ILIAD : Management Discussion & Analysis

Société anonyme. Share capital: €12,953,409
Registered office: 16, rue de la Ville l'Evêque - 75008
Paris, France
Registered in Paris under no. 342 376 332

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Société anonyme. Share capital: €12,953,409
Registered office: 16, rue de la Ville l'Evêque - 75008 Paris, France
Registered in Paris under no. 342 376 332

KEY CONSOLIDATED FINANCIAL DATA

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Fueled by the success of its broadband offerings marketed under the Free brand, the Iliad Group (also referred to as the 'Group') has positioned itself as a major player in the French landline telecommunications market. In addition, since 2012 when it first launched its mobile offerings, the Group has become an integrated operator present in the broadband, ultra-fast broadband and mobile segments.
By June 30, 2015, three years after it entered the mobile market, the Group had become the third largest telecom operator in France, with close to 17 million subscribers, of which almost
11 million mobile subscribers and 6 million broadband and ultra-fast broadband subscribers. In the first half of 2015, the Group generated revenues of nearly €2.2 billion, up by almost 7% year on year.
As substantially all of its operations are in France, the Group only has one geographic segment. However, this presentation may change in the future, depending on operating criteria and the development of the Group's businesses.
EBITDA - which corresponds to profit from ordinary activities before share-based payment expense, depreciation, amortization and provisions for impairment of non-current assets - is a key performance indicator for the Group and is used throughout this management report.

Offerings and services available under the Free and Alice brands

The Group offers its subscribers a number of different Internet access solutions (at prices ranging from
€9.99 to €37.97 per month), with a box provided and no installation fees.
Depending on the eligibility of the subscriber's line, the following broadband offers are available:

n Via ADSL, whichallows subscribers to access the Internet at a speed of at least 2 Mbps and up to 22.4 Mbps in areas where the local loop is unbundled, and 17.6 Mbps in non- unbundled areas, depending on whether a subscriber's line is eligible (IP speeds).

n Via VDLS2,which gives subscribers in unbundled areas and with short lines Internet access at speeds of up to 100 Mbps download and 40 Mbps upload.

n Via optical fiber (FTTH),which is available in Free rollout areas and provides subscribers with ultra-fast broadband (up to 1 Gbps download and up to 200 Mbps upload in bridge mode).

Through these offerings, subscribers are provided with the services described below:

n Telephony.All subscribers are provided with a telephone service under which they can make calls through their modem to landline numbers in Metropolitan France (apart from short numbers and special numbers), as well as to 60 or 108 landline destinations outside Metropolitan France depending on the terms of their package. Additionally, certain of the Group's offers include free calls or packaged deals for calls to mobile numbers in Metropolitan France.

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n Free proposes the largest television offeringin the market, comprising around

450 channels (of which some 90 or 200, depending on the type of subscription, are included in the basic packages), with some 100 high definition channels and a 50-channel catch-up TV service.

n Free also offers its subscribers numerous value added servicesincluding Freebox Replay (its catch-up TV service), video on demand (VOD or S-VOD), subscription to pay-TV channels (Canal+, beIN Sports, etc.) and video games.

When a subscriber signs up to one of the Group's offerings they are provided with a box. Two main boxes are currently available:

n The Freebox Revolution,which allows subscribers to connect all of their terminals and offers optimal Internet access. The Freebox Revolution also includes many innovative new services, such as the NAS server which has storage capacity of up to 250 GB accessible

from anywhere at any time, a Blu-RayTMplayer, and calls to all mobile numbers in
Metropolitan France. It incorporates state-of-the-art technologies such as PLC (Power
Line Communication), a gyroscopic remote control, a gamepad and loud speakers.
nThe Freebox mini 4K, which is the Group's new entry-level offering that replaces the Freebox Crystal. The Freebox mini 4K is the world's first triple-play box that has integrated AndroidTVTM, the GoogleTMplatform for TV, and is compatible with 4K technology (Ultra High Definition). It has Bluetooth technology and offers many other innovative
services, such as a remote control with a voice search function and the possibility of using a mobile phone as the remote control. It is also the most compact box on the market, measuring 11 x 15 cm.

Hosting offers and services available under the Online, Dedibox and Iliad Entreprises brands

The Group's hosting business is structured around three service areas, each of which is represented by a brand:

n Shared hosting services, marketed under the Online brand, which correspond to website hosting and the purchase and resale of domain names. These services are invoiced to customers based on an annual subscription and are primarily targeted at private individuals and very small businesses that have relatively low data storage requirements.

n Dedicated hosting services, marketed under the Dedibox brand, which correspond to the provision of dedicated servers to private individuals and SMEs that wish to secure their data. This offering is invoiced based on a monthly subscription.

n Server collocation services,which consist of providing physical space in fully secure and accessible data centers.

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The Group proposes two simple value-for-money mobile offerings, with 4G included since
December 2013:

nThe €2/month plan (€0/month for Freebox subscribers) which includes 120 minutes of voice calls per month in Metropolitan France and to French overseas departments (départements d'outre-mer - DOM), as well as to 100 landline destinations outside Metropolitan France and to mobiles in the United States (including Alaska and Hawaii), Canada, French overseas departments and China, plus unlimited SMS/MMS messages in Metropolitan France, 3G/4G mobile Internet access with 50MB data volume, and unlimited access to the FreeWifi network. This no-commitment plan - which also includes services such as voice mail - caller display and usage monitoring, was primarily designed for subscribers mainly wanting to make voice calls at competitive prices. Under the plan, subscribers can opt for extra minutes and data volume as well as for calls to additional foreign countries and from abroad.

n The Free Mobile Plan at €19.99/month (€15.99/month for Freebox subscribers)with unlimited voice calls and SMS and MMS messages as well as Internet access of up to

3 GB for 3G and 20 GB for 4G (fair use policy with speeds slowed in excess of these thresholds). All subscribers to this no-commitment plan can also make unlimited calls to landlines in 100 destinations outside Metropolitan France and to mobiles in the United States (including Alaska and Hawaii), Canada, French overseas departments and China, and have unlimited access to the FreeWifi network. In addition, subscribers can use their Free Mobile Plan, for 35 days per year and per destination, when they are in the French West Indies, Guiana, Canada or Israel as well as in around twenty European countries.

In tandem, the Group offers a selection of the latest mobile phones on the market, including top-of-the- range Apple, Samsung and Nokia phones. With a view to being as transparent as possible, Free sells its phones separately from its subscriptions, which means that subscribers can opt for whichever plan and phone they prefer, or can choose not to purchase a phone at all. Several different solutions are available for subscribers who choose to obtain their phone from Free:

o Purchasing a phone and paying for it upfront.

o Purchasing a phone and spreading the payment (four interest-free installments or

24 installments, depending on the model).

o Renting a phone: subscribers can rent high-end smartphones for 24 months. Depending on the type of phone chosen, the subscriber makes an initial payment of between €9 and

€99 and then pays a monthly rental fee of between €9 and €18 (again, depending on the phone) over a period of 24 months. At the end of the 24-month period subscribers can return their phone and get a latest-generation phone under a new rental agreement, or can extend the rental period for their existing phone.
In all cases, the Group recognizes the corresponding revenue when the phone is received by the subscriber.

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n Option 1(subscribers on an unbundled line), whereby the Group markets services entirely on its own network (excluding the local loop).

Under Option 1, direct costs per subscription and per month, as set out in the basic incumbent operator unbundling offer, were as follows at June 30, 2015:

Operating costs (partial unbundling)

o Rental of the copper pair and the ADSL splitter: ............................... €1.77

Operating costs (full unbundling)

o Rental of the copper pair: ................................................................. €9.051

n Option 5(subscribers not on an unbundled line), representing a wholesale offer proposed by the incumbent operator that is sold on to subscribers by Free.

Under Option 5, for a subscription that is sold at the same price, costs per subscription and per month are made up of access costs and the costs of the IP transit service.
Access costs

o The respective monthly fees for the 'DSL Access' and 'DSL Access Only' services are €4.79 and €12.53 (since April 1, 2015).

IP transit service costs

Option 5 costs also include IP transit service costs which vary depending on the bit rate used by all Option 5 subscribers. The price terms applicable in first-half 2015 were as follows:

o Usage fee per Mbps: ........................................................................ €7.00

o Access fees: ..................................................................................... €5.40

Option 1 gross margin and EBITDA margin are therefore significantly higher than Option 5 margins. Consequently, the Group's objective is to maximize the proportion of Option 1 subscribers or, where technically feasible, by directly offering Option 1 to new subscribers living in an area where the local loop has been unbundled.

1 Prior to April 1, 2015 the cost of renting the copper pair was €9.02

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n The Group also offers its subscribers in eligible areas the possibility of migrating to an FTTH offering.

Gross margin and EBITDA margin on FTTH offerings are much higher than Option 1 margins as the Group no longer has to pay the operating costs related to renting the copper pair from the incumbent operator.
The Group's objective is therefore to maximize the proportion of FTTH subscribers in eligible areas where technically feasible.

Since July 1, 2013, Free Mobile has no longer been able to apply asymmetric call termination charges. Consequently, these charges amounted to 0.78 euro cents in first-half 2015 compared with
0.8 euro cents in the first six months of 2014.

The Group has to pay roaming charges for the services it is provided, which are defined in a roaming agreement signed with France's incumbent operator during the first half of 2011. The agreement has a six-year term commencing from the commercial launch of the Group's mobile offerings and applies to
2G and 3G technologies. It has been amended since it was first signed - notably in relation to interconnection capacity - to take into account the increase in mobile subscriber numbers.
The roaming agreement allows the Group to:
- offer a service to subscribers with a 2G phone.
- add to its expanding network coverage.
The charges provided for in the roaming agreement include (i) a fixed portion corresponding to the purchase of a right of use for the period (which is recognized as capital expenditure in accordance with IFRS), and (ii) a variable portion based on volumes used (minutes, SMS, MMS, Internet, etc.). The volume-based variable portion represents the majority of the roaming charges paid by the Group.
Both gross margin and EBITDA margin are significantly higher for Free Mobile's own-network traffic than for roaming traffic. Margin levels also depend on (i) changes in subscriber usage patterns, particularly in relation to data, and (ii) the proportion of subscribers on the €19.99/month Free Mobile Plan (or €15.99/month for Freebox subscribers).
The Group's objective is therefore to maximize the amount of traffic carried directly on its own network, by pursuing the rollout targets described in section 1.1.3.c below, and to increase the proportion of subscribers on the €19.99/month Free Mobile Plan (or €15.99/month for Freebox subscribers), notably by migrating subscribers on the €2/month plan (or €0 for Freebox subscribers) to the
€19.99/€15.99 plan. Achieving this objective should be helped by the fact that people are increasingly using mobile Internet on a daily basis.
In accordance with the new powers assigned on August 6, 2015 to the French electronic communications regulatory authority (Autorité de régulation des communications électroniques et des postes - ARCEP) under the 'Macron Act' (France's new economic reform law), ARCEP plans to analyze the mobile network sharing agreements in place (roaming and RAN-sharing agreements). As part of this process, ARCEP will examine the Group's roaming agreement with a view to organizing a gradual phase-out of 3G roaming. Work has just begun to define the timing and conditions of the phase-out.

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(i) Transmission network and unbundling the local loop
Having laid over 80,000 km of fiber in less than 15 years, Iliad has rolled out one of the largest IP networks in France, both in terms of coverage and traffic volumes. The Group draws on this extensive network to connect up subscriber connection nodes and unbundle the local loop. Since the beginning of 2015 the Group has continued to extend its coverage by opening around 900 new subscriber connection nodes, which brought the total number of unbundled subscriber connection nodes to some 7,600 at June 30, 2015 and gave Free a network coverage rate of over 87% of the French population. This means that Free is now France's leading unbundler.
The optical fiber used in the transmission network is depreciated over periods ranging between 10 and
27 years. The equipment installed in the subscriber connection nodes (Freebox DSLAMs) is depreciated over 5 or 6 years.

(ii) Operating costs and capital expenditure by subscriber
Just as operating costs differ significantly between Option 1 and Option 5, so do levels of capital expenditure.
The main costs that the Group capitalizes for Option 1 relate to the following:

n The boxes provided to subscribers. In first-half 2015, the cost of a Freebox ranged from a few dozen euros (for the Freebox Crystal) to €180 for the Freebox mini 4K and €290 for the Freebox Revolution. The depreciation of the euro against the US dollar during the period had a negative impact on the cost of the Freeboxes, as their components are mainly purchased in US dollars.

n Fees billed by the incumbent operator for access to unbundling services (also known as cabling costs or access fees), which amount to €56 per subscriber for full unbundling and

€66 per subscriber for partial unbundling.

n Logistics and modem dispatch costs.

All of the above items (Freebox modems, access fees and logistics costs) are depreciated over a period of five or seven years.
Under Option 5, total capital expenditure is lower as the majority of new subscribers are provided with
Freebox Crystal modems, which only cost a few dozen euros.
The main capitalized costs correspond to access fees billed by the incumbent operator, breaking down as follows:

o Fees for access to the DSL Access service: .................................. €56.00o Fees for access to the DSL Access Only service: .......................... €61.00o Fees for access to the DSL Access Only service (where operator access

was already in place): ..................................................................... €17.00
Capitalized access fees are also depreciated over a period of seven years as from when the related services are provided.

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(i) Migration of the landline network to VDSL2 technology
In line with its pioneering image, in the second half of 2013 the Group launched a large-scale plan for migrating its network equipment (Freebox DSLAMs) to VDSL2 technology.
During 2014 and the first half of 2015 the Group stepped up its drive to complete this equipment migration plan, which is aimed at offering a maximum number of subscribers faster Internet speeds. At June 30, 2015 the Group had some 7,600 subscriber connection nodes equipped with VDSL2 technology, enabling over 20% of Freebox subscribers to increase their Internet speeds.
(ii) Rollout of an FTTH network
To support the rollout of its FTTH (fiber-to-the-home) optical fiber network, the Group is making fresh investments in network infrastructure through its subsidiaries Free, Free Infrastructure, IRE and Immobilière Iliad.
By rolling out its own optical fiber local loop, the Group directly owns all of its fiber-to-the-home infrastructure and is therefore totally independent from the incumbent operator. This means that it has complete control over its service quality and subscriber relations, and can provide its subscribers with access to a technology that fully meets their growing bandwidth requirements.
The FTTH rollout is a logical extension of Iliad's strategy of investing in the deployment of its own infrastructure with the aim of raising margins and profitability.
There are two distinct geographic rollout zones, each subject to different deployment processes:

Very densely populated areas. At June 30, 2015, the Group had 230 sites (optical nodes) in very densely populated areas, representing potential coverage of around 3.4 million FTTH plugs. During the first half of 2015, the Group stepped up the pace of its vertical connections and increased the

number of migrations of eligible subscribers within these areas.

Other areas. In August 2012, the Group was the first operator to take up Orange's third-party operator access offer for the FTTH lines rolled out by the incumbent operator, by undertaking to co-finance the FTTH network in certain urban areas. This offer enables each operator to co-finance the rollout only to the extent of the lines required to serve its subscribers in the local area concerned. By pooling resources to create a single network shared among the fiber optic providers and subscribers the service can be expanded to a wider population. At June 30, 2015, the Group had given network co financing commitments covering more than 4.5 million homes in these areas which will be provided with FTTH coverage by 2020, and it already had coverage of 700,000 connectable FTTH plugs. The

Group also plans to partner the incumbent operator in any future rollouts.

Since it was awarded France's fourth 3G mobile license in January 2010, the Group has implemented its mobile network rollout strategy by drawing on its extensive landline transmission network (see section 1.1.3.a above) and putting in place a specific organizational structure to effectively manage and oversee the network rollout process (seeking out sites, undertaking discussions with all types of lessors, carrying out administrative and regulatory procedures, performing installation works and ensuring compliance with the related safety rules, and monitoring the operation and maintenance of radio equipment at sites where it has been installed).
Despite the more restrictive regulatory framework now applicable in France for the installation of mobile masts (following the introduction of the 'Abeille Act' and the 'ALUR Act'), the Group managed to step up the rollout of its mobile network in the first half of 2015, with over 800 new sites deployed during the period compared with 604 in the first six months of 2014. At June 30, 2015 the Group had a total of almost 5,300 3G sites in service, giving it a direct 3G mobile coverage rate of around 80% of the French population.

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In addition to its rollouts, in order to offer the best possible subscriber experience for users of mobile data, the Group has significantly increased the number of migrations of its sites to 4G technology. The Group's mobile network was designed from the outset to use the latest technologies (an all-IP NGN) and it was therefore able to open some 1,900 new 4G sites during the period (compared with 587 in first-half 2014). At June 30, 2015, the Group had a total of almost 4,000 4G sites in service (versus
1,411 one year earlier), bringing its 4G coverage rate to over 50% of the French population.
In parallel with its large-scale rollout process, during the period the Group continued to invest in extending its core network and information systems as well as in mobile site interconnection links.
In view of the progress achieved in its mobile rollout process and in order to keep up a sustained pace of deployment in the coming years, the Group is standing by its objectives (i) to focus its deployment efforts on densely populated areas, with more than 1,500 new sites planned for 2015, in order to maximize the volume of traffic carried directly on its own network, and (ii) to accelerate the conversion of existing sites to 4G in order to achieve a 4G coverage rate of around 60% of the French population by the year-end.
The Group is also standing by the coverage commitments it made to ARCEP in connection with its 3G
and 4G licenses:

o 3G license: 90% of the French population covered by 2018.

o 4G license: 25% of the French population covered by October 2015, 60% by

October 2019 and 75% by October 2023.
On January 1, 2015, the Group's frequency portfolio was increased by 5 MHz within the 1,800 MHz frequency band as part of the refarming process defined by ARCEP in its decision of December 16, 2014. The frequencies concerned gradually became available during the first half of
2015 and have been fully available throughout France since July 1, 2015. On July 30, 2015, ARCEP
authorized Orange and SFR to refarm their 1,800 MHz frequencies, which should free up 10 MHz within this band for Free Mobile on May 25, 2016. An annual fee is payable for the frequencies.
Furthermore, 30 MHz (six 5 MHz frequencies) within the 700 MHz frequency band will be sold at auction before the end of the year. The Group will participate in the auction.
The depreciation/amortization periods applied for the main assets brought into service are as follows:

o Licenses: 18 years.

o General equipment: 10 years.

o Technical and mobile equipment: 6 to 18 years.

o Other equipment: 3 to 5 years.

o Other assets: 2 to 10 years.

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During the first six months of 2015 the Group significantly strengthened its physical presence in
France by:

n Opening five new stores, bringing the total number of Free Centers to 48 at end-June 2015.

n Continuing to roll out France's first self-service kiosks for mobile subscriptions that have an integrated SIM card dispenser, in partnership with the Maison de la Presse and Mag Presse store network. At June 30, 2015, the Group had already set up around

1,600 such kiosks across France, both in Free Centers and via its partnership network.

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