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 nine months of 2019. We continue to rise to this challenge in the current financial year, achieving an increase of 33.4 percent in the number of FMC customers as of September 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 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 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 11.3 percent to 8.1 million as of September 30, 2019, primarily 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 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 nine months of 2019, down by 8.0 percent or 4.0 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 more or less stable compared with the prior year. The number of high-value contract customers rose by 2.4 percent compared with December 31, 2018. Overall, all of our national companies reported positive trends in their contract customer base, with particularly high growth recorded in Poland, Hungary, the Czech Republic, Austria, and Slovakia. Contract customers accounted for 58.7 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 September 30, 2019, we already covered 97 percent of the population in the countries of our operating segment with LTE, reaching around 107 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 1.7 percent to a total of 4.9 million customers as of September 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 most 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 2.8 percent compared with the end of the prior year to 6.6 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 largest national companies to 3.0 million households as of September 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 September 2019, this share amounted to 90.4 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 September 30, 2019, we had 4.4 million FMC customers; this corresponds to significant growth of 33.4 percent or 1.1 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. 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 8.9 billion in the first nine months of 2019, a year-on-year increase of 2.2 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 0.5 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. The wholesale business increased compared with the prior-year period, driven in part by higher revenue in Romania, especially from the termination of international voice and data traffic. Systems Solutions also reported moderate growth again as of September 30, 2019. Despite a slight year-on-year decrease, 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. 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 3.7 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. Mobile revenue declined slightly, with slightly higher service revenues only partially offsetting lower revenues from terminal equipment business.

Business Customer operations recorded a stable revenue trend as of the end of the third quarter of 2019, as well as a positive trend in the margin. In addition to strong core business with fixed-network and mobile communications, there was also above-average growth in ICT/cloud solutions in focus markets such as Poland and the Czech Republic. As a result of the business combination with UPC Austria to form the new Magenta brand, now all ten of our European markets are one-stop shops for convergent solutions for SMEs (MagentaOne Business). Our expanded partnership with Microsoft in B2B operations is now underway; over the coming quarters we expect this to generate new revenues with ICT/cloud solutions for small and medium-sized enterprises (SMEs) as well as for our corporate customers.

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 nine months of 2019. This offset the decline in revenue in Poland in particular. In Romania, the revenue trend stabilized at the prior-year level as of September 30, 2019. Declines in mobile revenues, for both service revenues and revenues from terminal equipment business were offset by the positive revenue trend in the fixed-network business, which benefited from higher wholesale revenues. Systems solutions business also recorded a rise in revenue. This offset the decline in revenue from voice telephony.

EBITDA AL, adjusted EBITDA AL

Our Europe operating segment generated adjusted EBITDA AL of EUR 3.0 billion in the first nine months of 2019, 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 2.3 percent compared with the prior-year period, thus continuing the positive trend, mainly on the back of increased revenues, especially higher-margin service revenues, 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, Slovakia, Hungary, and the Czech Republic. Contrasting developments were reported primarily at the national companies in Romania and Croatia. In Romania, adjusted EBITDA AL was down 18.1 percent year-on-year in organic terms, mainly as a result of the lower mobile revenue contribution.

Our EBITDA AL increased by 3.8 percent year-on-year to EUR 2.9 billion, due largely to the effects described under adjusted EBITDA AL. At EUR -110 million, special factors were EUR 37 million higher than in the prior year. In organic terms, EBITDA AL grew by 1.0 percent.

Development of operations in selected countries

Greece. In Greece, revenue developed positively in the first nine months of 2019, coming in at EUR 2.2 billion, 1.7 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. In the wholesale business the growth trend continued, while systems solutions revenues were again above the prior-year level after a decline in the first half of 2019. The FMC offering developed positively, with rising customer numbers and corresponding revenue.

In the first nine months of 2019, adjusted EBITDA AL in Greece increased significantly by 4.1 percent year-on-year to EUR 910 million. Higher revenue along with savings in indirect costs were partially offset by higher direct costs.

Hungary. As of September 30, 2019, revenue in Hungary stood at EUR 1.4 billion, down 1.5 percent year-on-year. In organic terms, revenue was on a par with the prior year. Mobile business posted strong year-on-year growth, driven by volume and price-driven increases in service and terminal equipment revenues. Fixed-network business was primarily impacted by a decline in systems solutions, in particular as a result of significantly higher revenue generated in the prior-year period, which so far this year has not been replicated to the same extent. Higher revenue in broadband and terminal equipment business only partially offset this decline. The major success of our FMC offering, MagentaOne, is underscored by continued growth in the FMC customer base and a corresponding rise in revenue.

At EUR 408 million, adjusted EBITDA AL was at the same level as in the first nine months of 2018. In organic terms, adjusted EBITDA AL grew by 1.9 percent.

Austria. Revenue in Austria totaled EUR 939 million in the first three quarters of 2019, a year-on-year increase of 30.2 percent. In organic terms, i.e., adjusted for the inclusion of UPC Austria, revenue increased by 0.9 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 Magenta brand.

Adjusted EBITDA AL increased by 46.0 percent year-on-year to EUR 368 million. In organic terms, i.e., adjusted for the inclusion of UPC Austria, adjusted EBITDA AL increased by 6.4 percent, as a result of higher revenue as well as savings in indirect costs.

Poland. Revenue at our national company in Poland decreased by 4.2 percent compared with the prior-year period to EUR 1.1 billion. In organic terms, revenue declined by 3.1 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. Systems solutions business generated higher revenues. 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 290 million, down 0.3 percent year-on-year. In organic terms, adjusted EBITDA AL grew by 1.7 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 increased by 4.1 percent in the first nine months of 2019 to EUR 1.2 billion. 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 increase in EBIT was attributable to the growth in EBITDA AL.

Cash capex

In the reporting period, our Europe operating segment reported cash capex of EUR 1.3 billion, up 3.8 percent year-on-year. This rise was largely a result of cash outflows 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.