The Telekom Austria Group Achieved a Net Profit of Almost EUR 104 Million for the Full Year 2012 Despite a Decline in Revenues

Vienna, February 28, 2013 – Telekom Austria Group (VSE: TKA, OTC US: TKAGY) today announced its results for the full year 2012 and the fourth quarter ending December 31, 2012.

• Group revenues declined by 2.8% to EUR 4.33 billion and EBITDA comparable dropped by 4.7% to EUR 1.46 billion in the period under review
• Fixed access lines remained almost stable group-wide, totaling 2.6 million (-0.3%)
• The Group’s convergence strategy proved successful in Austria, Croatia and Bulgaria
• The mobile customer base grew by 3.1% to 20.9 million subscribers at the group level
• Strong, double-digit increase in both revenues and EBITDA were recorded in Belarus due to organic growth, stable currency development and price increases
• The segment ‘Additional Markets’ (Slovenia, Republic of Serbia, Republic of Macedonia and Liechtenstein) showed a considerable increase in EBITDA comparable of 29.7%
• Successful acquisition of YESSS! and of other assets for a total sum of EUR 390 million
• Except for frequency auctions, the Group will be able to meet all financial requirements for 2013
• Outlook: for the full-year 2013 group revenues are expected to amount to roughly EUR 4.1 billion and capital expenditures to roughly EUR 700 million

Telekom Austria Group’ Key Figures

*) EBITDA excluding effects from restructuring and impairment tests

For the full-year 2012, the Telekom Austria Group reported net profit of EUR 103.8 million despite a very challenging market environment, contributing to a decline in group revenue of 2.8% to EUR 4.33 billion and a drop in group EBITDA comparable of 4.7% to EUR 1.46 billion. This net profit of over EUR 100 million for the full-year 2012, despite overall challenging trading conditions, is mainly attributable to a strong reduction of restructuring expenses in Austria, lower devaluations i.e. lower negative currency translation effects as well as cost savings totaling approximately EUR 70 million.

“I view this net profit of over EUR 100 million as a demonstration of the strong operating performance of the Telekom Austria Group. In a highly unfavorable economic environment, we were able to largely offset the negative trends based on a set of effective countermeasures. Thanks to our convergence strategy and the marketing of convergent product bundles in Austria, Croatia and Bulgaria, we were able to launch not only a successful product portfolio but also initiate a clear trend towards convergence in the end-customer market,” explained Hannes Ametsreiter, CEO Telekom Austria Group and A1.

Revenues and EBITDA comparable
Due to intense competition and regulatory effects, both the Austrian and Bulgarian segments reported declines in revenue of 5.3% and 11.1% respectively. In the Croatian segment, revenue remained almost unchanged at -0.1% thanks to the favorable development of convergent product offerings. The Belarusian segment reported an increase in revenue of 15.5% compared with the previous year. In the segment ‘Additional Markets’, both the Republic of Serbia and the Republic of Macedonia posted an increase in revenue of over 10% respectively, while Slovenia recorded a growth of 3.6%. Nevertheless, the strong declines in revenue in the two biggest markets of Austria and Bulgaria could only be partially compensated for by the positive revenue development in the other segments of the Group.

The same applies to the development of EBITDA comparable: both the Austrian and Bulgarian segments reported declines in EBITDA comparable of 7.2% and 20.8% respectively, whereas the Croatian segment recorded a slight increase of 1.5%. The biggest increase in EBITDA comparable in the year under review compared with the previous year was recorded in the Republic of Macedonia, which posted a rise of 91.7%, followed by the Republic of Serbia with an increase of 55.6%, Belarus with +16.7% and Slovenia with +12.3%.

At year-end 2012, the Telekom Austria Group’s total headcount across its 8 operating markets was 16,446 employees, a reduction of 771 FTE or 4.5% compared with the same period of the previous year. In 2012, personnel cuts took place mainly in Bulgaria and Austria, whereas the strong growing segment ‘Additional Markets’ recruited new staff.

Business Development and Regulatory Burden
In the period under review, both the fixed line and the mobile communications markets were characterized by very intense competition, with all group segments showing negative price developments. The Group’s business performance was negatively impacted by regulatory measures on both the domestic and foreign markets, mainly applying to mobile termination rates and roaming tariffs. Two thirds of the decline in operating results (EBITDA) is therefore attributable mainly to the negative effects of regulation.

In 2012, the Austrian mobile communications market was marked by further intensification of competition, which led to a considerable reduction of the price level for both package and data tariffs.

In the CEE area, business performance in the Bulgarian and Croatian segments continued to be significantly impacted by strong macroeconomic and regulatory headwinds as well as by intense competition, which started to increasingly affect the Slovenian market, the Republic of Serbia and the Republic of Macedonia. In the Bulgarian and Croatian markets specifically, intense competition had a clear negative influence on the pricing of mobile communications offerings and convergent product bundles.

The aforementioned national and international developments reflect the wide-ranging challenges currently faced by telecommunication markets. While the steady surge in demand for data traffic still requires on-going investments in the further development and rollout of network infrastructure, competitive pressure and regulatory decisions are curtailing the earning power of communications providers.

In 2012, Telekom Austria Group’s total capital expenditure amounted to EUR 728.2 million, a reduction of 1.5% compared to the full year 2011. Roughly EUR 35 million was spent on the acquisition of further spectrum in Croatia, Belarus and the Republic of Macedonia. In the period under review, the Group reported a significant increase in capital expenditure in Croatia (including spectrum acquisition) and a slight increase in the segment ‘Additional Markets’, while the remaining segments showed a reduction in investment volume.

Corporate Strategy and the Outlook for the Full Year 2013
The Telekom Austria Group is currently operating within extremely challenging market conditions: all markets are characterized by strong competition, strict regulatory regimes and considerable macro-economic risks. In Austria, the company’s scope of action is further limited by inflexible cost structures.

Nevertheless, the Telekom Austria Group’s management succeeded in counteracting these external factors by consistently implementing a comprehensive set of measures. The corporate strategy of Austria’s largest communications company is based on the following four core elements:

1. Optimization of the core business: the main goal is to increase core business profitability, stem price erosion and drive growth in mobile-only markets. In mature markets, the main focus is on the high-value customer segment.
2. Convergence: product bundles comprising fixed line and mobile communications services lead to a considerable churn reduction and an increase in ARPL. Based on these successful offerings, the Telekom Austria Group can enhance user experience and boost sales, positioning itself as an innovation leader.
3. Operational excellence: cost-saving programs are aimed at enhancing cost efficiency. In 2012, total cost savings amounted to roughly EUR 70 million; far higher savings are planned for 2013.
4. Strategic opportunities: the Telekom Austria Group constantly monitors its market environment and evaluates potential value-enhancing opportunities and options for action. These include potential new business areas such as M2M (Machine-to-Machine Communication) as well as new corporate acquisitions that might contribute to the further growth of the Group.

The management of the Telekom Austria Group expects the challenges that characterized the operational environment during 2012 continuing to dominate the development in 2013, namely through fierce competition in its mature mobile markets, further regulatory cuts, macro-economic headwinds and FX risks.

Regarding the outlook for 2013, Hans Tschuden, CFO and Deputy Chairman of the Telekom Austria Group, said: “The Telekom Austria Group pursues a conservative financial policy. Our top priority is to maintain a solid investment-grade rating BBB (stable), which will allow us to gain a competitive advantage based on low-cost financing possibilities.”

In 2012 as in 2011, the net debt to EBITDA comparable ratio amounted to 2.2x. In order to meet the financial requirements for 2013, while at the same time proactively securing its solid investment-grade rating, the Telekom Austria Group launched a hybrid bond with a volume of EUR 600 million in January 2013. Hans Tschuden added: “At times of global economic uncertainty, financial flexibility provides a significant competitive advantage which is closely related to a company’s leverage ratio. Financial flexibility allows us greater room for maneuver in case of planning uncertainties and also provides greater scope of action for strategic investments”.

The Telekom Austria Group will address the challenges it is currently facing with a range of measures, above all a focus on the high-value customer segment in its mature mobile markets. While this will impact margins in the short-term, the management of the Telekom Austria Group is confident that this strategy will provide a strong basis for future stabilization. In the same vein, the management of the Telekom Austria Group will also intensify cost efficiency efforts in all business segments to reduce margin pressure. In Austria especially, flexibility for cost saving measures is considerably limited due to a rigid cost structure.

Furthermore, the Telekom Austria Group will continue to pursue its successful convergence strategy. In its growth markets, the Telekom Austria Group expects to further benefit from strong demand for smartphones and mobile broadband solutions.

For the full year 2013, the company expects group revenues to amount to approximately EUR 4.1 billion and capital expenditure to reach approximately EUR 700 million, excluding any investments for licenses, further spectrum auctions and acquisitions. For the business years 2012 and 2013, the management of the Telekom Austria Group plans to distribute a dividend of 5 eurocents.

This outlook is based on the assumption that currency exchange rates will remain stable in all operating markets of the Group going forward and does not include any effects of hyperinflation accounting for the Belarusian segment. Furthermore, this outlook is in line with the company-compiled consensus.


Operational Highlights in the Single Operating Segments

A1, Austria
In Austria, A1 has offered a convergent product portfolio comprising fixed line and mobile communications solutions since 2007. Thanks to the successful implementation of the company’s convergence strategy, the churn rate, the number of customers migrating to other providers was reduced by 80% in all relevant market segments.

The persistent strong demand for higher bandwidths and convergent product solutions contributed to counteracting the decline of voice minutes (-10.6%) and led to a stabilization of fixed line revenues in the period under review. Nevertheless, intense competition in the mobile market, persisting fixed-to-mobile substitution and the widespread use of ‘all-in’ service contracts, have continued to have a negative impact on business performance in the Austrian segment. In order to counter this difficult market situation, in the period under review, A1 increasingly focused on the high-value market segment, which was successfully addressed with convergent offerings and subsidized high-value end-devices. A1 was also able to increase the number of mobile broadband customers by more than 4%. The demand for smartphones continued to be strong in 2012.

In the period under review, revenues in the Austrian segment amounted to roughly EUR 2.8 billion, a decline of 5.3% year-on-year. EBITDA comparable totaled about EUR 903 million, a drop of 7.2% compared to the previous year. The mobile customer base grew by 2.1% to 5.4 million subscribers, with users of convergent product bundles registering an increase of 0.3% and exceeding the one million mark. The number of broadband customers rose by 3% in the fixed line business and by 4.2% in the mobile communications business. The A1TV subscriber base recorded a growth of 10.2% to 218,800 customers. The corporate customer segment, especially data and ICT solutions, also showed a favorable development with an increase of 6.2%.

In 2012, the Telekom Austria Group invested a total of EUR 448.2 million in further rollout and maintenance of network infrastructure in Austria alone. The main highlights were the rollout of fiber-optic network infrastructure and the GigaCities in the fixed line business and the expansion of the 4G/LTE network in the mobile communications business.
With the acquisition of YESSS!, which was finalized in January 2013, the Telekom Austria Group took another important step towards the realization of a multi-brand strategy. Thanks to the complementary target groups of bob and YESSS!, new customer segments can now be effectively addressed.

Mobiltel, Bulgaria
The business development in the Bulgarian segment was marked by intense competition and a reduction of termination rates, which played an important role for the business performance of Mobiltel. The new gliding path for national and international termination rates with effect from July 1, 2012 was introduced, resulting in a reduction of this source of revenue by 50%. Furthermore, the Bulgarian market was marked by a very tense economic environment. Mobiltel revenues declined by 11.1% to EUR 469.1 Mio., EBITDA comparable decreased by 20.8% to EUR 207.4 Mio. As a consequence, Mobiltel also focused on the high-value customer segment and the multi-brand strategy in 2012.

In the period under review, a total of 5.6 million customers used the mobile services provided by Mobiltel in Bulgaria. This represents customer growth of 1.3% and a market share of 46.9% (a decrease of almost 2 percentage points compared with year-end 2011). The number of mobile broadband customers almost doubled compared with the previous year and totaled 370,700 at year-end 2012. The number of fixed line broadband customers increased by 23.2% to over 150,000 subscribers, with total fixed access lines growing by 21.5%.

Vipnet, Croatia
Despite a very weak economic environment and corresponding high price pressure in the Croatian mobile market, Vipnet was able to maintain stable revenue development (-0.1%) and increase EBITDA comparable by 1.5% thanks to the cable operator B.net. This favorable development in the Croatian segment is mainly attributable to the success of convergent product offerings (mobile communications, broadband and TV). In October 2012, Vipnet launched its IPTV platform under the brand name Vip TV.

In the period under review, Vipnet considerably increased its capital expenditure (investment for spectrum auction) by 56% to roughly EUR 78.8 million to improve and upgrade the fixed line infrastructure of B.net. In addition, Vipnet invested EUR 20 million in the acquisition of an LTE license and became the first Croatian communication provider to offer LTE smartphones in 2012.

In the period under review, Vipnet recorded a decrease in mobile subscribers (-4.8% to 1.9 million) but was able to increase its share of contract customers. The number of mobile broadband customers totaled 181,100 (+6.2%). The fixed line business also showed satisfactory growth, registering an increase in net adds of 13.5% to 163,000 access lines. The number of broadband lines even grew by 26.6%.

velcom, Belarus
In the period under review, velcom was able to further strengthen its number 2 position in the Belarusian market, which was marked by a difficult economic environment. While results in 2011 were strongly impacted by hyperinflation totaling 108%, in 2012 inflation in Belarus was considerably lower amounting to 21.8%, with the Belarusian ruble showing a much more moderate devaluation of 4.8% throughout the year under review. As a result of the hyperinflation in 2011, prices were increased three times in 2012 in the Belarusian segment, which led to an increase in revenues by 15.5% to EUR 301.2 million and a growth in EBITDA comparable by 16.7% to EUR 124 million compared with the previous year.

Customer numbers rose to 4.8 million in the period under review, a plus of 3.9% compared to the previous year, with the market share increasing by 2 percentage points. The development of smartphones and mobile broadband also showed a particularly positive increase, with customer numbers rising by 77.3% to 803,400 subscribers thanks to strong demand.

Si.mobil, Slovenia
In the period under review, the Slovenian subsidiary was able to strengthen its market position, recording a 3.6% increase in customer numbers, with the mobile broadband customer base rising by 14.5%. With a market share of 30.3%, Si.mobil is clearly the number 2 on the Slovenian market. Furthermore, the company was the first Slovenian provider in 2012 to commercially launch LTE onto the market with a speed of up to 100 Mbit/s. In the period under review revenues increased by 3.6% to EUR 199.6 million despite declining interconnection fees, with EBITDA comparable growing by 12.3%.

Vip mobile, Republic of Serbia
In the Republic of Serbia, Vip mobile continued its successful customer acquisition policy in 2012. Customer numbers increased by 13.2% compared to 2011 and the market share rose by 1.9 percentage points to 17.6%. The company continued to catch up, specifically in mobile broadband, even if the Serbian subsidiary started from a considerably lower level compared with other operating markets of the Group. Vip mobile recorded an increase of 48.8% in the period under review, while revenue grew by 12.1% to a total of EUR 160.4 million and EBITDA comparable rose by 55.6% compared to the previous year.

Vip operator, Republic of Macedonia
In 2012, the Macedonian subsidiary reinforced its number 2 position on the market, recording customer growth of 11.5% and totaling 632,000 subscribers, which corresponds to a market share of 27.3%. In the period under review revenue increased by 12.9% to
EUR 60.3 million due to higher customer numbers and higher usage, with EBITDA comparable almost doubling to EUR 12.1 million (+91.7%).