Moving Ahead With Confidence Annual Report and Accounts 2019 Contents Strategic report Governance Financial statements At a Glance 4 Board of Directors 38 Independent Auditor’s Report 48 Milestones 6 Management Board 40 Statement of Management’s Responsibilities 50 Chairman’s Statement 8 Corporate Governance 42 Consolidated Statement Key Events in 2019 10 Risk Management 46 of Financial Position 53 CEO’s Review 12 Consolidated Statement Business Model 14 of Comprehensive Income 54 Strategy 16 Consolidated Statement of Changes in Equity 55 B2B 18 Consolidated Statement B2C 20 of Cash Flows 56 Market Review 22 Notes to the Consolidated Financial Review 24 Financial Statements 57 Key Performance Indicators 26 Sustainability 28 The full annual report and accounts are available online at: investors.kcell.kz/en Corporate Social Responsibility 32 2019 highlights Revenues (KZT million) EBITDA1 (KZT million) Net income (KZT million) +4.6% y-o-y +24.7% y-o-y +18.6% y-o-y 65,533 11,699 149,701 156,657 10,177 147,475 55,560 50,943 8,531 2017 2018 2019 2017 2018 2019 2017 2018 2019 1 Excluding non-recurring items Handset sales (KZT million) B2B revenues (KZT million) Service revenues (KZT million) +3.6% y-o-y +16.2% y-o-y +4.8 % y-o-y 19,091 18,616 18,432 135,407 131,269 137,564 16,021 14,133 12,082 2017 2018 2019 2017 2018 2019 2017 2018 2019 Kcell Annual Report and Accounts 2019 Strategic report Governance Financial statements Introduction Welcome to Kcell’s annual report for 2019, when the Company demonstrated its ability to move ahead with confidence following Kazakhtelecom’s acquisition of 75% of its shares in December 2018. While making crucial governance changes, including the appointment of a new executive team and a Board led by independent members, Kcell also delivered strong financial and operational results, underscoring its position as the leader of Kazakhstan’s mobile telecommunications market. OFFERING UNRIVALLED CUSTOMER EXPERIENCE CHAIRMAN’S STATEMENT PROVIDING THE BEST BUSINESS SOLUTIONS CREATING THE LARGEST DIGITAL ARPU (KZT million) 4G data users ECOSYSTEM IN KAZAKHSTAN +15.5% y-o-y +25.2% y-o-y Data revenues (KZT million) Mobile financial service users +12.3% y-o-y +55.5% y-o-y Kcell Annual Report and Accounts 2019 /1 Strategic Report At a Glance 4 Milestones 6 Chairman’s Statement 8 Key Events in 2019 10 CEO’s Review 12 Business Model 14 Strategy 16 B2B 18 B2C 20 Market Review 22 Financial Review 24 Key Performance Indicators 26 Sustainability 28 Corporate Social Responsibility 32 Kcell Annual Report and Accounts 2019 Strategic report Governance Financial statements Kcell Annual Report and Accounts 2019 2/3 At a Glance Transforming ourselves to maintain future leadership Our company Our journey Our plans Kcell provides the full range of mobile In 1998, Kcell became the first company to Kcell’s vision for the future is clear: to telecommunication services, including receive a licence to provide cellular services deliver the highest possible service to voice, messaging, value-added (multimedia on the GSM-900 standard in Kazakhstan. In customers, thereby generating value for all and mobile content) and data transmission December 2018, Kazakhtelecom acquired stakeholders, including the nation. It plans (internet access). Its two brands, Kcell for a 75% stake in Kcell, enabling the Company to do this by investing further in its network, B2B (corporate and government clients) to move forward with its ambitious agenda. introducing more value-added offerings and Activ for B2C (mass-market customers), The transaction allows the two partners to and keeping prices competitive. Throughout are pre-eminent names on the market. begin to exploit the clear synergies between all of its efforts to ensure financial and Underpinning these is the Company’s them, particularly by giving Kcell access to operational excellence, the Company is high-quality network, which covers all Kazakhtelecom’s infrastructure. In addition, committed to striving towards best practice of the main populated areas in Kazakhstan. new corporate governance institutions and in corporate governance. At the end of 2019, Kcell had 8.3 million practices have been introduced, including subscribers, while 62.2% of the population a new executive team and a new Board led had access to its 4G network and 80.5% to by independent members. its 3G service. Network B2C B2B Coverage 69.0% 72.9% 66.2% 62.2% Share of LTE in data traffic Smartphone penetration among Share of revenues from Share of population with Kcell customers business solutions 4G/LTE access Kcell Annual Report and Accounts 2019 Strategic report Governance Financial statements Our range of products and services Products and services Brands Network Kcell provides the full spectrum of mobile Today, Kcell operates through two key Over the past two decades, Kcell has built telecommunication products and services brands that are among the best established one of the most modern, technologically to both individuals and organisations. in Kazakhstan. Activ is targeted at the advanced and extensive mobile Alongside voice, SMS, MMS and data consumer market (‘B2C’) and Kcell telecommunication networks in Kazakhstan. transmission, it offers internet access and at corporate subscribers and public In the coming years, the Company expects value-added services, including mobile organisations (‘B2B’), as well as high- the integration with Kazakhtelecom’s content. These include various OTT net-worth individuals. infrastructure to allow it to expand its services under the Mobi brand (TV, Music, offerings to both consumer and business Kino, Press, Bookmate) and an ecosystem Activ seeks to fulfil all individual customers’ customers significantly, while cutting costs of unique mobile financial services. The mobile communication needs by and improving quality. Company is also focusing increasingly offering numerous regional, national and on handset sales as a way of serving all international tariffs, complemented by Kcell has licences to operate on 2G, 3G customer needs. various bundles and an extensive range and 4G/LTE frequencies indefinitely. Its of additional services. Kcell features a network is collocated and operates on four premium service experience, including frequency bands – 700/800 MHz, 900 MHz, personal managers. 1700/1800 MHz and 2100 MHz – providing both data and voice communications. Data transfer speeds range from 300 kbps for 2G to 37 mbps for 3G and up to 74 mbps for 4G and 221 mbps for 4G+. Our operations Petropavlovsk Fedorovka Zatobolsk Kokshetau Pavlodar Lisakovsk Stepnogorsk Atbasar Ekibastuz Uralsk Aksay Nur-Sultan Ridder Semey Bukhtarma Aktobe Arkalyk Alga Temirtau Kandyagash Abay Inderborskiy Ayagoz Zaysan Dossor Shalkar Atyrau Zhezkazgan Urdzhar Kulsary Ganyushkino Balkhash Tengiz Aralsk Dostyk Ayteke bi Taldykorgan Fort Shevchenko Beyneu Kyzylorda Zharkent Aktau Kapchagay Zhanaozen Zhanakorgan Shu Almaty Turkistan Merke Korday Taraz Arys Shymkent Saryagash 2G coverage Zhetysay 3G coverage 4G/LTE coverage Kcell Annual Report and Accounts 2019 4/5 Milestones Setting off in a bold new direction In 2019, Kcell headed in a new direction, building on its unique journey over the past two decades. 1998 2003 In September 2003, Kcell became the first telecommunications 2010 operator in Kazakhstan In December 2010, Kcell to launch General Packet officially began operating Radio Service (GPRS) and dedicated 3G networks Multimedia Messaging in Astana and Almaty, Service (MMS) functionality. significantly improving the quality of data transfer services. 1998 1999 2005 On 1 June 1998, Kcell was After receiving the first GSM In September 2005, the established as GSM Kazakhstan licence in Kazakhstan, the Company was the first cellular OAO Kazakhtelecom to operate Company officially launched operator to introduce GPRS a cellular telecommunications its mobile communications roaming in Kazakhstan. network in Kazakhstan. network in February 1999, operating under the Kcell trademark, and added the Activ brand in September. Kcell Annual Report and Accounts 2019 Strategic report Governance Financial statements Setting off in a bold new direction 2016 In January 2016, Kcell In 2019, Kcell headed in a new direction, building acquired additional 2018 spectrum rights on In December 2018, Telia and on its unique journey over the past two decades. the 700/800 MHz and Fintur sold their 75% stake 2014 1800 Mhz bands, boosting in Kcell to Kazakhtelecom. In May 2014, Kcell became its nationwide connectivity an official distributor of and preparing for the iPhone in Kazakhstan; launch of advanced 4G while in September, and LTE services later it launched a major in the year. rebranding campaign for the Activ brand. 2020 2019 In the first full year since 2017 The international ratings the Kazakhtelecom agency Fitch assigned the acquisition, the Company 2015 Company a long-term issuer appointed a new Board In March 2015, the default rating of ‘BB’, the led by independent Company opened its first outlook ‘stable’. members, which outlined 2012 branded Kcell store in a new strategic vision and In February 2012, Almaty, a new concept established a new executive Kazakhtelecom sold its aimed at improving team to implement it. 49% stake to Sonera customer experience. The year marked a clear Holding B.V. (Sonera), a turnaround for Kcell, which subsidiary of TeliaSonera. increased revenues by 4.6%, the first improvement In December 2012, the in its key financial indicators Company successfully in five years. completed its offering of GDRs on the London Stock Exchange and ordinary shares on the Kazakh Stock Exchange. Kcell Annual Report and Accounts 2019 6/7 Chairman’s Statement Moving ahead with confidence In 2019, Kcell made major progress in transforming itself following the Kazakhtelecom acquisition, establishing new governance institutions and laying the foundations for renewed sustainability efforts in the future. Dear stakeholders, Following my election as Chairman of the Board of Directors at the beginning of 2019, it has been a privilege to watch Kcell move ahead with confidence as a team to address its opportunities and challenges, as well as strengthen its governance institutions.