One of the leading telecom companies' revenue has declined in Pakistan due to multiple factors, including re-introduction of telecom tax as well as challenging market environment. This has been revealed in third quarter report of Telenor issued Wednesday. Telenor's President & CEO Sigve Brekke stated that Malaysia registered improvements in revenue, but its business in Pakistan proved troublesome due to reintroduction of a telecom tax and a difficult macroeconomic environment.
In Pakistan, Telenor saw significant revenue decline and a challenging macroeconomic development in the third quarter. Subscription and traffic revenues decreased by 15 percent and earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by 50 percent.
Adjusting for the reversal of SIM tax in the third quarter last year, subscription and traffic revenues decreased by 11 percent and EBITDA decreased by 31 percent. The negative revenue development was mainly caused by the disallowance of the service fee in the second quarter but also lower average revenue per user (ARPU).
In addition, increased energy prices, network expansion and the depreciation of the local currency led to 8 percent higher opex (operating expense). On the positive side, the subscriber base increased by 0.5 million and the subscription base is now at a level which is 3 percent higher than the last year.
The report further stated that Telenor Pakistan's GSM license expired on May 25, and the renewal fee was set to USD 449 million by the Pakistan Telecommunication Authority (PTA). Telenor claimed that the renewal price should be USD 291 million, which is the same as prior renewals for other operators. In the third quarter, Telenor paid a deposit of US $225 million of the requested licence renewal fee awaiting a hearing in the Islamabad High Court.
Continued growth in Bangladesh, good overall performance in Norway and positive results in Myanmar were not able to cushion the strong decline in Pakistan, where a combination of falling revenues, higher network costs and reversals last year led to a significant decrease in EBITDA. In addition, the decrease in high margin fixed legacy revenues and corporate project costs contributed negatively.
Free cash flow before M&A activities was Norwegian Krone (NOK) 2.8 billion, which is a decrease of NOK 1.9 billion compared to the last year. This was primarily due to the 2G license deposit of NOK 2.1 billion made in Pakistan. In the first three quarters of 2019, free cash flow was negative NOK 10.1 billion, with a decrease of NOK 42.2 billion. In addition to the DNA transaction and license deposit in Pakistan, CAT settlement payments in Thailand of NOK 2.6 billion as well as higher income tax and interest payments affected the group's cash generation negatively.
Organic subscription and traffic revenues decreased by 0.6%, as the decline in Pakistan following the re-introduction of telco specific taxes outweighed positive developments in other markets. On a reported basis, growth was 7% after the inclusion of Finnish telecom operator in the group's consolidated figures.
The report maintained that subscription and traffic revenues decreased by 1% on an organic basis. In a challenging market environment, revenues in Pakistan declined significantly offsetting growth in several other markets. Total reported revenues increased by 7 percent to NOK 29.5 billion.
Currency adjusted gross profit excluding Finnish telecom operator (DNA) declined by NOK 0.8 billion, impacted by the revenue drop in Pakistan and reversals last year. Reported gross profit increased by NOK 0.6 billion. Currency adjusted opex increased by NOK 0.6 billion, but was stable excluding DNA and project costs related to the DNA acquisition and the Axiata merger discussions. Reported opex increased by NOK 0.9 billion or 10%. EBITDA decreased by 7% or NOK 0.9 billion on an organic basis, primarily as a consequence of the development in Pakistan. Reported EBITDA before other items was NOK 12.1 billion with an EBITDA margin of 41%.
"Based on the performance so far this year and our expectations for the fourth quarter, we maintain our outlook for 2019. Execution on our strategic agenda remains our focus and key driver for value creation going forward," said Sigve Brekke, President and CEO, Telenor Group.
The company stated that the performance in the third quarter reflects continued strong execution on its strategy, focusing on growth, efficiency and simplification. Overall, the group delivers an almost flat organic subscription and traffic revenue growth and organic EBITDA decline of 2%, when adjusting for project costs this quarter and non-recurring items last year. Its cost base remained stable, excluding DNA and project costs. The statement mainlined the modernization in Norway is progressing according to plan, and it see a 3% mobile subscription and traffic revenue growth combined with a 5% reduction in operating expenses this quarter. In Thailand and Myanmar, the momentum seen earlier in 2019 continued and both operations have now returned to positive subscription and traffic revenue growth. However, headwinds in Pakistan as a result of the telecom tax re-introduction and a difficult macroeconomic environment have made the situation locally challenging.
During the quarter we have successfully concluded the acquisition of DNA in Finland. The mandatory tender offer period ended on 10 October and resulted in an ownership share of 97.96 percent.