Kabel Deutschland Holding AG Unterfoehring

Transcription

1 Kabel Deutschland Holding AG Unterfoehring Quarterly Financial Report Pursuant to Section 37x para. 3 WpHG for the Quarter and the Nine Months Ended December 31, 2013

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3 TABLEOFCONTENTS Group Interim Management Report for the Quarter and the Nine Months Ended December 31, Interim Condensed Consolidated Financial Statements of Kabel Deutschland Holding AG Consolidated Statement of Financial Position as of December 31, 2013, as of March 31, 2013 and as of April 1, Consolidated Statement of Income for the Period from October 1, 2013 to December 31, 2013 and from October 1, 2012 to December 31, Consolidated Statement of Income for the Period from April 1, 2013 to December 31, 2013 and from April 1, 2012 to December 31, Consolidated Statement of Comprehensive Income for the Period from October 1, 2013 to December 31, 2013 and from October 1, 2012 to December 31, Consolidated Statement of Comprehensive Income for the Period from April 1, 2013 to December 31, 2013 and from April 1, 2012 to December 31, Consolidated Statement of Cash Flows for the Period from April 1, 2013 to December 31, 2013 and from April 1, 2012 to December 31, Consolidated Statement of Changes in Equity for the Period from April 1, 2013 to December 31, Consolidated Statement of Changes in Equity for the Period from April 1, 2012 to December 31, Selected Explanatory Notes to the Interim Condensed Consolidated Financial Statements as of December 31, This is a translation of the German Quartalsfinanzbericht gemäß 37x Abs. 3 WpHG der Kabel Deutschland Holding AG für das Quartal und die neun Monate zum 31. Dezember Sole authoritative and universally valid version is the German language document. 1

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5 KABEL DEUTSCHLAND HOLDING AG, UNTERFOEHRING GROUP INTERIM MANAGEMENT REPORT FOR THE QUARTER AND THE NINE MONTHS ENDED DECEMBER 31, Overview General TakeoverbyVodafone BusinessSegments TVBusiness Internet and Phone Business LegalReorganization/Restructuring Acquisition/Takeover KeyOperatingMeasures DevelopmentofSubscribersandRGUs ARPU Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, Revenues TVBusinessRevenues Internet and Phone Business Revenues Costs and Expenses for the Quarter ended December 31, CostofServicesRendered Selling Expenses General and Administrative Expenses Costs and Expenses for the Nine Months ended December 31, CostofServicesRendered Selling Expenses General and Administrative Expenses ProfitfromOrdinaryActivities InterestIncome InterestExpense IncomefromAssociates ProfitbeforeTaxes TaxesonIncome NetProfit/LossforthePeriod Adjusted EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) Group Interim Management Report 3

6 5 Financial Position and Net Assets for the Nine Months ended December 31, 2013 compared to the Nine Months ended December 31, CashFlowsfromOperatingActivities CashFlowsfromInvestingActivities CashFlowsfromFinancingActivities Other Comments on Net Assets OpportunityandRiskReport Outlook Group Interim Management Report

7 1 OVERVIEW 1.1 GENERAL 1.2 TAKEOVER BY VODAFONE Kabel Deutschland Holding AG ( KDH AG or the Company, together with its consolidated subsidiaries KDH or the Group ) is listed in the regulated market (Prime Standard) of the Frankfurt Stock Exchange under ISIN DE000KD From August 1, 2013 to October 7, 2013 certain KDH AG shares were listed under ISIN DE000KD88872 as Tendered KDH Shares (for further details see the following section 1.2). The share capital totals 88,522,939 and is divided into 88,522,939 shares. On October 14, 2013, Vodafone Vierte Verwaltungs AG ( Vodafone, formerly Vodafone Vierte Verwaltungsgesellschaft mbh) acquired the majority of shares of KDH AG and thus assumed control of the Group, see section 1.2. On October 14, 2013, the Group became part of the Vodafone Group Plc Group. As of December 31, 2013, KDH AG is the ultimate management and holding company of our Group. Its registered office is in Unterfoehring, Betastraße 6-8, Germany (commercial register of Munich HRB ). As the parent company of the Group it performs the typical tasks of a holding company, such as the strategic development of the Group and the provision of services and financing for its affiliated companies. The Group s business activities are in particular conducted by the respective operating subsidiaries, primarily Kabel Deutschland Vertrieb und Service GmbH ( KDVS GmbH ) and Kabel Deutschland Kundenbetreuung GmbH ( KDK ). In terms of homes that can be connected to a cable network ( homes passed ) and subscribers, we are the largest cable network provider in Germany according to our own estimate. With more than 15 million homes passed, our cable network is likely the largest within a single country in Europe. We offer our customers a variety of television and telecommunications services, including analog, digital and high-definition TV ( HDTV ), Video-on-Demand ( VoD ), digital HD video recorders, Pay-TV, broadband Internet (up to 100 Mbit/s) and phone via TV cable or mobile communication services via a partner. We currently operate cable networks in 13 federal states in Germany, and supply to 8.4 million homes connected. As a triple play service provider, we believe that we are well positioned to take advantage of the growth opportunities in the converging German media and telecommunications markets. On July 30, 2013, Vodafone Vierte Verwaltungs AG, an indirect subsidiary of Vodafone Group Plc, published its voluntary public takeover offer ( Takeover Offer ) to the shareholders of KDH AG to acquire all no par value bearer shares of KDH AG. The offer was subject to certain conditions, including a minimum acceptance threshold of 75% and a merger control clearance. Under the Takeover Offer, a total of 67,780,374 shares (corresponding to 76.57% of the share capital and the voting rights) had been tendered to Vodafone by the end of the acceptance period on September 30, On September 20, 2013, merger control clearance was declared by the European Commission, which meant that all the completion conditions of the Takeover Offer were fulfilled. The Takeover Offer was completed on October 14, On December 20, 2013, Vodafone and KDH AG entered into a domination and profit and loss transfer agreement, which the Supervisory Board of KDH AG approved on that same day. The General Meeting of Vodafone approved that agreement on December 19, The extraordinary General Shareholders Meeting of KDH AG is set to decide on its approval on February 13, In the case of approval, the domination and profit and loss transfer agreement will become effective upon its entry in the commercial register responsible for KDH AG, but no earlier than April 1, The invitation to the extraordinary General Shareholders Meeting on February 13, 2014 was published in the German Federal Gazette on Dezember 30, The invitation to the extraordinary General Shareholders Meeting as well as further documents, in particular the joint statement of the Management Board of Kabel Deutschland Holding AG and the Management Board of Vodafone Vierte Verwaltungs AG regarding the domination and profit and loss transfer agreement including appendices, describing changes in the structure of opportunities and risks of the Group, are available on the website of KDH AG ( Vodafone Group Plc issued a comfort letter to Vodafone with respect to the domination and profit and loss transfer agreement in December Group Interim Management Report 5

8 2 BUSINESS SEGMENTS The Group has two business segments: TV Business, and Internet and Phone Business. 2.1 TV BUSINESS The TV Business offers our subscribers Basic Cable and Premium-TV products and services. Our Basic Cable products consist of analog as well as digital TV and radio services. Our analog cable services currently offer up to 32 free-to-air television and up to 36 radio channels, respectively. Our digital cable services offer up to 100 digital TV (Free-TV) channels and up to 70 digital radio channels. We provide these Basic Cable services primarily via individual contracts with end customers or collective contracts with landlords or housing associations and via contracts with Level 4 network operators. Revenues are primarily generated from subscription fees. Premium-TV products are additionally offered to our direct Basic Cable subscribers. With our Premium-TV products, revenues are primarily generated from monthly subscription fees for Pay-TV and for digital video recorders ( DVR ) as well as from technical access fees for HD-Senderwelt. HD-Senderwelt currently offers access to up to 13 free-to-air high definition ( HD ) channels with basic encryption and a range of programs in standard definition ( SD ) with basic encryption. Our Pay-TV product branded Kabel Premium HD includes 17 HD channels. The additional optional package Premium Extra also includes 18 SD channels. For our subscribers speaking foreign languages we offer Kabel International, which includes 36 channels grouped into eight different foreign languages. Our DVR product Kabel Komfort HD allows several convenient viewing functions including the ability to pause real-time programs and to record up to four programs simultaneously to be watched at a later time. Additionally, our VoD offering SELECT VIDEO is available in over 25 cities, including Berlin, Dresden, Hamburg, Mainz and Munich, to approximately 3 million households. Services for feed-in and signal transport are rendered for public and private broadcasters as well as third party Pay-TV providers. For information on the current status of the legal dispute with public broadcasters over carriage fees, see section 5.2 of the Notes to the interim condensed consolidated financial statements of KDH AG as of December 31, Our TV Business generated revenues of T 293,557 or 60.9% of our total revenues in the quarter ended December 31, 2013, compared with T 302,068 or 65.0% of our total revenues in the quarter ended December 31, In the nine months ended December 31, 2013, our TV Business generated revenues of T 873,786 or 61.6% of our total revenues, compared to T 892,821 or 65.6% of our total revenues in the nine months ended December 31, Group Interim Management Report

9 Business Segments INTERNET AND PHONE BUSINESS Our Internet and Phone Business consists of our broadband Internet access, fixed-line and mobile phone services, mobile data services as well as additional options. Broadband Internet access and fixed-line phone services are offered to those homes which can be connected to our network upgraded for bi-directional services. In the quarter ended December 31, 2013, 89.6% of our new Internet and Phone subscribers subscribed for a bundled product incorporating both broadband Internet and Phone services. The bundle share in our subscriber base of the Internet and Phone Business increased to 89.8% in the quarter ended December 31, 2013, compared with 88.1% in the quarter ended December 31, Our offering for broadband Internet access includes download speeds between 10 Mbit/s and up to 100 Mbit/s. Since early 2010 we have been offering speeds of up to 100 Mbit/s in selected cities where the network is fully DOCSIS 3.0 capable. As of December 31, 2013 we had capacity to serve approximately 94.5% of the upgraded homes passed. Since December 2013 we are offering our subscribers bundled packages consisting of HDTV, Internet and Phone for the first time. Thus high-definition TV, fast Internet, and Phone are combined in a new product line. In addition to our fixed-line services we offer mobile phone and mobile data services via a contractual relationship with a German mobile network operator. Our Internet and Phone Business generated revenues of T 188,496 or 39.1% of our total revenues in the quarter ended December 31, 2013, compared with T 162,697 or 35.0% of our total revenues in the quarter ended December 31, In the nine months ended December 31, 2013, our Internet and Phone Business generated revenues of T 543,800 or 38.4% of our total revenues, compared to T 468,723 or 34.4% of our total revenues in the nine months ended December 31, LEGAL REORGANIZATION / RESTRUCTURING In the fiscal year ended March 31, 2013, the Group undertook a number of steps aimed at optimizing organizational structures and improving operating efficiency that led to structural changes and, in some cases, to changes in legal structure. A variety of measures implemented in customer-oriented areas, such as the call centers, technical services and sales, were aimed at ensuring the longterm competitiveness of the Group and optimizing services in order to further increase customer satisfaction. Key to the measures were primarily efficiency increases through improving interface processes in the functional areas concerned, and efforts to maintain and increase network quality by analyzing and adjusting the value creation chain. As part of the optimization measures described above, the Group bundled its customer and technical service centers in KDK, a wholly owned subsidiary of KDVS GmbH, effective November 1, KDK currently has around 1,300 employees located mainly in Berlin, Bonn, Erfurt and Halle/Leipzig. KDK permanently hired approximately 600 previously temporary employees of the Group as part of the process of reorganizing the service centers. In addition, we acquired the business operations of one of our regional complex service providers in August This acquisition secured and improved our technical service operations in the region of western and southern Bavaria. The strategic realignment introduced in January 2013 of a specific subsection of the sales organization providing basic services to American military bases and military personnel continued in the quarter ended December 31, 2013 with additional measures being implemented. For the implementation of the measures described above, T 382 were recorded as an expense both in the quarter and in the nine months ended December 31, 2013 (prior year periods: T 560 and T 3,253, respectively). 2.4 ACQUISITION / TAKEOVER Acquisition On May 21, 2012, KDH AG entered into a purchase agreement with Tele Columbus GmbH ( Tele Columbus ) to acquire the Tele Columbus Group. This resulted in expenses of T 652 in the quarter ended December 31, 2012, and T 3,952 in the nine months ended December 31, After this intended acquisition was prohibited by a resolution of the German Federal Cartel Office ( FCO ; Bundeskartellamt) dated February 22, 2013, Tele Columbus withdrew from the purchase agreement. With the withdrawal of the appeal in September 2013 against the prohibition of the merger at the Higher Regional Court of Dusseldorf, KDH AG has abandoned the takeover. In the quarter and the nine months ended December 31, 2013 no expenses were incurred for this initially planned acquisition. Takeover by Vodafone Expenses totaling T 1,857 in the quarter ended December 31, 2013 and T 207,496 in the nine months ended December 31, 2013 (prior year periods: 0) were incurred in connection with the takeover by Vodafone (see also further comments in section 1.2). These expenses in the nine months ended December 31, 2013 primarily resulted from the amortization of previously capitalized deferred tax assets on loss carryforwards at the KDH AG level, from the immediate amortization of financing and transaction costs due to the mandatory refinancing of the Senior Credit Facility as well as from expenses for legal advice and investment banks. Group Interim Management Report 7

10 3 KEY OPERATING MEASURES 3.1 DEVELOPMENT OF SUBSCRIBERS AND RGUS In recent fiscal years we have significantly expanded the capacity of our network and our product offering in the Premium-TV, broadband Internet and Phone segments. Our results reflect successive year-on-year RGU and revenue growth. in thousands, except as noted December 31, 2013 December 31, 2012 Operational data Network Homes passed 1) 15,189 15,293 Homes passed upgraded for two-way communication 1) 14,033 13,253 Upgraded homes as % of homes passed 92.4% 86.7% DOCSIS 3.0 availability as % of homes passed upgraded for two-way communication 94.5% 81.1% Homes upgraded for two-way communication being marketed 2) 11,659 11,137 Subscribers Direct Basic Cable subscribers 7,149 7,207 Internet and Phone Solo subscribers 3) Total direct subscribers 7,590 7,566 Indirect Basic Cable subscribers Total unique subscribers (homes connected) 8,389 8,501 Thereof Internet and Phone subscribers 2,185 1,856 RGUs Basic Cable 4) 8,392 8,659 Premium-TV 5) 2,235 1,970 Internet 2,088 1,741 Phone 2,050 1,753 Subtotal New Services 6,373 5,464 Total RGUs 14,765 14,124 RGUs per subscriber (in units) Penetration Premium-TV RGUs as % of Basic Cable subscribers 28.1% 24.2% Internet RGUs as % of total subscribers 24.9% 20.5% PhoneRGUsas%oftotalsubscribers 24.4% 20.6% 8 Group Interim Management Report

11 Key Operating Measures 3 1) The change, compared to prior periods, resulted from a modification of the definition of homes passed. Since September 30, 2013, homes passed are defined as households currently or once connected to our network. In the modified definition, those households that have never been connected to our network but are connectable at a reasonable cost are not considered anymore. The number of homes passed as of December 31, 2012 has not been adjusted retroactively. 2) Homes being marketed are those homes to which we currently sell our Internet and / or Phone products. 3) Internet and Phone Solo subscribers are non-basic Cable service customers subscribing to Internet and / or Phone services only. 4) The difference between the number of Basic Cable subscribers and Basic Cable RGUs is due to one additional digital product component, Kabel Digital. Until the end of fiscal year 2012/13 it has been sold directly to the end customer in addition to the analog Basic Cable service, which is provided and billed via a housing association. A customer subscribing to the Kabel Digital product is counted as one Basic Cable subscriber (analog service via a housing association) and two Basic Cable RGUs (analog service via a housing association and digital service via a direct contract with the end customer). 5) RGU (revenue generating unit) relates to sources of revenue, which may not always be the same as subscriber numbers. For example, one person may subscribe to two different services, in which case two RGUs would be assigned to that one subscriber. Premium-TV RGUs consist of RGUs for our Pay-TV product (Kabel Premium HD and Kabel International) as well as our DVR products Kabel Komfort HD and Kabel Komfort Premium HD. The number of homes upgraded for two-way communication being marketed increased as of December 31, 2013 by 522 thousand or 4.7% to 11,659 thousand compared to the prior year number of 11,137 thousand. The number of direct subscribers increased by 24 thousand to 7,590 thousand as of December 31, 2013 compared to the prior year number. Our total unique subscribers decreased by 112 thousand or 1.3% to 8,389 thousand as of December 31, 2013 compared with 8,501 thousand as of December 31, This decline is primarily due to the net loss of 136 thousand indirect subscribers (households supplied by Level 4 network operators), who only generate a very low ARPU. Each service that a Basic Cable subscriber receives counts as one RGU. As of December 31, 2013 we had 8,392 thousand Basic Cable RGUs, compared with 8,659 thousand as of December 31, The primary reason for the decrease is the above-mentioned net loss of 136 thousand indirect subscribers. The number of households receiving Basic Cable services via landlords or housing associations and digital access (Kabel Digital) directly from us also decreased slightly. These households count as two RGUs in our statistics. As of December 31, 2013 we had 1,453 thousand Premium-TV subscribers and accordingly 2,235 thousand Premium-TV RGUs. Compared to the 1,970 thousand Premium-TV RGUs as of December 31, 2012, this represents an increase of 265 thousand or 13.5%. The expiration of the Pay-TV cooperation with Kabel BW led to a loss of 47 thousand RGUs in the nine months ended December 31, In order to receive Premium-TV services, a household must be a Basic Cable subscriber. A Premium-TV RGU refers to the source of revenue and each Premium-TV service for which a subscriber pays counts as one RGU. For example, a Basic Cable subscriber using Pay-TV and DVR services counts as two Premium-TV RGUs. However, Privat HD is not counted as RGU. Internet RGUs grew by 347 thousand or 19.9% to 2,088 thousand as of December 31, 2013 from 1,741 thousand as of December 31, The number of Phone RGUs increased by 297 thousand or 16.9% to 2,050 thousand as of December 31, 2013 from 1,753 thousand as of December 31, A growing number of our subscribers purchases more than one of our service offerings, such as Basic Cable, Premium-TV as well as Internet and Phone products. As of December 31, 2013, we recorded 1.76 RGUs per subscriber, compared to 1.66 RGUs per subscriber as of December 31, ARPU The ARPU indicates how far we are realizing potential revenues from subscribers. We calculate ARPU per subscriber on an annual, quarterly or monthly basis by dividing total subscription fees including usage dependent fees (excluding installation fees and other non-recurring revenues) generated from the provision of services during the period by the sum of the monthly average number of total subscribers in that period. Quarter ended Nine months ended in /month December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 Total blended TV ARPU per subscriber 1) Total blended Internet and Phone ARPU per subscriber 2) Total blended ARPU per subscriber 3) ) Total blended TV ARPU per subscriber is calculated by dividing the subscription revenues (excluding installation fees and other non-recurring revenues) generated for a specified period from our TV Business products by the sum of the monthly average number of total Basic Cable subscribers in that period. 2) Total blended Internet and Phone ARPU per subscriber is calculated by dividing the Internet and Phone subscription revenues including usage dependent fees (excluding installation fees and other non-recurring revenues) generated in the relevant period by the sum of the monthly average number of Internet and Phone subscribers of these products in that period. 3) Total blended ARPU per subscriber is calculated by dividing recurring TV and Internet and Phone subscription revenues including usage dependent fees (excluding installation fees and other non-recurring revenues) generated in the relevant period in the TV Business and Internet and Phone Business segments by the sum of the monthly average number of total unique subscribers in that period. Group Interim Management Report 9

12 3 Key Operating Measures The increase in total blended ARPU per subscriber for the quarter and the nine months ended December 31, 2013 resulted primarily from a higher number of Internet and Phone subscribers, a growing number of subscribers who purchase more than one product, and a decrease in indirect subscribers, who only generate a very low ARPU. The total blended ARPU per subscriber in the TV Business segment also improved in the quarter and in the nine months ended December 31, This was primarily driven by a higher number of subscribers subscribing to more than one TV Business product, and a decrease in indirect subscribers, who only generate a very low ARPU. In contrast, the total blended ARPU in the Internet and Phone Business segment decreased in the quarter and the nine months ended December 31, The decline is due to lower variable phone usage as well as lower termination fees for incoming phone traffic. The larger number of customer premise equipment ( CPE ) rentals and an improved product mix towards higher download speeds of up to 100 Mbit/s helped to partially offset this decline. We continue to focus on increasing ARPU per subscriber, particularly by increasing RGUs per subscriber. In the nine months ended December 31, 2013, the total blended ARPU per subscriber improved by 1.27 or 8.1% to compared to in the nine months ended December 31, Group Interim Management Report

13 4 COMPARISON OF OPERATING RESULTS FOR THE QUARTER AND THE NINE MONTHS ENDED DECEMBER 31, 2013 AND DECEMBER 31, REVENUES Our business is divided into two operating segments: (i) the TV Business segment, which accounted for 61.6%, and (ii) the Internet and Phone Business segment, which accounted for 38.4% of our total revenues in the nine months ended December 31, The following table gives an overview of our revenues in the quarter and in the nine months ended December 31, 2013 compared to the quarter and the nine months ended December 31, Quarter ended Nine months ended in T, except as noted December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 TV Business revenues 293, , , ,821 Internet and Phone Business revenues 188, , , ,723 Total revenues 482, ,764 1,417,586 1,361,544 Blended ARPU per subscriber (in / month) 1) ) Total blended ARPU per subscriber is calculated by dividing recurring TV and Internet and Phone subscription revenues including usage dependent fees (excluding installation fees and other non-recurring revenues) generated in the relevant period in the TV Business and Internet and Phone Business segments by the sum of the monthly average number of total unique subscribers in that period. Total revenues for the quarter and the nine months ended December 31, 2013 increased by 3.7% and 4.1%, respectively. Adjusted for carriage fees from public broadcasters received in the previous year (see section 4.1.1), revenue growth was 5.3% and 5.7%, respectively. This is the result of the continued strong growth in Internet and Phone, where particularly products based on the technology standard DOCSIS 3.0, with a transmission rate of up to 100 Mbit/s, contributed significantly to the growth TV Business Revenues TV Business revenues are generated primarily from Basic Cable subscription fees, which are paid for access to our network and reception of our analog and digital TV signals. These Basic Cable subscription fees are realized from private households, housing associations (including landlords) and Level 4 network operators. In addition, the Group generates revenues in the TV Business via our Premium-TV services such as Pay-TV and DVR services. Generally, first-time subscribers are charged an installation fee for the initial connection to our network and the provision of products. In addition, we generate fees and receive reimbursements for connecting newly built homes to our network. Furthermore, the Group receives revenues from carriage fees for the distribution of broadcasters programming, from signal transport services as well as from the sale of CPE and other revenues. Carriage fees are typically based on the number of homes to which we distribute the programming and are subject to subsequent ordinary antitrust regulations. The future development of carriage fees depends, among other things, on the number of subscribers connected to our network and the embodiment of contracts. For additional information on the current status of the legal dispute with public broadcasters over carriage fees, please see section 5.2 of the Notes to the interim condensed consolidated financial statements of KDH AG as of December 31, Group Interim Management Report 11

14 4 Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, 2012 Quarter ended Nine months ended in T, except as noted December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 Subscription fees 259, , , ,357 Carriage fees and other revenues 34,490 46, , ,464 TV Business revenues 293, , , ,821 Blended ARPU per subscriber (in / month) 1) ) Total blended TV ARPU per subscriber is calculated by dividing the subscription revenues (excluding installation fees and other non-recurring revenues) generated for a specified period from our TV Business products by the sum of the monthly average number of total Basic Cable subscribers in that period. The decrease in revenues in the TV Business in the quarter and in the nine months ended December 31, 2013 was primarily due to a reduction of carriage fees from public broadcasters by T 6,899 and T 20,698, respectively. An increase in Premium-TV RGUs, particularly in connection with our HD DVR and the expanded HD subscription packages, such as Kabel Premium HD, could only partially offset the decrease in carriage fees Internet and Phone Business Revenues We offer broadband Internet access, fixed-line and mobile phone services, mobile data services as well as additional options. Revenues of our Internet and Phone Business include recurring revenues from monthly usage dependent and fixed subscription fees as well as termination fees generated by the phone traffic of third party carriers terminating in our network. Revenues also include non-recurring revenues from installation fees, sale proceeds of CPE, mobile phone commissions and other revenues. We promote these Internet and Phone products independently from our TV products, but have also been offering bundled packages consisting of HDTV, Internet and Phone since December We offer mobile phone and data services under a contract with a German mobile network operator to our customers. Under this agreement, we enter into a direct contractual relationship with the subscriber and sell this provider s mobile phone services under our own brand name. Quarter ended Nine months ended in T, except as noted December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 Subscription fees (recurring) 177, , , ,292 Installation fees and other non-recurring revenues 11,002 8,269 30,233 23,431 Internet and Phone Business revenues 188, , , ,723 Blended ARPU per subscriber (in / month) 1) ) Total blended Internet and Phone ARPU per subscriber is calculated by dividing the Internet and Phone subscription revenues including usage dependent fees (excluding installation fees and other non-recurring revenues) generated in the relevant period by the sum of the monthly average number of Internet and Phone subscribers of these products in that period. In the quarter and the nine months ended December 31, 2013, revenues for the Internet and Phone Business increased, primarily as a result of the increase in recurring fees. This continuous strong growth is primarily due to the increase in the number of our Internet and Phone subscribers. As a percentage of our total revenues in the quarter and nine months ended December 31, 2013, our Internet and Phone Business generated 39.1% and 38.4%, respectively, compared to 35.0% and 34.4% in the quarter and nine months ended December 31, Group Interim Management Report

15 Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, COSTS AND EXPENSES FOR THE QUARTER ENDED DECEMBER 31, 2013 Costs and expenses are divided into the three functional areas cost of services rendered, selling expenses as well as general and administrative expenses and were as follows: Quarter ended in T, except as noted December 31, 2013 December 31, 2012 Cost of services rendered 222, ,909 Selling expenses 109, ,730 General and administrative expenses 40,733 37,765 Costs and expenses 372, ,403 Thereof: Depreciation and amortization 102,442 91,260 Expenses related to LTIP (IFRS 2) 1) 12,356 7,293 Expenses related to acquisitions / takeover and changes in norms 3,035 1,132 Expenses related to restructuring / legal reorganization Total expenses from non-cash depreciation and amortization and non-operating costs 118, ,245 Operating costs and expenses 2) 254, ,158 Monthly operating costs and expenses per average RGU in 2) ) Will be cash settled under certain conditions at the end of the program, see Notes to the consolidated financial statements of KDH AG as of March 31, 2013 (section 5.5). 2) Operating costs and expenses comprise costs and expenses before non-cash depreciation and amortization, expenses related to LTIP, expenses related to acquisitions / takeover and changes in norms, and expenses related to restructuring / legal reorganization. In the quarter ended December 31, 2013 total costs and expenses increased by T 25,186 or 7.2% to T 372,589 (prior year period: T 347,403), with operating costs and expenses contained therein increasing only by T 7,217 or 2.9%, while the remaining costs and expenses increased by T 17,970 or 17.9%. The increase in the remaining costs and expenses primarily resulted from higher non-cash expenses for depreciation and amortization as well as from expenses related to the Long-Term Incentive Plan ( LTIP ). The increase in operating costs and expenses is primarily due to higher expenses relating to Service Level Agreements ( SLAs ) with Deutsche Telekom AG ( DTAG ), primarily due to a sales bonus which was granted in the prior year quarter as a contractually agreed sales threshold was reached. In the current fiscal year, the sales threshold was reached in the quarter ended September 30, 2013, and the sales bonus was therefore recognized in September Adjusted for the effects of this time shift, operating costs and expenses declined slightly, despite an increase in personnel expenses, which was mainly attributable to the additional recruitments in our call centers. Monthly operating costs and expenses per average RGU decreased in the quarter ended December 31, 2013 to 5.78 from 5.89 in the prior year period Cost of Services Rendered Cost of services rendered relates primarily to costs associated with our business activities which are directly attributable to generating revenues. These include costs and expenses related to the operation and maintenance of our network, costs and expenses related to leased networks, as well as other costs directly associated with the provision of products and services over our network, such as content costs. Group Interim Management Report 13

16 4 Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, 2012 The cost of services rendered for the quarters ended December 31, 2013 and 2012 was as follows: Quarter ended in T December 31, 2013 December 31, 2012 Cost of materials and services 116, ,001 Thereof: Service Level Agreements ( SLAs ) renting and leasing DTAG 46,887 36,410 Thereof cable ducts 25,869 25,854 Content costs 22,123 19,886 Connectivity and other network costs 12,569 11,020 Interconnection expenses 9,587 11,307 Maintenance and repair 8,279 11,285 Other expenses 17,076 18,094 Personnel expenses 11,291 10,810 Thereof: Expenses related to LTIP (IFRS 2) 1) 1, Expenses related to restructuring / legal reorganization 0 (68) Depreciation and amortization 76,432 65,931 Other costs and expenses 17,995 19,167 Thereof: Expenses related to restructuring / legal reorganization Cost of services rendered 222, ,909 1) Will be cash settled under certain conditions at the end of the program, see Notes to the consolidated financial statements of KDH AG as of March 31, 2013 (section 5.5). In the quarter ended December 31, 2013, the cost of services rendered increased by T 18,331 or 9.0% to T 222,240 compared with T 203,909 in the quarter ended December 31, The increase is mainly the result of increased non-cash depreciation and amortization expenses and higher expenses from SLAs with DTAG. In the prior year, a sales bonus, which was granted because a contractually agreed sales threshold was reached, was not recognized until the quarter ended December 31, 2012, while the sales bonus in the current fiscal year was already recognized in the quarter ended September 30, There were also higher content costs. Adjusted for the time shift of the sales bonus, the cost of services rendered as a percentage of our total revenues remained almost stable. Cost of Materials and Services Cost of materials and services in relation to cost of services rendered consists to a large extent of expenses in connection with SLAs with DTAG relating primarily to leased cable ducts, technical rooms, fiber optic systems and energy supply. Additionally, content costs, connectivity and other network costs, maintenance and repair costs, interconnection expenses as well as other expenses are included in the cost of materials and services. Expenses from SLAs with DTAG in connection with rental and leasing agreements rose in the quarter ended December 31, 2013 by T 10,477 or 28.8% to T 46,887 compared to T 36,410 in the quarter ended December 31, This is primarily due to the above mentioned DTAG sales bonus in the prior year period, which for the current fiscal year was recognized in the earlier quarter ended September 30, Adjusted for this sales bonus, expenses from SLAs with DTAG remained almost stable. The cost of leasing cable ducts from DTAG, which accounted for most of the expenses reported under this item, remained nearly unchanged in the quarter ended December 31, 2013 at T 25,869 (prior year period: T 25,854). As a percentage of total revenues, the cost of leasing cable ducts from DTAG declined in the quarter ended December 31, 2013 to 5.4% compared to 5.6% in the prior year period. The remaining cost of materials and services comprises several items, including content costs, connectivity and other network costs, interconnection expenses, maintenance and repair, cost of CPEs sold, energy costs, expenses for external technical call center agencies, and other materials and services costs. These expenses declined due to various cost reduction measures by T 1,956 or 2.7% to T 69,635 in the quarter ended December 31, 2013, compared with T 71,591 in the prior year period, although the content costs in connection with an increased subscriber base and for our new HD offerings, and, to a lesser extent, connectivity costs for leased backbones increased. In total, the cost of materials and services increased to 24.2% of our total revenues during the quarter ended December 31, 2013, compared to 23.2% in the quarter ended December 31, Group Interim Management Report

17 Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, Personnel Expenses Personnel expenses within cost of services rendered mainly consist of costs incurred with respect to our technical staff responsible for network infrastructure planning and operation. In addition, technical staff in this area maintains the IP platform, the playout centers and our technical service center, among others by insourcing former temporary personnel to KDK. Personnel expenses comprise salaries, social security contributions and expenses for items that will be cash settled under certain conditions or for non-recurring items, such as LTIP or restructuring. In the quarter ended December 31, 2013, personnel expenses increased by T 481 or 4.4% to T 11,291, compared with T 10,810 in the quarter ended December 31, However, adjusted for LTIP and restructuring, these decreased in the quarter ended December 31, 2013 by T 215 or 2.2% to T 9,767 compared with T 9,982 in the quarter ended December 31, Adjusted personnel expenses for the quarter ended December 31, 2013 also declined as a percentage of total revenues to 2.0% compared with 2.1% in the prior year period. Depreciation and Amortization In the quarter ended December 31, 2013, depreciation and amortization increased by T 10,501 or 15.9% to T 76,432 (prior year period: T 65,931). The higher depreciation and amortization expenses relate primarily to a larger number of higher-quality CPE, in particular our HD customer premise equipment in the Premium-TV business, and a larger number of capitalized modems associated with a growth of Internet and Phone RGUs. In addition, higher depreciation and amortization expenses were also due to investments in network upgrades. As a percentage of total revenues, depreciation and amortization increased to 15.9% in the quarter ended December 31, 2013, compared to 14.2% in the quarter ended December 31, Other Costs and Expenses Other costs and expenses within cost of services rendered comprise copyright fees, other expenses for IT support, rental expenses and other miscellaneous items. In the quarter ended December 31, 2013, other costs and expenses declined by T 1,172 or 6.1% to T 17,995 (prior year period: T 19,167), and as a percentage of total revenues to 3.7% compared with 4.1% in the prior year period. Depreciation and amortization within cost of services rendered relate to the investments incurred to upgrade the network infrastructure and mainly comprise the depreciation of the network and the CPE Selling Expenses Selling expenses arise in connection with the activities to support our sales and marketing effort with respect to our products and services, and also comprise expenses related to customer support and customer service. They are divided into four categories. For the quarters ended December 31, 2013 and 2012 selling expenses were as follows: Quarter ended in T December 31, 2013 December 31, 2012 Cost of materials and services 6,548 9,167 Personnel expenses 33,248 30,879 Thereof: Expenses related to LTIP (IFRS 2) 1) 3,351 2,125 Expenses related to restructuring / legal reorganization Depreciation and amortization 19,571 19,362 Other costs and expenses 50,250 46,322 Thereof: Expenses related to restructuring / legal reorganization 0 68 Selling expenses 109, ,730 1) Will be cash settled under certain conditions at the end of the program, see Notes to the consolidated financial statements of KDH AG as of March 31, 2013 (section 5.5). While selling expenses increased by T 3,886 or 3.7% to T 109,616 in the quarter ended December 31, 2013 (prior year period: T 105,730), they yet remained stable as a percentage of our total revenues at 22.7% compared with the prior year period. Group Interim Management Report 15

18 4 Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, 2012 Cost of Materials and Services Cost of materials and services within selling expenses is associated with the general sale of our products and services as well as expenses relating to our customer service centers. The cost of materials and services decreased in the quarter ended December 31, 2013 by T 2,619 or 28.6% to T 6,548 (prior year period: T 9,167). The decline is primarily due to lower expenses for our external customer service centers. As a percentage of total revenues, cost of materials and services decreased to 1.4% in the quarter ended December 31, 2013 from 2.0% in the quarter ended December 31, Personnel Expenses Personnel expenses within selling expenses comprise salaries, social security contributions and pension costs as well as expenses for items that will be cash settled under certain conditions or are non-recurring, such as LTIP or restructuring, related to sales and marketing personnel as well as personnel of our customer service centers, which were strengthened by insourcing former temporary personnel to KDK. In the quarter ended December 31, 2013, personnel expenses for sales and sales-related activities increased by T 2,369 or 7.7% to T 33,248 (prior year period: T 30,879). Personnel expenses adjusted for LTIP and restructuring increased by T 1,028 or 3.6% to T 29,515 in the quarter ended December 31, 2013 from T 28,487 in the quarter ended December 31, 2012, mainly as a result of additional recruitments through the regular employment of former temporary personnel in KDK s customer service. With this regular employment, the cost of temporary personnel, which is reported under Other costs and expenses, decreased accordingly. Adjusted personnel expenses as a percentage of our total revenues remained stable in the quarter ended December 31, 2013 at 6.1% compared with the prior year period. Depreciation and Amortization Depreciation and amortization reported under selling expenses primarily include the amortization of the customer list, capitalized subscriber acquisition costs and costs for CPE, and increased by T 209 or 1.1% to T 19,571 (prior year period: T 19,362). Other Costs and Expenses Other costs and expenses with regard to selling expenses mainly include marketing costs, sales commissions, bad debt expenses, sales support, temporary personnel and other items. In the quarter ended December 31, 2013, other costs and expenses within selling expenses increased by T 3,928 or 8.5% to T 50,250 (prior year period: T 46,322). The increase is mainly the result of higher expenses due to intensified marketing and sales activities. As a percentage of our total revenues, other costs and expenses remained relatively stable at 10.4% in the quarter ended December 31, 2013, compared with 10.0% in the prior year period. 16 Group Interim Management Report

19 Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, General and Administrative Expenses General and administrative expenses are expenses that are not directly allocated to cost of services rendered or to selling expenses and cover in particular headquarter functions, such as managing directors, IT, legal and regulatory, finance, human resources, corporate services and security. General and administrative expenses are divided into three categories. For the quarters ended December 31, 2013 and 2012 general and administrative expenses were as follows: Quarter ended in T December 31, 2013 December 31, 2012 Personnel expenses 20,962 19,052 Thereof: Expenses related to LTIP (IFRS 2) 1) 7,481 4,271 Expenses related to acquisitions and changes in norms Expenses related to restructuring / legal reorganization 0 88 Depreciation and amortization 6,438 5,967 Other costs and expenses 13,333 12,746 Thereof: Expenses related to acquisitions / takeover and changes in norms 2, Expenses related to restructuring / legal reorganization 0 64 General and administrative expenses 40,733 37,765 1) Will be cash settled under certain conditions at the end of the program, see Notes to the consolidated financial statements of KDH AG as of March 31, 2013 (section 5.5). Personnel Expenses Personnel expenses within general and administrative expenses comprise salaries, social security contributions and pension costs related to administrative personnel. This item also includes expenses that will be cash settled under certain conditions and non-recurring items, such as LTIP, acquisitions, changes in norms and restructuring. In the quarter ended December 31, 2013, personnel expenses increased by T 1,910 or 10.0% to T 20,962 (prior year period: T 19,052). Adjusted for expenses related to LTIP or non-recurring items, personnel expenses declined to T 12,937 in the quarter ended December 31, 2013 compared with T 14,533 in the prior year period, primarily due to an increased level of own work capitalized related to project work. The adjusted personnel expenses decreased to 2.7% of our total revenues in the quarter ended December 31, 2013 compared with 3.1% in the quarter ended December 31, Depreciation and Amortization Depreciation and amortization reported under general and administrative expenses relate primarily to investments in IT systems. Depreciation and amortization increased by T 471 or 7.9% to T 6,438 in the quarter ended December 31, 2013 from T 5,967 in the quarter ended December 31, 2012, primarily due to continuous investments into our IT systems. Other Costs and Expenses Other costs and expenses within general and administrative expenses primarily include expenses for consulting, IT support, and other headquarterrelated costs. In the quarter ended December 31, 2013 other costs and expenses increased by T 587 to T 13,333 (prior year period: T 12,746). The increase is primarily due to expenses in connection with the takeover by Vodafone and with the implementation of the EU Directive on the Introduction of a Single Euro Payments Area ( SEPA ). The non-operating expenses of T 1,036 in the prior year period were mainly related to the originally planned acquisition of Tele Columbus and to SEPA. Adjusted for these non-operating expenses, other costs and expenses within general and administrative expenses declined by T 869 or 7.4% to T 10,841 in the quarter ended December 31, 2013 from T 11,710 in the prior year period, and as a percentage of our total revenues to 2.2% from 2.5% in the prioryearperiod. Group Interim Management Report 17

20 4 Comparison of Operating Results for the Quarter and the Nine Months ended December 31, 2013 and December 31, COSTS AND EXPENSES FOR THE NINE MONTHS ENDED DECEMBER 31, 2013 Costs and expenses for the nine months ended December 31, 2013 and 2012 were incurred as follows: Nine months ended in T, except as noted December 31, 2013 December 31, 2012 Cost of services rendered 654, ,287 Selling expenses 323, ,432 General and administrative expenses 156, ,843 Costs and expenses 1,134,291 1,027,563 Thereof: Depreciation and amortization 299, ,492 Expenses related to LTIP (IFRS 2) 1) 56,648 29,416 Expenses related to acquisitions / takeover and changes in norms 32,337 4,678 Expenses related to restructuring / legal reorganization 382 3,253 Total expenses from non-cash depreciation and amortization and non-operating costs 388, ,839 Operating costs and expenses 2) 745, ,725 Monthly operating costs and expenses per average RGU in 2) ) Will be cash settled under certain conditions at the end of the program, see Notes to the consolidated financial statements of KDH AG as of March 31, 2013 (section 5.5). 2) Operating costs and expenses comprise costs and expenses before non-cash depreciation and amortization, expenses related to LTIP, expenses related to acquisitions / takeover and changes in norms, and expenses related to restructuring / legal reorganization. In the nine months ended December 31, 2013, costs and expenses increased by T 106,728 or 10.4% to T 1,134,291 (prior year period: T 1,027,563). Operating costs and expenses contained therein only increased by T 17,808 or 2.4%, whereas the remaining costs and expenses increased by T 88,919 or 29.7%. The increase in the remaining costs and expenses primarily resulted from higher non-cash expenses for depreciation and amortization, from nonrecurring expenses in connection with the takeover by Vodafone for legal advice and investment banks and from higher expenses related to LTIP. The rise in operating costs and expenses is largely related to additional content costs, as well as higher personnel expenses, mainly due to the permanent employment of former temporary personnel in our call centers of KDK. As a percentage of total revenues, the adjusted costs and expenses in the nine months ended December 31, 2013 declined slightly to 52.6% from 53.4% in the prior year period. Monthly operating costs and expenses per average RGU declined in the nine months ended December 31, 2013 to 5.69 from 5.87 in the prior year period. 18 Group Interim Management Report