U.S. Markets open in 8 hrs 17 mins

Edited Transcript of MTELEKOM.BU earnings conference call or presentation 6-Nov-19 5:00pm GMT

Q3 2019 Magyar Telekom Tavkozlesi Nyrt Earnings Call

Budapest Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Magyar Telekom Tavkozlesi Nyrt earnings conference call or presentation Wednesday, November 6, 2019 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* János Szabó

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CFO

* Peter Bauer

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - Head of IR

* Tibor Rékasi

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director

================================================================================

Conference Call Participants

================================================================================

* Ivan Kim

Xtellus Capital Partners, Inc., Research Division - Equities Analyst

* Jakub Krawczyk

Raiffeisen CENTROBANK AG, Research Division - Financial Analyst

* Nora Nagy

Erste Group Bank AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good afternoon, and welcome to Magyar Telekom Third Quarter Financial Results Conference Call. We have just a few announcements before we begin today's presentation. The event will last for approximately 1 hour, and the slides will be advanced automatically throughout the presentation. (Operator Instructions) Your hosts today will be Mr. Tibor Rékasi, CEO; and János Szabó, CFO. Dear speakers, please go ahead.

--------------------------------------------------------------------------------

Peter Bauer, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - Head of IR [2]

--------------------------------------------------------------------------------

Good evening, everyone, and welcome to Magyar Telekom Third Quarter 2019 Results Conference Call. I am Peter Bauer, Head of Investor Relations at Magyar Telekom, and with me today is Mr. Tibor Rékasi, our CEO; and Mr. János Szabó, our CFO, who will take you through the presentation and answer any questions you may have. Please note that the Q3 results presentation can be accessed via the link provided in the conference call invitation and is also available in the Investor Relations section of our website.

Before we begin, I would like to draw your attention to the disclaimer on the second page. Information in this presentation contains statements about future -- expected future events and financial results that are forward-looking and subject to risks and uncertainties. Now it's my pleasure to hand over to Tibor, who will begin the presentation.

--------------------------------------------------------------------------------

Tibor Rékasi, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director [3]

--------------------------------------------------------------------------------

Thank you, Peter. Good evening, everybody. Let me start again with an update on our key initiatives as set out on Slide 3. In Hungary, we progressed the delivery of our fiber rollout program, adding more access points to our fiber network than ever before in a single quarter. This coupled with the completion of the DOCSIS upgrade process that now enables us to offer gigabit speed on the majority of our cable network, has notably strengthened the competitiveness of our fixed infrastructure. At the end of September, we became capable of providing gigabit speed to 1.7 million households and businesses in Hungary.

With regards to our service portfolio, we continued to reshape our offering to maximize potential household spend by offering higher-value packages by maintaining attractive prices. Success of this strategy is reflected in the increase of mobile data ARPU attributable to the changes introduced in August to our mobile data portfolio, which promotes subscription packages with higher monthly data allowances.

In September, we launched new tariffs in our fixed segment to simplify the portfolio and capitalize our improved -- on our improved network capabilities. The initial results of this are promising and overall, sales volumes are up across all service categories. Furthermore, an increasing number of broadband customers are signing up for gigabit packages, equating to approximately 1/3 of sales in September.

From the third quarter, we provide Magenta customers with a single combined deal for their telecommunication service portfolio. Not only does this help customers to track discounts they benefit from more closely, but it also supports our internal processes by enabling us to better identify customer needs and demands.

Meanwhile in North Macedonia despite competitive pressure, favorable trends will sustain these customer numbers rising further supported by bundled and fixed mobile convergent service offerings. This contributed to our ability to maintain the positive financial performance with regard to both revenues and EBITDA.

Turning to group results on Slide 4. Revenues in the third quarter grew moderately due to telecommunication revenue increases in both Hungary and North Macedonia. The growth in both countries were -- was fueled by an expansion of the fixed broadband and TV subscriber bases as well as the continued strong demand for mobile data. The continuous positive trend in fixed equipment sales, supported by the opportunity to group equipment subsidies, fully offset the year-on-year decline in mobile equipment sales.

Group EBITDA, excluding the impact of IFRS 16 adoption, grew 4% year-on-year, thanks to the improvement recorded in both countries of operation. In Hungary, the growth in gross profit reflects a one-off improvement in bad debt expenses, while the year-on-year reduction in indirect cost is attributable to savings and employee-related expenses. In North Macedonia, the gross profit increase is the result of higher revenue and the reduction of -- and the reduction in indirect cost attributable to lower employee and marketing expenses. It is also worth noting that group EBITDA was favorably impacted by the implementation of IFRS 16 to the tune of HUF 4.7 billion.

With regards to delivery against our targets set out on Slide 5, as forecasted, the revenue growth trend witnessed last year has slowed considerably, driven by the reduction in SI/IT and mobile equipment sales revenues. Looking ahead, we expect SI/IT revenues to decline further, however, we believe this will be largely compensated by the positive dynamics of our core telecommunication revenue.

In line with our targets, we expect group EBITDA to increase 1% to 2% on an annual basis, thanks to efficiency-enhancing measures we have been implementing across the business. Capital expenditures, excluding the impact of IFRS 16 adoption, increased year-on-year largely due to a ramp-up in fixed infrastructure investments and more evenly timed investments compared to 2018.

In the third quarter, free cash flow improved, reflecting positive trends in our underlying performance. Excluding the HUR 11 billion payment for the extension of the 2,100-megahertz frequency license, free cash flow by the end of September was broadly flat year-on-year. This is driven by higher EBITDA and an improvement in installments and other receivables, which helped to offset increased outpayments to suppliers in -- and capital expenditure. Given our performance so far this year, we believe we are very well positioned to deliver on our full year targets for 2019.

I will now hand over to János to provide you with further details on the performance of our business segments.

--------------------------------------------------------------------------------

János Szabó, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CFO [4]

--------------------------------------------------------------------------------

Thank you, Tibor. Good evening. Turning first to the performance of our business in Hungary on Slide 6. Total revenues increased marginally by 0.3% in the third quarter primarily due to the continued decline in SI/IT and mobile equipment revenues, which was offset by an increase in data usage by our customers. As reported in recent quarters, mobile service earnings continued to grow, thanks to continued strong demand for data by our customers and changes in our mobile portfolio pricing.

This year, we renewed both our postpaid voice and data packages with our more-for-more strategy in mind, offering higher value packages to customers at a higher price point. Unfortunately, the growth of our mobile service revenues could not offset the continued decline in mobile equipment revenues, where customer spending has still not recovered from the second quarter of 2019.

Meanwhile, fixed revenues continued to grow both on the service revenue and equipment revenue lines. This is primarily due to fixed service revenue growth in the broadband segment, where like the mobile segment, we still encounter growing customer interest in data-related products. To ensure we take advantage of this opportunity, we restructured our fixed portfolio offering in Q3 with our more-for-more strategy in mind. In the fixed segment, equipment sales revenue continued to grow in the quarter, up approximately 38% versus last year.

In the System Integration and IT segment, we witnessed a continuing year-on-year decline in revenues as we continue to operate against a particularly strong prior year with revenues further impacted by a change in the seasonality of public sector projects. EBITDA, excluding the impacts of IFRS 16 adoption, increased by 4.6% (sic) [4.7%]. Including the impact of IFRS 16, EBITDA increased by 15%.

Despite the reduction in System Integration and IT revenues, we successfully grew gross profit, thanks to higher contribution from our telecommunications services, both in the fixed and mobile segment as well as one-off improvements in bad debt expenses. The savings in our employee-related expenses reflect the effect of a lower head count and the reduction in severance expenses, which helped to offset wage increases to ensure salaries remain competitive in the Hungarian market.

Slide 7 illustrates the key developments within our Hungarian mobile operations. We continue the ongoing efforts to convert our customers from pre to postpaid packages. Attractiveness of postpaid packages was boosted by both the continued requirement to annually register prepaid customers as well the rising demand for data. We also grew the total number of SIM cards compared to last year.

In 2019, in addition to focusing on the aforementioned pre to postpaid migration and growing our SIM card, we also took the opportunity to review our mobile portfolio. This initiative commenced in Q1 with the introduction of our new prepaid packages followed by a restructuring of the voice portfolio in Q2 and updates to our mobile data portfolio in Q3. Thanks to these portfolio changes, we grew our blended mobile ARPU by 2% this quarter.

In the third quarter, we witnessed continued growth in our customer data-based usage and a strong increase in the number of 4G customers using our networks. Despite the temporary decline in handset sales, our focus on providing our customers with the latest 4G handsets show in our network usage, where over 88% of all data customers are using our award-winning 4G network. The importance of our 4G network is even more visible when you look at the mobile broadband usage of our 4G and non-4G customers. By the third quarter, 97% of all data consumed in the network was via the 4G connections.

Total data consumption has also grown by over 50% compared to the same quarter of last year. It is worth mentioning that 4G usage being more and more frequent, 4G customers tend to use more data than the non-4G customers, over 6x as much as in the last quarter.

Slide 8 shows the progression of fixed net -- segment in the third quarter. As we look at the fixed customer base, it shows that besides the structural decline in the fixed voice customer base, we have managed to grow both our TV and fixed broadband customer base. In the TV segment, the growth came from the IPTV customer base reflecting our continued efforts to encourage our customers to adopt this technology, where we can leverage our ever-growing fixed network and offer the best products to our customers.

In the fixed broadband segment, as mentioned by Tibor earlier, we upgraded our cable network to a gigabyte capacity, meaning that we can now reach 1.7 million households and businesses with gigabyte (sic) [gigabit] connectivity.

The next chart illustrates the distribution of our multiplay subscriber base. In Q3, we recorded decline in 1Play customers as an increasing number of subscriptions (sic) [subscribers] discovered the benefit of having 2 and 3 fixed services with us. In addition to the structural decline in voice ARPU, we have experienced a decrease in TV ARPU largely due to higher customer discounts, while fixed broadband ARPU continued to grow in the third quarter. This is in line with our efforts to upgrade our fixed network to be able to offer gigabyte Internet in every household in Hungary.

The advantages of this strategy are clearly reflected in the fixed broadband ARPU growth figures, where we find that many of our customers opt for higher data packages if possible. Our ability to offer 1.7 million households with gigabyte-capable Internet connections demonstrates our ability to create value for both customers and the company with this strategy.

The final chart illustrates for us the advantages of customers having more than one services. In Q3, we successfully grew the blended ARPU of our fixed products while also growing customer ARPU figures across the board from 1 to 3Play customers. As we focus on encouraging customers to use more of our products, we believe there's a further growth potential in blended ARPU.

On Slide 9, we have outlined the developments in Hungarian System Integration and IT segment. In the third quarter, the revenue decline has come -- the revenue decline has continued in our SI/IT subsidiary, which resulted in a lower gross profit for the period. This was driven primarily by a lower number of public sector projects being implemented in the Hungarian market compared to the prior year period.

Moving on to the performance of our Northern Macedonia operation on Slide 10, all results are presented in local currency to better reflect our underlying performance. I'm pleased to report a further year-on-year increase in revenue and EBITDA despite the intensifying competitive pressure we are facing both in fixed and mobile side markets.

Third quarter market -- third quarter marked the start of a rebranding campaign of a major competitor, Vip, to A1 Macedonia with strong data and equipment promotions accompanying the process. Nonetheless, thanks to our strong service quality and attractive offerings, we managed to sustain the positive performance in the period.

In the mobile segment, service revenue growth continued to be driven by higher data revenues, thanks to the continued expansion of our mobile broadband customer base, which grew approximately 6% year-on-year. To maintain competitiveness, we have introduced attractive smart equipment offers that led to higher equipment revenues and a 5% increase in the number of postpaid subscribers. The third quarter is also typically characterized by seasonally higher tourism leading to higher prepaid customer numbers.

From July 1, the Balkan roaming agreement became effective, which like the EU Directive aims to minimize roaming charges in the 6 Balkan countries who have signed this agreement. As a result, visitor traffic rose sharply, supporting other mobile revenues. Conversely, subscriber roaming revenues deteriorated compared to the third quarter of 2018. Overall, this performance, coupled with the changing dynamics in the postpaid subscriber base, led to a slight decline in the pre and postpaid ARPUs, while blended ARPU was up approximately 3% year-on-year.

Despite competitive pressures also characterizing the fixed segment, TV and retail broadband revenues increased. This reflects continued expansion of the relevant customer bases, which helped to partly compensate for the decline in wholesale and retail voice revenues. Our continued efforts to cross sell our bundled packages supported expansion of our customer base, including a [20%] year increase -- year-on-year increase in the double and triple play customer base.

Our FMC Magenta subscriber base also continued to grow; by the end of September 45% of our home customers held and integrated packages with us. System Integration and IT revenues witnessed a temporary decline driven solely by year-on-year differences in the timing of project deliveries. Going forward, we expect continued growth in this segment.

EBITDA in Macedonia, excluding the impact of IFRS 16 implementation, improved considerably as a result of revenue growth and indirect cost savings, specifically in employee and marketing expenses. Looking ahead, we believe that our attractive service offerings, coupled with our efforts to increase operational efficiency, will mitigate the negative impacts stemming from the intensifying competition and support us in maintaining the positive financial performance delivered in the past quarters.

--------------------------------------------------------------------------------

Tibor Rékasi, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director [5]

--------------------------------------------------------------------------------

Thank you very much, János. That concludes the formal part of Magyar Telekom's conference call. Now, operator, when you're ready, we will take the first question.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We've received the first question, it is from Nora Nagy of Erste Group.

--------------------------------------------------------------------------------

Nora Nagy, Erste Group Bank AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

The first one would be, on today's news, the Hungarian government revealed the 5G network with Huawei. Do you see any impact on your operation and how you will be at the 5G network? Because we know that you use 3 vendors. Must say, I would be curious on your view.

--------------------------------------------------------------------------------

Tibor Rékasi, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director [3]

--------------------------------------------------------------------------------

I'm not sure about the news because -- or I misunderstood the question, but it was not the government --- the 5G network. But on our side, we will comment on this for our plans by the time when we will commercially launch 5G. So far, we did not make any decision on which technology or which other partner we will use in terms of 5G network or not.

--------------------------------------------------------------------------------

Nora Nagy, Erste Group Bank AG, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Okay, I see. And the second question would be on financial results. We can see that actually this is the line where in Q3 was weaker year-on-year. And can you please give us more information on that line that it is [able to trade there] due to IFRS 16 implementation, that was the main reason behind or something else?

--------------------------------------------------------------------------------

János Szabó, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CFO [5]

--------------------------------------------------------------------------------

Well, in terms of the financial results, there was also the -- we have to consider that -- due to the weakening of the forint. We have to book for currency loss in relation to these liabilities. And that's the major difference which has created this [underline].

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

At the moment, there are no further questions. (Operator Instructions) And we have received another question. It is from Ivan Kim of Xtellus Capital.

--------------------------------------------------------------------------------

Ivan Kim, Xtellus Capital Partners, Inc., Research Division - Equities Analyst [7]

--------------------------------------------------------------------------------

One question from me, please. On the [challenging] the exclusion from 5G spectrum bidding, when do you expect the decision? And I appreciate it's probably hard to comment on the outcome. But how do you see right now basically for 5G spectrum auction is going to be 3 operators participating or with [bidding]?

--------------------------------------------------------------------------------

Tibor Rékasi, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director [8]

--------------------------------------------------------------------------------

It's a complex question, but let me try to [separate a certain point]. So far, what we know is that the regulator is expected to decide on the appeal in November. Anything else, we don't know. So we won't be able to comment. We will need to wait until the auction process is [started], and then after it concludes, we'll get back to this question.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

The next question we've received is from Jakub Krawczyk of Raiffeisen CENTROBANK.

--------------------------------------------------------------------------------

Jakub Krawczyk, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [10]

--------------------------------------------------------------------------------

I have -- well, I have 2 questions. I think one of them was, let's say, I guess, answer to the probably the best extent. I just wanted an update on auction. So if I heard this correctly, I think you said that the regulator is expected to decide on the appeal in November. Is that correct?

--------------------------------------------------------------------------------

Tibor Rékasi, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director [11]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jakub Krawczyk, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [12]

--------------------------------------------------------------------------------

Okay. Okay. And obviously, the second question is equally difficult. It's just about the progress with the discussions around T-Systems. So I appreciate you probably can't give anything binding. But just maybe is there any update whatsoever in terms of whether things could still happen this year?

--------------------------------------------------------------------------------

Tibor Rékasi, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director [13]

--------------------------------------------------------------------------------

Yes. As we already earlier publicly announced. It is still expected to be closed this year. But the process is ongoing, so let us not further comment on the process.

--------------------------------------------------------------------------------

Jakub Krawczyk, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [14]

--------------------------------------------------------------------------------

Okay. Okay. And maybe if I just go back to the auction. Is it realistic that if there is an appeal decision, let's say, by the end of November that there is enough time, obviously given Christmas and all that, to run and complete the auction still this year technically?

--------------------------------------------------------------------------------

Tibor Rékasi, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CEO, Chief Technology & IT Officer and Director [15]

--------------------------------------------------------------------------------

Look, it will be speculation on our side. Let me not comment this, sorry. [Realistically, it's] impossible for me to answer this question.

--------------------------------------------------------------------------------

Jakub Krawczyk, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [16]

--------------------------------------------------------------------------------

Okay. And maybe just one more if I may. In terms of a potential dividend policy, is it -- should I understand that we need clarity on these 2 big issues before you are going to think about setting a dividend policy? Or you're not thinking at all about setting a dividend policy?

--------------------------------------------------------------------------------

János Szabó, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CFO [17]

--------------------------------------------------------------------------------

As we earlier talked, we are working on the dividend policy, and we expect the Board to discuss it in one of the next Board meetings, most probably next -- first quarter next year, and then we will publish this dividend policy. These 2 -- I mean these concrete topics are not in relation to our dividend policy discussion, which we already promised earlier to come.

--------------------------------------------------------------------------------

Jakub Krawczyk, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [18]

--------------------------------------------------------------------------------

Okay. So no particular delay from this, guidance to the dividend policy.

--------------------------------------------------------------------------------

János Szabó, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - CFO [19]

--------------------------------------------------------------------------------

No, no.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

As there are no further questions, I would hand back to you, speakers.

--------------------------------------------------------------------------------

Peter Bauer, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság - Head of IR [21]

--------------------------------------------------------------------------------

If you have any follow-up questions, please do contact our Investor Relations department. Please also note that the transcript of our conference call will be -- shortly be available on our website. Thank you again for joining us today and your continued interest in Magyar Telekom.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.