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

Total revenues declined by 4.1% year-on-year to HUF 160.8 billion in Q2 2019 as the continued positive trend in fixed and mobile service revenues was offset by a sharp decline in System Integration and IT revenues. Total revenues remained broadly stable in the first half of 2019 compared to the same period in 2018, as the increase in service revenues were coupled with higher equipment sales as well thus could counterbalance the lower SI/IT revenues.
 

• Mobile revenues were up 1.8% year-on-year at HUF 84.9 billion in Q2 2019, owing to higher mobile data revenues in both countries of operation which were partially offset by lower voice and equipment sales revenues. In H1 2019, mobile revenues grew by 5.0% year-on-year to HUF 169.7 billion, reflecting higher mobile data and equipment sales revenues.
• Fixed line revenues were up 3.1% higher year-on-year at HUF 52.7 billion in Q2 2019 and 2.6% higher at HUF 105.3 billion in the first half of 2019. Rising equipment sales and TV and broadband retail service revenues were among the key drivers behind this increase.
• System Integration (SI) and IT revenues declined by 30.1% year-on-year to HUF 23.2 billion in Q2 2019, resulting in a year-on-year revenue contraction of 17.4% for the first half of 2019. This result has been driven by lower income from Hungarian public sector projects including the absence of the benefit from a major PC delivery completed for the education sector in the prior year period of Q2 2018. In North Macedonia, the increase in SI/IT revenues was driven by the higher volume of projects delivered in the public sector.

Direct costs were down 9.3% year-on-year, at HUF 68.1 billion in Q2 2019, and broadly stable in H1 2019 versus H1 2018. While other direct costs continued to rise in Q2 2019, SI/IT related expenses were significantly lower thus resulting in a year-on-year cost decline in the second quarter.
 

• Interconnect costs were broadly unchanged at HUF 5.3 billion in Q2 2019, as increased payments to mobile operators (reflecting higher off-network mobile traffic) were counterbalanced by lower outpayments to fixed operators in both countries.
• SI/IT service related costs declined by 31.7% year-on-year, to HUF 17.3 billion in Q2 2019, driven by a lower volume of related projects.
• Bad debt expenses deteriorated by 7.7% year-on-year in Q2 2019, reflecting higher fixed and mobile revenues in Hungary and the absence of one-off items positively impacting the prior year figures in North Macedonia.
• Telecom tax was down 3.6% year-on-year, at HUF 6.4 billion in Q2 2019, as the lower fixed voice usage more than offset an increase in mobile traffic in Hungary.
• Other direct costs increased by 3.1% year-on-year, to HUF 36.8 billion in Q2 2019, reflecting an increase in Hungarian content fees and roaming outpayments.

Gross profit remained stable at HUF 92.6 billion in Q2 2019 and at HUF 184.8 billion in H1 2019. This result is broadly attributable to improved performance of telecommunication services, offset by lower SI/IT profit contribution.

Indirect costs improved by 15.6% year-on-year, to HUF 35.7 billion in Q2 2019, and by 10.4% year-on-year to HUF 81.5 billion in H1 2019. If the impact of IFRS 16 implementation is excluded, indirect costs were down 4.6% at HUF 40.4 billion in Q2 2019 and broadly stable at HUF 91.2 billion in H1 2019.
 

• Employee-related expenses declined by 2.1% year-on-year, to HUF 19.8 billion in Q2 2019, driven by lower headcount in both Hungary and North Macedonia. In H1 2019, employee-related expenses were up 6.6% year-on-year, due to the HUF 3.0 billion in severance expenses booked in Q1 2019 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.
• Other operating expenses were down HUF 5.5 billion year-on-year, at HUF 17.6 billion in Q2 2019, with IFRS 16 adoption and higher level of provision reversal driving the decline. The underlying performance reflects higher rental expenses offset by general cost savings across several other expense lines. Other operating expenses in North Macedonia increased moderately, driven by higher electricity, regulatory, marketing and maintenance expenses.
• Other operating income increased by HUF 0.7 billion year-on-year in Q2 2019, mostly attributable to income related to a legal case .

EBITDA increased by 13.4% year-on-year to HUF 56.9 billion in Q2 2019, and by 11.4% to HUF 103.3 billion in H1 2019. Excluding the impact of IFRS 16 adoption, EBITDA was 4.1% higher year-on-year in Q2 2019 and improved 0.9% year-on-year in H1 2019.

Depreciation and amortization (D&A) expenses rose by HUF 3.1 billion year-on-year, to HUF 32.2 billion in Q2 2019, with IFRS 16 adoption accounting for HUF 4.0 billion increase; the underlying decline reflects the one-off increase in D&A driven by the shortened useful life of customer connection related network elements in Q2 2018. In the first half of 2019, D&A increased by HUF 10.1 billion, HUF 8.6 billion of this increase relates to the adoption of IFRS 16, with the remaining balance attributable to the shortened useful lives of customer connection related network elements.

Profit for the period declined moderately by 1.5% year-on-year to HUF 14.5 billion in Q2 2019, resulting from the HUF 0.8 billion impact resulting from the adoption of IFRS 16. In the first half of 2019, net profit declined by 23.7% year-on-year to HUF 18.5 billion as a combined result of higher severance expenses, an increase in tax expense in Q1 2019, and the overall HUF 1.7 billion impact resulting from the adoption of IFRS 16.
 

• Net financial expenses increased by HUF 3.5 billion year-on-year to HUF 6.5 billion in Q2 2019, driven partly by the adoption of IFRS 16 (with an impact of HUF 1.4 billion), the unrealized losses in relation to the fair valuation of derivatives driven by the changes in the relevant yield curves during the period as well as the absence of the unrealized gains recorded in relation to the fair valuation of derivatives in Q2 2018 that was driven by the 5.1% weakening of the EUR-HUF exchange rate in the period.
• Income tax expenses increased by 14.5% to HUF 3.9 billion in Q2 2019, despite only a moderate increase in profit before tax. This was driven by a slight increase in local business tax, 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) and higher withholding tax in relation to the dividend payment of the North Macedonian holding company, Stonebridge.

Profit attributable to non-controlling interests increased by 14.2% year-on-year to HUF 1.1 billion in Q2 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 together with a deterioration in working capital.

Net debt increased to HUF 411.4 billion at the end of Q2 2019 reflecting the recognition of lease liabilities in accordance with IFRS 16 and the payment of dividends in May 2019.

Tibor Rékasi, CEO commented:
"I am pleased to announce that, in H1 2019, positive trends across both the fixed and mobile segments in Hungary and all business segments in North-Macedonia facilitated consolidated moderate revenue and EBITDA growth, despite challenges in the Hungarian Systems Integration and IT (SI/IT) segment. With this performance, we are well on track to meet our guidance for 2019, which assumes a moderate decline in revenues and continued EBITDA growth.
Looking at Q2 2019, specifically, the revenue decline in the quarter is solely due to lower Hungarian SI/IT revenues attributable to a significant reduction in the volume of public sector contracts realized and the absence of a one-off project that was completed in the prior year. We recorded revenue growth across all other segments in Hungary and in North Macedonia during the quarter.
In the Hungarian mobile segment, strong demand for data helped offset the decline in voice revenues and lower equipment sales driven by a temporary slowdown in purchases of Huawei handsets. As long expected, DIGI launched its mobile service in Hungary during the quarter; however, their service offering, and availability remains very limited.
In the fixed segment, the ongoing rollout of our fiber network, which replaces crucial parts of our legacy network with fiber optic, played a key role in facilitating further development of our product offering. We are pleased to report that this has resulted in continued growth of our customer base and broadband ARPU. We were also successful in maintaining momentum in the TV segment, growing both revenues and our customer base. Despite the structural decline in voice revenues, we delivered 3.1% year-on-year fixed revenue growth in Q2 2019.
In line with our strategy, we continued to place strong emphasis on growing our FMC customer base. Even with the recent market changes we are the leading integrated player in the Hungarian market and we are taking full advantage of this position to reinforce our market presence and prepare for future developments in the market. Our Magenta1 offering, introduced in 2018 to deliver highly attractive services and related equipment, remains popular with our customers and supports the sustained growth in our FMC customer base.
Our efforts to further strengthen our online presence are reflected in improved sales and customer service, as we deliver increasingly simple and attractive solutions to our customers."