Europe

Customer development

Total

At the start of the second quarter of 2020, all markets in our Europe segment were affected by the travel restrictions and temporary shop closures imposed in response to the coronavirus pandemic. By making greater use of digitalized services, such as our service app and service center services, in customer acquisition and retention, we managed to shore up sales and service and thereby largely offset the negative effects of the coronavirus pandemic through our convergent products and our network infrastructure. Our MagentaOne convergent product portfolio in particular enjoyed high popularity, generating double-digit growth in FMC customers of 10.4 percent. We are continuously building out our fixed-network infrastructure with state-of-the-art fiber-optic-based lines (FTTH, FTTB, and FTTC), with the national companies in Greece, Hungary, and Slovakia seeing the greatest rollout progress in the first half of 2020. We increased our broadband customer base by 2.0 percent in total since the start of the year.

In mobile business, we recorded growth in high-value contract customers, partially offsetting the decline in the prepaid 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. Poland was the third national company to launch 5G commercially, also in the second quarter of 2020. The plan is to add more 5G networks following the anticipated spectrum auctions in various countries in 2020.

Mobile communications

In the Europe operating segment, we had 45.7 million mobile customers in the first half of 2020, a slight decline of 1.1 percent compared with the end of 2019. The number of high-value contract customers rose slightly by 1.1 percent (and compared with the first half of the prior year by as much as 2.9 percent). The contract customer bases increased in most of our national companies, with particularly strong growth recorded in Romania, Poland, Austria, Hungary, and Greece. Overall, contract customers account for 58.1 percent of the total customer base. 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 June 30, 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 prepaid customer base declined, 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 prepaid customers to switch to higher-value rate plans. We succeeded in this with a number of prepaid customers. Furthermore, inactive SIM cards are deactivated from the customer base at regular intervals.

Fixed network

Broadband business continued to grow despite the coronavirus pandemic, with the customer base increasing by 2.0 percent compared with the end of the prior year to a total of 6.8 million (compared with the prior-year quarter, it grew by as much as 4.1 percent). In particular, the customer bases of our national companies in Greece, Hungary, and the Czech Republic grew significantly. By continuing to invest heavily in innovative fiber-optic-based technologies, we are systematically building out our fixed-network infrastructure. Thus, we increased household coverage with optical fiber at our four largest national companies to 3.5 million households as of June 30, 2020. The number of IP-based lines increased to account for 92.1 percent of all fixed-network lines by the end of June 2020. The total number of fixed-network lines in our Europe operating segment was on a par with the prior-year level at 9.0 million.

The TV and entertainment business remained stable against the prior-year level as of June 30, 2020 at 5.0 million customers in total. With both telecommunications 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 half of 2020, we had 5.3 million FMC customers; this corresponds to growth of 10.4 percent compared with the end of the prior year. Our national companies in Greece, Hungary, Romania, and Austria in particular contributed to this double-digit growth. 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 5.7 billion in the first half of 2020, a decrease of 2.1 percent compared to the prior year. In organic terms, i.e., assuming constant exchange rates and adjusted for the sale of Telekom Albania as of May 7, 2019, revenue remained on a par with the prior-year level, despite the deterioration in economic conditions due to the coronavirus pandemic.

The fixed-network business in particular proved to be a solid business area: For example, we recorded an increase in 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., Connect readers’ choice 2020). Thanks to the wide range of services we offer, the TV business also recorded slight 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. In mobile business, many consumers cut their spending in view of the threat of short-time work or even redundancies – with a potential impact on demand for higher-priced contracts and high-value handsets. We recorded a slight organic decline in revenue compared with the prior year. This was primarily driven by declines in low-margin terminal equipment business and roaming revenues as a result of the travel restrictions that had been imposed. These negative effects have been partially offset by increases in higher-margin service revenues (excluding roaming).

Looking at the development by country, our national companies in Poland, Romania, the Czech Republic, and Austria posted the best organic development of revenue in the first half of 2020. This offset the decline in revenue in Croatia, Greece, and Hungary in particular.

Revenue from Consumers declined by 2.0 percent compared with the prior-year period. Lower revenue from mobile terminal equipment business and from roaming was only partially offset by gains in higher-margin service revenues (excluding roaming). In the fixed network, revenue from broadband/TV business increased thanks to our innovative TV and entertainment offerings as well as the continuous rollout of fiber-optic technology. 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 decreased by 2.0 percent in the first half of 2020 compared with the previous year. The mobile business in particular fell short of the prior-year level on account of the coronavirus pandemic. These effects were largely down to the loss of roaming revenues as well as significantly lower voice and data traffic from SIM cards in industries that have been particularly affected, such as tourism. By contrast, our cloud business recorded a positive trend: there was strong demand for collaboration tools such as Cisco Webex and Microsoft Teams compared with the prior-year period.

EBITDA AL, adjusted EBITDA AL

Our Europe operating segment generated adjusted EBITDA AL of EUR 1.9 billion in the first half of 2020, which was on a par with the prior-year level. In organic terms, i.e., assuming constant exchange rates and adjusted for the sale of Telekom Albania, adjusted EBITDA AL increased by 2.2 percent, thus continuing the positive earnings trend. Savings in indirect costs, primarily due to lower personnel, marketing, and travel costs, contributed to this development.

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, Austria, and Poland. Contrasting developments were reported primarily at the national company in Croatia, where decreases in mobile revenue, especially decreases in sales of terminal equipment, were only partially offset by positive revenue effects from the broadband and systems solutions business.

Our EBITDA AL remained stable compared with the prior-year period at EUR 1.9 billion. Special factors were at around the same level as in the prior year. In organic terms, EBITDA AL grew by 1.8 percent.

Development of operations in selected countries

Greece. In Greece, revenue decreased in the first half of 2020, coming in at EUR 1.4 billion or 1.3 percent lower than in the prior-year period. In mobile business in particular, service revenues declined due mainly to the developments in roaming. Mobile terminal equipment sales decreased year-on-year. Higher customer numbers from business with the convergent product portfolio partially offset these negative effects. In the fixed-network business, revenues continued to increase slightly: the 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 remained more or less at the prior-year level.

In the first half of 2020, adjusted EBITDA AL in Greece was stable at the prior-year level of EUR 573 million: the decline in revenue was offset in full by lower direct and indirect costs.

Hungary. In the first half of 2020, revenue in Hungary stood at EUR 832 million, down by 9.0 percent year-on-year, largely driven by negative exchange rate effects. In organic terms, revenues decreased by 1.8 percent, 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. By contrast, revenue in the broadband/TV business continued to grow, due among other things to a larger customer base. In organic terms, the mobile business also recorded year-on-year growth in both mobile terminal equipment sales and in service revenues, driven in part by a larger base of high-value contract customers and in part by volume-based revenue growth in mobile voice telephony. Our MagentaOne convergence products also continued to perform well, with substantial customer additions and corresponding revenue.

Adjusted EBITDA AL stood at EUR 238 million, down 8.5 percent year-on-year. In organic terms, adjusted EBITDA AL declined slightly by 0.9 percent. Savings, particularly in indirect costs, primarily due to lower personnel costs, partially offset the decline in revenue.

Poland. In Poland, revenue stood at EUR 719 million as of June 30, 2020, up slightly by 0.8 percent year-on-year. In organic terms, revenue increased significantly by 3.7 percent. This growth is attributable to both higher mobile and fixed-network revenue. Declines in revenue from mobile terminal equipment were offset by increases in service revenues driven in particular by volume-based growth in revenue from voice telephony. Growth in the fixed network resulted mainly from the positive trend in the systems solutions business. By contrast, wholesale business recorded a slight decline.

Adjusted EBITDA AL came in at EUR 192 million, on a par with the prior-year level. In organic terms, adjusted EBITDA AL increased by 3.0 percent on the back of a higher net margin.

Czech Republic. In the first half of 2020, revenue in the Czech Republic stood at EUR 521 million; thus it remained stable at the prior-year level. In organic terms, revenue increased by 2.2 percent. The fixed-network business was a strong driver of growth, particularly recording year-on-year increases in broadband and TV business in the first half of 2020. The continuous investments in new fiber-optic networks paid off, as can be seen in the higher number of customers. Revenue from mobile business declined slightly on account of low-margin terminal equipment revenue. This effect was partially offset by higher-margin service revenues (excluding roaming). Our MagentaOne and MagentaOne Business convergence products also continued to perform very well, with rising customer numbers and corresponding revenue.

Adjusted EBITDA AL decreased by 3.2 percent year-on-year to EUR 214 million. In organic terms, earnings remained almost unchanged against the previous year: the positive organic revenue contribution was partially offset by moderate increases in direct and indirect costs.

Austria. Revenue in Austria totaled EUR 630 million as of June 30, 2020, an increase of 1.4 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. Business with mobile terminal equipment also contributed to the growth in revenue. Since the launch of the Magenta brand, we now also offer convergent products in addition to mobile broadband internet services. The success of our convergence products among customers can also be seen in the development of fixed-network operations: 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 6.0 percent year-on-year to EUR 247 million. In addition to the positive revenue effects, savings in indirect costs also contributed to this growth.

EBIT

EBIT in our Europe operating segment increased by 8.9 percent in the first half of 2020 to EUR 758 million as a result of decreases in depreciation and amortization.

Cash capex

As of June 30, 2020, our Europe operating segment reported cash capex of EUR 1.0 billion, up 9.8 percent year-on-year. This increase is mainly due to a rise in cash outflows for the acquisition of spectrum licenses in Hungary. Moreover, 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.