4% to EUR 91.2 million, a significant improvement compared to the double-digit percentage declines registered in the 2013 financial year. EBITDA comparable fell by 5.8% to EUR 37.1 million, reporting a considerably lower decline compared to the previous year.

In the period under review, the slight decrease in the average monthly revenue per mobile user (ARPU) from EUR 6.1 to EUR 6.0 was mainly attributable to negative price developments as well as stringent regulatory measures. Average monthly revenue per access line (ARPL) increased by 5.9% to EUR 14.3 year-on-year.

velcom, Belarus

In the first quarter 2014, velcom continued to show a strong operating performance supported by demand for smartphones and data services. As a result, the customer base increased by 2.5% year-on-year. At the same time, however, the devaluation of the Belarusian currency began to accelerate following the Ukrainian crisis and the Belarusian ruble depreciated by 18.1% in the last 12 months. Thus revenues declined by 0.8% to EUR 81.0 million. On a local currency basis, velcom reported an increase in revenues of 20.8%. EBITDA comparable rose by 1.1% to EUR 39.9 million despite negative currency effects.

Vipnet, Croatia

In the first quarter 2014, Vipnet in Croatia sought to counteract ongoing macroeconomic pressure and the decline in roaming and interconnection revenues following the accession to the EU in July 2013 by focusing once again on the high-value customer segment. Nevertheless, due to competitive pressure prices for both prepaid and contract customers, and in particular for the business customers, were declining. To counter this trend, the company introduced new mobile communications and fixed line offerings in April, which provide, amongst other options, the possibility to opt for higher-value convergent products.

In Croatia revenues declined by 9.6% to EUR 83.2 million in the period under review, with EBITDA comparable dropping by 22.5% to EUR 22.7 million.

In the first quarter 2014, Vipnet's mobile customer base decreased by 3.8% to just above 1.8 million customers. In the fixed line business, fixed access lines reported a growth of 17.4% to roughly 202,100 lines. This increase is partly attributable to company acquisitions in the fixed line business in 2013.

Si.mobil, Slovenia

Despite macroeconomic headwinds, Si.mobil reported a slight increase in revenues by 2.5% to EUR 50.4 million in the first quarter 2014, with EBITDA comparable rising by 17.8% to EUR 15.1 million. The Slovenian frequency auction was completed on April 28, 2014 and Si.mobil acquired almost 50% of the entire Slovenian auctioned mobile spectrum for a total consideration of EUR 63.9 million with an excellent frequency infrastructure in the long term.

Vip mobile, Republic of Serbia

In the Republic of Serbia, Vip mobile's business operations continued to gain momentum, extending the upward trend seen over the last quarter of 2013 into the new business year. In the period under review, Vip mobile reported both an increase in revenues of 15.6% to EUR 49.3 million and in EBITDA comparable of 2.0% to EUR 15.3 million. The company's customer base rose by 7.4% to more than 2.0 million subscribers.

Vip operator, Republic of Macedonia

In the first quarter 2014, Vip operator registered a decline in revenues of 11.6% to EUR 13.5 million mainly due to a decrease in interconnection and national termination rates. Regulatory market interventions also led to cost reductions, especially as a result of lower interconnection tariffs. Consequently, EBITDA comparable rose by 34.2% to EUR 2.5 million. The company also succeeded in raising its market share to 28.3% based on a subscriber base of 622,200 customers.