Financial review in 2020

Possible thanks to basic telecommunications services as well as IT and integration services

In 2018, we changed the layout of our revenue reporting. The new layout better reflects our commercial strategy, which is focused on convergent offer sales. Consequently, we now report convergent revenues separately from revenues from mobile-only and fixed-only services (i.e. sales to non-convergent customers).

Revenues totalled PLN 11,508 million in 2020, up PLN 102 million or 0.9% year-on-year.

Convergence remains a strategic drive for revenue growth, but there was also a major trend improvement in mobile-only and fixed broadband-only revenues. Mobile-only revenues decreased by only 1.6% year-on-year compared to a 4.7% decline in 2019. This significant improvement was achieved despite a slump by about 40% in international roaming revenues due to the COVID-19 pandemic and resulted from growing customer base and improvement in ARPO trend, mainly as a result of price increases in 2019. Fixed broadband-only revenues were almost flat compared to a 7% decline in 2019. The improvement was driven by an increase in ARPO, following its earlier decline, mainly an outcome of price increases, as well as a significantly growing share of fibre customers, who generate the highest ARPO. As a result, combined revenues of these two categories and convergence (comprising the set of core telecommunication services) were up 2.9%, that is more than double the growth rate in 2019 (1.4%).

ARPO from convergent customers accelerated its growth rate to 3.2% year-on-year to PLN 105.7. This was largely due to our value strategy, increasing share of fibre and TV services, and upsell of additional services.

Blended ARPO (from mobile-only services) amounted to PLN 19.6 in 2020 and was down 2.5% year-on-year. The decrease resulted from a combination of a 4% decline in post-paid ARPO and a 3% increase in pre-paid ARPO.

The post-paid ARPO decline continued to slow down. In 2020 it was 4% versus almost 6% in 2019. The trend improved despite a major negative impact of the drop in international roaming revenues. Excluding roaming, the post-paid ARPO decline was only 0.6%. The improvement resulted from the following factors:

• Focus on value and related price increases (in line with our ‘more for more’ strategy) in both the consumer market (introduced in May 2019) and the business market (introduced to SOHO customers in November 2018 and February 2020);
• Lower penetration of mobile broadband in the mobile customer base; as a result, post-paid ARPO is less affected by substantial declines in mobile broadband ARPO (reflecting much lower take-up of this service).

Revenues from IT and integration services maintained their high growth rate (24% year-on-year), owing to a combination of robust organic growth as well as the consolidation of BlueSoft acquired in 2019 and, to a minor extent, Craftware acquired in December 2020. A major factor supporting organic growth was the execution in the first half of 2020 of a contract with the Polish Post for the delivery of tablets for postmen and provision of accompanying services. Revenue evolution in 2020 was also influenced by the following factors:

• A further structural decline in fixed voice telephony legacy revenues (by 13% year-on-year);
• A 13% decrease in equipment sales reflecting temporary closure of a considerable part of distribution network and a drop in customer purchases due to the COVID-19 pandemic;
• A 6% increase in wholesale revenues, resulting mainly from much higher mobile traffic owing to the impact of the pandemic;
• A 14% decrease in other revenues due to a change in business terms of energy resale versus 2019.

In 2020 EBITDAaL (EBITDA after Leases) increased up 2.9% year-on-year, driven by strong performance of core telecom services and exceptional efforts on cost savings

In 2020, total operating costs (defined as EBITDAaL less revenues) increased, yet less than revenues. As a result, EBITDAaL was up 2.9% (or PLN 79 million) year-on-year. Operating margin (ratio of EBITDAaL to revenues) increased by 0.5 pp to 24.3%. Profitability was positively influenced by improvements in key telecommunication services and last year’s price increases. EBITDAaL was significantly affected by developments related to the COVID-19 pandemic. Taking measures to mitigate its negative impact, Orange Polska introduced changes regarding jubilee awards for long service. This enabled us to reverse PLN 64 million of balance-sheet provisions for employee benefits, which was directly reflected in our financial result. On the other hand, we recorded additional provisions, estimating the risk related to bad debts and non-performance of other contractual obligations.

Cost evolution can be attributed mainly to the following factors:

• A decrease of 5% in commercial expenses, resulting from a decline in handset sales as well as savings in advertising and marketing costs;
• A decrease of 9% year-on-year in labour costs, owing to release of provisions for jubilee awards and workforce optimisation related to the implementation of the new Social Agreement;
• An increase of 10% in network and IT costs due to a significant increase in the electricity unit price and the unit distribution fee; and
• An increase of 9% in interconnect expenses due to an exceptional increase in traffic during the peak of the pandemic.

Bottom line reflects much lower gains on real estate disposals and FX losses

Net income for 2020 was PLN 46 million versus PLN 82 million generated in 2019. Operating income was slightly lower year-on-year as growth of EBITDAaL was offset by much lower gains on sale of assets and slightly higher depreciation (due to our network investments). Financial costs were PLN 34 million higher year-on-year only due to foreign exchange losses mainly on EURO denominated long-term leasing liabilities.

At PLN 1.8bn, in line with the guided range

Group’s economic capital expenditures (starting from 2020, this measure includes accrued proceeds from asset disposals) in 2020 amounted to PLN 1,801 million and were higher by PLN 100 million year-on-year.

These included mainly the following:

• Roll-out of our fibre access network in the announced investment programme, which covered 0.8 million households in 2020. Including the lines developed in 2014 to 2019, there are now 5 million households connectable with our fibre network, available in a total of 154 cities (compared to 142 cities at the end of 2019);
• Investments to enhance the range of LTE services and the mobile network connectivity, expand the capacity and range of GSM/UMTS services, and adapt the mobile access network to the 4G technology requirements, particularly in the areas not covered by the mobile access network consolidation project (i.e. strategic or underinvested regions);
• Expansion of the mobile transport and core network in order to handle the growing volume of data transmission and ensure the service quality expected by customers;
• Implementation of transformation programmes;
• Investment projects related to the portfolio development and sales and customer service processes as well as the modernisation and enhancement of the IT technical infrastructure; and
• Proceeds from sale of assets lower by PLN 347 million year-on-year.

Reflects strong cash generation from operating activities and much lower proceeds from sale of assets

Organic cash flow for 2020 was PLN 642 million, which was PLN 95 million below the level generated in 2019. However excluding PLN 440 million lower cash proceeds from sale of assets (an outcome of on the one hand record high real estate sales in 2019 and on the other hand pandemic-related market slowdown in 2020) level of cash generated was PLN 345 million better than the year before. This was down to two main factors. Firstly, growth of EBITDAaL and higher working capital release (mainly as a result of lower growth of receivables related to equipment instalment sales) translated into PLN 147 million better year-on-year cash from operating activities. Secondly, capital expenditure cash outflows were PLN 262 million lower year-on-year and reflected some slowdown of investments introduced to offset more difficult property market due to the pandemic.

Our net financial debt in 2020 decreased by around PLN 538 million to PLN 6,087 million mainly due to strong cash generation. Our leverage ratio stood at 2.0x at the end of 2020, having strongly decreased over the previous 12 months. It reflects improving business fundamentals and balance sheet optimisation initiatives. Our debt was fully hedged against currency movements and we increased the share of debt based on a fixed interest rate, to 99% from 96% at the end of 2019. In January we’ve concluded an agreement to refinance 2.7 billion zloty of our debt. In consequence, our average cost of debt will fall to ~2.8% from Q2 of 2021.

Net Debt in PLNm

To be addressed in the strategy update

Successful completion of Orange.one strategy brings us closer to resumption of dividend payments. It is also management intention to reinstate dividends in the future, on permanent basis. There are two key conditions for that. Firstly, we need sustainable growth of EBITDAaL and organic cash flow. Sustainable means that it should be driven by revenues and not only by cost savings. Secondly, structure of our balance sheet needs to be safe. In this context, an important uncertainty is related to the costs of 5G technology rollout, including acquisition of spectrum licence. We will address dividend topic in the strategy update in June 2021.