comparable launches turnaround

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1 TURNAROUND in AUSTRIA Quality, not quantity 22 Telekom Austria Group Annual Report 2014

2 In its home market the Telekom Austria Group has countered the revenue and EBITDA comparable decline of recent years with a consistent turnaround strategy since It emphasises an increased focus on high-value customer segments and convergent products. In addition, the road to the turnaround entails investments in network quality and extensive, finely balanced cost optimisation programmes. On course with a new course The Austrian telecommunications market continues to present the Telekom Austria Group with numerous challenges. Due to the ongoing, intense competition, it has one of the lowest price levels in Europe in terms of purchasing power with average monthly revenue per mobile customer of EUR Regulatory requirements are another burden, especially with regard to roaming tariffs and termination rates, which have been drastically reduced by 60% between January 2013 and January In order to mitigate the continuous revenue and earnings declines caused by these factors, the Telekom Austria Group has been pursuing a turnaround strategy since The key element of this strategy is the focus on premium customers. These are mainly A1 contract customers 1), who are offered subsidies as well as a comprehensive service when buying new handsets: At 52% of the total customer base of the Telekom Austria Group, they are responsible for 80% of the customer value 2) in Austria, thus offering a significantly higher value contribution. The focus on these premium customers as well as the concept more for more with a more extensive performance and service offering is intended to reverse the trend of revenue and earnings development. In addition to the consistent continuation of the convergence strategy, highest network quality standards and strict cost discipline present other important cornerstones of the strategy. In the case of EBITDA comparable the targeted turnaround is not only within reach but has already been achieved at an operational level: The EBITDA comparable rose by 1.4% in Austria year-on-year in 2014, and adjusted for one-off effects, EBITDA comparable even increased by 9.2% year on year. The one-off effects relate to a change in revenue accounting estimates in the context of the introduction of a new fixed-line billing system interface in Austria, which had a negative impact amounting to EUR 28.2 mn in the second quarter. In addition, a verdict by the ECJ in Q required the recognition of additional personnel provisions for civil servants of EUR 30.1 mn. These non-recurring effects may have prevented New ways Focus on high-value customer segments and convergent products New tariff policy and device strategy Investment in new technologies confirm quality leadership Innovative cost optimisation programme Moderate increase of EBITDA comparable launches turnaround 1) Premium customers are A1 classic contract customers and Red Bull Mobile customers. 2) Customer value = average revenue per mobile user direct costs subsidies Annual Report 2014 Telekom Austria Group 23

3 Key elements of the turnaround strategy Focus on high-value customer segments More for more: More performance as well as service & data monetisation Differentiation through the best network Best frequency spectrum and approx. EUR 400 mn additionally for fibre rollout Cost efficiency More efficient market management Consistent cost control the turnaround already achieved in operational terms from making a visible impact on Group EBITDA comparable, but the Telekom Austria Group has clearly been successful in halting the declining trend. Successful convergence strategy key for turnaround target Churn mobile voice Austria in % Single Play Approx. 35% 1.1% Multi Play 0.8% Convergent Av. monthly churn mobile voice, residential Austria THE KEY ELEMENTS OF THE TURNAROUND STRATEGY More for the customer As part of the more for more concept the Telekom Austria Group offers its customers more performance while at the same time improving price differentiation. The optimisation of the tariff structure relates to the A1 offering as well as the no-frills brands. In that way the Telekom Austria Group meets particularly the continuously increasing demand for data with a greater wealth of options. While e. g. data speeds used to be throttled if the data limit was exceeded, customers now have the option to buy additional data volume if they need to. Both customers and the Telekom Austria Group benefit from this: Customers do because they have a choice between additional data or an upgrade to a different tariff if they reach their data limits, and the Telekom Austria Group does because it can monetise the increasing data volume, i. e. convert it into tangible revenues. The result: satisfied customers and rising revenues commensurate with performance. Convergence ensures customer loyalty In addition to concentrating on high-value customer segments, the Telekom Austria Group is 24 Telekom Austria Group Annual Report 2014

4 Costs reduced effectively Transformation of sales and service processes A comprehensive programme was launched in 2012 to redesign and optimise all sales and service processes as well as to harmonise the IT system landscape for this purpose. Following the introduction of the target IT system environment in 2013, significant savings were generated in this area in 2014 already. Order processes were automated to nearly 90%, and early standardised technical feasibility checks ensure faster execution. Manual post-processing of orders is therefore mostly a thing of the past, the same as sales cancellations and wasted kilometres driven in field service. Similarly, implementation costs for sales campaigns were cut by two thirds. An internal survey in 2014 showed that these efficiency improvements and process simplifications have also been positively received by employees, including those in Customer Service. Optimisation in purchasing Another programme is concerned with purchase optimisation. It is intended to optimise the value chain of the Telekom Austria Group together with its suppliers and partners in three dimensions: Beyond the mere negotiation of prices, a further step also scrutinises in detail the necessity or usefulness of the imposed requirements. A third step adds the optimisation of processes connected with the services offered, which frequently occurs jointly with suppliers. Systematic monitoring, interdepartmental teams, monthly board meetings and the willingness to think outside the box have resulted in a strengthening and simultaneous streamlining of the value chain as part of this project. As a result, savings of considerably more than EUR 100 mn have been generated between the start of the project in 2011 and the end of Restructuring of the technology department A realignment or restructuring is intended to make A1 s operating technology areas more efficient. The project set up for this purpose was launched in June 2013; the reorganisation started in May Due to the continually mounting content-related requirements in technical planning and implementation, it is a central goal of the project to make work processes more compartmentalised and to develop generalists into specialists. Likewise, a functional allocation of responsibilities and the establishment of specialised teams prevent the duplication of work. In this way, technical tasks from planning to commissioning are to be made more efficient according to the plan-build-run concept, and all orders will in future be handed over ready for construction. The project affects around 1,300 employees who are actively involved in the process improvements. Annual Report 2014 Telekom Austria Group 25

5 relying mainly on convergence to stabilise revenues: Bundles of mobile and fixed-line services with far-reaching household coverage clearly differentiate the company from its competitors in Austria. This approach is also advantageous for customers and for the company. The customer can obtain various services from a single provider and pay for everything with just one bill. In addition, customers increasingly want to use services and content with different devices. As a result, the Telekom Austria Group has already sold over one million fixed-line product bundles. As well as bringing additional revenues, the focus on convergent products entails in particular a stable customer base for the company: Contract customers who use mobile and fixed-line services in one bundle change mobile providers less often. The level of churn of these convergent customers is up to 35% lower than among customers who use mobile services only. The churn rate for contract customers is now back at a record low of 0.6% (monthly average) after rising following tariff adjustments in the second quarter due to the extraordinary cancellation rights. Despite the migration of customers from fixed line to mobile, the Telekom Austria Group was able to grow its customer base in the fixed-line business. While voice telephony has almost completely shifted to mobile networks, fixed access lines for broadband services are growing in popularity as a result of rising demand for data volume. The demand for A1 TV is also growing. With A1 the Telekom Austria Group is among Europe s leaders in this regard and one of very few European incumbents to see growth in fixed access lines. Best network quality as foundation The excellent network quality of the Telekom Austria Group provides a solid foundation for the high-value strategy and is a precondition for all services. It is maintained and expanded by means of ongoing investment. At the Austrian multiband auction in 2013 the Telekom Austria Group invested around EUR 1 bn in the acquisition of 50% of the auctioned spectrum. A1 therefore has by far the best frequency spectrum in Austria, especially in the valuable low frequency bands. On this basis, and by means of further expanding the LTE network, network coverage in rural areas in particular can be made considerably more efficient. The Telekom Austria Group will continue to invest in the quality of its networks in future. Subject to the annual budget approvals as well as the announced government broadband subsidy programme, EUR 400 mn will be spent additionally on the accelerated fibre rollout from 2015 to The broadband subsidies announced by the Federal Republic of Austria, stemming from the proceeds of the multiband auction in 2013, will support this rollout. Specifically, subsidies of EUR 300 mn have so far been granted for All in all, the government held out the prospect for subsidies of EUR 1 bn. The establishment of the 30 Mbps product as the standard offer stands at the core of Telekom Austria Group s fibre strategy. From 2018 it shall replace the current standard offer of 8 Mbps. The intelligent combination of different technologies presents the basis for this, which also ensures an efficient use of the invested funds. The focus is on fibre, vectoring and G.fast a new technology which makes possible significantly higher transmission rates with the existing copper technology. This will allow the Telekom Austria Group to satisfy the rapidly rising demand for higher bandwidths and data volumes, especially for existing customers. Targeted cost optimisation In addition to measures that primarily affect the revenue development of the Telekom Austria Group, cost efficiency also makes an important contribution on the way to achieving the turnaround in Austria. Extensive measures have been implemented for this purpose in the last two years. A crucial element was the increase in cost efficiency in market management. Specifically and above all, handset subsidies were considerably reduced. Subscriber retention costs thus fell by 27.2% and subscriber acquisition costs by as much as 75.9%. Nevertheless, in February 2014 the Telekom Austria Group introduced the option to pay for handsets in instalments, so as to make it easier for customers to purchase new devices. This option has been received extremely well by customers: Around 17% of new customers have since used this option. A range of efficiency programmes presented the second cost optimisation focus point, which in some cases led to considerable process improvements and savings thanks to targeted structural measures. These projects affected departments including IT, purchasing and technology, and 26 Telekom Austria Group Annual Report 2014

6 Prize-winning network quality The quality leadership of the Telekom Austria Group is regularly confirmed by top marks for its infrastructure in tests and rankings. The 2014 futurezone network test e. g. confirms that A1 offers the best mobile network in Austria. A1 s network also met the highest quality standards in the 2014 connect network test. It was designated the best network in Austria and the secondbest network in the German-speaking region, nearly on par with Swisscom. BEST QUALITY brought considerable relief both in terms of operating expenses and capital expenditure. Turnaround strategy bears fruit As a result of the successful implementation of these measures, Telekom Austria Group again achieved a slight growth of EBITDA comparable in Austria for the year The new Austrian strategy has therefore been successful and will be continued with the same force in the years to come. It is thus also a model for successfully overcoming the imminent challenges in the other markets of the Telekom Austria Group. Annual Report 2014 Telekom Austria Group 27