MARKET DEVELOPMENT AND OPERATING MILESTONES

In the 2016 financial year, the Telekom Austria Group consistently undertook important steps in successfully executing its corporate strategy. The Group managed to achieve substantial progress with regard to its operational performance despite ongoing fierce competition and partly challenging macroeconomic conditions as well as the stepwise abolition of retail roaming in the EU.

In the year under review, the Telekom Austria Group posted revenue growth of 2.1%, which, in- ter alia, was driven by M&A transactions, despite retail roaming revenue losses of around EUR 38 mn. In the mobile business, the number of customers remained stable, with a shift from pre- paid to contract offers. Revenue-generating units (RGUs) grew by 6.3% thanks to continued strong demand for fixed-line products in international markets.

Increased sales activities and handset subsidies as part of the ongoing implementation of the Group strategy led to a rise in costs. However, these were offset to a large extent thanks to a fo- cus on cost efficiency. In addition, the acquisition of the fixed-line operator Atlant Telecom and its subsidiary TeleSet in Belarus as well as Metronet in Croatia strengthened the convergent footprint. The switch to a single radio access network vendor (RAN) in Austria, Belarus and the Republic of Macedonia increased efficiency in terms of ongoing costs and capital expenditures. Overall, EBITDA fell by 1.1%, driven by the negative roaming impact.

AUSTRIA: STRONG DEMAND FOR 30 MBPS PRODUCTS

In 2016, the competitive situation in Austria remained driven by mobile no-frills offers. In addi- tion, mobile WiFi routers with unlimited data offers became an increasingly relevant element of the Austrian broadband market. A1 Telekom Austria AG countered these challenges, on the one hand, through its successful multi-brand strategy. On the other hand, A1 introduced a hy- brid modem in July 2016 which combines the fixed-line and mobile networks and thereby en- ables A1 to offer fixed-line products with higher bandwidth to a larger number of households. In 2016, already 40% of the fixed-line products sold used this hybrid modem (for more details, see chapter ‘Innovation and Technology’).

In 2016, the Telekom Austria Group successfully continued its accelerated broadband rollout in Austria. 70% of all Austrian private and commercial addresses should be covered with the 30 Mbps product by the end of 2018. At the end of 2016, the coverage of the 30 Mbps product, which saw the strongest demand in the year under review, amounted to 50% on the pure fixed- line network (excluding Hybrid solution).

BULGARIA: FOCUS ON VALUE-ORIENTED MANAGEMENT TO COUNTER PRICE PRESSURE

As in previous years, the Bulgarian market was also shaped by a fiercely competitive environ- ment in the 2016 financial year, especially in the business segment. In order to counter price pressure, Mobiltel’s management intensified its focus on value-oriented management and re- taining high-value customers. At the same time, revenue pressure was mitigated by strict cost management. In the fourth quarter of 2016, Mobiltel achieved moderate growth year-on-year in service revenues for the first time, after several years of consistent decline, thanks to successful up- and cross-selling activities in the residential business.

The Bulgarian mobile market saw a significant shift from prepaid to postpaid offers. In addi- tion, the ongoing rise in the use of mobile data led to a considerable increase in the number of mobile broadband customers. The fixed-line business benefited from the growing popularity of bundled products with TV and increased demand for broadband products. After Austria, Croat- ia, Slovenia, the Republic of Serbia and the Republic of Macedonia, the Group also began offer- ing LTE in Bulgaria in 2016.

CROATIA: STRONG GROWTH DESPITE HIGH REGULATORY COSTS

The Croatian segment continued to exhibit positive results in the year under review thanks to on- going fixed-line growth and stronger mobile trends. The new tariff portfolio introduced by Vipnet in 2015 played a significant role here. However, regulatory pressure remained in the form of high frequency usage fees, despite which Croatia still saw a solid rise in revenues and EBITDA.

The acquisition of Metronet strengthened its fixed-line position, especially in the business seg- ment. Metronet is a leading alternative fixed solutions provider in Croatia and delivers a diverse product offering, focussed on delivering services to the business segment. Metronet offers data, voice, managed IT and cloud services to its approximately 4,300 corporate customers, who gen- erated approximately 90% of total revenues in 2015. The company is present in 66 cities, there- by reaching approximately 85% of all corporate customers in Croatia, and operates on a fibre network. In 2015, Metronet generated revenues and EBITDA of approximately EUR 28 mn and EUR 12 mn respectively.

BELARUS: POSITIVE OPERATIONAL DEVELOPMENT OVERSHADOWED BY CURRENCY EFFECTS

In Belarus, strong operational development continued to face macroeconomic and regulatory headwinds. While inflation slowed to 10.6% in 2016, value added tax on mobile services was increased from 20% to 25%. The decline of the economic output in Belarus by 3.0% also led to a decrease in purchasing power. In addition, the depreciation of the currency at the beginning of the year overshadowed velcom’s positive operational development. However, the exchange rate recovered during the year thanks to the improved development of the oil price and the Russian Rouble. In order to reduce the company’s vulnerability to FX and energy prices volatility, a solar power plant was commissioned in 2016. velcom is also the first telecommunications company in the world to switch to a fully virtualised commercial core network, reducing total costs of ownership by more than 50% (for more details, see ‘Innovation and Technology’).

Through the acquisition of Atlant Telecom and its subsidiary TeleSet, velcom developed from a pure mobile provider to a fully integrated operator. Atlant Telecom and TeleSet are the leading pri- vately-owned fixed-line operators in Belarus offering fixed-line broadband, IPTV and cable TV, as well as a video and audio library. As of year-end 2015, Atlant Telecom and TeleSet had approxi- mately 125,700 fixed broadband and 46,000 cable TV customers. In 2015, Atlant Telecom and Tele- Set generated revenues and EBITDA of approximately EUR 16 mn and EUR 4 mn respectively.

FIERCE COMPETITION IN SLOVENIA, THE REPUBLIC OF SERBIA AND THE REPUBLIC OF MACEDONIA

In 2016, the Slovenian telecommunications market was again characterised by intense competi- tion in the area of convergent products. Demand for fixed-line products was continuously strong. The Republic of Serbia focused on a stronger competitive position. Also, competition remained intense on the Macedonian market.