Europe

For information on changes resulting from the first-time application of the IFRS 16 “Leases” accounting standard and changes in the organizational structure, please refer to the section “Group organization, strategy, and management.”

Customer development

Total

The markets in our segment remained intensely competitive in the first half of 2019. We continue to rise to this challenge in the current financial year, achieving an increase of 23.4 percent in the number of FMC customers as of June 30, 2019, thanks in particular to our convergent product portfolio, MagentaOne. We also made important progress on our journey to becoming an integrated provider of mobile and fixed-network products across our entire segment: Following the successful integration of UPC Austria, in May 2019 we added convergent products to our portfolio in Austria under the new Magenta product brand. At the end of June 2019, we began offering our customers in Poland the MagentaOne product bundle, which combines mobile communications over the fiber-optic-based internet and an entertainment package. We parted ways with our last remaining mobile-only subsidiary, Telekom Albania, on May 7, 2019.

Our broadband/TV operations are making progress consistently, not least thanks to the large-scale build-out of the network with state-of-the-art fiber-optic-based lines (FTTH, FTTB, and FTTC), in particular in the national companies of Greece and Hungary. As a result, the number of IP lines increased by 8.0 percent to 8.0 million as of June 30, 2019, primarily thanks to the migration from traditional PSTN lines to IP technology.

In our mobile business, we recorded moderate growth in the number of high-value contract customers. The number of prepay customers decreased sharply, mainly due to the streamlining of the portfolio in Austria and the sale of Telekom Albania. In addition, our national company in Greece recorded reductions in its prepay customer base, due in part to the deactivation of inactive prepaid SIM cards. The positive outcome of the 5G spectrum auction in Austria in the first quarter of 2019 marked the achievement of a first major milestone in the rollout of 5G in our Europe operating segment: Our national company in Austria has now put the first 5G cell sites into operation using the spectrum acquired. Successful testing is already underway in other countries. The plan is to add more 5G networks following the anticipated spectrum auctions in 2019 and 2020.

Mobile communications

The number of mobile customers totaled 46.5 million at the end of the first half of 2019, down by 8.1 percent or 4.1 million customers compared with the end of 2018. Two main effects contributed to this decline: Firstly, the streamlining of the prepay portfolio at our Austrian subsidiary, which resulted in the removal of 2.4 million cross-border M2M SIM cards from our customer base. We had made these cards available internally to the Germany segment. The second factor was the sale of our national company in Albania. Excluding these effects, the figure would have been stable compared with the prior year. The number of high-value contract customers rose by 1.3 percent compared with December 31, 2018. Overall, all of our national companies reported positive trends in their contract customer base, especially in Poland, Hungary, the Czech Republic, and Slovakia. Contract customers accounted for 58.2 percent of the total customer base. Our customers benefited not only from our innovative services and rate plans, but also from extensive coverage with fast mobile broadband – a result of our integrated network strategy. As of June 30, 2019, we already covered 97 percent of the population in the countries of our operating segment with LTE, reaching around 109 million people in total. Customer demand for high data volumes remained persistently high due to the explosion in data traffic driven by video streaming services, for example.

Fixed network

Our TV and entertainment services saw moderate customer growth of 1.6 percent as of June 30, 2019, partly as a result of new business in Croatia and partly from the stronger customer growth in Hungary and the Czech Republic. Declining customer numbers in Romania were offset by additions in virtually all of our national companies. With both telecommunication providers and OTT players offering TV services, the TV market is already saturated in many countries of our segment.

The broadband business also recorded growth of 2.1 percent compared with the end of the prior year to 6.5 million customers. In particular, the customer bases of our national companies in Greece, Hungary, and the Czech Republic saw growth, partly on the back of increased investment in innovative fiber-optic-based technologies. For example, we increased household coverage with optical fiber at our four biggest integrated national companies to 2.9 million households as of June 30, 2019 (December 31, 2018: 2.6 million).

Consistent growth in IP-based lines as a percentage of all fixed-network lines confirms that we are making good progress: At the end of June 2019, this share amounted to 88.6 percent. At 9.0 million, the number of fixed-network lines in our Europe operating segment remained on a par with the prior-year level, also thanks to the acquisition of UPC Austria.

FMC – fixed-mobile convergence

Our portfolio of convergent products, MagentaOne, was highly popular with consumers across all of our national companies. As of June 30, 2019, we had 4.1 million FMC customers; this corresponds to significant growth of 23.4 percent or 775 thousand additions compared with the end of the prior year. The main driver of this trend was our national company in Greece, which since fall 2018 also offers its convergent product portfolio to prepay customers. Pleasing customer growth trends were reported in Hungary, the Czech Republic, and Slovakia. We have also been increasingly successful in marketing our MagentaOne Business product to business customers.

Development of operations

Total revenue

Our Europe operating segment generated total revenue of EUR 5.9 billion in the first half of 2019, a year-on-year increase of 2.8 percent. In organic terms, i.e., assuming constant exchange rates and adjusted for the inclusion of UPC Austria as of July 31, 2018 and the sale of Telekom Albania as of May 7, 2019, revenue increased slightly by 0.4 percent.

Fixed-network business was the biggest driver of organic growth in the reporting period, with positive revenue effects reported in both our broadband and TV operations – partly as a result of larger customer bases and partly driven by prices. Revenue in wholesale business also increased year-on-year. Mobile revenue remained at a consistently high level: Rising higher-margin service revenues, especially in Poland, Hungary, Greece, and the Czech Republic, were offset by a decrease in revenues from the lower-margin terminal equipment business. The ICT business recorded a revenue decline. In addition, intense competition on the telecommunications markets in some countries of our operating segment had a negative impact on revenue.

Revenue from Consumers developed positively, up 4.8 percent year-on-year driven mainly by fixed-network business. Here, revenue from broadband and TV business increased substantially thanks to our innovative TV and program management activities as well as the continuous rollout of fiber-optic technology in most of our national companies. In addition, strong growth in the number of FMC customers had a positive impact on revenue. Voice telephony revenue was on a par with the prior-year level. Mobile revenue declined slightly, with higher service revenues only partially offsetting lower revenues from terminal equipment business.

Revenue from Business Customers remained virtually stable in the first half of 2019. In our core business (fixed network and mobile), revenue was once again up on the prior year. As a result of the business combination with UPC Austria to form the new Magenta Telekom brand, now all ten of our European markets are one-stop shops for convergent solutions for SMEs (MagentaOne Business). We expect the launch of our partnership with Microsoft in the business customer segment to bring in new revenue from ICT/cloud solutions for SMEs and corporate customers in the second half of the year.

Wholesale revenue grew year-on-year as a result of the increase in international voice and data termination services.

Looking at the development by country, our national companies in Greece, the Czech Republic, Slovakia, and Austria made the largest contributions to the organic development of revenue in the first half of the year. This offset the decline in revenue in Romania and Poland in particular. The negative trend in Romania is a result of a substantial decrease in mobile revenue. In the fixed network, Wholesale reported higher revenue in particular from international voice and data termination services. This offset the decline in revenue from voice telephony. Our B2B/ICT business customer operations reported a downward trend.

EBITDA AL, adjusted EBITDA AL

Our Europe operating segment generated adjusted EBITDA AL of EUR 1.9 billion in the first half of 2019, an increase of 5.6 percent. In organic terms, i.e., assuming constant exchange rates and adjusted for the inclusion of UPC Austria and the sale of Telekom Albania, adjusted EBITDA AL increased by 1.8 percent compared with the prior-year period, thus continuing the positive trend in 2019.

The positive development in adjusted organic EBITDA AL comes on the back of the increase in revenue and savings in indirect costs.

Looking at the development by country, the increase in adjusted organic EBITDA AL was largely attributable to the positive trends at our national companies in Greece, Austria, the Czech Republic, and Slovakia. A contrasting development was reported primarily at our national company in Romania, where adjusted EBITDA AL was down 21.6 percent year-on-year, mainly as a result of the lower revenue contribution.

Our EBITDA AL increased by 3.9 percent year-on-year to EUR 1.9 billion, due largely to the effects described under adjusted EBITDA AL. At EUR -86 million, special factors were EUR 34 million higher than in the prior year. In organic terms, EBITDA AL remained stable.

Development of operations in selected countries

Greece. In Greece, revenue developed positively in the first half of 2019, coming in at EUR 1.4 billion or 1.4 percent higher than in the prior-year period. This was driven primarily by higher mobile revenue, in particular service revenues, and consistently high fixed-network revenue. Broadband business posted particularly strong growth as a result of the ongoing rollout of fiber-optic lines and vectoring. TV revenue also increased compared with the prior-year period. Our wholesale operations continued to grow, while our B2B/ICT business customer operations reported a decline versus the same period of last year. The FMC offering developed positively, with rising customer numbers and corresponding revenue.

In the first half of 2019, adjusted EBITDA AL in Greece increased significantly by 3.1 percent year-on-year to EUR 573 million. Higher revenue along with savings in indirect costs were partially offset by higher direct costs.

Hungary. Revenue in Hungary declined by 1.8 percent year-on-year to EUR 914 million in the first half of 2019. In organic terms, revenue was on a par with the prior year. Mobile business posted strong year-on-year growth, with volume- and price-driven increases in service and terminal equipment revenues. Fixed-network business declined compared with the same period of last year, largely due to lower revenue in B2B/ICT customer operations, caused mainly by a non-recurring effect in the prior year. Higher revenue in broadband and terminal equipment business partially offset this decline. The extreme success of our FMC offering, MagentaOne, is underscored by continued growth in the FMC customer base and a corresponding rise in revenue.

At EUR 260 million, adjusted EBITDA AL was virtually on a par with the first half of 2018 – in part due to negative currency translation effects. In organic terms, adjusted EBITDA AL grew by 1.2 percent.

Austria. Revenue in Austria totaled EUR 621 million in the first half of 2019, a year-on-year increase of 43.8 percent. In organic terms, i.e., adjusted for the inclusion of UPC Austria, revenue increased by 1.5 percent, largely a result of rising higher-margin service revenues. Alongside the existing mobile-based broadband internet solutions already being successfully marketed to customers, the acquisition of UPC Austria has enabled us to add fixed-network technology to our portfolio and introduce convergent products under our new product brand.

Adjusted EBITDA AL increased by 66.4 percent year-on-year to EUR 233 million. In organic terms, i.e., adjusted for the inclusion of UPC Austria, adjusted EBITDA AL increased by 5.7 percent as a result of higher revenue as well as savings in indirect costs.

Poland. Revenue at our national company in Poland decreased by 4.0 percent compared with the prior-year period to EUR 713 million. In organic terms, revenue declined by 2.3 percent. This decrease is mainly due to lower revenue from mobile terminal equipment business, which could not be completely offset by the increase in higher-margin service revenues. B2B/ICT business customer operations posted a revenue increase. In traditional fixed-network business, which we are still working to expand, revenue declined once again year-on-year. We are investing heavily in the development of technologies with the goal of becoming a one-stop shop for our customers as an integrated service provider.

Adjusted EBITDA AL stood at EUR 192 million, down 1.0 percent year-on-year. In organic terms, adjusted EBITDA AL grew slightly by 0.7 percent. The downward trend in revenue was offset by an even larger reduction in direct costs; indirect costs also declined compared with the prior year.

EBIT

EBIT in our Europe operating segment decreased slightly by 0.9 percent in the first half of 2019 to EUR 696 million. Whereas previously expenses had been recognized in connection with operating leases, the right-of-use assets recognized in this context since the application of accounting standard IFRS 16 as of January 1, 2019 result in particular in higher depreciation charges. The decline in EBIT was driven by the increase in other depreciation, amortization and impairment losses compared with the prior year.

Cash capex

In the reporting period, our Europe operating segment reported cash capex of EUR 915 million, up 9.4 percent year-on-year. This rise was largely a result of cash outflows in the first half of 2019 for the acquisition of spectrum licenses in Hungary and for 5G spectrum in Austria. A further key focus of our capital expenditures was the rollout of broadband and fiber-optic technology in Greece, Austria, Poland, and Hungary as part of our integrated network strategy.