Niefinansowy Raport Polsatu za rok 2017

2017 was yet another successful year for Cyfrowy Polsat Group during which we achieved our key business goals. We consistently pursued the adopted strategy of strengthening our position on the multiplay market by, among others, expanding our broadband access offer, as well as through new acquisitions. We also enriched the portfolio of the TV channels we offer, we acquired broadcasting rights to attractive sports events and we implemented the Roam Like at Home (RLAH) principle.

In 2017, the Group consistently continued to develop its telecommunication network based on the unique frequency blocks that we own, thanks to which the coverage footprint of our LTE broadband access service extended to nearly every Pole, while half of the population has been able to enjoy services provided in the LTE-Advanced technology offered by our network. We also continued refarming the spectrum owned by the Group as well bandwidth aggregation, thanks to which we are able to offer higher quality broadband Internet access to our customers, with data transfer rates of even up to 500 Mbps.

Last year we made the strategic decision to acquire a controlling stake in Netia, with the first stage of the transaction, consisting in the acquisition of ca. 32% of that company’s shares, having been completed in December 2017. The acquisition of a controlling stake in Netia fully complies with Cyfrowy Polsat Group’s strategy by assuring the provision of the most attractive products and services for homes as well as for residential and business clients using the best and the most advanced technologies. It is a potential merger of two complementary businesses and a natural step forward towards the development of Cyfrowy Polsat Group – a step which will enable the Group to offer new services to its existing and future customers, as well to add new elements to the package of multiplay services offered by the Group.

Thanks to the implementation of the EU regulation Roam Like at Home , since June 2017 our customers have been able to use our telecommunication services on identical terms as domestically without having to pay any extra charges on nearly the entire territory of Europe.

We are expanding the portfolio of our TV channels and we are acquiring broadcasting rights to attractive sports events

We are expanding the portfolio of our TV channels and we are acquiring broadcasting rights to attractive sports events

In 2017, the Group added new TV channels to its portfolio. The new channels include a general digital terrestrial TV channel, called Super Polsat, which broadcasts entertainment and news programs as well as movies, TV series and live sports coverage, and also the thematic channel Polsat Doku HD, whose offer includes a wide range of the best, premiere documentary productions on various topics from around the world dedicated to the entire family. In addition, by acquiring five music stations, namely Eska TV, Eska TV Extra, Eska Rock TV, Polo TV and VOX MUSIC TV, as well as by establishing cooperation with Fokus TV and Nowa TV, we strengthened the Group’s position in the segment of thematic channels whose importance has been continuously growing on the Polish TV market. Thanks to our established market position and solid vierwership results, the new channels have formed an attractive addition to our comprehensive programming offer.

One of the assumptions of our mission has constantly been to provide to our viewers the most attractive content and the best entertainment. Bearing this in mind, we have decided to make a strategic investment in exclusive broadcasting rights to over 1000 UEFA Champions League and UEFA Europe League matches over the next three years (from 2018 to 2021) in all distribution channels, including TV, the Internet and mobile devices. TV Polsat Group’s channels will broadcast the first Champions League matches already in September of 2018.

What is more, by virtue of the agreement signed with FIVB, during the coming 7 years TV Polsat channels will be broadcasting major international volleyball events.

Thanks to the investments in attractive content as well as strict cost control we have been able to maintain a strong position on the Polish TV broadcasting and production market. We estimate that in 2017 we acquired a 27.2% share in the Polish TV advertising market worth approximately PLN 4.1 billion. POLSAT, the Group’s main channel, acquired a 12.3% audience share, while our thematic channels had a 12.1% audience share.

We systematically develop our multiplay offer for homes and businesses

In 2017, we consistently developed our offer of multiplay services. We promote the smartDOM and smartFIRMA unique savings programs which enable our customers to create favorable combinations of state-of-the-art services for homes and businesses. Our offer of integrated services relies on a simple and flexible mechanism – it is enough to have only one service to be able to obtain attractive discounts for the entire duration of a contract by buying further products from us. Our customers can flexibly combine such products as satellite TV, LTE broadband access, telephone services, banking and insurance services, electricity and gas supply, home security services or the purchase of electronic equipment, obtaining savings on each service they add.

THE GROUP’S OPERATING PERFORMANCE

The consistent pursuit of our strategic assumptions during the year 2017 has been reflected in very good operating results of both of our business segments.

Stable contract customer base

In accordance with our strategic assumptions, we focus on strengthening the loyalty of our customers, in particular by offering an extensive portfolio of integrated services as well as by building the ARPU of our contract customers. We have a stable base of contract customers which numbered around 5.8 million at the end of 2017.

Stable growth of contract services

At the end of 2017 contract services accounted for a vast majority (83%) of the services we offer. Their number increased by 3.2% yoy and reached 13.7 million. We observed growth of the number of all services provided in the contract model: pay TV – by 3.7% yoy, to 4.9 million, mobile telephony – by 3% yoy, to 6.9 million, broadband Internet access – by 3% yoy, to 1.8 million. In 2017, growth in this segment was significantly driven by the growing popularity of the Multiroom service, the dynamically growing sale of paid OTT services as well as the effective implementation of the upselling strategy which was reflected in the rapidly growing base of mobile telephony users.

At the end of 2017 we provided a total of over 16.5 million services (RGUs) in both, contract and prepaid models.

Success of our multiplay strategy

We strive to maximize average revenue per contract customer by upselling products and services to the combined customer base of Cyfrowy Polsat and Polkomtel, among others as part of the smartDOM loyalty scheme. Our integrated services offer enjoys constant interest and continues to record very good sales results, which has a positive influence on the level of RGU per customer, ARPU of our contract customers as well as the churn ratio. At the end of 2017 our integrated offer was used by over 1.5 million customers who had over 4.5 million services (RGUs). This meant that as many as 26% of our contract customers had chosen our integrated services offer.

The success of our multiplay strategy translated into stable ARPU in the contract segment, in spite of the substantial adverse impact of the implemented Roam Like at Home regulation, as well as into systematically growing loyalty of our customers.

In the year 2017 the average revenue per contract customer of our Group was at the level of PLN 89.0, demonstrating slight growth year-on-year. The high level of subscriber satisfaction with the provided services was in turn reflected by the low churn ratio. In 2017, we recorded churn at the level of a mere 8.8% annually, which is one of the best results in the industry.

Changes on the prepaid market

During 2017 the Polish prepaid mobile services market remained under the pressure of external regulations. The reduction of our prepaid base by 15.3% was above all associated with the statutory obligation to register new prepaid SIM cards, which came into effect in July 2016. The regulation led to a market-wide significant drop in new activations and also forced mobile operators to deactivate in February 2017, those SIM cards which had not been correctly registered by that time. Concurrently, as a result of this regulation, prepaid ARPU increased in 2017 by 7% yoy and reached PLN 19.9, which was the outcome of cleansing the prepaid SIM base of cards which were characterized by short-term usage only, thus consequently by low ARPU.

FINANCIAL RESULTS OF POLSAT GROUP

We have increased revenue ….

In 2017, our total revenue increased by 1% Y-o-Y and reached PLN 9.8 billion as a result of growing revenue from the sale equipment, growth of wholesale revenue as well as growth of other revenue, which was partly offset by lower retail revenue.

Y-o-Y growth of 24% of revenue from the sale of equipment was mainly the outcome of higher revenue from installment plan sales of telecommunication equipment to our customers. The 3% growth Y-o-Y of our wholesale revenue in 2017 was driven primiarily by higher revenue from interconnection services as well as from advertising and sponsorship, generated on our thematic channels and main TV channel. Other revenue increased by 91% in connection with, among others, growing revenue from interest on installment plan sales of equipment to our customers.

The positive influence of the above factors was partly offset by a 4% decline of retail revenue from individual and business customers. This decline was mainly caused by lower revenue from voice services, which resulted from the full implementation of the Roam Like at Home regulation, change of the model of offering equipment to retail customers, as well as a lower number of prepaid activations, connected with mandatory SIM card registration. The decrease in retail revenue was partially compensated by higher revenue from pay TV and higher revenue from mobile Internet access services.

…we keep operating expenses under control

In 2017, our operating expenses, excluding depreciation, amortization, impairment and liquidation, amounted to PLN 6.2 billion and remained under the pressure of higher technical costs and interconnection costs, higher distribution, marketing and customer retention costs as well as higher costs of content.

Growth of technical and IC costs by 4% Y-o-Y was the effect of the increase in interconnection costs realted to the growing popularity of tariffs offering unlimited connections to other telecommunication networks, as well as due the higher costs related to the wholesale purchase of traffic in international roaming (effect of the Roam Like at Home regulation). Concurrently, the factor negatively influencing the growth dynamics of this cost category was the elimination on consolidation of the costs of wholesale purchase of data traffic within our broadband Internet access service in connection with the acquisition of Aero2 Group on February 29, 2016.

Distribution, marketing, customer relation management and retention costs increased by 8% Y-o-Y, among others due to the intensification of marketing campaigns and the recognition of higher costs of distribution, as well as higher costs of customer service and retention, associated, among others, with an increase in per hour rates resulting from an upward pressure on wages on the Polish labor market.

The growth of content costs by 4% Y-o-Y was mainly driven by higher costs of programming licenses and in-house productions, which was associated, respectively, with the growing popularity of “premium” type packages among our pay TV customers and the expansion of our programming offer. The growth was partly offset by lower costs of sports licenses which included, in 2016, costs of broadcasting licenses for the 2016 UEFA European Championship in football.

…leading to high and stable EBITDA

Thanks to stable revenues and cost control, our EBITDA result for 2017 remained stable and amounted to slightly over PLN 3.6 billion. It is worth stressing that in 2017 we managed to maintain our EBITDA at a stable level in spite of certain unfavorable factors – the negative impact of the Roam Like at Home regulation on the one hand, and on the other the effect of a high base in the comparative period, associated with the positive one-off event, i.e. the UEFA EURO 2016 tournament which we broadcasted.

Liquidity and capital resources

In 2017, we generated a strong stream of cash flows at the level of nearly PLN 1.7 billion.

Our net debt at the end of 2017 amounted to ca. PLN 10.5 billion, as compared to ca. PLN 11.1 billion at the end of 2016 and was fully denominated in Polish zloty. The ratio of net debt to EBITDA decreased to 2.91x at the end of 2017, as compared to 3.06x at the end of 2016.

We maintain cash to fund the day-to-day requirements of our business. Our objective is to ensure cost-efficient access to various financing sources, including bank loans, bonds and other borrowings.

We believe that our cash balance and cash generated from our current operations, as well as funds available under our revolving facilities should be sufficient to finance the future cash needs related to our operational activity, development of our services, service of our debt as well as for realization of a majority of investment plans in the field of the Group’s activity.