Magyar Telekom's Q3 profit falls

Magyar Telekom Nyrt’s net income fell to Ft 23.4 billion (€89.2 million) in the three months ended October 31 compared with Ft 23.6 billion a year before, the Budapest-based company said in a statement. Profit was forecast at Ft 21.5 billion, according to the median estimate in a Bloomberg survey of seven analysts. Magyar Telekom, majority-owned by Germany's Deutsche Telekom AG, is faced with declining revenue from its traditional fixed-line business and eroding profitability on mobile phones because of increased competition from the likes of Vodafone Group Plc. An expanded Internet unit and foreign ventures have yet to make up for the drop in sales elsewhere. „Fixed line is the culprit,” Péter Dobár, an analyst at the Hungarian unit of Banca Intesa SpA, said before the release. „Mobile growth is also slowing and is set to peak soon. They will obviously lose market share there.” CEO Elek Straub is guiding the company toward new markets, such as expanding the Internet business and offering fixed-line services in Romania and Bulgaria, where the cost of expansion outweighs profit. He also plans to sell phone services in Ukraine. The company in June bought Hungarian software developer KFKI Zrt for as much as Ft 9.7 billion and in February opened a Romanian fixed-line unit, Combridge SRL. Magyar Telekom also bought information technology services company Dataplex Kft. Those new divisions boost sales, though are less profitable, according to Dalibor Vavruska, an analyst at ING Groep NV.

Fixed-line sales in the first nine months rose 3.5% to Ft 253.4 billion, while mobile phone revenue increased 12.3% to Ft 241.5 billion, Magyar Telekom said. Sales from the Internet business rose 23.9% to Ft 36.3 billion. The mobile phone unit, operated under the brand name T-Mobile, is tackling competition from Vodafone and Telenor ASA. T-Mobile's market share in September was 44.8%, compared with 45.1% a year ago. The rate is slipping at a time when the market is growing more slowly because 95.4% of the population now has a mobile. Vodafone is going after Magyar Telekom's most lucrative customers, offering a variety of post-paid subscription plans and more aggressive marketing and advertising, Dobár said.

„Erosion is inevitable,” Dobár said. „The only way to keep the market share would be at the expense of profitability, if at all. There's just no evidence of demand for new services.” Magyar Telekom is eastern Europe's second-largest phone operator, behind Poland's Telekomunikacja Polska SA. Telekomunikacja, or TPSA, on October 25 raised its 2006 revenue forecast after its mobile unit drove Q3 sales above market estimates. Net income fell to 689 million Polish zloty from 1.04 billion zloty a year earlier, Warsaw-based TPSA said. The Hungarian company last year started to merge its mobile unit into the rest of the group to save as much as Ft 20 billion over four years by eliminating positions. The company has yet to produce audited figures for the 2005 business year, which also led to the postponement of the annual shareholder meeting since April. Magyar Telekom has been dogged by a probe into four contracts at its Montenegro unit. Legal fees reached Ft 3.1 billion on October 9, surpassing the value of the agreements. Legal problems have contributed to the company's shares trailing Hungary's benchmark BUX Index this year. They are up 0.5%, the second worst performance, while the BUX has advanced 11%. TPSA shares are up 5.1%. Bloomberg News calculated Q3 earnings by subtracting first-half figures from nine-month data. (Bloomberg)