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Crnogorski Telekom 2014 Annual Report
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Page 1: Contents: 2014 Annual...  · Web viewContents: To Our Shareholders. ... the Reference Unbundling Offer defines the terms and conditions of collocation for the purpose of local loop

Crnogorski Telekom

2014 Annual Report

Page 2: Contents: 2014 Annual...  · Web viewContents: To Our Shareholders. ... the Reference Unbundling Offer defines the terms and conditions of collocation for the purpose of local loop

Crnogorski Telekom - 2014 Annual Report DRAFTContents:To Our ShareholdersAbout Crnogorski TelekomSelected Financial and Operational Data of Crnogorski TelekomLetter to Our Shareholders

Management reportManagement Report for the Financial Year 2014Crnogorski Telekom’s Management

Board of Directors Executive Management Board

Vision and StrategyRegulatory EnvironmentPromotions and Offers

Human Resources

Corporate Responsibility

Financial StatementsIndependent Auditor’s ReportStatement of Financial PositionStatement of Comprehensive IncomeStatement of Cash FlowsStatements of Changes in EquityNotes to the Financial Statements

Further Information

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Crnogorski Telekom - 2014 Annual Report DRAFT

To Our ShareholdersAbout Crnogorski TelekomCrnogorski Telekom (CT) is the largest telecommunications company in Montenegro. It provides a full range of fixed and mobile telecommunication services (voice, messaging, internet, TV, leased-line circuits, data networks and ICT solutions).

Crnogorski Telekom fully digitalised the fixed-line network in 2007 and brought ADSL coverage of PSTN customers close to a 100% base by the end of 2012. In December 2007, Crnogorski Telekom started an IPTV service. At the end of 2011 CT started offering ICT solutions, promoted under the name “Integris”.

CT was the second entrant into the mobile market in Montenegro. From its founding in 2000, it has always offered innovative and advanced services to the Montenegrin market and has been experiencing dynamic growth. Telekom uses mobile technologies such as UMTS, HSDPA, GPRS and EDGE. A 3G network was launched in the summer of 2007. A 4G service was softly launched in 2012, while wider coverage was brought to the market in 2013 and in 2014.

In 2006, the T-Com and T-Mobile brands were launched.

In May 2009, Crnogorski Telekom a.d., T-Mobile Crna Gora d.o.o and Internet Crna Gora d.o.o were merged into one legal entity, Crnogorski Telekom a.d.

In 2012, the T-Com and T-Mobile brands were replaced by the Telekom brand, under which all products are now marketed.

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Crnogorski Telekom - 2014 Annual Report DRAFTOn 1 April 2005, Magyar Telekom obtained a 76.53% interest in Crnogorski Telekom. Deutsche Telekom AG holds 59.21% of the Magyar Telekom shares. Deutsche Telekom and Magyar Telekom have a number of subsidiaries worldwide, with which Crnogorski Telekom has regular transactions. Details of related party transactions are given in the company’s Financial Statements, Note 27.

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Crnogorski Telekom - 2014 Annual Report DRAFT

Selected Financial and Operational data of Crnogorski Telekom

Main financial KPIs (m€) 2013 2014 Δ Δ%Revenues 110,2 104,6 -5,6 -5EBITDA before SI 1 43,3 41,1 -2,2 -5EBITDA before SI margin (%) 39,3 39,3 0,0EBITDA 39,8 41,0 1,3 3EBITDA margin (%) 36,1 39,2 3,1Operating profit 20,1 23,0 2,9 14Net profit 18,8 21,6 2,7 14Total Assets 198,2 187,2 -11,0 -6CAPEX 14,5 16,2 1,8 12Number of employees (closing FTE) 651 657 6 1

Fixed line operations KPIs (in thousands)

Dec 31,

2013

Dec 31,

2014Δ Δ%

Fixed-voice customers, Total 167,2 162,9 -4,3 -3Fixed voice Market share (%) 98,3 98,4 0,1

ADSL customers, Total 74,4 77,8 3,4 5BB Internet Market share (%) 81,8 81,7 -0,1

IPTV customers, Total 61,8 64,3 2,5 4Pay TV Market share (%) 41,6 41,8 0,1

Mobile line operations KPIs (in thousands)

Dec 31,

2013

Dec 31,

2014Δ Δ%

Number of customers, Total 352,8 345,9 -7,0 -2Prepaid 214,8 197,3 -17,4 -8Postpaid 138,1 148,5 10,5 8Mobile customers market share (%) 34,3 34,1 -0,2

1 Restructuring costs

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Crnogorski Telekom - 2014 Annual Report DRAFTMobile internet customer number 96,9 114,3 17,4 18Mobile Internet customers market share (%) 40,6 38,3 -2,3Mobile penetration (%) 160 163 3,1

Dear Shareholders,

As always at this time of the year, I have a pleasure to share with you a view about the Crnogorski Telekom’s most significant moments in 2014 when it comes to business developments, expectations for the next year and our strategies on how to fulfil them. Last year can be summarized in a few words: as a clear technology leader in Montenegro and European market, we are proud to be a part of an industry that’s truly transforming the world. We’ve been facing increasing customer expectations and, consequently, rules of the game changing just as fast, tough competitors and global Internet players, but still helped businesses to grow and national economy to develop, improving the quality of life of our customers through our innovative technology solutions. I am happy to conclude that, in spite of the impeded economic developments and of the overall state at the telecommunications market, our business is still solid, thanks to increase of ICT and IPTV revenues, as well as to better equipment sales and increase of mobile and fixed BB revenues. Speaking of the financial achievements, let me inform you that our revenues, amounting to 104.6 million EUR, were in line with plans, driven by Wholesale revenues, Equipment/Handsets sales and ICT revenues, while service revenues deteriorated (-3.7m or -5% YoY). Furthermore, EBITDA was in line with expectations and 2.2.m or 5% lower YoY, while oFCF performed 10% lower YoY, but still exceeding expectations. As the overall Telecommunication market is shrinking every year, I am proud that we were achieving our targets.

Business year 2014 was, in spite of all challenges (embodied in continuously raising regulatory pressure, increasingly

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Crnogorski Telekom - 2014 Annual Report DRAFTaggressive competition, new market players, changing customer behaviour and new technologies areas) or maybe exactly because of them, a successful year, because we’ve been through those challenges very successfully, not only resisting the temptations, but getting out of them stronger and more united. CT’s strategic framework is based on three strategic layers: Stand for Broadband - capturing and retaining customers and outperform competition; Transform to Outperform - full focus on e-Business, e-Company, One Billing/CRM and Save2Invest initiatives and New Way to Play - growing revenue streams in ICT/Cloud and Retailer No.1 initiatives, new business development and exploring partnering concept. Obviously, our management’s full commitment to it paid in.

Speaking of our further 2014 achievements, we were primarily focused on intensive FTTH rollout, expanding ICT business, 3G 900 roll out, implementation of Hybrid Access project, diminishing/minimizing negative effects of the extensive regulatory changes and completion of One.Billing & CRM project.

Regarding the fiber development, it is very rewarding to hear that this project, providing best service quality and stability for broadband customers, is extraordinarily performing and that we are experiencing significant increase of customers’ demand for FTTH services. Over less than 4 years almost 37,000 households in 10 cities were given possibility to use FTTH service and more than 9,000 have been connected. The most important KPI, utilization, was significantly raised over the years – starting from 8% in the first year (2011) to 25% in 2013 and 2014, which puts us among operators with highest utilization rate in the Group. Let’s also mention that results exceeded the plan for FTTH rollout for 2014 already in October. Our aspiration for this year is to cover more than 4,000 new households with FTTH possibility and achieve additional increase in terms of utilization – reach 26%.

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Crnogorski Telekom - 2014 Annual Report DRAFT

Speaking about expansions, let me remind you that CT has made a big step forward in expanding the mobile network, targeted at improvement of its service quality. We can praise ourselves for doubling 3G network in terms of capacity and coverage, which resulted in 50% increase of traffic in 2014. We tripled 4G network and made it available to customers in almost all municipalities and improved it in Podgorica and coastal towns. Traffic increase of 570% in 2014 is the evidence that our customers recognized benefits provided by our network and that they enjoy surfing in T network every time and everywhere. These results confirm that we are on the right track in this process, so we are continuing with expansion of mobile BB network already at the beginning of 2015, with special emphasis on 4G services as our strategic guidance.

When it comes to ICT, I am happy to inform you that the success story about this business, after three years in a row with three digits’ YOY revenue growth, continued in 2014, with revenues close to EUR 4 million. We are recognized as a reliable ICT partner for important investment projects in Montenegro. As result of good customers’ experience with previous project, in November we signed the biggest ICT contract, worth EUR 2.5 million.

Regarding the Hybrid Access launch, I can report that we are the first among all DT Europe members to develop Hybrid Access technology implementation plan for the next 4 years. The plan foresees EUR 3 million investments enabling 6.5 thousand customers benefit from this new technology. We expect our first customers by the end of 2015.

We continued to be the number one company as far as corporate social responsibility is concerned and I am sure that awards “Iskra”and “The Best Company for Work in Montenegro” confirm our essential dedication to do business in a socially responsible manner and to develop in sustainable manner. We are proud of the fact that our

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Crnogorski Telekom - 2014 Annual Report DRAFTemployees demonstrate high level of personal commitment and corporate culture, which is prerequisite for increase of the existing and setting up of new standards in our environment.

Speaking of the year 2015, it will definitely bring a new and unique combination of bright and less bright moments, but we have all answers prepared and worked out through our Corporate Strategy and we know what we must keep on doing: providing our customers with the best service and most comprehensive solutions in the market, being innovative and exploring new revenue streams and ways to maximize benefits obtained from the existing ones. We must insist on simplicity in our offers, smart investments in network, communicating technology superiority, awarding loyalty, customization and personalization of our offers. In that regard, in order to be no. 1 Telecommunications operator in Montenegro, three main pillars were defined in our new Corporate Strategy:

Technology leadership, Best customer experience and New Businesses.

If we implement this we will retain/win customers and grow our business.

Now, looking forward into the future, according to our main strategic commitment, customers will remain in focus of our attention: we will keep on investing into our network’s quality and providing access to the most advanced technologies. As in previous years, we continued to maintain a very substantial volume of investments of more than EUR 16 million. We will also continue extending our service portfolio, accompanied by even wider offer of exciting devices. According to our long – term orientation, we will simultaneously keep on developing and implementing various initiatives in the area of corporate social responsibility and investing in Montenegrin society to which we belong and operate in.

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Crnogorski Telekom - 2014 Annual Report DRAFTUnfortunately, our key words in the upcoming period will also be cost control. It is true that we must decrease our employee related expenses and it is true that organizational changes will follow, affecting all levels of employees. I am fully aware that this is always the most painful step but if we want to stay as a company in the market providing very good working conditions and to deliver interesting products to Montenegrin citizens there is no other way. However, rest assured that the management will do everything to preserve interest of all our employees, since we always have in mind that our employees’ loyalty and dedication are key factors in business success and good reputation of our Company. On the other hand, I am also sure that the award “Best Company for Work” we received at the beginning of 2014 indicates that care and commitment of Crnogorski Telekom to its employees are recognized in business environment.

As in previous years, the management intends to propose to the General Assembly to pay out dividend. This is the best way to show to our shareholders that we take care about their interests and it is the best base to motivate our shareholders for further investments into Montenegro’s Infrastructure.

I would like to take the opportunity to thank all of our employees for a job well done in 2014. I’m really proud of how they have all pulled together and the terrific results they have achieved. That will always be the solid ground on which we can build strategies to fulfil our goals during the coming years.

Finally, dear shareholders, let me also thank you, for the fourth time already, for contribution to the success of our Company. Your trust and confidence have always been an important driving force and great support for us. Please continue to support us in our efforts to maintain and improve the profitability of our company.

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Crnogorski Telekom - 2014 Annual Report DRAFT

Rüdiger J. SchulzChief Executive Director

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Crnogorski Telekom - 2014 Annual Report DRAFT

Management reportManagement Report for the Financial Year 2014Highlights

In 2014 revenues kept a declining trend with a YoY decrease of EUR 5.6 million or -5%, to a level of EUR 104.6 million. The main reasons behind are related to lower interconnection revenues, to fix and mobile voice revenues, messaging revenues, visitors’ revenue and data services. This development was partly compensated by the increase of internet, TV, ICT and equipment revenues.

EBITDA excluding special influences decreased by 5% YoY, to EUR 41.1 million, with a margin of 39.3%.

Net profit increased YoY, by EUR 2.7 million, or 14%, to EUR 21.6 million, mainly due to lower depreciation and amortization costs and due to severance payment in 2013.

Capital expenditure was EUR 16.2 million. The main projects were One Billing & CRM, fibre-optic network roll-out, IPTV and IMS.

Dividend of EUR 21.5 million was paid out. The share capital was decreased by EUR 17.1 million.

Revenues and profitability

In 2014, Crnogorski Telekom was focused on further extending its 3G and 4G mobile network, on fibre-optic access roll-out, on expansion of the ICT service, on sale of equipment and on the improvement of voice services. In the fixed-line voice segment, CT kept a stable customer base, while ADSL and Extra TV customer base increased. In the mobile segment CT retained both total postpaid and

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Crnogorski Telekom - 2014 Annual Report DRAFTbusiness segment postpaid leadership. CT’s revenues and profitability were negatively impacted by regulation of fixed voice and fixed broadband retail prices.

Despite the positive development of the number of customers, CT experienced YoY revenue decline of 5%. Revenues reached EUR 104.6 million. The retail revenues were kept stable, while wholesale revenues decreased by 24%. Major revenue downsides, compared to 2013, related to:

- interconnection revenues (-22%), driven by decreased mobile termination rates and lower incoming traffic, both national and international,

- fixed-line voice retail revenues (-10%), influenced by decreasing usage and retail prices regulation,

- mobile prepaid revenues (-12%).This development was partly compensated by higher:

- IPTV revenues (+10%), driven by higher customer numbers,

- Fix broadband revenues (+5%), driven by higher customer numbers,

- data services revenues (+15%), driven by the growth of ICT services,

- equipment revenues (+42%), boosted by sales of TVs/laptops and handsets.

As a result of continuous successful efforts to increase efficiency and improve the cost base, operating expenses excluding special impact at the same time decreased YoY by EUR 3.2 million (-5%), to the level of EUR 63.7 million.

The limited YoY revenue decrease and cost efficiency resulted in a 5% YoY decrease of EBITDA before special influences, to the amount of EUR 41.1 million.

Operating income (EBIT) increased YoY, by EUR 2.9 million to EUR 23.0 million, mainly due to lower depreciation and amortization costs and due to severance payment in 2013. Net income increased by EUR 2.7 million to EUR 21.6 million.

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Crnogorski Telekom - 2014 Annual Report DRAFT

Non-Financial KPIs

In 2014, the fixed-line voice customer number decreased by 3%. Fix broadband revenue increase was driven by a customer base increase of 3,400 or 5%. IPTV revenues also increased due to a customer number increase of 2,500 YoY or 4%.

Fixed line operations KPIs (in thousands)

Dec 31,

2013

Dec 31,

2014Δ Δ%

Fixed-voice customers, Total 167,2 162,9 -4,3 -3

Residential 145,5 141,8 -3,7 -3Business 21,7 21,1 -0,6 -3

Fixed voice Market share (%) 98,3 98,4 0,1

Fix broadband customers, Total 74,4 77,8 3,4 5

Residential 66,7 69,6 2,9 4Business 7,7 8,2 0,6 7

BB Internet Market share (%) 81,8 81,7 -0,1

IPTV customers, Total 61,8 64,3 2,5 4Residential 59,7 62,1 2,4 4Business 2,0 2,2 0,2 8

Pay TV Market share (%) 41,6 41,8 0,1

At the end of 2014, Crnogorski Telekom customers were using 346 thousand SIM cards, which is 7 thousand or 2% less compared to the previous year. Total SIM market share decreased by 1.4pp and amounted to 34.1%. Prepaid SIM base decreased by 17 thousand or -8%, while Postpaid SIM base increased YoY by 10 thousand or 8%. Crnogorski Telekom remained market leader in postpaid segment.

Mobile line operations KPIs (in thousands)

Dec 31,

2013

Dec 31,

2014Δ Δ%

Number of customers, Total 352,8 345,9 -7,0 -2Prepaid 214,8 197,3 -17,4 -8

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Crnogorski Telekom - 2014 Annual Report DRAFTPostpaid, Total 138,1 148,5 10,5 8

Postpaid Residential 36,7 41,5 4,8 13Postpaid Business 101,4 107,0 5,6 6

Mobile customers market share (%) 34,3 34,1 -0,2Mobile internet customer number 96,9 114,3 17,4 18Mobile Internet customers market share (%) 40,6 38,3 -2,3Mobile penetration (%) 160 163 3,1

Main investments

In 2014, CT continued implementation of One Billing/CRM (Customer Relations Management). The new billing system will replace three separate billing systems. It will increase market competitiveness, by enabling fully convergent (prepaid/postpaid and fixed/mobile) and real-time rating.

All IP Transformation program continued in 2014. More than 90 thousand customers were migrated from PSTN to IMS Technology. For IMS customers new services are available, like “Internet on Klik” where service activation is immediate. Introduction of MSAN (Multi-Service Access Node) technology in CT started in 2014, where existing ADSL technology will be gradually replaced. 10 thousand ADSL ports on MSAN have been installed during 2014. In parallel, CT extended BB coverage by 5%.

In line with Mobile Access Strategy, major focus was on Mobile Broadband coverage and capacity extension. CT invested EUR 1.4 million. Number of 4G base stations is tripled, while the population coverage increased from 38% to 62%. By this, 21 cities in Montenegro are covered with 4G service and CT gained leader position on the market in 4G. In addition CT successfully started testing of 4G+ service, with download speeds of up to 300 Mbps.

3G coverage is extended in the suburban, rural areas and main, while new sites were mounted in urban areas. Number

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Crnogorski Telekom - 2014 Annual Report DRAFTof 3G sites is doubled and population coverage is increased from 72% to 94%.

In accordance with Integrated Network Strategy CT continued the development of FTTH network, resulting in new 8,800 flats covered by fibre network and new 2,200 customers enjoying the services over this supreme technology. At the end of 2014 there were 37 thousand homes covered with FTTH and over 9 thousand customers using the service. We managed to maintain high utilization rate of 25%.

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Crnogorski Telekom - 2014 Annual Report DRAFT

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Crnogorski Telekom - 2014 Annual Report DRAFTCrnogorski Telekom's Board of Directors

As proposed by the majority owner of the Company, following the resignation of Ms. Melinda Szabo to the CT’s BoD membership, at the Extraordinary Shareholders’ Assembly (held on January 21, 2015), it was decided to decrease the number of BoD members from seven to five. Based on relevant resolutions, Mr. Peter Zsom and Mr. Frank Polcz were dismissed as BoD members. Mr. Jovica Gjorgjeski has been elected a member of the BoD, together with the remaining four members of the previous BoD composition.

- János Szabo, Chairman- Susanne Krogmann- Michael Frank- Jovica Gjorgjeski- Tripko Krgović

János Szabó

János Szabó was born in Hódmezovásárhely (Hungary) in 1961. He graduated at the Budapest University of Economics in 1986, majoring in international relations.After working in foreign affairs for three years, he continued in various finance and consultant positions in the private business sector. He became Director of Finance at Delco Remy Hungary (a subsidiary of the US-based automotive supplier) in 1995. Later he became Deputy General Manager of the operation, responsible for sales, purchasing and operations. In 1998 he moved to the position of Director of Finance for Europe, in charge of the finance activities and acquisitions of European operations. Later he became CFO and Managing Director of a joint venture between Delco Remy and Hitachi. From 2003 he was the Finance Director of the Wireline Services LOB of Magyar Telekom (later T-Com).

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Crnogorski Telekom - 2014 Annual Report DRAFTThe role was extended to the fixed-line network and IT operations in 2006. Since 2008, he has been the Director of Group Planning & Controlling of the Magyar Telekom Group. From April 2013, he holds the position of the CFO of Magyar Telekom.

Susanne Krogmann

Susanne Krogmann, born 1964, holds a diploma in Economics from Georg-August-University Göttingen, Germany and studied European Integration at the College of Europe, Bruges, Belgium. Susanne Krogmann started her career at Treuhandanstalt, the state-owned agency responsible for the privatization of the enterprises and assets of the former Democratic Republic of Germany. During her five years at Treuhandanstalt she worked in the controlling and in the contract management department. For the last 2 years at Treuhandanstalt she held the position of key account manager for several companies in the chemical industry. Susanne Krogmann joined Deutsche Telekom in 1999. For more than 8 years she worked in different positions in the Regulatory and Public Affairs division, especially in the field of regulatory economics and regulatory strategy. She then took over the position of Head of the group “Corporate Responsibility Strategy and Controlling” where she developed a new Corporate Responsibility strategy for DT group. Following the increasing awareness of data security and data protection at Deutsche Telekom she later worked in a data security project with her personal focus on customer data security. Since the end of 2009 she holds the position of Vice President Corporate Governance Europe within Board Area Europe at Deutsche Telekom. She has become member of the Board of Directors of Crnogorski Telekom in 2011. Since

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Crnogorski Telekom - 2014 Annual Report DRAFT2012 she is also member of the Board of Directors of Makedonski Telekom and the Board of Directors of T-Mobile Macedonia. Susanne Krogmann is also a member of the Supervisory Board of T-Mobile Czech Republic, since 2013.

Michael Frank

Michael Frank was born in 1977. He graduated as an Industrial Engineering with Business Studies from the Technical University of Karlsruhe in 2003 before gaining an additional Master degree in International Relations from the Andrássy University Budapest in 2006. He started his career in 2004 with T-Mobile Hungary as a Regulatory Manager, then joining Detecon in 2007 as a Strategy Management Consultant with global project assignments. From 2010, he worked at Deutsche Telekom’s Headquarter as a Senior Manager, first in International Public & Regulatory Affairs and later in the International Business Unit. In 2013, Mr. Frank joined Magyar Telekom as Head of Portfolio Management and since January 1, 2014, he is heading Magyar Telekom’s Corporate Strategy and Portfolio Management Department. He is a member of the Board of Directors of Makedonski Telekom and of T-Mobile Makedonija.

Jovica Gjorgjeski

Jovica Gjorgjeski was born in Skopje, Republic of Macedonia. He studied Management at the Faculty of Economics on the University of Ss. Cyril and Methodius in Skopje. He started his career in 2004 at Makedonski Telekom where until 2007 he held several positions within the finance area. Between 2007 and 2010 he held the position of General Coordinator in the Cabinet of the Chief Executive Officer of Makedonski Telekom. In 2010, Mr. Gjorgjeski joined Magyar Telekom as Country Manager for the Macedonian operations (Makedonski Telekom, T-Mobile Macedonia, Stonebridge Communications and Telemacedonia) being responsible for the business and corporate governance issues. Since 2011,

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Crnogorski Telekom - 2014 Annual Report DRAFThe is a permanent invitee to the Board of Directors and the Audit Committee of Makedonski Telekom and the Board of Directors of T-Mobile Macedonia. During 2014, he was representing Magyar Telekom at the Shareholders' Assembly of Crnogorski Telekom, exercising all voting rights on its behalf.

Tripko Krgović

Tripko Krgović was born in 1977 in Belgrade. He finished his undergraduate and Master’s studies at the Faculty of Economics in Podgorica. His professional career began in 1996 at his family business. From 2004 he worked in the Securities Commission, in the Market Supervision Department. In 2005, he held the position of Investment Manager in Moneta Investment Fund. From 2006 to 2008, he was the Chief Executive Officer of Moneta Broker–Diler AD, Podgorica. From 2008 to 2011, he was a member of the Board of Directors of the Moneta privatisation fund and of Otrantkomerc AD, Ulcinj. From 2013 to 2014 he was a member of the Board of Directors of Central Depository Agency, while during the 2014 he was a member of the Board of Directors of Budvanska Rivijera AD Budva as well. He was elected a member of Crnogorski Telekom’s Board of Directors, Audit Committee and Compensation Committee in 2008.

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Crnogorski Telekom - 2014 Annual Report DRAFTThe Executive Management Board of Crnogorski Telekom

- Rüdiger Schulz, Chief Executive Officer and Chairman of the Executive Management Board

- Endre Horanyi, Chief Human Resources Officer - Vladan Peković, Chief Technology and Information

Officer - Manfred Knapp, Chief Financial Officer - Vladimir Beratović, Chief Corporate Affairs Officer - Milija Zeković, Chief Commercial Officer

Rüdiger Schulz, Chief Executive Officer and Chairman of the Executive Management Board

Rüdiger Schulz, who is an internationally experienced business leader, completed his studies in electrical engineering at the University of Hamburg and business management studies at the University of Koblenz. His professional career began with service in the German Navy as Chief Engineer on Vessels, after which he joined Deutsche Telekom Group in 1991. To begin with, he was responsible for technology platforms, and later became responsible for marketing and sales in the residential and corporate segment.In 2005, he began working for T-Systems as Senior Executive Vice President of Business Customers and Large Enterprises in the north-eastern region of Germany, one of six in the country and developed his experience in the area of IT. He joined Slovak Telekom in November 2006, taking over the position of Senior Executive Vice President for Marketing, Sales and Technology/COO and was a member of the Executive Management Board being responsible for T-Com's product and service portfolio in the business, residential and wholesale segment. In 2010 he was appointed Chief Operating Officer for Networks and IT of Slovak Telekom. In 2011 he joined Crnogorski Telekom in his current position.

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Crnogorski Telekom - 2014 Annual Report DRAFT

Endre Horanyi, Chief Human Resources Officer

Endre Horanyi was previously an HR Partner of the Consumer Business Unit at Magyar Telekom. According to the MT organisational model, he was in charge of more than 4 000 people. From that position Mr. Horanyi joined Magyar Telekom in 2003. His professional development in the field of HR management mainly relates to his career path within MT. From 2003 until now, he has covered several positions related to HR functions such as: Senior HR Operational Development Manager, Head of HR Operational Development, HR Director of the Mobile Business Unit and most recently: HR Partner of the Customer Business Unit. Since 2010, he has been working as Chief Human Resources Officer at Crnogorski Telekom.

Vladan Peković, Chief Technology and Information Officer

Vladan Peković took over the position of Chief Technology and Information Officer in January 2014. He came from T-Mobile Poland, where he was Technology and Platforms Director and Chairman of the Supervisory Board of Networks.Before joining DT group in 2009, he gained vast experience during long-lasting international carrier working for major telco companies on projects of development, implementation and management of telecommunications networks in the Czech Republic, Mexico and the USA.

Manfred Knapp, Chief Financial Officer

Born in 1955 in Frankfurt am Main, Germany. He holds a degree in Business Administration and Management. Before joining Deutsche Telekom Group in 1997, Manfred Knapp covered several senior controlling and finance management positions in different industries where he gained broad experience in all areas of finance management, mergers and

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Crnogorski Telekom - 2014 Annual Report DRAFTacquisitions and turnaround management. In 1998, Manfred Knapp was assigned to the mobile operator Wind, in Italy, as Controlling Director. From 1999, he managed the controlling department of the Deutsche Telekom Carrier Services Business. In 2001, he joined Slovak Telekom as Controlling Director and Deputy CFO. Since 2009, he has been responsible for the Finance Department of Crnogorski Telekom as CFO.

Vladimir Beratović, Chief Corporate Affairs Officer

Born in 1970 in Podgorica, he graduated in international management, and is currently undertaking postgraduate studies. His 17-year-long career in telecommunications started in the Montenegrin mobile operator Promonte (today’s Telenor). During his last 10 years at Telenor, he held various directorial positions and was a member of the top-level management. He left Telenor as Chief Corporate Affairs Officer, in charge of government relations, legal, regulatory, interconnection and wholesale and corporate communication departments. His career at Crnogorski Telekom started in September 2010 as advisor to the Chairman of the Board. He was appointed Corporate Affairs Officer in November 2010. He currently holds the position of Chief Corporate Affairs Officer, which includes the wholesale area.

Milija Zeković, Chief Commercial Officer

Born in 1971, he holds a degree in economics from the University of Montenegro. After completing his studies in 1995, he started his career at “Kartonka”, Podgorica as Production and Sales Manager. He started working as Sales Manager in T-Mobile (formerly Monet) in 2000. In 2006, he became the Director of Sales for residential customers and small and medium enterprises. In 2008 he was appointed as the Chief Sales Officer of Crnogorski Telekom. In 2013 he took the position of Chief Commercial Officer for Business segment. He currently holds the position of Chief

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Crnogorski Telekom - 2014 Annual Report DRAFTCommercial Officer, responsible for both consumer and business segments.

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Our VisionIn a fast changing world,we are your first choice to live in a fully digital lifestyle wherever you are, whatever you do; by aspiring to be the best in class.

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Crnogorski Telekom - 2014 Annual Report DRAFTOur StrategyTelekom continued with successful implementation of corporate strategy based on three strategic pillars: Stand for Broadband; Transform to Outperform and New Way to Play.

Stand for Broadband

Telekom is constantly improving its technology leadership and we are continuously investing in modernization of our network, as a precondition for superior quality of service and best experience of our customers. In 2014 we continued with successful migration of customers to the IMS platform and MSAN system migration, where we replaced legacy access systems with modern MSAN technology. Our fibre network footprint expanded in 2014 and in the same time, we modernized our mobile access network through improvements in 3G and 4G technologies. Thanks to these investments, we can proudly say that “we are the network that gives you the most”. Being a technology leader is a privilege but a commitment too, to continue with our activities and investments in order to meet our customers’ needs.

Transform to Outperform

In order to leverage on the opportunities of the new world, we must adapt. Emerging competition, new market players, internet application are changing traditional way of doing business. As a response we have established eBusiness department that is moving away from one-way communication with our customers to two-way communication. By setting strong eSales; eCare and alternative channels capabilities we strive to make our services more simpler and faster, and to ensure seamless experience to our customers.

New Way to Play

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Industry we are operating in is facing strong regulatory requirements, which, together with existing and emerging competition, is driving down service revenues. In such a situation, Telekom is using its leading position on the market to exploit new market opportunities and develop new business models. Partnership network is expanded both in core and beyond core products. We are in the meantime preferred choice on ICT market, with expanding network of our valued enterprise customers that are top brands in their respective fields.

In order to continue to be successful, keep leading position and capture new digital opportunities, Telekom has launched a new corporate strategy for 2015 and beyond. We see ourselves as technology leaders and pioneers. Our modern, best in class, network infrastructure will offer the best customer experience and simpler, faster and innovative products. At the same time we are proactively committing to new growth opportunities for us.

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Regulatory EnvironmentRegulatory environment is characterised by implementation of the new Law on Electronic Communications based on the EU regulatory 2009 framework, as well as number of bylaws adopted in accordance with the new Law. New regulatory framework is dedicated to ensuring competitiveness in the market as well as obtaining greater level of consumer rights protection. The new products placed in the market, based on the resolutions on SMP operators from 2010 and 2013, haven’t been put into operation yet, due to a lack of interest from other parties. The only interest was shown for duct rental.

The Cost Accounting and Accounting Separation Methodology were implemented for both fixed and mobile services. Revised reports for 2013 were approved by the National Regulatory Authority (NRA) in July 2014.

In 2013, the NRA completed second round of market analysis of seven relevant markets already analysed in 2010. CT was identified as an SMP in all seven markets again. Additionally in 2012 the NRA applied three criteria test on two retail markets: broadband and mobile service as to find out if those markets are susceptible for ex ante regulation. Retail market of mobile services was found sufficiently competitive, while CT was designated as SMP on fixed broadband market. Upon approval of 2013 Regulatory reports for fixed network the NRA entered in retail price regulation of the following services provided at fixed location: access to the network, broadband as well as voice service (local, national and international calls) on cost orientation basis. Price adjustment implied decrease based on CT cost model

Universal service

Universal service (US) was commercially launched in December 2011, but without significant interest from the

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Crnogorski Telekom - 2014 Annual Report DRAFTcustomers’ side for the service. However, after introducing changes in the US regulatory framework customers interest was significantly increased, especially for voice service and internet access. Interest for US Inquiry and Directory Service was not remarkable. Consequently, Montenegrin operators compensated a rather significant net cost to USOs for the period 2011- 2013.

Number Portability

The Number Portability service was commercially launched in 2011. During last three years around 50% of all ported mobile numbers were ported in the CT network. Interest for porting numbers in the fixed-line segment was not significant. The new Rulebook on Number Portability adopted in 2013 provides for fewer restrictions for the porting of numbers.

Regulatory fees

Under the regulations currently in effect, Crnogorski Telekom pays fees for market supervision, numeration and the usage of radio frequencies.

Carrier Selection

Carrier Selection was already included in the Reference Interconnection Offer (RIO) published in 2008. In accordance with the NRA’s Resolution on Designating CT as an SMP in the relevant market, the updated RIO also includes Carrier Pre-selection. Only two operators have signed interconnection agreements with Crnogorski Telekom with Carrier Selection included.

Sharing of infrastructure

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Crnogorski Telekom - 2014 Annual Report DRAFTThe RIO also defines the terms and conditions of collocation, for the purpose of interconnection realised in Crnogorski Telekom’s premises. This includes renting of space in buildings, masts and ducts. The RIO’s conditions are valid only for operators looking for interconnection/access, while usage of infrastructure by operators for other purposes is subject to commercial negotiations. Apart from the RIO, the Reference Unbundling Offer defines the terms and conditions of collocation for the purpose of local loop unbundling, including also rental of collocation space in CT premises and ducts. Regulated prices for duct rental do not encourage investments in new duct deployment.

Termination of calls

Based on the relevant SMP resolutions adopted by the NRA as of 1st of November 2014 the fixed termination rates (FTR) were decreased from 0,93 to 0,74 cents/min (for local) and 1,07 to 0,94 cents/min ( for single transit), while mobile termination rate (MTR) for voice traffic was decreased from 2,2 cents to 1,9 cents/min.

Future regulatory developments

In the process of implementation of the 2013 Law on Electronic Communications, the NRA and the responsible ministries will work on further regulatory framework developments through harmonisation of exiting bylaws and adoption of new ones.

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Promotions and offersResidential customers

Postpaid

The beginning of the year was marked by a campaign in which all new and existing customers had the possibility to buy a new option which allowed them to talk and SMS within the network for a favourable price, along with three months free subscription for contract prolongations. Promotions continued in September, with a campaign offering three months free minutes and SMS within the network, along with included data.

Prepaid

The year kicked off with an upgrade of existing voice options, which now include SMS within the network with a promotional element of the first activation being free of charge for the bi-weekly option.

In order to better match the needs of a special customers segment, CT launched VOLIM, a branded reseller tariff in partnership with a leading retailer in the country. VOLIM is specifically designed to satisfy the needs of the target segment and is offering relevant benefits: free minutes and SMS within the group, with a strong loyalty element.

Fixed telephony

IMS (IP Multimedia Subsystem) migration, a key technical transformation project, continued in 2014. The new system is based on IP protocols and will set the stage for the new generation of fixed services, with new functionalities for customers. At the end of 2014, over 90.000 customers had

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Crnogorski Telekom - 2014 Annual Report DRAFTbeen migrated to the new system. Aim of the company is to complete migration to IMS in 2015.

Extra TV

Extra TV customers had an exciting year in 2014, with new promotions throughout the year, along with new product and content offers. Extra TV was available as a bundle with free minutes in the fixed network and later with included internet access, enabling customers to call their loved ones for free or use the internet. At the end of 2014, there were 64,300 customers, which is an increase of 4% compared to the previous year. The company maintained its leading position in the market with a market share of 41.8%.

Fix broadband

Strong marketing campaigns marked the entire year helping to increase the Fix broadband customer base to 77,800 customers, which is an increase of 5% compared to the previous year. CT introduced a new product, enabled by its progress in the IP migration: Broadband on Demand allows the customer to start using broadband services within 15 minutes of ordering. As a result of the various marketing and promotional activities, CT holds a 81.7% market share in the broadband internet market.

Fibre to the home (FTTH)

Crnogorski Telekom continued its strong development of its fibre infrastructure resulting in utilisation reaching 25%. The number of customers of fibre increased from almost 7.000 to over 9.000 in 2014. In addition to the existing benefits available to fibre customers, such as very high internet speeds, the possibility of connecting up to five TV sets to the IPTV service, and a free additional phone line, fibre customers can now also enjoy more full HD channels.

Sales of consumer goods

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In 2014, Crnogorski Telekom continued the development and expansion of partnership with major retail chains. A wide portfolio of electronic consumer goods is offered.

Loyalty program

Premium program activities in 2014 were focused on expanding the number of partners and companies supporting the program, along with the number of Premium program customers. The year saw intensive promotions of the benefit of the program and special discounts from selected partners.

Business customersPostpaid

Together with residential segment we introduced for the first time flat on-net option (voice and SMS) in February 2014, in order to improve CT’s position in this segment. On-net option was available to all new and existing postpaid customers.

Throughout the year there were promotions for SME and SOHO segments, which were in focus in 2014, in order to protect our leadership position on the market and partially compensate revenue decrease of Key and Large accounts segment.

Roaming

In order to protect customers using services in roaming we continued with internet roaming cards for data usage throughout 2014. The number of activated daily and weekly roaming cards increased by almost 200% compared to 2013.

Fix broadband

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Crnogorski Telekom - 2014 Annual Report DRAFTStrong telesales activities during the entire year was helping us to increase the Fix broadband customer base to 8.2 thousand, which is an increase of 7% compared to the previous year base.

Convergent offers

The Business Summer Offer was launched in April 2014 and targets SMEs that are oriented towards summer-season business and have no need for internet connections for the entire year. It consists of fixed/mobile data services with minimal contract duration of three months. Also, purchase of HW (TVs, laptops, mobile phones) in instalments was a part of the promotional offer.

Integris (ICT)

Integris continued its successful story during 2014. Great progress in the hotel/resort segment and retail area was helping us to achieve YoY revenue growth of more than 70%. In November 2014, CT finished implementation of the largest ICT contract, for Porto Montenegro Marina phase I, with value of EUR 1.1 million. As a result of such a good cooperation, in November 2014 a new contract was signed for works in Porto Montenegro Marina phase II, with value of over EUR 2.5 million.

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Human ResourcesHR Contribution to three- year Business Transformation program DELFINIn 2014 HR has been fully dedicated to support the goals of “DELFIN” business transformation program. HR managed to provide efficient and sustainable organizational development, to align the organization with new business challenges by proportionate decrease of personnel related costs and managed necessary changes related to workforce allocation along with continuous efforts related to transformation towards e-Company.

Strategic Leadership and Employer positioning

According to the Pulse check results in 2014, CT managed to keep positive trends and stability. This has been also proven by the outcomes of the external benchmark research “The best company to work for in Montenegro” (Crnogorski Telekom won 3 prizes for 2013/2014: Best Company to work for; The Most Attractive Employer; Fair Play Award).

To confirm our leading position at the labour market, HR initiated the first gathering of HR professionals in Montenegro by organizing HR Forum of Montenegrin HR Community. This was a strategic initiative aimed to validate CT corporate social responsibility, identify trends and changes among the workforce at the local labour market and make HR Community visible and more strategically oriented.

Commitment to ONE DT EU

CT has actively taken part in cascading One DT (Europe) story and used Employee survey results to leverage

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Crnogorski Telekom - 2014 Annual Report DRAFTemployee satisfaction, motivation, strategy awareness and commitment to ONE DT (Europe).

Our stability and gradual improvements are mainly enabled by strong communication campaigns before each round of Pulse Check and full commitment of top and senior management to the survey process. In two Pulse Check rounds in 2014, we have recorded the best response rate in the Group, being especially strong in all questions which indicate Crnogorski Telekom’s commitment and willingness to build One DT across Europe.

Social dialogue & Employee benefits

Collective Bargaining Discussions for telecommunications branch on country level have been continued in 2014. CT representatives are actively involved trying to further improve social dialogue. Negotiations with representatives of the Trade Union on Company level on Salary discussion and new Rulebook on housing loans also started in the last quarter of 2014.

In Cooperation with Trade Union we have continued to provide and improve large scale of employee benefits: sport and recreation offers for all employees; medical check-ups for employees and their children including annual systematic check-ups, prevention check-ups for female and male colleagues separately; purchasing goods on the instalments; material aids in case of illness; subvention of winter and summer vacation, etc. The advanced health insurance is under negotiation.

Optimization of Training and Development offer

Based on the heritage of CT Management Academy and full utilization of DT Group-wide training offers, we managed to increase overall employee satisfaction with the training and development opportunities while at the same time, we

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Crnogorski Telekom - 2014 Annual Report DRAFTapplied cost saving measures and reduced the training budget. The main achievements in 2014 were:

fully standardized local training offers according to the following categories: executive management, senior management, middle managers, experts and the employees)

Extended HRD product portfolio with the first pool of internal trainers in the Company

Advanced training offer for 29 managers - Franklin Covey: 7 habits of Highly Effective People

The biggest team building event ever organized in the Company - for the One Billing team (more than 60 participants)

Improved training facilities (new HR training room), which creates a precondition for knowledge transfer within the Company and to meet further cost efficiency requirement.

Living culture and effective communication

To strengthen the trust and collaboration as a foundation of targeted corporate culture, HR took part in and initiated several programs and initiatives.

All CxOs and directors from CT have attended Group-wide program for executives: Effective Collaboration sessions.

Supporting the CEO’s initiative HR started to organize so called C.E.O. Circle of trust – informal meetings between the CEO and the employees from non-managerial positions.

HR also extended existing Communication portfolio with some new products like Company newsletter T – NEWS to enhance the trust and closer communication within the Company.

HR redesigned and revised Cultural guidelines for day- to-day usage (Pocket Culture) which is dedicated to our

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existing cultural habits and the most preferable behavioural patterns. That way, we are continuously aligning our culture with the upcoming business challenges, taking care that only a living corporate culture can be valid foundation for sustainable business growth.

HR Processes Review - We make it lean and simple!

To support the implementation of leaner organisation and efficient business operations, HR has started to reduce the complexity by simplification of HR product portfolio and standardization of its key processes, which was finalized by the end 2014. Following the lean principles, HR Area organized its regulations in a more business driven framework clearly applying more systematic approach regarding development and more pragmatic approach regarding implementation. This way, HR met one of the top strategic priorities for 2014.

HR also continues to enable provision of traditional HR services on-line.

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Corporate ResponsibilityCorporate responsibility has been part of our corporate culture for many years; it involves and is an integral component of all our business activities. As one of the leading companies in the country, Crnogorski Telekom aims to be involved in all areas that are important to Montenegrin society. Besides striving to offer the most advanced telecommunication services for our customers, we wish to actively contribute to the development of the community in which we do business and of which we are a part.

Crnogorski Telekom is a company that has always maintained a balance between economic, environmental and social goals while being accountable to the community and positioning itself in a socially responsible manner. The areas on which we are focusing are education, health and the environment, culture and community support.

“Za svako dobro “

Among Telekom’s many projects in 2014, the highlight of the year was the donation contest called "Za svako dobro“ (eng. "For every good"), a long term project that finance socially responsible projects of special importance to the Montenegrin society, in the amount of EUR 23 thousand.

Among 70 NGOs that applied for grants, four projects were selected and awarded with funds for implementation.

- “No hate offline, no hate online”: a project to prevent cyber bullying among teenagers

- “Free your creativity”: showing how new technologies can empower women who are victims of domestic violence

- “Day care”: specialist support for children with autism

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- Android app: promoting the botanical garden Dulovine near Kolasin

The contest was open to all non-governmental organizations from Montenegro that could apply their projects in the field of education, arts and culture, environmental protection and the creation of equal opportunities for networking and participation in digital society.

The aims of the project include making people more aware of Crnogorski Telekom’s social responsibility activities, engaging important stakeholders and gaining their trust, and increasing transparency in the company’s social engagement. In order to ensure transparency and the selection of the best projects, beside Telekom employees, representatives from NGO "Fund for active citizenship", Montenegrin TV station „TV Vijesti“ and local UNDP office participated in selection of the winning projects.

Development of information society in Montenegro

Being the leading broadband provider in the country, Crnogorski Telekom has the responsibility of being the country's first partner on its way to becoming an information society.

For the eight year in a row, Crnogorski Telekom is enabling free internet access via ADSL to all elementary and high schools in the country. During 2014, around 150 Montenegrin schools benefitted from this. The project was implemented together with the Ministry of Education and Science.

In 2014, Crnogorski Telekom, together with Deutsche Telekom organized the Telekom Innovation Contest in Montenegro, aiming at students, entrepreneurs with startup ideas, and young IT startups. Areas of competition were Internet of Things, Big Data, Internet Security, Cloud-Based Productivity and Future Media & Communication. Montenegrin finales included six teams, while the winning

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Crnogorski Telekom - 2014 Annual Report DRAFTidea, for a social network “Hook”, that allows users to follow where their friends are in real time, was awarded with a trip to Krakow, Poland where they participated in international finale of this competition.

In the same year, Telekom supported Spark.me, one of the biggest tech/business conferences in the Balkan region.

Sports, music and culture move people

Our sponsoring platform focuses on sports, music and culture – which is perfect for underlining our brand promise “Life is for sharing” and giving a wide range of memorable moments to share.

Within the company’s sponsorship strategy, sports have a special place since this is an important area for developing a healthy, modern and advanced society. The company is the golden sponsor of the Montenegrin national football team and general sponsor of the Telekom Montenegrin Football First League. Additionally, in 2014 Telekom supported and sponsored Budućnost Basketball Club.

Regarding music, as one of the main areas within the sponsorship strategy, we sponsored numerous musical events and activities, since music is considered to be the universal language for all generations. We partnered with organisations across Montenegro and supported the Asfaltiranje Hip-Hop Festival in Podgorica, the Southern Soul Festival in Ulcinj, Sea Dance in Budva, and After Beach Parties across Montenegrin coastline. In September 2014, with the support of Deutsche Telekom, Crnogorski Telekom organized Electronic Beats, festival of electronic music in Podgorica.

In the field of culture, Crnogorski Telekom partnered with several organisations in order to support different projects, with the focus being on youth and education. The activities of these organisations were vital to the Montenegrin art scene.

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In 2014, the company was also the sponsor of the Telekom Underhill Fest, an international documentary film festival which featured a series of concerts, film projects and lectures in Podgorica. Telekom supported the International TV Festival in Bar, as well as FIAT, festival of alternative theatre in Podgorica.

Environment protection and energy efficiency

In 2014, Crnogorski Telekom continued implementing a range of measures to save energy and make their operations more energy-efficient. Energy consumption was reduced through a number of different measures.

In March 2014, the company participated in the Earth Hour and Earth Day global campaigns with the aim of raising awareness about climate change issues. The company is constantly promoting usage of sustainable solutions among its customers and employees, e.g. promoting e-mail bills, online registration, etc.

Crnogorski Telekom owns three state-of-the art base stations that use renewable energy sources, the power of the sun and wind. The project is part of a broader company initiative to address global warming issues and protect the environment.

Community support

Besides the contest for socially responsible ideas, the year 2014 was also marked by the cooperation with NGO Bicklo.me in order to promote cycling as a sustainable mode of transportation. Thanks to Telekom’s donation, 18 bike racks have been installed in Podgorica, and a mass cycling event was organized to promote cycling.

The company also participated in disaster relief activities to support victims of floods that hit several countries in the region in May 2014. Telekom gave a corporate donation of

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Crnogorski Telekom - 2014 Annual Report DRAFTEUR 10 thousand and in cooperation with Red Cross Montenegro, the company opened a donation line in order to enable its customers to give their contribution and help the ones in need. By the end of June, total amount collected was 104 156.

Volunteering

In 2014, the company continued to organize blood donation activities. In cooperation with Montenegrin Centre for Blood Transfusion, around 40 employees donated blood and helped to raise awareness to this important social issue. In December 2014, the company was awarded with the Recognition of contribution to blood donations in Montenegro, given by the Montenegrin Office for Blood Transfusions and the Montenegrin WHO Office.

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Further InformationContacts

Crnogorski TelekomMoskovska 2981000 PodgoricaMontenegroTel: + 382 20 433 433Fax: + 382 20 225 752e-mail: [email protected]

Stock trading information:

Crnogorski Telekom stock code: TECG

Montenegroberza a.d.PodgoricaMoskovska 7781000 PodgoricaMontenegroTel/Fax: +382 20 228 502E-mail: [email protected]

Published by:Crnogorski Telekom © 2015

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