Risk factors related to our business and the sector in which we operate
- Development prospects. Further development of our operations in the mature telecommunications and pay TV sectors will depend mainly on the ability to effectively encourage the existing customers to use a wider range of our services, win customers from competitive operators, as well as the ability to reduce churn. The Group cannot give any assurance that the measures it is undertaking will encourage its existing customers to use a wider range of services or attract customers from competitive pay TV or telecommunication operators, or that the measures we are undertaking to increase customer loyalty will reduce the rate of churn or allow the Group to maintain the current churn rate.
- Competition. The Group operates on numerous markets, competing mainly with cable and satellite pay TV operators, telecommunication operators and producers of television programmes. The Group cannot assure that as result of our operations, customers will use a wider range of our services, resign from our competitors’ offers or whether such operations will reduce the rate of churn or allow the Group to maintain the current churn rate.
Additionally, competing pay TV and telecommunication operators may improve their ability to attract new customers, or offer their products or services at lower prices, improve their attractiveness for customers, which could make it more difficult for us to retain the current customer base or the scale of generated revenues, and the cost of retaining and acquiring new customers could increase.
Furthermore, a high level of customers’ satisfaction with our programming offer cannot be not assured, because audience preferences are variable and difficult to predict. The Team of Cyfrowy Polsat Group makes every effort to deliver the best programming content and provide pay TV customers with access to a broad range of various thematic channels, as well as channels in HD quality. Whether customers are satisfied with our programming is vital for our ability to acquire and retain customers, as well as to generate advertising revenue. Viewership figures also affect the potential for selling by TV Polsat of television programmes at attractive prices.
- Technologies. Despite following the changes, which occur on the market, the Group may be unable to keep pace with new technologies. We are unable to predict the way in which the currently observed and future technological trends will affect the operations of the Company nor whether the expected technologies required for supporting services the introduction of which we anticipate will be available within the desired time.
- Reputation of brands. The reputation of the Cyfrowy Polsat, Plus, Telewizja Polsat, IPLA, TV4 and TV6 brands is a significant component of Group's value. Maintaining their good name is fundamental for acquiring new and retaining existing subscribers and advertisers. Our reputation may suffer, if we are unable to provide existing products and services or implement new products and services due to technical faults or other circumstances.
- Sales network. Because of growing competition with other pay TV providers and telecommunications services providers, we may have to raise fees paid to our distributors, which would result in higher operating costs and probably lead to lower profit from operating activities.
- Cooperation with third-party providers. Polsat Group uses the support of third-party providers. Any delays or lack of delivery of services by them may result in the delay or disruption in the provision of services by us. Such a risk exists, despite the fact that we select proven and reliable third-party providers. However, we have a limited influence over the manner and time of performance of the obligations by external providers.
- License agreements for key television programmes.· If the Group fails to conclude or extend license agreements which provide rights for distribution of key program, there is a risk that the Group will not be able to attract or maintain customers or advertisers.
- Broadcasting licenses. As of the date of the Annual Report of the Cyfrowy Polsat Capital Group for the financial year ended December 31, 2015 (publication date – 29 February, 2016), we held five terrestrial broadcasting licenses and twenty satellite broadcasting licenses. All TV broadcasting licenses issued by the National Broadcasting Council (KRRiT) are issued for specified periods. Our terrestrial TV broadcasting licenses and satellite broadcasting licenses will expire at various times between 2015 and 2030.
Our mobile pay TV services use the 470–790 MHz band, which has been allocated to us for a specified period. There can be no assurance that this allocation will be extended prior to its expiry. Our frequency allocation may not be extended or may be revoked by the President of the Office of Electronic Communications (UKE), especially if the extension of the allocation would lead to excessive frequency concentration within the Group. Given that the regulations and laws governing the Polish telecommunications industry are very complex and change frequently, there can be no assurance that the Group will not breach any laws or regulations related to frequency allocation or any terms of such allocation. If any of our broadcasting licenses or the Group's frequency allocations are not extended, are revoked or extended on unfavorable conditions, the Group may be forced to suspend the provision of some services temporarily or permanently, may be unable to offer services based on a particular technology or may have to incur substantial expenditure, all of which may have a material adverse effect on our business, financial condition, results of operations or development prospects.
- Polkomtel's frequency allocations. All frequency allocations have been issued to Polkomtel for a definite term. Polkomtel's frequency allocations may not be extended or may be revoked by the President of the Office of Electronic Communications (UKE) in case of a substantial breach of the terms of its use, or if revocation of the frequency allocation follows from the necessity to ensure equal and effective competition or substantially better use of frequencies, especially if the extension of the Polkomtel’s frequency allocation for the next period would lead to excessive frequency concentration at Polsat Group.
- New frequencies. The spectrum of radio frequencies available to the mobile phone industry is limited, therefore we may not be able to obtain new frequency allocations. The inability, or limited ability, to obtain access to frequency bands important for further development of our operations (on favorable terms or at all), including maintaining the existing or implementing new or improved mobile technologies, or obtaining such access by competitors can have a material adverse effect on our business, financial condition, results of operations and develoopment prospects.
- Frequency allocations of Midas Group companies. No assurance can be given that as a result of pending proceedings Midas Group will not lose its 800 MHz or 1800 MHz frequency allocations, which could have a material effect on the ability to provide LTE services. T-Mobile Polska, Orange Polska and P4, as well as the French Chamber of Commerce and Industry have undertaken a series of legal actions aimed at blocking the possibility of using frequencies from the 800 MHz spectrum by Sferia S.A., a member of Midas Group. As of the date of the Annual Report of the Cyfrowy Polsat Capital Group for the financial year ended December 31, 2015 (publication date – 29 February, 2016) legal proceedings were in progress before the Regional Court in Warsaw, the Administrative Court in Warsaw and the Supreme Administrative Court in Warsaw. So far all decisions of the courts have been favourable for Sferia S.A. Nonetheless, until the legally binding termination of the proceedings, it is not possible to exclude the possibility of an unfavourable, from the point of view of Sferia S.A., modification of rulings in the currently ongoing proceedings, which may result in an unfavourable change of the reservation decision regarding the 800 MHz spectrum, or its withdrawal.
- Production of set-top boxes. We are currently producing most of the set-top boxes we offer to our customers at our facility in Mielec. Any disruption to our set-top box production and subsequent necessity to procure more set-top boxes from third-party suppliers could adversely affect our reputation and lead to the erosion of our brand value, which could have a material adverse effect on our business, financial standing, results of operations or development prospects.
- Network infrastructure, including information and telecommunications technology systems, may be vulnerable to circumstances beyond the Group control that may disrupt service provision. The services we provide may encounter disruptions from many sources, including power outages, acts of terrorism and vandalism human errors, as well as fire, flood, or other natural disasters. Base stations, which form a crucial element of our network infrastructure, are exposed to most of these factors.
In addition, we could experience interruptions of our services due to, among other things, software bugs, computer virus attacks, or unauthorised access. Any such interruptions could seriously harm our reputation and reduce customer confidence. Our satellite centre (satellite transponders), and in the TV production and broadcasting segment - the IT systems used primarily for management of air-time – are exposed to such failures.
- Building permits. Roll-out of Polkomtel's network infrastructure, including in particular the construction and installation of base transceiver stations, might require obtaining building permits. No assurance can be given that all the necessary building permits will be obtained or that they will be obtained when originally anticipated, which would pose the risk that the roll out of network infrastructure may have to be discontinued, or may be considerably delayed.
- Management staff. Whether we are successful in the future will depend partly on our ability to retain Management Board members who have made considerable contributions to the development of our company, as well as to acquire and retain qualified employees. Therefore, no assurance can be given that on the competitive labour market we will be able to acquire or retain the best employees, which may have a material adverse effect on our business, financial condition, results of operations or prospects.
- Employees. In spite of correct relations with our employees, we may cannot rule out the risk of occurrence of work disruptions, disputes with employees, strikes or significant growth of labor costs in one or many of our companies. Two trade unions are active at Polkomtel: Niezależny Samorządny Związek Zawodowy Solidarność (the Solidarity Independent Self-Governing Trade Union) and Ogólnopolskie Porozumienie Związków Zawodowych (All-Poland Alliance of Trade Unions). As at December 31, 2015, 154 employees (expressed as full-time equivalents), or 4.1% of the total workforce of Polkomtel Group , were trade union members. As of the date of the Annual Report of the Cyfrowy Polsat Capital Group for the financial year ended December 31, 2015 (publication date – 29 February, 2016), we had no knowledge of any disputes with trade unions or any other collective disputes at Polkomtel. However, involvement in lengthy negotiations with the trade unions or in collective disputes cannot be ruled out; strikes, work interruptions or other industrial action (triggered, for example, by an attempt to optimise the employment level or labour costs or the need to restructure the workforce), as well as employees' pay rise demands may also be experienced.
- Fraudulent activities. Some of our customers use telecommunications services in a way that differs from the standard method of their use by the end user in order, for example, to terminate mass traffic in the network of another operator while bypassing wholesale interconnect settlements. Countarcting this type of phennomena does not guarantee 100% efficiency, which may expose us to additional costs or loss of some revenue.
- Health risks associated with devices. Concerns about the impact of mobile telecommunications devices on health could result in decreased mobile usage or increased difficulty in obtaining sites for base stations. In addition, these health concerns may cause authorities to impose stricter regulations on the construction of the components of mobile telecommunications networks, which may lead to an increase in our operating costs in the segment of services to individual and business customers, and may hinder the completion of network deployment and the commercial availability of new services, or may increase costs of such a development.
- Administrative and court proceedings in which we are involved may result in unfavorable rulings.
- Intellectual property rights. Should any claims related to the infringement of third-party intellectual property rights be brought against us, we may be forced to incur substantial expenses to defend against those claims, to acquire a license for a third-party technology, or to redefine our business methods to eliminate the infringement. Our own intellectual property rights and other means of protection may not adequately protect our business, and insufficient protection of our programming content, proprietary technologies and know-how may cause profit erosion and customer churn.
- Goodwill. Goodwill and brand values may be impaired. We test the goodwill and brand value allocated to our business segments for impairment on an annual basis, by measuring the recoverable amounts of cash-generating units, based on value in use. Any adverse changes to the key assumptions we apply in impairment testing may have a material adverse effect on the results of operations.
Risk factors associated with the Group’s financial profile
- Servicing of our debt is very cash-intensive, and our debt servicing liabilities may impair our ability to finance the Group's business operations.
Our ability to service and repay debt depends on the future results of our operations and our ability to generate sufficient cash flows to pay these and other liabilities, which in turn depends, to a significant extent, on the general economic climate, financing terms, market competition, acts of law and secondary legislation, and a number of other factors which are often outside of our control.
Also, a need to refinance our debt on unfavorable market terms would require us to pay higher interest rates or observe more stringent covenants, which could further restrict our business activity. If our debt financing increased, the related risks would also increase.
Our facility agreements and notes indentures provide for a number of restrictions and obligations (including maintaining specified financial ratios), limiting the Group's ability to incur new debt for financing future operations or to pursue business opportunities and activities that may be in our interest.
Our inability to generate sufficient cash flows to service our debt, or to restructure or refinance it on commercially reasonable terms (or at all), may have a material adverse effect on our business, financial condition, results of operations or prospects.
We may need to incur a significant amount of new debt in the future. In particular, the terms and conditions of the Senior Facilities Agreement of 21 September 2015, as well as the Series A Bonds Indenture of 21 July 2015, impose certain limitations on, but do not prohibit us from, incurring new debt or other liabilities. In particular, a high level of debt may:
- limit our ability to repay our liabilities under the Senior Facilities Agreement, or other liabilities,
- require us to apply a considerable portion of operating cash flows towards debt repayment, restricting the availability of cash used to finance our investment activities, working capital, and other corporate needs and business opportunities,
- reduce our competitiveness relative to other market players with lower debt levels,
- affect our flexibility in business planning or responding to the overall unfavorable economic conditions or to specific adverse developments in our sector, and
- impair our ability to borrow new funds, increase our borrowing costs and/or affect our equity financing capacity. In consequence, any additional debt would further reduce our ability to secure external financing for our operations, which may have a material adverse effect on our business, financial condition, results of operations or prospects.
- Possible future refinancing. We are exposed to risks related to debt financing, including the risk that the debt will not be repaid, extended, or refinanced at maturity, or that the terms of such an extension or refinancing will be less favorable. In the future, we may need to increase our share capital if our operating cash flows are insufficient to ensure financial liquidity or fund new projects. Depending on our capital requirements, market conditions, and other factors, we may be forced to seek additional sources of financing, such as debt instruments or a share offering. If we are unable to refinance our debts on reasonable terms, or at all, we may be forced to sell our assets on unfavorable terms, or to restrict or suspend certain activities, which could have a material adverse effect on our financial condition and performance. Our inability to secure external financing could force us to abandon new projects, which could have a material adverse effect on our business, financial condition, results of operations or prospects.
- Change of control of Cyfrowy Polsat. In the event of a change of control of Cyfrowy Polsat within the meaning of the Senior Facilities Agreement of 21 September 2015, we are under the obligation to repay our liabilities under both agreements. Moreover, if a change of control takes place, our ability to repay our debt will be limited by the level of available funds at the time. There can be no assurance that those funds will be sufficient to repay outstanding debts. In view of the above, we believe that in the case of change of control over Cyfrowy Polsat, we would require additional external financing in order to repay the debt. Limitations arising from our contract obligations could make it impossible for us to repay the credit facilities or secure external financing if events constituting a change of control actually occur. Any breach of those limitations may lead to a default under other contracts and acceleration of other debts, which could have a material adverse effect on our business, financial condition, results of operations or prospects.
Risk factors related to market environment and economic situation
- Economic situation. The Group derives almost all of its revenue from telecommunication services customers, pay-TV customers and TV advertisers in Poland. Our revenue depends on the amount of cash our existing and potential customers can spend on entertainment, recreation and telecommunications services. If the economic conditions in Poland deteriorate, consumers may be willing to spend less on entertainment, recreation and telecommunications services, which may have an adverse effect on the number of our customers or on our customers' spending on our services. Lower consumer spending caused by economic recession may also lead existing and potential customers to choose cheaper versions of our service packages or to discontinue using the services, which in turn may have a material adverse effect on the growth prospects in the television production and broadcasting segment.
- Competition on the telecommunication services market. The Group faces strong competition in all of its core business areas, especially from telecommunication operators such as: Orange Polska S.A., T-Mobile Polska S.A. and P4 Sp.zo.o. A shift in the business model of mobile telecommunications network operators in Poland, whereby competing providers of telecommunications services would form joint ventures or strategic alliances, or launch new types of services, products and technologies may additionally intensify competition on the telecommunications services market. The situation on the telecommunications market in Poland may also change significantly as a result of potential acquisitions or if new mobile telecommunications operators enter the market. We face growing competition from entities offering non-traditional voice and data transmission services which rely on the VoIP technology, such as Skype or Viber, through which customers who use only mobile data transmission services can be provided with mobile voice and video services, and users with fixed broadband access can be provided with voice and video services over fixed-line networks, usually at prices lower than traditional voice and data transmission services. Continued growing popularity of these services may lead to a decrease in ARPU per customer and the customer base of telecommunications operators, including ours. Mobile virtual network operators (MVNO) also compete with traditional mobile telecommunications network operators.
Moreover, the high rate of mobile voice penetration and the highly consolidated nature of the Polish mobile telephony market may result in increased pricing pressure and our ability to compete effectively will depend on our ability to introduce new technologies, convergent services and attractive bundled products at competitive prices.
The Group’s reduced competitiveness and increased pricing pressures could have a material adverse effect on the Group’s financial condition, results of operations or prospects.
We face competition from entities offering alternative forms of entertainment and leisure. The growing variety of leisure and entertainment options offered by our current and future competitors may bring about a decrease in demand for our products and services, and weaken the effect of television as an advertising medium. This may have a material adverse effect on our business, financial condition, results of operations or growth prospects in the future.
- Competition on the pay TV and television advertising market. Operating results of our TV production and broadcasting segment depend on the importance of television as an advertising medium. On the Polish advertising market television competes with other advertising media, such as the Internet, newspapers, magazines, radio, and outdoor advertising. There can be no guarantee that TV commercials will maintain their position on the Polish advertising market, or that changes in the regulatory regime will not favor other advertising media or other broadcasters. This may have an adverse effect on advertising revenue generated by our TV production and broadcasting segment. A decrease in he viewership of our channels may also have an adverse impact on the level of advertising revenue generated by the TV production and broadcasting segment. Given the intense competition across all market segments in which we operate, there can be no assurance that in the future our customers and advertisers will use our services rather than those of our competitor. There can be no assurance that our revenue from pay TV subscriptions and advertising will be satisfactory compared to that of our competitors. Our current and future competitors may outmatch us in terms of financial and marketing resources, which may allow them to attract customers and advertisers more effectively. Losing customers and advertisers to our competitors may have a material adverse effect on our business, financial condition, results of operations or prospects.
- Competition from other entities. Technological progress, as well as a number of various other factors expose our operations to growing competition from entities offering other forms of entertainment and communication. New technological solutions such as VOD, OTT, VoIP etc. may lead to the increased competition for our offer from entities against whom we have not competed yet.
- The switch-over from analogue to digital terrestrial television broadcasting technology, leading to an increase in the number of generally available free-to-air (FTA) channels, may result in lower demand for our pay TV services and affect our audience share.
- Currency risk. Our business is exposed to risk related to fluctuations in foreign exchange rates. While our revenue is denominated mainly in the Polish złoty, part of our operating costs is denominated in other currencies. We have trade payables (including amounts due for access to the catalogues of the leading film and TV studios as well as other suppliers and producers of programming content, purchase of modems, components of set-top boxes, other hardware and software, and lease of transponder capacities) that are denominated in foreign currencies, mainly in euro and US dollars. Fluctuations in foreign exchange rates are outside of our control and any adverse changes in the exchange rates of foreign currencies against the Polish złoty may significantly increase our costs and expenses translated into the Polish złoty, which in turn may have a material adverse effect on our business, financial condition, results of operations or prospects.
- Interest rate risk. We are exposed to interest rate risk. Market interest rate fluctuations do not impact the Group's revenue directly, but they do affect our cash flows from operating activities through the amount of interest on current bank accounts and deposits, and also cash flows from financing activities through the Group's costs of servicing debt Interest rate fluctuations may affect our ability to meet our current liabilities, which may have a material adverse effect on our business, financial condition, results of operations or prospects.
Risk factors associated with the legal and regulatory environment
- The complexity, lack of clarity, and frequent amendments of Polish tax laws may lead to disputes with tax authorities. Moreover, there are discrepancies between the way tax authorities apply tax laws in practice and in rulings of administrative courts. There is a risk that tax interpretations and decisions issued by competent authorities may be unpredictable or even contradictory. There is a risk that we may fail to bring certain areas of our activity in compliance with the frequently amended tax laws and the ever-changing practice of their application. Therefore, no assurance can be given that there will be no disputes with tax authorities, and, consequently, that tax authorities will not question the correctness of the Group companies' tax settlements on non-statute-barred tax liabilities (including conformity with the taxpayer's obligations), and will not determine the existence of tax arrears of such Group companies. Any unfavorable decisions, interpretations (including changes to any interpretations obtained by the Group companies) or rulings by tax authorities may have a material adverse effect on our business, financial condition, results of operations or prospects.
- Intra-group and related-party settlements. Tax authorities may question the accuracy of intra-group and related-party settlements under applicable transfer pricing regulations. No assurance can be given that the Group companies will not be subjected to audits and other inspections by tax authorities and tax inspection bodies with respect to the foregoing. The nature and diversity of transactions with related-parties, the complexity and ambiguity of the regulations governing methods of verifying the prices applied, dynamic changes in market conditions affecting the calculation of prices applied in such transactions, as well as the difficulty in identifying comparable transactions, the risk that the methodology used to determine arm's-length terms for the purpose of such transactions is questioned by tax authorities cannot be excluded, and therefore tax authorities may question the accuracy of settlements between the Group companies and their related parties under applicable transfer pricing regulations, which may have material adverse effect on our business, financial condition, results of operations or prospects.
- Restructuring of the Group. Assessment of tax effects of the restructuring of the Group by Polish tax authorities may differ from the assessment of such activities by the Group. Despite monitoring the risk in individual business areas, with respect to completed and planned restructuring activities, no assurance can be given that Polish tax authorities will not have a different assessment of tax effects of individual restructuring events and transactions, both completed and planned, in particular with respect to the possibility, manner, and timing of the recognition of income and tax-deductible expenses by entities participating in such events and transactions, or that financial terms of such activities will not be questioned, which may have a material adverse effect on our business, financial condition, results of operations or prospects.
- Interpretation uncertainties. The tax regime applicable to our operations and the sector in which we operate creates numerous uncertainties. Given that Polish tax laws are frequently amended, inconsistent, and lack uniform interpretation, and considering the relatively long limitation periods on tax liabilities, there is a risk that our selected operations may not be harmonised with the changing legal (including tax) regulations and their changing application. Despite monitoring the risk in individual business areas, there can be no guarantee that disputes with tax authorities regarding assessment of tax effects of individual events and transactions typical for our operations and the sector in which we operate will not occur, which may have a material adverse effect on our business, financial condition, results of operations or prospects.
- Property tax laws. The Group uses a significant number of telecommunications infrastructure facilities located on real property. Property tax laws give rise to numerous interpretation uncertainties, in particular with respect to the tax base and the determination of items subject to tax. The definition of a structure and its practical use under the Local Taxes and Charges Act might lead to disputes with tax authorities. Therefore, no assurance can be given that there will be no disputes between Polkomtel and tax authorities as to the amount of the property tax payable, as well as unfavorable rulings in this respect. The may have an adverse effect on our business, financial condition or growth prospects.
- Legal regulations in various countries. The Group’s companies are subject to diverse legal regulations (including tax legislation) in force in the countries in which they operate. In view of such dissimilar legal frameworks, there is a risk that the Group will interpret local legal regulations (including tax legislation) in a way which is divergent from their construction by the country's tax authorities. The diversity of legal regulations by which individual companies are bound may give rise to internal problems within the Group. Additionally, such countries' legal and tax legislation may be subject to change. Therefore, no assurance can be given that there will be no disputes with tax authorities in countries where the Group conducts its business, and their result may have an adverse effect on our business, financial condition, results of operations or prospects.
- Office of Competition and Consumer Protection (UOKiK). There can be no assurance that in the future the President of the Polish Office of Competition and Consumer Protection (UOKiK) will not deem the practices we use as limiting competition or violating the Polish consumer protection laws. If a court finds any of our practices or contract terms to be misleading or in conflict with Polish competition and consumer protection laws, we may be subject to fines and our reputation could be harmed. Apart from the order to discontinue the unlawful practice, the President of UOKiK could impose on us a cash fine of up to 10% of our revenue generated in the financial year immediately preceding the year in which the fine is imposed and additionally,pursuant to the provisions of the amended legislation on consumer and competition protection, the President of UOKiK can impose on us the obligation to pay compensation to consumers, who were affected by the practises in question. Moreover, if we, even unintentionally, fail to provide the President of UOKiK with the required information or provide misleading information, a fine of up to EUR 50 million may be imposed on us. In addition, the expansion of consumer protection legislation, including a newly introduced act that allows for ‘group claims’, could increase the scope or scale of our potential liability or the scope of consumer rights. Such and similar events may have a material adverse effect on our business, financial condition, results of operations and prospects.
- We may be adversely affected by changes in Polish and European Union regulation of the levels of MTR and roaming charges. As part of telecommunications market regulation in Poland, the President of the Office of Electronic Communications (UKE) may determine MTR rates between telecommunications operators. In recent years, the regulator used this power several times, leading to the reduction of MTR rates. There can be no assurance that there will not be any further reductions of MTR rates in the future, which may directly affect our financial performance. Our roaming rates are also regulated. The Reduction or removal of roaming charges in the EU may have an adverse effect on our revenue, and consequently on our performance and financial standing. We may violate the acts of law and regulations, which are subject to periodic amendments governing our satellite TV distribution business as well as telecommunications, TV broadcasting, advertising and sponsoring activities. Telecommunication operations are subject to a number of legal regulations and requirements of awarded frequency allocations which could be amended in the future. No assurance can be given that we will not breach any personal data protection laws or regulations, or that we will not fail to meet requirements imposed by the Inspector General for the Protection of Personal Data.
A description of specific risk factors concerning the Series A Bonds issued by Cyfrowy Polsat can be found in the Annual Report of the Cyfrowy Polsat Capital Group S.A. for the financial year ended December 31, 2015, published on 29 February, 2016.