Financial review in 2017

Financial Key Performance Indicators (KPIs)

We use the following financial and operational KPIs to track Orange Polska’s performance.

Revenue evolution improves following rebound in fixed broadband

Revenue totalled PLN 11,381 million in 2017 and was down PLN 157 million (or -1.4%) year-on-year. However, the rate of decline was lower than in 2016 (-2.4%).

Revenue erosion was almost evenly distributed between fixed line and mobile segments, whereas other revenues grew substantially.

There was a considerable improvement in the trend of fixed services revenues. Erosion was contained at 3.2% compared to 7.5% in 2016, despite a continued slump of about 13% in traditional voice revenues, which were affected by negative structural factors. Fixed broadband revenues improved greatly with growth of 4.5% in 2017 compared to a decline of about 4% in 2016. This was driven by rapid expansion of the customer base, which increased almost 11%. A considerably lower decline was reported in wholesale revenues, which were positively affected by an increase in traffic terminating on a fixed network.

The declining trend in mobile revenues can be attributed to the implementation of our value-driven commercial strategy. Our focus on value and convergence was reflected in a radical reduction in handset subsidies, which resulted in a considerable rise in unit sales prices accompanied by a decline in sales volume and, consequently, a significant increase in the share of SIM-only transactions. This strategy led to an improvement in EBITDA, but had a negative impact on both mobile equipment sales and ARPU.

Blended mobile ARPU amounted to PLN 29.8 in 2017 and was up 5.3% (year-on-year). The increase was driven exclusively by a major improvement in pre-paid ARPU. This improvement, however, resulted not from fundamental factors, but from a huge decline in the number of SIM cards sold following the registration obligation. In the post-paid segment, ARPU erosion continued at a double-digit pace.

The post-paid ARPU decline in 2017 can be attributed to the following factors:

• growing take-up of SIM-only offers;
• focus on installment sales in customer acquisition, while reducing sales of traditional subsidised offers (in the installment scheme, a portion of revenue corresponding to the handset is reported as revenue from equipment sales rather than revenue from services, which is the basis for ARPU calculation);
• discounts granted to customers subscribing to convergent services;
• popularity of family offers, in which customers get several SIM cards;
• substantial decrease in mobile broadband ARPU, resulting from much lower take-up of this service;
• price competition.

Other revenues jumped by 35% year-on-year, driven among other factors by a rise in sales of ICT equipment, higher sales of wireless broadband equipment and the consolidation of almost 4 months’ results from new acquisition Multimedia Polska Energia.

Evolution of adjusted EBITDA proves substantial progress towards stabilisation and return to growth

Total operating costs (determined as EBITDA less revenues) remained flat year-on-year. As a result, revenue erosion fully filtered through to adjusted EBITDA, which was down 4.8%. However, adjusted EBITDA erosion was significantly lower than in 2016, when it exceeded 10%. Adjusted EBITDA margin decreased by 0.9 percentage points year-on-year and stood at 26.5%.

This cost evolution can be attributed mainly to the following factors:

• A decrease of over 10% in commercial expenses, resulting mainly from much lower volume of customer acquisition and retention transactions bundled with handsets as well as optimisation of the distribution channel mix and significant savings in advertising and promotion costs;
• An increase of over 18% in interconnect costs due to growth in retail and wholesale traffic, owing to a higher customer base and much higher usage per customer (particularly resulting from a massive increase in traffic following the introduction of free roaming within the EU);
• An increase of 3.3% (year-on-year) in labour costs (adjusted for the effect of revision related to the new Social Agreement). However, the increase resulted exclusively from recognition of low labour costs in 2016 following renegotiation of retirement bonuses (PLN 94 million). Excluding this one-off factor, labour costs decreased by more than 2%, mainly owing to workforce optimisation;
• A decrease of approximately 3% in network and IT expenses, resulting from savings in energy consumption, network maintenance and installation costs.

The margin decline was greatly affected by negative structural trends in high-margin traditional fixed line services (mainly fixed line voice services); the decrease in these services was almost entirely reflected in profit erosion. However, the implementation of our convergence strategy and the rollout of the fibre network significantly improved broadband margins.

Bottom line impacted by provisions related to the new Social Agreement

The net loss for 2017 stood at PLN -60 million and resulted from the PLN 204 million impact of the Social Agreement for the years 2018–2019 and the final settlement of the Social Agreement for the years 2016–2017. The bottom line benefited from lower depreciation (down PLN 153 million as a result of extension of useful life of certain fixed assets and PLN 55 million lower net financial costs (mainly owing to stronger PLN vs EUR impacting discount expense).

Capex reflects investments in connectivity and optimisations

The Group’s adjusted capital expenditures in 2017 amounted to PLN 1,933 million and were broadly flat year-on-year. Capex related to fibre network deployment increased almost 30% and was the only growing category.

Organic cash flow reflects lower EBITDA and working capital requirement

Adjusted organic cash flow for 2017 came in at PLN 111 million, down from PLN 620 million in 2016. This year-on-year decrease stemmed from lower EBITDA and much higher year- on-year working capital requirements (PLN 381 million). The latter was mainly a consequence of handset inventory restocking, lower year-on-year positive effect of reverse factoring transactions and different timing of settlements with one of our carrier customers.

Leverage ratio at 2.2x

Our net debt in 2017 decreased by around PLN 0.3 billion, to PLN 6.5 billion mainly due to organic cash flow of PLN 0.1 billion combined with investments grants received related to POPC programme of PLN 0.3 billion. At the same time PLN 31 million was spent on the acquisition of Multimedia Polska Energia. Despite lower debt the leverage ratio was a bit higher, at 2.2x compared to 2.1x at the end of 2016, due to the drop in adjusted EBITDA. Our debt was fully hedged against currency movements and we increased the share of debt based on a fixed interest rate, to 78% from 69% at the end of 2016, as we anticipate higher interest rates in the future.

Management proposes no dividend payout in 2018

As we prioritise investments in long-term value creation, and taking into account potential payment of the EC fine, the management will recommend not paying any dividend in 2018 (in line with the statement during our September 2017 strategy presentation).