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ANNUAL REPORT 2017 LIFE IS FOR SHARING. CONTENT FINANCIAL HIGHLIGHTS OPERATIONAL STATISTICS INTRODUCTION CORPORATE PROFILE INVESTOR INFORMATION MANAGEMENT BOARD SUPERVISORY BOARD CORPORATE GOVERNANCE CODE COMPLIANCE STATEMENT ECONOMIC ENVIRONMENT ECONOMIC BACKGROUND CROATIAN MARKET OVERVIEW REGULATORY OVERVIEW CHANGES IN REPORTING SUMMARY OF KEY FINANCIAL INDICATORS BUSINESS REVIEW MOBILE TELECOMMUNICATIONS FIXED TELECOMMUNICATIONS FIXED LINE BROADBAND TV WHOLESALE SYSTEM SOLUTIONS ENERGY DEVELOPMENT OF THE FINANCIALS REVENUE OPERATING EXPENSES PROFITABILITY FINANCIAL POSITION CAPITAL EXPENDITURE CRNOGORSKI TELEKOM STANDALONE FINANCIAL AND NON FINANCIAL HIGHLIGHTS OVERVIEW OF SEGMENT PROFITABILITY HT INC. FINANCIAL HIGHLIGHTS CORPORATE RESPONSIBILITY HT GROUP FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET CONSOLIDATED CASH FLOW CONSOLIDATED EBITDA RECONCILIATION 3 FINANCIAL HIGHLIGHTS 2017 2017 % of change % of change Income statement in HRK million 2016 with CT wo CT A17 with CT/A16 A17 wo CT/A16 Revenue 6,984 7,756 7,125 11.0% 2.0% Mobile 2,821 3,305 2,988 17.2% 5.9% Fixed voice 953 927 843 -2.8% -11.5% Broadband & TV 1,315 1,439 1,318 9.4% 0.3% Fixed wholesale 365 369 347 1.0% -4.9% Other fixed 742 835 779 12.5% 4.9% System solutions 677 731 698 8.0% 3.2% Miscellaneous 112 151 151 34.7% 34.7% EBITDA before exceptional items 2,821 3,138 2,918 11.2% 3.4% Exceptional items 85 151 144 78.0% 69.4% EBITDA after exceptional items 2,736 2,986 2,774 9.1% 1.4% EBIT (Operating profit) 1,239 1,118 1,066 -9.8% -14.0% Net profit after non controlling interests 934 863 833 -7.5% -10.8% EBITDA margin before exceptional items 40.4% 40.5% 41.0% 0.1 p.p. 0.6 p.p. EBITDA margin after exceptional items 39.2% 38.5% 38.9% -0.7 p.p. -0.2 p.p. EBIT margin 17.7% 14.4% 15.0% -3.3 p.p. -2.8 p.p. Net profit margin 13.4% 11.1% 11.7% -2.2 p.p. -1.7 p.p. At 31 Dec At 31 Dec At 31 Dec % of change % of change Balance sheet 2016 2017 with CT 2017 wo CT A17 with CT/A16 A17 wo CT/A16 Total non current assets 8,889 10,385 10,132 16.8% 14.0% Total current assets 5,566 5,353 4,991 -3.8% -10.3% TOTAL ASSETS 14,455 15,738 15,122 8.9% 4.6% Total issued capital and reserves 12,046 12,573 12,325 4.4% 2.3% Total non current liabilities 561 737 695 31.4% 23.8% Total current liabilities 1,847 2,429 2,102 31.5% 13.8% TOTAL EQUITY AND LIABILITIES 14,455 15,738 15,122 8.9% 4.6% 2017 2017 % of change % of change Cash flow 2016 with CT wo CT A17 with CT/A16 A17 wo CT/A16 Net cash flow from operating activities 2,075 2,691 2,406 29.7% 16.0% Net cash flow from investing activities -1,742 -1,215 -1,060 30.2% 39.1% Net cash flow from financing activities -833 -981 -909 -17.8% -9.2% Cash and cash equivalents at the end of 2,676 3,152 3,095 17.8% 15.6% period 2017 2017 % of change % of change CAPEX 2016 with CT wo CT A17 with CT/A16 A17 wo CT/A16 CAPEX 1,608 1,885 1,745 17.2% 8.5% CAPEX / Revenue ratio 23.0% 24.3% 24.5% 1.3 p.p. 0.1 p.p. 4 At 31 Dec At 31 Dec At 31 Dec % of change % of change Number of employees 2016 2017 with CT 2017 wo CT A17 with CT/A16 A17 wo CT/A16 Number of employees (FTEs) 4,427 5,110 4,588 15.4% 3.6% 2017 2017 % of change % of change Residential segment 2016 with CT wo CT A17 with CT/A16 A17 wo CT/A16 Revenue 3,750 3,754 3,754 0.1% 0.1% Contribution to EBITDA before exceptional 2,565 2,546 2,546 -0.7% -0.7% items 2017 2017 % of change % of change Business segment 2016 with CT wo CT A17 with CT/A16 A17 wo CT/A16 Revenue 2,793 2,883 2,889 3.2% 3.4% Contribution to EBITDA before exceptional 1,373 1,329 1,332 -3.2% -3.0% items 2017 2017 % of change % of change Network & support functions 2016 with CT wo CT A17 with CT/A16 A17 wo CT/A16 Contribution to EBITDA before exceptional -1,355 -1,236 -1,236 8.8% 8.8% items 2017 2017 % of change % of change Segment optima consolidated 2016 with CT wo CT A17 with CT/A16 A17 wo CT/A16 Revenue 441 483 483 9.5% 9.5% Contribution to EBITDA before exceptional 239 275 275 15.4% 15.4% items SEGMENT CRNOGORSKI TELEKOM 2017 2017 % of change % of change 2016 CONSOLIDATED with CT wo CT A17 with CT/A16 A17 wo CT/A16 Revenue n/a 636 n/a n/a n/a Contribution to EBITDA before exceptional n/a 223 n/a n/a n/a items 5 OPERATIONAL STATISTICS Key operational data 2016 2017 % of change A17/A16 Mobile customers in 000 Number of customers 2,234 2,244 0.5% - Prepaid 1,075 985 -8.4% - Postpaid 1,159 1,260 8.7% Minutes of use (MOU) per average customer 206 216 4.8% Blended ARPU (monthly average for the period in HRK) 76 77 0.9% - Prepaid 42 43 1.9% - Postpaid 110 106 -3.3% SAC per gross add in HRK 105 109 3.9% Churn rate (%) 2.8 2.5 -0.3 p.p. Penetration (%) 1 114 118 4.3 p.p. Market share of customers (%) 1 47 46 -0.8 p.p. Smartphone customers (%) 2 57 58 1.0 p.p. Smartphones sold (%) 3 79 84 5.0 p.p. 1 Source: internal estimation of the competitors customers for EO December 2017 2 Number of customers using a smartphone handsets in total number of mobile customers 3 Number of smartphones sold in total number of handsets sold (postpaid only) 6 Key operational data 2016 2017 % of change A17/A16 Fixed mainlines in 000 Fixed mainlines - retail 1 924 875 -5.4% Fixed mainlines - wholesale (WLR - wholesale line rental) 83 63 -24.2% ARPU voice per user (monthly average for the period in HRK) 2) 84 78 -6.9% IP mainlines/customers in 000 Broadband access lines - retail 3 618 624 1.0% Broadband access lines - wholesale 4 134 131 -2.3% TV customers 401 417 4.0% Broadband retail ARPU (monthly average for the period in HRK) 122 117 -3.8% TV ARPU (monthly average for the period in HRK) 82 81 -1.4% Wholesale customers in 000 ULL (Unbundled Local Loop) 148 135 -9.2% 1 Includes PSTN, FGSM,old PSTN Voice customers migrated to IP platform and Smart packages for business; payphones excluded 2 Payphones excluded 3 Includes ADSL,VDSL, FTTH and Naked DSL 4 Includes Naked Bitstream + Bitstream Note: Optima Telekom’s non financial KPIs not integrated into Group results due to limited access to Optima Telekom’s information as a result of “Chinese wall” introduced by regulator Presentation of information in the Annual Report Unless the context otherwise requires, references in this publication to “HT Group” or “the Group” or are to the Company - Hrvatski Telekom d.d., together with its subsidiaries. References to “HT” or “Company” are to the Company - Hrvatski Telekom d.d. References to “Iskon” are to the Company’s wholly-owned subsidiary, Iskon Internet d.d. References to “Combis” are to the Company’s wholly-owned subsidiary, Combis, usluge integracije informatičkih tehnologija d.o.o. References in this publication to “Agency” are to the Croatian National Regulatory Authority, the Agency for Post and Electronic Communications. Presented financial figures may slightly differentiate from Consolidated Financial statements due to rounding principle (in Consolidated Financial statements all mathematic operations are performed with numbers without decimal places). 7 INTRODUCTION LETTER TO SHAREHOLDERS CORPORATE PROFILE INVESTOR INFORMATION MANAGEMENT BOARD SUPERVISORY BOARD SUPERVISORY BOARD REPORT CORPORATE GOVERNANCE CODE COMPLIANCE STATEMENT INTRODUCTION LETTER TO SHAREHOLDERS LETTER TO SHAREHOLDERS ars, we have an opportunity to make considerable investments. Dear shareholders, Our growth is based primarily on investments in increasing the capacity of the broadband internet access, improving user expe- Another successful year is behind us and we have posted an incre- rience and increasing competitiveness. ase in all the key indicators. The two-digit increase in revenue and EBIDTA and even higher investments have all confirmed that, after We increased our capital investments by an additional 8.5% to a four-year transformation period, Hrvatski Telekom (HT) is steadily HRK 1.745 billion and, over the past four years, we have invested becoming a modern and agile company focused on the future and more than HRK 6 billion. With such investments, HT will indepen- growth across all business segments. dently meet 70% of the goals outlined in the European Digital Agenda for Croatia by 2020. With the acquisition of Crnogorski Telekom, we have made the initial major step into the region and can already see the first Investments in the fixed network enabled fiber optic access for synergy effects. Crnogorski Telekom kept its leading market po- 374,000 households and access speeds of over 30 Mbit/s for as sition in both fixed and mobile segments, and with its positive many as 879,000 Croatian households. contribution to HT results, we will continue to grow stronger in the coming years.