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Netia

comprises a group of subsidiaries of Netia SA. As a group of companies, Netia is a leading independent fixed-line telephony operator in Poland. It operates on the basis of its own state-of-the-art fibre-optic backbone network which covers major Polish cities (5,002 km long) as well as on the basis of local access networks. Moreover, taking advantage of the regulatory opportunities, Netia offers services based on an access to the fixed-line network of the incumbent operator (via bitstream access (BSA), local loop unbundling (LLU) and wholesale line rental (WLR)). Netia provides a wide range of fixed-line telecommunications services including voice, data transmission and Internet access, and wholesale network services. Netia‘s objective is to become the service provider of preference for broadband services and deliver growth by establishing the Company as the leader in the rapidly expanding Polish broadband market. 

On April 18, 2007 Netia announced its new operating strategy focused on growth through dynamic expansion of the customer base and an increase in customer value. The Company plans to build on the opportunities to access the fixed-line network of the incumbent operator, to leverage Netia’s investment in PLAY mobile project, and to capitalize on the Company’s already strong position in the business market. In particular, Netia aims to become the market leader for broadband services in Poland amongst altnet providers. Netia also intends to focus on the most attractive segments of the business market, significantly increasing the number of SME & SOHO clients and increasing profitability from large corporate clients while minimizing cash burn. The above growth strategy is supported by corporate culture changes aimed at strengthening our customer focus. Despite the sale of Netia’s stake in P4 Sp. z o.o., a mobile service provider operating under the PLAY brand, Netia expects to continue to leverage its position as a founding shareholder in P4 and continue a business partnership with P4 based on the key commercial agreements signed by both companies.

Netia acquired Tele2 Polska. On June 29, 2008, Netia concluded an agreement to buy a 100% interest in Tele2 Polska Sp. z o.o., and the transaction closed on September 15, 2008. The transaction values Tele2 Polska’s enterprise at between EUR 29.1m and EUR 33.9m, depending on the level of additional performance related payments. This valuation translates to a maximum of 156 PLN per voice customer, which is broadly comparable to direct acquisition costs for new customers acquired organically.

The acquisition of Tele2 Polska is a transformational move in realizing Netia’s mass market strategy. Netia projects to increase its annual revenue base by over 40%, becoming nearly 3 times larger by revenue than the next largest altnet. The combined business gains significant scale over Netia’s stand-alone operations and significant potential to upsell its broadband, value added and content services to Tele2 Polska’s clients. Netia completed the post acquisition integration of Tele2 Polska with migration of billing and customer care processes from Tele2 Polska’s outsourced legacy systems onto Netia’s systems in Q3 2009, which was the last major element of Tele2 Polska’s integration into the Netia group. Annualised synergies projected to be delivered in 2010 from completed initiatives total PLN 46.2m, 54% above the original estimate of PLN 30.0m.

Cost saving initiatives (the “Profit” project). Following the acquisition of Tele2 Polska in September 2008 which significantly augmented the scale of the business, Netia performed a comprehensive cost review across all functional areas of the Company. Areas for operating cost optimization were indentified, with a target to reduce full year operating expenses for FY2010 and onwards by PLN 100.0m. The program included a reduction of Netia’s headcount, review of control and reporting processes, increase in work effectiveness, span of control increase and contract renegotiations. After 12 months of implementation, 90% of all initiatives were already completed and another 10% are in the implementation phase. Value-wise, already implemented initiatives exceeded total savings envisaged for FY2009 and reached PLN 74.3m due to accelerated implementation and better than estimated savings from many projects. Management plans the annual savings realized via Project Profit will amount to PLN 123.0m gross in 2010, surpassing the originally targeted PLN 100.0m. After off-setting cost increases associated with unit price increases, planned pay rises or new projects, net savings anticipated for 2010 and going forward in Netia opex are at PLN 96.0m.

Customer satisfaction initiatives (the “Klientomania” project). Following the rapid acquisition of new customers in 2009, Netia decided to focus its 2010 strategic initiatives on customer service. In March 2010 a new project “Klientomania” was launched, with a goal to increase customer satisfaction at every stage of the customer life cycle and to establish Netia as the clear market leader in this respect.
As of today, the research phase of the project has been completed with twelve main initiatives focusing on service provisioning and customer relationships defined. Some of the most important customer satisfaction initiatives should be completed in H2 2010.
The “Klientomania” project is being conducted with participation of all functions in the Company and is expected to deliver measurable improvements in customer satisfaction and be self-financing through increased sales and better customer retention performance.

Netia announced its guidance for 2010¹, expecting 700,000 broadband subscribers, 1,225,000 voice subscribers and over 500 unbundled LLU nodes by year end before any positive impact of expected further Ethernet acquisitions. Revenue is forecasted at over PLN 1,550.0m, Adjusted EBITDA at over PLN 355.0m, with an Adjusted EBITDA margin at 23%, and EBITDA at over PLN 360.0m including expected profits from disposal of transmission equipment to P4. EBIT is expected at over PLN 60.0m and capital investments at PLN 220.0m. Netia expects to be net profitable throughout 2010.

The mid term outlook for Netia¹. Netia estimates revenue increases for the combined retail segments (Home, Corpo and SOHO/SME) for the 2010-2012 period at 5-10% CAGR, while total revenue is expected to increase at 3-5% CAGR for same period due to the reduction in Carrier segment revenue resulting from the reduced scope of transmission services for P4 and the continued defocusing of lower margin wholesale services. The previously published objective of free cash-flow positive results by 2010 was achieved a year earlier than planned. Netia expects to grow its free-cash flows year on year from hereon as it continues to implement its broadband driven growth strategy. In addition, Netia guides for capex to sales of 15% in 2010.

Netia’s broadband subscriber base reached 624 thousand at June 30, 2010. Netia estimates that its total fixed broadband market share increased to 10.7% from 8.5% at June 30, 2009. The Company’s voice service customer base (own network, WLR and LLU) reached 1,181 thousand at June 30, 2010. Netia estimates that its total fixed voice market share increased to 12.1% from 11.0% at June 30, 2009. Netia is the undisputed leader in the roll-out of LLU service in Poland with 350 nodes unbundled and total coverage of approximately 2.9m lines as at June 30, 2010. Netia plans to unbundle over 500 nodes by the year-end 2010.

Revenue from continuing activities increased in 2009 by 35% versus 2008 to PLN 1,505.9m. Adjusted EBITDA was PLN 303.9m for the full year 2009, up by 78% over 2008. Including restructuring costs of PLN 11.7m, a gain of PLN 5.3m on the sale of the first tranche of P4 transmission assets and a positive accounting impact from the settlement agreement with TP of PLN 15.3m, EBITDA was PLN 312.8m. Net profit for the full year 2009 was PLN 88.7m and was supported by the recognition of a deferred income tax asset of PLN 88.3m, while in the prior year Netia recorded a gain from disposal of its shares in P4 of PLN 353.4m.
Revenue for H1 2010 was PLN 780.7m (+4% yoy). Adjusted EBITDA was PLN 186.2m for H1 2010 (+28% yoy) while EBITDA was PLN 188.8m (+35% yoy). EBIT profit was PLN 40.0m in H1 2010 and net profit was PLN 29.9m.

Cash resources at June 30, 2010 totalled PLN 272.5m (PLN 145.2m in cash and cash equivalents plus PLN 127.2m in treasury bills at market value).

Organizational structure

Employees