Cyfrowy Polsat
Transcription
Cyfrowy Polsat
pa m Co ny Tomorrow’s cash cow, still a fast growing calf today Analyst: Sobiesław Pająk, CFA, [email protected], +48 (22) 489 94 70 rt po Cyfrowy Polsat Re 4/2008/CR (150) June 19, 2008 pa m Co ny 4/2008/CR (150) June 19, 2008 Tomorrow’s cash cow, still a fast growing calf today While Cyfrowy Polsat’s business model, making it at the moment a perfect vehicle to capture the development of consumerism and rising disposable incomes of the society (also at the lower-part of the income scale), should grant the Company further 2-3 years of robust growth of profits, once the pay multichannel TV market approaches its maturity stage, this growth is likely to come to a halt. Hence, in a LT perspective Cyfrowy should be perceived as a no-growth (or little-growth) cash cow, whose ultimate value will constitute a function of the adopted dividend policy and ability to develop a bundled offering. aaLack of network-reach-embedded constraints constitutes the main competitive advantage of DTH over cable and IPTV at the moment; with large part of the population inhabiting off-largecities-areas, Poland appears now to constitute more favorable operating environment for DTH platforms than for CATVs or IPTV providers. However, over the LT the competitive edge may gradually shift to telcos and CATVs unless satellite providers manage to offer (most likely on the basis of third-party infrastructure) a bundled service to their users. aaThe main risk factors related to Cyfrowy Polsat are more of broader, environment-related nature (e.g. possibility of an acceleration of the DTT roll-out, the possible consequences of a GDP slow-down in the context of Company’s volume-driven DTH strategy increasingly directed recently towards the prospects from the lower part of the income scale, more vivid competition from DTH rivals (both existing and possible newcomers), etc.) than of purely company-specific character. Market Cap.: US$ 1,715 m Reuters code: CPSM.WA Av. daily turnover: US$ 1.42 m Free float: 25% 12M range: PLN 12.84-15.40 Guide to adjusted profits Adj EBITDA, adj EBIT, adj PBT and adj NI exclude IFRS2 SOCs. Key data IFRS consolidated Sales: EBITDA Adj EBITDA: DTH MVNO EBIT Adj EBIT Net income Adj net income Net debt EV P/E P/CE EV/EBITDA EV/EBIT EV/FCFF Gross dividend yield FCFF yield No. of shares PLN m PLN m PLN m PLN m PLN m PLN m PLN m PLN m PLN m PLN m PLN m x x x x x % % ths. 2007 796.7 165.9 176.1 179.1 -3.0 145.1 155.3 113.4 123.6 71.8 3,801.6 30.2 27.8 21.6 24.5 21.6 0.0 4.6 268,325 2008E 1,051.1 364.5 364.5 397.5 -33.1 335.6 335.6 263.8 263.8 -262.7 3,467.0 14.1 12.7 9.5 10.3 9.5 0.0 10.5 268,325 2009E 1,362.1 484.6 484.6 527.6 -43.0 445.9 445.9 376.2 376.2 -680.4 3,068.4 10.0 9.0 6.3 6.9 6.3 0.0 15.8 269,694 2010E 1,624.5 595.7 595.7 604.0 -8.3 548.4 548.4 471.2 471.2 -1,153.5 2,614.3 8.0 7.3 4.4 4.8 4.4 0.0 22.8 271,063 Source: Company, DM IDMSA estimates Stock performance Source: www.money.pl Upcoming events 1. 2. 3. 4. AGM to approve the dividend policy of the Company and decide upon the use of last year’s NI: July 4, 2008 Launch of MVNO: at the turn of 2Q08 and 3Q08 2Q08 financial results release: August 13, 2008 3Q08 financial results release: November 13, 2008 Catalysts aaThe way we see it, the Company’s 2008-2010E growth outlook is strong (sales/SOC-adjusted EBITDA CAGR forecast at c. 27%/ 50%), due to (i) monetization on the 2007-2008E robust DTH volume additions and (ii) a business model providing a boost to profits in periods when users’ net adds decline in relation to the seasoned subscribers’ number. Such envisaged near- to mid-term earnings momentum coupled with subdued, due to reasons of companyspecific nature, investment sentiment towards alternative local sectoral plays may make Cyfrowy Polsat the media & entertainment sector equity exposure of choice in the near- to mid-term. rt po Cyfrowy Polsat Sector: Media & Entertainment Fundamental rating: Buy (-) Market relative: Overweight (-) Price: PLN 13.9 12M EFV: PLN 18.3 (-) Re Analyst: Sobiesław Pająk, CFA, [email protected], +48 (22) 489 94 70 1. Brisk yoy profits growth in the coming quarters, on the back of monetization on last year’s volumes net add and business model resulting in a hike in profitability in periods when the new subscribers represent a lower portion of the overall subscribership in relation to the seasoned customers 2. Adoption of a dividend policy envisaging hefty distributions to shareholders in periods of accruing excess cash Risk factors 1. Acceleration of the DTT rollout: could adversely impact Cyfrowy Polsat, due to its focus on off-largecities areas and recent clear drive towards the lowerto-average income part of the customer spectrum 2. Major GDP slowdown: could cap the affordability of the Company’s service to lower-income prospects and result in a down-selling effect 3. Inability to create an appealing bundled offering in a LT: could result in an outflow of subscribers to telcos and CATVs 4. Competitive pressures intensifying (more aggressive actions by competing DTHs, planned launches of new satellite platforms, approaching kick-off and roll-out of DTT): may result in thinner volume adds, lower ARPU, growing churn and higher content costs than we assume 5. Weakening of PLN against US$ and Euro: would boost the FX-denominated OPEX component 6. MVNO project launch: will dilute the DTH profits in short- to mid-term 7. Share supply overhang: lock-up on 5.8 million (>2%) of shares (acquired at PLN 0.04 per share) expires at the turn of November and December 2008 8. Current management stock option program: may generate material SOCs under IFRS2 9. Lack of adoption of a clear dividend policy Contents 1. Investment opinion . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.1. Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.2. DTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.3. MVNO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.4. SOTP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. Global market outlook and trends . . . . . . . . . . . . . 19 3.1. Distribution of TV programmes . . . . . . . . . . . . . . . . . . . . . . . . 19 3.2. Mobile virtual network operators (MVNO). . . . . . . . . . . . . . . . 34 4. Local market outlook and trends . . . . . . . . . . . . . . 38 4.1. Distribution of television programs . . . . . . . . . . . . . . . . . . . . . 39 4.1.1. DTT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4.1.2.CATV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.1.3.DTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.1.4.IPTV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.1.5.Television programs distribution market forecasts . . . . 49 4.2. MVNOs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.2.1.Mobile and MVNO market forecasts . . . . . . . . . . . . . . . 53 5. Business model and strategy. . . . . . . . . . . . . . . . . 55 5.1. Shareholder structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 5.2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 5.3. Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 5.3.1.DTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Packages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Packages of thematic channels . . . . . . . . . . . . . . . . . . . . . . . 59 Relax Mix package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 FTA channels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Development of the programming offer . . . . . . . . . . . . . . . . . 59 Set-Top-Boxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 New services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.3.2.MVNO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.4. Distribution network. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.5. Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 5.6. Technical infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 5.7. Competitive advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 5.8. Risk factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.9. Business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 5.10.Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 6. Financials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.1. Seasonality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.2. FX exposure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.3. Financial leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.4. Dividend policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.5. NWC and deferrals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 6.6. Capex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 6.7. YTD results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 7. Financial forecasts . . . . . . . . . . . . . . . . . . . . . . . . . 79 7.1. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 7.2. Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 7.3. Margins and profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 8. Financial statements (IFRS consolidated). . . . . . 103 Cyfrowy Polsat 1. Investment opinion aaLack of network-reach-embedded constraints constitutes the main competitive advantage of DTH over cable and IPTV at the moment; with large part of the population inhabiting off-large-cities-areas, Poland appears now to constitute more favorable operating environment for DTH platforms than for CATVs or IPTV providers. However, over the LT the competitive edge may gradually shift to telcos and CATVs unless satellite providers manage to offer (most likely on the basis of third-party infrastructure) a bundled service to their users. aaCyfrowy Polsat is the largest paid DTH platform in CEE, following the low cost leadership strategy, and offering ‘the best price for quality content’ programming. Compared to competing DTHs, Cyfrowy focuses on broader income range of customers, which coupled with comparable programming content offered at discount-to-peers prices proves to be the winning card, allowing the Company to grow its volumes way ahead of local peers. aaThe way we see it, the main risk factors related to Cyfrowy Polsat are more of broader, environment-related nature (e.g. possibility of an acceleration of the DTT roll-out, the possible consequences of a GDP slow-down in the context of Company’s volumedriven DTH strategy increasingly directed recently (from 4Q06, when the Mini package was introduced) towards the lower-end of the subscriber market, more vivid competition from DTH rivals (both existing and possible newcomers), etc.) than of purely companyspecific character (though the latter ones also exist). aaStrong 2008-2010E profit growth outlook (despite mid-term dilutive effect of the MVNO launch), due to (i) monetization on the 2007-2008E robust DTH volume additions and (ii) a business model providing a boost to profits in periods when net adds decline in relation to the seasoned subscribers’ number. aaEnvisaged strong short- to mid-term profits’ momentum of the Company coupled with subdued investment sentiment towards alternative local sectoral plays (due to factors of nature related to particular companies) may make Cyfrowy Polsat the media & entertainment sector equity exposure of choice for the near- to mid-term. The largest DTH in CEE, following the low cost leadership strategy with ‘the best price for quality content’ offering, growing way ahead of its local peers Compared to competing DTHs, Cyfrowy focuses on a broader range on the customer income scale, which coupled with comparable programming content offered at discount-topeers prices proved to be the winning card ???????????????????????? Cyfrowy Polsat is the largest – in terms of number of subscribers – paid DTH platform in CEE (6th largest in Europe), growing rapidly on the back of its low-cost leadership generic strategy and ‘the best price for quality content’ offering (affordable entry packages with upward migration outlook, lack of ‘killer programming’ in the offer) coming on the top of Poles’ rising incomes and entertainment needs. The Company penetrates predominantly rural areas and smaller cities, which often lie beyond the scope of alternative fee-based multichannel platforms (IPTV, CATV), targeting a broad income range of the DTH customers group. With such business approach, the Company’s growth has been to-date mainly based on soaring volumes (the share in DTH’s net adds way above those of alternative satellite platforms), as Cyfrowy’s offering holds most appeal and affordability to the rising disposable income inhabitants of small cities and rural areas, previously not subscribing to any kind of a paid multichannel TV package. Compared to competing local DTH platforms (Cyfra+, ‘n’) Cyfrowy Polsat focuses on a broader income range of clients and off-large-city areas, which coupled with comparable programming content offered at discount-to-peers prices proves to be a winning card during the phase of dynamic growth of volumes on the market. Moreover, the way we see it, the Company’s TV programs’ package strategy has been better aligned to subscribers’ needs than the peers’ strategies. Cyfrowy Polsat is the only digital platform in Poland to offer a base family package (the ‘n’ platform is divided into thematic channels only, while Cyfra+ offers nested series of packages, which often makes customers purchase channels in which they have no interest). This – apart from the change in the new subscribers acquisition strategy (switch from STB leases to STB outright sales) – helps keep the churn reasonably low, as terminating the service would directly affect all family members. 7 Cyfrowy Polsat Large potential users’ base + strong brand → the MVNO bundle may succeed Lack of network-reachembedded constraints constitutes at the moment the main competitive advantage of DTH over cable and IPTV However, the LT well-being of DTH operators will depend, in our view, on their ability to provide a bundled service to their users The risk factors related to Cyfrowy are mainly of broader, environmentrelated nature, and include… ...possible acceleration of the DTT roll-out (as DTT is likely to have most appeal for the low-to-average income inhabitants of smaller towns and rural areas, should its rollout be sped up Cyfrowy could suffer as it targets also this customer group),… 8 To further capitalize on its ample subscribers base (c. 2.2 million DTH households as of the end of April) Cyfrowy Polsat plans to bundle its DTH service with a MVNO offering at the turn of 2Q08 and 3Q08. The MVNO service stands a chance for success, in our view, on the back of the strong brand-name of the Company (one of key success factors in the MVNO business) and large potential users’ base (Cyfrowy’s DTH households). As a DTH operator (i.e. distributor of paid television program packages by way of signal transmission via transponders at a geostationary satellite) Cyfrowy Polsat competes not only with alternative DTH platforms, but also with providers of such service by other means (i.e. cable, IPTV). Traditional (analog) CATVs engender less customer loyalty than DTH (as satellite subscribers, unlike CATV viewers, have to purchase a satellite dish), but CATVs’ switchover to digital enabling them to roll out bundled services, which - at least for now - cannot be easily deployed via most satellite platforms, is fostering loyalty of customers, while offering them a richer range of value added services (VOD). It should be noted, though, that the DTH service is not subject to network infrastructure reach constraints, which are embedded both in cable and IPTV offerings; this provides the former with a clear upper hand in rural areas and small cities, which often lie outside the non-satellite TV distribution platforms’ reach. On the other hand, however, rural areas and small cities tend to be inhabited by people with lower disposable income and purchasing power, which is unlikely to protect the DTH platforms from the low-cost DTT service. Hence, from their perspective, the slower the pace of analog terrestrial signal switch-off, the better. All in all, with large part of the population inhabiting off-large-cities-areas (c. 60% of the population inhabiting villages and towns with less than 50 thousand dwellers), Poland appears to constitute at the moment more favorable operating environment for DTH platforms than for CATVs or IPTV providers. Putting another way, despite the infringed ability to easily provide fully-blown bundled service, among the existing subscription multichannel TV platforms it is DTH that appears to be the prime beneficiary of current economic upswing and people’s rising incomes, due to its ability to penetrate rural areas and smaller towns, which often lie beyond the network scope of cable and IPTV providers; by the same token, due to its lack of network-reach-implied constraints DTH has been the main beneficiary of the delayed DTT roll-out. It should be noted, however, that over the long term the competitive edge may gradually shift to telcos and CATVs unless satellite providers manage to offer (most likely on the basis of thirdparty infrastructure) a bundled service to their users. The way we see it, the main risk factors related to Cyfrowy Polsat are more of broader, environmentrelated nature (e.g. possibility of an acceleration of the DTT roll-out, the possible consequences of a GDP slow-down in the context of Company’s volume-driven DTH strategy increasingly directed recently (from 4Q06, when the Mini package was introduced) towards the lower-end of the subscriber market, etc.) than of purely company-specific character (though the latter ones also exist, e.g. share supply overhang). First, the current plan for the introduction of DTT in Poland seems to be still reasonably favorable for DTH providers. The reasons for this are twofold. First, Poland will be the late implementator – the first terrestrial digital islands are to be created at the turn of this and next year, i.e. when the pay multichannel penetration is likely – according to our forecasts – to dwell almost at the 70% level. Second, the national roll-out is planned for completion in 2012 (with possible extension till mid-2015), leaving pay multichannel platforms at least further 4-year grace period. Should this provisional plan, however, become altered, with accelerated – compared to the currently binding schedule – roll-out throughout the country and/or faster (i.e. pre-2013) launches of additional digital multiplexes, DTH providers would likely suffer (or at least enjoy less upside), as the DTT offering would be probably most appealing to inhabitants of small cities and rural areas and households with low-to-average incomes. It straightforwardly follows then that Cyfrowy Polsat, targeting regions off-large-citycenters and a broader income range of clients (inclusive of lower-to-average income part of the DTH market (the Mini package)) would suffer from such an acceleration. Please note that our market projections and forecasts for the Company are based on the assumption that the aforementioned current provisional plan for the introduction of DTT in Poland will be kept; while we are not able to assess (even roughly) what is the risk of a scenario in which the plan is changed (and the DTT roll-out is accelerated and/or the number of multiplexes becoming operational before 2013 is enlarged), it is obvious to us that such a hypothetical development would open up some downside risk for our current forward estimates regarding: (i) DTH penetration, (ii) Cyfrowy’s DTH subcribership, and (iii) Cyfrowy’s financial results. ???????????????????????? Cyfrowy Polsat ...possible consequences of a GDP slow-down in the context of Company’s volume-driven DTH strategy increasingly directed recently also towards the lower-end of the subscriber market (though it is to some extent mitigated by the pre-paymentbased subscriber billing safety valve mechanism embedded in Cyfrowy’s business model),... ...and more vivid actions by competing DTHs Strong 2008-2010E SOCadjusted profit growth outlook, due to (i) monetization on the 2007-2008E robust DTH volume additions and (ii) a business model providing a boost to profits in periods when net adds decline in relation to the seasoned subscribers’ number We value Cyfrowy Polsat’s equity in the PLN 16.6-19.9 per share range Envisaged robust shortto mid-term earnings momentum at the Company coupled with subdued investment sentiment towards alternative local sectoral plays may make Cyfrowy the media & entertainment sector equity exposure of choice → Buy + Overweight ???????????????????????? Second, while Cyfrowy’s focus on the broad disposable income range of small cities and villages inhabitants constitutes the best strategy during an expanding economy, it would be more risky in times of economic slackness/contractions; consequently, a major slowdown of GDP (unexpected at the moment in the foreseeable future) would most likely cap the affordability of the Company’s service to lower-income prospects, and result in rising bad receivables from current subscribers and/or a downselling effect. Please note that the DTH business model of the Company makes it a pure play on consumerism and rising disposable incomes of the society (also at the lower-part of the income scale). In such context, the adverse impact of slowing GDP on Company’s results could be expected to be two-faceted. First, it could cap the influx of new subscribers, limiting the affordability of the service to the prospects from the lower-income range. Second, the Company’s current below-average income subscribers could default on their subscription payments, boosting provisions for bad accounts receivable or at least start to migrate to cheaper program packages. It should be, however, emphasized that the Company is (at least partially) hedged against the latter via a pre-payment-based subscriber billing safety valve mechanism embedded in its business model, which apart from reducing the bad receivables risk, diminishes Cyfrowy’s NWC financing requirements and favorably impacts TV programming content costs. Nonetheless, overall we do perceive the strategy of Cyfrowy Polsat as more aggressive than the strategies of its local DTH peers – being more rewarding during the periods of strong economic growth, but also potentially more risky (most likely more severe penalty during times of economic hardship). Finally it should be noted that with the approaching saturation of the domestic DTH market (likely to be attained, in our opinion, in c. 2-3 years from now) the competition on the domestic DTH scene seems to be on a rise. For example, the 2H06 entrant ‘n’ presented very aggressive business targets (regarding the details, please refer to section Local market outlook and trends; DTH) – while at the moment we remain skeptical as far as their ultimate attainment is concerned, we have no doubts than ‘n’ intends to more vigorously fight for its share in the sector’s volume net add – public television (TVP) announced plans of launching its satellite platform in 2H09 and local telco incumbent (TP SA) entered into an ageement with DTH platform Cyfra+ regarding re-distribution of its TV packages in areas outside of the reach of the incumbent’s IPTV over DSL service. While at the current stage it is hard to assess their chances for success (especially as TPSA seems to target the new market segment with a mistailored product and TVP’s project will constitute a truly late entrant), they are likely to add to the competitiveness of the local DTH market (though our gut feeling is that this risk should not give sleepless nights to the shareholders of local DTH incumbents). Financial-results-wise, we forecast strong (27% p.a.) growth of Cyfrowy Polsat’s 2008-2010E revenues, mainly on the back of robust DTH volumes and launch of the MVNO project. Simultaneously, we forecast the Company’s OPEX increases to lag top-line’s, due to (i) continued cost-consciousness, (ii) launch of an in-house DTH STB assembly (enabling to cut the STB subsidies), (iii) less painful initial impact from the new additions once the existing pool of subscribers is large (in volume terms) relative to the newly added ones and (iv) material fixed-costs component. It straightforwardly follows then that we forecast Cyfrowy Polsat’s consolidated EBITDA margin to extend its last year’s growth from its 2006 trough, despite the launch of the MVNO business; our mid-term targets for the entire group, DTH business and Cyfrowy’s MVNO stand, respectively, at >35%, >40% and 0% (LT (maturity stage) SOC-adjusted EBITDA margin expectancy for the MVNO endeavor rests at >10%). Consequently, despite the mid-term profit-dilutive kick-off of the MVNO project, we forecast impressive 2008-2010E CAGR of Cyfrowy’s SOC-adjusted consolidated EBITDA – app. 50%. On the basis of such financial forecasts for the Company, we value its equity in the PLN 16.6-19.9 per share range, with 12M EFV of PLN 18.3 per share (mid-range of valuation). Summing up, Cyfrowy Polsat provides an exposure to growing DTH market in Poland, which constitutes at the moment probably one of the fastest growing segments (perhaps apart from the Internet advertising) of the broadly defined media and entertainment sector in Poland. While the Company’s aggressive strategy would bear some risk during the economic down-cycle, the emergence of such adverse economic conditions appears rather unlikely in the mid-term. Furthermore, although the competition on the DTH scene is clearly rising (more aggressive moves by current competing players, new platforms’ launches on the horizon), we do not expect this tendency to materially impact Cyfrowy Polsat’s supreme mid-term (2008-2009E) outlook for profits growth, which coupled with apparent subdued investment sentiment towards alternative local media & entertainment plays (due to company-specific reasons (execution of dear M&A deals in case of TVN and Agora, shortening of fixed assets’ depreciable lives (depressing reported profits) in case 9 Cyfrowy Polsat of Multimedia)) may make Cyfrowy Polsat the preferred sectoral equity exposure in the near- to midterm; on such grounds we initiate our coverage of the Company’s equities with a Buy LT fundamental rating and an Overweight ST market-relative bias. 10 ???????????????????????? Cyfrowy Polsat 2. Valuation aaGiven (i) start-up nature of the MVNO project and (ii) different business metrics of the DTH and MVNO operations at their maturity stage, sum-of-the-parts (SOTP) appears to constitute the most proper valuation approach towards Cyfrowy Polsat. aaDCF + peer-relative exercise (based on IFRS2-SOC-adjusted profits). aaCyfrowy’s DTH business peer-relative valuation based on forward EV/EBITDA multiples (average P/E multiples for the closest peer group – DTH operators – appear meaninglessly high). aaThree peer groups for Cyfrowy’s DTH business: (i) global DTH platforms (the closest peer group from the operating perspective), (ii) local paid TV programs distributors (CATV), and (iii) CEE TV broadcasters. aaCyfrowy’s DTH business equity value (DCF + peer-relative): PLN 4.4-5.4 billion (PLN 16.4-19.6 per share). aaMVNO does not appear to constitute a major value contributor (relative to the value of the Company’s DTH business); we value its equity value (DCF) at PLN 60-90 million (PLN 0.2-0.3 per share). aaSOTP-based equity value of Cyfrowy Polsat seen in the PLN 4.5-5.4 billion range (PLN 16.6-19.9 per share); we set our 12M forward per share EFV at PLN 18.3 – mid-point of our fair value range. 2.1. Digitalization + telco & broadcasting convergence → TV distribution market rides the wave of change LT SOC-adjusted margin compression assumed at DTH, >10% LT EBITDA margin at MVNO LT non-capital-intense nature of both DTH and MVNO operations Approach The way we see it, given the start-up nature of the Company’s MVNO project (bound to generate material losses during first few years) and materially different business metrics of the DTH and MVNO operations at their maturity stage (e.g. profitability), sum-of-the-parts (SOTP) seems to constitute the most proper approach towards the assessment of Cyfrowy Polsat’s EFV, with both these business lines valued separately and then added up (should we value them all together, the peer-relative forward-multiples-based valuation of the DTH business would be unjustifiably understated, due to the inclusion of the MVNO’s forecasted mid-term negative contribution). Such valuation approach, however, required preparation of separate forecasts (income statement + selected cash flow data (capex, NWC changes)) for these two endeavors, a pre-requisite which we met, building our projections of the Company’s consolidated financial statements on the basis of stand-alone financial forecasts for DTH and MVNO (regarding the details, please refer to the Financial forecasts chapter of this research report). The details regarding the assumptions underlying our forecasts of the Company’s DTH and MVNO business lines’ financial results are discussed in depth in Chapters: 7.1 (revenues), 7.2 (operating costs), 7.3 (margins and profits), 6.6 (capital expenditures), 6.5 (NWC-and-deferrals-related financing needs) and 6.3 (financial leverage); to avoid undue repetition let us only briefly note that we assume (i) all-equity capital structures, (ii) LT contraction of the Company’s DTH business profitability (SOCadjusted margins) towards the levels enjoyed by its more mature peers, and (iii) LT (maturity stage) EBITDA margin of the MVNO operations at >10%. We would also like to note that in the longer-run we do not perceive Cyfrowy’s DTH and MVNO businesses as capital-intensive ones, both in terms of capital expenditures (LT capex-to-sales ratio of, respectively, 2% and 3-4%) or NWC requirements. As discussed in the Risk factors and Financial forecasts; operating costs sections, the Company is likely to report significant non-cash stock option costs under IFRS2 (we tentatively roughly ???????????????????????? 11 Cyfrowy Polsat estimate them to come out at c. PLN 80 million; however, their exact size and timing of their P&L recognition remain undetermined at the moment). While these non-cash charges will impact the Company’s reported profit numbers (but not the SOC-adjusted profit figures, which – the way we see it – should be used as a measure of the Company’s underlying profitability), they are irrelevant from the valuation point of view. First, from the DCF perspective, they are of non-cash nature and hence do not impact the free cash flows of the Company. Second, from the forward multiple-based peer-relative valuation perspective, we invariably believe that the financial results (used as input for the calculation of multiples) should be adjusted for the IFRS2 SOC charges in order to obtain an unbiased assessment of fair equity value. On the other hand, however, our assessment of Cyfrowy Polsat’s EFV is diluted (fully in case of DCF approach, on a pro-rata (as vested) basis in peer-relative exercise) for the aforementioned prospective management stock option issues. All-equity betas at 1.20, both for DTH and MVNO 1% base scenario residual period nominal growth rates As far as the WACC components are concerned, we assume: (i) risk-free rates at the level of current Polish government 10-year bond yields (6.4%) for the definite period and 5.0% for the residual period, (ii) equity market risk premium of 4.5% (in the base scenario; a standard assumption of ours), and (iii) an unleveraged beta of 1.2, both for DTH (in line with the DTH operators’ average) and MVNO (level higher than for established MNOs (MVNOs are lacking in the public domain), due to start-up nature of the project). Finally, as far as the residual period FCFFs’ nominal growth rate is concerned, we assume it (in the base scenario) at 1.0% (i.e. below the inflation) both for DTH and MVNO, as in our view, given the drivers of the DTH and MVNO business models, at their maturity stages they are likely to show very little growth. 2.2. DCF + peer-relative exercise Three groups of peers DTH We value the equity value of Cyfrowy Polsat’s DTH operations via DCF (discounted cash flows) and via comparison with the Company’s peers: (i) global DTH platforms (the closest peer group from the operating perspective), (ii) local paid TV programs distributor peer Multimedia (CATV), and (iii) CEE TV broadcasters (operationally the most distant peer group, in our view). On the basis of (i) our forecasts for the Company, (ii) risk parameters adopted, and (iii) assumed residual growth levels (both discussed in Chapter 2.1), we value (via DCF) Cyfrowy Polsat’s DTH operations in the PLN 4.8-5.4 billion range (PLN 17.6-19.6 per share) Peer-relative valuation based on forward EV/EBITDA multiples Three groups of peers: (i) global DTHs, (ii) CEE TV broadcasters and (iii) local paid TV program distributors Peer-relative exercise implies equity value of Cyfrowy Polsat’s DTH operations in the range of PLN 4.4-5.0 billion (average of mins/maxs for three peer groups), i.e. PLN 16.4-18.8 per share 12 We base our peer-relative valuation of Cyfrowy Polsat on forward EV/EBITDA multiples. Such an approach values Cyfrowy’s DTH business at: (i) PLN 5.2-6.0 billion (PLN 19.4-22.4 per share), when global DTH operators (the best, in our view, peer group) are taken as a benchmark for comparison, (ii)PLN 4.3-5.1 billion (PLN 16.0-20.1 per share), relative to the average of the CEE TV broadcasters (while we are fully aware that DTH operators and TV broadcasters business models are not tantamount, as these two groups of companies derive their revenues from different sources (subscription sales in case of DTHs, advertising revenues in case of broadcasters), they both ultimately depend upon the people’s TV viewerships, which makes their comparisons justified, in our view (though of much lighter significance than in case of the average for other DTH platforms)), and (iii)PLN 3.8 billion (PLN 13.8 per share) relative to the only local peer - Multimedia. In this latest context we would like to note that while we are fully aware of the differences between the DTH (Cyfrowy Polsat) and CATV (Multimedia) business models, and are convinced that the former should trade with a premium relative to the latter (due to, e.g., lack of network-reach-related constraints, facilitating much faster (and significantly less capital intense) organic growth at DTH; regarding the details of this argument, please refer, e.g., to Chapter 5.7 (Competitive advantages) of this research report), Multimedia does constitute a plausible valuation benchmark for Cyfrowy due to two reasons. First, both these companies provide basically the same service (paid TV programs distribution to the end-users), although via different modes (satellite vs. cable), competing generally for the ???????????????????????? Cyfrowy Polsat same client pool. Second, from the local market perspective (with no other DTH platforms being WSE-listed) Multimedia constitutes the closest peer for Cyfrowy. Notwithstanding the above, given the network-reach-growth constraint embedded in the CATV business model (which is lacking in DTH), we believe that the comparison of these two businesses would be only justified for periods when the resultant growth rates differential consequences cease to be immense; as for 2008-2009 we still forecast fairly strong growth of volumes in Polish DTH (inclusive of Cyfrowy; though much weaker compared to 2007), we believe that the comparison to a local CATV is warranted only from 2010E onwards (i.e. when the forecasted growth rates differential diminishes)1. Fig. 1 Cyfrowy Polsat’s DTH operations; DCF valuation PLN m Sales yoy change EBIT margin EBIT yoy change Effective CIT tax rate (T) EBIT*(1-T) yoy change EBITDA yoy change EBITDA margin D&A EBIT*(1-T)+ D&A yoy change CAPEX: intanglibes and tangibles Change in NWC and deferrals: Inventories Trading A/R Trading A/P STB deposits Deferred assets and liabilities - users' pre-payments Non-trading A/R and A/P Capitalized distribution commissions Other operating flows Equity issue proceeds FCFF yoy change Cost of equity Risk free rate Equity market premium Beta Unlevered beta Beta adjusted for level of leverage Required rate of return Cost of debt Cost of debt (pre-tax) Tax rate After tax cost of debt 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E > 2018E 1,041.9 1,250.7 1,395.2 1,533.1 1,660.7 1,762.1 1,839.8 1,927.1 2,029.5 2,137.7 2,251.9 31% 20% 12% 10% 8% 6% 4% 5% 5% 5% 5% 35.7% 39.8% 41.1% 41.7% 40.4% 39.7% 38.2% 36.8% 35.3% 33.7% 32.1% 371.6 498.0 572.8 639.1 671.7 699.7 703.5 708.9 716.5 721.2 723.4 135% 34% 15% 12% 5% 4% 1% 1% 1% 1% 0% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 301.0 403.4 464.0 517.6 544.1 566.7 569.8 574.2 580.3 584.2 586.0 131% 34% 15% 12% 5% 4% 1% 1% 1% 1% 0% 397.5 527.6 604.0 669.6 702.0 722.0 728.7 736.0 743.6 749.9 754.1 122% 33% 14% 11% 5% 3% 1% 1% 1% 1% 1% 38.2% 42.2% 43.3% 43.7% 42.3% 41.0% 39.6% 38.2% 36.6% 35.1% 33.5% 25.9 29.6 31.2 30.6 30.3 22.3 25.2 27.1 27.1 28.7 30.7 326.9 433.0 495.2 548.2 574.3 589.1 595.0 601.3 607.5 612.8 616.6 117% 32% 14% 11% 5% 3% 1% 1% 1% 1% 1% -49.9 -20.0 -20.0 -10.0 -20.0 -30.2 -33.0 -34.3 -33.1 -32.7 -33.1 101.6 68.3 7.1 -15.1 -2.8 17.7 1.6 -3.7 -1.0 -0.7 -0.7 74.6 13.2 0.7 -1.1 -0.8 5.5 -1.1 -0.8 0.6 -0.6 0.1 -13.7 -11.7 -8.1 -7.7 -7.1 -5.7 -4.3 -4.9 -5.7 -6.0 -6.4 1.9 11.7 6.2 3.0 7.3 5.5 3.0 3.5 5.3 5.9 5.4 -10.0 -5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 23.1 23.3 11.6 9.2 6.6 7.3 3.8 4.3 4.9 4.7 4.6 -6.1 31.7 0.1 0.0 378.6 449% -5.8 42.6 0.0 0.1 481.4 27% -4.5 1.2 0.0 0.1 482.4 0% -3.8 -14.5 0.0 0.1 523.2 8% -3.4 -5.3 0.0 0.1 551.6 5% -2.8 7.8 0.0 0.0 576.6 5% -2.1 2.4 0.0 0.0 563.7 -2% -2.4 -3.4 0.0 0.0 563.4 0% -2.6 -3.6 0.0 0.0 573.3 2% -2.7 -1.9 0.0 0.0 579.4 1% -2.8 -1.5 0.0 0.0 582.9 1% 1.0% 6.4% 4.5% 1.26 1.20 1.22 11.9% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 5.0% 4.5% 1.20 1.22 11.9% 1.20 1.22 11.9% 1.20 1.22 11.9% 1.20 1.21 11.9% 1.20 1.21 11.9% 1.20 1.21 11.9% 1.20 1.21 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 10.4% 8.5% 19% 6.9% 8.5% 19% 6.8% 7.7% 19% 6.2% 7.1% 19% 5.8% 6.5% 19% 5.3% 6.5% 19% 5.3% 6.5% 19% 5.3% 6.5% 19% 5.3% 6.5% 19% 5.3% 6.5% 19% 5.3% 6.5% 19% 5.3% 6.5% 19% 5.3% Note: EBITDA and EBIT are IFRS2 SOC-adjusted. Source: Company, DM IDMSA estimates 1 ???????????????????????? Please note, however, that this comparison is still biased as Multimedia’s equities are, the way we see it, grossly underpriced at the moment. 13 Cyfrowy Polsat Fig. 2 Cyfrowy Polsat’s DTH operations; DCF valuation (continued) PLN m WACC Weight of interest-bearing debt Weight of equity Cost of equity After-tax cost of debt WACC Discount multiple Discount factor PV of FCFF Sum of FCFFs PVs Weight of interest-bearing debt in the residual period Weight of equity in the residual period Average cost of equity in the definite period Average WACC in the definite period WACC in the residual period Residual growth of FCFFs (base case scenario) Residual value Present value of the residual value Value of the Company's DTH operations Non-operating assets Enterprise value of DTH Cash and equivalents, eop 2008E Interest-bearing debt, eop 2008E Equity value of DTH operations No. of shares 12M EFV base-case scenario (PLN) 2008E 2009E 2010E 0% 100% 11.9% 6.9% 11.9% 1.06 0.94 0% 100% 11.9% 6.8% 11.9% 1.19 0.84 406.1 0% 100% 11.9% 6.2% 11.9% 1.33 0.75 363.7 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E > 2018E 0% 100% 11.9% 5.8% 11.9% 1.48 0.67 352.6 0% 100% 11.9% 5.3% 11.9% 1.66 0.60 332.3 0% 100% 11.9% 5.3% 11.9% 1.86 0.54 310.5 0% 100% 11.9% 5.3% 11.9% 2.08 0.48 271.4 0% 100% 11.8% 5.3% 11.8% 2.32 0.43 242.5 0% 100% 11.8% 5.3% 11.8% 2.60 0.39 220.8 0% 100% 11.8% 5.3% 11.8% 2.90 0.34 199.6 0% 100% 11.8% 5.3% 11.8% 3.25 0.31 179.6 0% 100% 10.4% 5.3% 10.4% 2,879 0% 100% 11.8% 11.8% 10.4% 1.0% 6,266 1,931 4,810 0.0 4,810 394 132 5,073 273,801,020 18.5 Note: EBITDA and EBIT are IFRS2 SOC-adjusted. Source: Company, DM IDMSA estimates Fig. 3 DFC valuation of Cyfrowy Polsat’s DTH operations; Sensitivity analysis Equity risk premium 4.25% 4.50% 4.75% 5.00% Residual weight of debt 0% 0% 0% 0% 0% Residual WACC 9.8% 10.1% 10.4% 10.7% 11.0% Implied 12M per share equity value of DTH operations (PLN/share) 18.9 18.3 17.8 17.3 16.9 19.3 18.7 18.1 17.6 17.1 19.7 19.1 18.5 18.0 17.5 20.2 19.6 18.9 18.4 17.8 20.8 20.1 19.4 18.8 18.2 4.00% Residual growth of FCFF Nominal 0.0% 0.5% 1.0% 1.5% 2.0% Real -2.0% -1.5% -1.0% -0.5% 0.0% Source: DM IDMSA estimates 14 ???????????????????????? Cyfrowy Polsat Fig. 4 Cyfrowy Polsat’s DTH business; Valuation relative to foreign peers (DTH operators) Company BSkyB Sogecable Premiere Echostar Astro Median Average Min Max Cyfrowy Polsat: DTH EBITDA (PLN million) Implied enterprise value (PLN million), based on median Implied enterprise value (PLN million), based on average Implied enterprise value (PLN million), based on min Implied enterprise value (PLN million), based on max Net debt/cash (PLN million) Implied equity value (PLN million), based on median Implied equity value (PLN million), based on average Implied equity value (PLN million), based on min Implied equity value (PLN million), based on max Implied per share equity value (PLN/share), based on median Implied per share equity value (PLN/share), based on average Implied per share equity value (PLN/share), based on min Implied per share equity value (PLN/share), based on max 2008E 11.0 13.2 19.1 9.0 9.7 11.0 12.4 9.0 19.1 EV/EBITDA 2009E 8.9 11.2 13.7 9.4 7.6 9.4 10.1 7.6 13.7 2010E 7.5 9.6 9.7 4.8 6.5 7.5 7.6 4.8 9.7 397.5 4,377 4,934 3,570 7,601 -262.7 4,640 5,197 3,833 7,864 17.3 19.4 14.3 29.3 527.6 4,945 5,352 4,033 7,209 -680.4 5,625 6,032 4,713 7,889 20.9 22.4 17.5 29.3 604.0 4,541 4,605 2,924 5,852 -1,153.5 5,695 5,758 4,077 7,006 21.0 21.2 15.0 25.8 2008E 10.1 11.7 12.0 6.9 10.9 10.2 6.9 12.0 EV/EBITDA 2009E 8.7 9.7 9.6 5.5 9.2 8.4 5.5 9.7 2010E 7.5 9.0 7.7 4.3 7.6 7.1 4.3 9.0 397.5 4,329 4,043 2,753 4,760 -262.7 4,592 4,306 3,016 5,022 17.1 16.0 11.2 18.7 527.6 4,832 4,422 2,884 5,140 -680.4 5,512 5,102 3,564 5,820 20.4 18.9 13.2 21.6 604.0 4,602 4,304 2,570 5,443 -1,153.5 5,756 5,458 3,723 6,597 21.2 20.1 13.7 24.3 Note: Multiples for Cyfrowy Polsat are IFRS2 SOC-adjusted. Peers’ share prices as of close of June 18. Source: Reuters, DM IDMSA estimates Fig. 5 Cyfrowy Polsat’s DTH business; Valuation relative to CEE TV broadcasters Company TVN CME CTC DYH Median Average Min Max Cyfrowy Polsat: DTH EBITDA (PLN million) Implied enterprise value (PLN million), based on median Implied enterprise value (PLN million), based on average Implied enterprise value (PLN million), based on min Implied enterprise value (PLN million), based on max Net debt/cash (PLN million) Implied equity value (PLN million), based on median Implied equity value (PLN million), based on average Implied equity value (PLN million), based on min Implied equity value (PLN million), based on max Implied per share equity value (PLN/share), based on median Implied per share equity value (PLN/share), based on average Implied per share equity value (PLN/share), based on min Implied per share equity value (PLN/share), based on max Note: Multiples for Cyfrowy Polsat are IFRS2 SOC-adjusted. Peers’ share prices as of close of June 18. Source: Reuters, DM IDMSA estimates ???????????????????????? 15 Cyfrowy Polsat Fig. 6 Cyfrowy Polsat’s DTH business; Valuation relative to local CATV peer (Multimedia) Multimedia Cyfrowy Polsat: DTH EBITDA (PLN million) Implied enterprise value (PLN million) Net debt/cash (PLN million) Implied equity value (PLN million) Implied per share equity value (PLN/share) 2008E 5.9 EV/EBITDA 2009E 5.1 2010E 4.3 398 2,357 -263 2,620 9.8 528 2,672 -680 3,352 12.4 604 2,600 -1,153 3,753 13.8 Note: EBITDA for Cyfrowy Polsat adjusted for IFRS2 stock option costs. Peers’ share prices as of close of June 18. Source: DM IDMSA estimates Fig. 7 Cyfrowy Polsat’s peers; EV/EBITDA vs. EBITDA’s CAGR Fig. 8 Cyfrowy Polsat’s peers; EV/EBITDA multiples vs. EBITDA margin Peers’ share prices as of close of June 18. Source: Reuters, DM IDMSA estimates Peers’ share prices as of close of June 18. Source: Reuters, DM IDMSA estimates 2.3. MVNO project valued at PLN 60-90 million (PLN 0.2-0.3 per share); hence, at the moment it does not constitute a major shareholder MVNO Given lack of listed MVNOs (MNOs do not constitute a plausible valuation benchmark, in our view), we valued Cyfrowy Polsat’s MVNO project only via DCF; our absolute-value exercise values it in the PLN 60-90 million range (PLN 0.2-0.3 per share), suggesting that given the estimated value of the Company’s DTH operations (regarding the details, please refer to the preceding section), the MVNO project does not constitute a meaningful equity value contributor (at least as of now). value contributor 16 ???????????????????????? Cyfrowy Polsat Fig. 9 Cyfrowy Polsat’s MVNO operations; DCF valuation PLN m Sales yoy change EBIT margin EBIT yoy change Effective CIT tax rate (T) EBIT*(1-T) yoy change EBITDA yoy change EBITDA margin D&A EBIT*(1-T)+ D&A yoy change CAPEX: intanglibes and tangibles Change in NWC and deferrals: Inventories Trading A/R Trading A/P STB deposits Deferred assets and liabilities - users' pre-payments Non-trading A/R and A/P Capitalized distribution commissions Other operating flows Equity issue proceeds FCFF yoy change Cost of equity Risk free rate Equity market premium Beta Unlevered beta Beta adjusted for the level of leverage Required rate of return Cost of debt Cost of debt (pre-tax) Tax rate After tax cost of debt WACC Weight of interest-bearing debt Weight of equity Cost of equity After-tax cost of debt WACC Discount multiple Discount factor PV of FCFF 2008E 9.2 n.m. -392.7% -36.0 n.m. 19% -29.1 n.m. -33.1 n.m. -361.2% 2.9 -26.3 n.m. -12.7 -3.0 -2.5 -0.5 3.7 0.0 0.2 2009E 2010E 111.4 229.2 1,116% 106% -46.7% -10.6% -52.1 -24.4 n.m. n.m. 19% 19% -42.2 -19.8 n.m. n.m. -43.0 -8.3 n.m. n.m. -38.6% -3.6% 9.1 16.1 -33.1 -3.6 n.m. n.m. -37.0 -41.0 -14.7 3.5 -10.3 1.8 -5.7 -6.6 16.9 8.0 0.0 0.0 4.2 4.2 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E > 2018E 297.7 347.1 389.2 425.4 462.8 484.3 492.2 498.4 30% 17% 12% 9% 9% 5% 2% 1% -7.3% -3.0% 3.3% 5.4% 6.5% 8.0% 8.3% 9.2% -21.8 -10.4 12.7 23.1 30.0 38.7 41.0 45.9 n.m. n.m. n.m. 82% 30% 29% 6% 12% 19% 19% 19% 19% 19% 19% 19% 19% -17.6 -8.4 10.3 18.7 24.3 31.3 33.2 37.2 n.m. n.m. n.m. 82% 30% 29% 6% 12% -0.3 12.8 36.3 48.0 55.0 61.9 62.1 65.5 n.m. n.m. 184% 32% 15% 12% 0% 5% -0.1% 3.7% 9.3% 11.3% 11.9% 12.8% 12.6% 13.1% 21.5 23.2 23.6 24.9 25.0 23.2 21.1 19.6 3.8 14.8 33.9 43.6 49.3 54.5 54.3 56.8 n.m. 288% 130% 29% 13% 11% 0% 5% -25.0 -15.0 -18.5 -20.2 -21.0 -20.3 -20.1 -20.3 13.0 4.9 -1.8 -7.9 -5.2 6.1 1.2 -1.8 -1.6 -3.1 -0.7 -1.7 -1.3 1.1 -0.8 0.1 -3.8 -2.8 -2.4 -2.0 -2.1 -1.2 -0.4 -0.3 2.7 2.9 1.4 1.0 1.3 0.7 0.3 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.0 1.1 1.2 0.8 0.8 0.5 0.1 0.1 -0.2 -3.8 0.0 0.0 -42.0 n.m. -1.9 -17.8 0.0 0.0 -84.7 n.m. -2.0 -2.0 0.0 0.0 -41.2 n.m. -1.3 15.0 0.0 0.0 -8.2 n.m. -1.0 7.7 0.0 0.0 4.6 n.m. -0.8 -0.6 0.0 0.0 13.6 n.m. -0.7 -5.3 0.0 0.0 15.5 13% -0.7 -3.2 0.0 0.0 23.1 49% -0.5 5.5 0.0 0.0 40.3 75% -0.2 2.2 0.0 0.0 35.4 -12% -0.1 -1.6 0.0 0.0 34.7 -2% 1.0% 6.4% 4.5% 1.20 1.20 1.20 11.8% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 6.4% 4.5% 5.0% 4.5% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 11.8% 1.20 1.20 10.4% 8.5% 19.0% 6.9% 8.5% 19.0% 6.8% 7.7% 19.0% 6.2% 7.1% 19.0% 5.8% 6.5% 19.0% 5.3% 6.5% 19.0% 5.3% 6.5% 19.0% 5.3% 6.5% 19.0% 5.3% 6.5% 19.0% 5.3% 6.5% 19.0% 5.3% 6.5% 19.0% 5.3% 6.5% 19.0% 5.3% 0% 100% 11.8% 6.9% 11.8% 1.06 0.94 0% 100% 11.8% 6.8% 11.8% 1.18 0.84 -71.6 0% 100% 11.8% 6.2% 11.8% 1.32 0.76 -31.1 0% 100% 11.8% 5.8% 11.8% 1.48 0.68 -5.5 0% 100% 11.8% 5.3% 11.8% 1.65 0.60 2.8 0% 100% 11.8% 5.3% 11.8% 1.85 0.54 7.4 0% 100% 11.8% 5.3% 11.8% 2.07 0.48 7.5 0% 100% 11.8% 5.3% 11.8% 2.31 0.43 10.0 0% 100% 11.8% 5.3% 11.8% 2.58 0.39 15.6 0% 100% 11.8% 5.3% 11.8% 2.89 0.35 12.3 0% 100% 11.8% 5.3% 11.8% 3.23 0.31 10.8 0% 100% 10.4% 5.3% 10.4% Note: EBITDA and EBIT are IFRS2 SOC-adjusted. Source: Company, DM IDMSA estimates ???????????????????????? 17 Cyfrowy Polsat Fig. 10 Cyfrowy Polsat’s MVNO operations; DCF valuation (continued) Sum of FCFFs PVs Weight of interest-bearing debt in the residual period Weight of equity in the residual period Average cost of equity in the definite period Average WACC in the definite period WACC in the residual period Residual growth of FCFFs (base case scenario) Residual value Present value of the residual value Value of the Company's MVNO operations Non-operating assets Enterprise value of MVNO Cash and equivalents Interest-bearing debt Equity value of MVNO operations No. of shares 12M EFV base-case scenario (PLN) -42 0% 100% 11.7% 11.7% 10.4% 1.0% 373 116 74 0.0 74 0.0 0.0 74 273,801,020 0.3 Note: EBITDA and EBIT are IFRS2 SOC-adjusted. Source: Company, DM IDMSA estimates Fig. 11 DFC valuation of Cyfrowy Polsat’s MVNO operations; Sensitivity analysis Equity risk premium 4.25% 4.50% 4.75% 5.00% Residual weight of debt 0% 0% 0% 0% 0% Residual WACC 9.8% 10.1% 10.4% 10.7% 11.0% Implied 12M equity value of MVNO operations (PLN m) 76 68 61 55 49 83 75 67 60 54 91 82 74 66 59 99 90 81 73 65 109 98 89 80 72 4.00% Residual growth of FCFF Nominal 0.0% 0.5% 1.0% 1.5% 2.0% Real -2.0% -1.5% -1.0% -0.5% 0.0% Source: DM IDMSA estimates SOTP: Cyfrowy’s equity value in the PLN 16.6-19.9 per share range 2.4. SOTP The results of our SOTP valuation of Cyfrowy Polsat are summarized in Figure 12; we value the Company’s equity in the PLN 4.5-5.4 billion range (PLN 16.6-19.9 per share), with the lion share of the overall equity value stemming from the value of the DTH operations; we set our 12M forward per share EFV at PLN 18.3 – mid-point of our fair value range. Fig. 12 Cyfrowy Polsat; SOTP valuation summary Business line Valuation method (1) DTH DCF Peer-relative (average of the mins/maxs of three peer groups): Global DTHs Local (CATVs) CEE TV broadcasters (2) MVNO DCF Cyfrowy Polsat SOTP Average Equity fair value range Equity fair value per share range (PLN m) (PLN) 4,419 5,358 16.4 19.6 4,828 5,358 17.6 19.6 4,419 4,963 16.4 18.8 5,197 6,032 19.4 22.4 3,753 3,753 13.8 13.8 4,306 5,102 16.0 20.1 60 90 0.2 0.3 4,479 5,448 16.6 19.9 4,963 18.3 Source: DM IDMSA estimates 18 ???????????????????????? Cyfrowy Polsat 3. Global market outlook and trends aaGrowing subscriberships (volumes) coupled with increasing ARPU (resulting from the proliferation of the digital technologies) will constitute the main driving forces behind further growth of the television distribution spending by end-customers all over the word. Simultaneously, the competition will continue to tighten, with telcos increasingly engaging in the TV distribution domain via IPTV offerings occassionally complemented by satellite. aaThe position of free multichannel services often explains the cross-country differences in fee-based penetrations. Free DTT roll-outs have two opposite effects for subscriptionbased TV distributors: (i) disenfranchising effect (extraordinary influx of users at analog shut-down dates), and (ii) carve out effect (decreased number of potential clients among the nonsubscribing households). aaTraditional (analog) CATVs engender less customer loyalty than DTH (as satellite subscribers, unlike CATV viewers, have to purchase a satellite dish), but CATVs’ switchover to digital enabling them to roll out bundled services, which – at least for now – cannot be deployed via most satellite platforms, is fostering loyalty of customers, while offering them a richer range of value-added services (VOD). It should be noted, though, that the DTH service is not subject to network infrastructure reach constraints, which are embedded both in cable and IPTV offerings; this provides the former with a clear upper hand in rural areas and small cities, which often lie outside the non-satellite TV distribution platforms’ reach (but this starts to be mitigated by telcos complementing their IPTV offerings by satellite). On the other hand, however, rural areas and small cities tend to be inhabited by people with lower disposable income and purchasing power, which is unlikely to immunize the DTH platforms from the low-cost DTT service. Hence, from their perspective, the slower the pace of analog terrestrial signal switch-off, the better. All in all, the DTH subscribership is expected to grow in the coming years ahead of the CATV’s, despite the bundled service limitations of the former. However, down the road the satellite players will need to build multi-play functionality and capabilities into their service offering if they are to maintaine their market share in the long run. aaGrowing competition (e.g. MVNOs entries, resulting in ARPU slides), combined with the constantly decreasing new additions (consequence of high-to-very-high penetration levels) hinder further dynamic growth of mobile telephony revenues. aaMVNOs tend to target customer groups which are more difficult to reach by MNOs or try to capitalize on the power of their company brandname. Depending on the chosen strategy, the extent of MVNOs’ capital engagement in infrastructure development may vary. While the timing of consolidation among the virtual operators will depend on the growth rates of the telecommunication markets in a various countries, it does seem inescapable. aaCompared to MNOs, MVNOs exhibit: (i) lower ARPUs, (ii) lower margins, (iii) lower capex/sales ratios, (iv) shorter BEPs, and (v) capped FCFs. First-mover advantage seems to constitute the key-success factor in the MVNO business, along with recognized brandname and cross-selling capability (ample pool of potential clients), which appear much more essential than content. On the other hand, though, the type of the MVNO business model pursued (affinity partner, service provider, enhanced service provider, hybrid, full MVNO) does not seem to be the best guide in segregating leaders from laggards. 3.1. Digitalization + telco & broadcasting convergence → TV distribution market rides the wave of change ???????????????????????? Distribution of TV programmes The television distribution market is undergoing major changes as the switchover from analog to digital broadcasting progresses. People are able to receive audio-visual content through a number of different networks (cable, satellite, terrestrial, IPTV, UMTS) on a variety of devices (including PCs 19 Cyfrowy Polsat and mobile telephones) and the convergence of the telecommunications and broadcasting – made possible through digitalization – resulted in a number of new commercial offerings (e.g. multiple-play services) of both linear (i.e. traditional scheduled TV services) and non-linear (i.e. on-demand) audio-visual services. The television program distribution market is expected to continue to grow globally, as well as in the EMEA and CEE regions,… The television distribution market comprises revenues received by distributors for delivery to endusers (viewers) of television packages, i.e. subscription fees (coming in basic and premium options) charged by cable operators (CATV), satellite platforms and telephone companies (IPTV2), as well as payments for video-on-demand services (VOD3) and pay-per-view4 services. In 2007-2011E, the global television distribution market is expected to grow at a CAGR of approx. 11% in value terms, with forecasts predicting the fastest growth in Asia/Pacific (approx. 19%) and Latin America (15%). The EMEA region is expected to grow at a CAGR of c. 12% and the CEE markets (with a predicted growth of 11.2%) should not lag far behind Western Europe (11.6%). Fig. 13 TV distribution market in various regions of the world in terms of the end-user spending (US$ million) USA yoy chng EMEA yoy chng Asia/Pacific yoy chng Latin America yoy chng Canada yoy chng World yoy chng 2001 2002 41,316 8.7% 19,452 15.6% 9,896 8.9% 4,155 4.5% 3,117 8.0% 77,937 n.a. 45,552 9.3% 22,619 14.0% 11,494 13.9% 4,877 -14.8% 3,254 4.2% 87,796 12.7% 2003 2004 49,541 54,467 8.8% 9.9% 24,975 27,767 10.4% 11.2% 13,718 15,822 19.3% 15.3% 4,880 5,200 0.1% 6.6% 3,494 3,669 7.4% 5.0% 96,608 106,925 10.0% 10.7% 2005 2006 58,330 62,796 7.1% 7.7% 31,099 35,069 12.0% 12.8% 17,977 20,187 13.6% 12.3% 5,810 6,539 11.7% 12.5% 3,951 4,151 7.7% 5.1% 117,167 128,742 9.6% 9.9% 2007E 2008E 2009E 2010E 2011E 66,935 71,305 77,192 82,796 88,571 6.6% 6.5% 8.3% 7.3% 7.0% 39,457 44,642 50,097 56,075 62,722 12.5% 13.1% 12.2% 11.9% 11.9% 22,847 26,268 31,539 38,403 46,363 13.2% 15.0% 20.1% 21.8% 20.7% 7,508 8,632 9,942 11,362 12,883 14.8% 15.0% 15.2% 14.3% 13.4% 4,409 4,678 4,974 5,248 5,516 6.2% 6.1% 6.3% 5.5% 5.1% 141,156 155,525 173,744 193,884 216,055 9.6% 10.2% 11.7% 11.6% 11.4% CAGR: 2007-11E 7.3% 12.3% 19.4% 14.5% 5.8% 11.2% Source: PwC, Wilkofsky Gruen Associates Fig. 14 TV distribution market in various parts of the EMEA region in terms of the end-user spending (US$ million) 2001 Western Europe yoy chng CEE yoy chng Middle East/Africa yoy chng VOD yoy chng Total EMEA yoy chng 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 17,707 20,551 22,545 24,905 13.9% 16.1% 9.7% 10.5% 1,138 1,317 1,542 1,790 n.a. 13.6% 17.1% 16.1% 601 733 808 907 n.a. 18.0% 10.2% 12.3% 6 18 80 165 n.a. 200.0% 344.4% 106.3% 19,452 22,619 24,975 27,767 15.6% 16.3% 10.4% 11.2% 27,698 11.2% 2,126 18.8% 1,017 12.1% 258 56.4% 31,099 12.0% 30,932 11.7% 2,439 14.7% 1,126 10.7% 572 121.7% 35,069 12.8% 34,495 11.5% 2,760 13.2% 1,236 9.8% 966 68.9% 39,457 12.5% 38,699 12.2% 3,076 11.4% 1,352 9.4% 1,515 56.8% 44,642 13.1% 43,145 11.5% 3,422 11.2% 1,475 9.1% 2,055 35.6% 50,097 12.2% 48,082 11.4% 3,802 11.1% 1,603 8.7% 2,588 25.9% 56,075 11.9% 53,585 11.4% 4,223 11.1% 1,741 8.6% 3,173 22.6% 62,722 11.9% CAGR: 2007-11E 11.6% 11.2% 8.9% 34.6% 12.3% Source: PwC, Wilkofsky Gruen Associates The development of the paid television distribution market will probably be underpinned by several main trends, which have been outlined below. 2 3 4 20 IPTV (Internet Protocol Television) is a system where a digital television signal is delivered by using Internet Protocol over a network infrastructure, which may include delivery by a broadband connection. IPTV is a switched service which does not deliver all channels to each home at once but allows viewers to select the channel to be viewed (potentially, more than a thousand channels can be available). VOD operates through a server and enables viewers to access program at any time and is not circumscribed by a preset schedule. VOD also allows viewers to pause, rewind and fast-forward (functions not available on pay per-view). VOD requires a single channel to access the server and, consequently, with no limitation on channel capacity, much more programs are potentially available on VOD than on pay-per-view at any point of time. Pay-per-view uses dedicated channels to show films or other events at scheduled intervals. ???????????????????????? Cyfrowy Polsat …driven by increasing 1. Competition on the rise. The competition among television distributors has been intensifying aa competition,… as the new entrants have been challenging incumbents which – in turn – have been rolling out new services to retain their customers. This trend is likely to extend in the coming years. … as new entrants challenge A rise in competition will be brought on by (i) market entry by new telco players (a phenomenon observed for several years now) using the DSL infrastructure to transmit television content (IPTV offers digital quality, allows to deliver a greater number of channels within a single package and to provide VOD services (unavailable via most satellites)), and (ii) proliferation of free-of-charge distribution platforms (digital terrestrial television (DTT)5, free satellite services), which do not charge subscription fees from users (who only have to make a one-off initial investment into a decoder/satellite dish). the market’s incumbents In some prime TV markets (US, France, Italy, Spain) IPTV is showing strong gains; although DTH remains an efficient way for delivering television, telco companies – which are rich in cash – are gradually finding their feet in the TV domain. The telephone companies’ underlying motivation for entering the television distribution market has been an urge to address the main weakness of their core market of fixed-line telephone services, resulting from shift to wireless and VOIP protocol, and migration of telcos’ subscribers to CATV operators (lured by triple-play services (TV + broadband + fixed-line voice) of the latter). By matching CATV’s ability to offer a triple-play package, telephone companies strive to limit churn among their voice subscribers; consequently, they have been (i) investing heavily in fiber-optic-cable infrastructure enabling them to launch the television distribution services (fiber provides more capacity than coaxial cable does, and it allows for more high definition transmissions and enhanced VOD offerings), and (ii) introducing Internet protocol television (IPTV) which delivers television services over a broadband Internet connection. The outcome of these endeavors varies from region to region. In the USA, the telephone companies are signing up around 15% of the homes to which they are marketing their television service within the first year (virtually all of these new subscribers take a premium service and at least one non-TV service (i.e. fixed-line voice or broadband) and app. 80% are triple-play subscribers). As far as the EMEA goes, France, with 900 ths subscribers as of the end of 2006, followed by Italy (at 600 ths) and Spain (at 500 ths) are the three largest TV distribution markets for telco companies in this region (representing c. 85% of all telco companies’ TV subscribers in the EMEA), but it should be noted that these are the countries which either lack strong cable markets (France, Spain) or lack cable market at all (Italy), which enabled telcos to fill the void and become more easily established – in other countries of the Telcos increasingly present in the TV distribution field Some telcos look at DTH to complement their IPTV offering telephone company TV households and the share of telephone companies Fig. 15 EMEA in the total number of TV subscription households in the EMEA region Source: PwC, Wilkofsky Gruen Associates 5 ???????????????????????? DTT is an implementation of digital technology to provide a greater number of channels and/or better quality of picture and sound using aerial broadcasts to a conventional antenna (or aerial) instead of a satellite dish or cable connection. DTT is transmitted on radio frequencies through the airwaves that are similar to standard analog television, with the primary difference being the use of multiplex transmitters to allow reception of multiple channels on a single frequency range (such as a UHF or VHF channel). DTT is received via a digital set-top box, or integrated receiving device, that decodes the signal received via a standard aerial antenna. However, due to frequency planning issues, an aerial with a different group (usually a wideband) may be required if the DTT multiplexes lie outside the bandwidth of the originally installed aerial. 21 Cyfrowy Polsat region their take-up rates have been much weaker thus far. Nonetheless, it is expected that in four years TV distribution by telcos will be available in virtually every country of the EMEA region, with forecast 21.4 million subscribers (up from 2.4 million in 2006), representing 16% of all television subscription households in the region (up from 3% last year). Moreover, some of the telcos (e.g., FT) are looking at satellite to complement their existing offering, taking their IPTV offers to the next stage.6 Taking the CEE perspective, it should be noted that with several recent service launches and others in the pipeline, IPTV is starting to emerge as some kind of an alternative in some countries of the region; while Russia leads the region in terms of IPTV subscribers, services such as o2TV (Czech Republic), Gala TV (Lithuania), DigiTV (Estonia) or SiolTV (Slovenia) are also making progress. To circumvent this inroad by the telcos in their home turf the CATV operators counteract with the addition of wireless to create quadruple-play packages, yet telephone companies are also in a position to add wireless as many of them control major wireless providers. There are no ready answers to the question which of the television distribution platforms currently dominating the market (cable TV or paid satellite platforms) will prove more vulnerable to intensified competition from such ‘new’ distribution platforms. On the one hand, traditional (analog) CATVs engender less customer loyalty than satellites (as satellite subscribers, unlike CATV viewers, have to purchase a satellite dish), but then again CATVs’ switchover to digital enabling them to roll out bundled services (double-play, triple-play, quadruple-play), which – at least for now – cannot be directly deployed via most satellite platforms, is fostering loyalty of customers, while offering them a richer range of value-added services (VOD). It is also evident that telcos are starting to put more pressure on the satellite players via, e.g., taking a more proactive approach towards having their own unique content and using satellite to bring their TV services to areas that cannot be served by their telecom networks. The larger the TV subscriber bases are built by the telco companies, the more likely they will be to bid agressively for attractive (unique) content which will result in an increase of the content costs for all providers of pay TV. It is unclear which of the two currently dominant distribution platforms (CATV or satellite) proves more vulnerable to this encroachment It should be noted, though, that the DTH service is not subject to network infrastructure reach constraints, which are embedded both in cable and IPTV offerings; this provides the former with a clear upper hand in rural areas and small cities, which often lie outside the non-satellite TV distribution platforms’ reach (but this starts to be mitigated by telcos complementing their IPTV offerings by satellite). On the other hand, however, rural areas and small cities (i.e. regions where DTH enjoys reach advantage over CATV and IPTV) tend to be inhabited by people with lower disposable income and purchasing power, which is unlikely to immunize the DTH platforms from the low-cost DTT service. Hence, from their perspective, the slower the pace of analog terrestrial signal switch off, the better. Summing up, it appears that down the road the satellite players will need to build multi-play functionality and capabilities into their service offering if they are to maintain market share in the long run. DTH is not subject to infrastructure reach constraint embedded in the CATV and IPTV modes, which constitutes a clear entry barrier in rural areas and small cities; it does not, however, provide an immunization against DTT and telco’s satellite services → multi-play functionality is a LT must for DTHs The proliferation of the digital 2. Migration of subscribers from analog to digital, digital terrestrial and analog broadcast aa shutdowns. The digitalization is taking off significantly; for the OECD countries the average of digital television households was 14.6%/20.0% excluding/including the USA in 2001 and the EU25 average for digital television households was 17.3% in 2003 and 23.2% in 2005 (with the UK in the lead, at 61%). technology will be the main theme for TV distributors in coming years The proliferation of the digital technology will be the main underlying theme for the TV distribution industry all over the world in the coming years. In this context two main market tendencies need to be noted: (i) conversion of the CATV subscribers from analog to digital, and (ii)terrestrial analog TV shutdowns. An integral element of cable’s multi-play roll-outs is the conversion of subscribers from analog to digital (apart from enabling the multi-play service bundling, the digital gives subscribers more basic channels and opens up the premium market; digital subscribers also get more pay-per-view channels than analog subscribers do, and have access to VOD, which is not available to the analog ones). CATV subscribers are migrated from analog to digital… 6 22 E.g. FT will launch its DTH’s satellite service in the French market in early July this year; according to the operator the service will be available to 98% of French households through a combination of ADSL and satellite technology, with DTH serving those areas which currently are not reached by the IPTV service over DSL. ???????????????????????? Cyfrowy Polsat Cable operators have been migrating their subscribers from analog to digital so as to more efficiently use bandwidth to offer more services (there is no bundling service possibility in the analog technology) and increase revenues per user (while the single service ARPUs of services offered as part of the bundled offer are lower than the ARPUs of such services offered on a stand-alone basis, the resultant average revenue per user is higher due to larger number of services per customer, and – additionally – leads to lower churn rates, improved customer loyalty and lower unit cost of service (single invoice for a bundle of services)). As subscribers shift to digital, they will be able to access more channels, which will fuel demand for premium services. While digital suites cost somewhat more than the analog ones, the per-channel cost is typically lower; consequently, digital households tend to take more premium services that the analog ones do7. In the coming years, the trend of viewer migration from cheaper basic packages to more expensive premium options (digital, with extra channels added) is expected to gain momentum worldwide. It will underlie increased potential to provide value-added services, such as VOD. …to more efficiently use bandwidth and increase revenues per user Growth in digital terrestrial services (provided by cable and telco companies) should fuel the growth of APRU, due to the fact that access to digital tiers requires an additional (compared to the analog service) monthly subscription fee and the provision of additional potential revenues from pay-per-view, VOD, broadband and voice. All OECD member countries have published their plans concerning analog switch-off, i.e. the termination of the analog terrestrial signal. Most EU member states have followed the European Commission’s recommendations to phase out analog terrestrial broadcasting by 2012, and majority have already started this process. The first countries to offer DTT (digital terrestrial television) were Germany, the UK and the USA in 1998. By 2006, with the exception of Norway, Poland, Portugal, Ireland and Turkey, all OECD countries have started the transition to DTT. Analog switch-off plans all-over the OECD Analog broadcast shutdowns in the USA and EMEA will stimulate the volumes on the subscription market (penetration). The scheduled shutdowns of analog broadcasting (already completed for the Netherlands, Luxemburg, Finland (2007) and Sweden (2007), 2008 in Switzerland, 2009 in the USA, Denmark and Norway, 2010 in Austria, Germany, Spain and France, between 2010 and 2012 in the Czech Republic, Ireland, Slovak Republic, Hungary and Belgium, 2012 in Italy and Poland (possible extension till 2015), 2013 in the UK, and between 2012 and 2015 in Turkey and Greece) will disenfranchise households that do not subscribe to a multichannel service and that do not purchase a digital television receiver. In other words, the households that will lose access to terrestrial analog broadcast will either need to subscribe to a multichannel service or to buy a set-top-box enabling the digital terrestrial signal. While many of the non-subscribing households will not need to convert to a paid service as they will purchase digital converters – the extent of such phenomenon is likely to be country-specific, we believe, depending upon the locally introduced incentives or lack of thereof (e.g. in the USA the National Telecommunications and Information Administration will support the digital set-top-box purchases by households through the distribution of US$ 40 coupons – up to US$ 1.5 billion) – a portion of these households will choose to subscribe to a multichannel service, which should boost the subscribership growth rates and penetration levels around the mandated dates of the analog switch-offs. The scheduled analog shutdowns will disenfranchise households that do not subscribe to a multichannel service or do not purchase a STB enabling digital terrestrial signal → expect a boost in subscribership and penetration levels around the shut-down dates Contrary to other platforms (DTH, CATV, and even IPTV), DTT roll-outs in the region of CEE have been lingering, with no apparent incentives for a prompt conversion to a full-blown commercial launch. The Czech Republic witnessed the region’s first digital switchover, when the Damazlice region ceased analogue terrestrial signal in August 2007 (please note, however, that problems over licensing have stalled the progress in the rest of the country’s territory). Elsewhere, the services are up and running in Lithuania and Estonia, while there are tests in Poland and Hungary. DTT roll-outs in CEE have been slow A related theme pertains to the high definition television (HDTV8). Tests of HDTV started already decades ago, but the first market launches took place in the late 1990s only. Some countries (e.g. the USA) offer terrestrial HDTV, while other use satellite or cable. While in some countries 7 8 ???????????????????????? DBS (direct broadcast satellite, an all-digital service) constitutes a good example; in 2006 in the USA an average DBS household had 2.5 premium subscriptions compared to 1.0/0.6 premium subscription for average digital cable household/ analog cable household. High-definition television (HDT) is a digital television broadcasting system with a significantly higher resolution than traditional formats (NTSC, SECAM, PAL). While some early analog HDTV formats were 23 Cyfrowy Polsat Fig. 16 DTT in CEE Country Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Russia Slovakia Slovenia Ukraine Operators BTC TCL, OiV Czech Digital Group, Cra, Czech Telecom Levira Antenna Hungaria DLRTC Lithuania Telecom yet unknown Radiocom Telemedium Slovak Telecom, Telecom Group RTV Slo Kvant Efir Broadcasters BTC HTV, HRT Czech TV, TV Nova, Prima TV ETV MTV, Duna, TV2 n.a. n.a. TVP, Polsat, TVN None n.a. n.a. RTV Slo n.a. Service launch date 2009 2007 2005 2006 2008 2008 2006 2008-2009 2007 2007 2008 2007 2007 Analogue switch-off date 2012 None set 2010 2012 2012 2012 2012 2012-2015 2012 2015 2012 2012 2015 Source: TV International; Informa Telecoms & Media, DM IDMSA (e.g. the USA, Japan, Canada, Korea, Australia, the UK, France) there are a number of full HDTV channels, in most OECD countries HDTV productions and broadcasts are still limited. Satellite, and to a lesser extent cable, are the most suitable platforms for transmitting the HDTV programs; the amount of spectrum required means that HDTV may not be suitable for DTT in all countries or xDSL networks. In combination with the availability of flat screen TV sets and HD DVDs, HDTV can become one of the drivers behind further growth of pay television services. In the CEE region HD is particularly active in Poland, where ITI’s DTH platform ‘n’ led the way with the HD launch in 2H06, closely followed by rival DTH platforms of Cyfrowy Polsat and Cyfra+, as well as CATV player Multimedia. Also several other companies in the region are making moves into HD (o2TV (Czech Republic), Elion (Estonia), NovaTV (Croatia), NTV-Plus (Russia), Kosmos TV (Russia), ComCor (Russia), etc). Fig. 17 Digital (CATV, DTH, IPTV and DTT) TV households in CEE (million) Country Czech Republic Hungary Poland Romania Russia Entire region Source: Informa Telecoms & Media The digitalization is expected to progress rapidly in CEE Conclusion: proliferation of digital should drive the growth of the TV distribution market,… Fig. 18 Digital penetration (CATV, DTH, IPTV and DTT) of TV households in CEE 2006 2012E CAGR 0.3 0.4 2.3 0.7 1.7 7.8 2.8 1.9 8.2 3.2 10.3 34.8 47% 32% 24% 30% 35% 28% Country Czech Republic Hungary Poland Romania Russia Entire region 2006 7.2% 9.0% 18.1% 9.0% 3.2% 5.5% 2012E 69.8% 46.7% 62.8% 41.9% 19.3% 23.7% Source: Informa Telecoms & Media The number of digital households in the CEE region is forecasted to expand quickly over the next few years; the region reported 7.8 million of digital homes at the end of 2006, a number expected to have increased by 40% in 2007 to app. 11 million, and to soar four-folds to over 34 million by the end of 2012E. Consequently, the digital penetration is expected to rise and exceed 23% in four-year time, driven by a wide-spread conversion to digital in the cable access in Poland, Czech Republic and Hungary, and further proliferation of digital satellite (penetrating regions where the access to cable and IPTV is inhibited), which established itself as a very strong alternative to cable. Summing up the above, the accelerating proliferation of the digital technology – emanating in the form of the conversion of the subscriber base from analog to digital (CATV) and acquisition of new subscribers from the non-fee-TV-distribution domain (terrestrial analog signal shutdowns) – is expected to constitute the main driving force for the television distribution industry in the coming years, both in terms of the prices (ARPUs; higher in digital than in analog) and volumes (penetration; part of the current users of analog terrestrial migrating upon the nonfree-of-charge platforms rather than on the ‘free-of-charge’ digital terrestrial). broadcast in Europe and Japan, HDTV is usually broadcast digitally, because digital television (DTV) broadcasting requires much less bandwidth if it uses enough video compression. 24 ???????????????????????? Cyfrowy Polsat Fig. 19 Annual TV subscription spending per subscription household in the EMEA region (US$) Western Europe Austria % yoy chng Belgium % yoy chng Denmark % yoy chng Finnland % yoy chng France % yoy chng Germany % yoy chng Greece % yoy chng Ireland % yoy chng Italy % yoy chng Netherlands % yoy chng Norway % yoy chng Portugal % yoy chng Spain % yoy chng Sweden % yoy chng Switzerland % yoy chng Great Britain % yoy chng Total Western Europe % yoy chng CEE Czech Republic % yoy chng Hungary % yoy chng Poland % yoy chng Romania % yoy chng Russia % yoy chng Turkey % yoy chng Total CEE % yoy chng Total EMEA % yoy chng 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2007-11E CAGR (%) 209 7.2 155 15.7 293 8.9 156 11.4 421 3.2 182 4.6 723 2.1 286 5.5 471 1.3 199 5.9 337 23.4 373 10.0 433 8.8 239 14.9 249 4.2 564 3.7 302 8.6 224 7.2 160 3.2 306 4.4 160 2.6 419 -0.5 187 2.7 727 0.6 301 5.2 474 0.6 214 7.5 371 10.1 377 1.1 438 1.2 238 -0.4 259 4.0 617 9.4 316 4.6 239 6.7 166 3.8 321 4.9 165 3.1 425 1.4 198 5.9 738 1.5 316 5.0 484 2.1 237 10.7 406 9.4 399 5.8 467 6.6 244 2.5 268 3.5 649 5.2 337 6.6 256 7.1 173 4.2 337 5.0 174 5.5 429 0.9 213 7.6 753 2.0 332 5.1 494 2.1 258 8.9 443 9.1 422 5.8 507 8.6 252 3.3 278 3.7 581 -10.5 360 6.8 271 5.9 181 4.6 355 5.3 180 3.4 435 1.4 229 7.5 768 2.0 346 4.2 510 3.2 281 8.9 483 9.0 444 5.2 512 1.0 260 3.2 287 3.2 715 23.1 383 6.4 286 5.5 188 3.9 375 5.6 188 4.4 443 1.8 246 7.4 783 2.0 361 4.3 523 2.5 301 7.1 524 8.5 466 5.0 532 3.9 268 3.1 297 3.5 751 5.0 408 6.5 301 5.2 196 4.3 396 5.6 195 3.7 452 2.0 264 7.3 799 2.0 376 4.2 537 2.7 322 7.0 561 7.1 505 8.4 553 3.9 277 3.4 306 3.0 788 4.9 433 6.1 316 5.0 203 3.6 416 5.1 203 4.1 459 1.5 283 7.2 814 1.9 392 4.3 552 2.8 345 7.1 598 6.6 542 7.3 572 3.4 285 2.9 316 3.3 828 5.1 458 5.8 331 4.7 211 3.9 436 4.8 211 3.9 467 1.7 301 6.4 828 1.7 406 3.6 566 2.5 369 7.0 636 6.4 579 6.8 590 3.1 293 2.8 325 2.8 869 5.0 483 5.5 346 4.5 218 3.3 456 4.6 218 3.3 474 1.5 316 5.0 843 1.8 421 3.7 580 2.5 394 6.8 673 5.8 617 6.6 608 3.1 301 2.7 335 3.1 912 4.9 506 4.8 127 5.8 54 12.5 142 6.8 57 1.8 108 1.9 116 7.4 99 6.5 260 8.3 133 4.7 60.0 11.1 151 6.3 59 3.5 113 4.6 124 6.9 106 7.1 271 4.2 143 7.5 65 8.3 166 9.9 61 3.4 117 3.5 133 7.3 114 7.5 288 6.3 157 9.8 71 9.2 179 7.8 63 3.3 126 7.7 141 6.0 123 7.9 305 5.9 170 8.3 77 8.5 191 6.7 65 3.2 141 11.9 150 6.4 132 7.3 324 6.2 180 5.9 82 6.5 203 6.3 67 3.1 154 9.2 158 5.3 141 6.8 344 6.2 188 4.4 88 7.3 212 4.4 70 4.5 168 9.1 166 5.1 149 5.7 365 6.1 196 4.3 94 6.8 222 4.7 72 2.9 181 7.7 175 5.4 158 6.0 386 5.8 204 4.1 100 6.4 232 4.5 74 2.8 194 7.2 183 4.6 166 5.1 406 5.2 212 3.9 105 5.0 241 3.9 75 1.4 208 7.2 191 4.4 175 5.4 426 4.9 5.0 3.8 5.1 3.9 1.7 6.6 1.9 4.0 2.6 7.0 6.8 6.7 3.5 3.0 3.1 5.0 5.7 4.5 6.4 4.7 2.8 8.0 4.9 5.8 5.6 Source: PwC, Wilkofsky Gruen Associates ???????????????????????? 25 Cyfrowy Polsat Fig. 20 Subscription-based TV ARPU in CEE (US$/month) CATV yoy chng DTH yoy chng IPTV yoy chng Weighted average yoy chng 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 4.0 5.5 5.8 6.6 7.0 7.3 7.5 7.7 8.1 8.3 8.8 9.2 9.7 10.2 10.2 11.3 11.9 12.6 n.a. 38% 5% 14% 7% 3% 3% 3% 4% 4% 5% 5% 5% 5% 5% 6% 5% 6% 0.0 0.0 0.0 6.8 9.0 13.3 18.1 22.1 23.6 24.3 23.4 20.9 21.2 21.9 22.7 23.5 24.3 25.1 n.a. n.a. n.a. n.a. 33% 48% 36% 22% 7% 3% -4% -11% 2% 3% 4% 4% 3% 3% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.6 6.6 10.8 14.0 16.3 18.1 19.9 21.6 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 44% 65% 29% 16% 11% 10% 9% 4.0 5.5 5.8 6.6 7.1 7.5 8.1 8.7 9.2 9.7 10.2 10.8 11.5 12.3 13.0 13.8 14.6 15.4 n.a. 38% 5% 14% 8% 7% 8% 7% 6% 5% 6% 5% 7% 7% 6% 6% 6% 6% Source: Informa Telecoms & Media Fig. 21 CATV ARPU in CEE (US$/month) Czech Republic yoy chng Hungary yoy chng Poland yoy chng Romania yoy chng Russia yoy chng Entire region yoy chng 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 6 8 10 16 16 16 17 17 18 19 20 21 23 24 25 26 28 29 n.a. 33% 25% 60% 0% 0% 6% 0% 6% 6% 5% 5% 10% 4% 4% 4% 8% 4% 1 2 1 2 2 3 3 4 5 5 6 7 7 8 9 10 11 12 n.a. 100% -50% 100% 0% 50% 0% 33% 25% 0% 20% 17% 0% 14% 13% 11% 10% 9% 6 8 7 9 9 10 11 11 12 12 13 14 14 15 16 17 18 19 n.a. 33% -13% 29% 0% 11% 10% 0% 9% 0% 8% 8% 0% 7% 7% 6% 6% 6% 1 2 3 3 3 4 4 4 5 6 6 7 7 8 8 8 9 9 n.a. 100% 50% 0% 0% 33% 0% 0% 25% 20% 0% 17% 0% 14% 0% 0% 13% 0% 5 7 7 7 7 7 7 8 8 8 9 9 10 10 11 11 12 12 n.a. 40% 0% 0% 0% 0% 0% 14% 0% 0% 13% 0% 11% 0% 10% 0% 9% 0% 4 5 6 7 7 7 7 8 8 8 9 9 10 10 11 11 12 13 n.a. 38% 5% 14% 7% 3% 3% 3% 4% 4% 5% 5% 5% 5% 5% 6% 5% 6% Source: Informa Telecoms & Media Fig. 22 DTH ARPU in CEE (US$/month) Czech Republic yoy chng Hungary yoy chng Poland yoy chng Romania yoy chng Russia yoy chng Entire region yoy chng 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 0 0 0 0 0 14 18 22 28 33 35 36 33 32 36 37 38 39 n.a. n.a. n.a. n.a. n.a. n.a. 29% 22% 27% 18% 6% 3% -8% -3% 13% 3% 3% 3% 0 0 0 0 0 0 13 20 21 23 25 21 22 22 22 23 25 26 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 54% 5% 10% 9% -16% 5% 0% 0% 5% 9% 4% 0 0 0 7 9 14 16 17 18 17 17 16 18 19 20 21 21 22 n.a. n.a. n.a. n.a. 29% 56% 14% 6% 6% -6% 0% -6% 13% 6% 5% 5% 0% 5% 0 0 0 0 0 0 0 0 0 3 4 5 8 9 10 10 11 13 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 33% 25% 60% 13% 11% 0% 10% 18% 0 0 0 0 9 13 17 18 19 21 22 23 24 25 27 28 29 31 n.a. n.a. n.a. n.a. n.a. 44% 31% 6% 6% 11% 5% 5% 4% 4% 8% 4% 4% 7% 0 0 0 7 9 13 18 22 24 24 23 21 21 22 23 24 24 25 n.a. n.a. n.a. n.a. 33% 48% 36% 22% 7% 3% -4% -11% 2% 3% 4% 4% 3% 3% Source: Informa Telecoms & Media Fig. 23 IPTV ARPU in CEE (US$/month) Czech Republic yoy chng Hungary yoy chng Poland yoy chng Romania yoy chng Russia yoy chng Entire region yoy chng 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 0 0 0 0 0 0 0 0 0 0 0 14 18 23 28 31 32 33 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 29% 28% 22% 11% 3% 3% 0 0 0 0 0 0 0 0 0 0 0 13 14 17 19 22 23 25 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 8% 21% 12% 16% 5% 9% 0 0 0 0 0 0 0 0 0 0 0 10 11 14 16 18 19 20 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10% 27% 14% 13% 6% 5% 0 0 0 0 0 0 0 0 0 0 0 0 0 7 8 10 10 11 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 14% 25% 0% 10% 0 0 0 0 0 0 0 0 0 0 8 10 14 16 18 20 22 23 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 25% 40% 14% 13% 11% 10% 5% 0 0 0 0 0 0 0 0 0 0 5 7 11 14 16 18 20 22 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 44% 65% 29% 16% 11% 10% 9% Source: Informa Telecoms & Media 26 ???????????????????????? Cyfrowy Polsat …both in terms of prices 3. ARPUs. As signaled in the preceding section, the migration to digital (higher fees than in the aa (ARPUs), … analog) should enhance the average revenue per user (ARPU) in the industry, fuelling the subscription spending and acting as the principal revenue driver during next few years. It should be noted, though, that while the upgrades to digital cause average fees paid by basic subscribers to rise, the intensifying competition (e.g. telcos’ encroachment) is holding down the rate increases (e.g. in the USA some major CATV operators introduced no rate increases in 2007, while other announced rate hikes smaller than in the preceding years). Nonetheless, in the EMEA region the level of spending per subscription household is expected to continue to increase, chiefly due to higher fees commanded on expanded services (2007-2011E ARPU CAGR of <6% both in Western Europe and CEE). While in the CEE region average spending per subscription household dwells at c. 35% of the average for Western Europe, Poland stands out in the region in this respect with average spending representing app. 50% of the Western European average (no meaningful divergencies from these current proportions are expected in next few years). …and volumes (subscribership 4. Volumes (subscribership levels and penetration). An increase in subscriber numbers will remain, mainly thanks to IPTV and DTH, a material driver of the market growth in most regions of the world albeit, compared to previous years, its significance will be gradually wearing off in favour of a higher average revenue per user (ARPU; in EMEA the expected annual average growth in subscriber numbers (>5%) is on a par with the expected annual average growth in ARPU). The rise in volumes (i.e. subscriber population) will probably, to an increasingly large degree, follow from proliferation of triple-play services (a package combining fixed-line voice and penetration) Fig. 24 Penetration of subscription-based TV in Western Europe and CEE (million) Western Europe yoy chng Penetration (%) CEE 2002 66.53 5% 43.0% 13.30 2003 69.62 5% 44.5% 14.55 2004 71.94 3% 45.7% 15.65 2005 74.77 4% 46.8% 17.26 2006 78.24 5% 48.6% 18.47 2007E 81.91 5% 50.5% 19.64 2008E 86.31 5% 52.9% 20.63 2009E 90.94 5% 55.3% 21.72 2010E 96.19 6% 58.1% 22.89 2011E CAGR: 2007-11E 102.18 6% 5.7% 61.3% 24.17 yoy chng Penetration (%) 6% 14.3% 9% 15.5% 8% 16.6% 10% 18.2% 7% 19.4% 6% 20.5% 5% 21.4% 5% 22.5% 5% 23.5% 6% 24.7% 5.3% Source: PwC, Wilkofsky Gruen Associates Fig. 25 Penetration of subscription-based TV in various countries of Europe Western Europe Austria Belgium Denmark 2002 43.0% 84.7% 99.1% 45.5% 2003 44.5% 85.1% 99.1% 49.4% 2004 45.7% 84.9% 99.3% 51.2% 2005 46.8% 85.1% 99.4% 53.1% 2006 48.6% 85.5% 99.4% 53.7% 2007E 50.5% 86.1% 99.4% 54.3% 2008E 52.9% 87.3% 99.4% 55.6% 2009E 55.3% 88.9% 99.4% 58.2% 2010E 58.1% 91.0% 99.4% 59.6% 2011E 61.3% 94.0% 99.4% 62.2% Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden Switzerland UK CEE Czech Republic Hungary Romania Russia Turkey Poland 54.1% 28.3% 54.0% 15.6% 58.0% 11.8% 99.3% 66.8% 50.0% 21.2% 67.9% 81.0% 38.4% 14.3% 21.0% 62.7% 48.6% 2.7% 11.0% 36.3% 55.3% 29.6% 56.5% 20.0% 61.7% 12.3% 99.3% 69.2% 52.9% 23.1% 70.7% 81.4% 39.4% 15.5% 23.2% 64.8% 50.9% 3.4% 12.2% 39.3% 55.9% 31.7% 55.6% 22.1% 65.9% 15.4% 99.3% 71.8% 57.4% 24.4% 72.3% 81.7% 41.2% 16.6% 25.3% 66.9% 53.9% 3.9% 12.9% 42.8% 56.6% 35.3% 52.9% 24.2% 67.9% 17.7% 99.3% 75.4% 60.4% 28.1% 74.3% 82.0% 42.4% 18.2% 27.4% 69.0% 56.2% 5.5% 13.6% 46.0% 56.8% 38.9% 52.0% 28.5% 69.8% 21.6% 99.3% 78.9% 63.6% 32.1% 75.1% 82.3% 44.6% 19.4% 29.6% 71.1% 60.7% 6.2% 14.6% 52.1% 57.4% 42.1% 51.2% 32.8% 70.9% 25.8% 99.4% 82.0% 66.7% 36.5% 76.7% 82.5% 46.8% 20.5% 31.9% 73.1% 64.5% 6.8% 15.6% 61.2% 58.5% 44.4% 50.9% 37.0% 72.7% 31.0% 99.5% 84.5% 69.4% 42.9% 79.3% 82.8% 49.4% 21.4% 34.5% 75.3% 66.0% 7.4% 16.6% 67.9% 59.6% 46.0% 51.1% 41.1% 74.5% 37.8% 99.5% 86.5% 71.4% 47.9% 81.6% 83.4% 52.0% 22.5% 37.3% 77.5% 67.6% 8.1% 17.5% 71.4% 60.6% 49.2% 51.5% 45.3% 76.2% 44.3% 99.6% 88.5% 73.3% 53.9% 83.1% 83.9% 54.5% 23.5% 40.4% 79.9% 69.2% 8.8% 18.5% 74.3% 62.1% 54.3% 52.3% 49.4% 78.5% 50.0% 99.6% 91.4% 74.5% 60.2% 84.2% 84.5% 57.5% 24.7% 44.0% 82.6% 71.1% 9.6% 19.4% 76.7% Source: PwC, Wilkofsky Gruen Associates, DM IDMSA estimates (data and forecasts for Poland) ???????????????????????? 27 Cyfrowy Polsat telephony, broadband Internet and a range of TV channels offered at a price lower than the sum of individual parts), as well as of the economic expansion and of the mandated analog terrestrial signal shutdowns in the USA and EU materializing in the coming years (regarding the details, please refer to the preceding paragraphs), and resulting in a forced influx of so-far-non-subscribing households into the subscription domain in time intervals surrounding the shut-down dates. The scale of this ‘extra-ordinary’ step-up in subscribership related to the mandated shutoff of the analog broadcast will, however, probably widely vary from country to country, constituting the function of current subscribed-TV penetration levels (the higher the penetration, the smaller the population of the households using the analog terrestrial signal) and possible incentives to switch to terrestrial digital (the stronger the incentives, the smaller – ceteris paribus – portion of the non-subscribing population is likely to switch to a subscription-based service). When comparing the levels of subscription-based TV penetration across the countries and assessing further room for growth, the position of free multichannel services needs to be inspected, as it often explains the differences in fee-based penetrations (this is especially visible in case of Western European countries). For instance: (i) In Germany, majority of satellite users receive their TV programs for free; if they were paid subscribers, the overall subscription penetration would be above 90% (rather than 52%). (ii)There are >7 million of free-satellite and free-DTT users in the UK; if they were paid subscribers, overall subscription penetration would be above 70% (rather than 45%). (iii)In the 2005-2006 period 17 free DTT channels were launched in France, and they attracted over 2 million users; if these free users were subscribers, overall subscription penetration level would stand at app. 50% (rather than actual 39%). (iv)The DTT market is expanding also in other European countries (Spain, Italy), putting a restraint upon the potential of subscription-based services. The position of free multichannel services often explains the cross-country differences in fee-based penetrations The above examples tend to imply that the wide-spread launches of DTT do suck out the potential of the subscription-based TV programs distribution area; the LT adverse impact is more severe – ceteris paribus – in countries where the subscription TV penetration levels are low and vice versa. It is hence evident, that the free DTT launches have two opposite effects from the perspective of subscription-based TV distributors: (i) they disenfranchise non-subscribing households, resulting in an extraordinary influx of new paid users around the mandated analogue terrestrial signal shutoff dates, and (ii) decrease the pool of non-subscribing households which sooner or later could become customers of a subscription-based service. DTT roll-outs have two opposite effects for subscription-based TV programs distribution platforms Satellite subscribership 5. How will the cake be split (CATVs vs. satellites vs. telcos)? The coming years should see CATVs grow aa at a slower rate when compared to satellites (with the exception of USA) and in some parts of the world (e.g. in Western Europe) they may even bring a decline in subscribership of the former television distribution platform (a trend already transpiring from historical data for the last couple of years), mainly due to fiercer competition from telcos, which are more and more aggressively developing triple-play products (it needs to be noted that where the launch of such services does not require any substantial expenditure on network upgrades, telephone companies are able to offer much more competitive prices than cable operators or satellite providers, as incremental revenue from distribution of television content represents only a fraction of their return on investment in the service launch – the remaining portion comes from ‘retained’ (thanks to triple-play services) revenue from Internet access and fixed-line telephony services), as well as from new free-of-charge distribution platforms (a phenomenon particularly widespread in the largest EU countries – Germany and UK). However, the CEE region – with a relatively low cable penetration compared to Western Europe – should experience continued, albeit moderate, growth in CATV volumes in the years to come. Satellite platforms are likely to fare better than CATV operators, as they normally have wider programming offers and lower churn rates. It should be noted, though, that satellite platforms are at some disadvantage to CATV operators and telcos, because their ability to offer directly multi-play packages is limited (while there are some existing deals with telephone companies for voice and broadband services, telephone companies are likely to focus more on their own networks to offer triple-play offerings9). expected to grow in the coming years ahead of the CATV’s, even though the former are at competitive disadvantage to CATVs and telcos due to the limitations in their ability to directly offer multi-play services 9 28 Telephone companies teamed up with satellite platforms largely because they had no TV; when they can provide television distribution on their own (IPTV), they will not need satellite platforms as partners for other than IPTV service reach increase purposes. ???????????????????????? Cyfrowy Polsat No growth of CATV volumes in Western Europe During the past four years, subscription cable in Western Europe has shown very little growth, as the declines in the UK and Germany (the territories with the largest number of free multichannel users) held down the rates of growth (excluding these two countries, the number of CATV households in Western Europe would show >6% cumulative growth since 2003, rather than a mere 0.2% with their inclusion). Notwithstanding the above, CATV subscribership is not forecasted to grow in Western Europe (2007-2011E CAGR of -0.3%), on the back of approaching saturation, network-reach-related constraints in reaching new prospects and IPTV proliferation. Fig. 26 The structure of subscription-based TV distribution market in various parts of the EMEA region (million) Western Europe: % yoy chng yoy chng Penetration (%) CATV % yoy chng yoy chng Penetration (%) % share of CATV % share of CATV in yoy change Satellite % yoy chng yoy chng Penetration (%) % share of satellite % share of satellite in yoy change Other (IPTV) % yoy chng yoy chng Penetration (%) % share of other % share of other in yoy change CEE % yoy chng yoy chng Penetration (%) CATV % yoy chng yoy chng Penetration (%) % share of CATV % share of CATV in yoy change Satellite % yoy chng yoy chng Penetration (%) % share of satellite % share of satellite in yoy change Other (IPTV) % yoy chng yoy chng Penetration (%) % share of other % share of other in yoy change 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E 66.53 n.a. n.a. 43.0% 69.62 4.6% 3.09 44.5% 71.94 3.3% 2.32 45.7% 74.77 3.9% 2.83 46.8% 78.24 4.6% 3.47 48.6% 81.91 4.7% 3.67 50.5% 86.31 5.4% 4.40 52.9% 90.94 5.4% 4.63 55.3% 96.19 5.8% 5.25 58.1% 102.18 6.2% 5.99 61.3% 49.14 49.08 48.98 48.82 0.4% -0.1% -0.2% -0.3% 0.21 -0.06 -0.10 -0.16 30.7% 30.5% 30.2% 29.9% 65.7% 62.7% 59.8% 56.6% 7.4% -1.7% -2.7% -3.6% 24.55 26.89 28.97 30.47 8.3% 9.5% 7.7% 5.2% 1.88 2.34 2.08 1.50 15.4% 16.7% 17.9% 18.7% 32.8% 34.4% 35.4% 35.3% 66.4% 67.4% 56.7% 34.1% 1.08 2.27 3.96 7.02 217.6% 110.2% 74.4% 77.3% 0.74 1.19 1.69 3.06 0.7% 1.4% 2.4% 4.3% 1.4% 2.9% 4.8% 8.1% 26.1% 34.3% 46.0% 69.5% 17.26 18.47 19.64 20.63 10.3% 7.0% 6.3% 5.0% 1.61 1.21 1.17 0.99 18.2% 19.4% 20.5% 21.4% 13.77 14.19 14.67 15.04 8.1% 3.1% 3.4% 2.5% 1.03 0.42 0.48 0.37 14.5% 14.9% 15.3% 15.6% 79.8% 76.8% 74.7% 72.9% 64.0% 34.7% 41.0% 37.4% 3.48 4.21 4.83 5.31 19.6% 21.0% 14.7% 9.9% 0.62 0.48 0.57 0.73 3.7% 4.4% 5.0% 5.5% 20.2% 22.8% 24.6% 25.7% 35.4% 60.3% 53.0% 48.5% 0.01 0.07 0.14 0.28 n.m. 600.0% 100.0% 100.0% n.m. 0.06 0.07 0.14 0.0% 0.1% 0.2% 0.3% 0.1% 0.4% 0.7% 1.4% 0.6% 5.0% 6.0% 14.1% 48.72 -0.2% -0.10 29.6% 53.6% -2.2% 31.57 3.6% 1.10 19.2% 34.7% 23.8% 10.65 51.7% 3.63 6.5% 11.7% 78.4% 21.72 5.3% 1.09 22.5% 15.39 2.3% 0.35 15.9% 70.9% 32.1% 5.86 10.4% 0.55 6.1% 27.0% 50.5% 0.47 67.9% 0.19 0.5% 2.2% 17.4% 48.59 -0.3% -0.13 29.4% 50.5% -2.5% 32.75 3.7% 1.18 19.8% 34.0% 22.5% 14.85 39.4% 4.20 8.9% 15.4% 80.0% 22.89 5.4% 1.17 23.5% 15.73 2.2% 0.34 16.2% 68.7% 29.1% 6.42 9.6% 0.56 6.6% 28.0% 47.9% 0.74 57.4% 0.27 0.7% 3.2% 23.1% 48.43 -0.3% -0.16 29.1% 47.4% -2.7% 33.62 2.7% 0.87 20.2% 32.9% 14.5% 20.13 35.6% 5.28 12.0% 19.7% 88.1% 24.17 5.6% 1.28 24.7% 16.06 2.1% 0.33 16.4% 66.4% 25.8% 6.99 8.9% 0.57 7.2% 28.9% 44.5% 1.12 51.4% 0.38 1.1% 4.6% 29.7% 47.49 48.97 48.93 n.a. 3.1% -0.1% n.a. 1.48 -0.04 30.7% 31.3% 31.1% 71.4% 70.3% 68.0% n.a. 47.9% -1.7% 19.00 20.53 22.67 n.a. 8.1% 10.4% n.a. 1.53 2.14 12.3% 13.1% 14.4% 28.6% 29.5% 31.5% n.a. 49.5% 92.2% 0.04 0.12 0.34 n.a. 200.0% 183.3% n.a. 0.08 0.22 0.0% 0.1% 0.2% 0.1% 0.2% 0.5% n.a. 2.6% 9.5% 13.30 14.55 15.65 n.a. 9.4% 7.6% n.a. 1.25 1.10 14.3% 15.5% 16.6% 11.45 12.12 12.74 n.a. 5.9% 5.1% n.a. 0.67 0.62 12.3% 12.9% 13.5% 86.1% 83.3% 81.4% n.a. 53.6% 56.4% 1.85 2.43 2.91 n.a. 31.4% 19.8% n.a. 0.58 0.48 2.0% 2.6% 3.1% 13.9% 16.7% 18.6% n.a. 46.4% 43.6% 0.00 0.00 0.00 n.m. n.m. n.m. n.m. n.m. n.m. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% n.a. 0.0% 0.0% CAGR: 2007-11E 5.5% -0.3% 4.6% 54.7% 5.5% 2.5% 10.7% 74.1% Source: PwC, Wilkofsky Gruen Associates ???????????????????????? 29 Cyfrowy Polsat Fig. 27 Structure of subscription-based TV markets in various countries in Europe (2006) Source: PwC, Wilkofsky Gruen Associates, DM IDMSA estimates (data and forecasts for Poland) Fig. 28 Structure of subscription-based TV markets in various countries in Europe; CATV penetration Western Europe Austria Belgium Denmark 2002 30.7% 35.0% 94.1% 31.4% 2003 31.3% 35.4% 93.5% 33.7% 2004 31.1% 35.4% 93.5% 34.0% 2005 30.7% 35.4% 93.2% 34.3% 2006 30.5% 35.5% 92.8% 34.1% 2007E 30.2% 35.6% 92.1% 34.0% 2008E 29.9% 35.8% 91.3% 33.9% 2009E 29.6% 36.0% 91.1% 34.1% 2010E 29.4% 36.2% 90.1% 34.0% 2011E 29.1% 36.4% 89.2% 33.5% Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden Switzerland UK CEE Czech Republic Hungary Romania Russia Turkey Poland 45.4% 13.7% 52.0% 11.6% 38.2% 0.3% 94.5% 42.2% 40.9% 6.9% 44.9% 79.0% 15.5% 12.3% 14.8% 56.0% 48.6% 2.3% 6.9% 29.0% 46.1% 14.4% 54.5% 14.7% 38.3% 0.3% 94.4% 42.3% 42.3% 7.8% 46.3% 78.6% 14.0% 12.9% 15.9% 56.9% 50.9% 2.9% 7.1% 32.0% 46.8% 14.5% 53.5% 15.5% 40.0% 0.0% 94.3% 42.1% 45.3% 8.7% 48.2% 78.3% 13.3% 13.5% 16.9% 59.1% 53.8% 3.3% 7.3% 34.0% 47.1% 14.5% 50.7% 16.3% 40.9% 0.0% 94.2% 42.4% 46.8% 9.5% 48.8% 78.0% 13.6% 14.5% 17.9% 59.9% 55.7% 4.6% 7.5% 34.6% 47.3% 14.5% 49.6% 17.5% 41.7% 0.0% 94.0% 42.2% 48.2% 9.9% 49.2% 77.7% 13.3% 14.9% 18.8% 60.7% 56.1% 5.0% 7.6% 34.7% 48.0% 14.5% 48.7% 19.7% 42.6% 0.0% 93.5% 42.4% 49.1% 10.1% 49.3% 77.5% 12.8% 15.3% 19.8% 61.5% 56.8% 5.5% 7.8% 34.9% 48.7% 14.5% 47.8% 21.7% 42.7% 0.0% 92.8% 42.2% 49.7% 10.1% 49.2% 77.2% 12.4% 15.6% 20.7% 62.3% 57.3% 5.7% 8.0% 35.1% 49.3% 14.5% 47.2% 23.8% 42.8% 0.0% 92.2% 42.0% 50.2% 10.0% 48.9% 76.9% 11.9% 15.9% 21.6% 63.1% 57.7% 6.0% 8.1% 35.3% 49.6% 14.4% 46.6% 25.9% 42.9% 0.0% 91.5% 41.3% 50.5% 10.0% 48.5% 76.4% 11.5% 16.2% 22.5% 63.9% 57.9% 6.3% 8.3% 35.5% 49.8% 14.3% 46.0% 27.9% 43.0% 0.0% 90.9% 40.7% 50.8% 10.0% 48.2% 75.5% 11.0% 16.4% 23.3% 64.7% 58.0% 6.6% 8.4% 35.8% Source: PwC, Wilkofsky Gruen Associates, DM IDMSA estimates (data and forecasts for Poland) 30 ???????????????????????? Cyfrowy Polsat Fig. 29 Structure of subscription-based TV markets in various countries in Europe; satellite penetration 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E Western Europe Austria Belgium Denmark 12.3% 49.7% 5.0% 14.0% 13.1% 49.7% 5.6% 15.6% 14.4% 49.5% 5.9% 17.2% 15.4% 49.4% 5.7% 18.4% 16.7% 49.4% 5.8% 18.7% 17.9% 49.2% 6.1% 19.0% 18.7% 49.1% 6.3% 19.4% 19.2% 48.9% 5.8% 20.1% 19.8% 48.8% 5.9% 19.6% 20.2% 48.7% 5.6% 18.7% Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden Switzerland UK CEE Czech Republic Hungary Romania Russia Turkey Poland 8.7% 14.6% 1.9% 4.0% 19.8% 11.3% 4.8% 24.6% 9.1% 14.2% 23.0% 2.1% 22.9% 2.0% 6.2% 6.7% 0.0% 0.4% 4.1% 5.3% 9.1% 15.2% 2.0% 5.3% 23.3% 11.5% 4.9% 26.4% 10.6% 15.3% 24.4% 2.7% 25.4% 2.6% 7.3% 7.9% 0.0% 0.5% 5.1% 7.3% 9.1% 16.7% 2.2% 6.6% 25.9% 14.6% 5.0% 28.7% 12.1% 15.7% 24.1% 3.3% 27.9% 3.1% 8.4% 7.9% 0.2% 0.6% 5.6% 8.8% 9.5% 18.6% 2.2% 7.9% 27.0% 16.4% 5.1% 31.0% 13.6% 18.0% 25.0% 3.9% 28.7% 3.7% 9.5% 9.1% 0.5% 0.9% 6.2% 11.4% 9.5% 20.7% 2.4% 11.0% 28.1% 18.9% 5.3% 33.3% 15.5% 18.9% 24.9% 4.5% 31.1% 4.4% 10.6% 10.3% 4.7% 1.1% 7.0% 17.3% 9.4% 22.3% 2.5% 13.1% 28.4% 21.3% 5.1% 33.7% 17.6% 20.1% 25.1% 5.1% 33.2% 5.0% 11.6% 11.5% 7.8% 1.1% 7.8% 26.0% 9.4% 23.2% 2.5% 15.2% 29.4% 23.3% 4.7% 34.0% 19.7% 20.5% 25.5% 5.6% 34.7% 5.5% 12.6% 12.7% 8.7% 1.2% 8.6% 31.5% 9.3% 23.6% 2.5% 17.3% 30.3% 24.8% 3.9% 33.3% 21.0% 20.9% 25.9% 6.2% 35.7% 6.1% 13.6% 13.9% 9.8% 1.4% 9.3% 34.0% 9.3% 24.1% 2.5% 19.4% 31.3% 27.1% 3.0% 32.7% 22.2% 21.3% 26.1% 7.0% 36.4% 6.6% 14.6% 15.0% 11.0% 1.6% 10.1% 35.9% 9.3% 24.6% 2.5% 21.5% 32.2% 28.7% 2.0% 31.6% 22.8% 21.6% 26.0% 8.1% 36.6% 7.2% 15.6% 16.2% 12.4% 1.8% 10.8% 37.2% Source: PwC, Wilkofsky Gruen Associates, DM IDMSA estimates (data and forecasts for Poland) Fig. 30 Changes in the structure of subscription-based TV markets in various countries in Europe in 2002-2011E; share of CATV in subscription-based TV programs distribution market (measured by number of subscribers) Source: PwC, Wilkofsky Gruen Associates, DM IDMSA estimates (data and forecasts for Poland) ???????????????????????? Fig. 31 Changes in the structure of subscription-based TV markets in various countries in Europe in 2002-2011E; share of satellite in subscription-based TV programs distribution market (measured by number of subscribers) Source: PwC, Wilkofsky Gruen Associates, DM IDMSA estimates (data and forecasts for Poland) 31 Cyfrowy Polsat Fig. 32 Changes in the structure of subscription-based TV markets in various countries in Europe in 2002-2011E; share of IPTV in subscription-based TV programs distribution market (measured by number of subscribers) Source: PwC, Wilkofsky Gruen Associates, DM IDMSA estimates (data and forecasts for Poland) Much brisker growth of DTH’s than cable’s volumes in CEE in next few years Proliferation of digitalization boosts potential for incremental services (e.g. VOD) However, in CEE the CATV market has been expanding (and is expected to continue so) at brisker rates, as at lower overall paid multichannel penetration levels and with delayed (compared to Western Europe) roll-outs of DTT, the digital services and triple-play offering help cable operators attract and retain subscribers. It should be, however, noted that already in 2006 cable ceased to win the largest share of non-free multichannel net additions in the CEE region (with DTH taking the lead with app. 60% share in the new users net add), a trend which is expected to continue in the coming years. These advances in the CEE DTH sector have been assisted by backing from several major media companies (MTG, Liberty Global, Canal+), and the sector generally benefited from DTH’s perception as a premium TV service – giving it advantage over the often fragmented CATV sector, which still finds it difficult to shake off its connotation as a lowcost utility service. As with cable, the 2007-2011E growth of subscription satellite households in CEE should outpace the growth in Western Europe (10.7% vs. 4.6%) on the back of rising incomes, low penetration and demand for more entertainment. 6. Growing significance of value-added services (VOD). The main reason why CATVs have been aa investing in digital technology, apart from ensuring the ability to deploy triple-play offerings, is the potential associated with VOD. The ability to provide VOD services is also one of the key factors prompting investment into and development of IPTV. As VOD allows viewers a much wider choice than pay-per-view services, in the longer term (after a sufficient number of households get used to its novelty) video-on-demand should start to squeeze pay-per-view services out of the market. While at the moment VOD selections tend to be quite limited, the distributors are actively securing rights for additional programming. Please note that VOD gives cable an advantage over satellite, as the majority of the latter cannot provide the service (two-way capability required), yet a competitive disadvantage with respect to telcos’ IPTV offering which exhibit greater capacity (i.e. should be potentially able to offer more VOD selections than cable does). The growth of VOD services is likely to be driven by the two factors: (i) increases in VOD-enabled population (i.e. IPTVs, digital cable and two-way capability satellite penetration) and (ii) increased selection, which should boost the buy rates. Fig. 33 VOD (video on demand) in the EMEA region 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E CAGR: 2007-11E VOD households (million) yoy chng Annual VOD spending per VOD household (US$) 0.3 n.a. 20 0.6 100% 30 2 233% 40 3.3 65% 50 4.3 30% 60 8.8 105% 65 13.8 57% 70 20.2 46% 75 27.4 36% 75 34.5 26% 75 42.3 23% 75 yoy chng Total VOD spending by households (US$ million) yoy chng n.a. 6 50% 18 33% 80 25% 165 20% 258 8% 572 8% 966 7% 1,515 0% 2,005 0% 2,588 0% 3173 2.9% n.a. 200% 344% 106% 56% 122% 69% 57% 32% 29% 23% 40.9% 36.9% Source: PwC, Wilkofsky Gruen Associates 32 ???????????????????????? Cyfrowy Polsat Fig. 34 PPV/VOD in CEE (US$ million) Czech Republic yoy chng Hungary yoy chng Poland 1995 0 n.a. 0 n.a. 0 1996 0 n.a. 0 n.a. 0 1997 0 n.a. 0 n.a. 0 1998 0 n.a. 0 n.a. 0 n.a. 0 n.a. 0 n.a. 0 n.a. n.a. 0 n.a. 0 n.a. 0 n.a. n.a. 0 n.a. 0 n.a. 0 n.a. n.a. 0 n.a. 0 n.a. 0 n.a. yoy chng Romania yoy chng Russia yoy chng Entire region yoy chng 1999 2000 0 0 n.a. n.a. 0 0 n.a. n.a. 0 0 n.a. 0 n.a. 0 n.a. 0 n.a. n.a. 0 n.a. 0 n.a. 0 n.a. 2001 0 n.a. 0 n.a. 11 n.a. 0 n.a. 0 n.a. 22 n.a. 2002 0 n.a. 0 n.a. 12 2003 2004 1 2 n.a. 100% 1 2 n.a. 100% 12 13 9% 0% 0 0 n.a. n.a. 1 3 n.a. 200% 39 50 77% 28% 2005 2006 2007E 2008E 2009E 2010E 2011E 2012E 2 3 6 10 14 17 20 23 0% 50% 100% 67% 40% 21% 18% 15% 2 4 5 7 9 13 13 16 0% 100% 25% 40% 29% 44% 0% 23% 15 21 31 36 43 52 60 70 8% 15% 40% 48% 0 1 5 10 n.a. n.a. 400% 100% 4 10 13 17 33% 150% 30% 31% 60 75 93 119 20% 25% 24% 28% 16% 14 40% 21 24% 145 22% 19% 17 21% 27 29% 176 21% 21% 20 18% 30 11% 210 19% 15% 25 25% 37 23% 245 17% 17% 31 24% 46 24% 286 17% Source: Informa Telecoms & Media Fragmented CEE markets will consolidate ???????????????????????? 7. Pending consolidation of fragmented markets. A unique trait of the CEE subscription-based TV aa programs distribution markets is their fragmentation (on the CATV or DTH side, or both). While there are numerous competing services in each CEE country (e.g. five DTH platforms in Romania), the experience of a majority of developed markets have shown that the LT economic reality is that each market is likely to be left with one dominant player for each distribution platform. Hence, both closures of unsuccessful operations and a lot of M&A activity should be expected in the region in next few years. 33 Cyfrowy Polsat Fig. 35 The structure of CATV and DTH markets in CEE countries Country Bulgaria Czech Republic Hungary Poland CATV Very well developed (penetration: >70%), yet heavily overbuilt and fragmented market (over 700 operators), consolidation already started (led by CableTel). Market fragmented (over 100 operators), but the market leader (UPC CR) serves more than 50% of CATV subscribers in the country. Despite some consolidation in recent years, which has taken the number of CATV operators from 500 to 400, the CATV industry remains fragmented; however, top 2/5 operators control 50%/80% of the market. The market remains fragmented (>500 CATV operators), though the 4 largest players (UPC, Vectra, Multimedia, Aster) control more than half of the market. Polish rules allow network overbuild, which increases inter-CATV competition. The consolidation of the CATV sector already started (e.g. Multimedia is active on this front), but as of now it has been limited to acquisitions of small- to mid-sized players. DTH There are 2 DTH platforms in the country (Bulsatcom and ITV Partner); it remains unclear whether the market can support such number of DTH players, given very high CATV penetration. There are 3 DTT operators in the Czech Republic (UPC Direct, DigiTV, GES Media). Country's relatively early switchover to DTT coupled with relatively low penetration of subscription-based TV (26% in CATV, 4% in DTH) may cap the upside for the latter. 2 DTH operators - UPC Direct and DigiTV (launched last year). 3 DTH operators (Cyfrowy Polsat, Cyfra+, n). TVP (public television) planning to launch the 4th platform in 2H09. DTH has a clear edge over cable and IPTV in rural areas and small towns that are not passed by CATV infrastructure and where telephony network may not support TV services, as well as by the fact that only 5% of the country's population lives in the capital city. DTH has proved popular with residents of houses, while cable is more common in larger residential districts with apartment blocks and multi-dwelling units. Romania Market dominated by 2 operators (UPC Romania and RCS-RDS), commanding jointly >50% market share. The sector has been consolidating in recent years with larger operators acquiring smaller networks. The launch of two satellite services, Boom TV and Dolce TV, in 2006 took the number of DTH operators to 5 (the three other more established players are DigiTV (clear market leader), MaxTV and Focus Sat). Such number of operators in unusual, given that most European markets struggle to support only two or three DTH operators. Romanian DTH platforms have been benefiting from their ability to penetrate rural areas characterized by patchy cable coverage as well as new suburbs around the cities lacking CATV access. Russia The CATV sector is engaged in major upgrading and consolidation, benefiting from entries by local strategic investors attracted by the triple-play potential. Slovakia With app. 53% penetration cable dominates the pay TV market in Slovakia. While there are c. 100 cable operators, the leading 3 (UPC, Satro and Slovakia Cable Company) control almost 50% share. The vast majority of subscribers have analogue cable, with digital cable still in the very early stage of development. The CATV sector is highly fragmented (app. 300 operators); c. 80% of the market is controlled by small local operators with less than 10 ths subscribers. The major exception is Volia, with c. 598 ths subscribers as of the end of 2006. While with many households inaccessible by cable, Russia constitutes an ideal territory for DTH platforms to thrive, generating subscriber interest has been quite difficult, due to low average household income and strong free-to-air terrestrial services. There is only 1 national DTH service in play (NTV-Plus), and a number of regional satellite providers, but the latter tend to provide only free-to-air channels. However, new service entrants (e.g. Naspers, South-African based pay TV provider) are expected. 2 satellite platforms (UPC Direct and Digi TV) operate in the country. Ukraine There are 2 DTH providers in Ukraine - PSC and NTV-Plus. Source: Informa Telecoms & Media 3.2. MVNO operates without radio network 34 Mobile virtual network operators (MVNO) Mobile virtual network operators (MVNO) provide mobile services without possessing own radio network or infrastructure required for providing the service. They can be compared to alternative fixed-line operators. The business model is similar: an MVNO purchases services at wholesale rates and later resells them to retail users at a mark-up. Putting another way, instead of the mobile communications spectrum and proprietary network, MVNO applies its brand value and customer ???????????????????????? Cyfrowy Polsat management capabilities to create a wireless company; as a virtual operator, MVNO leases excess network capacity from a traditional mobile operator (MNO) and sells it to its own customers. Mobile network operator, which does not have its own radio infrastructure in a particular region may operate as an MVNO in that region. For instance Play - a Polish MNO - develops its own radio network only in the largest cities and densely populated areas, while in other regions Play uses the Polkomtel network (MNO). 360 planned or operational MVNO world-wide 4 marketing strategies… …discount MVNO,… …lifestyle MVNO,… …segmentation-driven MVNOs, and… ...network-utilization-driven MVNO Three MVNO business models:… Virgin Mobile UK was the first commercially successful MVNO. It was lunched in 1999 and now has more than 4.5 million customers. According to Takashi Mobile, currently are there 360 planned or operational MVNOs world-wide. Most of the MVNOs operate in Western Europe, mainly in France and the UK. Yet as the number of players in the mobile area increases, so does the risk. It is unclear how many MVNOs any geographic market may support, but it appears almost certain that not each and every MVNO will manage to survive long enough to turn a profit. There are four marketing strategies most commonly used by the MVNOs: (i) Discount MVNOs – compete with MNOs by offering attractive pricing with basic voice and SMS services. Discount MVNOs are companies such as Fresh Mobile, Mobile World or Virgin Mobile. (ii)Lifestyle MVNOs – niche players, which focus on providing its services to dedicated social groups, e.g. Disney Mobile’s target group are families with children, while MyAvon wants to posses users among its customers – mostly women who buy its cosmetic products. (iii)Segmentation-driven MVNOs. Mobile operators may have problems to be successful in all customer segments, and may try to penetrate such unchartered territories by a MVNO. As an example, Telekomunikacja Polska has its main MNO operator – Orange – and MVNO – WPmobi – owned by its subsidiary Wirtualna Polska, in order to target Internet users with sales channels of the Wirtualna Polska portal. (iv)Network-utilization-driven MVNOs. MNOs often have free capacity of their network, especially connected with supplying the 3G services. In order to enhance utilization of the capacity and create economies of scale MNOs may operate with MVNOs. In Poland Play, an MNO which targets young people using multimedia services (run in 3G), has limited own network and entered in an agreement with Polkomtel to provide Play’s services via its network. As far as the business models go, we may distinguish three MVNO business approaches, depending on the extent of the possessed infrastructure. Fig. 36 MVNO business models Source: MobileVirtualNetwork.co.uk …an affinity partner,… ???????????????????????? (i) Affinity partner; such business model is based on possessed sales channels. An affinity partner may be a retail or entertainment company, which has a well known brand helpful in marketing the new service. The business model is the lowest entry level of MVNO, which does not require extensive capital expenditures connected with investing in network service components, billing or CRM center. 35 Cyfrowy Polsat ...service provider/ enhanced service provider/ hybrid, and... ,...full MVNO Infrastructure involvement depends on MVNO business model (ii) Service provider/ enhanced service provider/ hybrid; these business models are more capital extensive’ than these of an affinity partner. Depending on the scale of the investment we can differentiate between: –– service provider (with its own CRM & billing center), –– enhanced service provider (enforced with distribution of content and other applications), and –– hybrid (which additionally may contain some elements of the network). It is important to mention that the more extensive capital involvement generates also higher costs in the longer run, which are connected with the maintenance of the technical support. For this reason MVNOs should broaden their capex on infrastructure only when such investments could add value to their business, i.e. when the host MNO cannot outsource such services to virtual operator or when they differ from the MVNOs demand. (iii) Full MVNO; according to MobileVirtualNetwork.co.uk, the only difference between the full MVNO and MNO is lack of the radio access and transmission (which is licensed). Beside the network, all the infrastructure possessed by the MVNO allows to differentiate its product offering independently from the host MNO capabilities. When the three aforementioned business models of MVNOs were presented in 1999 it was claimed that the natural way for an MVNO development is to climb on the path of the infrastructural involvement. Nowadays it is clear that not the infrastructure but the business strategy is the key to MVNOs development, and infrastructure should be adjusted to the requirements of the target group, product offering, etc. Resellers vs. brand MVNOs While some MVNOs are simply wireless resellers focusing mainly on providing distinctive voice and data services to particular segments of the market, brand MVNOs strive to capitalize on the value and power of their company brandname; putting that brand on ubiquitous wireless devices constitutes a way to reach a new customer base (e.g. a loyal customer of Virgin’s MVNO is more likely to be a consumer of all the other products and services offered by that brand); hence, launching an MVNO may constitute a critical part of a long-term brand and customer acquisition strategy. MVNO vs. MNO: (i) lower ARPU, Lack of radio infrastructure has a number of consequences for the financial performance of the MVNO business model compared with the business model of an MNO. Firstly, as the virtual operators tend to focus on providing basic services at reasonable prices (more attractive than the MNOs; please be reminded that their business model is based on buying the ‘minutes’ from MNOs at wholesale (discount) prices and their subsequent re-sale to the users at a marked-up price (yet lower compared with the retail prices of the MNOs)). While such an approach helps to boost the number of new users, in a longer run, however, it becomes an obstacle to increase to company’s profitability (hence, MVNOs exhibit lower margins than MNOs). Secondly, MVNOs may operate at much lower capex/sales ratios than MNOs, as the expenditure on network maintenance of the former are equal to the fee for the network rental. What follows is that due to lower capital intensity of the MVNO business model, they tend to achieve their BEPs much faster than MNOs (providing that the necessary scale of operations is attained, of course). On the other hand, however, by the same token, once the BEP is reached, MVNOs’ free cash flows tend to remain fairly flat afterwards, while in the case of MNOs they have much larger potential to improve further. (ii) lower margins, (iii) lower capex/ sales, (iv) shorter BEP, and (v) capped FCF First-mover advantage seems to be the key-success factor in the MVNO business,… …equally important as recognized brandname or cross-selling capability,… …and much more important than content 36 Inspecting the characteristics of an array of MVNOs (both successful and unsuccessful) that launched their operations in the past years, it appears that the first-mover advantage constitutes the most important key success factor in the MVNO business; prevailing part of the successful MVNOs (e.g. Tele2, Debitel, Virgin Mobile UK) are the early-movers on their respective markets, which gave them an upper hand in winning large number of subscribers (due to relatively softer competition at the stage they entered the market). On the other hand, bulk of unsuccessful (at least as of now) MVNOs are the late market-entrants (e.g. Disney Mobile, Virgin Mobile Singapore). The companies that succeed on the MVNO front also tend to have strong and widely recognized brand-names (though this is not always the case – e.g. Virgin Mobile Singapore) and usually exhibit capabilities of cross-selling their products/ services via the new channel. Content delivery capabilities do not appear to play a major role in segregating leaders from laggards in the MVNO field (e.g. Tele2 and Tesco succeeded without content, while Virgin Mobile Singapore or Disney Mobile underperform despite their content capabilities). ???????????????????????? Cyfrowy Polsat Early-moving MVNOs are late entrants compared to the MNOs; hence, even the best of them are unlikely to win market shares close to the latter’s The type of the MVNO business model pursued does not seem to be the best guide in segregating leading from lagging MVNOs ???????????????????????? While since the inception some of the most successful European MVNOs managed to win as high as 10% market shares (in number of subscribers’ terms) in the markets of their operations (e.g. Telmore), the market shares of a vast majority of operational MVNOs typically do not exceed 3%, which – the way we see it – is a consequence of the late life-cycle stage at which they enter the market (high penetrations limit the potential for winning new subscribers and necessitate luring existing subscribers from other players). The way we see it, the statements regarding a continuously growing market share of MVNOs constitute rather a myth and should not be automatically applied to all national markets (market shares of some successful MVNOs – e.g. of Debitel Denmark – have been on quite steep declines during the past year – which may, for example, constitute a consequence of these players reaching close-to-full penetration levels in their respective niche target customer segments). Definitely small niche players are in easier position to improve their market share due to the low-base effect (though, on the other hand, their late entries often constitute a major hindrance in winning market shares large enough to justify the economic viability of their operations). On the other hand, the early movers with significant market positions have to defend themselves against the inroads by new entrants and often face ceilings in terms of penetration within their target groups. Finally, it appears that none of the underlying types of the MVNO business models (affinity partner, service provider, enhanced service provider, hybrid, full MVNO) guarantees the success; however, the majority of successful MVNOs do not operate within the simplest business modes (of an affinity partner or service provider), though – on the other hand – some operators running the most complex and capital-intensive full MVNO business approach also suffer hardships (e.g. BT Mobile) from low and sliding market shares. 37 Cyfrowy Polsat 4. Local market outlook and trends Due to its late launch, DTT is unlikely, in our view, to become a dominant TV programs aa distribution platform; by the time the roll-out of DTT is completed, majority of the viewers of ATT should have subscribed to a fee-based multichannel service. However, given increasing level of uncertainty related to the ropes of DTT’s implementation in Poland, there is some risk related to this assessment of ours. Despite the inability to provide bundled service, among the existing subscription aa multichannel platforms it is DTH that appears to be the prime beneficiary of current economic upswing and people’s rising incomes, due to its ability to penetrate rural areas and smaller towns, which often lie beyond the network scope of cable and IPTV providers; by the same token, due to its lack of network-reach-implied constraints DTH has been the main beneficiary of the delayed DTT roll-out. However, ability to develop a bundled offering will be crucial for DTHs’ well-being in a LT, we believe. Each of the three DTH platforms in Poland pursues a different generic strategy: Cyfra+ aa and ‘n’ are differentiators (premium-priced content quality approach and innovative technology leadership, respectively), while Cyfrowy Polsat places itself as the low cost leader. Cyfrowy’s approach proved highly successful in past two years, boosting its subscribers number way above the competitors’, though – by the same token – its ARPU materially lags these of its local peers. We expect a sluggish growth of volumes in CATV, due to ‘stickiness’ of cable’s ability aa to pass new homes, more emphasis on monetization on the current pool of clients (bundled offerings, digital roll-outs), and the volume growth driven by M&As rather than extensive roll-outs of networks into new regions. IPTV is a new service in Poland, with rather disappointing take-up rates to-date. While aa we forecast the IPTV penetration to grow, we believe its proliferation will be fairly slow, due to the already high penetration of an alternative multichannel platform (CATV) in urban areas. On the other hand, TP SA’s decision to complement its IPTV offer with Cyfra+ DTH package re-selling will broaden its reach to prospects beyond its DSL network. We forecast the LT fee-based multichannel (DTT) penetration rate at c. <80% (>20%); aa such target levels appear plausible for countries with high subscription multichannel penetration at the time of DTT launches. In terms of market shares, increases are expected for DTH and IPTV, and a decline in CATV. The television ARPUs are expected to trend upwards for all distribution platforms, and aa to converge with one another in a long term (implied higher LT CAGR at IPTV than at CATV, and at CATV than at DTH). The penetration rate in excess of 109% suggests approaching maturity of the mobile aa sector, which adds to the competitive pressures resulting from new players (MNO and MVNOs) service launches; we forecast LT target mobile penetration level at c. 130%, and app. 12% LT target market share of MVNOs. At present, there are seven operational MVNOs on the market, but their number is likely aa to increase significantly in next few months, making future consolidation inevitable. Following Western European tendencies early-mover advantage, recognized brandname and ample pools of target clients seem to constitute the key-success factors of MVNOs. At the moment, as we see it, Halo Polsat and Carrefour MOVA seem to have the best chances to succeed with their MVNO endeavors. 38 ???????????????????????? Cyfrowy Polsat 4.1. Distribution of television programs At the moment there are four main platforms of distributing television programs in Poland: three multichannel (CATV, DTH and IPTV) and analog terrestrial; according to the governmental provisional plan the launch of yet another platform (DTT) should take place (probably via the island method) at the turn of this and next year. Fig. 37 Television programs distribution platforms in Poland Type Number of channels offered 5-7 Price Description free-of-charge CATV Penetration (TV households, eop 2007) technical coverage = 99% (c. 39% of TV households using analog terrestrial signal) 35% 5-65 PLN 4.99-64 DTH 26% 20-99 (plus c. 500 free-to-air foreign language channels) PLN 9.9-145 DTT 0% (the first digital terrestrial islands to be created at the turn of 2008 and 2009, the digital transformation to be completed by the end of 2012 (with possible extension till mid-2015)) 0.3% Initially 7; target number remains unknown 1st multiplex probably free-of-charge, remaining probably payable, likely STB subsidies PLN 29.9-47.9 Average quality of signal Free of charge HDTV unavailable High quality signal STB not required for analog network (needed for digital) Possibility of offering Internet and VoIP services (in digital) Potentially new services (VOD, DVR, HDTV) Possibility of offering bundled services Service subject to network-reach-related constraints High quality signal Dish installation required STB required Limited possibility of offering Internet and VoIP services Potentially new services (VOD, DVR, HDTV) Bundled services potential limited Service not subject to network-reach-related constraints High quality signal STB required HDTV available Possibility of offering bundled services VOD, DVR available High quality signal STB required HDTV available Possibility of offering bundled services VOD, DVR available Service subject to network-reach-related constraints ATT IPTV 43-53 Source: GUS, KRRiTV, Informa, PIKE, company data, DM IDMSA estimates While we provide an in-depth discussion of the aforementioned platforms in the following sections of this research report, below – in a snap-shot – we present the main points determining, in our opinion, their current market positions and possible future performance. DTT - subdued performance expected, due to late introduction CATV – strong presence, but volume growth capped ???????????????????????? 1. DTT – the late introduction. DTT is unlikely – in our opinion – to become a dominant platform, due to aa its late launch and roll-out completion; by the time the DTT roll-out is up and running, a large part of viewers of analog terrestrial television is likely – the way we see it – to become subscribers of some kind of a fee-based multichannel service. However, given increasing level of uncertainty related to the ropes of DTT’s implementation in Poland, there is some risk related to this assessment of ours. 2. CATV – relatively high penetration with network-reach embedded constraint. While CATV aa penetration is reasonably high in Poland (c. 35% of the end of 2007), looking forward only slow growth of volumes in the cable sector is expected, due to: (i) stickiness of cable’s ability to pass new homes, (ii) more emphasis on monetization of the current pool of clients (bundled offerings, digital rollouts) than passing new homes, and (iii)apparent preference of the industry’s leaders toward M&A-driven volume growth (facilitated by the declining prices in takeovers resulting from an inability of smaller networks to finance the shift to digital) rather than extensive organic roll-outs of networks into new regions. 39 Cyfrowy Polsat DTH - the main beneficiary of people’s rising incomes; strong volume growth, due to lack of network-reachrelated constraints IPTV – new service operating in areas already largely passed by a competing platform (cable) ARPUs to grow and converge 3. DTH – soaring volumes (despite infringed ability to offer bundled service), due to rising incomes aa and lack of network-reach-related constraint. Among the existing platforms DTH appears to constitute the prime beneficiary of the current economic upswing and people’s rising incomes, due to its ability to penetrate rural territories and smaller towns, which often lie beyond the network scope of CATV and IPTV providers. By the same token, this platform has been also benefiting most (in net add terms) from the aforementioned delayed roll-out of DTT. 4. IPTV – a fledgling service with network-reach embedded constraint, operating in the aa environment with strong presence of an alternative distribution platform (cable). IPTV is a new, not commonly recognized, service in Poland, currently provided by only six operators, with fairly disappointing take-up rates to-date. While we forecast the IPTV penetration to grow, we believe its proliferation will be quite slow, due to the already high penetration of an alternative multichannel platform (CATV) in urban areas (i.e. on the IPTV front we expect Poland to follow the footsteps of Germany and Ireland rather than of France or Italy), though TP SA is likely to broaden the reach of its IPTV service via starting re-selling of Cyfra+ packages. 5. ARPUs. Expected to show an upward trend for all of the multichannel platforms, aa and to converge to one another in the long term (implied higher CAGR at IPTV than at CATV, and at CATV than at DTH). 4.1.1. The introduction of DTT in Poland = the arcane of chaos Strategic questions concerning DTT game-plan for Poland remaining unanswered Provisional plan: two (or three) multiplexes now, more in 4-5-year time UKE forcing its plan, despite some uncertainties of legislative nature 40 DTT The process leading to the implementation of DTT in Poland could not probably be more chaotic, erratic and progressing in a more disharmonic manner. After few years of talks, working group meetings and consultations among various engaged central administration bodies (UKE, KRRiT, Ministry of Infrastructure, Ministry of Culture, Parliament, etc.,) Poland remains among those few EU counties that so far has neither appointed an institution/person clearly in charge of the co-ordination of the works related to the digital transition nor enacted relevant legislations. Consequently, some of the most basic questions pertaining to the switch from analogue terrestrial to digital terrestrial broadcasting (e.g., what is the target structure of the TV broadcasting market in the DTT era?; will DTT be free-ofcharge or payable (which multiplexes are to be free-of-charge?); who’s going to pay for the STBs?; will the current system of automatic renewal of analog terrestrial licenses be maintained in the digital regime?; will the second multiplex be operated by an active or passive operator (i.e. who will decide on the programming content of the second multiplex?); how many multiplexes will be earmarked for DTT purposes?; will all multiplexes, except the first one, be put on an open tender?, etc.) remain unanswered at the moment. In the paragraphs that follow we strive to provide an overview of the current status of the DTT game-plan for Poland, though we would like to stress that the situation is likely to remain ‘dynamic’. The provisional plan regarding introduction of DTT in Poland provides for two (or three) national multiplexes to roll-out on a region-by-region basis (the first is to cover c. 80% of the country’s population, the second one – almost 100%, and the third one (if its launch proves feasible) – c. 40%). The two/three multiplexes in question are capable to host 7 SD channels (or 3 HD channels) each, and they are supposed to encompass a ‘basic’ package for the viewers. UKE intends to grant the first multiplex to TVP (public TV), which will be obliged to host in it (by the time frequencies in the following digital multiplexes are freed pursuant to the analogue switch-off (i.e. post 2012)) channels of commercial FTA broadcasters which had been granted analog terrestrial licenses (i.e. Polsat, TVN, TV4 and TV Puls coming on the top of three channels of public television – TVP1, TVP2 and TVP Info). Simultaneously, UKE intends to launch an open tender for the operator of the second multiplex already in September this year (all parties i.e., both broadcasters present at the moment on the Polish market as well as the potential new entrants, may submit their bids (though the latter ones will be preferred)), which effectively would mean partial removal of the TV broadcasting market entry barriers prior to the analog switch-off (potentially bad news for commercial FTA broadcasters – Polsat and TVN). Such situation (2/3 multiplexes in place, hosting jointly up to c. 20 channels (some in HD)) would persist till the end of 2012, when further three-four multiplexes (again, capable of carrying 7/3 SD/HD channels each) would be put on the table. The fourth multiplex is planned to be given to TVP, which would move its three channels from the first multiplex (and fill in the available free space for additional three channels according to its wishes), with the resultant freed frequencies in the first multiplex granted to current analog FTA broadcasters (i.e. Polsat, TVP, TV Puls; though it is unclear on what ???????????????????????? Cyfrowy Polsat terms). The third multiplex would be then subject to an open tender (unless it proves feasible to launch its operations already now; in such circumstances the tender would take place earlier), with the fifth and sixth ones earmarked either to DTT (DVB-T) TV (unclear whether via open tender or not) or mobile TV (DVB-H), depending on the development of the DVB-H service. In the context of the above, it should be noted that: (i) local TV broadcasters oppose the plan, (ii) the split of authority between two bodies – UKE and KRRiT – is not completely clear (though this week the two regulators seem to have reached some kind of a consensus over this issue), and (iii) the novelty of the media act (likely to remove the aforementioned clash of competencies between UKE and KRRiT) is rather unlikely, we believe, to come into force, as Sejm (lower chamber of the Parliament) will not probably manage to overrule the veto by the President of Poland. The island method will be probably used for the digital transition of terrestrial television in Poland Who is going to pay for the STBs? The terrestrial television switch to digital will be (probably) implemented in Poland via the island method, which is based on gradual shift from analogue to digital transmission in particular areas until the entire country is covered (first digital islands to be created at the turn of 2008 and 2009). The method follows the German experience and – compared with the simulcasting method (simultaneous introduction of DTT in the whole country and transmission of both analogue and digital signal at the same time for a predetermined period (adopted, e.g., in Great Britain)) – is less expensive in terms of infrastructure (cost spread over a number of years), does not force the broadcasters to incur additional costs connected with simulcasting and allows for higher number of multiplexes and broader program offering. It, however, requires a necessity to quickly provide the selected region with STBs or digital receivers. So how the costs of the STBs would be then financed? It is a crucial issue, as – according to the recent polls – Poles do not appear willing to pay for them, and – even more importantly – on the back of the fact that by the time of the DTT roll-out probably only the poorest families will not subscribe to some form of a paid multichannel TV service, the potential viewers of DTT simply may not afford it (average cost of a MPEG-4 STB stands at c. PLN 300 at the moment). Given such premise, it makes no wonder that UKE sees the broadcasters as a party covering these costs (i.e. subsidizing the STBs’ purchases by the viewers). While earmarking the funds raised from prospective sale of multiplexes to their operators (predominantly probably new market entrants) for STB-subsidies raises no controversies, UKE’s idea that current FTA analogue broadcasters (e.g. Polsat, TVN) should also pay for the STBs to be given away to DTT viewers is controversial. UKE uses the mobile telco market reference, claiming that if the GSM operators deeply subsidize the handsets sold to the users and do not have to struggle to make ends meet, the TV broadcasters could also pay for the STBs. However, the way we see it, such reasoning is flawed, as in return for handset subsidies customers of mobile operators commit themselves to pay monthly fees (typically, over a 2-year period), whereas DTT (at least as far as the first multiplex (i.e. the one to host current FTA analog terrestrial channels) goes) is supposed to be free-of-charge for the viewers (it appears that ‘premium’ (i.e. non-free-of-charge) channels may be hosted in the following multiplexes). It is of no surprise then, that current FTA analog terrestrial broadcasters do not express their willingness to succumb to UKE’s proposal, unless they are granted the exclusivity in the access to the DTT multiplexes operating in Poland till 2012-end. Such proposal was not only rejected by UKE, but the Office’s Chairperson (Mrs. Anna Streżyńska) stated even that in such situation current commercial FTA analogue channels broadcasters may be deprived of their frequencies in the first digital multiplex, which would be put on an open tender (along with the entire second multiplex and possibly also the third one). The situation is further blurred by the fact that it is not completely clear whether the DTT plan for Poland governing the rules of the award of the digital multiplexes (whatever form it ultimately takes) requires for its lawful enforcement an act of the Parliament (which would additionally delay the process) or not. While representatives of majority of parties seating in the Parliament seem to believe that enacting such a legislation is a must, UKE claims the opposite, and – according to the statements by its Chairperson – does not intend to delay its actions related to the DTT roll-out (e.g. announcement of a tender for the operator of the second multiplex) by the time relevant act is enacted and comes into force. Even though it is hard to draw any clear-cut conclusions regarding the ultimate DTT regime in Poland (especially from the broadcasters’ stand-point), it appears that irrespective of future course of action (excluding extreme scenarios (e.g. award of two or more multiplexes to a single new entrant now, coupled with major acceleration of the DTT roll-out)), we will be, most likely, witnessing a ‘late’ DTT roll-out scenario in Poland. The consequences of such a development for the pay multichannel ???????????????????????? 41 Cyfrowy Polsat TV programs distribution market are likely to be significant. By the end of 2005, a moderate level of paid multichannel (DTH + cable + IPTV) penetration in Poland (c. 46% as at year’s end) due to its late launch and roll-out implied reasonably favorable premise for the DTT service prospects. However, the progress towards completion; by the time the DTT transition has been slow and introduction of DTT has been delayed by a mixture of administrative roll-out is up and running, a large and technical issues, though the government remains committed to a national roll-out starting part of viewers of analog terrestrial at the turn of this and next year and the complete analog switch-off set for 2012 (with possible television is likely – the way we see extension till mid-2015). During the past two years, the market situation has materially changed, it – to become subscribers of some however, as the fee-based multichannel penetration increased significantly since then (c. 46% kind of a paid multichannel service as at the end of 2005, app. 52% as at the end of 2006 and c. 61% at the 2007-end) – mainly on the back of robust growth of DTH volumes – and, what is more, is expected to continue to soar in the short- to mid-term (we forecast eop-2008 multichannel penetration at app. 68%). Against such market backdrop, the current provisional plan providing for creation of the first digital islands at the turn of 2008 and 2009, i.e. when the paid multichannel penetration will dwell most likely close to the 70% level (c. 68%, according to our forecasts), appears to be probably too delayed for the DTT to succeed. Moreover, as noted before, the DTT roll-out in Poland is likely to be extended over at least a 4-year period, which means – the way we see it – that DTT is unlikely to fully replace (in terms of the number of users) current analogue terrestrial service, as by the time of the former’s roll-out completion, large part of analogue terrestrial service current viewers will most likely switch to some form of a fee-based multichannel service (with the bulk of the multichannel’s net add materializing probably by the end of the current year). In other words, the possible subdued performance of DTT in Poland would constitute the consequence of poor/delayed timing of the service roll-out; should the service roll-out have started earlier (before the end of 2005), i.e. before the rapid take-up in paid multichannel penetration on the back of people’s improving incomes, it could have – in our opinion – put much stronger restraint on multichannel that it will with its launch at the turn of 2008 and 2009. DTT is unlikely – in our opinion – to become a dominant platform, Fig. 38 DTT and ATT in Poland; Number of households and net additions Fig. 39 DTT and ATT in Poland; Share of DTT and ATT households in all television households Source: DM IDMSA estimates on the basis of various sources With lack of network-reachimplied constraints and dominant position in the rural areas and small towns, DTH has been the main beneficiary of the delayed DTT roll-out Which of the paid multichannel platforms is then best positioned to benefit from DTT’s late launch? Given that urban households are already largely subscribed to some kind of a multichannel service (though no precise data in this respect are available, unfortunately), the likely beneficiary will thrive on its ability to attract non-subscribers from rural areas and smaller towns. Given the networkreach-related constraints embedded both in cable and IPTV, it follows then that this beneficiary is DTH (this is, as a matter of fact, corroborated by the market data for the past three years, with the lion share of multichannel net add accruing to this distribution platform). 4.1.2. >500 CATV operators, but the largest 4 control >50% of the market 42 Source: DM IDMSA estimates on the basis of various sources CATV Despite the fact that the CATV sector in Poland witnessed some consolidation in the past 24 months (leading players acquired small- to mid-sized competing networks), the market remains excessively fragmented with >500 operators remaining in the play. It should be noted though, that the four largest players – UPC, Vectra, Multimedia Polska and Aster – command jointly over 50% market share. ???????????????????????? Cyfrowy Polsat Financing the digital network upgrade is often beyond the scope of smaller CATV operators → consolidation to speed up With increased pressure from DTH services, thriving on their lack of network-reachrelated constraints, and new IPTV service launches, the local market’s leading CATV operators are likely, sooner or later, to engage in a major consolidation of the sector, which as of now is too fragmented to effectively compete in a longer run, especially as the levels of capital expenditures that need to be incurred in relation to the switchover from analogue to digital (c. USS 150-200 per home passed) is often beyond the scope of the smaller operators (and without such switchover, their business would perish), which makes them doomed unless they are bought by a player capable of financing the digital transition (i.e. one of the ‘big four’). As of now, there have been no M&A activities at the level of the local CATV market leaders, though in 2006 there were rumors regarding merger talks between Vectra and Multimedia, which, however, failed. With competitive pressure from nonCATV participants of the television programs distribution market intensifying, consolidation among the CATV market’s leaders cannot be precluded, in our view, especially as the Polish regulations allow network overbuild, which increases the inter-cable competition also in the areas of coverage of the market.s leaders (e.g. Multimedia starting an overbuild of Warsaw – the area historically passed by UPC and Aster). Sluggish volumes Fairly slow growth of volumes in the CATV sector expected, due to ‘stickiness’ of cable’s ability to pass new homes, and more emphasis on monetization on the current pool of clients (bundled offerings, digital roll-outs) and M&A-driven volume growth than extensive roll-outs of networks into new regions Network-reach constraint → As noted in the preceding section, cable volumes are subject to the network-reach constraint, implying that their organic growth critically hinges upon the speed of passing new homes. Additionally, the leading operators introduced bundled services and increasingly focus on boosting their total revenues per subscriber by offering their current TV subscribers broadband Internet access and fixed voice, rather than on sheer organic growth of CATV users. Moreover, with the capital-intensive digital roll-outs facing the industry, and inability of numerous small networks to finance this challenge – implying, in our opinion, declining prices in the small- to mid-sized CATV network takeover transactions on the local market, as the targets’ value is subject to clear time decay at the moment – in the coming years we expect only moderate growth of CATV volumes in Poland (lagging DTH and also possibly IPTV), as apart from the ‘stickiness’ of the cable operators ability to pass new homes (compared, for example, with the DTH service, where there are no reach limitations), the sector’s leaders are more likely to focus on non-organic growth of volumes. In other words, small- to mid-sized cable operators (unable to finance the digital shift) are unlikely to increase their volumes at all, whereas large CATVs are likely to put more emphasis on: (i) existing networks upgrades (digitization, implying higher cable TV ARPU), (ii) better monetization of their current customer bases by offering cable TV subscribers bundled service, and (iii)takeovers of smaller cable players (given likely decreases of prices in such transactions) rather than extensive organic roll-outs of their networks to new territories. focus on bundled services offering and M&A-induced growth of volumes While such scenario could facilitate even brisk growth of the total volumes of the sector’s leaders, the organic growth of the volumes in the entire sector is likely, in our view, to be slow. When this is viewed against the current strong volume momentum of DTH, it follows then that in the coming years we expect only a minor growth in the CATV penetration and further significant decline of CATV’s share in multichannel households in Poland (already visible during last two years). CATV ARPU expected to rise, though In terms of ARPU, we expect – in line with the global experiences – a slightly upward, consistent and long-run trend in the CATV sector in Poland, on the back of: (i) migration of current users from cheaper to more expensive packages, (ii) proliferation of the digital cable (service by c. 10% more expensive than the analogue), and (iii)growing importance of value-added services (VOD). While as of now the CATV ARPUs tend to lie below the DTH’s ARPU (e.g. according to the Informa estimates), with the digitization of cable networks and proliferation of the value-added services, we expect them to converge over the long term. ???????????????????????? 43 Cyfrowy Polsat Fig. 41 CATV in Poland; Number of subscribers and net additions Fig. 42 CATV in Poland; Penetration and share in paid multichannel TV programs distribution market (in number of users’ terms) Source: DM IDMSA estimates on the basis of various sources (PIKE, PwC, Informa), DM IDMSA estimates Source: DM IDMSA estimates on the basis of various sources (GUS, KRRiTV, PIKE, Informa, PwC), DM IDMSA estimates Fig. 40 Television ARPU in CATV sector in Poland; Multimedia Polska Source: Multimedia, DM IDMSA estimates 4.1.3. Three DTH platforms at the moment (Cyfrowy Polsat, Cyfra+ and ‘n’), one more to come (TVP) Generic strategic followed: differentiation vs. low cost leadership Low cost leadership strategy boosts subscriber volumes at Cyfrowy Polsat 44 DTH In Poland there operate three DTH platforms: Cyfrowy Polsat, Cyfra+ and ‘n’. Public television (TVP) intends to launch the fourth platform in 2H09. DTH has a clear edge over cable and IPTV in rural areas and small towns that are not passed by CATV infrastructure and where telephony network may not support TV services (though this may be partially mitigated by the telco incumbent’s decision to complement its IPTV offering with a satellite platform). DTH has proved popular with residents of single-family houses, while cable is more popular in larger residential districts with apartment blocks and multi-dwelling units. Each platform has chosen a different strategy of positioning its services on the Polish market. Cyfra+ and ‘n’ platforms use a differentiation strategy, while Cyfrowy Polsat focuses on the low cost leadership. Cyfra+ delivers the widest range of channels, which allows it to charge more for its services and helps attain the highest ARPU among all DTH platforms in Poland (according to our rough estimates, the 2007 ARPU of Cyfra+ was > PLN 80). The third operator – ‘n’ – is an innovative technology leader, which has been the first DTH network to implement STBs with HDD functionality, HD channels and VOD services. Thanks to the low cost leadership strategy, Cyfrowy Polsat has been able to improve significantly the size of its subscriber base, particularly in 2006 and 2007 (following c. 94% growth in 2006, the Company reached 2.07 million subscribers at the end of 2007, which means 62% yoy increase). When disposable incomes of Polish households improve on the back of the strong GDP growth, the number of multichannel households also grows. In such environment, in our opinion, Cyfrowy Polsat – with its budget offering – stands good chance of winning the new marginal DTH households. The largest (in users’ terms) DTH platform does not, however, offer innovative services (the first HD channel launched in 4Q07, the date of launching VOD services remaining unknown as of now). ???????????????????????? Cyfrowy Polsat Cyfra+ is the premium-priced high quality content provider,… ...while ‘n’ positions itself as an innovative technology leader Vertical structure of programming packages = unique feature of ‘n’ Deep losses at ‘n’ at the moment, BEP expected in 2010 Near-term ARPU targets of ‘n’ seem attainable… Cyfra+, thanks to the largest channel offering, enjoys the highest ARPU among all DTH platforms, which however does not help net addition volumes. The platform gained 128 thousands of new subscribers in 2006 (16% up, yoy) exceeding 900 ths. of users, while as of the end of 1Q08 its client base stood at app. 1.1 million. Given the focus on the upper part of the market, in our opinion, in the case of Cyfra+ the GDP growth is not as important net add catalyst as for Cyfrowy Polsat. The ‘n’ platform is the youngest DTH operator in Poland (the platform launched its services in 4Q06). With c. 320 ths. of subscribers as of the end of April 2008 (up from 204 thousand in October 2007 and c. 50 thousand at the 2006-end) it is still far behind the other players, but – according to our estimates – the volume of its net additions last year might have exceeded the number of subscribers won by Cyfra+ (though accounted for a mere 25% (approximately) of Cyfrowy Polsat’s 2007 net add). Thanks to the fresh image and innovative services, coupled with the low base effect, ‘n’ has a chance to increase its market share significantly. The company’s unique feature is a vertical structure of programming packages (with no typical ‘broad’ basic package embedded in the competitors’ horizontal programming offerings), which – on one hand – enables better fit to the tastes of narrowly-focused audiences (no necessity to pay for thematic channels that are of no interest), but on the other means fairly expensive offering for audiences with wider ranges of channels of interest. The ‘n’ platform is running at deep losses, due to its relatively early stage of development and large proportion of the ‘new’ subscribers (generating STB subsidy costs and sign-up fees paid to the distributors of the service) in relation to the ‘seasoned’ ones (not generating such costs). Last year the company’s sales reached Euro 27.9 million (c. PLN 105 million) with EBITDA loss of Euro -48.7 million (PLN -184 million) and net loss of c. PLN -208 million. For 1Q08 ‘n’ reported revenues of Euro 16.0 million (c. PLN 57.1 million), marking an impressive 249% yoy growth, yet its quarterly loss at the EBITDA level widened to Euro -10.2 million (c. PLN -36.3 million) from Euro -9.3 million for 1Q07, and its bottom line dwelled in the red by c. PLN -47 million. According to the statements of the representatives of ‘n’, despite deeper yoy 1Q08 EBITDA loss, FY2008E losses of ‘n’ should be smaller yoy, and the platform is expected to reach its EBITDA BEP (and become FCFF positive) in 2010. The near term targets of ‘n’ provide for ARPU of PLN 56 and PLN 65 as of the end of 2008E and 2009E, and the number of platform’s subscribers reaching – respectively, by the end of 2008E and 2009E – 523 ths. (net add of c. 270 ths., implied expected share in sector’s net add of c. 33% (may prove realistic, in our view)) and 798 ths. ((net add of 275 ths., implied expected share in sector’s net add of c. 75% (very aggressive, the way we see it)). …just like the LT ARPU aim The LT targets of the ‘n’ platform provide for: (i) c. 30% market share in the DTH market by 2012E (measured by the number of subscribers) and (ii) APRU of PLN 70/month in 2012E. As far as the ARPU target goes, we deem its quite aggressive, yet attainable, given: (i) company’s programming packaging strategy and (ii) potential for added services (e.g. VOD), despite the fact that the targeted ARPU dwells materially above ARPU of the local low-cost leadership peer Cyfrowy Polsat (PLN 37.3/month in 1Q08 (the Family Package), forecast to increase to PLN 48-49/month by 2012E). However, post-2008E market However, the market share target seems extremely aggressive to us, given (i) only c. 9% market share at the moment, and (ii) the fact that the DTH market in Poland is likely – in our view – to approach its close-to-saturation stage in c. 3-year time. Given that the total number of DTH subscribers is expected to reach c. 5 million in 3-4-year time, down the road platform ‘n’ would need to have c. 1.5 million of subscribers to enjoy a 30% share in the market. Given, however, the fact that at the moment there are probably app. 3.6 million of DTH-subscribing households in Poland, ‘n’ would need to grab c. 75% share in the net addition of volumes in the DTH sector in Poland between now and 2012E (assuming no net influx of subscribers churning from alternative DTH operators) to reach the implied 1.5 million subscriber target. Given that the company’s share in the sector’s volume net add last year stood probably in the vicinity of c. 17-20% (and for 2008E we expect it to come out at c. 25-33%), we deem such an implied hike in its forward volume net add share extremely challenging. The resultant gap might be hence, in our view, filled only by the churning customers of other DTH operators (switching from Cyfrowy Polsat and Cyfra+ to ‘n’); as of now we do not see clear rationale supporting the expectancy of such strong churning behavior. share (share in DTH sector’s net adds) targets of ‘n’ appear extremely aggressive ???????????????????????? 45 46 1 FY2007 Source: companies, Gazeta Prawna, DM IDMSA minimum one-off expense (dish, STB, activation fee) - STB purchase option maximum one-off expense (dish, STB, activation fee) - STB purchase option Start-up attractiveness minimum one-off expense (dish, STB, activation fee) - leased STB option maximum one-off expense (dish, STB, activation fee) - leased STB option The most expensive subscription offer PLN 49 (included: PLN 189 fee for STB purchase for antenna set) PLN 600 (included: PLN 699 for STB and for antenna set) PLN 1 (included: PLN 1 activation fee and antenna set) PLN 99 (included: PLN 99 activation fee and antenna set) PLN 178 million1 differentiation strategy: enhanced content delivery (the largest selection of channels) STB PLN 10 (lease) No of channels: 30 Price: PLN 19 (subscription) STB PLN 10-20 (lease) No of channels: 90 Price: PLN 147 (subscription) Net income Strategy The cheapest subscription offer 1998 controlled by Liberty and Canal+ 900 PLN 926 million1 PLN 811 1.1 million in April 2008 Cyfra + Service launch date Ownership Distribution (no of authorizated distributors) Revenues Estimated ARPU (total revenue/ average number of subscribers) General information Number of subscribers Fig. 43 DTH platforms in Poland the Company does not offer STB in purchased option PLN 499 (included: STB with HDD and antenna set) PLN 169 (included: STB and antenna set) PLN 159 (included: PLN 99 activation fee for nbox STB and PLN 60 activation fee for nbox antenna set) PLN 339 (included: PLN 199 activation fee for nbox recorder and PLN 140 activation fee for nbox recorder antenna set) the Company does not offer STB in purchased option 320 ths in April 2008 Future targets: 523 ths. in 2008E eop 798 ths. in 2009E eop 1.5 million in 2012E eop 2006 ITI (75%) + TVN (25%) 1 500 PLN 105 million1 PLN 56 in 2008E PLN 65 in 2009E PLN 70 in 2012E PLN -208 million1 (loss) differentiation strategy: innovative technology leadership (first to introduce VOD service and channels in HD quality) STB PLN 99 (leasing only) No of channels: 32 Price: PLN 48 (subscription) STB PLN 99 or 199 (depending on STB model, leasing only) No of channels: 67 Price: PLN 120 (subscription) n PLN 169 + leasing fee of PLN 15 for STB (available only for HD STB) PLN 169 + leasing fee of PLN 15 for STB (available only for HD STB) STB PLN 149 No of channels: 20 Price: PLN 9.9 (subscription) STB PLN 99-499 (depending on STB model) No of channels: 64 Price: PLN 87.8 (subscription) PLN 113.4 million1 low cost leadership 1999 controlled by Polaris Finance > 1,200 PLN 796.7 million1 Familijny package PLN 37.3 Mini package PLN 8.5 2.2 million in April 2008 Cyfrowy Polsat Cyfrowy Polsat ???????????????????????? ???????????????????????? 1 FY2007 Source: companies, Gazeta Prawna, DM IDMSA MVNO HD Additional options/services VOD PVR IPTV Unique content Fig. 44 DTH platforms in Poland (continued) not available available not available 2 exclusive sport channels, 4 BBC channels and Polsat (one of four main universal channels in Poland) Cyfrowy Polsat 1 exclusive sport channel, a number of thematic channels (e.g. Owsiak.tv, Religia.tv, TVN Lingua, etc.), no Polsat offered (one of four main universal channels in Poland) n available available not available at the moment (may be changed by the Netia agreement (to be disclosed on next Monday, June 23)) available (i.e. Canal+ Film HD, Canal+ Sport HD, available (Polsat Sport HD, Polsat Sport Extra HD, HBO HD) available (Eurosport HD, TVN HD, Discovery Histroria HD, National Geographic HD, HBO HD, Film Box HD, Euro Sport Film box HD, n Sport HD, MGM HD) HD) not available at the turn of 2Q08 and 3Q08 not available available available available (in co-operation with TPSA) Canal+ movie and Sport channels, no Polsat offered (one of four main universal channels in Poland) Cyfra + Cyfrowy Polsat 47 Cyfrowy Polsat Fig. 45 DTH in Poland; Number of subscribers and net additions Fig. 46 DTH in Poland; Penetration and share in paid multichannel TV programs distribution market (in number of users’ terms) Source: DM IDMSA estimates on the basis of various sources (GUS, KRRiTV, PIKE, Informa, PwC, Company data), DM IDMSA estimates Lack of network-reach-related constraints makes DTH the main fee-based multichannel net add winner DTH ARPU ahead of CATV’s and IPTV, but convergence expected in the LT DTH has been the main beneficiary of current rise in people’s disposable incomes, as with no network-reach-related constraints (embedded both in IPTV and CATV) it often constitutes the sole subscription multichannel platform available in rural areas and small cities (i.e. regions where the bulk of income-improvement-driven multichannel subscriber net add materializes). This phenomenon has been clearly visible during past three years (lion share (70-90%) of paid multichannel net add grabbed by DTH), and we expect it to continue at least in short- to mid-term. According to Informa estimates, DTH’s ARPUs in Poland are higher than CATV’s and IPTV’s, which seems justified on the ground of the digitalization argument (majority of cable is still analogue) and the novelty of IPTV service. In a longer run, however, this gap is expected to narrow down, due to faster price increase at the latter two platforms. 4.1.4. IPTV is a new, not commonly recognized, service in Poland, currently provided by only six operators The take-up rates have been so far low,… ...both at TPSA,… ...and Multimedia IPTV IPTV, distributed through DSL lines capable of handling 6 Mbit/s transfers (12Mbit/s for HD), constitutes a relatively new television content distribution service in Poland (launched commercially in 2006). So far, it has not managed to become a commonly recognized manner of receiving the television programs (at the end of last year the number of IPTV households in Poland exceeded merely 40 thousand). At the moment, the service is provided by only six operators (including TPSA, Multimedia, Dialog, Jumbox and Inotel), though other players are putting up their packages or are considering the entry into this business. In 2H06, TPSA launched its IPTV offering (provided as Videostrada TP or as a part of the Multipakiet TP bundled offering), encompassing 46 channels of DVD quality (MPEG 4), with technical possibility of boosting this number up to 200. Additionally, TPSA offers Cyfra+ channel offer as well as the VOD service. As of the end of 1Q08 TPSA had app. 49 thousand of IPTV households, which is a fairly poor number, in our opinion, given that the service has been provided already for six quarters in the largest cities of the country (Warsaw, Poznań, Cracow, Gdańsk, Wrocław and Katowice), while in 3Q07 the service was expanded from 6 to 42 largest cities (such move helped TPSA to rise the number of homes passed from 500 thousand to c. 1 million). TPSA has not disclosed any details concerning its targets for the IPTV subscribership. We tentatively expect the incumbent to have 80-100 thousand IPTV households at the end of 2008.10 The second IPTV supplier is Multimedia Polska (leading CATV company), which offers 43-53 channels as well as the VOD service. Multimedia’s IPTV network coverage is limited to 50 thousand homes (Kutno, Mielec, Brzesko and Dębica; the reach of the company’s IPTV network is not planned to be extended); however, as at the end of 2007 only 3.286 thousand households used the service (and only 3.5 thousand as of the end of 1Q08). With such take-up rates we expect the company to have c. 5 thousand of IPTV subscribers of as the end of 2008. 10 48 Source: DM IDMSA estimates on the basis of various sources (GUS, KRRiTV, PIKE, Informa, PwC, Company data), DM IDMSA estimates Please note that the incumbent’s TV service take-up rates may be helped by the approaching launch (2H08) of Cyfra+ DTH operator packages’ re-selling project which will complement TP SA’s IPTV offering and grant the access to prospects out of the DSL network reach. ???????????????????????? Cyfrowy Polsat While we expect the IPTV penetration to grow, we believe its proliferation will be quite slow, due to the already high penetration of an alternative multichannel platform (CATV) in urban areas While we do expect IPVT to increase its share in paid multichannel households in Poland in the long term (to c. 7-8% for all TV households, and app. 10% among the urban paid TV households), we believe that the Polish scenario for IPTV is more likely to resemble the experiences of such countries as Germany, Ireland or Portugal, i.e. countries where at the launch of IPTV services the CATV penetration was quite high, rather than of France, Spain or Italy, i.e. countries which at the moment of IPTV’s kick-off either entirely lacked the CATV sector or where this segment of the television programs distribution was weak. The level of CATV penetration and the strength of the local cable industry appear to constitute one of the most crucial determinants of the IPTV take up rates, as both services tend to focus on urban areas (hence the lack of strong CATV presence implies more easy-to-win room for IPTV and vice versa). Fig. 47 IPTV in Poland; Number of subscribers and net additions Fig. 48 IPTV in Poland; Penetration and share in paid multichannel TV programs distribution market (in number of users’ terms) Source: DM IDMSA estimates on the basis of various sources (PwC, Informa, France Telecom, Multimedia), DM IDMSA estimates IPTV ARPU below the CATV ARPU and DTH ARPU at the moment, though expected to rise in the coming years and to converge with the latter two over the longer term Source: DM IDMSA estimates on the basis of various sources (PwC, Informa, France Telecom, Multimedia), DM IDMSA estimates According to Informa estimates, the IPTV ARPU dwells at the moment significantly below ARPUs of the alternative available multichannel platforms’ DTH and CATV. Such pricing differential makes sense in our view, given that IPTV still is a novelty in Poland (requiring discount prices to arouse customers’ interest) as well as due to the fact that it is predominantly offered as a part of a bundled offering (with depressed individual services. ARPUs, yet higher user ARPU). However, with time the IPTV ARPU should be probably expected to trend relatively briskly upwards and to converge with ARPUs of DTH and CATV due to three main reasons: (i) Rising infrastructure costs (when the market in the urban areas becomes saturated, IPTV will be forced into smaller towns where the capex per user ratio is likely to be higher), (ii)Over time, the IPTV service will become more widely recognized among the viewers, which should facilitate price increases, and (iii)Assuming further growth of incomes, over time the subscribers may migrate from basic to more expensive packages and more extensively use the value-added services (VOD). 4.1.5. Television programs distribution market forecasts GUS-based household data Our forecast for the television programs distribution market in Poland have been based on GUS (Central Statistical Office) data and projections regarding the number of households in the country. We assumed that on the back of rising incomes the share of TV households will steadily increase from 91% in 2005 to 95% in next few years time. DTT’s LT penetration seen The issue of the LT attainable level of DTT penetration (determining the size of the TV household population outside of the paid multichannel platforms) constitutes one of the main assumptions of our market model. Looking at the experiences of the some European countries, it appears to us that in this respect the DTT developments in Poland may resemble those of Germany, i.e. a country, where at the time of the DTT roll-out the paid multichannel penetration was relatively high (though in Poland it is likely, in our view, to be even higher than in the Germany at time of the service launch), and where the island DTT roll-out method was used (or, generalizing, a development typical at app. >20%,… ???????????????????????? 49 Cyfrowy Polsat for countries where the launch of the DTT service was ‘late’ from the perspective of the fee-based multichannel penetration at the time of the kick-off of the former). We assume that the LT target share of the DTT households in all TV households in Poland will oscillate at >20% (i.e. at c. 70% of the share of the analog terrestrial TV households at the service launch (turn of 2008 and 2009). ...with pay multichannel at <80% Such target levels appear plausible for countries with high subscription multichannel penetration rates at the time of DTT service launches It follows then, that we forecast LT subscription multichannel penetration level in Poland at app. <80%, a number which, at the first sight, may appear high from the international perspective, yet would be in line with such countries as Ireland, Portugal, Hungary or Romania (regarding the details, please refer to Chapter 3 - Global market outlook and trends), i.e. countries with high paid multichannel penetration at the time of the DTT service launch. We expect the peak of the paid multichannel penetration growth in Poland to materialize during the 2006-2008E period; we forecast the eop penetrations at, respectively, c. 68% and 71% for 2008 and 2009 (up from 52% and 61% as of the end of 2006 and 2007, respectively), mainly on the back of booming volumes of the DTH services (expected share in sector’s net adds of c. 60-80% in 2008-2009E, compared to c. 90% in 2006-2007), thriving on people’s rising incomes and lack of network-reach-related constraints, and - though in much smaller extent - due to picking up IPTV volumes (though, from a very low base) and sluggish net adds at CATV (regarding the detailed rationale for our assumptions on various TV programs distribution platforms, please refer to the preceding sections of this chapter, devoted to particular distribution platforms). It then automatically follows, that we forecast material increases of DTH’s and IPTV’s shares in the subscription multichannel market (in number of users’ terms) at the expense of CATV. Fig. 49 TV households in Poland; paid multichannel vs. ATT & DTT (FTA) Fig. 50 TV penetration in Poland; Paid multichannel vs. ATT & DTT Source: DM IDMSA estimates on the basis of various sources (GUS, KRRiTV, Informa, PwC, Company data), DM IDMSA estimates Source: DM IDMSA estimates on the basis of various sources (GUS, KRRiTV, Informa, PwC, Company data), DM IDMSA estimates Fig. 51 Structure of paid multichannel TV market in Poland (in number of users’ terms) Source: DM IDMSA estimates on the basis of various sources (GUS, KRRiTV, PIKE, Informa, PwC, Company data), DM IDMSA estimates 50 ???????????????????????? Cyfrowy Polsat Fig. 52 Television distribution in Poland; Market model million 2003 Households: 13.54 Urban 9.08 Rural 4.46 TV households 12.38 TV households as % to total households 91% Paid multichannel households: 4.87 yoy change n.a. CATV 3.97 yoy change n.a. DTH 0.90 yoy change n.a. IPTV 0.00 yoy change n.a. Terrestrial analogue households 7.52 yoy change n.a. DTT households 0.00 yoy change n.a. Net additions: Paid multichannel: 0.39 CATV 0.31 DTH 0.08 IPTV 0.00 Terrestrial analogue n.a. DTT 0.00 Shares in paid multichannel net additions: CATV 81% DTH 19% IPTV 0% Structure of paid multichannel market: CATV 82% DTH 18% IPTV 0% Total multichannel 100% Penetration: Paid multichannel: 39.3% CATV 32.0% DTH 7.3% IPTV 0.0% Analogue terrestrial 60.7% DTT 0.0% CATV in urban areas 43.7% IPTV in urban areas 0.0% 2004 13.70 9.16 4.53 12.53 91% 5.36 10.2% 4.26 7.3% 1.11 22.8% 0.00 n.m. 7.17 -4.6% 0.00 n.m. 2005 13.86 9.24 4.61 12.67 91% 5.83 8.7% 4.38 3.0% 1.45 30.8% 0.00 n.m. 6.85 -4.5% 0.00 n.m. 2006 14.01 9.32 4.69 12.96 92% 6.75 15.7% 4.50 2.7% 2.24 55.0% 0.01 n.m. 6.21 -9.3% 0.00 n.m. 2007 14.16 9.40 4.77 13.17 93% 8.06 19.5% 4.60 2.2% 3.42 52.6% 0.04 765.7% 5.11 -17.8% 0.00 n.m. 2008E 14.32 9.47 4.85 13.38 93% 9.08 12.7% 4.70 2.2% 4.22 23.4% 0.16 277.2% 4.30 -15.8% 0.00 n.m. 2009E 14.46 9.53 4.93 13.59 94% 9.70 6.8% 4.80 2.1% 4.62 9.5% 0.28 73.5% 3.14 -27.0% 0.75 n.m. 2010E 14.60 9.59 5.01 13.79 94% 10.25 5.7% 4.90 2.1% 4.95 7.1% 0.40 42.4% 2.04 -35.0% 1.50 100.0% 2011E 14.72 9.63 5.09 13.98 95% 10.72 4.6% 5.00 2.0% 5.20 5.1% 0.52 29.8% 1.01 -50.5% 2.25 50.0% 2012E 2013E 2014E 2015E 2016E 2017E 2018E 14.83 14.93 15.01 15.08 15.14 15.18 15.22 9.66 9.68 9.70 9.70 9.69 9.68 9.65 5.17 5.24 5.31 5.38 5.45 5.51 5.57 14.09 14.18 14.26 14.32 14.38 14.42 14.46 95% 95% 95% 95% 95% 95% 95% 11.09 11.17 11.25 11.32 11.38 11.42 11.46 3.5% 0.7% 0.7% 0.6% 0.5% 0.4% 0.4% 5.10 5.11 5.12 5.13 5.14 5.15 5.16 2.0% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 5.35 5.36 5.37 5.38 5.39 5.40 5.41 2.9% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.64 0.70 0.76 0.81 0.85 0.87 0.89 22.9% 9.3% 8.5% 6.6% 4.9% 2.3% 2.3% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -100% n.m. n.m. n.m. n.m. n.m. n.m. 2.99 3.00 3.00 3.00 3.00 3.00 2.99 32.9% 0.5% 0.0% -0.1% -0.1% 0.1% -0.2% 0.50 0.29 0.21 0.00 -0.35 0.00 0.47 0.13 0.34 0.00 -0.32 0.00 0.92 0.12 0.79 0.01 -0.63 0.00 1.32 0.10 1.18 0.04 -1.10 0.00 1.02 0.10 0.80 0.12 -0.81 0.00 0.62 0.10 0.40 0.12 -1.16 0.75 0.55 0.10 0.33 0.12 -1.10 0.75 0.47 0.10 0.25 0.12 -1.03 0.75 0.37 0.10 0.15 0.12 -1.01 0.74 0.08 0.01 0.01 0.06 0.00 0.01 0.08 0.01 0.01 0.06 0.00 0.00 0.07 0.01 0.01 0.05 0.00 0.00 0.06 0.01 0.01 0.04 0.00 0.00 0.04 0.01 0.01 0.02 0.00 0.00 0.04 0.01 0.01 0.02 0.00 0.00 59% 41% 0% 27% 73% 0% 13% 87% 1% 8% 89% 3% 10% 78% 12% 16% 65% 19% 18% 60% 22% 21% 53% 26% 27% 41% 32% 13% 13% 75% 13% 13% 75% 14% 14% 71% 17% 17% 67% 25% 25% 50% 25% 25% 50% 79% 75% 67% 57% 52% 49% 48% 47% 46% 46% 46% 45% 45% 45% 45% 21% 25% 33% 42% 46% 48% 48% 48% 48% 48% 48% 48% 47% 47% 47% 0% 0% 0% 1% 2% 3% 4% 5% 6% 6% 7% 7% 7% 8% 8% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 42.8% 34.0% 8.8% 0.0% 57.2% 0.0% 46.4% 0.0% 46.0% 34.6% 11.4% 0.0% 54.0% 0.0% 47.4% 0.0% 52.1% 34.7% 17.3% 0.0% 47.9% 0.0% 48.3% 0.1% 61.2% 34.9% 26.0% 0.3% 38.8% 0.0% 49.0% 0.5% 67.9% 35.1% 31.5% 1.2% 32.1% 0.0% 49.6% 1.7% 71.4% 35.3% 34.0% 2.1% 23.1% 5.5% 50.4% 3.0% 74.3% 35.5% 35.9% 2.9% 14.8% 10.9% 51.1% 4.2% 76.7% 35.8% 37.2% 3.7% 7.2% 16.1% 51.9% 5.4% 78.7% 36.2% 38.0% 4.6% 0.0% 21.2% 52.8% 6.7% 78.8% 36.0% 37.8% 5.0% 0.0% 21.2% 52.8% 7.3% 78.9% 35.9% 37.7% 5.4% 0.0% 21.1% 52.8% 7.9% 79.1% 35.8% 37.6% 5.7% 0.0% 20.9% 52.9% 8.4% 79.2% 35.8% 37.5% 5.9% 0.0% 20.8% 53.0% 8.8% 79.2% 35.7% 37.4% 6.1% 0.0% 20.8% 53.2% 9.0% 79.3% 35.7% 37.4% 6.2% 0.0% 20.7% 53.4% 9.3% Source: GUS, KRRiTV, PIKE, Informa, PwC, DM IDMSA estimates. 4.2. Seven MVNOs operational at the moment; this number is likely to increase significantly by the year-end ???????????????????????? MVNOs mBank Mobile was the first MVNO on the Polish market; it launched its services at the end of 2006, and was followed in 2007 and 2008 by myAvon, WPmobi, MNI, Ezo Mobile (based on agreement with MVNE – MNI), Carrefour MOVA and Mobilking. This, however, seems to constitute only the first wave of MVNO launches, as a number of other parties – including i.a. Cyfrowy Polsat, GTS Energis, Telefonia Dialog, Tele2, Multimedia Polska, Inteligo, Grupa Aster, Crowley Data Poland, Gadu-Gadu or Netia have publicly confirmed their plans of starting the MVNO operations. The way we see it, by the year-end the Polish market may see as much as several MVNOs with commercially launched operations. 51 Cyfrowy Polsat The business models adopted by local MVNOs seem to depend on the owner’s core business exposure to the telco market (or lack of such an exposure) All MVNOs want to sell the mobile service to ‘already possessed’ customer base User approach strategies may differ It appears that the business models adopted by local MVNOs strongly correlate with the type of their owner’s core operations (related/unrelated to the widely defined telecommunication (or ‘digital communication’) sector)); specifically, the companies which are not engaged in the digital communication business (e.g. cosmetics producer Avon and banking institutions PKO BP and BRE) choose to structure their MVNO businesses within the affinity partner mode, whereas enterprises running some kind of a digital communication business as their core operations (e.g. TPSA-owned Wirtualna Polska horizontal Internet portal, CATV operators Aster and Multimedia, alternative fixed line operators Tele2 and Dialog or DTH platform Cyfrowy Polsat) typically prefer more ‘advanced’ MVNO business models (ranging from service provider to full MVNO), utilizing already possessed CRM & billing centers or investing in the network elements in order to provide their services independently from the host MNO’s capabilities. All MVNOs which already entered or will shortly enter the Polish market want to base their mobile business on the customer pools of their owners’ core operations; e.g. mBank Mobile dedicates its services predominantly to the banking clients of mBank, Multimedia Polska wants to market the mobile service to its current CATV subscribers (turning its triple-play offering into a quadruple-play one), etc. Via such an approach MVNOs may potentially quickly build their mobile subscriber base during the early stages of their operations (providing, of course, that the service arouses customer interest). It appears that the MVNOs owned by some kind of digital communication companies want to present offers which could attract an average mobile user, whereas those operating as add-ons to unrelated business and predominantly focusing on the customer base of the owners core non-digital communication businesses will probably aim to propose value-added services connected with the core business (e.g. myAvon offers its users possibility of checking the arrival date of purchased cosmetic products). Depending upon the broader-picture fit of the MVNO’s business into the owner’s overall crosssegment business context, we are likely to witness various approaches towards winning the users for the mobile services. For example, alternative fixed line operators Tele2 and Dialog will probably prefer to offer the mobile service to ‘everyone willing’ in the market, whereas others may conceptually limit their offerings to narrower customer groups (e.g. WPmobi, via its segmentation-driven marketing strategy, intends to win only the subscribers among the Internet users, as the ‘wide market’ offer is delivered by Orange – TPSA’s group MNO). Cross-selling possibilities MVNO have many potential cross-selling possibilities, which are connected with the core businesses of their parent companies. On the one hand, the majority of MVNOs, which plan to enter the Polish market do not disclose their plans concerning cross-selling actions, or are still in the stage of creating the conceptual frameworks of their projects. On the other hand, it is easy to find such concepts, i.e. companies with telecommunication background (Dialog, Multimedia, Tele2 or GTS Energis) may deliver different services based on the multi-play offering, while companies not connected previously with the telco market may utilize the additional channel in order to place their products or services (i.e. in case of mBank mobile or Inteligo it could be sales of credit cards, etc.). Marketing strategies adjusted The marketing strategies adopted by Polish MVNOs often constitute the consequence of the target customer group approach of the operators. Mass market operators, such as Tele2, want to win as many mobile users as possible, targeting the broad market and using discount MVNO marketing strategy. On the other hand, the lifestyle marketing strategy tends to be used by operators, which are (or want to be) niche players, providing services for dedicated groups of users (e.g., mBank treats its MVNO project as an add-on service for its banking clients). to targeted customer groups Future consolidation among the MVNOs is inevitable First MVNE already on the market Future consolidation among the MVNOs is inevitable 52 In our opinion, the current spree related to the MVNO operation launches will result, sooner or later, in the consolidation of this part of the telecommunication market, as given current penetration levels and relatively close-to-maturity life-cycle stage of the mobile sector, the market is unlikely to support as many as several MVNOs over the longer run. The way we see it, some of the current entrants will not manage to win sufficient number of subscribers to reach the break even points; while some of them may merge, others may be sold to the existing MNOs. MNI is the first MVNE (Mobile Virtual Network Enabler), which started its operations in Poland. As of now beside its own MVNO network called Simfornia it provides network access for Ezo Mobile – owned by Telestar. We believe that the growing number of MVNOs operating through MVNE agreements is only a matter of time. ???????????????????????? Cyfrowy Polsat With early-mover advantage, strong brandname and ample pools of target clients constituting the key-success factors, Halo Polsat and Carrefour MOVA seem to have the best chances to succeed with their MVNO endeavors Given the infancy of the MVNO sector in Poland, it is extremely difficult to assess which of the operators are likely to prove successful and which may fail. However, given the Western European experience, indicating the key-success factors in the MVNO business, one may try to tentatively assess the chances of particular entrants on the Polish market. The way we see it, these successfactors include (i) the early market presence, (ii) recognized brandname and (iii) large potential client pools. Looking from that perspective at the Polish scene, it appears that Halo Polsat and Carrefour MOVA stand the highest chance for success, as these two strong brandname operators command large target potential customers pools. Please note, however, that this is a very tentative assessment of ours, which may be subject to a change, depending on the actual developments. 4.2.1. We assume LT target mobile penetration level in Poland at c. 130%,… …will c. 12% LT target market share of MVNOs,… ...and MVNOs’ ARPUs lower than MNOs Mobile and MVNO market forecasts With mobile penetration rate in Poland exceeding 109% as of the end of 1Q08, the question arises, how much further this rate can go up in the years to come? While raw GDP per capita does not do much work in explaining the cross-country differences in mobile penetration rates, the purchasing power adjusted GDP per capita does somewhat better job (R2 = 60%). Nonetheless, we believe that in the long run the relationship between purchasing power adjusted GDP per capita and the level of mobile penetration should hold; hence, for our forecasts, we adopt LT target mobile penetration broadly in line with the regression-implied results (c. 130%), yet assume different path of reaching this target (steeper additions in next few years followed by a flattening). The other key assumption we have to make pertains to the target level of MNVOs’ share in the mobile market (measured in number of users. terms). Looking at the track-record of Western European countries (e.g. 13% market share in the UK, c. 25% in Germany, c. 15% in Denmark, app. 13% in Norway, 8% in Austria), we believe that the values in the 10-15% range constitute a plausible LT assumption in this respect for Poland (with central assumption of ours resting at 12% level). Due to their business model, MVNOs tend to record lower ARPUs than MNOs; while such differences vary from country to country, typically MVNO’s ARPU (especially in the pre-paid service) is by 10-30% lower than ARPU of MNOs operating on a given market. We assume that similar proportions will hold for Polish market. Fig. 53 Mobile penetration and number of mobile users in Poland Fig. 54 New mobile entrants (MVNOs + MNOs) in Poland; Users Source: Companies’ data, DM IDMSA estimates Source: Companies, DM IDMSA estimates ???????????????????????? 53 Cyfrowy Polsat Fig. 55 New mobile entrants (MVNOs + MNOs) in Poland; Market shares (in terms of number of users) Source: DM IDMSA estimates 54 ???????????????????????? Cyfrowy Polsat 5. Business model and strategy Cyfrowy Polsat is the largest - in terms of number of subscribers – paid DTH platform aa in CEE (6th largest in Europe), growing rapidly on the back of its low-cost leadership generic strategy and ‘best price for quality content’ offering (affordable entry packages with upward migration outlook) coming on the top of Poles’ rising incomes and entertainment needs, penetrating predominantly rural areas and smaller cities, which often lie beyond the scope of alternative fee-based multichannel platforms (IPTV, CATV). To further capitalize on its ample subscribers base (c. 2.19 million households as of the end of 1Q08) the Company plans to bundle its DTH service with a MVNO offering at the turn of 2Q08 and 3Q08. Compared to competing local DTH platforms (Cyfra+, ‘n’) Cyfrowy Polsat focuses aa on a broader income range of clients and off-large-city areas, which coupled with comparable programming content offered at discount-to-peers prices proved to be a winning card during the phase of dynamic growth of volumes on the market. Moreover, the way we see it, the Company’s TV programs’ package strategy has been better aligned to subscribers’ needs than the peers’ strategies. The alteration of Cyfrowy’s new subscribers’ acquisition approach (switch from STB leases aa to STB outright sales) results in low DTH churn rates (below the sector’s average). The main risk factors are connected with the Company’s environment. As DTT is likely aa to have most appeal for the low-to-average income inhabitants of smaller towns and rural areas, should its roll-out be accelerated (compared to current provisional plan) Cyfrowy could suffer due to its focus on this customer group. Cyfrowy’s focus on a broader disposable income range of small cities and villages aa inhabitants constitutes the best strategy during an expanding economy, but probably more risky for times of economic slackness/ contractions; consequently, a major slowdown of GDP would cap the affordability of the Company’s service to lowerincome prospects, and result in rising bad receivables from current subscribers and/or a downselling effect. The Company’s pre-payment-based subscriber billing approach reduces (i) NWC financing aa requirements, (ii) bad receivables risk and (iii) TV programming content costs. While Cyfrowy Polsat subsidizes – in order to maximize its share in the sector’s new aa adds – STBs sold to its DTH subscribers, the launch of an in-house STB assembly should bring the average subsidy down. To-date the Company has been maintaining an OPEX-conscious stand, which we expect to continue (in 1Q08 the Company’s revenues improved by 37% yoy, while OPEX raised only by 20% yoy). The MVNO service stands a chance for success, on the back of the strong brand-name aa of the Company (one of key success factors in the MVNO business) and large potential users’ base (Cyfrowy’s DTH households). 5.1. Mr Solorz retaining his control over the Company ???????????????????????? Shareholder structure Cyfrowy Polsat’s April 2008 IPO encompassed only sale of 67,081,250 of the existing shares (24% stake) at PLN 12.50 per share with no new equity issue placed on the market. Mr Zygmunt Solorz-Żak retained his control over the Company (directly and via Polaris Finance B.V.), holding a 73% stake in Cyfrowy Polsat. There is a 180-day lock up on all shares outstanding not sold at the IPO stage. 55 Cyfrowy Polsat Fig. 56 Cyfrowy Polsat; Shareholder structure (post-IPO) Source: Company 5.2. No. 1 DTH platform in CEE (in no. of users’ terms) Background Cyfrowy Polsat is the largest – in terms of number of subscribers – paid DTH platform in Poland and the CEE region (and the 6th largest in Europe), growing rapidly on the back of its cost leadership, ‘best price for quality content’ offering and a wide distribution network coming on the top of Poles’ rising incomes and entertainment needs, penetrating predominantly rural areas and smaller cities (<50 ths inhabitants), which often lie beyond the scope of alternative fee-based multichannel platforms (CATV, IPTV). The Company’s offering encompasses 64 television programs, including all four main terrestrial channels available in Poland (TVP1, TVP2, TVN and Polsat), which constitutes a unique feature among the Polish DTH players, as the remaining two (Cyfra+ and ‘n’) do not carry the Polsat national channel (of Polsat SA’s free-to-air television broadcaster). The Company complements its core DTH offering by innovative additional services and products (DVR, HD channels), a stance which should be expected to continue in the foreseeable future (e.g. MVNO, VOD). Fig. 57 Milestones in history of Cyfrowy Polsat 1996 December 1999 2000 2000 2003 2003 2004 2004 2005 July 2007 October 2007 4Q07 April 2008 Turn of 2Q08 and 3Q08 Set up of Market S.A. (legal predecessor of the Company). DTH service launched by Polsat S.A. (free-to-air television broadcaster, unrelated to the Company (controlled by Mr Solorz, owner of Cyfrowy Polsat)). Change of the Company's name from Market S.A. to Polsat Cyfrowy S.A. Polsat Cyfrowy signs an agreement with Polsat S.A. under which it provides the latter with the services related to the DTH platform (winning subscribers to the platform, collection of subscribers' payments, etc.). Polsat Cyfrowy receives the license from the National Broadcasting Council (KRRiT in Polish abbreviation) for wireless distribution of the satellite radio and television channels. Polsat Cyfrowy acquires from Polsat S.A. all its DTH assets, becoming a full-blown DTH operator. Change of the Company's name from Polsat Cyfrowy S.A. to Cyfrowy Polsat S.A. Cyfrowy Polsat signs an agreement with Nagravision providing for lease, license and installation of conditional access system and sales of the Nagravision access cards. Merger of Cyfrowy Polsat with its fully owned subsidiary Polsat Sp. z o.o. (an entity leasing the STBs to the Company's DTH service subscribers). Divestment of the entire (75%) stake in Emarket Sp. z o.o. (electronic equipment trading company). STBs production plant launch. The first HD standard TV channel launched (Polsat Sport in HD). IPO. MVNO launch. Source: Company 56 ???????????????????????? Cyfrowy Polsat 64 Polish language TV channels in offer Program offering for the entire family ‘No killer programming’ approach 5.3. Products 5.3.1. DTH Cyfrowy Polsat’s DTH platform gives its subscribers access to 68 Polish language television channels, including news, entertainment, music, sports, education and film channels. The Company is the only DTH operator whose platform carries all major terrestrial channels available in Poland (Polsat, TVP 1, TVP 2 and TVN). The channel portfolio of Cyfrowy Polsat comprises: (i) music and entertainment channels, (ii) education channels, (iii) news channels, (iv) children’s channels, (v) film channels and (vi) sports channels. In should be also noted that Cyfrowy Polsat is the only DTH platform to carry the three most popular sports channels: Eurosport, Polsat Sport and Polsat Sport Extra. Additionally, the Company offers its subscribers access to all FTA television and radio channels available via satellite in the territory of Poland. In December 2007 the Company launched, as the only digital satellite television operator in Poland, four thematic channels produced by BBC: BBC Lifestyle, BBC Knowledge, BBC Entertainment and CBeebies. Finally, in January 2008 the Company broadened its program portfolio by adding three premium movie channels HBO, HBO2 and HBO Comedy, filling in the only apparent gap in its program offering. Cyfrowy Polsat buys all pay-television channels from renowned content providers (e.g. TVN, Polsat, Discovery, Disney, Turner Broadcasting, Eurosport, Cinemax or MTV). To increase the level of takeup, the Company delivers a wide choice of television channels targeted at all family members; thanks to such approach, the channel mix of Cyfrowy Polsat appears attractive irrespective of the contents of individual programs, e.g. the rights to transmit a single popular sporting event (no ‘killer’ programming in the offer). Please note that the payments under the license agreements between the Company and television channel broadcasters (content providers) are in most cases settled on a per subscriber basis or, rarely, on a flat fee basis (we discuss this issue more thoroughly in the Operating costs section). Packages Two base starter program packages, accompanied by five thematic packages and three promotional packages Comparable programming content offered at discount-to-peers prices Base starter Mini package: 20 channels available Introduced to win low-end customers ???????????????????????? The starter packages offered by the Company come in two options: the Mini package (sundry package) and the Familijny package (flagship package). Customers subscribing to the Familijny package (but not to the Mini package) may additionally order five thematic packages, including Film, Sport, Cinemax, Bajeczka, Muzyka and the Adult (Playboy TV) channel. Majority (87.5% as of the end of 1Q08) of the Company’s customers choose the Familijny option as their starter package. The thematic channels are bundled into three promotional packages: Relax Mix, Relax Mix HBO and Super Film. In our opinion, the Company’s Familijny starting package (offered at the price of PLN 37.90) is comparable with the Cyfra+ Tematyczny package (offered at the price of PLN 40) accompanied with additional channel AXN (at PLN 5), as it is available in Cyfrowy Polsat’s Familijny package. Thus, Cyfrowy Polsat is able to deliver comparable programming content at the price which is by c. 19% lower than in its main competitor’s offer. However, in the premium packages area Cyfra+ is able to offer more movie channels (Canal+, Canal+ Film (also in HD) or Filmbox (also in HD)) than Cyfrowy Polsat (from the beginning of this year the channels of HBO are being offered at all local DTH platforms). The Mini package, launched in October 2006, is a starter package giving access to 20 Polish language television channels, as well as all free-to-air television and radio channels available via satellite in the territory of Poland. At any time during the subscription agreement period, the subscribers of the Mini package may purchase the Familijny package and be able to access the remaining program packages (Relax Mix, Relax Mix HBO and Super Film, or any of the thematic packages). The monthly subscription fee for the Mini package (having c. 273 thousand of subscribers as of the end of 1Q08), is PLN 9.90 (gross) and the agreements with Mini package subscribers are concluded for the initial minimum period of 24 months. Please note that when entering into a Mini package agreement, subscribers are given a one-month access to channels available in the Familijny and 57 Cyfrowy Polsat Relax Mix packages and when the initial minimum 24-month period ends, the agreement is automatically extended for an indefinite period of time (and may be terminated at three-months’ notice). The Mini package was launched by the Company with the aim of winning as many new customers as possible (also from the low-income brackets), as the Company believes (rightly, in our view) that once a customer has subscribed to Cyfrowy Polsat, he/she will be more likely to purchase more expensive program packages in the future (the upselling effect). Starter Familijny package: all channels available in the Mini package +25 thematic channels Familijny is a starter package allowing access to (i) all channels available in the Mini package, (ii) all FTA television and radio channels available via satellite in the territory of Poland and (iii) additional 25 thematic channels. The Familijny flagship package has been designed as a mix of all categories of television channels so that every family member can find something for themselves. As at the end of 2004, 2005, 2006 and 2007 the number of customers subscribing to the Familijny package stood at 393 thousand, 656 thousand, 1.169 million and 1.914 million, respectively. In the case of agreements concluded for the initial minimum period of 24 months (previously 17 months), customers are charged a monthly subscription of PLN 37.90 (following an 8% increase starting from January 1, 2008). When the initial minimum subscription period ends, the agreement is automatically extended for an indefinite period of time (and may be terminated at three-months’ notice). Fig. 58 Cyfrowy Polsat: Structure of offered program packages Numbers in brackets represent numbers of channels in particular package. Source: Company Fig. 59 Cyfrowy Polsat: Thematic channels packages Source: Company 58 ???????????????????????? Cyfrowy Polsat Packages of thematic channels The Company offers three larger promotional packages of thematic channels: Relax Mix, Relax Mix HBO and Super Film (but the thematic channels are available also on an ‘a la carte’ basis for subscribers of the Familijny package). Relax Mix package The Relax Mix package, which appeared in the Company’s offering in December 2005, provides access to an extra 15 television channels clustered into four thematic packages: (i) four sports channels (the Sport package), (ii) seven film channels (the Film package), (iii) two children’s channels (the Bajeczka package) and (iv) two music channels (the Muzyka package). Please note that the Relax Mix package can only be purchased by customers subscribing to the Familijny package. Price-wise the sum of subscription fees for access to the aforementioned four packages equals PLN 39.80. However, when signing an agreement for the Relax Mix package customers are offered a 50% discount and thus pay only PLN 19.90 per month (in addition to the Familijny package subscription fee). Agreements for the Relax Mix package are concluded for a 24-month period (17-month till October 2007). FTA channels All available satellite FTA TV programs included in Cyfrowy’s packages Receiving of FTA channels possible even with terminated subscription agreement Apart from pay channel packages, Cyfrowy Polsat’s set-top box lets viewers access the whole range of free-to-air television channels available via satellite in the territory of Poland as well as Poland’s leading radio stations. Please note that after the initial period of a subscription agreement expires, the Company allows its customers who own (but not lease) Cyfrowy’s set-top box unlimited access to all FTA channels, without the need to pay any additional subscription fees. In other words, customers who bought a set-top box and then effectively terminated their agreements may continue to use the STB to receive FTA channels. On the other hand, however, the Company blocks access to FTA channels by those customers who breach the terms and conditions of a subscription agreement. Development of the programming offer New TV channels to further enhance the Company’s offering BBC’s 4 thematic channels from December 2007 Premium film channels added in 2008 Launch of new program packages and enhanced attractiveness of the existing ones have been the driving force behind the Company’s growth. Cyfrowy Polsat intends to continue to expand its program offering by launching new channels and developing new program packages. Starting from December 2007, Cyfrowy Polsat is the only digital satellite television platform in Poland to offer four thematic channels (BBC Knowledge, BBC Lifestyle, BBC Entertainment and CBeebies) produced by BBC, which enhance the attractiveness of the Familijny package (and the Company’s DTH ARPU). The Company signed an agreement with HBO to offer three premium movie channels of HBO (HBO, HBO2, HBO Comedy), which filled in an apparent gap in its programming offering (previously inferior compared to the local peers’ premium movie ranges). Thanks to this agreement, Cyfrowy Polsat significantly enriched its program offering. Please note that the introduction of the new channels did not entail any additional technical costs, as the Company’s transponders already had the required capacity (we discuss this issue more thoroughly in the Operating costs section). Set-Top-Boxes Switch from third-party to in-house assembled STBs ???????????????????????? The bulk of set-top-boxes sold by Cyfrowy Polsat come from EIC and Samsung, two globally recognised STB producers. However, in October 2007 the Company launched its own STB production facility, which should help it win new customers by cutting the price of these devices or boost the digital platform’s profitability if it decides not to decrease the price of its set-top boxes (depending on the market’s situation). 59 Cyfrowy Polsat New services HD channels from October 2007 Video on demand (VOD) still in the stage of conceptualization TV over Internet protocol (IPTV) as a possible additional channel of service distribution Ahead of the other Polish operators, Cyfrowy Polsat successfully broadcast a test transmission of an HD channel during the 2006 World Football Cup. In November 2007 the Company launched Polsat Sport in HD – its first high-definition TV channel. This year, the Company intends to launch further four HD channels in four categories: sports, entertainment, film and education (i.e. total of five including Polsat Sport HD; at the moment Cyfrowy Polsat offers two HD channels in Sport category (Polsat Sport, Polsat Sport Extra) with one film channel – HBO HD – being in the stage of tests). Please note that Cyfrowy Polsat will commence to charge fees for access to HD channels as soon as the offering is fully developed (which should favorably impact the DTH ARPU from 2H08E onwards). The Company is considering deployment of the video-on-demand service. Depending on which solution is chosen, a subscriber will be able to watch a pre-selected film or program at a convenient time. However, before deciding to roll out the VOD service, the Company will take into account a number of factors, such as the prevailing market conditions (potential demand for the new service) which determine the economic viability of the VOD business model, or the implementation of other strategic objectives (e.g. impact on the churn rates or take-up levels, etc.). Putting another way, the launch of the VOD service cannot be taken for granted yet. Cyfrowy Polsat is also considering a roll-out of the IPTV service, which would enable it to reach customers who for technical or administrative reasons are unable to access pay digital satellite television. As the IPTV service consists of the delivery of television channels converted into the Internet Protocol format over a telephone line, if the Company decides to provide this service it will have to cooperate with a third-party telecom operator having the means to provide broadband Internet services. 5.3.2. MVNO to enable bundled offering Potential 6 million users in the reach of the new service from the inception By leveraging the strength of its brand and the existing DTH subscriber base (key success factors in the MVNO business), Cyfrowy Polsat intends to become a mobile virtual network operator (service to be commercially launched at the turn of 2Q08 and 3Q08). The Company plans to provide telecommunications services to its existing DTH subscribers, while prospecting for new customers. In the Company’s opinion, its bundled offering of digital satellite TV and mobile telephony should win the interest of a greater number of customers, due mainly to development of services and more attractive pricing. The Company is already working with leading vendors of telecommunications technologies to implement and put into operation the complete infrastructure (excluding radio transmitters) necessary to launch the MVNO service (full MVNO approach). Thanks to favorable decision of UKE, the Company received asymmetric MTR, which will help Cyfrowy Polsat to capitalize on its business by achieving higher margin or conducting more aggressive pricing strategy in order to lure new subscribers (consequently, the Company will probably experience positive cost/revenues balance from the inter-operator activities, as it will pay less for the call terminations in other networks than other networks will be obliged to pay to Cyfrowy’s MVNO). Currently, the Company still has to sign roaming agreements with Polkomtel and Centertel in order to launch the service. Given the number of Cyfrowy’s DTH subscribers, it appears that at its inception the Company’s new service will be able to potentially reach close to 6 million people from households already subscribing to its satellite television services (and probably a number of persons who are not the Company’s DTH customers at that time). The possibility of bundling services is expected to generate added cost synergies and boost profitability. However, it can be – in our opinion – almost taken for granted that in the mid-term the Company’s new business line will generate more costs than revenues. 5.4. Five main distribution channels:… 60 MVNO Distribution network The Company distributes its services through five channels: (i) specialized distribution network focusing on the sale of digital satellite TV products and services (by far the most important sales channel), (ii) a call center, (iii) the Internet, (iv) direct sale, and (v) mobile points of sale. ???????????????????????? Cyfrowy Polsat ...(i) more than 1,200 specialised sales points covering the entire country,… Cyfrowy Polsat has set up a specialised pay digital satellite TV distribution network spanning the entire country, which comprises 25 distributors and a partnership network numbering over 1,200 points of sale, where customers can sign agreements for Cyfrowy Polsat’s DTH services, purchase a set-top box or put in an order for a professional satellite dish installation service. In order to encourage the sales staff to achieve higher sales of Cyfrowy Polsat’s channel packages, the Company has introduced an incremental commission-based pay scheme (this issue is discussed more thoroughly in the Operating costs section). …(ii) call center,… Call center constitutes the second sales channel of the Company’s DTH service. Via the call center the prospective customers of Cyfrowy Polsat can place an order for a particular service and locate the nearest point of sale. Please note that when sales are high (implied ‘bottleneck’ risk), the Company outsources the call center services to third-party operators, which ensures high service standard and reduces Cyfrowy Polsat’s cost base (lack of higher fixed costs during the slack seasons). ...(iii) Internet,… The importance of the Internet sales channel increases. At Company’s website (www.cyfrowypolsat.pl) potential customers can find detailed information on Cyfrowy Polsat’s offering, order a receiver set, subscribe to selected DTH package or obtain the address of the nearest point of sale, while the existing subscribers can use this sales channel to purchase additional program packages. ...(iv) direct sales, and... Direct sale enables the Company to effectively target well-defined narrower customer groups and to have direct contact with customers. Cyfrowy Polsat cooperates with partners which distribute its DTH packages and STBs on a direct sale basis. The number of such partners is expected to be gradually increased. ...(v) mobile points of sale Another distribution channel used by Cyfrowy Polsat are mobile point of sale stands at shopping malls or mass event venues. Thanks to their distinct branding and display of promotional materials, mobile points of sale serve also to advertise the Company’s DTH offering. Encouraged by good sales performance of this channel, the Company plans its further expansion. An in-house warehouse The Company has established an in-house warehouse complete with its own logistics system to handle orders placed through all the aforementioned five distribution channels. The warehouse in question may store 300 thousand receiver sets and prepare for dispatch 15 thousand pre-activated STBs per day. Fig. 60 DTH distribution network of Cyfrowy Polsat Source: Company ???????????????????????? 61 Cyfrowy Polsat 5.5. Subscribership growing dynamically Cyfrowy’s customers tend to be the inhabitants of small towns and rural areas,… ...with average-to-slightlyabove-average net incomes Customers The subscribership of Cyfrowy Polsat has been growing exponentially, expanding to nearly twice its former size in each consecutive year. At the end of March 2008, the number of Cyfrowy Polsat’s subscribers stood at app. 2.19 million. Apart from the macroeconomic factors (such as robust GDP growth reflected in higher disposable incomes of households), other key factors driving rapid expansion of the Company’s DTH subscriber base include, in our view, attractive TV program offering tailored to the expectations of all family members, pricing advantage of Cyfrowy’s program packages (very popular with households of lower incomes) over its pay TV competitors, vast distribution network comprising more than 1,000 specialised points of sale, and launch of the attractively priced Mini starting package (aimed at attracting the viewers from the lower-end of the disposable income spectrum). A summary profile of Cyfrowy Polsat’s customers has been presented below: (i) A majority of the Company’s customers are inhabitants of rural areas and towns with a population size of up to 50 thousand (77.5%). These areas have poorly developed cable infrastructure, so there is a higher potential for growth of pay digital satellite TV. Large-city dwellers make up approx. 8.6% of the Company’s subscribers. (ii) The household incomes of the Company’s customers are slightly higher than the income structure of Polish society would imply. Nevertheless, customers with a household income not exceeding PLN 2,000 account for the largest share of the Company’s subscribers (nearly 41%), which is probably attributable to their place of residence (average incomes in rural areas are below those earned in towns and cities). The share of customers in the income brackets above PLN 2,000 is above the national average, although such Fig. 61 Cyfrowy Polsat: Subscribers’ age structure Fig. 62 Cyfrowy Polsat: Disposable income of subscribers’ households Source: Company Source: Company Fig. 63 Cyfrowy Polsat: Subscribers’ place of residence Fig. 64 Cyfrowy Polsat: Size of subscribers’ households Source: Company Source: Company 62 ???????????????????????? Cyfrowy Polsat customers account only for 29% of the Company’s subscriber base. Compared to competing local DTHs (Cyfra+, ‘n’) the average income of Cyfrowy’s DTH household is probably lower. (iii)As regards the number of persons per household, the Company’s customers are mostly families with children (>2 persons per household), which represent c. 65% of Cyfrowy’s DTH subscribers. DTH churn rates below market average The MVNO service should have a positive effect on the subscriber churn rate Cyfrowy Polsat estimates that its DTH subscriber churn rate (a percentage of terminated DTH agreements) is lower than the sector’s average (regarding the details on the trends in this indicator, please refer to Figure 85). The way we see it, the Company owes its low churn rate to its ‘best price for quality content’ offering, as well as to a change in the new subscribers acquisition strategy (switch from STB leases to STB outright sales), which makes the new subscribers (who bought Cyfrowy’s STB) more reluctant to churn and a relatively high share of ‘new’ customers (i.e. ones in an initial agreement term) in the overall customer number. Low churn rates are by all means desirable. Consequently, Cyfrowy Polsat takes various steps aimed at enhancing customer satisfaction with the offered DTH services (there is a clear negative correlation between the customers’ satisfaction with the service and their willingness to churn), e.g. the Company is working on enhancing its TV channels portfolio (discussed in the Products section), maintaining its price edge and improving customer service quality. It should be noted that the roll-out of the MVNO service can be expected to further cap (ceteris paribus) the subscriber churn rates, as customers who purchase multi-play bundles tend to be less inclined to terminate their agreements (such customer behavior is corroborated, e.g., by the CATVs’ experience). 5.6. Own fully professional satellite center and monitoring help to optimise costs Technical infrastructure Cyfrowy Polsat provides its services by means of a satellite center which provides (via satellite links) an uninterrupted transmission of the digital television signal to the Company’s subscribers. The transmission originates from the satellite center situated on the Company’s property in Warsaw, and is beamed to 74, 78 and 79 transponders on the Eutelsat Hotbird 8, whose geostationary position is 13° eastern longitude. The transponders then re-transmit the signal to all subscribers in Poland who pick it up by satellite dishes installed on the exterior of the buildings. Fig. 65 Simplified satellite system scheme Source: Company ???????????????????????? 63 Cyfrowy Polsat Transponder costs limited due to external conditional access systems High quality of satellite service guaranteed by Eutelsat Satellite signal available in 99.9% of time (including maintenance breaks) Company’s STBs utilise a system of conditional access The Company’s satellite center manages all television and radio channels available on the Cyfrowy platform. Twenty-four television channels and nine radio channels are placed on the satellite transponders used by the Company. The remaining twenty-four channels (transmitted directly by broadcasters) are encrypted and managed by the Company’s satellite center through external conditional access systems sitting at six European locations (Warsaw, London and Paris); thanks to this solution, the Company succeeded in reducing the costs of transponder lease, which are covered directly by broadcasters. Eighteen television channels and nine radio channels are received from broadcasters via satellite and then re-transmitted to the transponders leased by the Company, while six television channels are broadcast directly from the Company’s satellite center as a feebased service provided by Cyfrowy Polsat to broadcasters (regarding more details, please refer to the Revenues section; please also note that the Company can quickly expand its satellite center to 20 television channels if incremental demand arises). All channels available on the Cyfrowy Polsat platform are compressed into MPEG-2 or MPEG-4 formats (HD channels), encrypted in the Nagravision system and transmitted to the Eutelsat HotBird 8 satellite through a multiplex and a ground station. Cyfrowy Polsat is using three high-power transponders placed on the Eutelsat Hotbird 8 satellite (launched into orbit in August 2006, with an anticipated service life of 15 years). Eutelsat, one of the world’s top providers of satellite services, operates one of the largest satellite broadcasting system in the world, which ensures high quality of the satellite service. Historically, the subscribers of Cyfrowy Polsat have been able to receive its satellite signal in 99.9% of time, taking into account the scheduled maintenance downtime. To ensure uninterrupted transmission of television and radio signals, the Company has installed stand-by equipment at critical points of its satellite center (operational switchover between the main and the stand-by elements of the station occurs automatically, without disrupting the satellite center’s work). To authorise subscribers’ access to the pay channels broadcast, Cyfrowy Polsat’s set-top-boxes utilise Nagravision’s system of conditional access (the systems of this vendor are operated by more than 100 of pay TV platforms all over the world, which makes it a global leader in digital TV broadcast protection area). The software of the conditional access system decrypts television and radio signals when it receives decryption instructions from the subscriber management system located at the Company’s satellite center, mitigating the risk of an unauthorized access. 5.7. Cyfrowy’s competitive strengths and advantages include:… ...(i) own fully professional satellite center and monitoring help to optimise costs ...(ii) good quality program packages,… 64 Competitive advantages Looking strategically at Cyfrowy Polsat we see a number of features constituting the competitive strengths and advantages of the Company – such as lack of network-reach-embedded constraints in the DTH business model, large population inhabiting villages and smaller towns in Poland, good quality TV program packages offered at discount-to-peers prices (and resulting in below-average churn rates), efficient distribution network, widely recognized brand or modern technical infrastructure – which underpinned its to-date market success and which will be, as we see it, crucial for the maintenance of the competitive edge. We discuss these issues below. As thoroughly discussed in the Market outlook and trends section, DTH – unlike IPTV or CATV – is not subject to any kind of network-reach-related constraints, which allows it to penetrate small towns and rural areas practically with no competition from other paid multichannel platforms. This, coupled with favorable – from the DTH platforms’ perspective – distribution of the population in Poland – with c. 60% of the population inhabiting villages and towns with less than 50 thousand dwellers – constitutes a favorable market environment, which the Company successfully explores via its ‘best price for quality content’ offering (discussed in subsequent paragraphs). The Company’s customers are offered access to a wide selection of quality television channels (regarding the details, please refer to the Products section). Cyfrowy Polsat is the only digital platform in Poland to carry Polsat, one of the four major Polish FTA channels. Additionally, as the only DTH platform in Poland, Cyfrowy Polsat carries the three most popular sports channels: Eurosport, Polsat Sport and Polsat Sport Extra. In December 2007 the Company launched, as the only DTH operator in Poland, four thematic channels produced by BBC Worldwide (BBC Knowledge, ???????????????????????? Cyfrowy Polsat BBC Lifestyle, BBC Entertainment and CBeebies), and in January 2008 the Company’s portfolio of TV channels was enriched by premium movie packages (HBO, HBO2 and HBO Comedy). All these are contributors to the Company’s program packages quality. On the other hand, as the largest (in terms of number of users) pay TV operator in Poland, Cyfrowy Polsat enjoys a competitive advantage when it comes to securing access to quality programming. It also needs to be mentioned that the Company does not critically depend on the broadcasting rights to any sporting events, as its offering is designed as a mix of varied programming content tailored to the interests of all family members (‘no killer programming’ approach). ...(iii) comparable programming content offered at discount-topeers prices,… ...(iv) vast distribution network,… ...(v) well recognised brand name, and… ...(vi) modern technical infrastructure In our opinion, Cyfrowy’s Familijny starting package (offered at the price of PLN 37.90) is comparable with the Cyfra+ Tematyczny package (at the price of PLN 40) accompanied by additional channel package AXN (at PLN 5) – as it is available in the Cyfrowy Polsat’s Familijny package. Thus, Cyfrowy Polsat is able to deliver comparable programming content at the price which is by c. 19% lower than in its main competitor’s offer. However, in the premium packages area Cyfra+ is able to offer more movie channels (Canal+, Canal+ Film (also in HD) or Filmbox (also in HD)) than Cyfrowy Polsat (despite recent addition of three HBO’s channels). The significance of the Company’s DTH distribution network (25 distributors cooperating with a country-wide partnership network of over 1,200 POSs) to Cyfrowy’s market success cannot be underestimated; given that the Company’s growth is volume-driven at the moment, an extensive and efficient sales network constitutes a prerequisite for market success. Owing to its successful family-oriented marketing campaign based around an emotional connection between the brand and the customers, Cyfrowy Polsat has built a highly recognisable brand name on the Polish DTH market; a survey conducted by GFK Polonia shows that in January 2007 the Company’s brand name had the highest recognition among the three satellite operators present on the Polish market (Cyfrowy Polsat, Cyfra+ and ‘n’). The significance of a recognisable brand stems from the fact that it is probably the second most important contributory factor (apart from fast market entry) towards success in MVNO operations, which the Company is planning to launch at the turn of 2Q08 and 3Q08. Last but not least comes the technical infrastructure. Striving to provide services to a high technical standard, the Company has entered into cooperation with top technology vendors on the market, concluding LT agreements for the provision of all technical services material from the point of view of its operations. Cyfrowy Polsat utilises a conditional access system delivered by Nagravision, one of the world’s largest vendors of this kind of technology. Cyfrowy’s satellite ground station and signal transmission system were supplied by NDSatcom, while the core elements of the Company’s transmission system consist of professional equipment of brands like as Sony or Tektronix. The bulk of set-top boxes sold by Cyfrowy Polsat come from EIC and Samsung, leading global producers of STBs and the Company’s signal is broadcast via Eutelsat HotBird. All these elements of technical infrastructure enable the Company to provide services to a high technical standard, which translates into customer satisfaction and helps to drive down the churn rates. 5.8. The main risk factors are connected with the Company’s environment, though the company-specific ones also exist DTT is likely to have most appeal for the low-to-average income inhabitants of smaller towns and rural areas ???????????????????????? Risk factors The way we see it, the main risk factors related to Cyfrowy Polsat are more of broader, environmentrelated nature (e.g. possibility of an acceleration of the DTT roll-out, the possible consequences of a GDP slow-down in the context of Company’s volume-driven DTH strategy increasingly directed recently (from 4Q06, when the Mini package was introduced) towards the lower-end of the subscriber market, etc.) than of purely company-specific character (though the latter ones also exist). We discuss the major, in our view, areas of risk in the paragraphs that follow. While current plan regarding the introduction of DTT in Poland is favorable for DTH operators, should the DTT rollout be accelerated, Cyfrowy would be hit, due to its focus on off-large-cities areas and recent clear drive towards the lower-to-average income part of the customer spectrum (the Mini package subscribers). 65 Cyfrowy Polsat The current plan for the introduction of DTT in Poland seems to be favorable for DTH providers. The reasons for this are twofold. First, Poland will be the late implementator - the first terrestrial digital islands are to be created at the turn of this and next year, i.e. when the pay multichannel penetration is likely – according to our forecasts – to dwell almost at the 70% level. Second, the national roll-out is planned for completion in 2012 (with possible extension till mid-2015), leaving pay multichannel platforms at least further 4-year grace period. Should this provisional plan, however, become altered, with accelerated – compared to the currently binding schedule – rollout throughout the country and/or faster (i.e. pre-2013) launches of additional digital multiplexes, DTH providers would likely suffer (or at least enjoy less upside), as the DTT offering would be probably most appealing to inhabitants of small cities and rural areas and households with lowto-average incomes. It straightforwardly follows then that Cyfrowy Polsat, targeting regions offlarge-city-centers and a broader income range of clients (inclusive of lower-to-average income part of the DTH market (the Mini package)) would suffer from such an acceleration. Please note that our market projections and forecasts for the Company are based on the assumption that the aforementioned current provisional plan for the introduction of DTT in Poland will be kept; while we are not able to assess (even roughly) what is the risk of a scenario in which the plan is changed (and the DTT roll-out is accelerated and/or the number of multiplexes becoming operational before 2013 is enlarged), it is obvious to us that such a hypothetical development would open up a downside risk for our current forward estimates regarding: (i) DTH penetration, (ii) Cyfrowy’s DTH subcribership, and (iii) Cyfrowy’s financial results. Major GDP slowdown would cap the affordability of the Company’s service to lowerincome prospects, and result in rising bad receivables from the current subscribers with below-average incomes The MVNO project is a start-up; even if down the road it succeeds, its impact on Cyfrowy’s profits will be negative in mid-term Launch of in-house STB assembly → what will be the demand in the longer term? 66 While our forecasts do not envisage a major deceleration of the GDP growth in Poland in the coming years (post 2008E mid-term forecast growth rates in the 4.5-4.9% range), such an unexpected at the moment development would constitute a material adverse factor for Cyfrowy Polsat. Please note that the DTH business model of the Company makes it a pure play on consumerism and rising disposable incomes of the society (also at the lower-part of the income scale). In such context, the adverse impact of slowing GDP on Company’s results could be expected to be two-faceted. First, it could cap the influx of new subscribers, limiting the affordability of the service to the prospects from the lower-income range. Second, the Company’s current below-average income subscribers could default on their subscription payments, boosting provisions for bad accounts receivable. Please note, that our forecasts for the Company do not incorporate such a significant GDP slowdown scenario; hence, should GDP’s growth in the coming years materially fell below our current expectations, our forecast of Cyfrowy Polsat’s financial results could be subject to a downward risk. Cyfrowy Polsat is planning to extend its service range by launching the MVNO operations (at the turn of 2Q08 and 3Q08). Given the start-up nature of the Company’s MVNO project there is a risk (difficult to quantify at the moment, but to some extent mitigated, in our view, by the ample pool of target potential mobile clients – the DTH service subscribers) that the Company’s new service will not receive a warm welcome by the market, which - in turn - could undermine the economic viability of the MVNO endeavor. This way or another, the launch of the MVNO project seems bound to exert a material adverse impact on the Company’s financial results in the mid term (next few years). As a MVNO, Cyfrowy Polsat will be dependent on a number of key suppliers, particularly PTC, a MNO’s radio network supplier, as well as suppliers of core technical infrastructure supporting the telecommunications network (Nokia Siemens, Hewlett-Packard) and certain elements of the billing system (Accenture). Should these suppliers terminate their agreements or fail to comply with any contractual provisions, the Company may not be able to secure substitute agreements for provision of the necessary services or equipment on favorable terms. Nevertheless, we do not consider this risk to be material. In order to reduce the costs of subsidising third-party set-top-boxes, in 4Q07 Cyfrowy Polsat launched in-house production of those devices. If the production profitability or volume fall short of the anticipated targets, the Company may be unable to effectively reduce the cost of set-top-boxes. In the case of production of STBs for a local market only, there is an added risk that the market may become saturated in a matter of 2-3 years, necessitating adjustment (reduction) of the output, which might affect the production profitability, should the long-term output turn out to be disproportionately low compared to the incurred expenditure. Irrespective of the Company’s LT strategy for its in-house STB assembly (production for own needs vs. to external parties), the investment in it should pay off, however; we expect it to pay back in less than one year since the launch. ???????????????????????? Cyfrowy Polsat Share supply overhang risk As noted in the Shareholder structure section, all shares of Cyfrowy Polsat that were not sold at the IPO stage are subject to a 180-day lock up period. It cannot be precluded, in our view, that after the expiration of the lock up their holders may be willing to sell, especially as 5,825,000 shares (2.2% of Cyfrowy’s shares outstanding; IFRS2 PLN 10 million cost fully booked in 2007) were issued last year at price equal to the nominal value (PLN 0.04 per share) to members of the Company’s management board (625,000 shares) and persons unrelated directly to Cyfrowy Polsat but related to Polsat SA FTA commercial TV broadcaster (5,200,000 shares; Messrs Myszk, Birka and Nurowski); hence, in our opinion, some share supply overhang may occur in November/ December 2008. Management stock option The management stock option program for the Company’s management and key employees (approved by Cyfrowy’s AGM on December 4, 2007) may generate (if the share issue price proves lower than the share market price at the grant date) material stock option costs under IFRS2. The program in question provides for issuance of up to 5,476,020 (max. dilution of 2.0%) of G-series shares, split into four equal annual tranches of up to 1,369,005 shares each (vesting in 2009-2012). The issue price of the shares in question will be set by the Company’ supervisory board. Assuming that (i) the market share price at the grant date will lie in the vicinity of current market price of Cyfrowy Polsat’s equities and (ii) the G-series share issue price will be set at minimal possible level (tantamount to the par value of PLN 0.04 per share), the maximal value of the IFRS2 SOCs that may be booked over 2009-2012 period can be tentatively estimated at c. PLN 80 million (i.e. on average app. PLN 20 million per annum). program at Cyfrowy may generate material SOCs under IFRS2 5.9. Paid distribution of licensed audiovisual content through satellite to end-users Business model The main feature of Cyfrowy Polsat’s business model provides for the paid distribution (by way of signal transmission via transponders at a geostationary satellite) of audio-visual content in the form of licensed television channels to end users using an appropriate STB and satellite aerial. Generalizing, Cyfrowy is simply a distributor of audio-visual content (we present the visualization of the Company’s business model on Figure 66, and provide a more in-depth discussion of its merits in the paragraphs that follow). Sales channels…. To be able to use the DTH services offered by Cyfrowy Polsat, a prospective customer has to order the service (e.g. (i) directly at one of the Company’s authorised representatives, (ii) on the Company’s web site or (iii) through the Company’s call center, etc.). Having signed a contract for provision of the services, arranged for an installation set (an STB and satellite aerial) to be assembled (by a customer himself or an authorised technician) and made a subscription prepayment, the customer may start using the DTH services offered. ...and the distribution network Depending on the selected option, payment for the installation set is made: (i) at the authorised distributor or (ii) directly to Cyfrowy Polsat. In the former case, the Company settles the sales with its distributors; the settlement includes payment of a one-off sales commission to a distributor for acquiring new customers. Subscription fees for the use of services are made directly to the Company, monthly in advance. Pre-payment billing approach Being a distributor of third-party audio-visual content (television programs) to end users (subscribers), Cyfrowy Polsat is obliged to pay fees to providers of licensed TV content. The Company has implemented a payment model where the programming offering is made available to a customer upon payment of a subscription fee. This feature is crucial for the Company’s business model and effectively means that the costs of TV programming are incurred exclusively for the customers who have made the payment. Additionally, Cyfrowy Polsat is able to significantly reduce the number of customers defaulting on their due payments, owing to a number of solutions, including a billing system and a subscriber authorisation management system integrated with the former. The management system enables a TV signal to be transmitted to any selected customer (or blocked) at any time. The Company’s practice is to disconnect subscribers that do not pay. As STBs remain with the terminated viewers, such viewers may become again subscribers of the Company’s DTH service once they re-start their up-front monthly subscription payments (though they may not use the STB for receipt of an alternative DTH platform). reduces (i) NWC financing requirements, (ii) bad receivables risk and (iii) TV programming content costs ???????????????????????? 67 Cyfrowy Polsat Low churn, due to the switch from STB leases to STB outright sales Cyfrowy’s TV programs’ package strategy better aligned to subscribers’ needs than the peers’ strategies Own satellite center and leased transponders STBs subsidized (to win new adds), yet the launch of an inhouse assembly should bring the average subsidy down Mobile voice bundled service scheduled for the turn of 2Q08 and 3Q08 The MVNO service stands a chance for success, on the back of the strong brand-name of Cyfrowy (one of key success factors in the MVNO business), and large potential users’ base (DTH subscribers) 68 In 2004, the Company decided to alter its new subscribers acquisition strategy from STB leases to STB outright sales. Hence, the STB leases are likely to slowly perish, though are unlikely to null out, as the most advanced (and expensive) STBs continue to be offered in the leasing mode. Since the aforementioned change, subscribers have been less prone to switch to another paid television operator (once the STB has been fully paid for at the start of the service use, sunken costs incurred by the subscriber in connection with the decision to churn become materially higher than under the leasing arrangement), bringing Cyfrowy’s DTH churn rates to a low level. Moreover, Cyfrowy Polsat is the only digital platform in Poland to offer a base family package (the ‘n’ platform is divided into thematic channels only, while Cyfra+ offers nested series of packages, which often makes customers purchase channels in which they have no interest). This again helps keep the churn low, as resigning from the service would directly affect all family members. The infrastructure which is necessary for Cyfrowy Polsat to offer its services is partially owned by the Company and partially leased for the purposes of conducted operations. The Company-owned infrastructure includes a satellite center from which licensed audio-visual content is transmitted to the Hotbird geostationary satellite. Cyfrowy Polsat also owns equipment used in direct customer support and sales: (i) a toll line, (ii) a sales management system and (iii) a CRM system. The leased infrastructure includes: (i) three transponders on the Hotbird satellite and (ii) Nagravision’s conditional access system (which enables the number of unauthorised service users to be efficiently reduced). Cyfrowy Polsat uses both its own and leased infrastructure to provide signal emission and transmission services to operators of certain television channels. This solution enables the Company to reduce costs related to the lease of transponders and operation of the satellite center. The Company’s business model provides for subsidising customers’ purchases of STBs bought by the Company from vendors (in order to grab the largest share in the DTH net additions; this is an approach which we fully subscribe to during the phase of a rapid growth of volumes on the DTH market). Following the opening of Cyfrowy’s own STB production plant in October 2007, the cost of subsidies should gradually fall; we expect the cost of an STB manufactured by the Company to be by c. 30-35% lower than that of an STB purchased directly from an external STB vendor (the producer’s margin (at least partially) would stay with Cyfrowy, rather than being paid to a third party (STB vendor)). The Polish integrated services market remains relatively underdeveloped, but has a potential for a dynamic growth in the future. As a matter of fact, the bulk of the CATVs’ and telcos’ strategies at the moment are centered on the roll-out of bundled services. The Company hopes to win a material share in the market, exploiting Cyfrowy Polsat’s strong brand and the existing subscriber base (key success factors in the MVNO business), through offering – to the existing paid satellite digital television customers – a full range of mobile telephony services and products, and by effectively leveraging synergies between these business areas with a view to strengthening the Company’s position on both markets (Cyfrowy Polsat is also considering upgrading its offering with broadband Internet access in the future). The Company intends to become, at the turn of 2Q08 and 3Q08, a mobile virtual network operator offering telecommunications services to both its existing and new customers. The way we see it, the expertise gathered on the DTH market should help the Company to successfully enter the mobile telephony market. Bundling services should increase customers’ interest in the Company’s offering, mainly owing to the enhanced services portfolio and more attractive prices. While the Company’s MVNO project is at the moment at its fledgling stage, we believe Cyfrowy stands a sound chance to succeed in this endeavor, due to its strong and well recognized brand-name, which (looking at Western European experiences) seems to constitute the second (after the first-mover advantage) most important key-success factor in the MVNO business, as well as on the back of large base of potential mobile clients (subscribers of Cyfrowy’s DTH service). ???????????????????????? ???????????????????????? Source: DM IDMSA Polish Film Institute royalties (1.5% of subscription revenues) COSTS REVENUES Dish and STBs Content providers (TV broadcasters) payment for TV program content payment for signal transmission of broadcasting (regards a few content providers) DISTRIBUTION NETWORK (DTH) MVNO business part DTH business part (M V N O) full payment for STBs (when not leased) Fig. 66 Figure 92. Cyfrowy Polsat: Operating business model STBs DTH content service Eutelsat payment for transponder lease payment for STBs, Dish STBs, Dish SAC payments lease payment/ full payment for STBs (sale; lease) STB producers payment for STBs Dish and STBs MVNO Nagravision access costs & equipment DTH STB in-house assembly DTH subscription payment handsets MVNO DTH subscribers Handsets producers payment for handsets handsets Payment for radio network usage PTC (MNO) Radio network access technical infrastructure Nokia, Siemens payment for technical infrastructure SAC payments technical infrastructure and back-up payment for handsets HewlettPackard DISTRIBUTION NETWORK (MVNO) Payment for technical infrastructure and back-up payment for cards and SIM cards, handsets rechargeable cards, SIM cards, handsets revenues from sales of cards (SIM, rechargeable) post-paid subcriptions post-paid handset subsidy Inhabitants of smaller cities and rural areas (potential subscribers of MVNO) DTH Cyfrowy Polsat 69 Cyfrowy Polsat Both pre-paid and post-paid services to be offered A full MVNO business model approach Multiple sales channels for the mobile service Full subsidy on postpaid handsets, no subsidies on prepaid ones The Company is interested in providing both pre-paid and post-paid services. Prepaid services should be significantly less capital-consuming and easier to organise for reasons including, for instance, the settlement method (no invoices) or the structure of agreements and tariffs. We anticipate the structure of the Company’s MVNO customer base to be dominated by pre-paid service users (we expect them to represent approximately 80% of all MVNO users). The new service will first be offered to the Company’s existing customers. Consequently, at its launch it should be able to instantly reach nearly 6 million people inhabiting the households using satellite television services of Cyfrowy Polsat. Cyfrowy Polsat decided to follow the full infrastructure MVNO business model strategy, which offers the largest independence and operating flexibility to the Company. The Company intends to conclude separate roaming and interconnect settlement agreements with the domestic operators and leading operators all over the world, thus reducing the risk of excessive dependence on the radio network provider, PTC. Exploiting additional sales channels - (i) the Web page and (ii) the distribution network (to this end, Cyfrowy Polsat plans to use the existing DTH service distribution network and to build an additional network dedicated to the provision of MVNO services) - should enable the Company to address its offering to a very broad base of prospective customers, including those who are not currently using Cyfrowy Polsat’s DTH service. To be able to use the Company’s new service, a prospective customer will have to purchase (through one of the sales channels) a start kit to activate the service, and then upload his account. To render its service standing out among the existing operators, the Company will strive to both become the market leader in terms of the cost of services offered and offer a number of value-added services: (i) services connected with satellite television, including browsing television program schedules or paying for DTH services via an SMS and (ii) other services, including distribution of audio-visual content through a mobile telephone, with use of the DVB-H technology. Operating expenses related to the Company’s new business line will comprise six main areas: (i) radio infrastructure, (ii) technical infrastructure, (iii) mobile handsets, (iv) marketing, (v) distribution and (vi) HR. The Company will obtain access to radio infrastructure from PTC, to which fees will be paid for connection minutes settled on a wholesale basis and network access. Nokia Siemens Networks and Hewlett-Packard are to provide necessary technical infrastructure and technical support. Moreover, Cyfrowy Polsat has concluded agreements for the supply of mobile handsets for its customers. As signaled above, the pre-paid mobile handsets will be sold to the users at their cost (i.e. lack of subsidy, yet lack of any profits on handset sales), while the handsets to the postpaid subscribers will be fully subsidized by the Company (in line with the prevailing market practice). 5.10. Low-cost leadership strategy follower Soaring volumes → the main growth driver Affordable entry packages, with upward migration outlook 70 Strategy Cyfrowy Polsat is a follower of the low-cost leadership generic strategy, targeting the mid- and lower income part of the customer spectrum (as opposed to its two local DTH rivals - Cyfra+ and ‘n’ which appear to focus on the higher income side of the market). With such business approach, and lower than in case of local competitors ARPU, the Company’s growth has been to-date mainly based on soaring volumes (the 2005-2007 shares in DTH’s net adds way above those of alternative satellite platforms) as Cyfrowy’s ‘best price for quality content’ offering held most appeal and affordability to the rising disposable income inhabitants of small cities and rural areas, previously unsubscribing to any kind of a paid multichannel TV offering. The Company’s strategy is based on offering competitively priced packages (which refers to both Mini and Familijny packages) and the customers’ expected migration to more sophisticated packages (i.e., from Mini to Familijny, from Familijny to Relax Mix, from Relax Mix to Relax Mix HBO, and from Relax MIX HBO to Super Film). ???????????????????????? Cyfrowy Polsat Focus on the low-to-average disposable income small towns and villages inhabitants → the best strategy during an expanding economy, but probably more risky for times of economic slackness/ contractions Strategy of growing DTH ARPU, on the back of introduction of new channels into the Familijny package and broadening of the accompanying thematic channels range; the 2007 subdued growth constituted an exception to this rule (for DTH blended ARPU), due to the introduction of the Mini package budget offering and the introduction of (probably non-recurring) aggressive pricing promotion for the new subscribers of Familijny package OPEX-conscious stand aimed at profitability enhancement to continue ???????????????????????? As a matter of fact, in the foreseeable future the Company expects to continue to briskly grow its DTH volumes (and to win a major share in the DTH’s sector net adds) - a development which we deem likely (e.g. on the back on the ytd results) - due to factors related both to Cyfrowy’s environment (e.g. exploitation of the growth of Polish economy and growing disposable income of the country’s population) and company-specific features (e.g. maintaining the ‘best price for quality content’ approach, implementation of the marketing strategy addressing all members of the family, introduction of new products/services, etc.). In this context we would like to note that the Company’s definition of the target customer group (the lower-to-average income off-large-cities’ dwellers) coupled with the low-cost leadership strategy adopted by the Company appears to constitute the winning card during the economic expansion phases. By the same token, however, it could potentially underperform during period of economic slowdowns, with capped net adds potential and increased risk of soaring bad receivables and/or the downselling effect. From this perspective, we perceive the strategy of Cyfrowy Polsat as more aggressive than the strategies of its local DTH peers, and more rewarding during the periods of strong economic growth, but also potentially more risky (most likely more severe penalty during times of economic hardship). The Company’s ARPU from DTH services has been consistently growing over the last three years and amounted to: PLN 29.6 in 2004, PLN 30.2 in 2005, PLN 34.3 in 2006 and PLN 34.7 in 2007. The way we see it, this growth is mostly attributable to the growing sales of the promotional packages of thematic channels, as well as to the September 2005 increase of the subscription rate for the Familijny package. Cyfrowy Polsat intends to maintain the ARPU uptrend by introducing new program packages (as discussed in the Products section) and offering innovative services. In order to maintain the ARPU uptrend, in December 2007 the Company launched, as the only DTH operator in Poland, four thematic channels produced by BBC Worldwide: BBC Knowledge, BBC Lifestyle, BBC Entertainment and CBeebies (following the integration of these channels into the Familijny package, its gross price was increased by PLN 2.9, i.e. 8%). Additionally, in January 2008 the Company broadened its program portfolio by adding three premium movie channels HBO, HBO2 and HBO Comedy. Finally, in 4Q07, Cyfrowy Polsat launched the first high-definition channel (Polsat Sport in HD) and this year, the Company expects to have launched a total of five highdefinition channels in four programming categories (at the moment Cyfrowy Polsat offers two HD channels in Sport category (Polsat Sport, Polsat Sport Extra) and one film channel – HBO HD – in the stage of tests). The Company believes that all these factors, which may be summed up as the enhancement of the program offering of the Familijny package and broadening the range of the accompanying thematic channel packages, will bring about a further growth of ARPU from this package in the following years. We would like to note, however, that due to the introduction (in 4Q06) of the Mini package budget offering (offered at PLN 9.9 per month (gross of VAT), compared to PLN 37.90 per month for the Familijny flagship base starting package (after 8% increase beginning from January 1, 2008) as well as of an aggressive (but transient) pricing promotion (in the NovemberDecember 2007 peak season) for the new subscribers of the Familijny package (5 free-of-charge subscription months, instead of typically offered 1 free month), 2007 yoy growth of the Company’s blended DTH ARPU was subdued (only 1.5% yoy; due to the influx of budget subscribers and seasonal hike of Familijny new users in 4Q, i.e. when the aforementioned promotion was offered). The Company has been consistently following a cost-conscious policy, aimed at enhancement of the profitability of its operations. The cost measures implemented in the past include: use of external conditional access systems which enable the transmission of TV programs to be secured with use of transponders (transponder lease costs are incurred by the broadcasters), integration of all divisions (with the exception of the MVNO back office) at one location, in a Company-owned real estate in Warsaw, establishment of the Company’s own STB service center (which enables repair costs to be reduced significantly), development of the in-house IT systems (which has enabled the Company to avoid high costs of implementation), or substitution of printed invoices sent to customers on a monthly basis with personalised payment forms sent to customers twice a year (which significantly reduces mailing costs). While all these measures contributed to the reduction of operating expenses per user in the period of soaring DTH volumes, they do not exhaust the Company’s list of cost-saving initiatives; e.g. in October 2007, Cyfrowy Polsat launched its own production of STBs, which we expect to significantly (by 30-35%) reduce the Company’s cost of an average STB sold to customers (this, in turn, should help to improve the operating margin, as the STB subsidy is likely to be cut). 71 Cyfrowy Polsat Fig. 67 Cyfrowy Polsat: DTH product strategy Source: Company 72 ???????????????????????? Cyfrowy Polsat 6. Financials aaDTH’s net additions are strongly seasonal, peaking in 4Q. This is not the case for the MVNO business. aaAll revenues denominated in PLN, yet >60%/c. 50% of OPEX denominated in FX (US$ + Euro) in 2007/2008E and beyond; strength of the domestic currency is favorable to Cyfrowy (and vice versa). aaThe Company should follow a residual dividend policy; the way we see it, dividend distributions would be feasible from this year onwards. aaFinancial leverage does not appear to constitute an issue; Cyfrowy Polsat’s 2007 eop net debt to EBITDA declined to c. 0.4, with the Company holding a net cash position at the end of 2008E (unless large dividend is distributed in the meantime). aaNWC does not constitute a major issue for the Company in terms of the related financing requirements (mainly due to adopted pre-payment customer billing policy); as a matter of fact, in the mid-term it can – in our view – become even a source of positive cash flows on the back of forecasted: (i) decline in inventories, (ii) decline in capitalized distribution commissions and (iii) uninterrupted growth of deferred liabilities (users’ pre-payments). aaCyfrowy’s business model is not capital-intensive, as opposed to CATVs’, IPTVs’ or MNOs’. aaThe Company’s ytd (1Q08) financial posting is strong. 6.1. DTH’s net adds are strongly seasonal peaking in 4Q,… ...which is not the case for the mobile business Seasonality Cyfrowy Polsat’s DTH business net additions exhibit strong intra-year seasonal patterns, peaking in 4Q; historically (the 2005-2006 period), the last quarter of the year represented as much as app. 60%-70% of the full-year net addition figures. This seasonal pattern softened last year (4Q accounting for <50% of FY net add) – a tendency which we expect to further progress in 2008E and beyond. The mobile business in Poland, unlike DTH, does not exhibit such strong seasonal intra-year net add pattern. We do not see any reason why Cyfrowy’s planned MVNO endeavor should diverge in this respect from the market’s trends; hence, we do not expect Halo Polsat to show strong quarterly peaks and troughs in its net adds. Fig. 68 Cyfrowy Polsat; Quarterly DTH net additions Source: Company, DM IDMSA estimates ???????????????????????? 73 Cyfrowy Polsat Fig. 69 Cyfrowy Polsat: DTH net additions seasonality % of FY DTH net additions attained in: 1Q 2Q 3Q 1-3Q 4Q 2004 2005 2006 13% 3% 16% 32% 68% 16% 9% 16% 41% 59% 12% 10% 11% 33% 67% 2007 2008E 25% 12% 17% 53% 47% 27% 14% 19% 60% 41% Source: Company, DM IDMSA estimates 6.2. All revenues denominated in PLN + c. 60% of OPEX denominated in FX (US$ + Euro)→→ strength of domestic currency is favorable to Cyfrowy (and vice versa) FX-denominated interest bearing debt swapped into local currency debt in October 2007 While all revenues of Cyfrowy Polsat are denominated in PLN (this situation will not change following the launch of the MVNO project), some major components of the Company’s operating costs are FX-based. These include: (i) US$- and Euro-denominated TV programming content and STBs costs and (ii) Euro-denominated satellite transponder leases, Nagravision’s DTH conditional access system costs and office space rentals. We estimate that in 2006 and 2007 the FX-denominated costs accounted for c. 63% of the Company’s OPEX, respectively, a proportion which we forecast to decline this year and beyond to c. 50%. Moreover, following the launch of the MVNO project, the FX-denominated costs will start to include the mobile handsets. Given that the Company does not hedge its effective short FX position, strengthening of the local currency favorably impacts its operating results (and vice versa). To visualize, please note that the management of the Company estimates than a 5% weakening/strengthening of PLN against Euro and US$ would – ceteris paribus – decrease/ increase Cyfrowy Polsat’s 2007 (2006) profits by PLN 10.0 million and PLN 22.5 million (PLN 6.6 million and PLN 31.3 million), respectively. Additionally, Cyfrowy Polsat used to have almost all of its interest-bearing debt denominated in the foreign currencies, which during the 2004-2006 period resulted in large FX gains (e.g. PLN 56 million in 2004 and PLN 25 million in 2006) and losses (e.g. PLN 22 million in 2005), depending on the year-on-year swings of the local currency relative to US$ and Euro. In order to eliminate the resultant FX risk, the Company decided to swap its FX interest bearing debt into local currency (which was executed in October 2007). 6.3. 2007 eop net debt to EBITDA at c. 0.4, net cash position at the end of 2008E policy, dividends seem feasible from 2008 onwards 74 Financial leverage As of the end of 2007 the Company’s net debt to EBITDA ratio reached c. 0.4, which constitutes very safe level. Moreover, based on our forecast of Cyfrowy’s financial results, we envisage that the Company will hold a net cash (rather than net debt) position at the end of 2008E (unless a hefty dividend distribution is made from 2007 net income). 6.4. Probably a residual dividend FX exposure Dividend policy Cyfrowy Polsat should be, in our view, a residual dividend policy follower. The way we see it, given the expected levels of the Company’s forward capital expenditures and our forecasts of its operating cash flows, Cyfrowy Polsat becomes capable of distributing dividends to its shareholders already this year; as there is no straightforward indication by the management that such distributions are likely in foreseeable future, our cash flow forecasts for Cyfrowy Polsat abstract – for the time being – from feasible dividend payments, however (the upcoming shareholders meeting of Cyfrowy Polsat (to be held on July 4) is to approve a clear-cut dividend policy of the Company and vote on the possible distribution from last year’s net profit; its outcome will shed some light upon the dividend outlook at Cyfrowy). ???????????????????????? Cyfrowy Polsat 6.5. Pre-payment customer billing policy → NWC does not constitute an issue in terms of financing requirements Standard behavior of trading A/R and A/P Inventories hinge on volume gross adds; with gross adds softening post-2007, they should be expected to decline (unless the in-house STB assembly starts to supply to external parties) Capitalized distribution commissions constitute a function of users’ gross adds; with gross add peak last year, in the short-to-mid-term they should decline (despite the MVNO launch) Subscribers’ prepayments (deferred liabilities) depend on total number of users rather than yoy changes in the new adds; hence, their growth should be uninterrupted in the coming years Given the Company’s pre-payment customer billing policy, net working capital (understood as a notion including also the changes in deferred assets (capitalized distribution commissions) and deferred liabilities (subscribers’ pre-payments)) does not constitute a major issue for Cyfrowy Polsat in terms of the related financing requirements, and - as a matter of fact - in the mid-term can be even expected, in our view, to become a source of financing for the Company. While the behavior of Cyfrowy’s trading receivables and payables is standard (both directly related to the level of Company’s revenues and pre-SG&A costs), the drivers of (i) inventories, (ii) capitalized distribution commissions and (iii) deferred liabilities (subscribers’ pre-payments) are key for understanding the swings in Cyfrowy Polsat’s overall NWC. The level of Company’s inventories (STBs and – following the launch of the MVNO project – mobile handsets) constitutes a function of the gross additions in the DTH and mobile voice areas. As our forecasts for the Company envisage that the DTH gross add peaked in 2007, and will be followed by much softer gross add volumes in 2008E and beyond (regarding the details, please refer to Chapter 7.1 of this research report)11, it follows then that starting from 2008 we forecast the eop DTH inventory levels to decline on the yoy basis in the mid-term, which – in our opinion – is likely to more than offset the build up of the handset stocks for the MVNO purposes. As explained in detail in Chapter 7.2 of this research report, under IFRS the Company is mandated to capitalize the cash provisions paid to its DTH and MVNO distributors and to amortize them over the life of base subscription agreements (24 months (previously 18 months (on average)) in DTH, most likely 24 months in post-paid mobile voice). Such an accounting treatment overstates the accounting profits relative to cash flows in the periods of rising new additions, and – by the same token – understates the reported profits relative to cash flows during time spans of falling new adds. With such conceptual background coupled with our forecasts of Cyfrowy’s volume adds (peak of 2007 followed by softer volumes in 2008E and beyond; again, please refer to Chapter 7.1), it follows that in the near-to-mid-term (i.e. already this year) the financing requirement related to this category of assets is first likely to become subdued (while in 2008E the DTH newly added volumes are likely to go down yoy, this will be largely offset by the growing (from zero) new volumes at postpaid mobile voice), and then (the 2009-2010E period) the capitalized distribution commissions are likely to begin to significantly fall on a yoy basis (further weakening of newly added DTH volumes coupled with stabilization of new adds in post-paid voice). The Company’s DTH customer billing policy provides for the subscribers pre-paying for Cyfrowy’s service (an analogous situation will, obviously, emerge in the pre-paid mobile voice), which results in an emergence of resultant deferred liabilities in the Company’s balance sheet. Unlike the deferred assets described above, the deferred liabilities in question constitute a function of total number of DTH subscribers and MVNO pre-paid users, rather than their yoy changes (new adds). It follows then, that with the growing number of users (which, according to our forecasts, will be the case in the foreseeable future), the pre-paid-billing-policy-resultant deferred liabilities should be uninterruptedly growing, providing positive incremental cash flows. 6.6. Capital expenditures trending upwards for past few years Capex The Company’s capital expenditures in past few years have been on a rise, mainly due to growth of Cyfrowy Polsat’s customer base and implementation of new technologies. In 2004-2005 the main part of Company’s capex (>40%) was earmarked to upgrade Cyfrowy’s broadcasting center, while in 2006 the hike in capex was chiefly (in c. 70%) driven by real estate investments (acquisition of land plots, offices and buildings hosting Cyfrowy’s current headquarters). 11 ???????????????????????? NWC and deferrals We also assume that the Company’s in-house STB assembly will produce the set-top boxes solely for the internal purposes (i.e. for Cyfrowy Polsat’s DTH subscribers), with no spare production placed with external parties. 75 Cyfrowy Polsat Fig. 70 Cyfrowy Polsat; Capital expenditures Fig. 71 Cyfrowy Polsat; Capex/Sales ratios Source: Company, DM IDMSA estimates Source: Company, DM IDMSA estimates 2007/2008E capex at c. PLN 55 million/ PLN 63 million MVNO’s capex will be user-number-dependant Cyfrowy’s business model is not capital-intense, as opposed to CATVs’, IPTVs’ or MNOs’ In 2007 the Company’s capex came out at app. PLN 55 million (of which c. 34% was related to the MVNO project), with its ‘fixed’ part increasing to c. PLN 63 million in 2008E (of which app. 20% is to be MVNO-related). Please note, however, that the MVNO’s capex will include a variable part (upgrade of IT systems in order to carry incremental connections and data transfers), dependant upon the number of its users. Specifically, once the number of Company’s mobile voice customers approaches 500 thousand/ 1 million, additional PLN 12 million/ PLN 16 million of capital expenditures will need to be incurred for the upgrades. All in all, we do not perceive the Company’s business to be especially capital-intense (compared, for example, to other paid multichannel TV platforms (cable or IPTV) or MNOs). Hence, in the longer term (post-2010E) we would expect to see declines in the capital expenditures levels, with LT target DTH (MVNO) capex/sales ratio in the vicinity of 2% (3-4%)12. 6.7. Robust 1Q08 financial posting, due to monetization on last year’s strong volume net adds and control over operating costs, bodes well for the financial results for the upcoming quarters Cyfrowy Polsat posted robust 1Q08 financial results, with top line, EBIT and NP advancing yoy by, respectively, 37%, 91% and 100%. The strength of the Company’s quarterly posting stems from the monetization on last year’s volume net add (partially offset by the 5-month promotion period offered to the 4Q07 Familijny package new subscribers, which exerted its material adverse impact on the 1Q08 ARPU of Cyfrowy), and the Company’s business model providing for a boost to the operating profitability in times when the proportion of new subscribers to the seasoned ones declines. Notwithstanding the aforementioned embedded mechanism, please note that in 1Q08 the Company remained firm grip over its operating costs, with (i) flat yoy DTH cash SAC, (ii) over 40% lower yoy (according to our estimates) per unit PLN-denominated STB subsidy (the first effect, the way we see it, of the Company’s decision to launch an in-house assembly of STBs, which started to be offered to the new subscribers of Cyfrowy in March this year (hence, full effect should be seen from 2Q08 onwards)) and (iii) roughly flat yoy (according to our estimates) PLN-denominated TV programming content cost per subscriber (though here the strength of the local currency evidently helped the Company, as – according to our estimates – the value of this parameter increased yoy by almost 30% is US$ terms). All in all, such a quarterly posting of the Company should be assessed, in our view, as a robust one; the way we see it, Cyfrowy Polsat’s 1Q08 results provide a solid base for the attainment of our FY projections for the Company (regarding the details, please refer to the Financial forecasts and Financial statements sections). It should be, however, borne in mind that (i) in 2H08E the operating profitability of Cyfrowy is likely to be negatively affected by the launch of the MVNO endeavor and (ii) the total value of the STB subsidies in 4Q08E is likely to be larger than during the preceding quarters of the current year (though lower yoy) – despite the probably 12 76 YTD results Putting aside the incremental impact of possible new projects’ launches. ???????????????????????? Cyfrowy Polsat lowered value of the unit subsidy – due to the traditional intra-year new adds seasonality of the DTH business. Fig. 72 Cyfrowy Polsat; 1Q08 operating statistics Number of users of DTH eop (ths.) Familijny (ths.) Mini (ths.) DTH net addition (ths.) qoq Familijny (ths.) Mini (ths.) DTH net addition (ths.) yoy Familijny (ths.) Mini (ths.) Number of users of DTH (ths.), period's average Familijny (ths.) Mini (ths.) DTH churn Familijny Mini Churning DTH users (ths.) Familijny Mini Gross addition DTH (ths.) Familijny Mini DTH ARPU blended (PLN) Familijny Mini No. of STBs sold (ths.) Implied average price of STB sold (PLN) Implied average price of STB sold (US$) Cash DTH SAC (PLN) TV programming content cost per subscriber (PLN/month) TV programming content cost per subscriber (US$/month) Average price of STB sold (PLN) Average price of STB sold (US$) Average cost of STB sold (PLN) Average cost of STB sold (US$) DTH STB subsidy per STB (PLN) DTH STB subsidy per STB (US$) 1Q08 2,187.2 1,914.3 272.9 118.9 87.3 31.6 717.7 589.2 128.5 2,135.6 1,878.0 257.6 1.8% 2.0% 0.0% 37.6 37.6 0.0 156.5 124.9 31.6 33.8 37.3 8.5 156.5 131.5 57.6 96.9 -9.0 -3.9 131.5 57.6 -203.9 -89.4 -72.4 -31.7 4Q07 2,068.3 1,827.0 241.3 372.7 316.7 56.0 794.7 658.1 136.6 1,882.0 1,668.7 213.3 1.8% 2.0% 0.0% 33.4 33.4 0.0 406.1 350.1 56.0 33.9 37.3 7.1 406.1 107.9 42.7 n.a. -8.3 -3.3 107.9 42.7 -234.0 -92.7 -126.1 -50.0 1Q07 1,469.5 1,325.1 144.4 195.9 156.2 39.7 n.a. n.a. n.a. 1,387.2 1,254.5 132.8 0.9% 1.0% 0.0% 12.5 12.5 0.0 208.4 168.7 39.7 34.4 37.2 7.7 208.4 144.1 48.8 97.9 -9.1 -3.1 144.1 48.8 -274.6 -92.9 -130.5 -44.1 qoq chng 6% 5% 13% -68% -72% -44% -10% -10% -6% 13% 13% 21% -1% 0% n.m. 13% 13% n.m. -61% -64% -44% 0% 0% 19% -61% 22% 35% n.a. 8% 20% 22% 35% -13% -4% -43% -37% yoy chng 49% 44% 89% -39% -44% -20% n.a. n.a. n.a. 54% 50% 94% 96% 100% n.m. 201% 199% n.m. -25% -26% -20% -2% 0% 10% -25% -9% 18% -1% -1% 28% -9% 18% -26% -4% -45% -28% Source: Company, DM IDMSA estimates. ???????????????????????? 77 Cyfrowy Polsat Fig. 73 Cyfrowy Polsat; 1Q08 results IFRS consolidated PLN m Sales: DTH: Subscription fees: Familijny Mini STB leases STB sales Satellite signal transmission Other MVNO OPEX excl. D&A: TV programming content Signal transmission Marketing & distribution HR, of which: IFRS2 SOCS STBs, of which: subsidy Polish Cinema Institute royalties Other EBITDA Adj EBITDA Adj EBITDA margin D&A EBIT Adj EBIT Adj EBIT margin Net financial income (cost) PBT Adj PBT Adj PBT margin CIT NI Adj NI Adj NI margin 1Q08 248.8 248.8 216.6 210.1 6.6 0.9 20.6 4.4 6.3 0.0 -160.1 -50.7 -15.0 -38.1 -10.4 0.0 -31.9 -11.3 -3.2 -10.8 88.6 88.6 35.6% -5.1 83.5 83.5 33.6% -4.0 79.5 79.5 32.0% -15.5 64.0 64.0 25.7% 4Q07 243.3 243.3 191.1 186.6 4.5 1.6 43.8 2.5 4.3 0.0 -245.2 -41.5 -14.2 -52.5 -21.8 -10.2 -95.0 -51.2 -2.9 -17.1 -1.8 8.3 3.4% -8.4 -10.2 0.0 0.0% -2.2 -12.4 -2.2 -0.9% 3.5 -8.9 1.3 0.5% 1Q07 181.6 181.6 143.2 140.1 3.1 1.9 30.0 3.3 3.2 0.0 -133.2 -34.3 -10.5 -19.8 -5.7 0.0 -57.2 -27.2 -2.1 -3.5 48.4 48.4 26.6% -4.6 43.8 43.8 24.1% -2.4 41.4 41.4 22.8% -9.3 32.1 32.1 17.7% qoq chng 2% 2% 13% 13% 44% -46% -53% 77% 46% n.m. -35% 22% 6% -27% -53% -100% -66% -78% 13% -37% n.m. 964% -39% n.m. n.m. 82% n.m. n.m. n.m. n.m. 5,009% - yoy chng 37% 37% 51% 50% 113% -55% -31% 34% 97% n.m. 20% 48% 43% 93% 81% n.m. -44% -58% 51% 203% 83% 83% 13% 91% 91% 66% 92% 92% 66% 100% 100% - realization of FY number in 1Q: 2008E 2007 24% 23% 24% 23% 23% 22% 23% 22% 24% 18% 29% 32% 36% 28% 31% 28% 45% 34% 0% n.m. 23% 21% 23% 23% 25% 22% 22% 16% 22% 14% n.m. 0% 37% 27% 39% 27% 23% 24% 13% 7% 24% 29% 24% 27% 18% 22% 25% 30% 25% 28% 39% 48% 24% 30% 24% 28% 25% 35% 24% 28% 24% 26% - Source: Company, DM IDMSA estimates. 78 ???????????????????????? Cyfrowy Polsat 7. Financial forecasts aaSOTP valuation of the Company drives separate forecasts for DTH and MVNO business lines. aaStrong (27% p.a.) growth of 2008-2010E revenues, mainly on the back of robust DTH volumes and launch of the MVNO project; SOC-adjusted OPEX increases forecasted to lag top-line’s, due to (i) Company’s continued cost-consciousness, (ii) launch of an in-house DTH STB assembly (enabling to cut the STB subsidies), (iii) less painful initial impact from the new additions once the existing pool of subscribers is large (in volume terms) relative to the newly added ones and (iv) material fixed-costs component. aaWe forecast Cyfrowy Polsat’s consolidated EBITDA margin (SOC-adjusted) to continue to soar from its 2006 trough, despite the launch of the MVNO business; our mid-term targets for the entire group, DTH business and Cyfrowy’s MVNO stand, respectively, at >35%, >40% and 0%. Our LT (maturity stage) EBITDA margin expectancy for the MVNO endeavor rests at >10%. aaDespite mid-term profit-dilutive kick-off of the MVNO project, we forecast impressive 2008-2010E CAGR of Cyfrowy’s consolidated SOC-adjusted EBITDA – app. 50% (roughly in line with the CAGR forecast for the DTH business). DTH + MVNO activities included in the forecasts SOTP valuation of the Company drives separate forecasts for DTH and MVNO business lines Our forecasts of the Company’s financial performance cover both the DTH operations and the MVNO activities (to be commercially launched in mid-2008, yet already generating operating costs). We, however, abstract from the possible engagement in the broadband Internet access and IPTV activities, because as of now these themes have neither been firmly decided upon nor have we necessary input data for their incorporation in our projections. As argued in the Valuation section, given the start-up nature of the Company’s MVNO project (bound to generate sizable losses during initial few years) and materially different business metrics of the DTH and MVNO businesses at their maturity stage (e.g. profitability), sum-of-the parts (SOTP) seems to constitute the most proper approach towards the assessment of Cyfrowy Polsat’s EFV, with both these business lines valued separately and then added up (should we value them together, the peerrelative forward-multiples-based valuation of the DTH business would be unjustifiably understated, due to the inclusion of the MVNO’s forecast negative contribution). Such valuation approach, however, requires preparation of separate forecasts (income statement + selected cash flow data (capex, NWC changes)) for these two lines of activities, a pre-requisite which we meet, building our projections of the Company’s consolidated financial statements on the basis of stand-alone financial forecasts for DTH and MVNO. 7.1. Two main revenue sources: DTH + MVNO DTH revenues encompass: (i) subscription fees (by far the most important revenue stream),… ???????????????????????? Revenues Our forecast of Cyfrowy’s sales differentiates between two main streams of revenues: (i) revenues related to the DTH platform, and (ii) revenues related to the MVNO activities. As far as the DTH sales go, we further differentiate between four main revenue streams: (i) DTH subscription fees, (ii) STB lease revenues, (iii) revenues from STB sales, and (iv) miscellaneous revenues. While below we provide a general discussion of the characteristics of these inter-related revenue sources, with detailed sales assumptions outlined in Figures 74-76 and the final outcome (our forecast of Cyfrowy Polsat’s consolidated revenues) presented in Figures 77-83, it should be noted up front that among the plethora of assumptions that need to be made, by far the most crucial are the ones pertaining to volumes and prices (ARPUs) in (i) DTH subscriptions and (ii) MVNO. 1. Revenue from subscription fees, which comprises revenue from fees payable for access aa to the Company’s program offering, depends on the number of subscribers and the level of monthly subscription fees, which differs depending on the make-up of a channel package 79 Cyfrowy Polsat purchased by a given subscriber. We forecast a brisk growth of these revenues in the mid-term (2008-2010E), predominantly due to strong growth of volumes and, to a lesser extent, via the increases in the value of an average customer bill. At the moment, this revenue stream constitutes by far the most important component of Cyfrowy’s DTH revenues, and given our forecasts for other streams (for details see the following paragraphs and Figures 77-83), we expect its significance to increase even further in the coming years. ...(ii) STB leases, and… 2. Revenue from STB leases, which comprises revenue from fees payable for the use aa by subscribers of the Company-owned receiver sets, depends on the number of leased STBs and the level of lease installments payable to Cyfrowy Polsat. This revenue stream is accounted for on a straight-line basis over the subscription agreement term. It is generated under subscription agreements gained in the period when Cyfrowy Polsat made its receiver sets available primarily under a lease arrangement. Given the Company decision to switch from STB leases to STB sales, the STB lease revenues are likely to gradually perish, though are unlikely to null out, as the most advanced (and expensive) STBs continue to be offered in the leasing mode. This way or another, the STB leases constitute a revenue stream of a marginal significance to the Company - a situation which we do not expect to change in the foreseeable future. ...(iii) STB sales,... 3. Revenue from STB sales is the sum of (i) revenue from sales of STBs purchased by subscribers aa at the time of concluding their subscription agreements, and (ii) revenue from sales of STBs previously used by subscribers under operating lease agreements, in the case of which the purchase price of an STB includes the deposit paid by the subscriber at the time of concluding the lease agreement. This revenue is recognized at the fair value of payments received, less any refunds, discounts or rebates, while the purchase price depends on whether the subscriber purchases a set-top box with or without a satellite dish, as well as on the make-up of the channel package purchased by a given subscriber. ...which are driven by the Company’s ‘sell versus lease’ sales policy decisions and DTH gross adds MVNO revenues Since 2005 revenue from STB sales has been growing rapidly on the back of the new STB distribution strategy adopted by the Company in 2004. In line with this strategy customers are offered receiver sets at attractive retail prices (with a significant subsidy in case of the thirdparty-assembled STBs), instead of having to lease them. This stream of revenues constitutes a function of DTH users gross additions, mimicking the behavior of this variable; the gross adds peaked in 2007 and are expected to decline in 2008 and beyond, and so do the Company’s revenues from the sales of set-top-boxes (assuming, as we do, that no STBs are placed with third-party DTHs). 4. MVNO revenues will include revenues generated by the Company from its mobile voice aa business (to be launched at the turn of 2Q08 and 3Q08); they will constitute a pure consequence of the number of service users, post-paid/pre-paid mix and ARPUs (see Figures 77-83). Miscellaneous revenue sources (immaterial from the Company’s perspective) include… 80 5. Miscellaneous revenue comprises: (i) revenue from sales of signal transmission services, aa (ii) revenue from sales of electronic office equipment, (iii) compensation for lost and damaged equipment, (iv) revenue from investment property, and (v) other operating revenue. ???????????????????????? Cyfrowy Polsat Fig. 74 Cyfrowy Polsat; Revenue assumptions DTH Paid multichannel penetration Share of DTH in paid multichannel net addition Share of DTH in paid multichannel market DTH penetration Share of Cyfrowy in DTH’s net addition Share of Cyfrowy in DTH households Number of Cyfrowy Polsat DTH households Share of Mini package new subscribers in Cyfrowy Polsat’s DTH users net addition Share of Familijny package new subscribers in Cyfrowy Polsat’s DTH users net addition Share of Mini package subscribers in all Cyfrowy Polsat’s DTH subscribers As scrutinized in the Local market trends and outlook chapter, we forecast LT paid multichannel penetration level at <80%, with mid-term (2010E) target at <75%. We expect the bulk of the penetration increase to materialize by the end of 2008. These forecasts rest upon the assumption that the current plan for the roll-out of DTT in Poland (providing for the first digital islands being created at the turn of 2008 and 2009 and the analog signal switch-off at 2012-end) is not materially accelerated (please refer to the Risk factors section regarding the details). Given network-reach-related constraints in the CATV and IPTV modes, DTH is expected to continue to grab a lion share of sector's net add; for the mid-term (2008-2010E) we forecast it in the range of 60%-80%. A straightforward consequence of the above. We forecast it to rise from c. 42% as of the end of 2007 to c. 48% in three-year time. A straightforward consequence of the above. We forecast it to rise from c. 26% as of the end of 2007 to >35% in three-year time. Given its low cost leadership DTH strategy, Cyfrowy Polsat has been winning c. 70-80% share in DTH sector’s net adds in the 2005-2007 period. We assume that this proportion declines to c. 50% in short-to-mid-term and app. 33% in the LT. A straightforward consequence of the above; forecasted to decline from its 2007 peak already this year, as the Company’s forecasted share in sector’s net adds will start from 2008E to be lower than its eop market share for the directly preceding year. A straightforward consequence of the above; we forecast 2008 eop users at c. 2.5 million level, with mid-term (eop 2010E) target at c. 3 million. App. 17% for the 2007 net adds; assumed to remain at that level in the mid-term. Please note that once the volume growth slows at market’s saturation, the net add of the Mini package subscribers can be reasonably expected to become negative (slow net adds outweighted by the upselling effect (migration from Mini to Familijny)). App. 83% for the 2007 net adds; assumed to remain at that level in the mid-term. Consequence of the above; forecasted to increase in the mid-term to c. 13% (consequence of the low base; the package was introduced in 4Q06) from app. 8%/12% as of the end of 2006/2007, but in the long term should be expected to decline from its mid-term heights (once the upselling effect prevails). Share of Familijny package subscribers Consequence of the above; forecasted to decline in the mid-term to c. 87% (consequence of 4Q06 introduction of the Mini in all Cyfrowy Polsat’s DTH subscribers package) from app. 92%/88% as of the end of 2006/2007, but in the long term should be expected to reverse its mid-term declining trend (once the upselling effect starts to prevail). Churn 5.1% for 2007. Expecting increasing competition and decreasing share of fresh customers (i.e. ones during their initial period subscription agreements) in total customer number, we assume the DTH churn rate to steadily yet uniterruptedly grow in the coming years with LT target of c. 10%. ARPU (Mini package) PLN 8.5 in perpetuity (as Mini constitutes an entry low-end package - introduced in order to attract marginal subscribers with an aim of their later upselling into the Familijny package - we do not assume any increases of its ARPU in the years to come). ARPU (Familijny package) Assumed to: (i) increase by c. 4% yoy in 2008E (8% increase of the package price (starting from the beginning of this year), due to introduction (in December 2007) of four new BBC’s channels into the Familijny portfolio, standard upselling effects and introduction of HD channels and new thematic channels/packages (e.g. premium movie), offset partially by the impact of the 2007’s end-of-the-year-aggressive-promotion-Familijny-new-joiners utilizing their expanded no-subscriptioncharges period, (ii) increase by c. 8% yoy in 2009E, due to the FY P&L impact of the November-December 2007 new-joiners (benefiting in 2008E from their 5-month no-subscription fee periods), introduction of new thematic channels/packages and standard upselling effects, and (iii) rise by c. 4-5% thereafter (mainly the upselling effect). ARPU (blended) A straightforward consequence of the assumed trends in the ARPUs of Mini and Familijny packages and shares of their subscribers in the overall number of Cyfrowy’s DTH users. Generally forecasted to increase on average by 2-7% p.a. in the mid-term (please note that 2007 was affected by the introduction of the Mini package, which diluted the blended ARPU at an early stage, and 2008E is affected by the aforementioned November-December 2007 aggressive pricing promotion for the Familijny new joiners). STB lease revenues Given the Company decision to switch from STB leases to STB sales, the STB lease revenues are likely to slowly perish, though are unlikely to null out, as the most advanced (and expensive) STBs continue to be offered in the leasing mode. This way or another, the STB leases constitute a revenue stream of a marginal significance to the Company - a situation which we do not expect to alter in the foreseeable future. In-house assembled STB sales policy We assume that the Company’s STB assembly will produce STBs only for internal purposes (i.e. for Cyfrowy’s DTH subscribers). Such an assumption, coupled with forecasted slacker volume additions from 2009E (inclusive) onwards, imply an emergence of a spare STB production capacity at the Company. In such circumstances the Company may strive to place its STBs with external parties (i.e. for the purposes of other DTH providers (both domestically and abroad)), a possible (though far from being certain) development which - at the moment - is not incorporated in our forecasts. Share of in-house assembled STBs Assumed to increase from 0% in 2007 (in-house assembly launched in October) to c. 70% in the mid-term. in all STBs sold (to the users of Cyfrowy Polsat platform) Source: Company, DM IDMSA estimates ???????????????????????? 81 Cyfrowy Polsat Fig. 75 Cyfrowy Polsat; Revenue assumptions (continued) Sold STBs volumes Satellite signal transmission revenues Electronic equipment sales Miscellaneous revenues MVNO Mobile penetration Share of new entrants (MNOs + MVNOs in mobile users Share of MVNOs in mobile users Service launch date Target customer group Average number of people per family in the target group Penetration within the target customer group Cyfrowy’s share in MVNO mobile users net addition Cyfrowy’s share in the mobile market new entrants’ (MNOs + MVNOs) users net addition Cyfrowy’s share in MVNO market (in number of users’ terms) Cyfrowy’s share in new mobile entrants’ (MNOs & MVNOs) market (in number of users’ terms) Cyfrowy’s share in mobile market (in number of users’ terms) Cyfrowy’s MVNO number of users Share of post-paid users in Cyfrowy’s MVNO customers Share of pre-paid in Cyfrowy’s MVNO customers Post-paid users: standard agreement duration ARPU: post-paid ARPU: pre-paid ARPU: blended Churn: post-paid A consequence of the adopted assumptions regarding (i) the Company’s in-house assembled STB sales policy, and (ii) Cyfrowy’s DTH gross additions (i.e. net adds and churn)). Forecasted to decline from c. <900 ths. 2007 all-time peak to c. >500 ths. in 2008E (of which <200 ths. is assumed to be in-house assembled), app. 400 ths. in the mid-term and c. 300 ths. in the long-term (replacement demand). We expect the Company’s in-house assembly’s investment to reach its pay-back period in 1 year since its launch. Assumed to increase by 20% yoy this year and to stay flat in the coming years (a conservative assumption given that on the back of the Company’s current capacity they could double, providing that an incremental demand arises). Given the July 2007 divestiture of the non-core Emarket subsidiary (which dealt in this area), this sundry stream of revenues dried out last year. Assumed to increase by 50% yoy this year and to stay flat thereafter. As scrutinized in the Local market trends and outlook chapter, we forecast LT mobile penetration in Poland at c. 130%. Target share forecasted at >25%; regarding the detailed rationale, please refer to the Local market trends and outlook chapter. As scrutinized in the Local market trends and outlook chapter, we forecast target share of MVNOs in mobile users in Poland at c. 12%, which appears reasonable given Western European experiences. Turn of 2Q08 and 3Q08. Narrow target: households subscribing to Cyfrowy’s Familijny DTH package. Broader target: all households subscribing to Cyfrowy’s DTH packages (both Familijny and Mini). The 2.84 GUS number for Poland assumed to hold also for Cyfrowy’s customer household pool and to remain constant in time. We assume LT penetration target at c. 18% in the narrow target customer group and in the vicinity of app. 17% in the broader target customer group (these targets do not diverge much from each other as the populations of these two target groups in question do not differ much, due to: (i) assumed dominance of the Familijny package in the Company’s DTH net adds, and (ii) assumed continuous trend of upselling the Mini DTH subscribers). 30-40% (near term) – 20% (mid- to long-term). 15-20% in the near- to mid-term, 10% in the longer term. c. 30% in mid-term, c. 25% in the longer term <15% in mid-term, >10% in the longer term Our assumptions regarding (i) mobile penetration in Poland, (ii) Cyfrowy’s DTH subscribership (determining the size of the MVNO target customer group), and (iii) MVNO penetration within the target customer group imply c. 2% share of Cyfrowy Polsat’s MVNO mobile service (measured in number of users’ terms) in the mobile market in the mid-term (by 2010E) and c. 3% LT share. The above assumptions imply the following forecasts of Cyfrowy’s MVNO users (eop): 2008E - 100 ths., (ii) 2010E <1 million, (iii) LT target - >1.5 million. 20% (constant). 80% (constant). 24 months (in line with the market standard). PLN 65 per month (growing at 1% CAGR). This level implies >10% discount to current post-paid ARPUs of MNOs. Given the ability to offer content, we view this assumption as rather conservative one. PLN 13 per month (growing at 1% CAGR). This level implies c. 20% discount to current pre-paid ARPUs of MNOs. Given the ability to offer content, we view this assumption as rather conservative one. PLN 23 (growing at 1% CAGR); consequence of (i) assumed pre-paid and post-paid ARPUs and (ii) mix of pre-paid and post paid customers in Cyfrowy’s MVNO customer population. 3.0% (constant); slightly below the current post-paid churns of local MNOs (of c. 3.3%), due to Company’s ability to bundle its mobile offering with DTH (which should increase customers’ loyalty). Plase note that given assumed 24-month duration of standard post-paid agreement, the churn appears two years after the service launch (zero churn for the first two years). Source: Company, DM IDMSA estimates 82 ???????????????????????? Cyfrowy Polsat Fig. 76 Cyfrowy Polsat; Revenue assumptions (continued) Churn: pre-paid Churn: blended Handsets sold: volumes Handsets sold: prices 10% (constant); at the lower bound of the current pre-paid churns of local MNOs (of 9%-16%), due to Company’s ability to bundle its mobile offering with DTH (which should increase customers’ loyalty). 8%-9% (consequence of (i) assumed churn rates for the post-paid and the pre-paid customers, and (ii) shares of pre-paids and post-paids in Cyfrowy’s MVNO customer pool). Function of gross additions in the post-paid and pre-paid domains. We assume that all of post-paid (and 10% of prepaid) customers will buy their handsets with Cyfrowy, and that the average period of handset usage will be two years (replacement handset demand calculated on a post-compounded-churn basis). Post-paid handsets assumed to be sold - in line with market practices - at PLN 1 per unit (which given the average handset cost in the range of Eur 50-100 means deep handset subsidy on this part of the customer spectrum). Pre-paid handsets assumed to be sold at their cost (c. Eur 75 on average), with neither mark-up nor subsidy. Source: Company, DM IDMSA estimates ...sales of signal transmission services,… ...sales of electronic office equipment (till July 2007),... ...compensation for lost and damaged equipment, and... ...revenue from property lease Revenue from sales of signal transmission services to TV and radio broadcasters encompasses provision of access to portions of the transponder frequency, transmission, encryption and distribution of signal to cable networks (services provided to broadcasters which are Cyfrowy’s licensors). We assume these revenues to increase by c. 20% yoy this year (in 1Q08 they advanced by 34% yoy) and then to stay flat in the coming years, which is a conservative assumption, given that on the back of Company’s current capacity they could double (providing that an incremental demand arises). Revenue from sales of electronic office equipment (computers, servers, terminals, printers etc.) and related supplies were generated by Emarket Sp z o.o. - a subsidiary of Cyfrowy Polsat sold in July 2007. Consequently, since that time the Cyfrowy Polsat Group has not recorded any revenue (or costs) from this business line. When terminating their subscription agreements, customers are obliged to return the leased equipment. If the equipment is damaged, the customer is liable for the cost of its repair. If for any reason the customer fails to return the leased set-top-box, he/she must pay the amount equal to its price. Revenue derived from these two sources is recognized as compensation for lost and damaged equipment. Praga Business Park - Cyfrowy’s subsidiary - is the owner of the property located at ul. Lubinowa 4a in Warsaw, which it leases to the Company and external tenants which do not belong to the Cyfrowy Polsat Group. Rents received by Praga Business Park from the external tenants are recognized (on a straight-line basis over the lease term) as revenue from investment property. The combined value of these miscellaneous revenues is not material from the perspective of Cyfrowy Polsat - a situation which we do not forecast to change in the foreseeable future. Strong (c. 27% p.a.) growth of 2008-2010E revenues, mainly on the back of robust DTH volumes and launch of the MVNO project ???????????????????????? Summing up, we forecast a brisk pace of growth of Company’s revenues in the coming years (2008-2010E CAGR of 27%), mainly due to (i) sound growth of DTH volumes (2008-2010E CAGR of 12%), and (ii) launch of the MVNO activities. We would also like to note that the 2008E strong growth of Cyfrowy Polsat’s consolidated sales appears to be largely secured by the 2007 hike in DTH volumes, as the full effect of a given year’s volume performance fully shines through the Company’s income statement only in the subsequent year. 83 84 2005 5,361 5,829 10% 9% 496 468 42.8% 46.0% 1,105 1,446 yoy change 23% 31% 205 341 41% 73% 21% 25% 8.8% 11.4% yoy change 2004 Source: Company, DM IDMSA estimates 2,998 4% 368 0% 2,631 5% 12% 88% 2,921 5% 368 3% 2,553 6% 57.7% 50% 125 0 125 0% 100% 2,873 6% 368 5% 2,506 6% 13% 87% 2,771 7% 357 9% 2,415 7% 58.1% 50% 165 17 149 10% 90% -30 105 -40% 140% 358 -3% 2,668 5% 57.5% 50% 75 4% 338 -8% 2,736 4% 11% 89% 3,027 3,073 3% -3 7 -100% 200% 337 -6% 2,738 3% 57.4% 33% 3 2% 335 -1% 2,742 0% 11% 89% 3,075 3,077 0% 318 -4% 2,764 1% 57.3% 33% 3 0% 295 -10% 2,788 1% 10% 90% 3,081 3,083 0% 285 -10% 2,800 1% 57.3% 33% 3 0% 262 -11% 2,825 1% 8% 92% 3,084 3,087 0% 252 -12% 2,836 1% 57.2% 33% 3 0% 229 -13% 2,861 1% 7% 93% 3,088 3,090 0% 219 -13% 2,873 1% 57.2% 33% 3 0% 196 -14% 2,897 1% 6% 94% 3,091 3,093 0% -7 -33 -33 -33 -33 10 36 36 36 36 -200% -1,000% -1,000% -1,000% -1,000% 300% 1,100% 1,100% 1,100% 1,100% 332 -1% 2,745 0% 57.4% 33% 3 0% 328 -2% 2,752 0% 11% 89% 3,078 3,080 0% 19% 29% 20% 11% 15% 12% 13% 8% 2017E 2018E 2008-2010E CAGR 11,322 11,382 11,422 11,462 1% 1% 0% 0% 70 60 40 40 79.1% 79.2% 79.2% 79.3% 5,378 5,388 5,398 5,408 0% 0% 0% 0% 10 10 10 10 14% 17% 25% 25% 48% 47% 47% 47% 37.6% 37.5% 37.4% 37.4% 2011E 2012E 2013E 2014E 2015E 2016E 9,082 9,702 10,252 10,722 11,092 11,172 11,252 13% 7% 6% 5% 3% 1% 1% 1,020 620 550 470 370 80 80 67.9% 71.4% 74.3% 76.7% 78.7% 78.8% 78.9% 4,218 4,618 4,948 5,198 5,348 5,358 5,368 23% 9% 7% 5% 3% 0% 0% 800 400 330 250 150 10 10 78% 65% 60% 53% 41% 13% 13% 46% 48% 48% 48% 48% 48% 48% 31.5% 34.0% 35.9% 37.2% 38.0% 37.8% 37.7% 2007 2008E 2009E 2010E 6,746 8,062 16% 20% 917 1,316 52.1% 61.2% 2,241 3,418 55% 53% 795 1,178 87% 89% 33% 42% 17.3% 26.0% 2006 DTH households net addition (ths.) Share of DTH in paid multichannel net addition Share of DTH in paid multichannel households, eop DTH penetration, eop (1.1) DTH - subscription fees Cyfrowy Polsat DTH households (subscribers), eop (ths.) 393 657 1,274 2,068 2,508 2,708 yoy change n.a. 67% 94% 62% 21% 8% of which: Mini package (ths.) 0 0 105 241 317 351 yoy change n.a. n.m. n.m. 130% 31% 11% Familijny package (ths.) 393 657 1,169 1,827 2,191 2,357 yoy change n.a. 67% 78% 56% 20% 8% Mini package subscribers as % of all subscribers, eop 0% 0% 8% 12% 13% 13% Familijny package subscribers as % of all subcribers, eop 100% 100% 92% 88% 87% 87% Cyfrowy Polsat DTH households (subscribers), 353 476 854 1,591 2,236 2,584 period's average (ths.) yoy change n.a. 35% 79% 86% 41% 16% of which: Mini package (ths.) 0 0 40 166 265 328 yoy change n.a. n.m. n.m. 314% 59% 24% Familijny package (ths.) 353 476 814 1,424 1,970 2,257 35% 71% 75% 38% 15% yoy change n.a. Share of Cyfrowy Polsat households in DTH households, eop 35.6% 45.4% 56.8% 60.5% 59.5% 58.6% Share of Cyfrowy Polsat in DTH households net addition 27% 77% 78% 67% 55% 50% Cyfrowy Polsat DTH households net addition (ths.) 55 264 617 795 440 200 of which: Mini package (ths.) 0 0 105 137 76 34 Familijny package (ths.) n.a. 264 512 658 364 166 % of Cyfrowy's DTH total net add attributable to the Mini package 0% 0% 17% 17% 17% 17% % of Cyfrowy's DTH total net add attributable to the Familijny 100% 100% 83% 83% 83% 83% package Paid multichannel net addition (ths.) Paid multichannel penetration, eop DTH households, eop (ths.) (1) DTH (and related) Paid multichannel households, eop (ths.) Fig. 77 Cyfrowy Polsat; Sales model Cyfrowy Polsat ???????????????????????? ???????????????????????? Source: Company, DM IDMSA estimates Churn Churning subscribers of Cyfrowy Polsat (ths.) Cyfrowy Polsat DTH households gross (of churn) addition (ths.) DTH subscription revenues (PLN million) yoy change of which: Mini package (PLN million) yoy change Familijny package (PLN million) yoy change ARPU (PLN/month) yoy change of which: Mini package (PLN/month) yoy change Familijny package (PLN/month) yoy change (1.2) DTH - STB leases STB lease revenues (PLN million) yoy change (1.3) DTH - STBs sales Estimated number of STBs sold (ths.) to Cyfrowy's users: yoy change in-house assembled (ths.) yoy change third-party (ths.) yoy change Share of in-house assembled STBs in all sold STBs (to Cyfrowy's users) Share of third-party STBs in all sold STBs (to Cyfrowy's users) Cyfrowy's DTH service gross addition (ths.) STBs sold/Cyfrowy's DTH service gross addition Implied average net price per STB sold (PLN) yoy change Implied average net price per STB sold (US$) yoy change STB sales revenues (PLN million) yoy change Fig. 78 Cyfrowy Polsat; Sales model (continued) 23.7 6% 322 260% 0 n.a. 322 260% 0% 100% 322 100% 212 -5% 65 7% 68.3 243% 22.3 n.a. 89 n.a. 0 n.a. 89 n.a. 0% 100% 89 100% 223 n.a. 61 n.a. 19.9 n.a. 100% 660 85% 180 -16% 58 -12% 100.6 47% 560 74% 0 n.a. 560 74% 0% 16.5 -31% 100% 876 100% 122 -32% 44 -23% 107.2 7% 876 56% 0 n.a. 876 56% 0% 6.0 -64% 8.4 323% 37.8 5% 0.0 n.m. 30.2 2% 0.0 n.a. 29.6 n.a. 2.0 n.m. 35.9 19% 0.2 16.7 n.m. 6,904% 350.9 645.8 103% 84% 34.3 34.7 13% 1% 0.0 n.m. 172.8 38% 30.2 2% 5.1% 81 876 662.5 89% 2011E 2012E 2013E 2014E 2015E 2016E 67% 576 100% 100 -18% 44 0% 57.8 -46% 576 -34% 190 n.m. 386 -56% 33% 3.0 -50% 8.5 1% 39.2 4% 27.0 62% 926.1 43% 35.5 2% 40% 383 100% 99 -1% 44 0% 38.1 -34% 383 -33% 230 21% 153 -60% 60% 1.5 -50% 8.5 0% 42.5 8% 30% 389 100% 105 6% 44 0% 41.1 8% 389 2% 273 18% 117 -24% 70% 1.5 0% 8.5 0% 44.5 5% 30% 391 100% 105 0% 44 0% 41.2 0% 391 0% 274 0% 117 0% 70% 1.5 0% 8.5 0% 46.5 5% 30% 378 100% 105 0% 44 0% 39.8 -3% 378 -3% 264 -3% 113 -3% 70% 1.5 0% 8.5 0% 48.6 4% 30% 311 100% 105 0% 44 0% 32.8 -18% 311 -18% 218 -18% 93 -18% 70% 1.5 0% 8.5 0% 50.7 4% 30% 311 100% 105 0% 44 0% 32.8 0% 311 0% 218 0% 93 0% 70% 1.5 0% 8.5 0% 52.9 4% 30% 311 100% 105 0% 44 0% 32.8 0% 311 0% 218 0% 93 0% 70% 1.5 0% 8.5 0% 55.3 4% 30% 312 100% 105 0% 44 0% 32.9 0% 312 0% 218 0% 94 0% 70% 1.5 0% 8.5 0% 57.7 4% 30% 312 100% 105 0% 44 0% 32.9 0% 312 0% 218 0% 94 0% 70% 1.5 0% 8.5 0% 60.2 4% 30% 312 100% 105 0% 44 0% 32.9 0% 312 0% 219 0% 94 0% 70% 1.5 0% 8.5 0% 62.9 4% 22.3 -13% 2,167.2 6% 59.0 5% -27% 0% -5% -49% -24% -37% 6% 0% 5% 26% 30% 2017E 2018E 2008-2010E CAGR 10.0% 10.0% 309 309 312 312 2,075.3 2,189.5 5% 6% 26% 33.4 36.4 37.5 36.6 34.4 33.9 32.4 29.0 25.7 24% 9% 3% -3% -6% -1% -4% -10% -12% 1,149.7 1,288.3 1,424.9 1,554.9 1,665.5 1,743.6 1,832.4 1,938.1 2,049.6 24% 12% 11% 9% 7% 5% 5% 6% 6% 38.2 39.8 41.7 43.8 46.1 48.1 50.4 53.1 56.0 7% 4% 5% 5% 5% 4% 5% 5% 5% 6.1% 7.1% 8.1% 9.1% 10.0% 10.0% 10.0% 10.0% 10.0% 136 183 224 266 303 307 308 308 308 576 383 389 391 378 311 311 311 312 953.1 1,183.1 1,324.7 1,462.4 1,591.4 1,699.8 1,777.5 1,864.8 1,967.2 44% 24% 12% 10% 9% 7% 5% 5% 5% 2007 2008E 2009E 2010E 0.0 n.a. 125.2 n.a. 29.6 n.a. 2006 5.1% 44 660 351.1 103% 2005 9.9% 12.2% 35 58 89 322 125.2 172.8 n.a. 38% 2004 Cyfrowy Polsat 85 86 yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change 9.0 n.a. 1.1 n.a. 5.2 n.a. 15.4 n.a. 182.8 n.a. 125.2 n.a. 22.3 n.a. 19.9 n.a. 15.4 n.a. 2004 9.3 3% 3.9 236% 4.0 -23% 17.1 12% 281.9 54% 172.8 38% 23.7 6% 68.3 243% 17.1 12% 2005 10.3 11% 11.1 188% 4.2 6% 25.6 49% 493.8 75% 351.1 103% 16.5 -31% 100.6 47% 25.6 49% 2006 2011E 2012E 2013E 2014E 2015E 2016E Source: Company, DM IDMSA estimates 97% 0% 2% 1% 100% 97% 0% 1% 1% 100% 37,561 37,489 37,411 48,454 48,736 48,634 129.0% 130.0% 130.0% 27.5% 27.4% 27.4% 13,314 13,348 13,336 35 34 -12 12.0% 12.0% 12.0% 5,814 5,848 5,836 35 34 -12 3,087 3,090 3,093 3,084 3,088 3,091 2,825 2,861 2,897 97% 0% 2% 1% 100% 10% -27% -37% 26% 21% 10% 14% n.m. 6% 2017E 2018E 2008-2010E CAGR 11.6 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9 13.9 12% 20% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -100% n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. 9.4 14.1 14.1 14.1 14.1 14.1 14.1 14.1 14.1 14.1 14.1 14.1 123% 50% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 21.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 -18% 33% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 796.7 1,041.9 1,250.7 1,395.2 1,533.1 1,660.7 1,762.1 1,839.8 1,927.1 2,029.5 2,137.7 2,251.9 61% 31% 20% 12% 10% 8% 6% 4% 5% 5% 5% 5% 662.5 953.1 1,183.1 1,324.7 1,462.4 1,591.4 1,699.8 1,777.5 1,864.8 1,967.2 2,075.3 2,189.5 89% 44% 24% 12% 10% 9% 7% 5% 5% 5% 5% 6% 6.0 3.0 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 -64% -50% -50% 0% 0% 0% 0% 0% 0% 0% 0% 0% 107.2 57.8 38.1 41.1 41.2 39.8 32.8 32.8 32.8 32.9 32.9 32.9 7% -46% -34% 8% 0% -3% -18% 0% 0% 0% 0% 0% 21.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 -18% 33% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 2007 2008E 2009E 2010E yoy change DTH sales structure Subscription fees 68% 61% 71% 83% 91% 95% 95% 95% 96% 96% 97% 97% STB leases 12% 8% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% STB sales 11% 24% 20% 13% 6% 3% 3% 3% 2% 2% 2% 2% Other 8% 6% 5% 3% 3% 2% 2% 2% 2% 2% 2% 1% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% (2) MVNO Population, eop (ths.) 38,160 38,123 38,085 38,044 38,000 37,952 37,899 37,847 37,794 37,741 37,685 37,626 Mobile users, eop (ths.) 23,096 29,165 36,757 41,506 44,080 45,543 46,237 46,930 47,243 47,553 47,859 48,161 Mobile penetration, eop 60.5% 76.5% 96.5% 109.1% 116.0% 120.0% 122.0% 124.0% 125.0% 126.0% 127.0% 128.0% Share of new entrants (MNOs + MVNOs) in mobile users, eop 0.0% 0.0% 0.0% 2.2% 6.0% 10.6% 14.7% 18.2% 21.7% 23.7% 25.6% 27.6% New entrants' (MNOs + MVNOs) mobile users, eop (ths.) 0 0 0 896 2,661 4,822 6,774 8,520 10,252 11,255 12,265 13,279 New entrants' (MNOs + MVNOs) mobile users net addition (ths.) 0 0 0 896 1,765 2,161 1,953 1,746 1,732 1,003 1,009 1,015 Share of MVNOs in mobile users, eop 0.0% 0.0% 0.0% 0.1% 1.5% 4.0% 6.0% 7.5% 9.0% 10.0% 11.0% 12.0% Number of MVNOs mobile users, eop (ths.) 0 0 0 46 661 1,822 2,774 3,520 4,252 4,755 5,265 5,779 MVNO mobile users - net addition (ths.) 0 0 0 46 615 1,161 953 746 732 503 509 515 Number of Cyfrowy Polsat's DTH subscribers, eop (ths) 393 657 1,274 2,068 2,508 2,708 2,873 2,998 3,073 3,077 3,080 3,083 Number of Cyfrowy Polsat's DTH subscribers, period's average (ths.) 353 476 854 1,591 2,236 2,584 2,771 2,921 3,027 3,075 3,078 3,081 Number of Cyfrowy Polsat's DTH Familijny package subscribers, 393 657 1,169 1,827 2,191 2,357 2,506 2,631 2,736 2,742 2,752 2,788 eop (ths.) Other (PLN million) STB sales (PLN million) STB leases (PLN million) DTH subscription fees (PLN million) Total DTH revenues (PLN million), of which: Total other revenues (PLN million) (1.4.3) Miscellaneous (PLN million) (1.4.2) Electronic equipment sales (PLN million) (1.4) Other (1.4.1) Satellite signal transmission (PLN million) Fig. 79 Cyfrowy Polsat; Sales model (continued) Cyfrowy Polsat ???????????????????????? ???????????????????????? Source: Company, DM IDMSA estimates Number of Cyfrowy Polsat's DTH Familijny package subscribers, period's average (ths.) Average number of people per household Potential ‘broad’ (based on households of all subscribers) target customer group for Cyfrowy Polsat's MVNO service, eop (ths.) yoy change Potential ‘broad’ (based on households of all subscribers) target customer group for Cyfrowy Polsat's MVNO service, period's average (ths.) yoy change Potential ‘narrow’ (based on households of Familijny package subscribers) target customer group for Cyfrowy Polsat's MVNO service, eop (ths.) yoy change Potential ‘narrow’ (based on households of Familijny package subscribers) target customer group for Cyfrowy Polsat's MVNO service, period's average (ths.) yoy change Number of Cyfrowy's MVNO users, eop (ths.): yoy change Post-paid (ths) yoy change Pre-paid (ths.) yoy change Share of post-paid users in Cyfrowy's MVNO users (eop) Share of pre-paid users in Cyfrowy's MVNO users (eop) Net addition (ths.): Post-paid (ths) Pre-paid (ths.) Share of post-paid users in Cyfrowy's MVNO net addition Share of pre-paid users in Cyfrowy's MVNO net addition Share in MVNO net addition Share in mobile new entrants' (MNOs and MVNOs) net addition Number of Cyfrowy's MVNO users, period's average (ths.): yoy change Post-paid (ths.) yoy change Pre-paid (ths.) yoy change Fig. 80 Cyfrowy Polsat; Sales model (continued) 476 2.8 1,865 67% 1,352 35% 1,865 67% 1,352 35% 0 n.m. 0 n.m. 0 n.m. n.a. n.a. 0 0 0 n.a. n.a. n.m. n.m. 0 n.m. 0 n.m. 0 n.m. 2.8 1,117 n.a. 1,002 n.a. 1,117 n.a. 1,002 n.a. 0 n.a. 0 n.a. 0 n.a. n.a. n.a. 0 0 0 n.a. n.a. n.m. n.m. 0 n.a. 0 n.a. 0 n.a. 2005 353 2004 71% 0 n.m. 0 n.m. 0 n.m. n.a. n.a. 0 0 0 n.a. n.a. n.m. n.m. 0 n.m. 0 n.m. 0 n.m. 78% 2,312 79% 3,320 94% 2,426 2.8 3,617 814 2006 75% 0 n.m. 0 n.m. 0 n.m. n.a. n.a. 0 0 0 n.a. n.a. 0% 0% 0 n.m. 0 n.m. 0 n.m. 56% 4,045 86% 5,189 62% 4,517 2.8 5,874 1,424 8% 6,409 16% 6,694 8% 7,339 2.8 7,692 2,257 38% 15% 100 600 n.m. 500% 20 120 n.m. 500% 80 480 n.m. 500% 20% 20% 80% 80% 100 500 20 100 80 400 20% 20% 80% 80% 16% 43% 6% 23% 25 350 n.m. 1,300% 5 70 n.m. 1,300% 20 280 n.m. 1,300% 20% 5,596 41% 6,224 21% 6,349 2.8 7,124 1,970 7% 900 50% 180 50% 720 50% 20% 80% 300 60 240 20% 80% 31% 15% 750 114% 150 114% 600 114% 6% 6,857 7% 7,116 6% 7,870 2.8 8,160 2,415 2007 2008E 2009E 2010E 6% 1,050 17% 210 17% 840 17% 20% 80% 150 30 120 20% 80% 20% 9% 975 30% 195 30% 780 30% 5% 7,251 5% 7,471 4% 8,295 2.8 8,515 2,553 5% 1,200 14% 240 14% 960 14% 20% 80% 150 30 120 20% 80% 20% 9% 1,125 15% 225 15% 900 15% 4% 7,578 4% 7,769 3% 8,596 2.8 8,728 2,668 3% 1,301 8% 260 8% 1,041 8% 20% 80% 101 20 81 20% 80% 20% 10% 1,250 11% 250 11% 1,000 11% 0% 7,775 2% 7,788 0% 8,732 2.8 8,738 2,738 0% 1,403 8% 281 8% 1,122 8% 20% 80% 102 20 81 20% 80% 20% 10% 1,352 8% 270 8% 1,081 8% 0% 7,797 0% 7,816 0% 8,741 2.8 8,747 2,745 1% 1,505 7% 301 7% 1,204 7% 20% 80% 103 21 82 20% 80% 20% 10% 1,454 8% 291 8% 1,163 8% 1% 7,849 0% 7,919 0% 8,751 2.8 8,756 2,764 1% 1,513 0% 303 0% 1,210 0% 20% 80% 7 1 6 20% 80% 20% 20% 1,509 4% 302 4% 1,207 4% 1% 7,952 0% 8,022 0% 8,760 2.8 8,766 2,800 2011E 2012E 2013E 2014E 2015E 2016E 1% 1,519 0% 304 0% 1,215 0% 20% 80% 7 1 5 20% 80% 20% 20% 1,516 0% 303 0% 1,213 0% 1% 8,055 0% 8,125 0% 8,769 2.8 8,775 2,836 1% 1,517 0% 303 0% 1,213 0% 20% 80% -2 0 -2 20% 80% 20% 20% 1,518 0% 304 0% 1,214 0% 1% 8,158 0% 8,228 0% 8,779 2.8 8,784 2,873 19% 11% 20% 12% 2017E 2018E 2008-2010E CAGR Cyfrowy Polsat 87 88 Source: Company, DM IDMSA estimates Cyfrowy's MVNO users as % of ‘narrow’ target customer group, eop Cyfrowy's MVNO users as % of ‘narrow’ target customer group, period's average Cyfrowy's MVNO users as % of ‘broad’ target customer group, eop Cyfrowy's MVNO users as % of ‘broad’ target customer group, period's average Share of Cyfrowy's MVNO in the MVNO market (measured in terms of the number of users), eop Share of Cyfrowy's MVNO in the new entrants' (MNOs + MVNOs) market (measured in terms of the number of users), eop Share of Cyfrowy's MVNO in the mobile market (measured in terms of the number of users), eop Number of handsets sold (ths.): yoy change Post-paid (ths.): New users (ths.) Replacements for exististing users (ths.) Pre-paid (ths.): New users (ths.) Replacements for exististing users (ths.) Churn: Post-paid Pre-paid Churning MVNO customers (ths.): Post-paid Pre-paid Gross addition (ths): Post-paid (ths.) Pre-paid (ths) Share of post-paid users in Cyfrowy's MVNO gross addition Share of pre-paid users in Cyfrowy's MVNO gross addition ARPU post-paid (PLN/month) yoy change ARPU pre-paid (PLN/month) yoy change Blended MVNO ARPU (PLN/month) yoy change Fig. 81 Cyfrowy Polsat; Sales model (continued) 0.0% 0.0% 0.0% 0.0% n.m. n.m. 0.0% 0 n.m. 0 0 0 0 0 0 n.a. n.a. n.a. 0 0 0 0 0 0 0 0 0 n.m. 0 n.m. 0 n.m. 0.0% 0.0% n.m. n.m. 0.0% 0 n.a. 0 0 0 0 0 0 n.a. n.a. n.a. 0 0 0 0 0 0 0 0 0 n.a. 0 n.a. 0 n.m. 2005 0.0% 0.0% 2004 0 n.m. 0 0 0 0 0 0 n.a. n.a. n.a. 0 0 0 0 0 0 0 0 0 n.m. 0 n.m. 0 n.m. 0.0% n.m. n.m. 0.0% 0.0% 0.0% 0.0% 2006 0 n.m. 0 0 0 0 0 0 n.a. n.a. n.a. 0 0 0 0 0 0 0 0 0 n.m. 0 n.m. 0 n.m. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 7.8% 4.8% 14.1% 13.4% 11.0% 12.3% 9.5% 11.8% 9.0% 12.6% 5.5% 10.9% 13.7% 13.1% 15.4% 14.8% 28 n.m. 20 20 0 8 8 0 8.0% 0.0% 10.0% 2 0 2 102 20 82 20% 80% 65.0 n.m. 13.0 n.m. 23.4 n.m. 0.2% 3.8% 147 421% 100 100 0 47 43 4 8.0% 0.0% 10.0% 28 0 28 528 100 428 19% 81% 65.8 1% 13.2 1% 23.7 1% 1.3% 128 -13% 74 65 9 54 30 24 8.6% 3.0% 10.0% 65 5 60 365 65 300 18% 82% 66.6 1% 13.3 1% 24.0 1% 1.9% 148 16% 92 36 56 56 20 36 8.6% 3.0% 10.0% 84 6 78 234 36 198 15% 85% 67.4 1% 13.5 1% 24.3 1% 2.2% 12.4% 13.3% 12.3% 184 25% 121 37 85 63 21 42 8.6% 3.0% 10.0% 97 7 90 247 37 210 15% 85% 68.2 1% 13.6 1% 24.5 1% 2.5% 11.7% 17.9% 17.3% 17.2% 16.6% 17.3% 17.2% 19.0% 18.9% 18.5% 19.0% 17.3% 17.3% 17.3% 17.3% 2017E 2018E 2008-2010E CAGR 18.7% 18.4% 18.8% 18.6% 192 4% 126 28 99 66 18 48 8.6% 3.0% 10.0% 108 8 100 208 28 181 13% 87% 69.0 1% 13.8 1% 24.8 1% 2.7% 11.6% 212 10% 141 28 113 71 19 52 8.6% 3.0% 10.0% 116 8 108 218 28 190 13% 87% 69.8 1% 14.0 1% 25.1 1% 2.9% 11.4% 228 7% 152 29 122 76 20 56 8.6% 3.0% 10.0% 125 9 116 228 29 199 13% 87% 70.7 1% 14.1 1% 25.4 1% 3.1% 11.3% 215 -5% 142 10 132 73 13 60 8.6% 3.0% 10.0% 130 9 121 137 10 126 8% 92% 71.5 1% 14.3 1% 25.7 1% 3.1% 11.4% 225 5% 152 10 142 73 13 61 8.6% 3.0% 10.0% 130 9 121 137 10 127 8% 92% 72.4 1% 14.5 1% 26.1 1% 3.1% 11.4% 224 -1% 151 9 142 73 12 61 8.6% 3.0% 10.0% 131 9 121 128 9 119 7% 93% 73.2 1% 14.6 1% 26.4 1% 3.1% 11.4% 27.4% 26.6% 26.0% 26.0% 26.0% 26.0% 14.9% 16.0% 14.3% 15.5% 16.7% 16.1% 2011E 2012E 2013E 2014E 2015E 2016E 15.1% 32.9% 32.4% 29.8% 28.2% 1.4% 0.4% 1.6% 0.4% 2007 2008E 2009E 2010E Cyfrowy Polsat ???????????????????????? ???????????????????????? Source: Company, DM IDMSA estimates Handsets (PLN million) Pre-paid (PLN million) Post-paid (PLN million) MVNO (PLN million): DTH - other (PLN million) DTH - STB sales (PLN million) DTH - STB leases (PLN million) DTH - subscription fees (PLN million) DTH (PLN million): MVNO sales structure Post-paid Pre-paid Handsets Total Total consolidated revenues (PLN million): Handsets (PLN million) Pre-paid (PLN million) Post-paid (PLN million) MVNO revenues (PLN million): Fig. 82 Cyfrowy Polsat; Sales model (continued) yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change yoy change n.a. 182.8 n.a. 125.2 n.a. 22.3 n.a. 19.9 n.a. 15.4 n.a. 0.0 n.m. 0.0 n.m. 0.0 n.m. 0.0 n.m. n.a. n.a. n.a. 182.8 0.0 n.m. 0.0 n.m. 0.0 n.m. 0.0 n.m. 2004 54% 281.9 54% 172.8 38% 23.7 6% 68.3 243% 17.1 12% 0.0 n.m. 0.0 n.m. 0.0 n.m. 0.0 n.m. n.a. n.a. n.a. 281.9 0.0 n.m. 0.0 n.m. 0.0 n.m. 0.0 n.m. 2005 75% 493.8 75% 351.1 103% 16.5 -31% 100.6 47% 25.6 49% 0.0 n.m. 0.0 n.m. 0.0 n.m. 0.0 n.m. n.a. n.a. n.a. 493.8 0.0 n.m. 0.0 n.m. 0.0 n.m. 0.0 n.m. 2006 9.2 n.m. 3.9 n.m. 3.1 n.m. 2.1 n.m. 111.4 1116% 55.3 1317% 44.2 1317% 11.9 458% 229.2 106% 119.8 117% 95.9 117% 13.5 13% 297.7 30% 157.6 32% 126.1 32% 13.9 3% 347.1 17% 184.1 17% 147.3 17% 15.7 13% 389.2 12% 207.0 12% 165.6 12% 16.5 5% 425.4 9% 226.5 9% 181.2 9% 17.7 7% 462.8 9% 246.6 9% 197.3 9% 19.0 7% 61% 32% 30% 19% 13% 10% 7% 5% 6% 5% 5% 5% 796.7 1,041.9 1,250.7 1,395.2 1,533.1 1,660.7 1,762.1 1,839.8 1,927.1 2,029.5 2,137.7 2,251.9 61% 31% 20% 12% 10% 8% 6% 4% 5% 5% 5% 5% 662.5 953.1 1,183.1 1,324.7 1,462.4 1,591.4 1,699.8 1,777.5 1,864.8 1,967.2 2,075.3 2,189.5 89% 44% 24% 12% 10% 9% 7% 5% 5% 5% 5% 6% 6.0 3.0 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 -64% -50% -50% 0% 0% 0% 0% 0% 0% 0% 0% 0% 107.2 57.8 38.1 41.1 41.2 39.8 32.8 32.8 32.8 32.9 32.9 32.9 7% -46% -34% 8% 0% -3% -18% 0% 0% 0% 0% 0% 21.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 0% 0% 0% 0% 0% 0% 0% 0% -18% 33% 0% 0% 0.0 9.2 111.4 229.2 297.7 347.1 389.2 425.4 462.8 484.3 492.2 498.4 n.m. n.m. 1116% 106% 30% 17% 12% 9% 9% 5% 2% 1% 0.0 3.9 55.3 119.8 157.6 184.1 207.0 226.5 246.6 259.0 263.3 266.8 n.m. n.m. 1317% 117% 32% 17% 12% 9% 9% 5% 2% 1% 0.0 3.1 44.2 95.9 126.1 147.3 165.6 181.2 197.3 207.2 210.6 213.5 n.m. n.m. 1317% 117% 32% 17% 12% 9% 9% 5% 2% 1% 0.0 2.1 11.9 13.5 13.9 15.7 16.5 17.7 19.0 18.2 18.3 18.1 n.m. n.m. 458% 13% 3% 13% 5% 7% 7% -4% 0% -1% 10% -27% -37% 26% 21% 27% 2017E 2018E 2008-2010E CAGR 484.3 492.2 498.4 5% 2% 1% 259.0 263.3 266.8 5% 2% 1% 207.2 210.6 213.5 5% 2% 1% 18.2 18.3 18.1 -4% 0% -1% 2011E 2012E 2013E 2014E 2015E 2016E n.a. 43% 50% 52% 53% 53% 53% 53% 53% 53% 53% 54% n.a. 34% 40% 42% 42% 42% 43% 43% 43% 43% 43% 43% n.a. 23% 11% 6% 5% 5% 4% 4% 4% 4% 4% 4% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 796.7 1,051.1 1,362.1 1,624.5 1,830.8 2,007.8 2,151.2 2,265.2 2,389.9 2,513.8 2,629.9 2,750.4 0.0 n.m. 0.0 n.m. 0.0 n.m. 0.0 n.m. 2007 2008E 2009E 2010E Cyfrowy Polsat 89 90 Source: Company, DM IDMSA estimates Consolidated sales structure DTH DTH - license fees DTH - STB leases DTH - STB sales DTH - other MVNO Post-paid Pre-paid Handsets Total Fig. 83 Cyfrowy Polsat; Sales model (continued) 100% 68% 12% 11% 8% 0% 0% 0% 0% 100% 2004 100% 61% 8% 24% 6% 0% 0% 0% 0% 100% 2005 100% 71% 3% 20% 5% 0% 0% 0% 0% 100% 2006 100% 83% 1% 13% 3% 0% 0% 0% 0% 100% 99% 91% 0% 6% 3% 1% 0% 0% 0% 100% 92% 87% 0% 3% 2% 8% 4% 3% 1% 100% 86% 82% 0% 3% 2% 14% 7% 6% 1% 100% 2007 2008E 2009E 2010E 84% 80% 0% 2% 2% 16% 9% 7% 1% 100% 83% 79% 0% 2% 1% 17% 9% 7% 1% 100% 82% 79% 0% 2% 1% 18% 10% 8% 1% 100% 81% 78% 0% 1% 1% 19% 10% 8% 1% 100% 81% 78% 0% 1% 1% 19% 10% 8% 1% 100% 81% 78% 0% 1% 1% 19% 10% 8% 1% 100% 2011E 2012E 2013E 2014E 2015E 2016E 81% 79% 0% 1% 1% 19% 10% 8% 1% 100% 82% 80% 0% 1% 1% 18% 10% 8% 1% 100% 2017E 2018E 2008-2010E CAGR Cyfrowy Polsat ???????????????????????? Cyfrowy Polsat Fig. 84 Cyfrowy Polsat; Volumes Fig. 85 Cyfrowy Polsat; Churn Source: Company, DM IDMSA estimates Source: Company, DM IDMSA estimates Fig. 86 Cyfrowy Polsat; Consolidated revenues Source: Company, DM IDMSA estimates 7.2. A number of OPEX categories,... ...differentiation between DTHand MVNO-related components Past few years’ downward trend of D&A charges was driven by a change in the Company’s DTH new adds’ acquisition policy; with the minor value of leased STBs and the launch of MVNO, we forecast its reversal ???????????????????????? Operating costs Analysing and forecasting Cyfrowy Polsat’s OPEX we differentiate – due to their various dynamics and drivers – between an array of operating cost components: (i) D&A, (ii) HR costs, (iii) costs of sold STBs, (iv) costs of sold mobile handsets, (v) television programming content costs, (vi) signal transmission costs, (vii) distribution & marketing costs (inclusive of distribution commissions), (viii) Polish Cinema Institute royalties, (ix) provisions for bad receivables, (x) real estate rental costs, (xi) MVNO systems and infrastructure maintenance costs, (xii) the cost of ‘minutes’ bought from an MNO, and (xiii) miscellaneous operating costs. Additionally, due to the start-up nature of the MVNO project, we try to differentiate between operating costs related to the DTH and MVNO businesses, as such split is - the way we see it - required at the valuation stage, with these two businesses valued separately and combined later via the SOPT approach. Below we discuss each item of the costs, providing a brief overview of its chief drivers and expected future trends, with the detailed OPEX forecasts presented in Figures 87-93. D&A charges (7%/4% of total OPEX in 2006/2010E) constitute a straigtforward consequence of past capex decisions. In the case of Cyfrowy, they have been on steep decline in 2005-2007, due to a slump in STBs’ depreciation charges resulting from the management’s decision do direct the DTH new subscribers’ acquisition strategy away from STB leases (in this case STBs remain in the Company’s balance sheet as a component of its fixed assets, with their value depreciated over the lease agreement life) towards the outright sale of STBs (in this model the STBs are treated as ordinary goods, with their costs charged to COGS at the moment of sale). However, starting from 2008E, we forecast a reversal in this downward trend, for two reasons. Firstly, at the end of 2007 91 Cyfrowy Polsat the leased STBs started to constitute such a minor component of the Company’s DTH-related fixed assets, that further behaviour of their depreciation will not materially affect the overall level of DTH business line’s D&A charges (which, as a matter of fact, had been continuously growing in past few years, after removing the STBs-related component). Secondly, following the MVNO project launch (mid-2008), the fixed assets related to this new project will start to be amortized and depreciated, boosting the Company’s overall D&A charge. Notwithstanding the above, even after the launch of the MVNO business, we would not perceive the business-mix of Cyfrowy Polsat as a capitalintensive one (as opposed to other models of TV programs paid distribution, such as cable or IPTV). 2007 was a year of material increase in Company’s headcount (launch of in-house STB assembly, MVNO project, increase of the call center capacity), from 2008E onwards staff additions will be largely subscriber-number-driven The level of cash HR costs (4%/7% of total OPEX in 2006/2010E) follows directly from the employee headcount and rising payroll. For 2008E and beyond we forecast increases in both these cost drivers, extending the 2007-started tendency; the headcount rose materially last year (and will, probably, continue so in the short-term), due to: (i) launch of an in-house STB assembly, (ii)launch of the MVNO operations, and (iii)material extension of the in-house call center and customer service resources (forced by the rapid growth of subscribers). Per capita payrolls under control In a longer term, we expect possible future increases in Cyfrowy’s headcount to be predominantly driven by further influx of DTH and MVNO users, necessitating hiring more customer service staff. As far as the trend in average remuneration goes, it should be noted that historically the Company has been able to keep it well under control. The Company, however, does not operate in isolation and current wage pressures in the economy cannot remain without impact; consequently, we assume app. >10% yoy increase of per capita HR costs at Cyfrowy this year, followed by a singledigit increases in the coming years. Material non-cash stock option Please note that the management stock option program implemented at the Company may generate material non-cash SOCs under IFRS2 (please, refer to the Risks factors section regarding the details). Please note, however, that neither the final exact value of these non-cash accounting charges nor the timing of their recognition in the Company’s income statement have been determined yet. Hence, our forecasts of Cyfrowy’s profits do not include these non-cash costs (we remind that from the valuation perspective we invariably deem IFRS2 SOC charges irrelevant). cost charges are likely to arise under IFRS2 STBs’ COGS mimicks the Company’s DTH gross addition behavior Cyfrowy deeply subsidizes sales of STBs in order to boost its DTH new addition volumes Launch of in-house assembly of STBs… The Company’s costs of STBs sold (40%/5% of total OPEX in 2006/2010E) are a function of the volumes of sold set-top-boxes, i.e. effectively of Cyfrowy’s DTH service gross additions. The price which the Company pays to STB vendors is higher than the retail price at which these devices are offered to Cyfrowy’s subscribers. The cost of subsidising an STB differs between various STB types. Subsidies are intended to improve price attractiveness, and thus ensure the widest possible availability of the Company’s offering to potential customers of pay digital satellite TV. Despite substantial short-term costs (losses on STB sales; the costs of subsidising an STB are not amortized over time and are charged to profit and loss account at the time when the device is sold), this approach – especially during the seasonal peaks of 4Q – contributes materially to the subscriber base growth (especially given the Company’s target prospects’ group) and – as a result – boosts the revenue (and profit) from subscription fees in the longer term. As our forecasts for the Company assume that the in-house STBs are produced solely for Cyfrowy’s DTH subscribers (i.e. with no STB production placed with third parties), the COGS of STBs in the Company’s profit and loss account mimick the behavior of Cyfrowy’s DTH subscriber gross additions, peaking in 2007 and declining strongly beyond that year. In October 2007, Cyfrowy Polsat (via its 100%-owned subsidiary Cyfrowy Polsat Technology Sp. z o.o.) launched in-house STB production (with the target monthly throughput of 90 ths units). The STB production facility has been equipped with one of the most advanced assembly lines available on the market (produced by Assembleon13) for fully automated large-batch production. Cyfrowy Polsat plans to sell its own STBs and gradually replace a majority of STBs offered with in-house production. The Company’s policy, however, is to implement only fully developed 13 92 Assembleon production lines are used by leading producers of electronic equipment worldwide. ???????????????????????? Cyfrowy Polsat technologies; i.e. Cyfrowy will keep on using external providers – at least at the early stages – if a new type of a STB is developed. Hence, we assume that down the road app. 70% of STBs placed with the Company’s DTH subscribers will come from the in-house assembly, rising steadily to that level over a three-year period (from 0% in 2007 and >30% (<200 ths. in volume terms) in 2008E). ...provides the Company with flexibility regarding its STB pricing strategies (decreased subsidy to boost profitability versus reduction of the selling price (i.e. subsidy maintenance) to attract more low-end volumes) Post-paid mobile handsets deeply subsidized, pre-paid ones sold at cost TV programming content costs → one of the main OPEX components for DTHs A variable cost, dependant upon the subscribership levels Cyfrowy’s TV programming costs are bound to soar, mainly on the back of forecast further growth of its DTH volumes Putting aside the effect related to the changes in the number of leased transponders, satellite transponder costs are fixed in Euro terms ???????????????????????? Thanks to the launch of its in-house STB assembly, the Company may be able to bring down the cost of STBs sold (which would be reflected in improved profitability, assuming that the retail STB prices are not slashed; we expect the in-house production of STBs to reduce the STB costs (per unit) by app. 25-30%) or – alternatively – lower the selling price of receiver sets (i.e. with unaltered size of the subsidy per STB sold to its DTH subscribers), which should further sharpen Cyfrowy’s competitive edge leading to incremental subscribership from the lower-end of the market. The Company’s choice among these two options will depend upon the situation on the market and may vary in time. As far as our forecasts for the Company are concerned, given robust gross adds enjoyed by Cyfrowy in the absence of STB slashed prices (apart from the 4Q seasonal promotion periods), we assume that the in-house-produced STB will be priced with only moderate discount in relation to the third-party STBs, resulting in material decline of an average subsidy per sold STB (assuming that in the mid-term app. 70% of Cyfrowy’s DTH customers will be provided with inhouse-assembled set-top-boxes). Following launch of the MVNO operations, the Company will start to incur costs of mobile handsets (0%/3% of total OPEX in 2006/2010E) sold to its clients. In line with the prevailing market practices, we assume Cyfrowy Polsat to deeply subsidize the handsets sold to its post-paid users (with average post-paid handset subsidy around EUR 75) and to sell pre-paid handsets at cost (with neither markup nor subsidy). Hence, the value of the total handset subsidy constitutes a function of the Company’s post-paid subscribers (for details see Revenues section). TV programming content costs (15%/36% of total OPEX in 2006/2010E) constitute one of main variable operating cost components for TV programs distributors (DTHs inclusive). TV programming content costs incurred by Cyfrowy Polsat arise from payments due to TV content providers under license agreements, which are routinely concluded for three to five years (to lower these costs Cyfrowy Polsat tries to negotiate attractive fee rates and incentive periods). As a digital satellite TV platform operator eager to enrich its programming mix, Cyfrowy Polsat strives to continually expand its range of channels (maximising its take-up potential and revenue per subscriber, while keeping down the churn rate), which is connected with incurrence of additional licensing costs. Payments under the license agreements between the Company and TV channel providers are in most cases settled on a per subscriber basis (usually in US$ and EUR) or, rarely, on a flat fee basis. In the case of agreements providing for per-subscriber fees, licensing fees are calculated by multiplying a fixed per-subscriber rate by the total number of subscribers who purchased a channel package featuring the channel of a given broadcaster. It should be mentioned that license agreements frequently provide that if the number of subscribers exceeds a certain threshold, the per-subscriber fees are automatically lowered, though, on the other hand, the increases of the per subscriber fees paid to TV content providers also occur, especially in cases of strong increases in the viewership of a given channel (e.g. as was the case in 2006 and 2007, when TVN drastically increased its per-socket fee rates charged to CATVs and DTHs for TVN24, TVN Turbo and TNV Style, on the back of robust viewerships of these three thematic channels). With such hindsight regarding the drivers of the TV programming costs, we forecast their material growth in 2008 and beyond, mainly on the back of growing DTH volumes at Cyfrowy, and – though to a much smaller extent – due to gradual incorporation of further channels into the Company’s programming offering as well as forecast increasing number of upsold users of the Familijny package. The costs of signal broadcasting and transmission (8%/6% of total OPEX in 2006/ 2010E) incurred by Cyfrowy Polsat are the sum of: (i) costs of transponder lease, (ii)fees for the conditional access system from Nagravision (calculated as the product of a monthly unit rate and the number of active smart cards), and (iii)other costs of signal broadcasting and transmission. 93 Cyfrowy Polsat Lease of the third transponder drives them up in 2007-2008E Conditional access costs are fixed per DTH subscriber (linearly related to the subscribership levels) Distribution & marketing costs: commissions to distributors + advertising + mailing + call center Under IFRS distribution commissions are capitalized and amortized over the period of the duration of the subscription agreements;... ...they depend on two variables (i) DTH & MVNO gross additions and (ii) per user (cash) SACs DTH (MVNO) gross add peaked in 2007 (remaining high in 2008-2010E) Cyfrowy’s per user cash SAC to: (i) trend upwards in DTH, (ii) be in line with market’s in pre-paid mobile voice, and (iii) below the market’s in post-paid mobile voice We forecast Cyfrowy’s accrual distribution commission cost to extend its last year’s hike into 2008-2009 and then to decline 94 An increase in this cost item in 2006 can be traced to the implementation of a new conditional access system (Nagravision) at the end of 2005, which has effectively minimized unauthorized access to Cyfrowy’s program offering. In the coming years, we forecast increases in this cost category, for two reasons. Firstly, starting from September 2007 Cyfrowy Polsat started to lease (for the HDTV purposes) the third transponder (at an annual cost of EUR 3.2 million), which drives up the Company’s transponder lease costs for 2007 and 2008E (putting aside the effects connected with the change in the leased transponders number, these costs are practically fixed in Euro terms, with their 2005-2006 decline attributable to the weakness of the Euro against the Polish zloty). Secondly, while the Euro-denominated Nagravision conditional access (CA) costs are fixed on a persubscriber basis (flat rates for at least 10-year period), their growth in absolute terms will be linearly related to the DTH subscribership levels, which in case of Cyfrowy are forecast to grow in 2008 and next few years. Distribution & marketing costs (14%/18% of total OPEX in 2006/2010E) incurred by Cyfrowy Polsat are the sum of: (i) commissions to distributors, (ii)advertising, (iii)mailing, and (iv)the call center costs. Commissions to distributors (9%/7% of the Company’s total OPEX in 2006/2010E) are payments to distributors or – through their agency – to authorized partnership points of sales as remuneration for gaining new agreements on provision of pay digital satellite TV and mobile voice (since the turn of 2Q08 and 3Q08). The costs of commissions for gaining new subscription agreements are amortized over time over the initial basic agreement period (i.e. 24 months for the DTH Mini package and for the DTH Familijny package (though until recently the latter stood at 17 months); for the MVNO business we assume 24-month basic subscription agreement duration for the post-paid clients (over which the postpaid distribution commissions will be amortized) and an immediate expensing of the pre-paid users’ distribution commissions), whereas additional costs of commissions to distributors connected with meeting sales volume targets are fully charged to profit and loss account as incurred. Such an accounting policy (required under IFRS) with respect to the distribution commissions (i) understates, ceteris paribus, the actual cash cost incurred during periods of hiking new additions (e.g. 4Q) and – which follows – overstates the cash profits for such periods, and (ii) overstates the cash costs (and understates profits) during the following quarters. This cost category constitutes a function of two factors: (i) DTH and MVNO gross additions (with some embedded fade mechanism, due to aforementioned IFRS accounting treatment), and (ii)per user (cash) SACs (subscriber acquisition cost). As far as the new volumes (gross additions) go, our assumptions have been explained in detail in the Revenues section; to avoid undue repetition let us only mention that we expect them to have peaked in the DTH business last year (and to subdue from 2008E onwards), and to remain at a high level in MVNO in next three years. As far as the per user (cash) SACs are concerned, we assume that: (i) following strong, almost 40% yoy, increase in 2007 in DTH (due to introduced in November seasonal extra bonus payments to distributors (a move matching the competitor’s action, unlikely – in our view – to recur in the coming years)), followed by app. 15% yoy decline in 2008E (consequence of the non-recurring nature of the aforementioned competitor-induced 4Q07 extra bonus payments to distributors) and c. 3-5% yoy increases thereafter, (ii) c. PLN 12 in the pre-paid mobile voice (level in line with current pre-paid SAC levels of local MNOs), and (iii) c. PLN 250 in the post-paid mobile voice (c. 50% discount to the current post-paid SAC levels of local MVNOs; we believe that due to the service bundling effect and a material overlap between the DTH and MVNO distribution networks, an attainment of below-market post-paid SAC rates should prove feasible). The above assumptions regarding per user cash SAC levels and our forecasts of the Company’s DTH and MVNO gross additions imply extension of last year’s growth of the distribution commission costs into 2008-2009, followed by decline in 2010E (yoy increase at MVNO more than offset by significant declines at DTH). ???????????????????????? Cyfrowy Polsat Fig. 87 Cyfrowy Polsat; DTH’s OPEX PLN m 2004 2005 2006 2007 2008E 2009E D&A: -61.1 -50.1 -32.8 -20.8 -25.9 -29.6 STBs -55.9 -43.9 -23.2 -8.0 -0.5 -0.4 Non-STBs -5.2 -6.2 -9.6 -12.7 -25.4 -29.2 Marketing & distribution costs: -9.7 -28.6 -65.5 -121.7 -155.2 -154.7 DTH distributors' commission -3.0 -16.6 -42.9 -76.9 -98.7 -89.4 Mailing -2.1 -5.4 -5.5 -9.9 -14.6 -17.6 Call center -1.8 -2.3 -7.4 -12.8 -16.3 -18.4 Marketing and advertising -2.8 -4.3 -9.7 -22.2 -25.5 -29.3 STBs, of which: -21.2 -97.3 -179.7 -209.0 -86.6 -55.0 Subsidy -1.2 -29.0 -79.0 -101.8 -28.7 -16.9 TV programming content -22.7 -28.6 -68.4 -152.0 -224.2 -305.2 Satellite signal transmission: -33.8 -30.9 -36.1 -48.4 -60.1 -63.5 Transponder capacity lease -30.8 -27.1 -23.9 -27.0 -32.2 -31.5 Conditional access system -0.8 -1.6 -9.7 -18.6 -23.8 -26.9 Other -2.2 -2.2 -2.4 -2.9 -4.1 -5.1 Polish Cinema Institute royalties 0.0 0.0 -5.3 -9.0 -14.3 -17.7 HR: -12.6 -16.6 -19.9 -40.3 -41.5 -52.4 IFRS2 0.0 0.0 0.0 -10.2 0.0 0.0 Normal -12.6 -16.6 -19.9 -30.2 -41.5 -52.4 Miscellaneous: -30.3 -33.5 -44.4 -47.2 -62.5 -74.5 Bad receivables -6.0 -15.2 -13.2 -16.5 -23.7 -29.5 Office space rentals -2.1 -1.7 -1.8 -1.2 -1.1 -1.1 Electric equipment COGS -0.9 -3.7 -9.2 0.0 0.0 0.0 Other DTH-related -21.4 -13.0 -20.2 -29.6 -37.6 -43.9 Total OPEX of DTH -191.5 -285.6 -452.1 -648.5 -670.3 -752.8 Estimated DTH Cash SAC 39 111 105 143 116 122 (PLN/gross add) yoy change n.a. 186% -5% 36% -19% 5% Estimated STB subsidy (PLN; excess 14 90 120 116 50 44 of STBs' COGS over STBs' sales revenues divided by the DTH gross add) yoy change n.a. 566% 33% -3% -57% -12% Estimated TV content programming -18 -18 -27 -39 -50 -61 cost per subscriber (US$, per Familijny package average number of subs. (Mini's subs get only FTAs)) yoy change n.a. 5% 47% 43% 30% 20% 2010E -31.2 -0.4 -30.8 -124.5 -51.1 -19.6 -20.1 -33.7 -55.7 -14.6 -384.4 -65.2 -31.1 -28.4 -5.7 -19.9 -59.9 0.0 -59.9 -81.7 -33.0 -1.1 0.0 -47.6 -822.5 128 2011E -30.6 -0.4 -30.1 -116.4 -38.1 -21.3 -21.7 -35.4 -55.8 -14.6 -447.1 -66.9 -30.8 -29.7 -6.3 -21.9 -65.4 0.0 -65.4 -89.8 -36.4 -1.1 0.0 -52.3 -894.0 135 2012E -30.3 -0.4 -29.9 -130.8 -48.0 -22.7 -22.9 -37.2 -54.0 -14.2 -514.1 -68.5 -30.8 -30.8 -6.9 -23.9 -70.1 0.0 -70.1 -97.4 -39.6 -1.1 0.0 -56.7 -989.1 141 2013E -22.3 -0.4 -21.9 -140.3 -53.9 -23.8 -23.6 -39.0 -44.4 -11.6 -580.2 -69.5 -30.8 -31.3 -7.3 -25.5 -76.6 0.0 -76.6 -103.6 -42.3 -1.1 0.0 -60.1 -1,062.4 148 2014E -25.2 -0.4 -24.8 -140.7 -50.9 -24.5 -24.3 -41.0 -44.5 -11.7 -639.9 -69.8 -30.8 -31.3 -7.7 -26.7 -81.3 0.0 -81.3 -108.2 -44.3 -1.2 0.0 -62.8 -1,136.3 156 2015E -27.1 -0.4 -26.7 -140.2 -47.6 -25.3 -25.1 -42.2 -44.5 -11.7 -708.6 -70.2 -30.8 -31.4 -8.0 -28.0 -86.2 0.0 -86.2 -113.4 -46.4 -1.2 0.0 -65.8 -1,218.2 164 2016E -27.1 -0.4 -26.7 -145.4 -50.0 -26.0 -25.9 -43.5 -44.6 -11.7 -782.5 -73.9 -30.8 -34.5 -8.5 -29.5 -90.6 0.0 -90.6 -119.5 -49.0 -1.2 0.0 -69.3 -1,313.0 172 2017E -28.7 -0.4 -28.3 -152.7 -54.4 -26.9 -26.7 -44.8 -44.6 -11.7 -864.0 -74.4 -30.8 -34.6 -8.9 -31.1 -95.2 0.0 -95.2 -125.9 -51.7 -1.2 0.0 -73.0 -1,416.5 180 2018E -30.7 -0.4 -30.3 -159.0 -57.7 -27.7 -27.5 -46.1 -44.6 -11.7 -953.8 -74.9 -30.8 -34.6 -9.4 -32.8 -100.0 0.0 -100.0 -132.6 -54.5 -1.3 0.0 -76.9 -1,528.5 189 5% 37 5% 37 5% 37 5% 37 5% 37 5% 37 5% 37 5% 37 5% 37 -15% -67 0% -74 0% -81 0% -89 0% -98 0% -108 0% -118 0% -129 0% -140 11% 10% 10% 10% 10% 10% 9% 9% 9% Note: The size and timing of the IFRS2 non-cash SOC remain undetermined as of now; hence, the paper stock option costs are not included in the forecasts Source: Company, DM IDMSA estimates Advertising expenses seem bound to rise, due to inflation of the GRP prices and launch of the MVNO business ???????????????????????? Advertising costs (2%/6% of total OPEX in 2006/2010E) comprise outlays on TV, radio, press and Internet advertising, costs of marketing activities and marketing materials, as well as other expenses incurred to enhance sales and brand recognition. Their level is not directly linked to the number of subscribers. Historically, the Company has been keeping its marketing outlays low; even last year, following c. 150% yoy hike the Company’s advertising budget (PLN 22 million) represented only c. 4% of the FY DTH subscription revenues. Going forward, however, we expect the Company’s advertising expenses to exhibit a clear upward trend, even despite the assumed maintenance of the Company’s prudence in spending money. The reasons for this are twofold. First, even though in the foreseeable future Cyfrowy intends to keep its DTH advertising expenses flat in the GRP (gross rating points) terms, given persistingly very high levels of advertising time limits capacity utilizations at national commercial TV broadcasters (and CPT rates still below other advertising medias other than the Internet), the inflation of GRP prices is likely to persist in next few years (with feeble outlook for volume-driven growth, TV broadcasters will resort to the price-driven one, especially as further price increases are still unlikely to deprive television of its ‘second-cheapest-interms-of-cost-of-reach’ advertising medium status in the short-to-mid-term). Second, while given strong brand name of Cyfrowy Polsat and ample DTH clients data base (constituting the target customer group for the Company’s MVNO service), the Company is unlikely to engage in a massive 95 Cyfrowy Polsat mass-media advertising campaign related to its mobile voice services (as on the back of the DTHmobile voice bundling potential the cost-efficient direct advertising opportunity clearly exists here), some advertising campaign aimed (initially) at building and (then) at the maintenance of the service awareness among the broader group of prospects will be inescapable; with such premise, we assume that initially the MVNO-related advertising spending by Cyfrowy Polsat will lag its DTHrelated advertising budget, and then will gradually catch up in time. Mailing costs are linearly related to user volumes (in DTH and post-paid mobile voice), hence their strong growth should be expected this year and beyond Call center costs are also user-number-dependent Polish Cinema Institute royalties: flat function of DTH subscription revenues MVNO systems’ maintenance: function of MVNO cumulative capex MNO’s radio network usage costs: a variable component moving along with user numbers and their activity Bad receivables: a function of subscription revenues and client default rates Office space rental costs depend on the rented area and per square meter rates 96 Mailing costs (1%/2% of total OPEX in 2006/2010E) comprise outlays on mailings sent to subscribers containing subscription payment forms (and post-paid mobile voice invoices, once the MVNO service becomes operational), as well as information on changes in the program offering, pricing and rules applicable to subscribers. Such mailings have so far been sent to all subscribers of Cyfrowy Polsat (DTH service) at least twice a year, usually in spring and autumn. In addition, the Company regularly posts smaller mailings to a limited group of subscribers (e.g. a welcome information pack sent to all new subscribers, intended primarily to encourage them to purchase a wider selection of channels). The launch of the MVNO service will contribute (apart from growing DTH volumes of Cyfrowy) to further increases of the mailing costs, as even in the case of overlapping DTH and post-paid mobile customers, the invoices for the mobile service will need probably to be mailed on a more frequent (monthly) basis than subscription payment forms for DTH services (semi-annually), though some bundling-related cost saving potential clearly exists here. Finally, the call center costs (2%/2% of total OPEX in 2006/2010E) comprise payments to third parties which provide Cyfrowy with on-going telephone-based customer service and sale of pay digital satellite TV and mobile voice service. Similar to the mailing costs, the call center costs are also related to the number of the Company’s DTH and MVNO users; with forecast growing customer volumes they should be expected to trend upwards. Pursuant to the Cinematography Act, starting from 2006 the Company has to pay (along with other DTH operators, CATVs and TV broadcasters) a quarterly royalty fee to the Polish Cinema Institute equal to 1.5% of its DTH subscription sales. The Polish Cinema Institute royalties (1%/2% of total OPEX in 2006/2010E) constitute hence a perfectly variable component of Company’s OPEX, linked in an unvarying manner to the most important category of Cyfrowy Polsat’s revenues. On the back of launching the MVNO service the Company starts to incur the costs related to the maintenance of the MVNO systems and network (0%/2% of total OPEX in 2006/2010E); these costs will constitute a function of the Company’s cumulative MVNO capital expenditures. The way we see it, Cyfrowy Polsat in its agreement with PTC managed to negotiate favourable for the Company calculation method for the MNO’s network utilization. According to our understanding, the Company will pay only for the wholesale purchase of minutes, data and SMSs, without the need to pay any additional fixed access fee for the PTC’s network usage. We perceive such terms favourable for Cyfrowy Polsat, as all the costs related to the wireless network usage will be variable and will be flexibly adjusted to the current number of users of Cyfrowy’s MVNO. Bad receivables provisions (3%/3% of Cyfrowy’s total OPEX in 2006/2010E) arise from customers’ defaults on their subscription payments. We assume them to come out in a fixed (2.5%) proportion to the Company’s DTH and post-paid mobile voice subscription revenues. With the former forecast to experience strong growth in the mid-term and the launch of the latter still ahead of us, it follows automatically, that we forecast the bad receivable costs to trend upwards in the coming years. Office space rental costs (0.4%/0.4% of Company’s total OPEX in 2006/2010E) constitute the function of space rented and rental rates per square meter. As far as the former goes, the launch of the MVNO project necessitated increasing the office space rented by Cyfrowy Polsat (from parties out of its capital group) by c. 1.8 ths square meters, a cost incurred from mid-2007, which boosts the yoy increases of this OPEX category in 2008E. As far as the rental rates per square meter go, we assume them rise on average by 2% (in Euro terms) in the forecast horizon. ???????????????????????? Cyfrowy Polsat Fig. 88 Cyfrowy Polsat; MVNO’s OPEX PLN m D&A Marketing & distribution costs: MVNO distributors' commissions Mailing Call center Marketing & advertising Handsets, of which: Subsidy HR: IFRS2 Normal Miscellaneous: Bad receivables Office space rentals Infrastructure maintenance Other (lease of MNO's network, ‘minutes’ bought from MNO, etc.) Total OPEX of MVNO Cash MVNO post-paid SAC (PLN/gross post-paid add) Cash MVNO pre-paid SAC (PLN/gross pre-paid add) Cash MVNO blended SAC (PLN/ gross add) Handset subsidy: post-paid (EUR) 2004 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2005 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2006 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 0.0 -2.9 -9.1 -16.1 -21.5 -23.2 -23.6 -24.9 -25.0 -23.2 -21.1 -19.6 0.0 -18.3 -43.1 -64.3 -77.5 -75.4 -68.6 -68.7 -75.1 -79.7 -78.7 -76.4 0.0 -2.2 -13.2 -19.0 -27.4 -20.9 -10.0 -5.9 -8.7 -10.8 -7.6 -3.2 0.0 -0.2 -2.4 -5.3 -7.1 -8.4 -9.7 -10.8 -11.9 -12.7 -13.2 -13.6 0.0 -0.6 -4.1 -6.3 -7.6 -8.9 -10.0 -11.1 -12.2 -12.7 -13.1 -13.5 0.0 -15.3 -23.5 -33.7 -35.4 -37.2 -39.0 -41.0 -42.2 -43.5 -44.8 -46.1 0.0 -7.3 -37.2 -31.9 -36.7 -45.6 -47.6 -52.6 -56.3 -53.3 -55.8 -55.4 0.0 -5.2 -25.2 -18.4 -22.8 -29.9 -31.2 -34.9 -37.4 -35.1 -37.5 -37.2 -1.4 -5.8 -11.1 -16.5 -21.6 -27.0 -29.6 -31.4 -33.3 -34.9 -36.7 -38.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -1.4 -5.8 -11.1 -16.5 -21.6 -27.0 -29.6 -31.4 -33.3 -34.9 -36.7 -38.6 -1.6 -10.8 -62.9 -124.8 -162.2 -186.2 -207.0 -224.8 -243.1 -254.6 -258.9 -262.6 0.0 -0.1 -1.4 -3.0 -3.9 -4.6 -5.2 -5.6 -6.1 -6.4 -6.6 -6.6 0.0 -1.9 -1.9 -1.9 -1.9 -2.0 -2.0 -2.1 -2.1 -2.1 -2.2 -2.2 -1.6 -5.5 -12.0 -16.4 -20.2 -20.6 -21.0 -21.4 -21.8 -22.3 -22.7 -23.2 0.0 -3.4 -47.7 -103.5 -136.2 -159.0 -178.9 -195.7 -213.0 -223.8 -227.5 -230.5 0.0 0.0 0.0 0.0 0.0 0.0 -3.0 -45.1 -163.5 -253.6 -319.4 -357.5 -376.5 -402.3 -432.8 -445.7 -451.1 -452.5 0.0 250.0 257.5 265.2 273.2 281.4 289.8 298.5 307.5 316.7 326.2 336.0 0.0 0.0 0.0 0.0 12.0 12.4 12.7 13.1 13.5 13.9 14.3 14.8 15.2 15.7 16.1 0.0 0.0 0.0 0.0 58.7 58.8 57.4 53.0 53.4 50.5 51.4 52.4 38.3 39.3 37.6 0.0 0.0 0.0 0.0 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 2014E -50.1 -209.4 -56.8 -35.2 -35.4 -82.0 -44.5 -11.7 -52.6 -34.9 -639.9 -69.8 -30.8 -31.3 -7.7 -26.7 -112.6 0.0 2015E -52.0 -215.2 -56.3 -37.2 -37.3 -84.4 -44.5 -11.7 -56.3 -37.4 -708.6 -70.2 -30.8 -31.4 -8.0 -28.0 -119.5 0.0 2016E -50.3 -225.1 -60.8 -38.8 -38.5 -87.0 -44.6 -11.7 -53.3 -35.1 -782.5 -73.9 -30.8 -34.5 -8.5 -29.5 -125.5 0.0 2017E -49.8 -231.3 -61.9 -40.0 -39.8 -89.6 -44.6 -11.7 -55.8 -37.5 -864.0 -74.4 -30.8 -34.6 -8.9 -31.1 -131.9 0.0 2018E -50.3 -235.4 -60.9 -41.3 -41.0 -92.3 -44.6 -11.7 -55.4 -37.2 -953.8 -74.9 -30.8 -34.6 -9.4 -32.8 -138.6 0.0 -12.6 -16.6 -19.9 -31.5 -47.3 -63.5 -76.4 -87.1 -97.2 -106.2 -112.6 -30.3 -33.5 -44.4 -48.9 -73.3 -137.4 -206.5 -252.1 -283.6 -310.6 -333.0 -6.0 -15.2 -13.2 -16.5 -23.8 -30.8 -36.0 -40.3 -44.2 -47.5 -49.9 -2.1 -1.7 -1.8 -1.2 -2.9 -2.9 -3.0 -3.0 -3.1 -3.2 -3.2 -0.9 -3.7 -9.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -1.6 -5.5 -12.0 -16.4 -20.2 -20.6 -21.0 -21.4 -21.4 -13.0 -20.2 -29.6 -41.0 -91.7 -151.2 -188.5 -215.7 -239.0 -258.5 -191.5 -285.6 -452.1 -651.5 -715.5 -916.2 -1,076.1 -1,213.5 -1,346.5 -1,438.8 -1,538.6 -119.5 -356.5 -52.6 -3.3 0.0 -21.8 -278.8 -1,651.0 -125.5 -374.1 -55.4 -3.3 0.0 -22.3 -293.0 -1,758.7 -131.9 -384.8 -58.2 -3.4 0.0 -22.7 -300.4 -1,867.7 -138.6 -395.2 -61.2 -3.5 0.0 -23.2 -307.4 -1,981.0 Note: The size and timing of the IFRS2 non-cash SOC remain undetermined as of now; hence, the paper stock option costs are not included in the forecasts Source: Company, DM IDMSA estimates Fig. 89 Cyfrowy Polsat; Total OPEX (DTH + MVNO) PLN m D&A Marketing & distribution: Distributors' commissions Mailing Call center Marketing & advertising STBs, of which: Subsidy Handsets, of which: Subsidy TV programming content Satellite signal transmission: Transponder capacity lease Conditional access system Other Polish Cinema Institute royalties HR: IFRS2 Normal Miscellaneous: Bad receivables Office space rentals Electric equipment COGS Infrastructure maintence Other Total OPEX of Cyfrowy Polsat 2004 -61.1 -9.7 -3.0 -2.1 -1.8 -2.8 -21.2 -1.2 0.0 0.0 -22.7 -33.8 -30.8 -0.8 -2.2 0.0 -12.6 0.0 2005 2006 2007 2008E -50.1 -32.8 -20.8 -28.8 -28.6 -65.5 -121.7 -173.5 -16.6 -42.9 -76.9 -101.0 -5.4 -5.5 -9.9 -14.8 -2.3 -7.4 -12.8 -17.0 -4.3 -9.7 -22.2 -40.8 -97.3 -179.7 -209.0 -86.6 -29.0 -79.0 -101.8 -28.7 0.0 0.0 0.0 -7.3 0.0 0.0 0.0 -5.2 -28.6 -68.4 -152.0 -224.2 -30.9 -36.1 -48.4 -60.1 -27.1 -23.9 -27.0 -32.2 -1.6 -9.7 -18.6 -23.8 -2.2 -2.4 -2.9 -4.1 0.0 -5.3 -9.0 -14.3 -16.6 -19.9 -41.7 -47.3 0.0 0.0 -10.2 0.0 2009E 2010E 2011E 2012E 2013E -38.7 -47.3 -52.0 -53.5 -45.9 -197.9 -188.8 -193.9 -206.2 -208.9 -102.6 -70.1 -65.5 -68.9 -63.9 -20.0 -24.8 -28.4 -31.1 -33.4 -22.4 -26.4 -29.2 -31.8 -33.6 -52.8 -67.5 -70.8 -74.4 -78.1 -55.0 -55.7 -55.8 -54.0 -44.4 -16.9 -14.6 -14.6 -14.2 -11.6 -37.2 -31.9 -36.7 -45.6 -47.6 -25.2 -18.4 -22.8 -29.9 -31.2 -305.2 -384.4 -447.1 -514.1 -580.2 -63.5 -65.2 -66.9 -68.5 -69.5 -31.5 -31.1 -30.8 -30.8 -30.8 -26.9 -28.4 -29.7 -30.8 -31.3 -5.1 -5.7 -6.3 -6.9 -7.3 -17.7 -19.9 -21.9 -23.9 -25.5 -63.5 -76.4 -87.1 -97.2 -106.2 0.0 0.0 0.0 0.0 0.0 Note: The size and timing of the IFRS2 non-cash SOC remain undetermined as of now; hence, the paper stock option costs are not included in the forecasts Source: Company, DM IDMSA estimates ???????????????????????? 97 Cyfrowy Polsat Fig. 90 Cyfrowy Polsat; OPEX’s structure DTH D&A: STBs Non-STBs Marketing & distribution costs: DTH distributors' commission Mailing Call center Marketing and advertising STBs, of which: Subsidy TV programming content Satellite signal transmission: Transponder capacity lease Conditional access system Other Polish Cinema Institute royalties HR: IFRS2 Normal Miscellaneous: Bad receivables Office space rentals Electric equipment COGS Other DTH-related Total OPEX of DTH MVNO D&A Marketing & distribution costs: MVNO distributors' commissions Mailing Call center Marketing & advertising Handsets, of which: Subsidy HR: IFRS2 normal Miscellaneous: Bad receivables Office space rentals MVNO infrastructure maintenance Other MVNO-related (lease of MNO's network, ‘minutes’ bought from MNO, etc.) Total OPEX of MVNO 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 32% 29% 3% 5% 2% 1% 1% 1% 11% 1% 12% 18% 16% 0% 1% 0% 7% 18% 15% 2% 10% 6% 2% 1% 1% 34% 10% 10% 11% 9% 1% 1% 0% 6% 7% 5% 2% 14% 9% 1% 2% 2% 40% 17% 15% 8% 5% 2% 1% 1% 4% 3% 1% 2% 19% 12% 2% 2% 3% 32% 16% 23% 7% 4% 3% 0% 1% 6% 4% 0% 4% 23% 15% 2% 2% 4% 13% 4% 33% 9% 5% 4% 1% 2% 6% 4% 0% 4% 21% 12% 2% 2% 4% 7% 2% 41% 8% 4% 4% 1% 2% 7% 4% 0% 4% 15% 6% 2% 2% 4% 7% 2% 47% 8% 4% 3% 1% 2% 7% 3% 0% 3% 13% 4% 2% 2% 4% 6% 2% 50% 7% 3% 3% 1% 2% 7% 3% 0% 3% 13% 5% 2% 2% 4% 5% 1% 52% 7% 3% 3% 1% 2% 7% 2% 0% 2% 13% 5% 2% 2% 4% 4% 1% 55% 7% 3% 3% 1% 2% 7% 2% 0% 2% 12% 4% 2% 2% 4% 4% 1% 56% 6% 3% 3% 1% 2% 7% 2% 0% 2% 12% 4% 2% 2% 3% 4% 1% 58% 6% 3% 3% 1% 2% 7% 2% 0% 2% 11% 4% 2% 2% 3% 3% 1% 60% 6% 2% 3% 1% 2% 7% 2% 0% 2% 11% 4% 2% 2% 3% 3% 1% 61% 5% 2% 2% 1% 2% 7% 2% 0% 2% 10% 4% 2% 2% 3% 3% 1% 62% 5% 2% 2% 1% 2% 7% 0% 0% 0% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 7% 6% 4% 5% 6% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 16% 12% 10% 7% 9% 10% 10% 10% 10% 10% 10% 9% 9% 9% 9% 3% 5% 3% 3% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 11% 5% 4% 5% 6% 6% 6% 6% 6% 6% 6% 5% 5% 5% 5% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - 0% 0% 0% 0% 0% 0% 0% 0% 46% 0% 46% 54% 0% 0% 54% 0% 6% 41% 5% 0% 1% 34% 16% 11% 13% 0% 13% 24% 0% 4% 12% 7% 6% 26% 8% 1% 2% 14% 23% 15% 7% 0% 7% 39% 1% 1% 7% 29% 6% 25% 7% 2% 2% 13% 13% 7% 7% 0% 7% 49% 1% 1% 6% 41% 7% 24% 9% 2% 2% 11% 11% 7% 7% 0% 7% 51% 1% 1% 6% 43% 6% 21% 6% 2% 2% 10% 13% 8% 8% 0% 8% 52% 1% 1% 6% 44% 6% 18% 3% 3% 3% 10% 13% 8% 8% 0% 8% 55% 1% 1% 6% 48% 6% 17% 1% 3% 3% 10% 13% 9% 8% 0% 8% 56% 1% 1% 5% 49% 6% 17% 2% 3% 3% 10% 13% 9% 8% 0% 8% 56% 1% 0% 5% 49% 5% 18% 2% 3% 3% 10% 12% 8% 8% 0% 8% 57% 1% 0% 5% 50% 5% 17% 2% 3% 3% 10% 12% 8% 8% 0% 8% 57% 1% 0% 5% 50% 4% 17% 1% 3% 3% 10% 12% 8% 9% 0% 9% 58% 1% 0% 5% 51% - - - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Note: The size and timing of the IFRS2 non-cash SOC remain undetermined as of now; hence, the paper stock option costs are not included in the forecasts Source: Company, DM IDMSA estimates 98 ???????????????????????? Cyfrowy Polsat Fig. 91 Cyfrowy Polsat; OPEX’s structure Joint (DTH + MVNO) D&A Marketing & distribution: Distributors' commissions Mailing Call center Marketing & advertising STBs, of which: Subsidy Handsets , of which: Subsidy TV programming content Satellite signal transmission: Transponder capacity lease Conditional access system Other Polish Cinema Institute royalties HR: IFRS2 Normal Miscellaneous: Bad receivables Office space rentals Electric equipment COGS MVNO infrastructure maintenance Other (lease of MNO's network, ‘minutes’ acquired from MNO, etc.) Total OPEX of Cyfrowy Polsat, of which: DTH MVNO 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 32% 5% 2% 1% 1% 1% 11% 1% 0% 0% 12% 18% 16% 0% 1% 0% 7% 0% 7% 16% 3% 1% 0% 0% 11% 18% 10% 6% 2% 1% 1% 34% 10% 0% 0% 10% 11% 9% 1% 1% 0% 6% 0% 6% 12% 5% 1% 1% 0% 5% 7% 14% 9% 1% 2% 2% 40% 17% 0% 0% 15% 8% 5% 2% 1% 1% 4% 0% 4% 10% 3% 0% 2% 0% 4% 3% 19% 12% 2% 2% 3% 32% 16% 0% 0% 23% 7% 4% 3% 0% 1% 6% 2% 5% 8% 3% 0% 0% 0% 5% 4% 24% 14% 2% 2% 6% 12% 4% 1% 1% 31% 8% 5% 3% 1% 2% 7% 0% 7% 10% 3% 0% 0% 1% 6% 4% 22% 11% 2% 2% 6% 6% 2% 4% 3% 33% 7% 3% 3% 1% 2% 7% 0% 7% 15% 3% 0% 0% 1% 10% 4% 18% 7% 2% 2% 6% 5% 1% 3% 2% 36% 6% 3% 3% 1% 2% 7% 0% 7% 19% 3% 0% 0% 2% 14% 4% 16% 5% 2% 2% 6% 5% 1% 3% 2% 37% 6% 3% 2% 1% 2% 7% 0% 7% 21% 3% 0% 0% 2% 16% 4% 15% 5% 2% 2% 6% 4% 1% 3% 2% 38% 5% 2% 2% 1% 2% 7% 0% 7% 21% 3% 0% 0% 2% 16% 3% 15% 4% 2% 2% 5% 3% 1% 3% 2% 40% 5% 2% 2% 1% 2% 7% 0% 7% 22% 3% 0% 0% 1% 17% 3% 14% 4% 2% 2% 5% 3% 1% 3% 2% 42% 5% 2% 2% 0% 2% 7% 0% 7% 22% 3% 0% 0% 1% 17% 3% 13% 3% 2% 2% 5% 3% 1% 3% 2% 43% 4% 2% 2% 0% 2% 7% 0% 7% 22% 3% 0% 0% 1% 17% 3% 13% 3% 2% 2% 5% 3% 1% 3% 2% 44% 4% 2% 2% 0% 2% 7% 0% 7% 21% 3% 0% 0% 1% 17% 3% 12% 3% 2% 2% 5% 2% 1% 3% 2% 46% 4% 2% 2% 0% 2% 7% 0% 7% 21% 3% 0% 0% 1% 16% 3% 12% 3% 2% 2% 5% 2% 1% 3% 2% 48% 4% 2% 2% 0% 2% 7% 0% 7% 20% 3% 0% 0% 1% 16% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 0% 0% 0% 0% 94% 6% 82% 18% 76% 24% 74% 26% 73% 27% 74% 26% 74% 26% 74% 26% 75% 25% 76% 24% 77% 23% Note: The size and timing of the IFRS2 non-cash SOC remain undetermined as of now; hence, the paper stock option costs are not included in the forecasts Source: Company, DM IDMSA estimates COGS of electronic equipment evaporated following the divestment of Emarket ???????????????????????? The Company used to incur costs of electronic equipment sold (2% of Company’s total OPEX in 2006), related to the trading activities of its Emarket subsidiary; following the divestment of this entity (in July 2007) Cyfrowy Polsat no longer runs this sundry business and – which follows – incurs the related COGS no more. 99 Cyfrowy Polsat Fig. 92 Cyfrowy Polsat; Operating costs dynamics 2005 DTH - % yoy chng D&A: STBs Non-STBs Marketing & distribution costs: DTH distributors' commission Mailing Call center Marketing and advertising STBs, of which: Subsidy TV programming content Satellite signal transmission: Transponder capacity lease Conditional access system Other Polish Cinema Institute royalties HR: IFRS2 Normal Miscellaneous: Bad receivables Office space rentals Electric equipment COGS Other DTH-related Total OPEX of DTH MVNO - % yoy chng D&A Marketing & distribution costs : MVNO distributors' commissions Mailing Call center Marketing & advertising Handsets , of which: Subsidy HR: IFRS2 normal Miscellaneous: Bad receivables Office space rentals MVNO infrastructure maintenance Other (lease of MNO's network, ‘minutes’ bought from MNO, etc.) Total OPEX of MVNO -18% -22% 19% 195% 449% 163% 26% 53% 360% 2,296% 26% -9% -12% 113% -3% n.m. 32% 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E -35% -37% -47% -65% 54% 33% 129% 86% 158% 79% 2% 79% 218% 73% 127% 129% 85% 16% 173% 29% 140% 122% 17% 34% -12% 13% 503% 90% 11% 19% n.m. 70% 20% 103% 25% -93% 99% 27% 28% 48% 28% 15% -59% -72% 47% 24% 19% 28% 44% 60% 3% 14% -22% 15% 0% -9% 21% 13% 15% -36% -41% 36% 6% -2% 13% 24% 24% 26% 5% 0% 6% -20% -43% 11% 10% 15% 1% -14% 26% 3% -1% 6% 12% 12% 14% -2% 0% -2% -6% -25% 9% 8% 5% 0% 0% 16% 3% -1% 5% 10% 10% 9% -1% 0% -1% 12% 26% 7% 6% 5% -3% -3% 15% 2% 0% 4% 9% 9% 7% -26% 0% -27% 7% 12% 5% 3% 5% -18% -18% 13% 1% 0% 2% 7% 7% 9% 13% 0% 13% 0% -6% 3% 3% 5% 0% 0% 10% 1% 0% 0% 5% 5% 6% 7% 0% 7% 0% -6% 3% 3% 3% 0% 0% 11% 1% 0% 0% 5% 5% 6% 0% 0% 0% 4% 5% 3% 3% 3% 0% 0% 10% 5% 0% 10% 5% 5% 5% 6% 0% 6% 5% 9% 3% 3% 3% 0% 0% 10% 1% 0% 0% 5% 5% 5% 7% 0% 7% 4% 6% 3% 3% 3% 0% 0% 10% 1% 0% 0% 6% 6% 5% n.m. n.m. n.m. -100% 32% 20% 52% 38% 11% 32% 6% 32% 155% -13% 25% 44% -19% 5% -34% -7% 318% 152% -100% n.m. -39% 55% 47% 27% 49% 58% 43% 3% n.m. 26% 19% 24% 0% n.m. 17% 12% n.m. 14% 10% 12% 0% n.m. 8% 9% n.m. 9% 10% 10% 1% n.m. 10% 9% n.m. 7% 8% 9% 2% n.m. 8% 11% n.m. 9% 6% 7% 2% n.m. 6% 7% n.m. 6% 4% 5% 2% n.m. 4% 7% n.m. 6% 5% 5% 2% n.m. 5% 7% n.m. 5% 5% 5% 2% n.m. 5% 8% n.m. 5% 5% 5% 2% n.m. 5% 8% n.m. 5% 5% 6% 2% n.m. 5% 8% - - - n.m. 215% - n.m. 135% - n.m. 492% - n.m. 1360% - n.m. 526% - n.m. 53% - n.m. 409% - n.m. 389% - 321% 92% - n.m. n.m. - 321% 92% - 562% 482% - n.m. 1,317% - n.m. 0% - n.m. 118% - n.m. 1317% 77% 49% 43% 121% 55% 44% -14% -27% 48% n.m. 48% 98% 117% 2% 37% 117% 33% 21% 44% 34% 20% 5% 15% 24% 31% n.m. 31% 30% 32% 2% 23% 32% 8% -3% -24% 19% 18% 5% 25% 32% 25% n.m. 25% 15% 17% 2% 2% 17% 2% -9% -52% 14% 12% 5% 4% 4% 9% n.m. 9% 11% 12% 2% 2% 12% 5% 0% -41% 11% 11% 5% 10% 12% 6% n.m. 6% 9% 9% 2% 2% 9% 0% 9% 48% 11% 11% 3% 7% 7% 6% n.m. 6% 8% 9% 2% 2% 9% -7% 6% 24% 7% 3% 3% -5% -6% 5% n.m. 5% 5% 5% 2% 2% 5% -9% -1% -30% 3% 3% 3% 5% 7% 5% n.m. 5% 2% 2% 2% 2% 2% -7% -3% -58% 3% 3% 3% -1% -1% 5% n.m. 5% 1% 1% 2% 2% 1% - - - 55% 26% 12% 5% 7% 8% 3% 1% 0% n.m. 262% Note: The size and timing of the IFRS2 non-cash SOC remain undetermined as of now; hence, the paper stock option costs are not included in the forecasts Source: Company, DM IDMSA estimates 100 ???????????????????????? Cyfrowy Polsat Fig. 93 Cyfrowy Polsat; Operating costs dynamics (continued) Joint (DTH + MVNO) - % yoy chng D&A Marketing & distribution: Distributors' commissions Mailing Call center Marketing & advertising STBs, of which: Subsidy Handsets, of which: Subsidy TV programming content Satellite signal transmission : Transponder capacity lease Conditional access system Other Polish Cinema Institute royalties HR: IFRS2 Normal Miscellaneous: Bad receivables Office space rentals Electric equipment COGS MVNO infrastructure maintenance Other (lease of MNO's network, ‘minutes’ bought from MNO, etc.) Total OPEX of Cyfrowy Polsat, of which: DTH MVNO 2005 2006 -18% 195% 449% 163% 26% 53% 360% 2,296% n.m. n.m. 26% -9% -12% 113% -3% n.m. 32% n.m. 32% 11% 155% -19% 318% n.m. -39% -35% 129% 158% 2% 218% 127% 85% 173% n.m. n.m. 140% 17% -12% 503% 11% n.m. 20% n.m. 20% 32% -13% 5% 152% n.m. 55% 49% 49% n.m. 58% 58% n.m. 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E -37% 39% 34% 86% 43% 14% 79% 31% 2% 79% 50% 35% 73% 33% 32% 129% 84% 29% 16% -59% -36% 29% -72% -41% n.m. n.m. 409% n.m. n.m. 389% 122% 47% 36% 34% 24% 6% 13% 19% -2% 90% 28% 13% 19% 44% 24% 70% 60% 24% 110% 14% 34% n.m. -100% n.m. 59% 50% 34% 10% 50% 88% 25% 44% 29% -34% 154% 0% -100% n.m. n.m. n.m. 236% 118% 47% 39% 124% 44% 43% n.m. 10% 28% 3% 12% n.m. 262% 22% -5% -32% 24% 18% 28% 1% -14% -14% -27% 26% 3% -1% 6% 12% 12% 20% n.m. 20% 50% 17% 1% n.m. 37% 65% 10% 3% -7% 14% 11% 5% 0% 0% 15% 24% 16% 3% -1% 5% 10% 10% 14% n.m. 14% 22% 12% 2% n.m. 23% 25% 3% 6% 5% 10% 9% 5% -3% -3% 25% 32% 15% 2% 0% 4% 9% 9% 12% n.m. 12% 13% 10% 2% n.m. 2% 14% -14% 1% -7% 7% 6% 5% -18% -18% 4% 4% 13% 1% 0% 2% 7% 7% 9% n.m. 9% 10% 7% 2% n.m. 2% 11% 9% 0% -11% 5% 5% 5% 0% 0% 10% 12% 10% 1% 0% 0% 5% 5% 6% n.m. 6% 7% 5% 2% n.m. 2% 8% 4% 3% -1% 5% 5% 3% 0% 0% 7% 7% 11% 1% 0% 0% 5% 5% 6% n.m. 6% 7% 5% 2% n.m. 2% 8% -3% 5% 8% 4% 3% 3% 0% 0% -5% -6% 10% 5% 0% 10% 5% 5% 5% n.m. 5% 5% 5% 2% n.m. 2% 5% -1% 3% 2% 3% 3% 3% 0% 0% 5% 7% 10% 1% 0% 0% 5% 5% 5% n.m. 5% 3% 5% 2% n.m. 2% 3% 1% 2% -2% 3% 3% 3% 0% 0% -1% -1% 10% 1% 0% 0% 6% 6% 5% n.m. 5% 3% 5% 2% n.m. 2% 2% 17% 9% 55% 13% 9% 26% 11% 11% 12% 7% 7% 5% 7% 7% 7% 7% 7% 8% 7% 8% 3% 6% 8% 1% 6% 8% 0% Note: The size and timing of the IFRS2 non-cash SOC remain undetermined as of now; hence, the paper stock option costs are not included in the forecasts Source: Company, DM IDMSA estimates 7.3. Consolidated EBITDA margin to continue to soar from its 2006 trough, despite the launch of the MVNO business; 20082010E SOC-adjusted EBITDA’s CAGR forecast at app. 50% ???????????????????????? Margins and profits Our forecasts of profits and margins of Cyfrowy Polsat constitute a straightforward consequence of superimposition of the operating costs on revenue forecasts (both described in the preceding two sections). In a nutshell, we believe that 2006 constituted a trough in the Company’s profitability (with margins depressed by the cost consequences of rapid growth in net additions, and the revenue implications of these net adds not fully visible yet); consequently, we forecast Company’s SOCadjusted EBITDA margin to extend its last year’s increase (to c. 22% level) further into 2008 and next few years, as from the beginning of this year the revenue consequences of previous strong DTH net adds started to shine through the Company’s income statement, and the launch of in-house STB assembly (coupled with lower – when compared with the existing client pools – impact of new gross adds) should cut down on the size of the STB subsidies. While we forecast mid-term SOC-adjusted EBITDA margin target for Cyfrowy’s DTH operations at >40%, we would like to note that the Company’s overall consolidated SOC-adjusted EBITDA profitability is likely to be materially lower than that (we forecast >35% for the mid-term), due to the dilutive impact of the MVNO launch, whose embedded LT (maturity stage) SOC-adjusted EBITDA profitability (app. >10%) is likely to be much lower than DTH’s, and which is likely to be a negative contributor to the consolidated EBITDA in next few years (we forecast Cyfrowy’s MVNO to reach SOC-adjusted EBITDA BEP in c. 3-year time, i.e. when it wins c. 1 million of users). Notwithstanding the above, our forecasts for Cyfrowy Polsat imply c. 50% 2008-2010E CAGRs for its consolidated SOC-adjusted EBITDA and SOC-adjusted EBITDA of the DTH business. 101 Cyfrowy Polsat Fig. 94 Cyfrowy Polsat; EBITDA margins (SOC-adjusted) Fig. 95 Cyfrowy Polsat; EBITDA (SOC-adjusted) Source: Company, DM IDMSA estimates Source: Company, DM IDMSA estimates 102 ???????????????????????? Cyfrowy Polsat 8. Financial statements (IFRS consolidated) Fig. 96 Balance sheet PLN m 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E Fixed assets 153.1 88.0 103.0 163.4 189.7 205.6 220.1 198.5 177.0 Intangibles 5.2 6.7 4.4 11.5 13.2 15.8 17.3 13.8 11.4 Goodwill 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Leased STBs 104.1 42.1 8.0 0.5 0.4 0.4 0.4 0.4 0.4 Tangible fixed assets (other than STBs) 14.7 16.2 45.7 97.3 129.9 146.1 158.7 145.6 130.1 Investment real estate 0.0 0.0 28.5 18.9 18.5 18.0 17.5 17.1 16.6 Deferred tax asset 24.7 18.6 3.5 4.1 4.1 4.1 4.1 4.1 4.1 Commissions to distributors (LT) 0.1 0.0 10.6 29.6 22.2 19.8 20.6 16.1 13.1 LT equity stakes 4.0 4.0 2.2 1.3 1.3 1.3 1.3 1.3 1.3 Other LT assets 0.3 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Current assets 104.5 154.0 250.4 431.8 609.8 1,032.8 1,528.8 2,112.3 2,737.6 Inventories 21.4 30.4 58.0 130.0 57.9 55.0 52.4 55.2 59.1 Receivables: 55.2 34.2 43.3 82.1 108.4 140.4 167.5 188.7 207.0 Trade receivables 12.2 24.6 28.7 44.5 58.7 76.1 90.7 102.3 112.1 Other 43.0 9.6 14.6 37.6 49.7 64.4 76.7 86.5 94.9 Commissions to distributors (ST) 2.3 21.5 37.7 67.2 46.6 24.2 24.2 28.2 28.9 ST investments: 25.2 67.5 109.9 150.7 394.4 810.0 1,281.0 1,835.9 2,438.1 2013E 177.7 12.8 0.0 0.4 131.9 16.1 4.1 11.0 1.3 0.0 3,394.8 54.2 221.8 120.2 101.6 23.7 3,090.2 2014E 183.2 14.9 0.0 0.4 133.3 15.7 4.1 13.5 1.3 0.0 4,066.4 57.0 233.5 126.5 107.0 24.2 3,746.6 2015E 189.4 16.1 0.0 0.4 135.7 15.2 4.1 16.5 1.3 0.0 4,765.6 59.1 246.4 133.5 112.9 27.8 4,426.8 2016E 190.2 16.2 0.0 0.4 139.2 14.7 4.1 14.2 1.3 0.0 5,390.1 57.5 259.2 140.4 118.8 28.0 5,039.7 2017E 192.5 16.0 0.0 0.4 142.9 14.3 4.1 13.5 1.3 0.0 6,153.1 58.9 271.1 146.9 124.2 28.5 5,788.6 2018E 197.0 16.0 0.0 0.4 146.4 13.8 4.1 14.9 1.3 0.0 6,937.5 58.7 283.6 153.6 129.9 30.2 6,558.8 Interest bearing Equities Derivative financial instruments Cash ST deferred assets Assets related to discontinued operations Total assets Equity Minority interest Liabilities & reserves LT reserves: Deferred income tax Other LT liabilities: Non-interest-bearing Interest-bearing ST liabilities: Interest-bearing Non-interest-bearing: Trading STB deposits ST deferred liabilities (DTH and MVNO subscription pre-payments) Liabilities related to discontinued operations Other Total liabilities & equity 0.0 0.0 0.0 3,090.2 4.9 0.0 3,572.5 2,924.0 0.0 648.5 51.5 0.7 50.9 121.1 0.0 121.1 475.9 0.2 475.7 228.1 5.0 194.4 0.0 0.0 0.0 3,746.6 5.2 0.0 4,249.7 3,589.2 0.0 660.5 54.2 0.7 53.6 119.0 0.0 119.0 487.3 0.2 487.1 232.1 5.0 199.2 0.0 0.0 0.0 4,426.8 5.5 0.0 4,955.0 4,280.6 0.0 674.3 57.2 0.7 56.5 1.4 0.0 1.4 615.7 115.7 500.0 236.9 5.0 204.6 0.0 0.0 0.0 5,039.7 5.7 0.0 5,580.3 5,004.1 0.0 576.3 60.1 0.7 59.5 1.4 0.0 1.4 514.7 0.2 514.5 242.9 5.0 210.3 0.0 0.0 0.0 5,788.6 6.0 0.0 6,345.7 5,752.8 0.0 592.9 62.9 0.7 62.2 1.4 0.0 1.4 528.6 0.2 528.4 249.1 5.0 215.4 0.0 0.0 0.0 6,558.8 6.3 0.0 7,134.6 6,525.7 0.0 608.9 65.7 0.7 65.0 1.4 0.0 1.4 541.7 0.2 541.5 254.5 5.0 220.4 0.0 0.0 0.0 0.0 0.0 0.0 13.3 0.0 0.0 11.9 0.4 0.0 257.6 -93.9 0.3 351.3 8.6 8.5 0.0 202.3 4.0 198.3 140.4 30.4 110.1 43.0 31.5 31.8 3.0 0.0 0.0 64.5 0.5 0.0 242.0 -118.4 0.1 360.3 0.0 0.0 0.0 1.9 1.9 0.0 358.4 247.4 111.0 32.2 28.5 47.0 0.1 0.0 0.0 109.8 0.1 1.4 353.4 -62.7 0.1 416.0 0.6 0.0 0.6 30.1 0.0 30.1 385.3 208.1 177.2 73.4 21.6 66.5 0.0 0.0 0.0 150.7 1.8 0.0 595.2 61.1 0.0 534.1 19.5 0.7 18.8 133.6 0.0 133.6 380.9 88.9 292.0 156.9 20.0 97.2 0.0 0.0 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 394.4 810.0 1,281.0 1,835.9 2,438.1 2.4 3.1 3.7 4.2 4.6 0.0 0.0 0.0 0.0 0.0 799.4 1,238.4 1,748.9 2,310.8 2,914.7 324.9 699.9 1,169.8 1,706.9 2,286.4 0.0 0.0 0.0 0.0 0.0 474.5 538.6 579.1 603.9 628.2 25.5 32.9 39.1 44.0 48.2 0.7 0.7 0.7 0.7 0.7 24.9 32.2 38.4 43.3 47.5 131.5 129.5 127.4 125.3 123.2 0.0 0.0 0.0 0.0 0.0 131.5 129.5 127.4 125.3 123.2 317.4 376.2 412.7 434.7 456.9 0.2 0.2 0.2 0.2 0.2 317.2 376.0 412.5 434.5 456.7 162.5 191.1 205.3 211.0 221.2 10.0 5.0 5.0 5.0 5.0 121.2 149.4 165.8 177.5 185.5 0.0 0.0 0.0 0.0 0.0 3.8 3.3 14.5 17.8 23.5 30.5 36.4 41.0 45.0 48.2 50.7 53.5 56.3 58.9 61.6 257.7 242.0 353.4 595.2 799.4 1,238.4 1,748.9 2,310.8 2,914.7 3,572.5 4,249.7 4,955.0 5,580.3 6,345.7 7,134.6 Source: Company, DM IDMSA estimates ???????????????????????? 103 Cyfrowy Polsat Fig. 97 Income statement PLN m Revenues: DTH: Subscription fees STBs - leases STB - sales Other MVNO: Post-paid Pre-paid Handsets OPEX excl. D&A: DTH MVNO EBITDA add back IFRS2 stock option costs Adj EBITDA: DTH MVNO D&A: DTH MVNO EBIT Adj EBIT DTH MVNO Balance of financial operations: Financial income: Interest Gains on investments' disposals FX gains Other Financial costs: Interest Losses on investments' disposals FX losses Other Equity-method affiliates Extraordinary gains (losses) PBT Adj PBT Corporate income tax Gain (loss) on discontinued activities Minorities Net income Adj net income 2004 182.8 182.8 125.2 22.3 19.9 15.4 0.0 0.0 0.0 0.0 -130.3 -130.3 0.0 52.5 0.0 52.5 52.5 0.0 -61.1 -61.1 0.0 -8.6 -8.6 -8.6 0.0 42.7 58.9 2.1 0.3 56.4 0.0 -16.2 -16.2 0.0 0.0 0.0 0.0 0.0 34.1 34.1 -7.7 0.0 0.2 26.6 26.6 2005 281.9 281.9 172.8 23.7 68.3 17.1 0.0 0.0 0.0 0.0 -235.5 -235.5 0.0 46.4 0.0 46.4 46.4 0.0 -50.1 -50.1 0.0 -3.7 -3.7 -3.7 0.0 -33.4 3.3 3.3 0.0 0.0 0.0 -36.8 -15.2 0.0 -21.5 -0.1 0.0 0.0 -37.1 -37.1 2.4 0.0 0.2 -34.5 -34.5 2006 493.8 493.8 351.1 16.5 100.6 25.6 0.0 0.0 0.0 0.0 -419.2 -419.2 0.0 74.6 0.0 74.6 74.6 0.0 -32.8 -32.8 0.0 41.7 41.7 41.7 0.0 29.1 43.2 3.0 14.7 25.4 0.1 -14.2 -14.0 0.0 0.0 -0.2 0.0 0.0 70.8 70.8 -15.1 0.0 0.0 55.7 55.7 2007 796.7 796.7 662.5 6.0 107.2 21.0 0.0 0.0 0.0 0.0 -630.7 -627.7 -3.0 165.9 10.2 176.1 179.1 -3.0 -20.8 -20.8 0.0 145.1 155.3 158.3 -3.0 -5.0 19.0 6.2 0.4 12.4 0.0 -23.9 -13.3 -0.9 0.0 -9.7 0.0 0.0 140.2 150.3 -26.8 0.0 0.0 113.4 123.6 2008E 1,051.1 1,041.9 953.1 3.0 57.8 28.0 9.2 3.9 3.1 2.1 -686.7 -644.4 -42.3 364.5 0.0 364.5 397.5 -33.1 -28.8 -25.9 -2.9 335.6 335.6 371.6 -36.0 -10.0 13.7 13.7 0.0 0.0 0.0 -23.7 -15.1 0.0 0.0 -8.6 0.0 0.0 325.7 325.7 -61.9 0.0 0.0 263.8 263.8 2009E 1,362.1 1,250.7 1,183.1 1.5 38.1 28.0 111.4 55.3 44.2 11.9 -877.5 -723.1 -154.4 484.6 0.0 484.6 527.6 -43.0 -38.7 -29.6 -9.1 445.9 445.9 498.0 -52.1 18.6 29.8 29.8 0.0 0.0 0.0 -11.2 -11.0 0.0 0.0 -0.2 0.0 0.0 464.5 464.5 -88.3 0.0 0.0 376.2 376.2 2010E 1,624.5 1,395.2 1,324.7 1.5 41.1 28.0 229.2 119.8 95.9 13.5 -1,028.7 -791.2 -237.5 595.7 0.0 595.7 604.0 -8.3 -47.3 -31.2 -16.1 548.4 548.4 572.8 -24.4 33.4 43.4 43.4 0.0 0.0 0.0 -10.0 -9.8 0.0 0.0 -0.2 0.0 0.0 581.8 581.8 -110.5 0.0 0.0 471.2 471.2 2011E 1,830.8 1,533.1 1,462.4 1.5 41.2 28.0 297.7 157.6 126.1 13.9 -1,161.5 -863.5 -298.0 669.3 0.0 669.3 669.6 -0.3 -52.0 -30.6 -21.5 617.3 617.3 639.1 -21.8 47.5 56.7 56.7 0.0 0.0 0.0 -9.2 -9.0 0.0 0.0 -0.2 0.0 0.0 664.8 664.8 -126.3 0.0 0.0 538.5 538.5 2012E 2,007.8 1,660.7 1,591.4 1.5 39.8 28.0 347.1 184.1 147.3 15.7 -1,293.0 -958.8 -334.3 714.7 0.0 714.7 702.0 12.8 -53.5 -30.3 -23.2 661.2 661.2 671.7 -10.4 55.8 64.1 64.1 0.0 0.0 0.0 -8.3 -8.1 0.0 0.0 -0.2 0.0 0.0 717.1 717.1 -136.2 0.0 0.0 580.8 580.8 2013E 2,151.2 1,762.1 1,699.8 1.5 32.8 28.0 389.2 207.0 165.6 16.5 -1,392.9 -1,040.1 -352.8 758.3 0.0 758.3 722.0 36.3 -45.9 -22.3 -23.6 712.4 712.4 699.7 12.7 74.8 82.9 82.9 0.0 0.0 0.0 -8.1 -8.0 0.0 0.0 -0.2 0.0 0.0 787.2 787.2 -149.6 0.0 0.0 637.6 637.6 2014E 2,265.2 1,839.8 1,777.5 1.5 32.8 28.0 425.4 226.5 181.2 17.7 -1,488.5 -1,111.1 -377.4 776.7 0.0 776.7 728.7 48.0 -50.1 -25.2 -24.9 726.6 726.6 703.5 23.1 94.6 102.6 102.6 0.0 0.0 0.0 -8.0 -7.8 0.0 0.0 -0.2 0.0 0.0 821.1 821.1 -156.0 0.0 0.0 665.1 665.1 2015E 2,389.9 1,927.1 1,864.8 1.5 32.8 28.0 462.8 246.6 197.3 19.0 -1,598.9 -1,191.1 -407.8 791.0 0.0 791.0 736.0 55.0 -52.0 -27.1 -25.0 738.9 738.9 708.9 30.0 114.7 122.6 122.6 0.0 0.0 0.0 -7.9 -7.7 0.0 0.0 -0.2 0.0 0.0 853.7 853.7 -162.2 0.0 0.0 691.5 691.5 2016E 2,513.8 2,029.5 1,967.2 1.5 32.9 28.0 484.3 259.0 207.2 18.2 -1,708.4 -1,285.9 -422.5 805.5 0.0 805.5 743.6 61.9 -50.3 -27.1 -23.2 755.1 755.1 716.5 38.7 138.0 142.0 142.0 0.0 0.0 0.0 -4.0 -3.9 0.0 0.0 -0.2 0.0 0.0 893.1 893.1 -169.7 0.0 0.0 723.4 723.4 2017E 2,629.9 2,137.7 2,075.3 1.5 32.9 28.0 492.2 263.3 210.6 18.3 -1,817.9 -1,387.8 -430.0 812.0 0.0 812.0 749.9 62.1 -49.8 -28.7 -21.1 762.2 762.2 721.2 41.0 162.1 162.4 162.4 0.0 0.0 0.0 -0.3 -0.1 0.0 0.0 -0.2 0.0 0.0 924.4 924.4 -175.6 0.0 0.0 748.7 748.7 2018E 2,750.4 2,251.9 2,189.5 1.5 32.9 28.0 498.4 266.8 213.5 18.1 -1,930.7 -1,497.9 -432.9 819.6 0.0 819.6 754.1 65.5 -50.3 -30.7 -19.6 769.3 769.3 723.4 45.9 184.9 185.2 185.2 0.0 0.0 0.0 -0.3 -0.1 0.0 0.0 -0.2 0.0 0.0 954.2 954.2 -181.3 0.0 0.0 772.9 772.9 Source: Company, DM IDMSA estimates 104 ???????????????????????? Cyfrowy Polsat Fig. 98 Cash flow PLN m 2004 2005 2006 Net Income (losses) 26.6 -34.5 55.7 Total corrections: 5.5 97.2 25.6 Share of minorities in net income (loss) -0.2 -0.2 0.0 Equity-method affiliates 0.0 0.0 0.0 IFRS2 stock option costs 0.0 0.0 0.0 D&A 61.1 50.1 32.8 FX (gains) losses -57.9 19.3 -25.5 Interests 14.1 11.9 11.0 (Gain) loss on investments -0.3 0.0 -14.7 Change in non-CIT reserves 0.0 0.0 0.5 Change in NWC and deferrals, of which: -8.3 -6.2 1.8 DTH-related -8.3 -6.2 1.8 MVNO-related 0.0 0.0 0.0 Change in inventories: -6.3 -9.0 -27.6 DTH-related -6.3 -9.0 -27.6 MVNO-related 0.0 0.0 0.0 Change in trading A/R: -2.0 -12.4 -4.1 DTH-related -2.0 -12.4 -4.1 MVNO-related 0.0 0.0 0.0 Change in trading A/P: 2.0 -10.7 41.1 DTH-related 2.0 -10.7 41.1 MVNO-related 0.0 0.0 0.0 Change in STB deposits: -1.0 -3.1 -6.8 DTH-related -1.0 -3.1 -6.8 MVNO-related 0.0 0.0 0.0 Change in deferrals: 2.0 15.2 19.9 DTH-related 2.0 15.2 19.9 MVNO-related 0.0 0.0 0.0 Change in ST non-trading A/R and A/P: 0.0 33.0 6.1 DTH-related 0.0 33.0 6.1 MVNO-related 0.0 0.0 0.0 Change in capitalized distribution -3.0 -19.1 -26.7 commissions: DTH-related -3.0 -19.1 -26.7 MVNO-related 0.0 0.0 0.0 Decrease (increase) in leased STBs 1.2 18.1 11.9 Non-cash CIT -7.7 2.4 -15.1 Other 3.5 1.8 22.8 Operating cash flow 32.1 62.7 81.3 Capex on intangibles and tangibles: -18.5 -13.2 -27.7 DTH-related -18.5 -13.2 -27.7 MVNO-related 0.0 0.0 0.0 Acquisition of investment real estate 0.0 0.0 -28.8 Acquisition of subsidiaries 0.0 0.0 0.0 Other -10.8 11.5 17.7 Investing cash flow -29.3 -1.6 -38.8 Net equity issue proceeds 0.3 10.0 0.0 Credits, loans, bonds -11.0 0.3 16.4 Interests -16.9 -18.8 -13.2 Dividends 0.0 0.0 0.0 Share buy-backs 0.0 0.0 0.0 Other 0.1 0.1 -0.4 Financing cash flow -27.5 -8.5 2.8 Total cash flow -24.8 52.6 45.4 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 113.4 263.8 376.2 471.2 538.5 580.8 637.6 665.1 691.5 723.4 748.7 772.9 -2.2 143.3 79.8 29.4 6.0 2.5 -9.5 -48.1 -68.7 -79.6 -109.1 -134.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20.8 28.8 38.7 47.3 52.0 53.5 45.9 50.1 52.0 50.3 49.8 50.3 -16.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.0 1.4 -18.8 -33.6 -47.7 -56.0 -75.0 -94.7 -114.9 -138.1 -162.3 -185.1 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 18.3 6.0 7.4 6.2 4.9 4.2 3.4 2.7 2.9 2.9 2.7 2.8 -45.0 98.5 53.7 10.6 -2.1 2.1 15.9 -6.3 -8.9 5.1 0.5 -2.5 -46.3 101.6 68.3 7.1 -15.1 -2.8 17.7 1.6 -3.7 -1.0 -0.7 -0.7 1.3 -3.0 -14.7 3.5 13.0 4.9 -1.8 -7.9 -5.2 6.1 1.2 -1.8 -72.0 72.1 2.9 2.6 -2.8 -3.9 4.8 -2.8 -2.1 1.7 -1.4 0.2 -72.0 74.6 13.2 0.7 -1.1 -0.8 5.5 -1.1 -0.8 0.6 -0.6 0.1 0.0 -2.5 -10.3 1.8 -1.6 -3.1 -0.7 -1.7 -1.3 1.1 -0.8 0.1 -15.8 -14.2 -17.4 -14.7 -11.5 -9.9 -8.0 -6.4 -7.0 -6.9 -6.5 -6.7 -15.8 -13.7 -11.7 -8.1 -7.7 -7.1 -5.7 -4.3 -4.9 -5.7 -6.0 -6.4 0.0 -0.5 -5.7 -6.6 -3.8 -2.8 -2.4 -2.0 -2.1 -1.2 -0.4 -0.3 83.5 5.6 28.6 14.2 5.7 10.2 6.9 4.0 4.8 6.0 6.2 5.4 82.3 1.9 11.7 6.2 3.0 7.3 5.5 3.0 3.5 5.3 5.9 5.4 1.3 3.7 16.9 8.0 2.7 2.9 1.4 1.0 1.3 0.7 0.3 0.1 -1.6 -10.0 -5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -1.6 -10.0 -5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 29.0 23.4 27.5 15.8 11.2 7.7 8.5 4.6 5.1 5.4 4.8 4.7 29.0 23.1 23.3 11.6 9.2 6.6 7.3 3.8 4.3 4.9 4.7 4.6 0.0 0.2 4.2 4.2 2.0 1.1 1.2 0.8 0.8 0.5 0.1 0.1 -19.7 -6.3 -7.7 -6.5 -5.1 -4.4 -3.6 -2.8 -3.1 -3.1 -2.9 -3.0 -19.7 -6.1 -5.8 -4.5 -3.8 -3.4 -2.8 -2.1 -2.4 -2.6 -2.7 -2.8 0.0 -0.2 -1.9 -2.0 -1.3 -1.0 -0.8 -0.7 -0.7 -0.5 -0.2 -0.1 -48.4 28.0 24.8 -0.8 0.5 2.4 7.2 -2.9 -6.6 2.0 0.2 -3.1 -48.4 0.0 7.4 0.0 -5.4 111.2 -54.7 -36.0 -18.7 0.0 0.0 0.3 -54.4 0.2 -1.6 -11.7 0.0 0.0 -2.6 -15.7 41.2 31.7 42.6 1.2 -14.5 -5.3 7.8 2.4 -3.4 -3.6 -1.9 -3.8 -17.8 -2.0 15.0 7.7 -0.6 -5.3 -3.2 5.5 2.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 8.5 -1.2 -1.2 -1.2 -1.2 0.2 0.2 0.2 0.2 0.2 407.1 456.0 500.6 544.5 583.4 628.1 617.1 622.8 643.8 639.6 -62.6 -57.0 -61.0 -35.0 -35.0 -48.7 -53.2 -55.3 -53.4 -52.8 -49.9 -20.0 -20.0 -10.0 -20.0 -30.2 -33.0 -34.3 -33.1 -32.7 -12.7 -37.0 -41.0 -25.0 -15.0 -18.5 -20.2 -21.0 -20.3 -20.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 13.7 29.8 43.4 56.7 64.1 82.9 102.6 122.6 142.0 162.4 -48.9 -27.2 -17.6 21.7 29.1 34.3 49.4 67.3 88.6 109.6 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 -90.8 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1 -115.5 0.0 -15.1 -11.0 -9.8 -9.0 -8.1 -8.0 -7.8 -7.7 -3.9 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -8.6 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -114.5 -13.3 -12.1 -11.2 -10.3 -10.2 -10.1 -10.0 -119.5 -0.3 243.7 415.6 471.0 554.9 602.2 652.1 656.4 680.2 612.9 748.9 -1.5 -1.6 0.0 0.0 0.2 638.7 -53.4 -33.1 -20.3 0.0 0.0 185.2 131.8 0.0 0.0 -0.1 0.0 0.0 -0.2 -0.3 770.3 Source: Company, DM IDMSA estimates ???????????????????????? 105 Cyfrowy Polsat Fig. 99 Ratios Sales growth (yoy): DTH (yoy): Subscription fees (yoy) STBs - leases (yoy) STB - sales (yoy) Other (%) yoy MVNO (yoy): Post-paid (yoy) Pre-paid (yoy) Handsets (yoy) Adj EBITDA growth (yoy): DTH (yoy): MVNO (yoy): Adj EBIT growth (yoy): DTH (yoy): MVNO (yoy): Adj PBT growth (yoy) Adj NI growth (yoy) Trading A/R turnover days Inventory turnover days Trading A/P turnover days Cash conversion days (NWC + net deferrals)/Sales Current ratio Quick ratio CAPEX/Sales CAPEX/Sales: DTH CAPEX/Sales: MVNO Interest bearing debt/Equity Interest bearing debt/EBITDA Net debt/EBITDA EBITDA/Interest costs Adj EBITDA margin: DTH MVNO Adj EBIT margin DTH MVNO Adj pretax margin Adj net margin ROE ROA 2005 54% 54% 38% 6% 243% 12% n.a. n.a. n.a. n.a. -12% -12% n.m. n.m. n.m. n.m. n.m. n.m. 24 40 58 6 -9% 0.4 0.3 5% 5% n.m. n.m. 5.3 3.9 3.1 16.5% 16.5% n.a. -1.3% -1.3% n.a. -13.2% -12.2% n.m. n.m. 2006 75% 75% 103% -31% 47% 49% n.a. n.a. n.a. n.a. 61% 61% n.m. n.m. n.m. n.m. n.m. n.m. 20 38 46 12 -5% 0.6 0.5 11% 11% n.m. n.m. 3.2 1.7 5.3 15.1% 15.1% n.a. 8.5% 8.5% n.a. 14.3% 11.3% n.m. 22.5% 2007 61% 61% 89% -64% 7% -18% n.a. n.a. n.a. n.a. 136% 140% n.m. 272% 279% n.m. 112% 122% 17 54 67 5 2% 1.1 0.8 7% 5% n.m. 3.6 1.3 0.4 12.4 22.1% 22.5% n.m. 19.5% 19.9% n.m. 18.9% 15.5% n.m. 28.5% 2008E 32% 31% 44% -50% -46% 33% n.a. n.a. n.a. n.a. 107% 122% n.m. 116% 135% n.m. 117% 113% 18 50 85 -17 -8% 1.9 1.7 6% 5% 139% 0.4 0.4 -0.7 24 34.7% 38.2% -361.2% 31.9% 35.7% -392.7% 31.0% 25.1% 136.7% 39.6% 2009E 30% 20% 24% -50% -34% 0% 1,116% 1,317% 1,317% 458% 33% 33% n.m. 33% 34% n.m. 43% 43% 18 23 74 -32 -10% 2.7 2.6 4% 2% 33% 0.2 0.3 -1.4 44 35.6% 42.2% -38.6% 32.7% 39.8% -46.7% 34.1% 27.6% 73.4% 37.8% 2010E 19% 12% 12% 0% 8% 0% 106% 117% 117% 13% 23% 14% n.m. 23% 15% n.m. 25% 25% 19 19 70 -33 -9% 3.7 3.6 4% 1% 18% 0.1 0.2 -1.9 61 36.7% 43.3% -3.6% 33.8% 41.1% -10.6% 35.8% 29.0% 50.4% 32.1% 2011E 13% 10% 10% 0% 0% 0% 30% 32% 32% 3% 12% 11% n.m. 13% 12% n.m. 14% 14% 19 17 65 -29 -8% 4.9 4.7 2% 1% 8% 0.1 0.2 -2.6 74 36.6% 43.7% -0.1% 33.7% 41.7% -7.3% 36.3% 29.4% 37.4% 26.9% 2012E 10% 8% 9% 0% -3% 0% 17% 17% 17% 13% 7% 5% n.m. 7% 5% n.m. 8% 8% 19 16 61 -25 -7% 6.0 5.9 2% 1% 4% 0.1 0.2 -3.2 88 35.6% 42.3% 3.7% 32.9% 40.4% -3.0% 35.7% 28.9% 29.1% 22.5% 2013E 7% 6% 7% 0% -18% 0% 12% 12% 12% 5% 6% 3% 184% 8% 4% n.m. 10% 10% 20 15 59 -24 -7% 7.1 7.0 2% 2% 5% 0.0 0.2 -3.9 95 35.3% 41.0% 9.3% 33.1% 39.7% 3.3% 36.6% 29.6% 24.5% 19.9% 2014E 5% 4% 5% 0% 0% 0% 9% 9% 9% 7% 2% 1% 32% 2% 1% 82% 4% 4% 20 14 56 -23 -7% 8.3 8.2 2% 2% 5% 0.0 0.2 -4.7 99 34.3% 39.6% 11.3% 32.1% 38.2% 5.4% 36.3% 29.4% 20.4% 17.2% 2015E 6% 5% 5% 0% 0% 0% 9% 9% 9% 7% 2% 1% 15% 2% 1% 30% 4% 4% 20 13 54 -20 -6% 7.7 7.6 2% 2% 5% 0.0 0.1 -5.4 103 33.1% 38.2% 11.9% 30.9% 36.8% 6.5% 35.7% 28.9% 17.6% 15.2% 2016E 5% 5% 5% 0% 0% 0% 5% 5% 5% -4% 2% 1% 12% 2% 1% 29% 5% 5% 20 12 51 -19 -6% 10.5 10.4 2% 2% 4% 0.0 0.0 -6.3 209 32.0% 36.6% 12.8% 30.0% 35.3% 8.0% 35.5% 28.8% 15.6% 13.8% 2017E 5% 5% 5% 0% 0% 0% 2% 2% 2% 0% 1% 1% 0% 1% 1% 6% 3% 3% 20 12 49 -18 -6% 11.6 11.5 2% 2% 4% 0.0 0.0 -7.1 >1 000 30.9% 35.1% 12.6% 29.0% 33.7% 8.3% 35.1% 28.5% 13.9% 12.6% 2018E 5% 5% 6% 0% 0% 0% 1% 1% 1% -1% 1% 1% 5% 1% 0% 12% 3% 3% 20 11 48 -17 -5% 12.8 12.7 2% 1% 4% 0.0 0.0 -8.0 >1 000 29.8% 33.5% 13.1% 28.0% 32.1% 9.2% 34.7% 28.1% 12.6% 11.5% Source: Company, DM IDMSA estimates 106 ???????????????????????? Cyfrowy Polsat Fig. 100Ratios (continued) DTH blended ARPU (PLN) yoy chng DTH ARPU: Familijny package (PLN) yoy chng DTH ARPU: Mini package (PLN) yoy chng MVNO blended ARPU (PLN) MVNO ARPU: post-paid (PLN) MVNO ARPU: pre-paid (PLN) Churn: DTH Churn: MVNO Churn: MVNO post-paid Churn: MVNO pre-paid Est. DTH cash SAC (PLN/gross add) Est. STB subsidy (PLN; excess of STBs' COGS over STBs' sales revenues divided by the DTH gross add) Estimated TV content programming cost per subscriber (US$) TV content programming costs/Familijny package DTH subscription fees Cash MVNO post-paid SAC (PLN/gross post-paid add) Cash MVNO pre-paid SAC (PLN/gross pre-paid add) Cash MVNO blended SAC (PLN/ gross add) Handset subsidy: post-paid (EUR) 2004 2005 29.6 30.2 n.a. 2% 29.6 30.2 n.a. 2% 0.0 0.0 n.a. n.a. 0.0 0.0 0.0 0.0 0.0 0.0 9.9% 12.2% n.a. n.a. n.a. n.a. n.a. n.a. 39 111 13.5 90.1 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 34.3 34.7 35.5 38.2 39.8 41.7 43.8 46.1 48.1 50.4 53.1 56.0 59.0 13% 1% 2% 7% 4% 5% 5% 5% 4% 5% 5% 5% 5% 35.9 37.8 39.2 42.5 44.5 46.5 48.6 50.7 52.9 55.3 57.7 60.2 62.9 19% 5% 4% 8% 5% 5% 4% 4% 4% 4% 4% 4% 4% 2.0 8.4 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 n.a. 323% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0.0 0.0 23.4 23.7 24.0 24.3 24.5 24.8 25.1 25.4 25.7 26.1 26.4 0.0 0.0 65.0 65.8 66.6 67.4 68.2 69.0 69.8 70.7 71.5 72.4 73.2 0.0 0.0 13.0 13.2 13.3 13.5 13.6 13.8 14.0 14.1 14.3 14.5 14.6 5.1% 5.1% 6.1% 7.1% 8.1% 9.1% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% n.a. n.a. 8.0% 8.0% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% n.a. n.a. 0.0% 0.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% n.a. n.a. 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 105 143 116 122 128 135 141 148 156 164 172 180 189 119.7 116.3 49.8 44.1 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5 17.6 18.5 27.1 38.8 50.4 60.5 67.2 73.9 81.3 89.4 98.4 108.2 117.9 128.5 140.1 18% 17% 20% 24% 24% 27% 30% 31% 33% 35% 37% 39% 40% 42% 44% 0.0 0.0 0.0 0.0 250.0 281.4 289.8 298.5 307.5 316.7 326.2 336.0 0.0 0.0 0.0 0.0 12.0 12.4 12.7 13.1 13.5 13.9 14.3 14.8 15.2 15.7 16.1 0.0 0.0 0.0 0.0 58.7 58.8 57.4 53.0 53.4 50.5 51.4 52.4 38.3 39.3 37.6 0.0 0.0 0.0 0.0 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 74.7 257.5 265.2 273.2 Source: Company, DM IDMSA estimates ???????????????????????? 107 BASIC DEFINITIONS A/R turnover (in days) = 365/(sales/average A/R)) Inventory turnover (in days) = 365/(COGS/average inventory)) A/P turnover (in days) = 365/(COGS/average A/P)) Current ratio = ((current assets – ST deferred assets)/current liabilities) Quick ratio = ((current assets – ST deferred assets – inventory)/current liabilities) Interest coverage = (pre-tax profit before extraordinary items + interest payable/interest payable) Gross margin = gross profit on sales/sales EBITDA margin = EBITDA/sales EBIT margin = EBIT/sales Pre-tax margin = pre-tax profit/sales Net margin = net profit/sales ROE = net profit/average equity ROA = (net income + interest payable)/average assets EV = market capitalization + interest bearing debt – cash and equivalents EPS = net profit/ no. of shares outstanding CE = net profit + depreciation Dividend yield (gross) = pre-tax DPS/stock market price Cash sales = accrual sales corrected for the change in A/R Cash operating expenses = accrual operating expenses corrected for the changes in inventories and A/P, depreciation, cash taxes and changes in the deferred taxes DM IDM S.A. generally values the covered non bank companies via two methods: comparative method and DCF method (discounted cash flows). The advantage of the former is the fact that it incorporates the current market assessment of the value of the company’s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced. The advantage of the DCF method is its independence from the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those related to the residual value calculation. Please note that we also resort to other valuation techniques (e.g. NAV-, DDM- or SOTP-based), should it prove appropriate in a given case. Banks Net Interest Margin (NIM) = net interest income/average assets NIM Adjusted = (net interest income adjusted for SWAPs)/average assets Non interest income = fees&commissions + result on financial operations (trading gains) + FX gains Interest Spread = (interest income/average interest earning assets)/ (interest cost/average interest bearing liabilities) Cost/Income = (general costs + depreciation + other operating costs)/ (profit on banking activity + other operating income) ROE = net profit/average equity ROA = net income/average assets Non performing loans (NPL) = loans in ‘substandard’, ‘doubtful’ and ‘lost’ categories NPL coverrage ratio = loan loss provisions/NPL Net provision charge = provisions created – provisions released DM IDM S.A. generally values the covered banks via two methods: comparative method and fundamental target fair P/E and target fair P/BV multiples method. The advantage of the former is the fact that it incorporates the current market assessment of the value of the company’s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced. The advantage of the fundamental target fair P/E and target fair P/BV multiples method is its independence of the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those related to the residual value calculation. Assumptions used in valuation can change, influencing thereby the level of the valuation. Among the most important assumptions are: GDP growth, forecasted level of inflation, changes in interest rates and currency prices, employment level and change in wages, demand on the analysed company products, raw material prices, competition, standing of the main customers and suppliers, legislation changes, etc. Changes in the environment of the analysed company are monitored by analysts involved in the preparation of the recommendation, estimated, incorporated in valuation and published in the recommendation whenever needed. KEY TO INVESTMENT RANKINGS This is a guide to expected price performance in absolute terms over the next 12 months: Buy – fundamentally undervalued (upside to 12M EFV in excess of the cost of equity) + catalysts which should close the valuation gap identified; Hold – either (i) fairly priced, or (ii) fundamentally undervalued/overvalued but lacks catalysts which could close the valuation gap; Sell – fundamentally overvalued (12M EFV < current share price + 1-year cost of equity) + catalysts which should close the valuation gap identified. This is a guide to expected relative price performance: Overweight – expected to perform better than the benchmark (WIG) over the next quarter in relative terms Neutral – expected to perform in line with the benchmark (WIG) over the next quarter in relative terms Underweight – expected to perform worse than the benchmark (WIG) over the next quarter in relative terms The recommendation tracker presents the performance of DM IDMSA’s recommendations. A recommendation expires on the day it is altered or on the day 12 months after its issuance, whichever comes first. Relative performance compares the rate of return on a given recommended stock in the period of the recommendation’s validity (i.e. from the date of issuance to the date of alteration or – in case of maintained recommendations – from the date of issuance to the current date) in a relation to the rate of return on the benchmark in this time period. The WIG index constitutes the benchmark. For recommendations that expire by an alteration or are maintained, the ending values used to calculate their absolute and relative performance are: the stock closing price on the day the recommendation expires/ is maintained and the closing value of the benchmark on that date. For recommendations that expire via a passage of time, the ending values used to calculate their absolute and relative performance are: the average of the stock closing prices for the day the recommendation elapses and four directly preceding sessions and the average of the benchmark’s closing values for the day the recommendation expires and four directly preceding sessions. LT fundamental recommendation tracker Recommendation Cyfrowy Polsat Buy - Issue date Reiteration date Expiry date Performance Relative performance Price at issue/ reiteration (PLN) 12M EFV (PLN) 19.06.2008 - Not later than 19.06.2009 - - 13.90 18.30 Issue date Reiteration date Expiry date Price at issue/ reiteration (PLN) Relative performance 19.06.2008 - Not later than 19.06.2009 13.90 - Market-relative recommendation tracker Relative recommendation Cyfrowy Polsat Overweight - Distribution of IDM’s current recommendations Numbers Percentage Buy 23 52% Hold 16 36% Sell 4 9% Suspended 1 2% Under revision 0 0% Suspended 1 2% Under revision 0 0% Distribution of IDM’s current market relative recommended weightings Numbers Percentage Overweight 18 41% Neutral 17 39% Underweight 8 18% Distribution of IDM’s current recommendations for companies that were within the last 12M IDM customers in investment banking Numbers Percentage Buy 2 40% Hold 2 40% Sell 0 0% Suspended 1 20% Under revision 0 0% Distribution of IDM’s current market relative recommended weightings for the companies that were within the last 12M IDM customers in investment banking Numbers Percentage Overweight 3 60% Neutral 1 20% Underweight 0 0% Suspended 1 20% Under revision 0 0% Institutional sales Director – Dariusz Wareluk tel.: +48 (22) 489 94 12 [email protected] Leszek Mackiewicz tel.: +48 (22) 489 94 23 [email protected] Maciej Bąk tel.: +48 (22) 489 94 14 [email protected] Bartosz Zieliński tel.: +48 (22) 489 94 13 [email protected] Research Sobiesław Pająk, CFA (IT, Media, Equity strategy) tel.: +48 (22) 489 94 70 [email protected] This report is for information purposes only. Neither the information nor the opinions expressed in the report constitute a solicitation or an offer to buy or sell any securities referred herein. The opinions expressed in the report reflect independent, current judgement of DM IDM S.A. Securities. This report was prepared with due diligence and scrutiny. The information used in the report is based on all public sources such as press and branch publications, company’s financial statements, current and periodic reports, as well as meetings and telephone conversations with company’s representatives. We believe the above mentioned sources of information to be reliable, however we do not guarantee their accuracy and completeness. All estimates and opinions included in the report represent our judgment as of the date of the issue. The legal entity supervising DM IDM S.A. is Financial Supervision Commission in Warsaw (KNF in Polish abbreviation). IDM does not take any responsibility for decisions taken on the basis of this report and opinions stated in it. Investors bear all responsibility for investment decisions taken on the basis of the contents of this report. The report is intended exclusively for private use of investors – customers of IDM. No part or excerpt of the report may be redistributed, reproduced or conveyed in any manner or form written or oral without the prior written consent of IDM. This report is released to customers the moment it is issued and the whole report is made available to the public one month after the issuance. The analyst(s) responsible for covering the securities in this report receives compensation based upon the overall profitability of IDM which includes profits derived from investment banking activities, although the analyst compensation is not directly related thereto. IDM releases analytical reports via mail or electronic mail to selected clients (professional clients). Sobiesław Pająk and Jakub Viscardi, analysts of DM IDMSA, were involved in the preparation of a research report accompanying IPO of Cyfrowy Polsat during their employment term with CDM Pekao SA (preceding employer of the analysts in question). Apart from mentioned above, there are no ties of any kind between DM IDM S.A., the analyst/analysts involved in the preparation of the report and his/her relatives and the company/ companies analyzed in this publication, especially in the form of: i) offering of financial instruments in the primary market or/and Initial Public Offer within 12 months preceding the issue of this report, ii) purchasing and selling of financial instruments for own account due to tasks connected with organization of the regulated market, iii) purchasing and selling of financial instruments due to underwriting agreements and iv) the role of a market maker for securities analysed by IDM. The analysed company/companies does/do not possess DM IDM S.A. shares. IDM has not signed with the company/companies any contracts for recommendation writing. Investors should assume that DM IDM S.A. is seeking or will seek business relationships with the company/companies described in this report. Excerpts from Chapters 4, 5 and 6 of this research report were shown to the representatives of the analyzed Company prior to the distribution of the report to clients. Sylwia Jaśkiewicz, CFA (Construction materials, Retail, Mid-caps) tel.: +48 (22) 489 94 78 [email protected] Maciej Wewiórski (Commodities, Construction, Real estate) tel.: +48 (22) 489 94 62 [email protected] Michał Sobolewski (Banks) tel.: +48 (22) 489 94 77 [email protected] Jakub Viscardi (Telco, Retail) tel.: +48 (22) 489 94 69 [email protected] Adrian Kyrcz (Construction) tel.: +48 (22) 489 94 74 [email protected] Łukasz Prokopiuk (Associate) tel.: +48 (22) 489 94 72 [email protected] Copyright © 2008 by DM IDMSA Dom Maklerski IDMSA Mały Rynek 7 31-041 Kraków www.idmsa.pl Information: (+48) 0 801 390 801