Convergent network

Customers want fast, reliable and safe broadband access, and from their point of view the technology by which the service is delivered is less important. It is our strongly-held opinion that fulfilling customer needs requires first-class connectivity in both mobile and fixed. Mobile alone will not be sufficient. Fast fixed broadband is necessary to address the data demands of streaming services and heavier and heavier traffic, and at the same time to provide a desirable customer experience on the mobile network. In addition, a substantial part of our operations is dedicated to serving business customers who specifically cannot rely on mobile technology alone.

Fixed – from legacy to future proof fibre

In 2015 we made a strategic decision to invest on a large scale in the deployment of a fibre to the home (FTTH) network. It is structurally improving our competitive position and gives us leverage to win back market share in densly populated areas. It should also be an important lever for our convergent strategy and one of the key enablers of our turnaround ambition.

We have completed 3 years of investments, bringing 2.5 million households within the range of the service at the end of 2017. This put us more or less exactly in the middle of our investment cycle. Our ambition is to cover more than 5 million households by the end of 2020. That number would cover the vast majority of households in big cities and also a significant proportion of smaller cities. It also includes around 370,000 households in more rural areas, where fibre access is covered by the government POPC programme subsidised by EU funds.

The strategy of FTTH network rollout provides not only for the construction of our own infrastructure but also for wholesale agreements with other fibre network operators, where it is technically possible and economically viable. At the end of 2017 our network coverage included around 200,000 households via the infrastructure of other operators.

In 2017, we accelerated our fibre deployment. We covered around 1 million additional households, which was considerably more than in 2016. We plan to maintain this pace in 2018. This year’s plan assumes more focus on smaller cities and also on single family houses as opposed to multi-family residences. Currently small cities constitute around 15% of total coverage while single family houses constitute less than 1%. On one hand, single family houses carry a much higher construction cost; on the other hand, we expect much higher demand for our services owing to much lower competition. This expectation is based on our experience so far. In part, we plan to invest in single family houses through wholesale agreements with small local FTTH operators which will be cost efficient.

We will also explore opportunities to better monetise our fibre investment by granting wholesale access to other operators. In December 2017 we signed a letter of intent with T-Mobile for such access.

We closely monitor our fibre network rollout with respect to monetisation: the number of customers and the value they bring. This depends mainly on a level of competition and our sales effectiveness. Investment in fibre is by nature long term, but in our view this is future proof technology, the parameters of which may be easily upgraded if needed.

Mobile – more spectrum on LTE

Our strategic position in the mobile market improved significantly following the 800MHz and 2600MHz spectrum auction that finished in October 2015. Although very expensive, the purchase of two blocks of 800MHz was absolutely necessary for us to be able to offer a competitive service and compete countrywide. The surge in demand for LTE traffic (180% year-on-year growth in 2017) confirms that. By the end of 2017 our 4G/LTE mobile network reached almost the entire Polish population on an outdoor basis and 96% indoors. To accommodate robust growth of demand for LTE traffic, in 2018 we will focus on refarming of the spectrum to allocate more for this technology and decrease the allocation for both 2G and 3G. This will allow us to use spectrum in a much more efficient manner and improve the customer experience.

We will also analyse other options to increase spectrum use efficiency, potentially including reshuffling. To strengthen network capacity we continue to pursue spectrum aggregation. Almost 40% out of over 10,000 LTE sites enabled carrier aggregation at the end of 2017 and we plan further substantial progress on that in 2018.

We define ‘convergence’ as delivering a package of both mobile and fixed services, which fulfils the needs of an average household. In our view there is a significant potential for convergence in Poland as the vast majority of households still pay their media and telecom bills to different operators. Consolidation of these bills comes with both convenience and a financial benefit. We know from the example of some European markets (Spain or France) that convergence can be a winning commercial formula. In line with our value and focus approach we made convergence our flagship product for Polish households. At the same time we limited advertising of our mobile only or fixed only offers.

Convergence gives us the following key benefits:

• It constitutes our competitive edge, a key market differentiator. On one hand, cable operators do not offer mobile services on any meaningful scale. On the other hand, our mobile competitors do not invest in fixed access networks.
• It is a good customer loyalty tool. Convergent customers tend to churn a lot less than non-convergent customers.
• It allows us to upsell more services, winning a higher share of household media and telecom budgets.

Orange Love – a new convergent formula

We have pursued a convergent strategy for a few years now. However at the start of 2017 we changed the formula. The previous formula, which we called Orange Open, we based on a pick-and-mix concept. Customers could get a discount on the price of any additional service purchased from us. With market development this concept largely lost its competitive edge. In February 2017 we replaced it with the Orange Love offer: a predefined set of fixed and mobile services bundled together and sold at an attractive fixed price. The basic package can be extended with extra fees for additional SIM cards, higher fibre broadband speed and additional TV content. On top of that we offer a wide range of smartphones at attractive prices. Importantly, Orange Love is available on any broadband technology (fibre and copper) and also on LTE positioned as home broadband. This allows us to market this offer all over the country, which is very efficient.

TV content – an important success factor

An important factor in the success of our convergent strategy is the quality of TV content, which is very important for Polish consumers when choosing a service provider. In 2016 we changed the way we source our TV content both on IPTV and satellite technology. It allowed us to be more flexible in the way we shape our offer and price it. In 2017 we became the first operator in Poland to launch a decoder that allows customers to watch 4K Ultra HD TV. Our TV offer has only recently become fully competitive versus cable operators, which allows us to successfully build perception of Orange as a reliable content provider. We intend to remain a content reseller: our strategy does not foresee any investments in exclusive content.

Building positive customer experiences

The customer is at the centre of everything we do. Therefore, we focus on building positive customer experiences as well as developing strong, long-term relationships with our customers, using modern digital channels.

From product portfolio development and process planning to the right mix of contact channels, we unite all our employees around the common goal of providing Orange customers with a unique experience.

For several years we have been assessing our customers’ experiences with the NPS (Net Promoter Score) performance indicator, which is a measure of the loyalty of our customers and the quality of our relationships with them. Our strategic goal is to become the most frequently recommended telecom operator in Poland by 2020. At the end of 2017, we achieved the number two position among telecom operators in the NPS ranking (moving four places up the rankings since 2013), which vindicates our intensive focus on customers and their needs and expectations.

Approach driven by customer journeys

In 2017, we implemented an approach driven by customer journeys – part of a process to transform the entire organisation towards a better understanding of its impact on the customer experience. It is based on a customer journey map, which is the starting point for developing customer excellence.

Customer journey mapping has been the key element in our customer care analysis and a catalyst for changes within Orange Polska. These changes aim to streamline customer care processes and improve the experience of our customers, who in turn recommend our services to others, contributing to the take-up of our services.

In 2017, we implemented a number of solutions which improved customer satisfaction and minimised effort through simplification, automation and digitisation. These included:

• System for self-replacement of SIM cards (unique in Europe): after buying a starter kit, customers can themselves replace their SIM card with one suitable for their handset in a few minutes.
• Implementation of a new policy for using Orange roaming services within the European Union; we were also the first on the market to provide customers with a customised SMS tool which informs them about their limits for calls, SMSs, MMSs and data transfer, facilitating package and cost management.
• New, enhanced architecture of the orange.pl portal: simplified structure and new content make it easier for customers to find the information they seek. Remote restart of broadband modems, reducing both the Customer Effort Score and the number of contacts with Orange.
• Single invoice for customers using the Orange Love bundle of mobile and fixed line services, simplifying settlements and payments.
• OK SENIOR Certificate: Orange was the first telecom provider in Poland to obtain this certificate. It confirms the high quality of our customer service dedicated to senior citizens, which addresses the actual needs of elderly people, protects them against fraud and is friendly, understandable and easy to access.
• Automation of customer care processes, reducing the time to complete and eliminating errors in business operations. This type of automation is the prevailing trend among leading companies worldwide and we are one of its pioneers in Poland.

Improved customer experience, thanks to involvement of the entire organisation

Our entire organisation, from line employees to the Management Board, has been involved in reinforcing our customer- -centric culture.

On a monthly basis, the Management Board Members and Executive Directors review survey results, identifying the issues which affect customer satisfaction and determining what actions are necessary. Such review meetings are attended by special guests: customers who tell us about their experience with Orange. The key managers reporting to the Management Board monitor the effectiveness of the remedies we implement on a weekly basis.

All managers regularly call customers who expressed their discontent in satisfaction surveys in order to learn firsthand about the problems, so these can be solved in the best way possible.

Each quarter, numerous support function employees and managers spend at least one day on the frontline, observing and assisting in customer care. Such experiences enhance the understanding of the customer perspective across the company.

Furthermore, each employee can get involved in improving the customer experience by participating in “Listen & Respond” clubs, which operate according to continuous improvement methodology. A total of 150 such clubs were active in 2017.

Digitalisation: An increasingly important trend for our customers

Digital transformation plays an increasing role in all spheres of our customers’ lives, and this is also the direction in which we are developing. In Poland today, more than half the population uses social media, 34% shop online and more than 50% use internet banking services. Solutions such as app-only services (without a web interface), mobile shopping experiences or customer care via an in-app chat or bots are increasingly widespread. Digital services aim to serve a customer at the moment the need arises, giving them freedom to choose, change, or cancel the service. And by enabling highly personalised offers, digital services create a totally new level of company-customer interaction. Adoption of this trend is strongest among the younger generation: they are early adopters of digital solutions, who actively engage with the brands they love, but also have high service expectations. At the same time, the digital world is seamlessly integrating with the traditional/offline world; the trend is towards an omni-channel approach, where online empowers offline with the ROPO effect (“research online, purchase offline”) and vice versa.

Facing very high competition, ongoing pressure on our top line and the still significant burden of our legacy, our strategy puts a lot of emphasis on improving our efficiency on the cost and capital expenditures side. This area has been given new emphasis with the Orange.one strategy, which puts particular focus on value in all aspects of our activities. Our ambition is to be an agile company, digital and flexible, with a strong online presence and highly automated processes, as well as a proven ability to cut costs and find efficiency savings.

Direct profitability to benefit from value focus

With Orange.one we redefined our commercial approach. It is now much more balanced between volume and value. Orange Love convergent offers allow us to distinguish ourselves from the competition and reach our commercial goals more efficiently. We significantly reduced handset subsidies and optimised our distribution channel mix, which is allowing us to improve direct profitability. To facilitate higher value generation we have simplified and aligned our commercial offers, both convergent and mono, around a ‘more for more’ approach, cutting down on value-dilutive offers and introducing charges for every additional service. Such a strategy assumes that the level of market competition remains high with some tendencies towards recovery.

Transformation of processes

Our business model is a chain of interconnected processes that allow us to render our services. These processes are usually complex which is partly attributed to the incumbent operator status of Orange Polska. Within the framework of Orange.one implementation we have introduced a comprehensive transformation programme to simplify, and where possible to automate and digitise these processes. As an outcome, we expect savings in operating costs and capital expenditures.

Two examples out of many:

• Automation of service delivery and problem ticketing system for fibre
• Integrated IT platform for sales and customer care, which will allow for much faster customer service for all our products

Ongoing indirect cost optimisations with clear target to reach

We have been optimising our indirect operating costs for many years, generating hundreds of millions in savings every year. We plan to continue this in the years ahead. The savings will come from the above-mentioned process improvements, which are supposed to free resources, as well as from volume optimisations and simplification. We will be more focused and more selective in resource consumption. We plan to tackle all cost categories presented in the chart below. As one of Orange.one financial ambitions we committed to a 12-15% reduction of this cost pool (which amounts to around PLN 4 billion) between 2016 and 2020. This figure is net of potential increases related to inflation, pressure on labour costs and costs related to new business development.

The largest cost category, and at the same time the most important source of savings, is labour. Over the past five years (2012-2017) we have optimised our employment by around a third and we aim to continue. The scale of reductions is always negotiated with our social partners (there are 17 trade unions at Orange Polska). The new social plan, signed in December 2017 and covering the years 2018-2019, constitutes an acceleration of employment optimisation. According to the plan up to 2,680 employees may opt for voluntary departures in these two years, which constitutes 18% of the total workforce at the end of 2017.

In Orange Polska, we have been successfully implementing a policy of corporate business responsibility in all areas of our business for several years now. Our CSR strategy accounts for the company’s business objectives and fits into their implementation. The conclusions from a dialogue with stakeholders as well as market trends and social challenges for our industry in Poland and abroad have been key elements in its development. For us, social responsibility means an organizational culture which takes account of the expectations of employees and other stakeholder groups – customers, investors, suppliers, business and social partners as well as the environment – in creating and implementing our business strategy. We believe that such an approach generates benefits for the company and its environment, leads to long-term development and contributes to the improvement of everyone’s lives. Therefore, in Orange Polska we have created a social responsibility strategy which focuses on five areas which are of key importance from the point of view of our sector and our operations on the Polish market. In 2016 we launched the new CSR strategy for 2016-2020 A strong foundation of this strategy is responsible management – our values, ethics and compliance and our dialogue with stakeholders as a tool for understanding their expectations. On this foundation are based four pillars of our CSR strategy:

• Digital inclusion - for everyone, regardless of their skills, residence, age or ability, to be able to make use of the opportunities offered by the digital world
• Safe network - for the use of the latest technologies to be easy and risk-free
• Clean environment - to pursue our business objectives with respect for ecological principles and in harmony with the environment
• Enquiring team - to create a culture of co-operation, in which all employees feel respected and can freely pursue their professional goals and life passions.

Responsible management and actions within these four pillars account for our social impact, which is analysed in 6 areas: economy, innovations, customers, environment, communities and employees.

Human rights

Owing to the nature of our business model and supply chain, we follow the human rights policy formulated at the international level by the Orange Group. In addition to the general framework of the International Labour Organization conventions, the Universal Declaration of Human Rights and the Global Impact principles, Orange Group complies with the UN Guiding Principles on Business and Human Rights adopted in 2011.

The Group’s activities with respect to safeguarding fundamental human rights focus on three main areas:

• Relations with employees;
• Relations with suppliers;
• Privacy and freedom of expression.

These areas are all addressed in the Orange Polska Code of Ethics. We respect all people and their right to privacy. We accept diversity in terms of background, race, gender, culture, age and marital status as well as religious beliefs, political views and membership of social or professional organizations.

We are currently working on the human rights policy for Orange Polska. Human rights are also an element of a dialogue with our stakeholders. We discussed the issue of equal opportunities regardless of age, gender or ability during our debate on diversity and gender equality. Rights related to privacy and data protection are covered by our customer safety policy.

Key financial goal: return to sustainable growth of revenues and profits

Our financial results have been in continuous decline for a number of years. This is chiefly related to the following factors:

• The necessity to adjust to a very high level of competition, mainly in mobile services, in order to defend market shares;
• Very high exposure to fixed line telephony which is being effectively substituted by affordable mobile services;
• Regulatory regime limiting flexibility in terms of shaping commercial offers;
• Weak fixed broadband infrastructure, mainly in big cities, which resulted in the loss of market to cable operators.

Proper implementation of the Orange.one strategy will lead to the development of a business model which will enable us to break this negative trend and gradually return to growth. Our ambition is to stabilise EBITDA in 2018, stabilise revenues in 2019 and grow both in 2020 in a sustainable way. The expected stabilisation of adjusted EBITDA in 2018 will be the first period of non-decline in 9 years.

Sales revenues stabilisation in 2019 and growth afterwards will be driven by the following factors: significant growth of convergent customer base and convergent services, more focus on value generation, successful development in adjacent business areas (ICT, Orange Energy, Orange Finance, Orange Smart Care, sales of equipment) and a diminishing share of legacy services in total revenues.

The improving revenue trend will contribute to an improvement in the EBITDA trend, which will also be driven by operating leverage and continued cost optimisation. We forecast a reduction of underlying indirect costs by 12–15% by 2020 versus 2016. Savings will be generated across all cost groups, including labour, outsourcing, general & administrative, energy and network maintenance costs. They will result largely from the comprehensive transformation of Orange Polska’s processes at each stage of our business model: networks, products and services, distribution and customer care. The process transformation will aim at simplification, automation and digitisation.

Projected capex reflects our connectivity programme and business transformation needs. Our capex ambition is to spend at least PLN 2 billion annually by 2020, including around PLN 2.8 billion on fibre network deployment in 2018– 2020 to cover more than 5 million households by the end of 2020.