Europe

Customer development

Total

The markets in our segment remained intensely competitive in the first half of 2018. We rose to the challenge in several ways, for instance by achieving substantial growth of 21.1 percent in the number of FMC customers (fixed-mobile convergence) thanks in part to our convergent product portfolio, MagentaOne. Our TV and broadband operations are becoming consistent revenue drivers, 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). The number of IP lines increased as a result, primarily thanks to the migration from traditional PSTN lines to IP technology. Our mobile operations recorded growth overall, with increases in both the number of high-value contract customers and the number of prepay customers compared with the end of the prior year.

Mobile communications

The number of mobile customers totaled 49.9 million at the end of the first half of 2018, up by a slight 2.1 percent or 1.0 million customers compared with the end of 2017. The number of contract customers continued to grow unabated throughout the second quarter. In other words, by June 30, 2018 we had added a total of 539 thousand new customers (an increase of 2.1 percent) largely as a result of the positive customer trends at our national companies in Poland, Romania, the Czech Republic, and Hungary. The share of our total customer base accounted for by contract customers thus remained largely stable at 52.2 percent. Our customers benefited not only from our innovative services/rate plans, but also from greater coverage with fast mobile broadband – a result of our integrated network strategy. As of June 30, 2018, we already covered 96 percent of the population in the countries of our operating segment with LTE, reaching around 108 million people in total. Customer demand for high data volumes has risen sharply due to the explosion in data traffic driven by video streaming services, for example. Prepaid business also looks set to continue growing, with 506 thousand net additions (a 2.2 percent increase) in the first half of 2018. Our national companies in Austria and Greece made particularly marked contributions to this positive trend.

Fixed network

In the first half of 2018, our TV and entertainment service continued to grow – the customer base was up by 1.2 percent compared with the end of 2017 and by 3.3 percent year-on-year. Of the 137 thousand net additions, the majority were recorded by our national companies in Hungary, the Czech Republic, Slovakia, and Greece. With both telecommunication providers and OTT players offering TV services in the countries of our segment, the TV market there is highly contested.

The number of broadband customers as of June 30, 2018 increased by 2.5 percent to 5.7 million. The better part of this net growth was down to the positive trends seen at our national companies in Greece, the Czech Republic, and Hungary, which are investing more heavily in innovative fiber-optic-based technologies. We continued to extend our fiber-optic coverage and, as of June 30, 2018, had reached 6.8 million households.

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 2018, this share amounted to 74.1 percent. The number of fixed-network lines in our Europe operating segment has remained stable at 8.4 million since the end of 2017.

FMC – fixed-mobile convergence

Our portfolio of convergent products, MagentaOne, remained highly popular across all of our integrated national companies. As of June 30, 2018, we had around 7.2 million FMC customers, this corresponds to significant growth of 21.1 percent compared with year-end 2017. Of these, 229 thousand new customers were added in the second quarter alone. Our national companies in Greece, Romania, and Hungary were the main drivers of this trend. 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 5.7 billion in the first half of 2018, a year-on-year increase of 1.2 percent. In organic terms, i.e., assuming constant exchange rates, revenue increased slightly by 0.8 percent. The mandatory first-time application of the IFRS 15 accounting standard as of January 1, 2018 did not have a material effect on the development of revenues at segment level.

Our Business Customer operations continued on their successful growth course in the second quarter, driven mainly by the positive trend in ICT business in Hungary. Mobile communications revenue was also up slightly year-on-year. Most of the countries in our operating segment contributed to this growth. Fixed-network revenues at segment level decreased overall year-on-year due to the decline in wholesale business offsetting the positive revenue effect – mainly in Hungary – from TV and broadband business. Intense competition on the telecommunications markets as well as lower EU roaming charges had a negative impact on our revenue in some countries of our operating segment.

Revenue from Consumers increased by 2.0 percent compared with the first half of the prior year, driven mainly by mobile business. Revenue from fixed-network business rose, too, on the back of the trend in TV and broadband operations driven by our innovative TV and program management activities. In addition to higher terminal equipment revenues, strong growth in the number of FMC customers had a positive impact on revenue. This offset the negative effects caused by declining revenue mainly from voice telephony.

In Business Customer operations, especially ICT, we recorded year-on-year growth of 3.7 percent in the first half of 2018. This was attributable mainly to strong growth in ICT business in Hungary. Our Smart City projects in particular also supported this trend with their IoT revenue contribution. A slight year-on-year increase in the business customer base in our core mobile business also made a positive contribution to revenue.

Wholesale revenue declined year-on-year due in part to lower revenues in some companies, as well as to declining trends in international wholesale business following the latest changes to EU roaming regulation.

Considering the development by country, our national companies in Hungary and Greece made the largest contributions to the organic development of revenue in the first half of 2018, more than offsetting the decline in revenues in particular in Austria and Poland.

EBITDA, adjusted EBITDA

Our Europe operating segment generated adjusted EBITDA of EUR 1.9 billion in the first half of 2018, an increase of 1.5 percent. In organic terms, i.e., assuming constant exchange rates, adjusted EBITDA increased by 1.2 percent. The mandatory first-time application of the IFRS 15 accounting standard as of January 1, 2018 did not have a material effect on the development of adjusted EBITDA.

The positive trend in adjusted organic EBITDA was driven both by the growth in revenue and by savings made in indirect costs, such as lower personnel costs in Greece. By contrast, in terms of direct costs, market investments and costs relating to the B2B/ICT operations increased. In addition, regulatory effects, including the reduction in EU roaming charges, reduced adjusted EBITDA.

EBITDA continued the positive trend seen in the first quarter of 2018, growing by 1.2 percent to EUR 1.8 billion compared with the prior-year period due primarily to the increase in adjusted EBITDA with special factors having no material effect. In organic terms, EBITDA grew by 0.8 percent.

Considering the development by country, the increase in adjusted EBITDA was largely attributable to the positive trends at our national companies in Greece, the Czech Republic, and Hungary. Offsetting developments were reported mainly at the national companies in Poland, Austria, and Romania. At the latter, adjusted EBITDA decreased by 7.9 percent year-on-year to EUR 70 million as a result of declining fixed-network business, while revenue came to EUR 464 million in the first half of 2018, putting it on a par with the prior-year level.

Development of operations in selected countries

Greece. In Greece, revenue stood at EUR 1.4 billion in the first half of 2018, up slightly year-on-year by 1.0 percent. This was driven mainly by higher mobile revenues and sustained high fixed-network revenues: Broadband and B2B/ICT operations continued to grow, while revenues from TV business declined. The popularity of our FMC portfolio was reflected in growing customer numbers and corresponding revenues.

In the first half of 2018, adjusted EBITDA in Greece increased markedly year-on-year by 3.7 percent to EUR 559 million driven largely by improved cost efficiency, especially with regard to personnel costs.

Hungary. In Hungary, revenue grew substantially in the first half of 2018 by 7.1 percent compared with the prior-year period to EUR 931 million. In organic terms, it increased by 8.8 percent. This growth was driven by rising mobile service revenues and by fixed-network business with sustained clear revenue growth in B2B/ICT business customer operations. Broadband, TV, and terminal equipment operations also made a positive contribution to revenue. Our MagentaOne portfolio of FMC products is enjoying success among consumers and business customers alike, a trend that is underpinned by growing customer numbers and a corresponding rise in revenue. Both service revenues and terminal equipment business performed well, which was attributable to our high-speed, high-reach mobile network.

Adjusted EBITDA increased by 5.6 percent year-on-year to EUR 264 million, driven by revenue growth. This had a positive effect on organic adjusted EBITDA, which grew by 7.4 percent.

Austria. Our national company in Austria generated revenue of EUR 432 million in the first half of 2018, down 2.5 percent year-on-year. This was largely attributable to a high positive non-recurring effect from voice telephony business in the prior-year period. Excluding this effect, revenue would have remained stable. To meet growing demand for broadband internet access, the national company in Austria will transform into an integrated challenger with mobile and fixed-network infrastructure following the take-over of the cable and fixed-network business from UPC Austria. This will soon allow us to offer fixed-network technology in addition to the mobile broadband internet services already being successfully marketed to our customers.

The effects from the decline in revenue also impacted adjusted EBITDA, which decreased by 8.9 percent to EUR 144 million year-on-year. Adjusted for the aforementioned non-recurring effect, adjusted EBITDA decreased only slightly.

Poland. Revenue at our national company in Poland remained largely stable year-on-year at EUR 743 million; in organic terms, revenue declined by 1.0 percent year-on-year. Revenue from B2B/ICT business was higher, while revenue from mobile business was lower.

Adjusted EBITDA stood at EUR 197 million, down 12.1 percent year-on-year. In organic terms, adjusted EBITDA declined by 12.8 percent, mainly due to higher interconnection costs and regulation-induced higher roaming costs.

EBIT

EBIT in our Europe operating segment increased significantly by 3.1 percent in the first half of 2018 to EUR 702 million due to the positive development of EBITDA. At EUR 1.1 billion, depreciation, amortization and impairment losses were at the same level as in the prior-year period.

Cash capex

In the reporting period, our Europe operating segment reported cash capex of EUR 836 million. The decline of 4.8 percent is largely attributable to restrained investment activities in most of our national companies. By contrast, in some countries we invested more heavily in building out broadband and fiber-optic technology as part of our integrated network strategy. As in the prior-year period, we acquired a small number of spectrum licenses in the first quarter of 2018.