VEON Ltd. — FY2017 Form 20-F summary
Reporting period: Year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Audited consolidated financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars. VEON provides mobile and fixed-line telecommunications and digital services across multiple markets; Italy is reported as a 50%-owned equity-method joint venture, not consolidated revenue.
Key financial results
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total operating revenue | US$9.474bn | US$8.885bn | Up 7% reported; management said up 4% excluding currency impact |
| Operating profit | US$1.506bn | US$1.084bn | Up 39% |
| Adjusted EBITDA | US$3.587bn | US$3.232bn | Up 11%; non-IFRS measure |
| Adjusted EBITDA margin | 37.9% | 36.4% | Calculated as Adjusted EBITDA divided by revenue |
| Loss before tax | US$24m | Profit US$347m | Includes weaker equity-accounted results and higher finance costs |
| Loss from continuing operations | US$496m | US$288m | Loss widened |
| Net cash from operating activities | US$2.475bn | US$1.875bn | Up US$600m |
| Cash used in investing activities | US$3.016bn | US$2.671bn | Includes US$2.037bn purchases of property, equipment and intangibles |
| Cash used in financing activities | US$733m | US$126m | Includes dividends and debt-related activity |
| Cash and cash equivalents | US$1.304bn | US$2.942bn | Down US$1.638bn |
| External debt principal | US$11.1bn | US$10.5bn | Increased year over year |
| Working capital | Deficit US$732m | Deficit US$2.007bn | Deficit narrowed |
VEON reported 210.5 million mobile customers, up from 207.5 million, and 117.6 million mobile data customers, up from 107.3 million. Mobile service revenue was US$8.688bn; fixed-line service revenue was US$786m. Dividends declared were US$0.28 per share for 2017, including the final dividend paid in March 2018.
Material changes versus 2016
- Reported revenue growth reflected a stronger Russian ruble and a full year of Warid consolidation in Pakistan. Underlying performance excluding currency impact grew 4%.
- Russia revenue rose 15% in U.S.-dollar terms, but only 1% in rubles; Adjusted EBITDA was broadly stable in rubles. Pakistan revenue increased 18% and Adjusted EBITDA rose 39%, benefiting from merger synergies and a release of historic SIM-tax accruals.
- Algeria revenue declined 12% and Adjusted EBITDA fell 22%, amid competition, customer churn and higher taxes. Bangladesh revenue declined 7% and Adjusted EBITDA fell 13%, affected by price competition and network availability problems. Uzbekistan revenue fell 23% in U.S.-dollar terms following currency liberalization, while local-currency revenue increased 19%.
- The share of loss from associates and joint ventures swung to US$412m from a US$48m profit, principally reflecting VEON’s US$390m share of the Italy Joint Venture’s loss. The Italy JV also had substantial integration, refinancing and network-modernization costs.
- 2016 net income included a US$1.788bn non-cash gain on the Italy transaction and US$2.708bn profit from discontinued operations. These items did not recur in 2017, so headline net income comparisons are not like-for-like.
Liquidity, debt and capital allocation
- Management said cash balances and available facilities were sufficient for present requirements despite negative working capital. Undrawn credit facilities were US$2.185bn at year-end, excluding the Italy JV.
- US$987m was pledged as collateral for a proposed mandatory tender offer for additional GTH shares and classified in other financial assets; it was not freely available cash. The filing reports US$1.304bn cash and cash equivalents and US$1.374bn cash and deposits, with differing classifications.
- 2017 capital expenditures were US$1.791bn, compared with US$1.741bn in 2016, excluding Italy JV capital expenditure. The company expects 2018 investment to focus on network maintenance, capacity and 3G/4G rollout, including in Pakistan, Bangladesh and Ukraine.
- Management expected operating cash flow and other funding sources to cover foreseeable needs, while noting uncertainty around currency, financing access, subsidiary remittances and capital requirements. Debt agreements contain covenants, including a net debt-to-Adjusted EBITDA limit of 3.5x under most facilities; VEON reported no covenant breach at year-end.
Outlook, commentary, risks and unusual items
- Management expected challenging macroeconomic conditions, particularly in Algeria, and intense competition in 2018. It identified data, content and value-added services as growth opportunities. The filing does not provide a clear numerical 2018 revenue or EBITDA forecast.
- VEON prioritized digital services and digitizing customer experience. It anticipated combined operating and capital expenditure of approximately US$100m per year for four years for the VEON platform, funded through cash, operating cash flow and existing or future financing.
- Currency movements were material: Uzbekistan’s 2017 currency reset led to a US$16m income-statement foreign-exchange loss and a US$420m negative translation-reserve movement. Repatriating approximately US$200m from Uzbekistan generated a separate US$49m foreign-exchange loss.
- Material strategic and transaction developments included a signed agreement to sell approximately 13,000 Pakistan towers for about US$940m, subject to conditions; the proposed GTH tender offer, which remained subject to regulatory approval; and the planned sale of Laos operations for US$22m. VEON’s exit from the Euroset joint venture closed in February 2018.
- Key risks include substantial debt and refinancing needs, foreign-exchange volatility and restrictions on cash transfers, market competition, regulatory and spectrum requirements, tax disputes, cybersecurity and data-protection exposure, and execution risk in digital transformation and integrations.
- VEON remained subject to a DOJ deferred prosecution agreement, SEC judgment and Dutch settlement, with an independent compliance monitor expected to continue through 2019, subject to possible early termination or extension. The company recorded US$33m in remaining provisions for related future legal costs at year-end; future compliance costs could be significant.
- Other notable items: US$124m loss on early debt redemption; US$106m one-off vendor-agreement gain within HQ Adjusted EBITDA; US$66m impairment expense, including goodwill impairments in Armenia and Kyrgyzstan; and an additional US$110m impairment of the Euroset investment.
Most important facts for investors to verify
- Reconcile the income statement’s US$496m consolidated loss with the US$483m loss attributable to parent owners and the filing’s narrative references to loss for the year.
- Review the audited cash-flow statement and cash classifications, including the US$987m GTH-offer collateral, to assess unrestricted liquidity and cash generation after investment.
- Check debt maturities, refinancing terms, covenant headroom and foreign-currency exposure; principal debt was US$11.1bn and contractual debt cash payments, including interest, were US$13.735bn.
- Assess the Italy JV’s leverage, restrictions on distributions, 2017 losses and ability to realize integration savings; VEON records only its equity-method share in consolidated results.
- Track completion and proceeds from the Pakistan tower sale, the GTH tender offer, and the Laos divestiture, as well as the cost and funding of 2018 spectrum acquisitions.
- Monitor progress against digital-platform investment plans, underlying revenue growth excluding currency effects, and operating trends in Algeria, Bangladesh and Uzbekistan.
- Follow developments in tax and litigation matters, the compliance monitorship, and adoption of IFRS 9, IFRS 15 and IFRS 16; management expected IFRS 16’s impact to potentially be material.