O2 Czech Republic : January to September 2016 Financial Results – Interim Report (25 October 2016)

Interim report

25 October 2016

• Operating profit EBITDA increased slightly to CZK 7.9 billion in the first nine months, net profit grew by 8% to CZK 4 billion.
• Number of mobile contract customers grew by more than 90 thousand. Their loyalty (churn) reached all times maximum.
• Increasing demand for new services led to fixed segment revenue turnaround.
• Consolidated revenue reached CZK 27.7 billion and stopped year on year decline.
• O2 provides outlook for the full year 20161 - EBITDA of CZK 10.4 to 10.7 billion and net income of CZK 5.1 to 5.4 billion. For both, the lower bound is above last year actuals.
• O2 confirmed its dividend policy, it plans proposing payment of 90% to 110% of 2016 net income.
• In addition to dividend payment O2's Board of Directors considers proposing to the shareholders distribution of part of share premium of CZK 4 per share. This is not a one-off payment, but a sustainable way of gradual distribution of entire share premium in actual amount of CZK 36 per share2.

Despite continuous pressure in corporate and public sector segments and since May also negative impact of new roaming regulation, O2 has been able to maintain flat revenue year on yearand slightly increase operating profitability. Digital O2 TV and mobile data continue staying the key growth areas.

Based on the financial results for the first nine months of 2016 and considering the outlook for the fourth quarter, O2 expects that the 2016 full year consolidated EBITDA will reach CZK 10.4 to 10.7 billion and consolidated net income will reach CZK 5.1 to 5.4 billion.

A year ago, O2's Board of Directors introduced its new dividend policy, based on which it considers proposing distribution of 90% to 110% of net profit. This dividend policy is still valid

1 The 2016 full year outlook excludes any one-off/exceptional items, which may arise in the period from 25 October and 31 December 2016. 2 Calculated as current (as of 30 September 2016) share premium (CZK 11.9bn) less treasury shares account (CZK 658m), i.e. CZK 11.2bn in total, over current total number of shares (310.2m).

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and the Board of Directors will reflect it also in its dividend proposal for 2016. In addition to the dividend payment from the profit, the Board of Directors intends to propose to the shareholders a distribution of part of the share premium of CZK 4 per share. Sustainability of the shareholder remuneration's per share absolute amount will be one of the key proposal's factors in the future.

"I am pleased that the loyalty of our customers keeps growing. They enjoyed the new services, which we introduced in the past year and use them more. With the new unlimited tariff for callings from fixed lines to all networks they call by 40 % more. Also the popularity of digital televisionO2 TVis growing. In August, we launched for our customers new O2 TVFootball channel," comments Tomáš Budník, Chief Executive Officer and the Chairman of the Board of Directors of O2 Czech Republic on the results.

"Despite a negative impact of roaming regulation on our mobile revenue in the Czech Republic and in Slovakia, we have been able to maintain total revenue flat year on year thanks to customers' interest in new services and increased net profit by 8%", adds comments on the financial results Tomáš Kouřil, company's Chief Financial Officer and Vice-Chairman of the Board of Directors, and continues "For the 2016 full year, we expect operating profit EBITDA to reach between CZK 10.4 and 10.7 billion and the net income in the range from CZK 5.1 to 5.4 billion."

"There is no change in our dividend policy. We intend to propose to the shareholders distribution of 90% to 110% of the net profit for 2016 in dividends. On top of that we intend to propose distribution of the part of share premium of CZK 4 per share. This is not a one-off payment, but our mid-term object to gradually pay out the whole share premium amount." adds Tomáš Budník and concludes: "We present our proposal in the time of record low interest rates and our relatively low indebtedness compared to the levels seen in the industry."

Consolidated operating and financial results for the first nine months of 2016 comprise results of all subsidiaries, including O2 Slovakia.

As of the end of September 2016, total number of mobile customers reached 4.921 million. The number of contract customers increased by 2.5% year-on-year reaching 3.330 million. Since the beginning of the year their number increased by 92 thousand and their loyalty measured by average churn reached all times maximum. They represented already 67.7% of the mobile customer base, up by 1.5 percentage point. Number of prepaid customers reached 1.591 million customers. Decline of their number slowed down in the first nine months of 2016 and between June and September even grew. During summer, O2 offered to its prepaid customers a new prepaid card PředplaDENka, thanks to which they pay only in days, when they make a call, send an SMS or connect to Internet. In this day they can make unlimited calls to all networks for a fixed price.

Helped by LTE broadband network rollout and tariff proposition with increased data package mobile data traffic increased by over 80% year-on-year. Number of internet in handset service went up by 15% year-on-year to 1.738 million.

Already 55% of handsets in O2 network is already a smartphone and one fourth supports LTE technology. Number of customers with LTE smartphone and with USIM card, which supports the new technology, exceeded 730 thousand at the end of September and continues growing.

Numberof O2 TVservice customers provided on O2 fixed line as well as on internet connection from any provider reached 220 thousand (IPTV and OTT), up by 11.6% year-on-year. A complementary service MULTI which enables customers watching TV on more TV sets at one time became very popular. Already 32 thousand customers subscribed for this service and thus O2 can show off with over 250 thousand active set top boxes. Unique features (time shift, recordingetc.), and also own O2 TVSport channel with multidimension drive increasing demand for digital television. In August, O2 launched a new O2 TVFootball channel dedicated to the most popular sport in the country. Next year, it intends to add individual channels dedicated to tennis and ice-hockey.

Thecustomers also lie watching O2 TVvia internet and mobile application, or in restaurants. Following the successful cooperation with Staropramen brewery, O2 newly concluded a partnership with No. 1 brewery Pilsner Urquell. The market share of restaurants, pubs and bars' chainsof those two breweries is over 60%. Number of viewers, who actively watch O2 TVvia internet and mobile application, continues growing and in September these means of watching TV were already used by close to 350 thousand watchers.

Number of xDSL fixed internet customers reached 774 thousand at the end of September 2016. Thanks to internet speed increase through installation of remote DSLAMs, the share of customers enjoying VDSL technology on total xDSL base reached already over 60%, up by 10 percentage points year on year.

Almost all the households has been already passed to the new tariffs, which offer unlimited calls from fixed line to all mobile and fixed networks in the Czech Republic. The proposition thanks to which the customers do not need to count called minutes and are not charged any fee for line rental is liked among the customers. This is confirmed by the fact that with new tariffs customers call in average by 40% more. Total number of fixed voice lines reached 727 thousand at the end of September 2016.

Number of mobile customers in Slovakia increased by 5.2% year-on-year to 1,865 thousand. Through O2 Business Services O2 in Slovakia has been offering also fixed services for corporate customers from the beginning of the year.

In line with its long-term strategy to focus after the infrastructure spin off on development and offer other than traditional telecommunications services, O2 is extending its business into new areas that are currently experiencing a boom. At the same time this is happening in the time when trends in the telecommunications industry are changing significantly, and when the O2's financial results in the coming years will be negatively impacted by European roaming regulation. Following the handsets and tablets insurance and smart travel insurance in handset, O2 is preparing for its customers unique telco-insurance products. Another example of innovative services is a complete solution for electronic sales reporting, where O2 already belongs to the most relevant market players.

Total consolidated operating revenue reached CZK 27.720 billion in the first nine months of 2016, flat year-on-year. Operating revenue in the Czech Republic totalled CZK 22.918 billion, representing a 0.1% growth. Fixed business operating revenue improved by 0.5% year-on-year toCZK 8.600 billion, largely driven by continuous O2 TVrevenue growth and higher ICT revenue. Mobile operating revenue reported slight 0.2% decline to CZK 14.319 billion. Voice and SMS revenue declines driven by roaming regulation and competitive pressures in corporate and public sector segments were almost compensated by mobile data and hardware revenue growths. In Slovakia, revenue reached CZK 4.934 billion, a 0.5% year-on-year growth. Revenue denominated in euros improved by 1.7% to EUR 182 million.