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ORANGE POLSKA GROUP AND ORANGE

POLSKA S.A.

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MANAGEMENT BOARD’S REPORT ON
THE ACTIVITY

FOR THE YEAR ENDED 31 DECEMBER 2020

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February 17, 2021

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CHAPTER I

HIGHLIGHTS OF THE CONSOLIDATED FINANCIAL STATEMENTS

as of December 31, 2020 and for the twelve-month period ended thereon

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SUMMARISED FINANCIAL STATEMENTS

SUMMARISED CONSOLIDATED FINANCIAL STATEMENTS

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SUMMARISED STANDALONE FINANCIAL STATEMENTS

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1.1     Comments on the Consolidated Income Statement and the Standalone Income Statement

Comments on the Consolidated Income Statement of the Group

Consolidated revenue amounted to PLN 11,508 million in 2020 and was higher by PLN 102 million compared to 2019. Firstly, combined revenues of convergence, mobile-only and fixed broadband-only (which we consider our core telecom services) were up 2.9% year-on-year. This growth rate was twice as high as in 2019, when it amounted to 1.4%, despite that in 2020 it was affected by much lower roaming revenues (down 40% year-on-year). This much better performance was a consequence of a successful combination of strong growth of customer volumes and improving trends of average revenue that they generate (ARPO). Improving ARPO is a consequence of our value pricing strategy and growing share of fibre. Secondly, despite pandemic-related market slowdown (especially in 3Q2020), IT and integration services recorded another strong year with revenues growing 24% year-on-year, partially owing to the contribution of BlueSoft acquired in mid-2019. Thirdly, mobile wholesale revenues were up 12% year-on-year, reflecting much higher voice traffic as a result of the pandemic. Fourthly, on the negative side, revenues from equipment sales were down 13% year-on-year, mainly reflecting the negative impact of the pandemic (disturbance in the distribution network in 2Q and reduced demand). Finally, top line continued to be affected by structural decline in legacy fixed-voice revenues, which were down 13% year-on-year.

EBITDAaL (definition of our measure of operating performance was changed in 2020, please see Note 3 to the IFRS Consolidated Financial Statements for 2020) amounted to PLN 2,797 million and was higher by PLN 79 million year-on-year. EBITDAaL benefitted from strong performance of core telecom services and continued cost optimisation pushing indirect costs down 4% year-on-year. Cost savings in 2020 were significantly supported by exceptional measures taken by the Management Board, which included mainly curtailment of jubilee awards scheme (resulting in PLN 64 million reversal of provisions for employee benefits) and renegotiation of certain terms of the Social Agreement with trade unions. These measures helped to offset the negative impact of the pandemic, coming mainly from a significant drop in roaming revenues as well as additional risk provisions.

Operating income (EBIT) amounted to PLN 404 million and was slightly lower year-on-year.

Net finance costs amounted to PLN 342 million in 2020 and increased by PLN 34 million compared to 2019, mainly due to unfavourable movements in foreign exchange rates.

As a result, consolidated net income amounted to PLN 46 million in 2020 compared to PLN 82 million in 2019.

For more information on the operational and financial performance please see section 2 below.

Comments on the Income Statement of Orange Polska S.A.

Net income of Orange Polska S.A. amounted to PLN 47 million in 2020 and was at a comparable level to that of the Group.

1.2     Comments on the Consolidated Statement of Cash Flows and the Standalone Statement of Cash Flows

Comments on the Consolidated Statement of Cash Flows of the Group

Net cash from operating activities amounted to PLN 3,005 million in 2020 and was PLN 147 million higher year-on-year, mainly as a result of working capital improvement.

Net cash used in investing activities amounted to PLN 2,064 million in 2020 compared to PLN 1,919 million in 2019. This change resulted mainly from lower proceeds from real estate disposal, which was partially offset by lower payments for purchases of property, plant and equipment and intangible assets.

Net cash outflows from financing activities amounted to PLN 989 million compared to PLN 1,146 million in 2019. This change was mainly attributable to cash flows from related party loans and bank overdrafts.

Comments on the Statement of Cash Flows of Orange Polska S.A.

Net cash outflow in Orange Polska S.A. in 2020 amounted to PLN 46 million and was at a comparable level to that of the Group.

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1.3    Economic Capital Expenditures (eCAPEX)

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:

Split of CAPEX
(PLNm)

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1.4     Comments on the Consolidated Statement of Financial Position and the Standalone Statement of Financial Position

Comments on the Consolidated Statement of Financial Position

Total assets were lower by PLN 622 million than at December 31, 2019. This change resulted mainly from a decrease in fixed assets, as depreciation and amortisation expense exceeded capital expenditures by PLN 618 million, and a decrease in trade receivables.

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Total liabilities were lower by PLN 664 million than at December 31, 2019. This change resulted mainly from a decrease in debt and a decrease in trade payables.

Comments on the Statement of Financial Position of Orange Polska S.A.

Total assets of Orange Polska S.A. amounted to PLN 23,904 million as at December 31, 2020 and were lower by PLN 396 million than total assets of the Group. This difference is attributed mainly to lower goodwill and trade receivables, which was partially offset by the value of investments in subsidiaries included in the statement of financial position of Orange Polska S.A. and eliminated on consolidation.

Total liabilities of Orange Polska S.A.as at December 31, 2019 amounted to PLN 13,371 million and were lower by PLN 330 million than total liabilities of the Group, mainly owing to lower trade payables.

1.5     Related Parties Transactions

Please see Note 31 to the Consolidated Full-Year Financial Statements about Group’s transactions with related entities.

1.6     Description of Significant Agreements

Please see section 1.11.2 and 4.6 below for information on significant agreements concluded by the Group in 2020.

1.7     Unrecognised Contractual Obligations

Please see Note 29 to the Consolidated Full-Year Financial Statements for information about unrecognised contractual obligations.

1.8     Subsequent Events

Please see Note 32 to the Consolidated Full-Year Financial Statements for information on subsequent events.

1.9     Scope of Consolidation within the Group

Please see Note 1.2 to the Consolidated Full-Year Financial Statements for information about the scope of consolidation within the Group.

1.10   Information about the Loan or Borrowing Collaterals or Guarantees Provided by the Issuer or Its Subsidiaries

In the twelve months ended December 31, 2020, neither the Company nor its subsidiaries granted guarantees or collateral of loans or borrowings to any entity or a subsidiary with a total value representing the equivalent of at least 10% of Orange Polska S.A.’s shareholders equity. Please see section 1.11.5 below for additional information.

1.11   Management of Financial Resources and Liquidity of the Group

In the reported period, the Group financed its activities by cash from operating activities, loans provided by the Orange S.A. Group, current account overdraft facilities, and sale of receivables in a newly launched securitisation programme.

In 2020, the Group repaid long-term bank loans of PLN 6 million and a revolving loan of PLN 920 million provided by the Orange S.A. Group.

In the reported period, the Group used PLN 400 million out of a revolving loan provided by the Orange S.A. Group.

As of December 31, 2020, Group’s interest-bearing liabilities (before derivatives) totalled PLN 6,011 million, which is a decrease of PLN 500 million compared to December 31, 2019. Debt to the Orange S.A. Group accounted for 99.7% of this amount.

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On September 11, 2020, the Group concluded agreements with BNP Paribas SA as the buyer and Eurotitrisation as the settlement agent to amend the programme of sale of receivables related to handsets instalment sales, which was set up in 2019. As a result, the amount of the programme was increased. The Group raised approximately PLN 67 million from the sale of receivables under the programme in 2020.

In 2020, under a cash-pooling agreement concluded a year earlier by the parent company with selected subsidiaries from the Group and Bank Handlowy w Warszawie S.A., acting as the pool leader, the process of the Group’s liquidity management was continued with subsidiaries investing their surplus cash in the parent company’s account.

Group’s liquidity remained solid, owing to strong cash position, amounting to PLN 358 million at December 31, 2020, and available credit facilities totalling the equivalent of PLN 1,978 million.

Based on available cash, back-up and revolving credit facilities, as well as external sources of financing, the Group has sufficient funds to carry out its investment projects, including capital investments, scheduled for implementation in 2021.

At December 31, 2020, Group’s liquidity ratios decreased as compared to the end of 2019. The Group’s lower financial liquidity stemmed from the maturing of a loan of EUR 190 million in May 2021 and a loan of PLN 2,700 million in June 2021, which resulted in an increase of PLN 3,429 million in current liabilities (less provisions and contract liabilities). In January 2021, the Group refinanced both loans with the repayment date in June 2026. Consequently, its liquidity ratios will increase in subsequent periods.

The liquidity ratios for the Group at December 31, 2020 and December 31, 2019, respectively, are presented in the table below.

*Current liabilities less contractual liabilities and provisions were used to determine the ratio.

Group’s net financial debt (after valuation of derivatives) decreased to PLN 5,549 million at December 31, 2020 (from PLN 6,087 million at the end of 2019).

1.11.1   Bonds

As part of the Group’s liquidity management, in 2020 the parent company did not issue or redeem short-term bonds acquired by its subsidiaries.

The Group did not issue or redeem any external long-term debt notes in the reported period.

1.11.2   Loan and Borrowings Agreements

On January 5, 2021, Orange Polska S.A. concluded an investment financing agreement with Alior Bank S.A., which provided a broadband loan of PLN 45 million with a maturity term of 10 years for financing a part of costs of connecting end users under the Measure 1.1 of the Operational Programme Digital Poland: Eliminating territorial differences in terms of access to high-speed broadband Internet. The loan is financed in 80% (i.e. PLN 36 million) from the funds of the Operational Programme Digital Poland for 2014–2020 and in 20% (i.e. PLN 9 million) from Alior Bank S.A.’s own funds.

On January 29, 2021, the Group and Atlas Services Belgium S.A., a subsidiary of Orange S.A., concluded a loan agreement for PLN 2,700 million with repayment date in June 20, 2026. Its purpose is to refinance the Group’s debt under a term loan of PLN 2,700 million maturing in June 2021.

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In the reported period, the Group concluded annexes to current account overdraft agreements with the following banks:

On June 12, 2020, the Group and Orange S.A. concluded a new cash-pooling agreement, which replaced the agreement of 2013 and maintained the backup liquidity financing limit of PLN 500 million.

Furthermore, on December 4, 2020, the parent company and its subsidiary BlueSoft sp. z o.o. concluded a loan agreement for PLN 90 million maturing on December 4, 2025. The loan will be used for financing the development of BlueSoft, including acquisition of other companies. In December 2020 the subsidiary repaid part of the loan and at the end of 2020 the debt outstanding under the loan was PLN 60 million.

1.11.3   Unused Credit Facilities

As of December 31, 2020, the Group had outstanding general-purpose credit facilities amounting to the equivalent of PLN 1,478 million.

In addition, the Group had an unused limit of back-up liquidity financing of PLN 500 million, provided by Orange S.A.

1.11.4   Loan Covenants

Agreements to which the Group is a party do not impose any obligations on the Group to meet any financial ratios. For informational purposes, the ratio of net debt to EBITDAaL was 2.0 on December 31, 2020.

1.11.5   Guarantees and Collaterals

In 2020, Orange Polska S.A. requested banks to issue bank guarantees with respect to liabilities of its subsidiary TP Teltech sp. z o.o. towards its business partners, while promising to cover any claims related to payments under the guarantee. As of December 31, 2020, these guarantees totalled PLN 5.3 million.

As of the reporting date, collaterals granted by Orange Polska S.A. to Bank Handlowy w Warszawie S.A. to secure proper performance bonds issued by the latter in favour of TP Teltech sp. z o.o., Orange Polska’s wholly-owned subsidiary, with respect to its obligations towards Nokia Solutions And Networks sp. z o.o., related to the implementation of the Operational Programme Digital Poland 2, was still valid and totalled PLN 28.1 million.

As of the reporting date, a collateral of PLN 2.4 million granted by Orange Polska S.A. to Bank Handlowy w Warszawie S.A. to secure a proper performance bond issued by the bank in favour of TP Teltech sp. z o.o., Orange Polska’s wholly-owned subsidiary, was still valid.

As of December 31, 2020, a collateral of PLN 20 million granted by Orange Polska S.A. to Santander Factoring sp z o.o. to secure a facility provided by the latter to its subsidiary TP Teltech sp. z o.o. under a confirming agreement for payment management was still valid.

In 2020, Orange Polska S.A. requested banks to issue bank guarantees with respect to liabilities of its subsidiary Orange Retail S.A. on the account of lease of premises for Orange sales outlets, while promising to cover any claims related to payments under the guarantees. As of December 31, 2020, these guarantees totalled PLN 1.2 million.

In 2020, Orange Polska S.A. requested banks to issue bank guarantees with respect to liabilities of its subsidiary Orange Energia sp. z o.o. towards its business partners, while promising to cover any claims related to payments under the guarantees. As of December 31, 2020, these guarantees totalled PLN 15 million.

As of December 31, 2020, a collateral of PLN 22.0 million granted by Orange Polska S.A. to Bank Handlowy w Warszawie S.A. to secure liabilities of its subsidiary Orange Energia sp. z o.o. on the account of a current account overdraft facility provided by the bank was still valid.

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As of December 31, 2020, a bank guarantee of PLN 3.8 million issued by BNP Paribas Bank Polska S.A. upon request of Orange Polska S.A. with respect to liabilities of its subsidiary Fundacja Orange [Orange Foundation] on the account of an agreement concluded by the latter with the Digital Poland Project Centre was still valid.

In 2020, Orange Polska S.A. granted a collateral of PLN 5 million to PKO Bank Polski S.A. to secure liabilities of its subsidiary Essembli sp z o.o. with respect to multi-purpose credit facility dedicated to bank guarantees.

In 2020, Orange Polska S.A. granted collaterals totalling PLN 15 million to BNP Paribas Bank Polska S.A. and PKO Bank Polski S.A. to secure liabilities of its subsidiary BlueSoft sp z o.o. on the account of a current account overdraft facility and a multi-purpose credit facility dedicated to bank guarantees. As of December 31, 2020, these collaterals totalled PLN 10 million.

1.11.6Hedging Transactions

In 2020, the Group continued to minimise its exposure to foreign exchange volatility by concluding and maintaining cross currency swap, currency option, cross currency interest rate swap and non-deliverable forward contracts, which at December 31, 2020 covered:

As a result of hedging, Group’s effective currency exposure at December 31, 2020 was as follows:

Furthermore, the Group hedged a portion of the exposure to foreign exchange risk generated by operating expenditures (e.g. handset purchases) and capital expenditures.

The Group uses interest rate swaps and cross currency interest rate swaps to hedge its interest rate risk. As of December 31, 2020, the Group’s proportion between fixed/floating rate debt (after hedging) was 99/1% as compared to 96/4% on December 31, 2019.

In addition, the Group hedged the risk of Orange Polska share price increase with options. As of December 31, 2020, 100% of phantom shares for the incentive programme for managers were hedged (please see section 3.3.1 below for more information).

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CHAPTER II

MANAGEMENT BOARD’S REPORT ON OPERATING AND FINANCIAL PERFORMANCE OF THE GROUP

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in 2020

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2    OPERATING AND FINANCIAL PERFORMANCE OF THE GROUP

The Group reports a single operating segment as decisions about resources to be allocated and assessment of performance are made on a consolidated basis. Group performance is currently evaluated by the Management Board based on revenue, EBITDAaL, net income, organic cash flows, eCapex (economic capital expenditures), net financial debt and net financial debt to EBITDAaL ratio based on cumulative EBITDAaL for the last four quarters. Starting from 2020, in order to better capture economic transformation of asset base, proceeds accrued on disposal of assets offset capital expenditures, while gains on their disposal are excluded from EBITDAaL. As a result, eCapex (economic capital expenditures) replaced Capex (capital expenditures) as the key measure of resources allocation used by the Group. Additionally, the amount of EBITDAaL in a comparative period was restated to conform to the new definition used in 2020.

Since the calculation of EBITDAaL, organic cash flows, eCapex and net financial debt is not defined by IFRS, these performance measures may not be comparable to similar indicators used by other entities. The methodology adopted by the Group is presented below.

EBITDAaL is the key measure of operating profitability used by the Management Board and corresponds to operating income before gains on disposal of assets, depreciation, amortisation and impairment of property, plant and equipment and intangible assets, decreased by interest expense on lease liabilities and adjusted for the impact of deconsolidation of subsidiaries, costs related to acquisition, disposal and integration of businesses, employment termination programmes, restructuring costs, significant claims, litigation and other risks as well as other significant non-recurring items.

Organic cash flows are the key measure of cash flow generation used by the Management Board and correspond to net cash provided by operating activities decreased by payments for purchases of property, plant and equipment and intangible assets and repayment of lease liabilities, increased by impact of net exchange rate effect received/paid on derivatives economically hedging capital expenditures and lease liabilities and proceeds from sale of property, plant and equipment and intangible assets and adjusted for the payments for acquisition of telecommunications licences, payments for costs related to acquisition, disposal and integration of businesses not included in purchase price and payments relating to significant claims, litigation and other risks.

eCapex (economic capital expenditures) is the key measure of resources allocation used by the Management Board and represents acquisitions of property, plant and equipment and intangible assets excluding telecommunications licences, offset by the proceeds accrued on disposal of these assets (‘proceeds accrued on disposal of assets’). eCapex does not include acquisitions of right-of-use assets.

Net financial debt and net financial debt to EBITDAaL ratio are the key measures of indebtedness and liquidity used by the Management Board.

Reconciliation of operating performance measure to financial statements

⁽¹⁾ Gains on disposal of assets in 2019 include PLN 1 million of loss on disposed subsidiary that was already excluded from EBITDAaL calculation under the previous definition and presented separately in the table above in 2019 as an adjustment for the impact of deconsolidation of subsidiaries.

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* From 2020 our definitions of Capex and EBITDAaL alternative performance measures have been revised. Capex for 2020 is presented net of the accrued proceeds from asset disposals and is named economic Capex (eCapex). Consequently, EBITDAaL excludes gains on asset disposals. This change better reflects transformation of Orange Polska’s fixed asset base, which has been rapidly evolving over the past few years and will do so in the future. Orange Polska invests in assets essential for its future value creation (fibre and mobile network) and disposes assets no longer necessary for its core operations. Economic benefits of this transformation have been shifted from EBITDAaL to Capex. Data for 2019 have been revised for comparative purposes.

** In 2Q 2020, data for 2019 and 1Q 2020 were retrospectively restated for the additional impact of IFRS16, as described in the Financial Statements in Note 2 and 3.  

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%).

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:

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.

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Cost evolution can be attributed mainly to the following factors:

Revenue evolution

(yoy change in PLN mn)

EBITDAaL evolution

(yoy change in PLN mn)

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2.1     Convergent Services

One of the key strategic objectives of Orange Polska is to be the leader in telecommunication services sales to households. Convergence, or sales of mobile and fixed-line service bundles, addresses household telecommunication needs in a comprehensive manner, increasing customer satisfaction and reducing churn (as churn rate is significantly lower than among single service users). It also contributes to revenue growth and increased efficiency of IT and marketing spending. Through our convergent offer we are able to enter new households with our services as well as upsell additional services to households where we are already present, displacing competitors that cannot provide such a comprehensive offer.

Our flagship convergent offer, Orange Love, remained unchanged in 2020. The pandemic increased the demand for high-speed fixed broadband access, which was largely reflected in sales of our convergent offer. This could be seen particularly in the second half of the year. Our B2C convergent customer base increased by 114 thousand (or 8%), exceeding 1.48 million. It needs to be noted that saturation of our broadband customer base with convergent services

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has already reached a significant level (65%). The majority of new mobile and fixed broadband acquisitions are still effected in the convergent bundle formula. Our convergent offer is a major competitive advantage over CATV operators, as they provide no or very limited mobile services. The total number of services provided in the convergence scheme among B2C customers reached 6 million, which means that, on average, each convergent residential customer uses more than four Orange services.

Our convergence strategy has been reflected in a new layout of revenues. Since the beginning of 2018, we have been separately reporting revenues from this group of customers.

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In 2020, revenues from convergent services totalled PLN 1,741 million and were up almost 12% year-on-year. The increase was driven mainly by customer base growth, but also, notably, an increase in average revenue per customer, which grew by over 3% year-on-year, mainly as a result of price increases introduced in 2019 and upsell of services.

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2.2     Mobile-only Services

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As at the end of 2020, Orange Polska had a mobile services base of almost 15.8 million, which is an increase of over 3% vs. the end of 2019. Growth in the post-paid segment offset a decrease in pre-paid services.

In the post-paid segment, SIM card trends were similar to those in 2019:

In order to better reflect our commercial strategy, since the beginning of 2018 we have been presenting separately convergent mobile customers and those who use mobile services only. The number of the former grows rapidly, driven by convergent customer base expansion and upsales of additional SIM cards to Orange Love customers. The number of non-convergent services (excluding M2M) also increased in 2020, after its earlier decline resulting mainly from migration to convergence, churn and lower migration from pre-paid services (as a result of their higher price attractiveness). This rebound was driven mainly by growing business customer base and rapid take-up of the Orange Flex service, which was introduced in 2019.

The number of pre-paid services shrunk by almost 4% in 2020, mainly due to lower activations of new pre-paid cards. This was a consequence of pandemic-related factors, including a decrease in the activity of small businesses, much lower sales to foreign residents and reduced tourism during the summer season.

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:

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2.2.1   Market and Competition¹

The estimated number of SIM cards (55.7 million) increased by 2.2% compared to the end of December 2019, driving the mobile penetration rate (among population) to 145% at the end of 2020. The largest segment of the market is still mobile voice, which maintained a positive annual growth rate. In post-paid services, sales of M2M cards also increased year-on-year, whereas sales of mobile broadband SIM cards decreased (largely due to migration to fixed broadband services and usage of data pools embedded in voice tariffs).

In 2020, Poland’s mobile market, like other sectors of the economy, was greatly impacted by the outbreak of the COVID-19 pandemic. The pandemic regulations and restrictions were reflected in changes in telecommunication services consumption patterns among both residential and business customers. A marked increase in mobile data consumption coupled with a slump in roaming and varying intensity of equipment and pre-paid sales in the individual quarters of 2020 were the key elements of the COVID-19 impact on the mobile market.

The mature mobile market in Poland is characterised by low prices compared to other EU countries. However, favourable macroeconomic environment in Poland and upcoming capital investments related to 5G frequency allocation urged a number of operators to adopt ‘more-for-more’ strategy for their telecommunication services in 2019. This strategy lead to offers with value-added services and larger data packages (GB) embedded in the subscription to address current customer expectations resulting from increased data consumption within mobile plans, in return for higher price. A powerful driver for data consumption growth was the outbreak of the COVID-19 pandemic and the resulting need for remote working and learning, higher consumption of digital services (e.g. content streaming and gaming) and a shift in daily activities from offline to online. The trend of enlarging data packages within mobile plans is expected to continue, as mobile service bundles will be expanded to include value-added services. Our strategy of selling convergent packages (bundling mobile and fixed services), followed by Orange Polska for years, has been imitated by market followers. All MNOs have decided to expand their product portfolio to include fixed line services (through acquisitions, wholesale agreements or partnerships). Operators also modify their offers, particularly by changing the way customers can manage services (from a smartphone application), which in the monthly subscription model enables customers to terminate contracts at any point.

Despite continued migration of some customers to post-paid services, the pre-paid segment is still important for MNOs and is highly competitive against the MVNO market. However, due to differences among operators in reporting pre-paid SIM cards, their comparative analysis remains difficult.

Unquestionably, the most important development in the mobile market in 2020 was to be the auction for 3.4–3.8 GHz frequencies. However, as the auction has not been completed, operators have launched 5G offers using the frequencies they already have.

According to Orange Polska’s own estimates, the four leading operators’ aggregated market share remained at 98% as of the end of December 2020, with Orange Polska’s estimated market share of 28.4%.

¹ Analysis of the mobile market, excluding wireless for fixed offers.

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2.2.2    Mobile Voice and Data Services

In connection with the market launch of the Orange Love offer in February 2017, we focused on our convergent offer in customer acquisitions, as it enables upsales of additional services and contributes to higher loyalty of customers. Despite significant saturation of our customer base with convergent services, the majority of new mobile voice acquisitions are still effected in the convergent bundle formula. Our strategy is still focused on value and monetisation of the price increases introduced last year.

The implementation of our commercial plans in 2020 was affected by the COVID-19 pandemic. The key development related to our mobile portfolio was a revision of our mobile plans for business customers, which we introduced in February, shortly before the outbreak of the pandemic. The revision reflected our ‘more for more’ strategy, but it was

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not a simple price increase. In three out of four new tariff plans, in addition to unlimited calls and SMSs and a data pool, customers can choose from among seven different value-added services within the subscription fee. These include handset maintenance (Orange Smart Care Premium), CyberShield, a package for international calls, an additional data pool in roaming and others. These additional services can be switched throughout the term of the contract.

In the consumer market, we modified our pre-paid portfolio by increasing prices of SMSs and MMSs in some tariff plans and increasing prices of calls from PLN 0.30 to PLN 0.32 for all customers charged per price lists.

A major development was the launch of our 5G service in the 2.1 GHz band in the beginning of July. It is available exclusively in high-end tariff plans for both residential and business customers. At present, our customers are offered over twenty different smartphones which support 5G technology in these frequencies. About 6 million people in almost 400 cities and towns are within the reach of this service.

There were no fundamental changes in Poland’s mobile market in 2020. Two out of four operators (Play and T-Mobile) introduced changes in their tariffs to encourage customers to choose more expensive tariff plans. In August, Play increased prices of its pre-paid tariffs based on price lists. At the end of 2020, Plus network operator

simplified the structure of its voice tariffs reducing their number from 4 to 3.

2.3    Fixed-only Services

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Total fixed broadband customer base increased by 95 thousand (or 3.6%) in 2020, which was markedly higher growth compared to 47 thousand in 2019. The growth acceleration was driven by our fibre service. Our fibre customer base increased by over 200,000 in 2020 or by almost 40% year-on-year. These record-breaking additions can be attributed to three main factors. Firstly, the pandemic and the resulting remote work and learning made high-speed Internet access a basic necessity for a great number of households. Secondly, we are constantly expanding the range of our network, turning increasingly to less competitive areas outside big cities. Finally, as we have improved our sales processes, we are able to increase the service penetration rate in the developed areas more rapidly every year.

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The strong growth in fibre is driving the technological transformation of our broadband customer base. The share of fibre in the total broadband customer base increased to 27% at the end of 2020 from 20% a year earlier, while the share of mostly non-competitive ADSL technology fell from 37% to 30%.

In line with the revenue reporting layout introduced in 2018, we separate convergent broadband customers (their number equals to that of convergent customers) from non-convergent broadband customers. Our non-convergent broadband customer base continued to shrink as a result of migration to convergence but also due to churn, but a significantly slower pace: in 2020 the decline was only 19 thousand compared to 86 thousand in 2019. This resulted mainly from the roll-out of our fibre network and higher demand for fixed broadband during the COVID-19 pandemic.

Despite a slight decline in customer base, revenues from fixed broadband-only services remained almost flat year-on-year, which is a major improvement versus a decrease of almost 7% in 2019. It is a consequence of higher broadband ARPO, which rebounded after years of decline. This can be attributed to the following factors:

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Erosion of the fixed voice customer base (excluding VoIP) totalled 284 thousand in 2020 and was slightly lower than in previous periods. Reduced churn was a consequence of increased demand for voice communications during the pandemic. The decline in these services can be attributed mainly to structural demographic factors and the popularity of mobile services with unlimited calls to all networks. It is also a result of our convergence strategy, which stimulates partial migration of customers to VoIP. After earlier steady decline, average revenue per user was up 2%. A major factor contributing to this improvement was higher traffic on our fixed line network during the peak of the pandemic.

2.3.1    Market and Competition

Fixed Voice Market

The Group estimates that the fixed line penetration rate was at 16% of Poland’s population at the end of December 2020, as compared to 17% at the end of 2019. The decline is still attributable mainly to growing popularity of mobile technologies. In countries like Poland, where the fixed line penetration was low at the time of introduction of mobile technology, mobile telephony is largely a substitute to fixed line telephony. The aforementioned downward trend has been also affecting regulated fixed wholesale products based on traditional infrastructure (WLR and LLU).

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Fixed Broadband Market

According to Group’s estimates, the total number of fixed broadband access lines, including wireless for fixed technology, increased in 2020 by 0.3 million versus the end of December 2019. This can be attributed to two factors: intensive roll-out of fibre infrastructure and growing popularity of wireless for fixed broadband. After the breakdown of the COVID-19 pandemic, access to high-speed broadband became even more necessary for both businesses, owing to the need to quickly shift a significant portion of operations from offline to online, and households, as for many people their homes became a working or learning place (as a result of remote work or education).

Our LTE offer successfully complements or sometimes (when quality of fixed connection is weak) substitutes for traditional cable lines. In 2020, Orange Polska’s LTE for fixed customer base increased by 42 thousand, exceeding 628 thousand lines at the end of December 2020.

Simultaneously, the high-speed fixed broadband market has been constantly expanding and growing in Poland, especially in urban areas, with Orange Polska contributing greatly to the growth. Orange Polska’s high-speed broadband customer base increased by 0.2 million year-on-year. The key success factors were rapidly growing range of our fibre network, modernisation of our VDSL network, as well as our convergent offer competitive to cable television (CATV) operators.

Orange Polska’s increased activity in the high-speed broadband segment has stimulated the already highly competitive market environment and forced CATV operators to upgrade and enhance their offer even more quickly. In addition, local markets saw a number of dedicated marketing campaigns by CATV operators offering additional discounts for discontinuation of services provided by other operators. As a result of such efforts, the position of CATV operators remains strong. According to Orange Polska’s estimates, CATV operators’ aggregate share in Poland’s fixed broadband market stood at 32% by volume or 22% by value at the end of 2020.

Another factor increasing the competitiveness of cable fixed broadband is the expansion of service portfolio by mobile operators (Play, T-Mobile and Plus) pursuant to wholesale agreements with infrastructure-based operators. This commercial co-operation extends to both networks developed with EU funding and the own networks of fixed-line operators, such as Inea, Vectra or Nexera (which offers wholesale services only).

The rapid growth of the high-speed fixed broadband and wireless for fixed customer base was reflected in an increase in the aggregate number of Orange Polska’s fixed broadband users by 95 thousand in 2020.

According to internal estimates, Orange Polska had the following share in the fixed broadband market:

Fixed broadband market – key performance indicators