OTE Group reports 2014 third quarter results

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Hellenic Telecommunications Organization SA, the Greek full-service telecommunications provider, today announced consolidated results (prepared under IFRS) for the quarter and nine months ended  September 30, 2014.

 

(€ mn)

Q3 ’14

Q3 ’13

Change

9M ’14

9M ’13

Change

Revenues

 

1,039.9

-5.0%

2,901.9

3,008.6

-3.5%

EBITDA

 

 

-0.4%

1,041.1

1,057.2

-1.5%

as % of Revenues

 

 

+1.7pp

 

 

+0.8pp

Pro forma EBITDA*

 

 

-2.1%

1,050.7

1,074.9

-2.3%

as % of Revenues

 

 

+1.2pp

 

 

+0.5pp

Net Income

 

 

-72.6%

 

 

-59.2%

Adjusted Net Income**

 

 

+24.3%

 

 

+17.9%

Basic EPS (€)

 

 

-72.6%

 

 

-59.0%

 

 

 

+29.3%

 

 

-9.5%

 

 

 

+38.1%

 

 

+32.0%

 

 

 

+20.3%

 

 

-44.6%

Cash & Other financial assets

1,314.3

1,723.0

-23.7%

1,314.3

1,723.0

-23.7%

Net Debt (Underlying)

1,427.4

1,664.8

-14.3%

1,427.4

1,664.8

-14.3%

*  Excluding the impact of Voluntary Retirement Programs and Restructuring Plans

** Excluding one-off items – See Reconciliation table, Page 3.

*** Cash Flow excluding discontinued operations, Voluntary Exit Programs, Restructuring and/or  Spectrum payments

 

Note: All figures adjusted to reflect only continuing operations (Bulgarian operations treated as discontinued operations – but HellasSat included in 9M’13)

 

Commenting on OTE’s third quarter results, Michael Tsamaz, Chairman & CEO, noted: “Our revenue performance  this quarter reflects the continuing stabilization of our Greek operations, with fixed-line operations delivering solid results in broadband and television services, and resilient service revenues in mobile. This partially offset lower revenues in our international mobile operations, impacted by MTR cuts and intense competition. Thanks to past  and ongoing actions on our cost base, we delivered a solid improvement in profitability at the EBITDA and net  income levels while we also generated solid increases in operating and free cash flows in the quarter. At the same time, we further improved our financial structure, one of the strongest in our peer group.  In conditions that remain persistently challenging, we are confident we will meet our €500mn free cash  flow year-end target and continue to deliver strong profitability and cash flow in the last quarter of 2014  and next year.

 

Financial Highlights

BREAKDOWN OF GROUP REVENUES

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Note: All figures adjusted to reflect only continuing operations (Bulgarian operations treated as discontinued operations – but HellasSat included in 9M’13)

 

The OTE Group recorded a 5.0% drop in total consolidated revenues in the third quarter of 2014.  Excluding the impact of recent changes in termination rates, mainly in Romania as of April 1, 2014, Group revenues would be down 3.0% in the quarter.

 

Revenues from Greek fixed-line operations, down 3.0%, further extended the multi-year string of  quarter-on-quarter reduction in the rate of revenue decline. In Romanian fixed-line operations, revenues  decreased by 0.9% in Q3’14, largely reflecting slower growth in wholesale and ICT revenues. Total revenues  from mobile operations were down 7.5% in the quarter, reflecting MTR cuts in Romania and Albania, and  challenging market conditions across all areas. In Greece, Cosmote revenues dropped by 7.0%, partly reflecting lower handset sales, while service revenues, down 5.3%, are showing improving trends quarter after quarter. Revenues at Telekom Romania Mobile (formerly Cosmote Romania), down 7.8%, would have been up  nearly 9% excluding the impact of the steep MTR cuts implemented in April 2014. Revenues from AMC in  Albania dropped by 14.5%, while excluding the recent termination rates cuts would be up 5%. Finally,  Other revenues were down 6.2% to €111.5mn, chiefly reflecting lower interconnection rates and traffic  at OTE Globe.

 

Total Operating Expenses, excluding depreciation, amortization, impairments and charges related  to voluntary retirement programs and restructuring costs, amounted to €633.2mn in Q3’14, down 6.2%  compared to Q3’13. Reflecting the recent VRS program, personnel expenses were down 31.0% in Greek  fixed-line  operations and 16.9% at Group level compared to Q3’13. Group expenses other than personnel costs stood at €461.7mn, down 1.5% in the quarter, despite the impact of the rebranding costs and the infrastructure taxes introduced this year in Romania.

 

Group Pro Forma EBITDA declined by 2.1% in the third quarter to €371.1mn, resulting in a 120bps  increase in pro forma EBITDA margin in the period. This was largely due to the sharp increase in Greek fixed-line  EBITDA, up 8.9% in the quarter, resulting in a 440bps margin increase over the Q3’13 level, to 40.1%.  Excluding the impact of termination rates changes, Group Pro Forma EBITDA would have been up slightly.

 

Financial Expenses were up 1.0% in the quarter to €68.0mn, reflecting bond issuance and bond  buyback premium of €30.0mn. The underlying sharp reduction in Interest Expense reflects lower indebtedness and  cost of financing.

 

Group Adjusted Net Income stood at €94.2mn in Q3’14, up 24.3% compared to €75.8mn in Q3’13.

 

Net Income to Adjusted Net Income Reconciliation:

€ mn

Q3 ’14

Q3 ’13

Change

9M ’14

9M ’13

Change

Net Income

 

 

-72.6%

 

 

-59.2%

Gains from disposals and deferred  tax credits

 

(185.3)

 

(300.9)

VRS & other restructuring costs

 

 

 

 

Financial expenses for Bond issue & Bond Buyback premium

 

 

 

 

Adjusted Net income

 

 

+24.3%

 

 

+17.9%

Note: After tax impact

 

Capital Expenditures amounted to €149.8mn in Q3’14, reflecting an acceleration in the investments in fixed and mobile networks in Greece and fixed-line infrastructure in Romania. Capital expenditures in  Greek fixed-line, Romanian fixed-line and mobile operations amounted to €51.5mn, €32.5mn and €61.0mn, respectively.

 

In Q3’14, the OTE Group posted adjusted Net Operating Cash Flow (ex-VRS and restructuring related  payments) of €276.2mn, up 29.3% compared to €213.6mn in the same period last year, largely reflecting improved working capital.

 

Despite the €30mn outflow related to bond issuance and bond buyback premium, Adjusted Group Free  Cash Flow (ex-VRS, spectrum and restructuring payments) rose by 20.3% in Q3’14 to €126.4mn.

 

The Group’s Underlying Net Debt amounted to €1.4bn at September 30, 2014, down 14.3% compared to  September 30, 2013. The Group’s ratio of Underlying Net Debt to 12-month trailing Pro forma EBITDA  stood at 1.0x. As of September 30, 2014, the Group held €4.2mn in short-dated highly liquid financial  assets, included under Other Financial Assets.

 

OTE Group debt outstanding breaks down as follows:

(€ mn)

Sep 30, 2014

Dec 31, 2013

Change

Sep 30, 2013

Change

Short-Term:

 

 

 

 

 

-Bank loans

 

 

 

Medium & Long-term:

 

 

 

 

 

-Bonds

2,564.8

2,735.6

-6.2%

2,736.0

-6.3%

-Bank loans

 

 

-15.7%

 

-72.8%

Total Indebtedness

2,741.7

2,956.4

-7.3%

3,387.8

-19.1%

Cash and Cash equiv.

1,310.1

1,444.3

-9.3%

1,707.2

-23.3%

Net Debt

1,431.6

1,512.1

-5.3%

1,680.6

-14.8%

Other financial assets

 

 

-74.5%

 

-73.4%

Underlying Net Debt

1,427.4

1,495.6

-4.6%

1,664.8

-14.3%

 

  1. Fixed Line Operations, Greece

ACCESS LINES

 

Sep 30, 2014

Sep 30, 2013

Change

PSTN connections

2,435,562

2,579,272

-5.6%

ISDN connections (BRA & PRA)

339,277

366,973

-7.5%

Other (MSAN)

13,104

6,685

+96.0%

OTE access line connections (incl. WLR)

2,787,943

2,952,930

-5.6%

Of which Wholesale line rental  (WLR) connections

39,178

51,817

-24.4%

OTE Retail access line connections (excl. WLR)

2,748,765

2,901,113

-5.3%

Total OTE Broadband active subscribers

1,358,841

1,271,449

+6.9%

OTE Broadband active retail subscribers

1,334,894

1,245,258

+7.2%

OTE TV Subscribers (IPTV & Satellite)

320,578

218,066

+47.0%

Unbundled local loops (active)

1,984,977

1,860,749

+6.7%

 

In Q3’14, the total Greek market (OTE active retail lines, Wholesale line rental connections and full LLU  subscribers) lost less than 17k lines, another quarter of limited line losses despite the challenging economic environment (Q2’14: -6k, Q1’14: -9k, Q4’13: -6k, Q3’13: -42k). OTE fixed-line operations in Greece posted  a net loss of 31k retail access line connections compared to net line losses of 29k in Q2’14 and 52k in Q3’13.  In the quarter, net additions by competitors stood at 14k compared to 23k in Q2’14.

 

In Q3’14, OTE achieved net additions of 25k retail broadband customers, or 49% of total market net  additions, bringing the total number of OTE broadband subscribers to 1,335k. OTE’s high-speed VDSL  broadband service, offering speeds of up to 50 Mbps, had been adopted by more than 78k subscribers  by the end of the quarter, extending the customer adoption this service has experienced since its introduction  in late 2012, despite the environment. OTE is activating new local exchanges and installs new cabinets at  a fast pace to retain customers or upsell to its base, experiencing significant pick up in the areas where the service is introduced, raising the size of its addressable VDSL market to approximately 1.3 million  households and businesses.  OTE’s aim is to raise VDSL population coverage to 30% by 2014 year-end.

 

OTE also recorded continued strong growth in its TV offering. As of September 30, 2014, total TV  subscribers amounted to 321k, an increase of 25k in the quarter. On October 15, 2014, OTE further  enriched its content bouquet by acquiring three-year broadcasting rights for two of the most popular  world sporting events, the European football UEFA Champions League and UEFA Europa League, starting  next season.

 

                     SUMMARY FINANCIAL DATA – FIXED LINE OPERATIONS, GREEECE

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* Excluding impact of Voluntary Retirement Programs & Restructuring costs

 

Total Greek fixed-line Revenues declined by 3.0% in Q3’14, extending the ongoing improvement  in revenue erosion begun in early 2013. Revenues from retail fixed services were down by just 1.8%  in the quarter, far and away the smallest rate of revenue erosion in this key segment the company has achieved in many years. Total Greek fixed-line Operating Expenses, excluding depreciation, amortization and charges  related to voluntary retirement programs and restructuring, amounted to €227.1mn in Q3’14,  an 11.4% drop compared to €256.4mn in Q3’13, far ahead of the drop in revenues. Total Personnel  Expenses were cut by 31.0% compared to the comparable quarter last year, and amounted to 20.6%  of total revenues, a sharp decline from 29.0% in Q3’13, mainly reflecting the Voluntary Exit Scheme  implemented in late 2013. As a result, the pro forma EBITDA margin pursued its improving trend, reaching  40.1%, a 4.4 percentage point improvement compared to Q3’13.

 

  1. Fixed Line Operations, Romania

SUMMARY FINANCIAL & ACCESS LINE DATA

 

 

Sep 30, 2014

Sep 30, 2013

Change

Voice Telephony Lines (Incl. CDMA)

2,166,417

2,270,045

-4.6%

Broadband subscribers (Incl. CDMA BB)

1,237,638

1,237,947

-0.0%

TV subscribers (DTH, IPTV& Cable)

1,396,973

1,320,038

+5.8%

 

(€ mn)

Q3 ’14

Q3 ’13

Change

9M ’14

9M ’13

Change

Revenues

 

 

-0.9%

 

 

+2.4%

 – Retail Fixed Services

 

 

-5.0%

 

 

-5.8%

 – Wholesale Fixed Services

 

 

+11.0%

 

 

+17.6%

 – Other

 

 

+1.6%

 

 

+17.6%

Other income

 

 

+186.7%

 

 

+199.2%

EBITDA

 

 

+8.6%

 

 

+12.7%

as % of revenues

 

 

+1.9pp

 

 

+2.2pp

Pro Forma EBITDA*

 

 

-2.0%

 

 

+7.5%

as % of  revenues

 

 

-0.3pp

 

 

+1.3pp

Operating Income/(loss) (EBIT)

 

(1.6)

 

 

-61.1%

Voluntary Retirement costs

(2.3)

(5.6)

-58.9%

(3.8)

(8.4)

-54.8%

Depreciation & Amortization

(32.0)

(31.7)

+0.9%

(107.4)

(83.2)

+29.1%

  * Excluding impact of Restructuring Plans

 

Romanian fixed-line activities, now operating under the Telekom Romania Communications  brand (“Telekom Romania”), posted a slight drop in revenues. The drop in revenues from  retail fixed services was in line with earlier trends, as higher TV and broadband revenues continued  to partly offset the decline in voice. Significant revenues from large-scale information and  communication technology projects and higher wholesale traffic also contributed to narrowing  the revenue drop. Other operating income was significantly higher, reflecting sales of unused  operating assets.

 

Television and broadband revenues were up 7% and 6% respectively, while voice revenues were down  14% in the quarter. Compared to the end of Q3’13, the total number of Telekom Romania TV subscribers rose by 5.8%.  These developments represent significant advances in Telekom Romania’s ability to defend its customer base despite intense competition, by launching attractive commercial bundles. The urban footprint of TV offeringcontinued to expand, allowing a growing number of households in major Romanian cities to gain access to Telekom Romania TV offering.

 

In Q3’14, wholesale revenues grew by 11% compared to Q3’13, with international transit revenues  increasing by 127%.

 

Total Romanian fixed-line Operating Expenses, excluding depreciation, amortization and charges related  to voluntary retirement programs and restructuring rose 6% in Q3’14 compared to Q3’13. Higher costs  related to ICT projects, increased interconnection traffic and the infrastructure tax imposed by the Romanian government since the beginning of the year, as well as higher marketing costs related to the company’s rebranding, were balanced by lower Personnel Expenses, down 16% compared to last year’s quarter, reflecting headcount reductions.

 

Telekom Romania, the new brand under which Telekom Romania Communications (formerly RomTelecom)  and Telekom Romania Mobile Communications (formerly Cosmote Romania) are operating since  mid-September, is combining the capabilities of both companies in an effort to become the premier  operator for telecom and entertainment services in Romania. A concerted commercial presence with  integrated fixed and mobile shops, unified call center, a single website and social media presence, and One Stop Shop  philosophy are supporting the Telekom brand experience.

 

  1. Mobile Operations

SUMMARY FINANCIAL DATA

Revenues (€ mn)

Q3 ’14

Q3 ’13

Change

9M ’14

9M ’13

Change

Greece

 

 

-7.0%

 

1,005.7

-6.8%

Romania

 

 

-7.8%

 

 

-2.6%

Albania

 

 

-14.5%

 

 

-4.4%

Intragroup eliminations

(4.8)

(5.7)

-15.8%

(13.0)

(17.2)

-24.4%

Total Revenues (Continued Operations)

 

 

-7.5%

1,311.8

1,388.0

-5.5%

 

 

 

 

 

 

 

Pro Forma EBITDA *

 

 

 

 

 

 

Greece

 

 

-4.9%

 

 

-9.8%

Romania

 

 

-22.7%

 

 

-10.6%

Albania

 

 

-29.6%

 

 

-12.7%

Intragroup eliminations

 

(0.5)

-120.0%

 

(5.2)

-101.9%

Total Pro forma EBITDA* (Continued Operations)

 

 

-9.2%

 

 

-9.1%

Voluntary retirement and restructuring costs

(1.4)

(3.2)

-56.2%

(5.8)

(7.4)

-21.6%

EBITDA (Continued Operations)

 

 

-8.4%

 

 

-8.9%

Pro Forma EBITDA Margin %*

 

 

 

 

 

Greece

 

 

+0.9pp

 

 

-1.3pp

Romania

 

 

-4.6pp

 

 

-2.1pp

Albania

 

 

-7.7pp

 

 

-3.3pp

Total Pro Forma EBITDA margin*

 

 

-0.7pp

 

 

-1.4pp

EBITDA Margin

 

 

-0.4pp

 

 

-1.3pp

 

   * Excluding the impact of Voluntary Retirement Programs and Restructuring Plans

 

Note: All figures adjusted to reflect only continuing operations (Bulgarian operations treated as discontinued operations)

 

MOBILE OPERATIONS, GREECE

As of the end of Q3’14, Cosmote provided mobile telephony services to 7.3mn customers  in Greece, down 2.8% from September 30, 2013.

 

The 5.3% service revenue drop recorded by Cosmote Greece in Q3’14 represents the smallest  revenue decline of recent quarters. The relative improvement in service revenue reflects both  healthier underlying performances and the tailing off of unfavorable comparisons due to MTR cuts (1.189 Eurocent/minute since January 1, 2014, as compared to 1.269 Eurocent/minute through 2013).

 

In line with its strategy to fully protect and grow its customer base focusing on customer experience  and high quality of services, Cosmote has been investing to maintain network performance leadership  in terms of coverage and data speeds. In Q3’14, Cosmote further expanded its 4G footprint, now covering  65% of the Greek population, representing more than double the coverage of its nearest competitor.

 

Consistently higher demand for mobile handset data usage continued in the quarter, posting an increase  of 86% in Q3’14 compared to Q3’13, enabled by growing smartphone uptake as well as high speeds offered by Cosmote’s network.According to independent surveys, Cosmote’s mobile Internet ranks among Europe’s  top-20 in a field of over 140 providers.

 

In Q3’14, blended AMOU increased by 4.7% to 322 minutes, while blended ARPU for the same period  was €12.9, down 3.8% from Q3’13, mainly reflecting lower consumer spending and competitive pressures.

 

MOBILE OPERATIONS, ROMANIA

As of mid-September, Cosmote Romania rebranded jointly with RomTelecom under the common  Telekom Romania brand, facilitating converged products and capitalizing on the customer attractiveness of international brands.

 

Competition intensified in the Romanian mobile sector during the quarter with the entry of an MVNO,  which is also a fixed telephony competitor.

 

As of the end of Q3’14, Telekom Romania’s Mobile total customer base stood at 5.9mn, of which 26.8% was postpaid.

 

Service revenues and Pro Forma EBITDA declined by 17.0% and 23.0% respectively, against Q3’13,  mainly reflecting termination rate cuts implemented in April 2014.

 

Blended ARPU decreased by 5.9% in 9M’14 compared to 9M’13, due to lower incoming ARPU,  adversely affected by interconnection rate cuts.

 

MOBILE OPERATIONS, ALBANIA

As of the end of Q3’14, AMC’s customer base totaled 2.0mn subscribers, up 1%, compared to  September 2013, maintaining its momentum in the Albanian telecommunications market.

 

AMC posted a 14% increase in mobile handset data revenues in Q3’14 compared to the same period last year, fueled by the efficiency of its network covering 96% of the population.

 

Intensifying competition and lower termination rates negatively impacted the Albanian market in Q3’14.  In this context, AMC’s total revenues declined by 14.5% and service revenues down by 15.6%,  compared to Q3’13. Excluding the impact of recent changes in termination rates, AMC revenues would be up 5%.

 

 Events of the quarter

OTE submitted non-binding offer for the acquisition of Nova

On July 1, 2014, OTE announced, following the approval of its Board of Directors, the submission of a  non-binding offer to Forthnet for the acquisition of the Nova pay TV operations. OTE’s non-binding offer  is within the range of €250-300mn on a debt free/cash free basis. In the event that an agreement is reached,  it will be subject to clearance from the competent authorities.

 

OTE Plc Raised €700mn Bond

On July 10, 2014, OTE PLC issued €700mn Fixed Rate Notes under its Global Medium-Term Note Program,  maturing on July 9, 2020, with an annual coupon of 3.5%. The Notes are guaranteed by OTE.

 

OTE Plc concluded Tender Offer For 2015 and 2016 NOTES

On July 11, 2014, OTE PLC concluded a tender for cash of its February 2015 Notes and its May 2016 Notes.  OTE PLC accepted tenders amounting to €305mn and €195mn of the February 2015 and the May 2016 Notes respectively. The tender was financed via the proceeds of the €700mn new bond issue of OTE PLC. The tendered notes were surrendered for cancellation. Following the completion of the tender, the outstanding nominal amounts of the February 2015 and May 2016 Notes were €482.7mn and €700mn respectively.

 

  1. Subsequent Events

Cosmote Secured Spectrum Rights At 800MHz and 2.6GHz Bands In Greece

On October 13, 2014, Cosmote secured the rights to use radio frequencies in the 800MHz and 2.6GHz spectrum bands in Greece for the period November 1, 2014 through February 28, 2030. With this new investment, Cosmote will enhance the speed and coverage of its extensive 4G network, both in urban and rural areas. The total amount invested by the company reached €134.8mn.

 

OTE Acquired The Broadcasting Rights For Uefa Champions League & UEFA Europa League

On October 14, 2014, OTE acquired the broadcasting rights for all games of the European football club  competitions UEFA Champions League and UEFA Europa League from July 2015 to 2018. Regarding the  Champions League, ΟΤΕ TV will broadcast exclusively 133 out of the 146 games and the remaining 13 in parallel broadcast with a free-to-air network, while regarding Europa League, ΟΤΕ TV acquired the exclusive  rights for all 204 matches to be played in the tournament up to the final, which will be offered concurrently by  OTE TV and a free-to-air TV channel.

 

 Outlook

In the fourth quarter of 2014, OTE expects a further deceleration of top-line contraction, helped by  further signs of recovery in the Greek economic environment, a more favorable base of comparison  following the successive rounds of MTR cuts implemented in Greece through early 2013, the growing  penetration of OTE new services, notably TV, and finally, resilient service revenues in mobile. MTR cuts  in Romania will continue to impact mobile revenues and EBITDA in that country. OTE will pursue its  cost-containment efforts, and its profitability should benefit from the continuing lowering of its cost base as  a result of the 2013 and earlier voluntary exit schemes.  Cash Flow from operations should further increase in Q4’13, due to improved  working capital. With limited Capex expected in the quarter, OTE reiterates its adjusted Free Cash Flow  guidance of around €500 million for full year 2014.