Am Diana Valkoni, Head of Investor Relations at Majors Telecom. It is my pleasure to welcome you to our third quarter twenty twenty two results conference call. Please note that today's presentation is also available on the Investor Relations section of our website. This event is being recorded for Internet purpose only. By joining the presentation, you give your consent to being recorded.
Throughout the presentation, your lines will remain muted. Once we have commenced the Q and A session, you will be able to ask a question using the recent function. Before we start, I would like to draw your attention to the disclaimer on the page of the presentation. Information in this presentation contains statements about expected future events and financial results that are forward looking and subject to risks and uncertainties. It is my pleasure to welcome Mr.
Tatibor Reykoshi, our CEO and Ms. Aria Dodonova, our CFO, who will take you through the presentation and answer any question you may have. Now I would like to hand over to Tibor to open the presentation.
Thanks, Idea. Good afternoon, everybody. I'm pleased to report that during the third quarter of the year, we continued to witness strong demand for our services, including our effort efforts to provide outstanding customer experience summarized on slide three. Given the importance of reliable networks and uninterrupted servicing capabilities, we progressed our selected network upgrade, namely the gigabit fixed network rollout and the radio access network modernization. Both initiatives reached further milestones during the quarter.
Three quarters of our Hungarian AMFIT network is now gigabit capable. Like like over half of the mobile network has gone through the modernization process. These upgrades are vital for for allowing for significantly higher throughput and capacity, which is key to meeting the accelerated demand for data that is reflected in the growing customer base, data usage and ARPU. To further monetize these investments, we introduced a new fixed and mobile service portfolio in September, both based on our more for more pricing and designed to provide additional flexibility, such as the very reliable add on options now available in three unlimited mobile data packages. We expect that these measures will help us further improve customer satisfaction and maintain positive momentum in customer and our returns.
In parallel to this positive commercial development, however, the external headwinds driving cost inflation intensified further, making our efficiency measures vital for protecting our profitability. In this context, we implemented a price increase across certain residential fixed and mobile and business mobile contracts as of September 1, while the company's right to inflation based price correction to be implemented in two in 2023 and now enforced across our customer contract. We also concluded an agreement with the trade union, including a one off employee compensation of 3,000,000,000 for him, which was accounted for in the third quarter. The agreement also set out the terms of the next year's wage increase for the parent company and TCP and Hungary employees, which will be around 7% on average with a higher rate applied to the lower wage levels to provide additional support for the ones most in need. To ensure uninterrupted energy supply and mitigate risks associated with energy price volatility, we took further steps to diversify our energy sources by sec securing both traditional and renewable energy contracts on a short and long term basis.
An additional significant step taken to increase operational efficiency is related to IT servicing. To further improve integrated ITT capabilities, we decided to both increase cross functional cooperation further between the parent company and T Systems Hungary and also the answer provided to the corporate and public segment from the current T Systems that I recommend from next year on. With this, by capitalizing on our existing competitive advantage, we would like to improve our convergent digital business offerings as well as increase the sales efficiency of our standardized IT product portfolio. And once again, we received external recognition for these efforts. Scope ratings reaffirmed Media Telecom at BBB plus with a stable outlook reflecting their view of our strong and stable position in the domestic mobile and broadband market and moderate leverage.
We also received further recognition for our efforts in the sustainability sphere. Our AA ESG rating was reaffirmed by MSCI, by ISS Corporate Solutions ranked the company among the best performers of the telecom sector globally with respect to its sustainability financials. Turning to Slide four, let me highlight some of the most important elements of our operational performance in Hungary. In a highly penetrated mobile market, we were able to further expand our SIM base, thanks to increases in machine to machine SIMs as well as further growth in our postpaid postpaid customer base driven by successful pre to post migration and acquisition efforts. In parallel to them, the number of customers opting for mobile data packages continued to grow at pace, while average monthly mobile data usage is now at almost 10 gigabyte, again, a significant increase from previous periods.
PE development yielded positive financial contribution reflected in further ARPU growth, which we aim to further capitalize on with our new portfolio of featuring unlimited data options. In Hungary's fixed market, we also continued to develop development as shown on Slide five. With the continued expansion of our gigabit network footprint, we managed to maintain the pace of customer growth both in fixed broadband and TV, leading to further increases in our residential home base with the share of double pay packages increasing steadily. In parallel, the favorable trends in broadband and TBRQ were also maintained in the third quarter driven by customer migration to higher bandwidth broadband packages, the faster to far more for more pricing strategy and the targeted price increase measures we introduced over the past year. To build on these positive trends, in September, we launched a new residential fixed service portfolio with simplified discount and flexible pricing.
I'm pleased to report that the initial feedback from customers has been positive, which is reflected in growing take up. With that, I'd like to hand over to Daria to take us through the financial results.
Thank you, Tiba. Good afternoon, everyone. Before I get into the detail of our quarterly revenue performance, let me draw your attention to a change in our basis of preparation and highlight an accounting policy change. Based on the principal versus agent software agenda decision by Eferis interpretation committee, the group had to reassess the control in run software reselling and provided streaming services, whether it is an agent or principal position. This reassessment was completed in the third quarter of twenty twenty and concluded that agent accounting should be adopted.
This resulted in accounting policy change and restatement in the presentation of these transactions with a decrease in revenue, direct cost and ARPU, while EBITDAL, net income, statement of financial position and free cash flow remained unchanged. Our presentation includes restated 2021 figures to facilitate like for like comparison. Let me continue with the main drivers of our quarterly revenue performance as shown on slide six. The primarily contributor to revenue growth in both periods was the strong increase in mobile data revenue, fueled by continued growth in our subscriber base as well as high usage levels in both Hungary and North Macedon. This sharp increase offset the moderate decline in mobile voice and messaging revenue, resulting in an overall increase in mobile service revenues.
The increase in fixed service revenue was driven by growth in broadband and pay TV services. Our fixed broadband revenue increase was driven by the positive impact of the continued customer base expansion in both countries of operation and migration to higher bandwidth packages in Hungary. On the other hand, our TV revenue was up, thanks to further expansion of the IPTV customer base, coupled with the positive impact of the targeted price increase measures in Hungary. With regards to equipment revenue, both the general increase in handset prices and the weakening of the foreign resulted in a rise in average smartphone prices. Our SI IT revenue decreased year on year as a result of the absence of revenues formerly generated by the Hungarian Healthcare Business Unit, including Pan and Form LLC, and lower project volumes in North Macedonia.
In underlying terms, SIIT revenues at the Hungarian operation showed positive development, thanks to higher project volumes. Turning to slide seven and our profitability. The sustained improvement in gross profit is thanks to positive underlying telecommunication service developments with strong demand for data among the key drivers of our performance. Despite this positive trend in our gross profit, the EBITDA after leases declined by 2.8% year on year in the third quarter because of the recently introduced supplementary telecommunication tax, which negatively affected our profitability in the third quarter to the tune of 6,500,000,000.0. In addition, our employee related expenses increased by 3.6% year on year driven by the 2022 wage increase and one off compensation to employees, which were partially offset by lower severance expenses and headcount reduction.
Other operating expenses exclude additional supplementary communication tax and employee related expenses by 16.6. Witness a negative impact of rising cost inflation and a weakening foreign. Higher energy costs put extra pressure on us with respect to both fuel and electricity with the later putting partially strong pressure on results of the North Macedonian operation. Slide eight shows the year on year changes in net income both on quarterly and year to date basis. As illustrated by the chart, in the third quarter, a decline of 4.5% was recorded as lower EBITDA year on year was coupled with a deterioration in financial results.
The later is the combined result of higher interest expenses related to lease liabilities, high average interest costs, and unfavorable change in other finance expense due to higher losses related to the significant weakening of the foreign during the period. These were partially offset by gains on the recognition of derivatives at fair value caused by the upward shift of the relevant yield curves. Income tax expenses increased in the third quarter due to an increase in local business tax in line with a high related tax base, which offset the saving related to the year on year lower level of the profit before tax. These impacts could only be partially offset by lower D and A expenses driven by lower depreciation expenses in Hungarian operations, thanks to full copper network retirement in some of areas in Hungary, lower software related depreciation expenses, thanks to the optimization of the IT infrastructure, and the proportionally lower amortization of the spectrum licenses that expired in April 2022 and were since reacquired. Looking at the nine months of the year, I'm pleased to report that EBITDA improvement driven by the favorable gross profit and lower DNA could fully offset the higher financial and income tax expenses, leading to a 14.4 year on year improvement in net income, 14.4%.
Let me also briefly reflect on our recently introduced KPI adjusted net income, which amounted to 40,500,000,000.0 foreign in the nine months of twenty twenty two. Adjustments versus reported net income were minor in the period. The non realized loss on measuring derivatives at fair value, particularly related to book lease liabilities, offset the positive impacts from the continued rise in the Hungarian yield curve over the periods. Now turning to the Slide nine, where we present the development of the group's capital expenditure and an update of the rollout of our gigabit capable fixed network. In the nine months of 2022, capital expenditure after leases without spectrum licenses increased by 16.2% year over year to 83,000,000,000 forint, reflecting different timing of investments and external pressure because of the weakening forint versus last year.
In Hungary, increases were primarily driven by further strong progress in radio network modernization, continued expansion of the fiber network, and higher spending on CPEs. In North Macedonia, capital expenditure after leases, excluding the successfully secured spectrum licenses in the second quarter, rose by NOK 2,500,000,000.0 year on year, driven by the nearly completed RAN modernization. On slide 10, we present the year on year development of our cash flow generation in the nine months. The underlying improvement in free cash flow is attributable to strong operational performance in both Hungary and North Macedonia, which generated an over 25,000,000,000 for an increase in gross profit. The positive change in the working capital was thanks to the fact that the payment of the supplementary telecommunication tax, which was accounted for in our nine months results, will be due only in the fourth quarter of the year.
The cash flow from the disposal of Paninform positively impacted our performance and fully offsets the deterioration related to higher income tax payments, ForEx losses reflecting of the weakening of foreign and cash flow impact of the Fibre Network acquisition covering 110,000 access points in Hungary. Overall, free cash flow was also impacted by the payment of the spectrum fees related to the acquisition of nine hundred and eighteen hundred MegaGas spectrum licenses in the amount of 44,300,000,000.0 forint in Hungary and 3,100,000,000.0 forint in relation to the secured frequencies in North Macedonia. Finally, let me summarize how we are delivering against our updated targets shown on slide 11. In the nine months of twenty twenty two, as detailed in the part of the presentation, we achieved strong commercial results reflected in the year on year revenue growth of over 9%. This performance allowed us to upgrade our revenue target for the year from a growth rate of one to 3% projected to that of around 5%.
Regarding EBITDA after leases, while in the half of the year, the strong business performance coupled with one off gain on the disposal of PAN and FORM could fully mitigate the impact of the additional tax. In the third quarter, the negative impacts of the concentration have started to have more of an effect on our results, mitigating these advances. Looking ahead, we expect the inflationary pressure, weakening of the foreign and the additional tax to put further pressure on profitability, which is to be partially mitigated by the higher rate of revenue growth. Regarding CapEx after leases and free cash flow performance, you can see the seasonality differences that impact our performance against our targets. In terms of CapEx after leases, the year on year increase is attributable to a more even delivery of projects throughout the year, which resulted in more balanced spending compared to 2021 with an additional negative effect of the foreign weakening.
With regards to free cash flow, the difference in the performance compared to last year is mostly driven by the better business performance and temporary boost from the shift in the payment of the supplementary telecommunication tax to the last quarter of the year. This concludes our presentation, and I will now hand back to Dia.
Happy. Now take any questions you may have. Please use the raise hand function, following which I will ask you to unmute yourself and ask a question.
Thank
you very much. Good afternoon to everyone. of all, I would like to congratulate to the company and the management for this quarterly results. I think these are very, very satisfactory results given the fact of this extra text the company received. So it's well done.
Thank you very much. And the question I would like to ask you is is about your guidance and outlook. In your quarterly results, you give an outlook for 2023 and '24. And there, you state that your EBITDA is targeted for a moderate annual growth. And I would like to just have some more flavor on that, especially focusing on 2023 next year Because this year is, as I understand, this will be quite a challenging year, especially because of the significantly increasing electricity prices.
So this guide us on indication, I just would like to better understand. This way, you you try to indicate that you are striving to increase EBITDA next year even with these cost challenges, or it's rather trying to give some midterm indication where you strive to be in two years' time?
Let me take the question. Nadia speaking. of all, Tamas, thank you very much for the congratulations. We also consider this quite an achievement in these turbulent times. When it comes to the outlook, and I would like to highlight, we tend to call, the next year and the year after expectation and outlook.
We normally keep the practice that, we formulate the guidance for the current year. And if we adjust it, we adjust it in the course of the year. But when it comes to the outlook for the next year and years after, we do it only once, once a year. So and building up on that practice, the planning are to either reconfirm or reiterate, this outlook in the expected, annual, results. So I'm currently not in the position on giving an confirmation or a comment on the outlook for the next three years.
Okay. Thank you very much.
I got it. You can unmute yourself and raise your question. Father, you raised your hand. So if you have any questions, then you can you can ask now.
Yes. Yes. Yes. Hello. Pawel Palsky.
Here. Well, part of my question has just been answered. Well, once again, I'm looking at your 2022 guidance and under the pressure of both inflation and FX negative changes must be really tough in fourth quarter because based on what you are presenting as official guidance, well, I'm looking at your fourth quarter EBITDA after lease at some 40,000,000,000 forints, which is rather poor outlook for the next quarter. Am I missing something here? Or fourth quarter outlook could be a good proxy for quarters in 2023?
Darius speaking. of all, referring to a couple of your comments about our, outlook, or better to say guidance for 2022. This is the guidance for the EBITDA was adjusted in the previous quarter. We kept the moderate decline as the guidance for 2022, unchanged now. The reason, of of this unchanged guidance for the moderate decline in the fourth quarter, despite the fact that we are changing our revenue, is increasing inflationary pressure, increasing pressure from the weakening of the foreign, increasing pressure coming from the energy course, in particular, in our operations in North Macedonia, and, actually, a big pressure of the supplementary profit tax.
This is when you compare the guidance or the moderate decline EBITDA guidance for '22, the post quarter guidance, indirect with the results of q three. When it comes to 2023, as I've just explained, I'm not in the position, to give you an outlook, which would be not the guidance for the 2023 because following our normal practice, we do it once a year for the upcoming year or years, and we adjust our guidance only for the current year.
Thank you very much. If I might, well, ask my question differently. You mentioned increasing pressures from inflation, FX, North Macedonian operations, supplementary tax, etcetera, all having, well, impact on your fourth quarter results. My question would be, shall I expect any one off extra, well, item depressing your fourth quarter results? No unusual items should be booked in fourth quarter?
Please please remind me.
We do expect the, increasing of the negative trends from the effects what I have mentioned in the fourth quarter, these three impacts, and we expect that the pressure from this one will be, slightly unproportionately high in the next quarter than it was in the q three.
Thank you very much.
Good afternoon, Peter. You can ask now your question.
Hello. Congratulations on strong results. I have a question about CapEx going forward. So as you are showing in the presentation that Gigabit, the capable network is now getting quite significant share of total network. Then maybe you can guide us what we can expect in terms of CapEx in the 2023, 2024 horizon, what will be driving it and whether there is a chance that the figures annual figures will be smaller than they have been in the past years.
And secondly, maybe if you can then also comment on what will be driving the dividend decision that you propose and whether it will be split in similar manner as last year between ordinary payment and share buyback? Thank you.
So let me start, Darius speaking, answering your question about our CapEx investments. Starting maybe through the strategy, which, the company follows since many years, the gigabit capital or gigabit capital rollout in the country and building, additionally on the, fully modernized mobile network. These two important elements of our strategy, which on one hand allow us to increase customer experience. On the other hand, especially when it comes to the network modernization, become more efficient, are these elements will become not become will stay, the substantial element of of the strategy for the future years. When it comes to the precise outlook or the guidance, about the CapEx, we are not in the position to give it.
And, also, this year, you might remember we were guiding for the CapEx for this year, but we were not giving an outlook for the capital, expenditures for the two, three years. When it comes to the dividend, just to remind ourselves, based on the, introduced shareholder remuneration framework beginning of the year, you can expect, the share remuneration payback or payout in the magnitude of 60 to 80% of the adjusted net income. This is, what is stated in our policy. When it comes to the exact split with between the cash dividend and share buyback, this is a decision of the board of directors, which obviously is still to come beginning of the next year, and I cannot comment what will be the final outcome for the payout related to the earnings of the year 10/22?
Questions or your your hands remain safe. Good afternoon, Nora. You can ask you can unmute yourself and ask your question.
Hi. Good afternoon. Thanks for the presentation and the possibility to ask questions. Two from my side, please. Firstly, what's your perception?
How do customers react to your recent price adjustment? And secondly, you've mentioned earlier that you are targeting to divert diversify the energy sources for next year in Hungary. Are there any plans for North Macedonia as well, or it's only valid for the Hungarian operation? Thank you.
Let me start with the question, Nora, about the diversification of the energy sourcing portfolio. We are closely monitoring the opportunities not only in Hungary, but also in North Macedonia. However, the opportunities, the the current opportunities available in North Macedonia are rather limited, but we are also looking rather positively, for the future and, also from the perspective of the sustainability and increasing the portion of the green energy we're using in the group. Obviously, North Macedonia will not be an exception, and we are closely monitoring the opportunities there as well. And your question about the, reaction of the customers when it comes to the price increases, can you kindly specify, the question, what you are precisely looking for?
Yeah. Thanks. Whether whether you see any change in customer demand after after September 1. For example, if customers moved or upgraded their packages? For example, for the older ones, the value increased the prices.
Yep. Let me take this question. You know, it's it's only been two months, but we have not in witnessed any negative perception from customers following the price increases.
I I see. Thank you. And, maybe if I could also, then ask a follow-up question on on customer demand. So far for for q four, is there any change in the customer in, if you can see us versus two free?
And what do you mean, Andrea, change in terms of the policy or in terms of the Christmas packages, Christmas offers, or can you please specify your question?
Yeah. Sorry. Naturally. I I'm really curious about the customer activity. Did it still at the level, where you've finished the q '3?
Well, obviously, we are, not even in the middle of the q four, so it's difficult to, comment on the customer's behavior on that one. So please accept that we cannot give the precise comment on the on the whole, fourth quarter. Additionally, we expect this quarter will not be an exception, but, it's always a strong quarter connected to the sales, Christmas sales and Christmas offers. But talking about the current figures, it's simply too early. It's less than half of the fourth quarter.
K. Thank you.
Questions. Thank you again for joining us today. Please note that a transcript of this conference call will shortly be available on our website. If you have any follow-up questions, please don't hesitate to contact us.