Magyar Telekom reported its consolidated financial results for the first quarter of 2019, in accordance with International Financial Reporting Standards (IFRS).

Total revenues increased by 5.5% year-on-year to HUF 158.9 billion in Q1 2019, primarily driven by a strong increase in equipment sales and mobile data usage.
 

• Mobile revenues increased by 8.4% year-on-year to HUF 84.9 billion in Q1 2019, as growth in equipment sales, along with a continued increase in mobile data revenues, more than offset the moderate decline in voice revenue.
• Fixed line revenues rose by 2.1% year-on-year to HUF 52.7 billion in Q1 2019, attributable to a further increase in equipment sales, as well as higher broadband retail service revenues.
• System Integration (SI) and IT revenues grew by 3.1% year-on-year to HUF 21.4 billion in Q1 2019, as revenues in Hungary continued to increase, primarily driven by public sector hardware and software delivery projects. SI/IT revenues declined in North Macedonia, reflecting a temporary reduction in project volumes.

Direct costs increased by 12.3% year-on-year, to HUF 66.8 billion in Q1 2019, primarily driven by higher equipment costs, in line with the growth in related revenue lines.
 

• Interconnect costs increased by 3.6% year-on-year to HUF 4.8 billion in Q1 2019, reflecting increased off-network mobile voice and SMS traffic in both countries, which led to higher payments to domestic mobile operators.
• SI/IT service related costs increased by 7.1% year-on-year to HUF 15.0 billion in Q1 2019, driven by a higher volume of lower margin delivery projects in the sales mix.
• Bad debt expenses increased by HUF 0.7 billion year-on-year to HUF 2.1 billion in Q1 2019. This was primarily driven by higher bad debt expense in Hungary, resulting from the strong growth in revenues and the absence of the positive one-off impact recorded in Q1 2018 relating to improvements in the aging structure of our receivables, in addition to temporarily favourable results related to factored trade receivables. In North Macedonia, bad debt expenses also increased due to higher equipment sales revenues.
• Telecom tax remained broadly stable year-on-year at HUF 6.2 billion in Q1 2019, as lower fixed voice usage mostly outweighed the increase in mobile traffic in Hungary.
• Other direct costs increased by 16.4% year-on-year to HUF 38.6 billion in Q1 2019, primarily due to an increase in the cost of equipment sales in line with higher sales, and an increase in TV content outpayments.

Gross profit increased by 1.1% year-on-year to HUF 92.2 billion in Q1 2019, thanks to a strong increase in revenues, but partly offset by the impact of the increasing weight of lower margin services in the sales mix.
 
Indirect costs improved by 5.7% year-on-year to HUF 45.8 billion in Q1 2019. Excluding the impact of IFRS 16 implementation, indirect costs were 4.7% higher at HUF 50.9 billion. The increase in costs was driven by growth in severance expenses booked in relation to the Hungarian headcount reduction programme, though this was partially offset by savings in other operating expenses.
 

• Employee-related expenses rose by 15.7% year-on-year to HUF 22.6 billion in Q1 2019, reflecting the HUF 3.0 billion in severance expenses in relation to the Hungarian headcount reduction programme, combined with increased expenses related to the restructuring of the remuneration system, driven by regulation changes in Hungary. Employee related expenses remained stable in North Macedonia.
• Hungarian utility tax remained broadly stable at HUF 7.2 billion in Q1 2019, reflecting an increase in the length of the taxable network, due to the refinement of the cable network records. This offset the positive effects of Magyar Telekom's tax credit relating to its new network investments and upgrades that enable internet access of at least 100 Mbps.
• Other operating expenses were HUF 6.1 billion lower year-on-year in Q1 2019, with IFRS 16 adoption accounting for HUF 5.1 billion of the decline. The underlying improvement of 4.4% was driven by lower IT maintenance and energy costs and temporary savings in marketing expenses. which more than offset increased rental fees in Hungary. Other operating expenses in North Macedonia remained broadly unchanged.
• Other operating income was HUF 0.1 billion lower year-on-year at HUF 0.9 billion in Q1 2019, reflecting the absence of one-off accrual reversals (related to lapsed unbilled liabilities in Q1 2018).

EBITDA increased by 9.0% year-on-year to HUF 46.4 billion in Q1 2019. Excluding the impact of IFRS 16 adoption, EBITDA was 2.9% lower year-on-year. This decline reflects higher severance expenses in Hungary, which more than offset increases in gross profit in both countries, and improvements in other operating expenses at the Hungarian operation.
Depreciation and amortization (D&A) expenses rose by HUF 7.0 billion year-on-year to HUF 33.8 billion in Q1 2019, with IFRS 16 adoption accounting for HUF 4.5 billion of that increase. The underlying increase of HUF 2.4 billion or 9.0% year-on-year was due to the shortened useful lives of customer connection related network elements.

Profit for the period declined by 58.1% year-on-year to HUF 4.0 billion in Q1 2019, as a combined result of higher severance expenses, an increase in tax expense, and the HUF 0.9 billion impact resulting from the adoption of IFRS 16.
 

• Net financial expenses increased by HUF 1.3 billion year-on-year to HUF 5.6 billion in Q1 2019, driven by the adoption of IFRS 16 (with an impact of HUF 1.4 billion). Excluding this impact, financial expenses declined 2.3% year-on-year thanks to lower interest expenses resulting from the lower debt level.
• Income tax expenses increased from HUF 2.3 billion in Q1 2018 to HUF 3.1 billion in Q1 2019, despite a decline in profit before tax. This was driven by a slight increase in local business taxes, which represent a substantial portion of income taxes, and arose on a near flat level in each quarter, combined with higher deferred tax expenses related to subsidiaries (i.e. a significant decrease in tax losses and a change in the handling of development reserves).
• Profit attributable to non-controlling interests increased by 8.8% year-on-year to HUF 0.9 billion in Q1 2019, as higher EBITDA led to increased profits at the North Macedonian operation.

Free cash flow decline reflects payment of the 2100 MHz frequency license extension fee along with some deterioration of working capital developments.
Net debt increased from HUF 272.8 billion at the end of 2018 to HUF 404.7 billion at the end of Q1 2019, reflecting the recognition of lease liabilities in line with IFRS 16 adoption.

Tibor Rékasi, CEO commented:
"I am pleased to confirm that Magyar Telekom has maintained its momentum from 2018 to deliver both revenue and EBITDA growth in Q1 2019. We increased revenue by 5.5% to HUF 158.9 billion through strong performance of data driven services in both the fixed and the mobile segments and by continuing to grow equipment sales. While we recorded 9% growth in EBITDA, this was attributable to IFRS16 implementation, without which a slight decline was registered on the account of severance expenses incurred in Hungary. On Free Cash Flow we experienced a stronger than usual Q1 decline in our figures, but with the planned sale of real-estate in 2019, we remain confident that we will meet our guidance for 2019.
In Hungary, positive business trends continued in the first quarter, with revenue growth across all three major business lines.
In the mobile segment, demand for mobile data continued to grow alongside equipment sales revenues, offsetting a slight decline in voice revenues. This was reinforced by our ongoing strategy for equipment sales. Thanks to our efforts, Magyar Telekom became the largest online seller of mobile phones and tablets, taking a third of the Hungarian market in 2018, according to GKI Digital's market analysis.
In the fixed market, we continue to focus on the rollout of our fiber network, providing an increasing number of households with 100+ MB connections. We continued to see the positive results of this strategy in the growth of fixed line revenue, where - despite the industry-wide trend of declining voice revenues - we grew revenues by 2.1% year-on-year to HUF 52.7 billion in Q1 2019. While TV revenues remained broadly stable across the Group, we again succeeded in growing both equipment sales and broadband retail revenues.
With the strong performance of both our fixed and mobile business lines, we were able to focus on the third pillar of our core business strategy, our FMC customer base. In Q1 2019 we are still the only truly integrated player in the Hungarian market and are taking full advantage of this position to enforce our market presence and prepare for future developments in the market. The Magenta1 offering introduced in 2018, delivering discounted prices for services and related equipment, remains popular with our customers and supports the sustained growth in our Magenta1 customer base.
In line with our strategy, in Q1 2019 we continued to strengthen our online presence focusing on sales and customer service, providing simpler and more attractive solutions to our customers.
In the System Integration and IT segment we maintained our growth, with revenues increasing 3.1% year-on-year to reach HUF 21.4 billion in Q1 2019, primarily driven by public sector hardware and software delivery projects. We continue to pursue our strategy focused on building long-term relationships in the market and converting these deals into higher margin service contracts.
Group performance during the year was further supported by the continued turnaround in North Macedonia. Both revenues and EBITDA improved, thanks to a solid performance in both the fixed and mobile segments."