Europe

Customer development

Total

The markets in our segment remained intensely competitive in the first quarter of 2020. We rose to this challenge, winning customers over to our convergent product portfolio MagentaOne and increasing the number of FMC customers by 4.9 percent. Convergent products require integrated networks. That is why we are systematically building out and interlinking our fixed and mobile networks. Our fixed-network infrastructure is continuously being built out with state-of-the-art fiber-optic-based lines (FTTH, FTTB, and FTTC), with the national companies in Hungary and Slovakia seeing the greatest rollout progress in the first quarter of 2020. We thus increased our broadband customer base by 1.0 percent.

In our mobile business, we recorded growth in the number of high-value contract customers, partially offsetting the decline in the prepay customer base. In 5G, we reached the first milestone a year ago with the market launch in Austria. At the start of April 2020, Hungary also launched, following the successful 5G auction. Successful tests are also underway in other countries, like Poland. The plan is to add more 5G networks following the anticipated spectrum auctions in the various countries in 2020.

Mobile communications

In the Europe operating segment, we had 45.9 million mobile customers at the end of the first quarter, a marginal decline of 0.5 percent compared with the end of 2019. The number of high-value contract customers increased slightly by 0.4 percent. The contract customer bases increased in most of our national companies, with particularly strong growth recorded in Romania, Poland, Austria, Hungary, and the Czech Republic. Following the M2M reclassification, the contract customer share of the total customer base now totals 57.4 percent. Already last 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 March 31, 2020, we covered 97.3 percent of the population in the countries of our operating segment with LTE, reaching around 107 million people in total.

By contrast, the prepay customer base declined slightly, in line with expectations. This is partly due to the fact that our market approach is focused on contract rate plans, with which we want to convince our prepay customers to switch to higher-value rate plans. We succeeded in this with a number of prepay customers. Furthermore, inactive SIM cards are deactivated from the customer base at regular intervals.

Fixed network

The broadband business recorded growth of 1.0 percent compared with the end of the prior year to a total of 6.7 million customers. By continuing to invest heavily in innovative fiber-optic-based technologies, we are systematically building out our fixed-network infrastructure. The customer bases of our national companies in Greece, the Czech Republic, and Hungary in particular saw substantial growth. Thus we increased household coverage with optical fiber at our four largest national companies to 3.4 million households as of March 31, 2020. 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 March 2020, this share amounted to 91.8 percent. The total number of fixed-network lines in our Europe operating segment was on a par with the prior-year level at 9.1 million.

The TV and entertainment business remained stable against the prior-year level as of March 31, 2020 at 4.9 million customers in total. With both telecommunication providers and OTT players offering TV services, the TV market is already saturated in many countries of our segment.

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 first quarter of 2020, we had 5.0 million FMC customers; this corresponds to growth of 4.9 percent compared with the end of the prior year. In particular, our national companies in Greece, Hungary, Romania, and Poland recorded higher customer numbers. We have also seen accelerated growth in the marketing of our MagentaOne Business product to business customers.

Development of operations

Total revenue

Our Europe operating segment generated total revenue of EUR 2.9 billion in the first quarter of 2020, a slight year-on-year increase of 0.4 percent. In organic terms, i.e., assuming constant exchange rates and adjusted for the sale of Telekom Albania as of May 7, 2019, revenue increased by 2.0 percent.

The fixed-network business is increasingly consistent as a driver of growth: For example, we recorded higher organic revenue from broadband business in part as a result of the ongoing build-out of our networks. In many places, we have already been rated the telecommunications company with the best network (e.g., CHIP network test). Our customers appreciate that. Thanks to the wide range of services we offer, the TV business also recorded encouraging growth rates. 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. The mobile business also saw slight organic revenue growth compared with the prior year. The positive development in higher-margin service revenues more than offset the decline in the lower-margin terminal equipment business. Poland and Greece in particular contributed to this trend.

Looking at the development by country, our national companies in Romania, Poland, Greece, the Czech Republic, and Austria made the largest contributions to the organic development of revenue in the first quarter of 2020. This offset the decline in revenue in Croatia and Hungary in particular.

Revenue from Consumers declined slightly compared with the prior-year period. Lower revenue from mobile terminal equipment business was only partially offset by gains in higher-margin service revenues. In the fixed-network, revenue from broadband and TV business increased thanks to our innovative TV and entertainment offerings as well as the continuous rollout of fiber-optic technology in most of our national companies. This offset the decline in revenue from voice telephony. In addition, a higher number of FMC customers had a positive impact on revenue.

Revenue from Business Customers grew by 2.7 percent year-on-year in the first quarter of 2020, with MagentaOne Business especially in Greece and Slovakia allowing small business customers to enjoy the added value of business solutions, such as the Premium Service. Our ICT/cloud business made the biggest contribution to the positive start to the year. Supported by the transnational Microsoft partnership, we are seeing fast growing demand for flexible solutions to mobile working, including state-of-the-art cloud storage capabilities and collaboration tools.

We continue to be able to maintain or strengthen our position in highly competitive markets.

EBITDA AL, adjusted EBITDA AL

In the first quarter of 2020, the Europe operating segment generated adjusted EBITDA AL of EUR 1.0 billion, an increase of 1.9 percent. In organic terms, i.e., assuming constant exchange rates and adjusted for the sale of Telekom Albania, adjusted EBITDA AL increased by 3.4 percent, thus continuing to make a positive contribution to earnings. In particular, the positive revenue effects resulted in a higher net margin. Savings in indirect costs, primarily thanks to lower personnel costs, had an increasing effect on earnings.

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 Romania, Greece, Austria, and Poland. Contrasting developments were reported primarily at the national company in Croatia, where decreases in mobile revenue were partially offset by positive revenue effects from the systems solutions business.

Our EBITDA AL remained stable compared with the prior-year period at EUR 0.9 billion. Special factors were up EUR 15 million against the prior year. In organic terms, EBITDA AL grew by 1.8 percent.

Development of operations in selected countries

Greece. In Greece, revenue developed positively in the first quarter of 2020, coming in at EUR 707 million or 1.4 percent higher than in the prior-year period, with fixed-network revenue continuing to increase. Broadband business posted particularly strong growth as a result of the ongoing rollout of fiber-optic lines and vectoring. The systems solutions business also recorded strong growth, while the wholesale business declined slightly. We saw further increases in mobile business, especially in service revenues. The FMC offering developed positively, with rising customer numbers and corresponding revenue.

In the first quarter of 2020, adjusted EBITDA AL in Greece increased by 1.8 percent year-on-year to EUR 288 million. Revenue increases were partially offset by moderate increases in costs.

Hungary. In the first quarter of 2020, revenue in Hungary stood at EUR 427 million, down by 7.0 percent year-on-year, mainly due to exchange rate effects. In organic terms, revenue declined only slightly by 0.7 percent. The mobile business recorded growth compared with the prior-year period, in particular in service revenues, driven in part by a larger customer base and in part by higher mobile voice traffic. This was almost enough to offset the losses in the fixed-network business, which were primarily due to a decline in revenue from systems solutions business, which was unable to replicate the number of major contracts won in the prior year. An encouraging revenue increase in the broadband business due in particular to a larger customer base partially compensated for this decline. Our MagentaOne convergence products also continued to perform well, with rising customer numbers and corresponding revenue.

Adjusted EBITDA AL stood at EUR 114 million, down 5.8 percent year-on-year. In organic terms, adjusted EBITDA AL grew slightly by 0.6 percent. Savings in indirect costs, primarily due to lower personnel costs, offset the slight revenue decline and resulted in a positive contribution to earnings.

Poland. In Poland, revenue stood at EUR 360 million in the first quarter of 2020, up 3.4 percent year-on-year. In organic terms, this increase was even higher at 4.0 percent. This growth is attributable in equal measure to higher mobile and fixed-network revenue. Declines in revenue from mobile terminal equipment were offset by increases in higher-margin service revenues. Growth in the fixed-network resulted from a positive trend in the systems solutions business. By contrast, wholesale business recorded a slight decline. We are continuing to invest in the development of technologies and in the provision of 5G infrastructure with the aim of becoming a one-stop shop for our customers as an integrated, state-of-the-art service provider.

Adjusted EBITDA AL stood at EUR 96 million, up 4.3 percent year-on-year. The higher net margin was partially offset by moderate increases in indirect costs.

Czech Republic. In the first quarter of 2020, revenue in the Czech Republic stood at EUR 266 million, an increase of 3.5 percent. In organic terms, the increase was 3.1 percent. The fixed-network business was the strongest driver of growth, particularly recording year-on-year increases in broadband and TV business in the first quarter of 2020. The continuous investments in new fiber-optic networks paid off, as can be seen in the higher number of customers. Growth in the mobile business was mainly due to increases in higher-margin service revenues, which were partially offset by decreases in lower-margin terminal equipment revenue. Our MagentaOne and MagentaOne Business convergence products also continued to perform very well, with rising customer numbers and corresponding revenue.

Adjusted EBITDA AL increased by 2.8 percent year-on-year to EUR 110 million. In organic terms, the increase was 2.3 percent. The positive revenue contribution was partially offset by moderate increases in direct and indirect costs.

Austria. Revenue in Austria totaled EUR 313 million as of March 31, 2020, an increase of 2.3 percent. This growth is primarily attributable to increases in higher-margin service revenues, mainly due to the Magenta product portfolio, which was launched in May last year and has been very well received by our customers. Since the launch of the Magenta brand, we now also offer convergent products in addition to mobile broadband internet services. The success of convergence can also be seen in the development of the fixed-network segment: The broadband business in particular generated positive growth rates, among other things as a result of a larger customer base.

Adjusted EBITDA AL increased by 4.2 percent year-on-year to EUR 123 million, with positive revenue effects offsetting the increase in direct costs as a result of a step-up in market approach.

EBIT

EBIT in our Europe operating segment increased by EUR 33 million in the first quarter of 2020 to EUR 372 million as a result of decreases in depreciation and amortization.

Cash capex

As of March 31, 2020, our Europe operating segment reported cash capex of EUR 438 million, down 1.8 percent year-on-year. This decline is mainly due to a decline in cash outflows for the acquisition of spectrum licenses in the reporting period. We continue to make significant investments in the provision of broadband and fiber-optic technology and in 5G as part of our integrated network strategy.