Europe

For further 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 sections “Management of the Group” and “Group organization.”

Customer development

Total

The markets in our segment also remained intensely competitive throughout the reporting year. We rose to this challenge, achieving an increase of 45.3 percent in the number of FMC customers as of December 31, 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 brand. At the end of June 2019, we also 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 our 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 12.4 percent to 8.3 million as of December 31, 2019, also thanks to the migration from traditional PSTN lines to IP technology.

In our mobile business, we recorded 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 companies in Greece and Romania recorded reductions in their prepay customer bases. 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 in the 3.4 to 3.8 GHz range. Successful testing is already underway in other countries. The plan is to add more 5G networks following the anticipated spectrum auctions in 2020.

Mobile communications

The number of mobile customers totaled 46.2 million at the end of the reporting year, down by 8.7 percent or 4.4 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. Adjusted for these two effects, the mobile customer base was down only slightly year-on-year. The number of high-value contract customers rose by 3.4 percent compared with the end of the prior year. Overall, all of our national companies reported positive trends in their contract customer base, with particularly high growth recorded in Poland, Hungary, Slovakia, and Austria. Contract customers accounted for 59.7 percent of the total customer base. In the reporting year, our innovative services and rate plans were joined in several countries by a new product portfolio, which we revamped in line with the “more for more” principle. Customers in these countries can now select high-value add-on services – e.g., more data – for a small additional monthly fee. The new portfolio also satisfies the growing demand for data volume driven by video streaming and gaming services. In addition, thanks to our integrated network strategy our customers benefited from greater coverage with fast mobile broadband. As of December 31, 2019, we already covered 97.6 percent of the population in the countries of our operating segment with LTE, reaching around 107 million people in total.

Fixed network

Our TV and entertainment services saw customer growth of 2.3 percent to a total of 4.9 million customers as of December 31, 2019, partly as a result of new business in Croatia and partly from the stronger customer growth in Hungary and the Czech Republic. The lower customer numbers in our national companies in Romania and Austria were more than offset by growth in the remaining 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 4.2 percent compared with the end of the prior year to 6.7 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 sustained high investment in innovative fiber-optic-based technologies. For example, we increased household coverage with optical fiber at our four largest national companies to 3.3 million households as of December 31, 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 December 2019, this share amounted to 91.3 percent. The number of fixed-network lines in our Europe operating segment increased slightly year-on-year to 9.1 million.

FMC – fixed-mobile convergence

Our portfolio of convergent products, MagentaOne, was highly popular with consumers across all of our national companies. At the end of the reporting year, we had 4.8 million FMC customers; this corresponds to significant growth of 45.3 percent or 1.5 million 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. Additionally, the first FMC customer figures were reported by our national company in Austria, which has been offering convergent product bundles since the launch of the new Magenta brand. 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 12.2 billion in the reporting year, a year-on-year increase of 2.4 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 by 1.4 percent.

Fixed-network business was the biggest driver of organic growth in the reporting year, 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. Both the systems solutions business and the wholesale business increased compared with the prior year, driven in part by higher revenue in Romania, especially from the termination of international voice traffic in wholesale operations. As in the prior year, mobile revenues remained at a consistently high level: Lower revenues from the lower-margin terminal equipment business were offset in full by rising higher-margin service revenues, in particular in Greece, Poland, Hungary, and the Czech Republic. In addition, intense competition on the telecommunications markets in some countries of our operating segment had a negative impact on revenue.

Looking at the development by country, our national companies in Greece, Romania, the Czech Republic, Slovakia, and Austria made the largest contributions to the organic development of revenue in the reporting year. This offset the decline in revenue in Poland in particular.

Revenue from Consumers developed positively, up 3.0 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. Higher service revenues almost offset the decline in revenue from terminal equipment business. As a result, mobile revenues overall remained on a par with the prior-year level.

Revenue from Business Customers ended the year on an upward trend with growth of 2.4 percent. We also increased the profitability of our business-to-business operations in Europe, thanks largely to our efforts in product development and customer experience (MagentaOne Business). With the launch of the Magenta brand in Austria, we now offer small and medium-sized enterprises solutions that are more closely tailored to their needs. In addition, the already very popular MagentaOne Business offering is a strong driver of revenue in Poland. Our ICT/cloud business was also successful in 2019 – thanks to our international partnership with Microsoft, our industry-specific marketing and technology solutions (e.g., for the retail sector), and 5G and SD-WAN offerings for production sites (primarily in Hungary, the Czech Republic, and Austria), we always offer our customers products with state-of-the-art technology.

EBITDA AL, adjusted EBITDA AL

In the reporting year, the Europe operating segment generated adjusted EBITDA AL of EUR 4.0 billion, an increase of 5.0 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 3.1 percent compared with the prior year, thus continuing the positive trend, primarily as a result of higher-margin service revenues as well as 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, Hungary, the Czech Republic, and Slovakia. Contrasting developments were reported primarily at the national company in Croatia, mainly as a result of more intense competition in fixed-network business.

Our EBITDA AL increased by 4.5 percent year-on-year to EUR 3.9 billion, due largely to the effects described under adjusted EBITDA AL. At EUR -146 million, special factors were EUR 24 million higher than in the prior year. In organic terms, EBITDA AL grew by 2.5 percent.

Development of operations in selected countries

Greece. In Greece, revenue developed positively in the reporting year, coming in at EUR 2.9 billion or 1.9 percent higher than in the prior year. 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. Wholesale and systems solutions business also grew substantially. The FMC offering developed positively, with rising customer numbers and corresponding revenue.

In the 2019 financial year, adjusted EBITDA AL in Greece increased significantly by 3.3 percent year-on-year to EUR 1.2 billion. Higher revenue along with savings in indirect costs were partially offset by higher direct costs.

Hungary. In the reporting year, revenue in Hungary stood at EUR 1.9 billion, down slightly by 0.9 percent year-on-year. In organic terms, revenue was up 1.1 percent compared with the prior year. Mobile business posted strong year-on-year growth, driven by volume and price-based increases in service revenues. Fixed-network business was primarily impacted by a decline in systems solutions business, which was unable to replicate the number of major contracts won in the prior year. Higher revenue in broadband and terminal equipment business partially offset this decline. Rising customer numbers and revenues reflect the consistently positive development of our MagentaOne convergent offering.

Adjusted EBITDA AL stood at EUR 0.6 billion, up 2.0 percent year-on-year. In organic terms, adjusted EBITDA AL grew by 4.0 percent.

Austria. Revenue in Austria totaled EUR 1.3 billion in the reporting year, an increase of 20.9 percent. In organic terms, i.e., adjusted for the inclusion of UPC Austria, revenue increased by 0.9 percent, largely as result of rising higher-margin service revenues and the positive trend in broadband business. Alongside the existing mobile-based broadband internet solutions already being successfully marketed to customers, the acquisition of UPC Austria enabled us to add fixed-network technology to our portfolio and introduce convergent products with the launch of our new Magenta brand in May 2019.

Adjusted EBITDA AL increased by 39.0 percent year-on-year to EUR 0.5 billion. In organic terms, i.e., adjusted for the inclusion of UPC Austria, adjusted EBITDA AL increased by 8.6 percent as a result of higher revenues and savings in direct and indirect costs, some of which were a result of synergy effects that had already been realized.

Poland. Revenue at our national company in Poland decreased by 2.6 percent compared with the prior year to EUR 1.5 billion. In organic terms, revenue declined by 1.8 percent, largely as a result of lower revenues in business with mobile terminal equipment. This was partially offset by rising higher-margin service revenues, as well as revenue in systems solutions business. 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 came in at EUR 0.4 billion, on a par with the prior-year level. In organic terms, adjusted EBITDA AL grew by 0.9 percent.

EBIT

EBIT in our Europe operating segment increased by EUR 0.4 billion in the reporting year to EUR 1.2 billion. This increase is partly due to the effects described under EBITDA AL. 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. Impairment tests carried out at the end of 2019 resulted in the recognition of impairment losses in the amount of EUR 0.3 billion on property, plant and equipment and intangible assets in Romania. In the prior year, impairment losses totaling EUR 0.6 billion had been recognized on goodwill in Poland and Romania.

Cash capex

In the reporting year, our Europe operating segment reported cash capex of EUR 1.8 billion, down 3.3 percent year-on-year. We continue to make significant investments in rolling out broadband and fiber-optic technology as part of our integrated network strategy, primarily in Greece, Austria, Poland, and Hungary. Cash capex in the reporting year also included cash outflows for the acquisition of spectrum licenses in Hungary and for 5G spectrum in Austria.