Telekom Austria Group: Cash Flow Growth Despite Demanding Market Environment

By Telekom Austria Group, PRNE
Tuesday, August 17, 2010

VIENNA, Austria, August 18, 2010 -

    - Continued challenging operating environment driven by fierce
      competition, regulatory induced pressure and macro-economic headwinds

    - Stabilization of Fixed Net line losses to 6,000 in 2Q 2010 vs. 12,600
      in 2Q 2009

    - Further Mobile Communication subscriber growth of 5.9% to 19.2 mn

    - Slow-down of Group revenue decline to -3.9% due to lower revenue
      reduction in the Fixed Net and the Mobile Communication segments

    - Group EBITDA declines by 8.3% due to higher revenue related Fixed Net
      expenses and lower mobile revenues, cushioned by cost reductions

    - Free cash flow generation remains strong with EUR 365.2 mn

    - Including impact from merger of domestic operations the management
      expects revenues of approx. EUR 4.7 bn and an EBITDA of EUR 1.60 to
      1.65 bn for FY 2010

    - DPS floor of EUR 0.75 reiterated
                                               %     1- 6 M    1-6 M      %
    in EUR million        2Q 2010  2Q 2009   change   2010      2009   change

    Revenues              1,168.7  1,191.7    -1.9%  2,294.7  2,388.8   -3.9%
    EBITDA                  403.8    450.0   -10.3%    829.7    904.8   -8.3%
    Operating income        134.2    170.2   -21.2%    300.5    350.3  -14.2%
    Net income               68.7     82.3   -16.5%    159.9    167.6   -4.6%
    Earnings per share (in
    EUR)                     0.16     0.19   -16.4%     0.36     0.38   -4.6%
    Free cash flow per share
    (in EUR)                 0.45     0.45     0.8%     0.83     0.75   10.8%
    Capital expenditures    160.1    149.3     7.2%    296.5    265.3   11.8%

                                                     Jun. 30, Dec. 31,    %
    in EUR million                                    2010     2009    change

    Net debt                                         3,590.3  3,614.8   -0.7%
    Net debt/EBITDA (12 months)                         2.1x     2.0x

    All financial figures are based on IFRS; if not stated otherwise, all
    comparisons are given year-on-year. EBITDA is defined as net income
    excluding financial result, income tax expense, depreciation and
    amortization. This equals operating income before depreciation,
    amortization and impairment charges.

Group Review

Today, Telekom Austria Group (VSE: TKA, OTC US: TKAGY) announced its
results for the first half 2010 and the second quarter ending June 30,

"We are still operating in an environment which is marked by fierce
competition and both regulatory and macroeconomic pressure. Due to these
effects Group revenues declined driven by lower Fixed Net voice minutes and
reduced mobile termination rates. Nevertheless, the strong cash flow
generation of Telekom Austria Group continued with an increase of free cash
flow by 10.8% to EUR 365.2 million for the first half year of 2010.

In the Fixed Net Business we almost stabilized the number of fixed lines
at 2.3 million, whilst the customer basis in the Mobile Communication segment
increased by 5.9% to 19.2 million. Effective cost management especially in
the Mobile Communication segment mitigated the impact of lower revenues on
Group EBITDA. For the full year 2010 we have refined our outlook for revenues
to reach approximately EUR 4.7 billion and for an EBITDA of EUR 1.60 billion
and EUR 1.65 billion. Furthermore we reiterate our dividend floor of 75 Cents
until 2012. The refined outlook reflects the Group's confidence to be able to
successfully address these challenges through clear customer focus,
continuous scrutiny of cost structures and improvements to operating
efficiency. We have claimed to build the most innovative and efficient
telecom operator in CEE and we will keep this claim - despite a demanding
economic environment", said Dr. Hannes Ametsreiter, CEO Telekom Austria


Year-to-date comparison:

During the first half 2010 group revenues declined by 3.9% to EUR 2,294.7
driven by lower revenues in both the Mobile Communication as well as
the Fixed Net segment. While Fixed Net revenues decreased mainly due to lower
voice volumes, revenues from Mobile Communication were impacted by fierce
competition as well as lower interconnection tariffs.

Stringent cost management in the Mobile Communication segment
overcompensated the increased revenue related expenses as well as one-off
effects in the Fixed Net segment and limited the impact from lower revenues
on the group's EBITDA, which declined by 8.3% to EUR 829.7 million in the
first half 2010.

Operating income fell by 14.2% to EUR 300.5 million during the first half
of 2010 and benefited from lower depreciation and amortization charges.

Lower net interest expenses, foreign exchange differences and income
taxes limited the decline in net income to 4.6% from EUR 167.6 million in the
first half 2009 to EUR 159.9 million in the first six months of 2010.

Capital expenditures increased by 11.8% to EUR 296.5 million due to
higher expenditures in the Fixed Net segment during the first half 2010.

Quarterly comparison:

In the second quarter 2010 group revenues declined only slightly by 1.9%
to EUR 1,168.7 million.

The slowdown of the rate of decline compared to previous quarters was
driven by higher revenues in the Fixed Net segment and a slower revenue
decline in Mobile Communication.

Reported group EBITDA fell by 10.3% to EUR 403.8 million. Cost savings in
the mobile segment absorbed almost half of the decline in segment revenues.
The Fixed Net segment was impacted by one-off expenses in the amount of EUR
14.0 million
. Without these one-off expenses, group EBITDA amounted to EUR
417.8 million
and fell by 7.2% during the second quarter 2010.

Despite lower depreciation and amortization charges operating income fell
by 21.2% to EUR 134.2 million. An improved financial result and lower income
tax expenses mitigated the impact of operating results on net income which
decreased by 16.5% from EUR 82.3 million in the 2Q 2009 to EUR 68.7 million
in the 2Q 2010.

The ongoing reduction of line loss and the continued success of product
bundles contributed to the increase of revenues in the Fixed Net segment.
While Mobile Communication continued to be impacted by a fierce competition
combined with an ongoing difficult macro-economic environment as well as
regulatory interventions, ARPU trends showed first signs of stabilization.
Moreover, the Group's mobile communication subscriber base grew by 5.9% in
the 2Q 2010.

Total capital expenditures increased to EUR 160.1 million in the 2Q 2010
compared to EUR 149.3 million in the 2Q 2009. The increase was mainly driven
by higher investments in the next generation network in the Fixed Net
segment. The Mobile Communication segment showed a reduction in capital
expenditures. Net debt declined by 0.7% to EUR 3,590.3 million at the end of
June 2010 compared to 3,614.8 million at year-end 2009. Net debt to EBITDA
(last 12 months) was 2.1x.

Market Environment

Telekom Austria Group operates in a highly competitive environment both
in the Fixed Net and Mobile Communication markets. The resulting negative
impact on pricing levels is further intensified by regulatory measures in
both segments. Continuous scrutiny of cost structures and improvements to
productivity and operating efficiency are therefore essential to the success
of Telekom Austria Group.

While the sustained migration of Fixed Net voice customers to the Mobile
Communication segment remains a key challenge, fixed line broadband continues
to make steady inroads into the market for internet access. In addition,
attractive product bundles and innovative products like aonTV continue to be
the main drivers for the reduction in line losses. The Fixed Net segment
continues to focus on the protection of cash flows by offering a
market-oriented product portfolio and attractive pricing schemes.

The Mobile Communication segment remains negatively impacted by
reductions in termination charges and roaming tariffs. In addition, Austria
is a highly developed mobile communications market characterised by intense
competition and persistent price pressure. In the Central & Eastern European
region, a challenging macro-economic environment, fiscal burden and a high
level of competition shape the operational situation. Moreover, innovative
products, such as mobile broadband and convergent product bundles become an
increasing element of the competitive environment in CEE.

Telekom Austria Group Refined Outlook for 2010

Several negative external effects and the impact of weak economies shape
the market environment for Telekom Austria Group. These effects include the
unabated fixed-to-mobile substitution and the continued price pressure in
Telekom Austria Group's major markets. In addition, regulatory induced lower
roaming prices as well as mobile termination rates will continue to impact
the group's results in the second half of 2010. Taxes levied on mobile
communication services in Croatia and the Republic of Serbia pose an
additional burden.

For the second half of 2010, the management expects the challenging
market environment to continue to persist. However, the refined outlook
reflects the group's confidence to be able to successfully address these
challenges through clear customer focus, intensified marketing of innovative
products and strict cost management. Moreover, the revised outlook now
includes the impact of the integration of Fixed Net and Mobile Communication
activities in Austria.

For the financial year 2010, revenues are expected to amount to
approximately EUR 4.7 billion. Stringent cost control will mitigate the
impact from lower revenues and is anticipated to result in an EBITDA of EUR
1.60 - 1.65 billion
. In light of investments for the migration to an All-IP
based voice network in the Fixed Net segment, capital expenditures of Telekom
Austria Group are forecasted to reach EUR 750 to 800 million. This amount
does not reflect a material roll-out of glass fiber which is not expected to
start in 2010.

Operating Free Cash Flow remains the primary focus of the management and
is expected to amount to at least EUR 800 million. Telekom Austria Group
reiterates its intention to distribute the higher of 65% of the annual net
income or at least 75 Eurocents per share as dividend until 2012.

The Management Board remains committed to its capital allocation policy
including returning excess cash to shareholders via share buybacks within the
1.8x-2.0x net debt/EBITDA target balance sheet structure and provided
stability in its main foreign currencies and operations.

However, in light of the ongoing challenging operating environment share
buyback is not expected to start in 2010.

This outlook is given on a constant currency basis.

                              Outlook 2010*        Outlook 2010**
                              as of Aug. 18         as of May 12
    Telekom Austria Group

    Revenues                  approx. EUR 4.7bn     approx. EUR4.7 bn
    EBITDA                    EUR 1.60 - 1.65bn     approx. EUR1.6 bn
    Capital expenditures      EUR 0.75 - 0.80bn     approx. EUR0.8 bn
    Operating Free Cash Flow  at least EUR 0.8bn    approx. EUR0.8 bn
                              65% of net            65% of net
                              income, DPS of        income, DPS of
    Dividend                  75 cents minimum      75 cents minimum

    * Including the impact of the merger of domestic operations
    **Excluding the impact of the merger of domestic operations

Further Information

For more detailed information about the first half-year 2010 please refer
to the corresponding report on Telekom Austria Group's website at


This news release contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements are usually accompanied
by words such as "believe," "intend," "anticipate," "plan," "expect" and
similar expressions. Actual results may differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors. Forward-looking statements involve inherent risks and uncertainties.
A number of important factors could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statement.
These factors include, but are not limited to, the following:

    - the level of demand for telecommunications services or equipment,
      particularly with regard to access lines, traffic, bandwidth and new

    - competitive forces in liberalized markets, including pricing pressures,
      technological developments, alternative routing developments and new
      access technologies, and our ability to retain market share in the
      face of competition from existing and new market entrants;

    - the effects of our tariff reduction or other marketing initiatives;

    - the regulatory developments and changes, including the levels of
      tariffs, the terms of interconnection, unbundling of access lines and
      international settlement arrangements;

    - our ability to achieve cost savings and realize productivity

    - the success of new business, operating and financial initiatives, many
      of which involve start-up costs, and new systems and applications,
      particularly with regard to the integration of service offerings;

    - our ability to secure the licenses we need to offer new services and
      the cost of these licenses and related network infrastructure

    - the progress of our domestic and international investments, joint
      ventures and alliances

    - the impact of our new business strategies and transformation program;

    - the availability, terms and deployment of capital and the impact of
      regulatory and competitive developments on capital expenditures;

    - the outcome of litigation in which we are involved;

    - the level of demand in the market for our shares which can affect our
      business strategies; changes in the law including regulatory, civil
      servants and social security law, including pensions and tax law; and
      general economic conditions, government and regulatory policies, and
      business conditions in the markets we serve.
    Elisabeth Mattes                      Matthias Stieber
    Group Spokeswoman                     Investor Relations
    Telekom Austria Group                 Telekom Austria Group
    Tel.: +43-664-66-39187                Tel.: +43-664-66-126
    E-Mail:                               E-Mail:

Elisabeth Mattes, Group Spokeswoman, Telekom Austria Group, Tel.: +43-664-66-39187, E-Mail: elisabeth.mattes at, or Matthias Stieber, Investor Relations, Telekom Austria Group, Tel.: +43-664-66-126, E-Mail: matthias.stieber at

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