Telekom Austria Group: Operational Success in a Challenging Environment

Overview of Key Financials: Telekom Austria Group in the First Half of 2011

In the first half of 2011, the Telekom Austria Group reported considerable operational success despite challenging economic conditions and a market environment marked by intense competition and strong regulation. Against this backdrop, the Group succeeded in increasing its mobile customer base as well as total data traffic. In Austria, following the turnaround in the fixed net business, there was a further increase in fixed net access lines. The rebranding of the new domestic subsidiary, A1, in June 2011 following the merger of the Austrian fixed net and mobile communication operations showed significant market success: in July 2011, the company's convergent product bundles exceeded the one-million customer mark.

In addition, the Group's convergence strategy has proved successful beyond Austrian borders: in Bulgaria, the Telekom Austria Group has been the dynamic provider of innovative converged services since the acquisition of two fiber optic operators. In Croatia, a total of 120,000 fixed net customers were acquired in the period under review following the acquisition of B.net (closing in August 2011, customers not yet reported in the first half year). The Group's subsidiaries in Slovenia and in the Republics of Serbia and of Macedonia also recorded significant growth rates, with both customer numbers and ARPU showing a favorable upward trend. The Belarus segment also reported customer growth.

"We are proud of our operational success, which we have achieved against a backdrop of intensive competition and strong economic headwinds. These results demonstrate once again that our convergence strategy provides a solid base for our future business," said Hannes Ametsreiter, CEO Telekom Austria Group.

Telekom Austria Group's Performance in Figures

The Group's operational success could not fully compensate for the negative impact of the macroeconomic environment and, more specifically, for the negative effects of intensive competition and persistently intrusive regulatory measures. Group revenues amounted to EUR 2,227.3 million in the first half of 2011, a decline of 2.9% or EUR 67.3 million compared to the same period of the previous year. In the first half of 2011, the negative impact on revenues of the 54% devaluation of the Belarusian ruble against the euro as of May 24, 2011 amounted to EUR 43.3 million.

EBITDA comparable fell by 7.8% to EUR 777.6 million in the first half of 2011. This decline of EUR 65.8 million year-on-year is due to regulatory effects, which account for a drop of EUR 15.6 million, as well as to the devaluation of the currencies, which accounts for a decline in EBITDA comparable of EUR 19.0 million. The remaining decrease of EUR 31.3 million is mainly attributable to a competition-related decline in earnings, which could only be partly offset by strict cost management.

Personnel expenses to be sustainably disburdened

In the first half of 2011, EBIT declined from EUR 300.5 million to EUR 42.7 million. This drop is mainly attributable to personnel expenses associated with the restructuring program in Austria of EUR 218.6 million in the period under review. This cost will ease the burden of personnel costs over the long term with a positive effect for the consolidated statements of operations.

Due to the restructuring cost and the negative impact of the devaluation of the Belarusian ruble, net income turned from EUR 159.9 million in the first half of 2010 to a net loss of EUR 59.2 million in the first half of 2011.

"The decline in revenues and earnings is in line with expectations. All in all, we were able to cope quite well with the devaluation of the Belarusian ruble thanks to the early adoption of effective countermeasures," said Hans Tschuden, CFO and Deputy Chairman of the Telekom Austria Group.

Outlook for the Full Year 2011

Against the backdrop of a furthermore challenging economic environment in all operating markets of the Telekom Austria Group, persisting competitive pressure and the currency devaluation in Belarus, the Management Board has adjusted the outlook for the full year 2011. However, this refined outlook for 2011 reflects the Group's confidence in mitigating the negative effects mentioned above through clear customer focus, intensified marketing of innovative products and strict cost management.

For the full year 2011, revenues are expected to amount to approximately EUR 4.50 billion. EBITDA comparable is anticipated to reach up to EUR 1.55 billion. Operating free cash flow is expected to total up to EUR 800 million and capital expenditures for the Group as a whole are forecasted to reach EUR 750 to EUR 800 million. Furthermore, the management confirms a minimum dividend floor of 76 eurocents per share for the 2011 financial year.

The Telekom Austria Group's Markets in Detail

Austria:

In the period under review, the most outstanding milestone in Austria was the rebranding of the new domestic operating company A1 Telekom Austria AG resulting from the merger of mobilkom austria and Telekom Austria the previous year. Since June 2011, the company's products and services have been provided from one source under the umbrella brand A1. This rebranding campaign in connection with the marketing of innovative offerings led to customer growth and market success: in July 2011, the company's product bundles exceeded the one-million customer mark. The number of fixed access lines continued to grow from 2.304 million lines in the first half of 2010 to 2.324 million lines as of June 30, 2011, with fixed net broadband accounting for 1.216 lines, an increase of 11.6% compared to the same period of the previous year. The number of A1TV (formerly aonTV) subscribers increased by 41.1% to more than 174,800. Customer up-take of high-value broadband offerings counteracted the loss of fixed net voice minutes and resulted in a slower decline of average revenues per line (ARPL), which dropped to EUR 32.4 in the period under review compared to EUR 33.1 in the previous year.

The mobile communication business recorded further customer growth in the first half of 2011. The mobile customer base increased by 4.2% from about 5 million subscribers as of June 30, 2010 to about 5.2 million customers as of June 30, 2011. The number of mobile broadband customers rose by 19.7% to more than 700,000 subscribers.

Revenues in the Austrian segment declined by 4.5% to 1,469.4 million in the first six months of 2011 compared to the same period of the previous year mainly due to regulatory measures, lower mobile tariffs and the persisting decline in fixed net voice minutes.

In the first half of 2011, EBITDA comparable dropped by 9.8% to EUR 497.8 million mainly due to regulatory measures. Strict cost management could counteract the pressure on earnings.

Bulgaria:

In the period under review, the Bulgarian segment was marked by opposite trends. While Mobiltel's customer base increased by 1% to 5.3 million subscribers and the number of mobile broadband customers more than doubled, ARPU declined by 10.6% due to intensive competition and lower usage. Revenues in the Bulgarian segment dropped by 4.8% to EUR 263.9 million. Mobiltel's revenue figures for the first six months of 2011 also include the results of two fiber optic operators Megalan AD and Spektrumnet AD, which were acquired the previous year. Together they account for a total of 101,200 fixed net lines, of which 95,700 are broadband lines.

In the first half 2011, the Bulgarian market was impacted by a laggard domestic economy and regulatory cuts. In addition, fierce competition spurred by smaller operators in the market characterized the operational environment. As a result, EBITDA comparable declined by 9.3% to EUR 135.5 million in the period under review.

Belarus:

In the first half of 2011, the most striking event in Belarus was the devaluation of the ruble by 54% as of May 24, 2011 as a result of a strong decline in the level of foreign exchange reserves. Despite this negative effect, the Belarus subsidiary Velcom was able to increase its mobile subscriber base by 7.6%, with the number of mobile broadband lines almost quadrupling. Thanks to the adopted countermeasures - in the form of price increases and CAPEX reductions - Velcom showed a strong operational performance in its local currency. Revenues denominated in the local currency increased by more than 26%, ARPU by 14.3% and EBITDA comparable by 21.3%.

However, due to the devaluation of the Belarusian ruble, this outstanding performance could not be translated into euro. As a result of negative currency translation effects, revenues showed an increase of 1.8% to EUR 162.8 million and EBITDA comparable declined slightly by 2% to EUR 75.4 million in the year under review.

Croatia:

Severe economic headwinds, regulatory and fiscal burdens as well as fierce competition were the key challenges on the Croatian market in the period under review. Due to the negative factors mentioned above, ARPU (average revenue per customer) dropped by 11.5% to EUR 12.8. Against this backdrop, the Croatian subsidiary, Vipnet, was able to increase its mobile customer base by 1% to almost 2.1 million subscribers. The number of mobile broadband customers rose by 17.3 % to over 165,000 subscribers.

Vipnet's revenues decreased by 9.5% to EUR 190.8 million in the first half of 2011. EBITDA comparable fell by 19.8% to EUR 52.0 million. This disproportionate decline is mainly attributable to one-off personnel expenses in connection with a headcount reduction by approximately 10% in the second quarter 2011.

To address the increasing demand for convergent products in Croatia, Vipnet acquired the Croatian cable operator B.net in August 2011 for a total consideration of EUR 93 million. B.net currently provides broadband fixed net offerings and cable TV services to roughly 120,000 households in Croatia.

Slovenia:

Slovenia showed a favorable development in the period under review: customer numbers grew by 6.9% to more than 630,000 and the mobile broadband customer base rose by 19.4%. Si.mobil's market share slightly increased to 29.9%. ARPU remained almost unchanged at EUR 19.8 compared to the same period of the previous year. Revenues in the Slovenian segment rose by 10.1% to EUR 90.0 million in the period under review, with EBITDA comparable dropping by 0.9% to EUR 22.9 million.

Republic of Serbia:

Vip mobile, the Group's subsidiary in the Republic of Serbia, showed a favorable performance and positive results in the first half of 2011. Customer numbers increased by 19.1% to roughly 1.5 million and ARPU rose by 17.4% to EUR 6.9. Revenues grew by 33.6% to EUR 65.6 million driven by customer growth and higher usage. Furthermore, Vip mobile, for the first time, was able to make a significant positive contribution of EUR 11.9 million to Group EBITDA.

Republic of Macedonia:

In the Republic of Macedonia, Vip operator, the most recent greenfield operation of the Group, was able to report strong growth rates. The mobile customer base rose by 42.9% to over 500,000 subscribers and market share increased to 22.7% as of June 30, 2011. ARPU improved by 12.7% to EUR 7.1. Revenues showed a similar favorable development, growing by 58.2% to EUR 24.3 million and EBITDA comparable was break-even.

The current quarterly report is available at
http://www.telekomaustria.com/ir/interim-results.php

About Telekom Austria Group

The Telekom Austria Group, listed on the Vienna Stock Exchange since November 2000, is the leading telecommunications provider in Central and Eastern Europe with approx. 22 million customers across its markets of operations. The Group is currently operating in eight countries: in Austria (A1), Slovenia (Si.mobil), Croatia (Vipnet), the Republics of Serbia (Vip mobile) and Macedonia (Vip operator), Bulgaria (Mobiltel), Belarus (Velcom) and Liechtenstein (mobilkom liechtenstein). The total market of the eight countries covers about 41 million inhabitants. The Group has more than 17,000 employees, revenues were EUR 4.7 billion as of year-end 2010. Telekom Austria Group's portfolio encompasses products and services of voice telephony, broadband Internet, multimedia services, data and IT solutions, wholesale as well as m-payment solutions. More detailed information is available at http://www.telekomaustria.com

Contact:

Elisabeth Mattes, Director Corporate Communications and Spokeswoman, Telekom Austria Group
mobile: +43-664-6639187, email: [email protected]