Crnogorski Telekom - 2014 Annual Report DRAFT

Crnogorski Telekom - 2014 Annual Report DRAFT

Crnogorski Telekom

2014 Annual Report
Contents:

To Our Shareholders

About Crnogorski Telekom

Selected Financial and Operational Data of Crnogorski Telekom

Letter to Our Shareholders

Management report

Management Report for the Financial Year 2014

Crnogorski Telekom’s Management

Board of Directors

Executive Management Board

Vision and Strategy

Regulatory Environment

Promotions and Offers

Human Resources

Corporate Responsibility

Financial Statements

Independent Auditor’s Report

Statement of Financial Position

Statement of Comprehensive Income

Statement of Cash Flows

Statements of Changes in Equity

Notes to the Financial Statements

Further Information

To Our Shareholders

About Crnogorski Telekom

Crnogorski Telekom (CT) is the largest telecommunications company in Montenegro. It provides a full range of fixed and mobile telecommunication services (voice, messaging, internet, TV, leased-line circuits, data networks and ICT solutions).

Crnogorski Telekom fully digitalised the fixed-line network in 2007 and brought ADSL coverage of PSTN customers close to a 100% base by the end of 2012. In December 2007, Crnogorski Telekom started an IPTV service. At the end of 2011 CT started offering ICT solutions, promoted under the name “Integris”.

CT was the second entrant into the mobile market in Montenegro. From its founding in 2000, it has always offered innovative and advanced services to the Montenegrin market and has been experiencing dynamic growth. Telekom uses mobile technologies such as UMTS, HSDPA, GPRS and EDGE. A 3G network was launched in the summer of 2007. A 4G service was softly launched in 2012, while wider coverage was brought to the market in 2013 and in 2014.

In 2006, the T-Com and T-Mobile brands were launched.

In May 2009, Crnogorski Telekom a.d., T-Mobile Crna Gora d.o.o and Internet Crna Gora d.o.o were merged into one legal entity, Crnogorski Telekom a.d.

In 2012, the T-Com and T-Mobile brands were replaced by the Telekom brand, under which all products are now marketed.

On 1 April 2005, Magyar Telekom obtained a 76.53% interest in Crnogorski Telekom. Deutsche Telekom AG holds 59.21% of the Magyar Telekom shares. Deutsche Telekom and Magyar Telekom have a number of subsidiaries worldwide, with which Crnogorski Telekom has regular transactions. Details of related party transactions are given in the company’s Financial Statements, Note 27.

Selected Financial and Operational data of

Crnogorski Telekom

Dear Shareholders,

As always at this time of the year, I have a pleasure to share with you a view about the Crnogorski Telekom’s most significant moments in 2014 when it comes to business developments, expectations for the next year and our strategies on how to fulfil them. Last year can be summarized in a few words: as a clear technology leader in Montenegro and European market, we are proud to be a part of an industry that’s truly transforming the world. We’ve been facing increasing customer expectations and, consequently, rules of the game changing just as fast, tough competitors and global Internet players, but still helped businesses to grow and national economy to develop, improving the quality of life of our customers through our innovative technology solutions. I am happy to conclude that, in spite of the impeded economic developments and of the overall state at the telecommunications market, our business is still solid, thanks to increase of ICT and IPTV revenues, as well as to better equipment sales and increase of mobile and fixed BB revenues. Speaking of the financial achievements, let me inform you that our revenues, amounting to 104.6 million EUR, were in line with plans, driven by Wholesale revenues, Equipment/Handsets sales and ICT revenues, while service revenues deteriorated (-3.7m or -5% YoY). Furthermore, EBITDA was in line with expectations and 2.2.m or 5% lower YoY, while oFCF performed 10% lower YoY, but still exceeding expectations. As the overall Telecommunication market is shrinking every year, I am proud that we were achieving our targets.

Business year 2014 was, in spite of all challenges (embodied in continuously raising regulatory pressure, increasingly aggressive competition, new market players, changing customer behaviour and new technologies areas) or maybe exactly because of them, a successful year, because we’ve been through those challenges very successfully, not only resisting the temptations, but getting out of them stronger and more united.

CT’s strategic framework is based on three strategic layers: Stand for Broadband - capturing and retaining customers and outperform competition; Transform to Outperform - full focus on e-Business, e-Company, One Billing/CRM and Save2Invest initiatives and New Way to Play - growing revenue streams in ICT/Cloud and Retailer No.1 initiatives, new business development and exploring partnering concept. Obviously, our management’s full commitment to it paid in.

Speaking of our further 2014 achievements, we were primarily focused on intensive FTTH rollout, expanding ICT business, 3G 900 roll out, implementation of Hybrid Access project, diminishing/minimizing negative effects of the extensive regulatory changes and completion of One.Billing & CRM project.

Regarding the fiber development, it is very rewarding to hear that this project, providing best service quality and stability for broadband customers, is extraordinarily performing and that we are experiencing significant increase of customers’ demand for FTTH services. Over less than 4 years almost 37,000 households in 10 cities were given possibility to use FTTH service and more than 9,000 have been connected. The most important KPI, utilization, was significantly raised over the years – starting from 8% in the first year (2011) to 25% in 2013 and 2014, which puts us among operators with highest utilization rate in the Group. Let’s also mention that results exceeded the plan for FTTH rollout for 2014 already in October. Our aspiration for this year is to cover more than 4,000 new households with FTTH possibility and achieve additional increase in terms of utilization – reach 26%.

Speaking about expansions, let me remind you that CT has made a big step forward in expanding the mobile network, targeted at improvement of its service quality. We can praise ourselves for doubling 3G network in terms of capacity and coverage, which resulted in 50% increase of traffic in 2014.

We tripled 4G network and made it available to customers in almost all municipalities and improved it in Podgorica and coastal towns. Traffic increase of 570% in 2014 is the evidence that our customers recognized benefits provided by our network and that they enjoy surfing in T network every time and everywhere. These results confirm that we are on the right track in this process, so we are continuing with expansion of mobile BB network already at the beginning of 2015, with special emphasis on 4G services as our strategic guidance.

When it comes to ICT, I am happy to inform you that the success story about this business, after three years in a row with three digits’ YOY revenue growth, continued in 2014, with revenues close to EUR 4 million. We are recognized as a reliable ICT partner for important investment projects in Montenegro. As result of good customers’ experience with previous project, in November we signed the biggest ICT contract, worth EUR 2.5 million.

Regarding the Hybrid Access launch, I can report that we are the first among all DT Europe members to develop Hybrid Access technology implementation plan for the next 4 years. The plan foresees EUR 3 million investments enabling 6.5 thousand customers benefit from this new technology. We expect our first customers by the end of 2015.

We continued to be the number one company as far as corporate social responsibility is concerned and I am sure that awards “Iskra”and “The Best Company for Work in Montenegro” confirm our essential dedication to do business in a socially responsible manner and to develop in sustainable manner. We are proud of the fact that our employees demonstrate high level of personal commitment and corporate culture, which is prerequisite for increase of the existing and setting up of new standards in our environment.

Speaking of the year 2015, it will definitely bring a new and unique combination of bright and less bright moments, but we have all answers prepared and worked out through our Corporate Strategy and we know what we must keep on doing: providing our customers with the best service and most comprehensive solutions in the market, being innovative and exploring new revenue streams and ways to maximize benefits obtained from the existing ones. We must insist on simplicity in our offers, smart investments in network, communicating technology superiority, awarding loyalty, customization and personalization of our offers. In that regard, in order to be no. 1 Telecommunications operator in Montenegro, three main pillars were defined in our new Corporate Strategy:

• Technology leadership,
• Best customer experience
• and New Businesses.

If we implement this we will retain/win customers and grow our business.

Now, looking forward into the future, according to our main strategic commitment, customers will remain in focus of our attention: we will keep on investing into our network’s quality and providing access to the most advanced technologies. As in previous years, we continued to maintain a very substantial volume of investments of more than EUR 16 million. We will also continue extending our service portfolio, accompanied by even wider offer of exciting devices. According to our long – term orientation, we will simultaneously keep on developing and implementing various initiatives in the area of corporate social responsibility and investing in Montenegrin society to which we belong and operate in.

Unfortunately, our key words in the upcoming period will also be cost control. It is true that we must decrease our employee related expenses and it is true that organizational changes will follow, affecting all levels of employees. I am fully aware that this is always the most painful step but if we want to stay as a company in the market providing very good working conditions and to deliver interesting products to Montenegrin citizens there is no other way. However, rest assured that the management will do everything to preserve interest of all our employees, since we always have in mind that our employees’ loyalty and dedication are key factors in business success and good reputation of our Company. On the other hand, I am also sure that the award “Best Company for Work” we received at the beginning of 2014 indicates that care and commitment of Crnogorski Telekom to its employees are recognized in business environment.

As in previous years, the management intends to propose to the General Assembly to pay out dividend. This is the best way to show to our shareholders that we take care about their interests and it is the best base to motivate our shareholders for further investments into Montenegro’s Infrastructure.

I would like to take the opportunity to thank all of our employees for a job well done in 2014. I’m really proud of how they have all pulled together and the terrific results they have achieved. That will always be the solid ground on which we can build strategies to fulfil our goals during the coming years.

Finally, dear shareholders, let me also thank you, for the fourth time already, for contribution to the success of our Company. Your trust and confidence have always been an important driving force and great support for us. Please continue to support us in our efforts to maintain and improve the profitability of our company.

Rüdiger J. Schulz

Chief Executive Director

Management report

Management Report for the Financial Year 2014

Highlights

• In 2014 revenues kept a declining trend with a YoY decrease of EUR 5.6 million or -5%, to a level of EUR 104.6 million. The main reasons behind are related to lower interconnection revenues, to fix and mobile voice revenues, messaging revenues, visitors’ revenue and data services. This development was partly compensated by the increase of internet, TV, ICT and equipment revenues.
• EBITDA excluding special influences decreased by 5% YoY, to EUR 41.1 million, with a margin of 39.3%.
• Net profit increased YoY, by EUR 2.7 million, or 14%, to EUR 21.6 million, mainly due to lower depreciation and amortization costs and due to severance payment in 2013.
• Capital expenditure was EUR 16.2 million. The main projects were One Billing & CRM, fibre-optic network roll-out, IPTV and IMS.
• Dividend of EUR 21.5 million was paid out. The share capital was decreased by EUR 17.1 million.

Revenues and profitability

In 2014, Crnogorski Telekom was focused on further extending its 3G and 4G mobile network, on fibre-optic access roll-out, on expansion of the ICT service, on sale of equipment and on the improvement of voice services. In the fixed-line voice segment, CT kept a stable customer base, while ADSL and Extra TV customer base increased. In the mobile segment CT retained both total postpaid and business segment postpaid leadership. CT’s revenues and profitability were negatively impacted by regulation of fixed voice and fixed broadband retail prices.

Despite the positive development of the number of customers, CT experienced YoY revenue decline of 5%. Revenues reached EUR 104.6 million. The retail revenues were kept stable, while wholesale revenues decreased by 24%. Major revenue downsides, compared to 2013, related to:

- interconnection revenues (-22%), driven by decreased mobile termination rates and lower incoming traffic, both national and international,

- fixed-line voice retail revenues (-10%), influenced by decreasing usage and retail prices regulation,

- mobile prepaid revenues (-12%).

This development was partly compensated by higher:

- IPTV revenues (+10%), driven by higher customer numbers,

- Fix broadband revenues (+5%), driven by higher customer numbers,

- data services revenues (+15%), driven by the growth of ICT services,

- equipment revenues (+42%), boosted by sales of TVs/laptops and handsets.

As a result of continuous successful efforts to increase efficiency and improve the cost base, operating expenses excluding special impact at the same time decreased YoY by EUR 3.2 million (-5%), to the level of EUR 63.7 million.

The limited YoY revenue decrease and cost efficiency resulted in a 5% YoY decrease of EBITDA before special influences, to the amount of EUR 41.1 million.

Operating income (EBIT) increased YoY, by EUR 2.9 million to EUR 23.0 million, mainly due to lower depreciation and amortization costs and due to severance payment in 2013. Net income increased by EUR 2.7 million to EUR 21.6 million.

Non-Financial KPIs

In 2014, the fixed-line voice customer number decreased by 3%. Fix broadband revenue increase was driven by a customer base increase of 3,400 or 5%. IPTV revenues also increased due to a customer number increase of 2,500 YoY or 4%.

At the end of 2014, Crnogorski Telekom customers were using 346 thousand SIM cards, which is 7 thousand or 2% less compared to the previous year. Total SIM market share decreased by 1.4pp and amounted to 34.1%. Prepaid SIM base decreased by 17 thousand or -8%, while Postpaid SIM base increased YoY by 10 thousand or 8%. Crnogorski Telekom remained market leader in postpaid segment.

Main investments

In 2014, CT continued implementation of One Billing/CRM (Customer Relations Management). The new billing system will replace three separate billing systems. It will increase market competitiveness, by enabling fully convergent (prepaid/postpaid and fixed/mobile) and real-time rating.

All IP Transformation program continued in 2014. More than 90 thousand customers were migrated from PSTN to IMS Technology. For IMS customers new services are available, like “Internet on Klik” where service activation is immediate. Introduction of MSAN (Multi-Service Access Node) technology in CT started in 2014, where existing ADSL technology will be gradually replaced. 10 thousand ADSL ports on MSAN have been installed during 2014. In parallel, CT extended BB coverage by 5%.

In line with Mobile Access Strategy, major focus was on Mobile Broadband coverage and capacity extension. CT invested EUR 1.4 million. Number of 4G base stations is tripled, while the population coverage increased from 38% to 62%. By this, 21 cities in Montenegro are covered with 4G service and CT gained leader position on the market in 4G. In addition CT successfully started testing of 4G+ service, with download speeds of up to 300 Mbps.

3G coverage is extended in the suburban, rural areas and main, while new sites were mounted in urban areas. Number of 3G sites is doubled and population coverage is increased from 72% to 94%.

In accordance with Integrated Network Strategy CT continued the development of FTTH network, resulting in new 8,800 flats covered by fibre network and new 2,200 customers enjoying the services over this supreme technology. At the end of 2014 there were 37 thousand homes covered with FTTH and over 9 thousand customers using the service. We managed to maintain high utilization rate of 25%.

Crnogorski Telekom's Board of Directors