Explanations of items in the income statement

Due to the modified initial adoption of IFRS 16 and the associated effects in the fiscal year 2019, the prior-year figures disclosed in the income statement are of limited comparability. For further information, please refer to Note 2.3 and Section 2.2 of the Management Report.

5. Sales revenue/segment reporting

According to IFRS 8, the identification of operating segments to be included in the reporting process is based on the so-called management approach. External reporting should therefore be based on the Group’s internal organization and management structure, as well as internal financial reporting to the Chief Operating Decision Maker. In the United Internet Group, the Management Board is responsible for assessing and controlling the success of the various segments.

The Group’s operating business is divided into the two business divisions “Access” and “Applications”, which in turn are divided into the reporting segments “Consumer Access” and “Business Access”, as well as “Consumer Applications” and “Business Applications”.

In the course of its ongoing integration measures in the Consumer Access segment, United Internet adjusted the disclosed sales figures of a Group subsidiary of 1&1 Drillisch acquired in 2017, which previously recognized revenue-reducing effects as cost of sales, and brought it in line with standard Group disclosure methods in the fourth quarter of 2019. To aid comparability, revenue and cost of sales figures for the fiscal year 2018 were also adjusted. As a result of this adjustment, disclosed revenue and cost of sales figures for the previous year in the Consumer Access segment and at Group level were both reduced by € 27.9 million. This merely resulted in a reclassification between these two items in the statement of comprehensive income. The adjustment has no effect on the key earnings figures (EBITDA and EBIT) of the segment or the Group.

A description of the products and services is provided in Note 2.1 in the explanation of revenue recognition. The segment “Corporate” comprises mainly management holding functions.

The Management Board of United Internet AG mainly controls operations on the basis of key performance figures. It measures segment success primarily on the basis of sales revenue, earnings before interest, taxes, depreciation and amortization (EBITDA), and the result of ordinary operations (EBIT). Transactions between segments are charged at market prices. Information on sales revenue is allocated to the country in which the company is domiciled. Segment earnings are reconciled with the total amount for the United Internet Group.

Segment reporting of United Internet AG in fiscal year 2019 was as follows:

Segment reporting of United Internet AG in fiscal year 2018 was as follows:

* Adjustment of prior-year figures; see above notes

Non-current segment assets comprise shares in associated companies, other financial assets, and goodwill.

In the fiscal year 2019, revenue of the Consumer Access segment from contracts with customers includes hardware sales of € 702,582k. Revenue of the Business Access segment from contracts with customers for the fiscal year 2019 includes hardware sales of € 10,625k. The remaining revenue of the two segments is attributable to service revenue. The other business segments only generate revenue from services.

In the periods under review, there was no significant concentration of individual customers in the customer profile. As in the privious year, the United Internet Group does not generate more than 10% of total external sales revenue with any single customer. Foreign sales accounted for 8.3% (prior year: 7.8%) of total Group revenue.

The highest management committee only monitors shares in associated companies, other non-current financial assets, and goodwill. The depreciation disclosed in the segments refers to other, non-monitored intangible assets, and property, plant, and equipment.

Contract balances developed as follows in the fiscal year 2019:

Apart from customer growth, the main reason for the increase in contract, compared to last year, was the increased subsidizing of hardware in the fiscal year 2019.

In fiscal year 2019, revenue of € 154,290k (prior year: € 177,288k) was recognized which was contained in contract liabilities at the beginning of the fiscal year.

The total transaction price of performance obligations still unfulfilled at the end of the reporting period amounted to € 1,604,511k (prior year: € 1,498,298k) as of December 31, 2019. The following table shows the time bands in which the transaction prices from unfulfilled or partially unfulfilled performance obligations as of the reporting date are expected to be recognized:

The transaction prices shown relate to unfulfilled performance obligations from contracts with customers with an original contract term of more than 12 months. They relate to service components with period-based revenue recognition and to contracts for which a one-off fee has been invoiced and which are now recognized as revenue over the relevant original minimum contract term.

6. Cost of sales

* Prior year figures adjusted; see note 5

Cost of sales in relation to sales revenue increased to 66.0 % compared with the previous year (65.7%*), resulting in a slight decline in gross margin to 34.0 % (prior year: 34.3%*).

7. Selling expenses

Selling expenses rose from € 678,231k (13.2% of sales) to € 741,754k (14.3 % of sales). They include personnel expenses of € 245,718k (prior year: € 219,359k), depreciation of € 136,471k (prior year: € 137,653k), and other selling expenses of € 359,565k (prior year: € 321,219k). Other selling expenses mostly comprise customer acquisition costs, advertising, customer care, and product management.

8. General and administrative expenses

Compared to the previous year, general and administrative expenses decreased from € 218,943k (4.3% of sales) to € 205,899k (4.0 % of sales). They include personnel expenses of € 81,644k (prior year: € 104,728k), depreciation of € 30,305k (prior year: € 14,051k), and other general and administrative expenses of € 93,950k (prior year: € 100,163k). The other general and administrative expenses mostly comprise expenses for accounts receivable management, legal and consulting fees, and maintenance costs.

9. Other operating income/expenses

9.1 Other operating expenses

* Bad debt losses will be presented seperately in the 2018 financial year due to the amended requirements of IAS 1.

Expenses from foreign currency translation mainly comprise losses from exchange rate changes between the date of origination and time of payment of foreign currency receivables and payables as well as losses from measurement as of the reporting date. Currency gains from these items are reported under other operating income. A net consideration of this item results in a net loss of € 2,048k (prior year: net loss of € 51k).

9.2 Other operating income

Income from the disposal of an associated company refers to the gain on disposal of shares in Virtual Minds AG, Freiburg.

Income from trademark write-ups relates to the impairment reversal of the trademark STRATO, which in contrast to the previous year was classified as an asset with an indefinite useful life. Please refer to Note 29 for further details.

Income from foreign currency translation mainly comprises gains from exchange rate changes between the date of origination and time of payment of foreign currency receivables and payables, as well as gains from measurement as of the reporting date. Currency losses from these items are reported under other operating expenses.

10. Impairment charges on receivables and contract assets

Impairment charges on receivables and contract assets comprised the following:

11. Depreciation and amortization

Depreciation and amortization of intangible assets, and property, plant, and equipment consist of the following:

Depreciation and amortization also includes the amortization of capitalized assets resulting from business combinations. These are divided between the capitalized assets as follows:

Amortization of capitalized assets resulting from business combinations is divided between the business combinations as follows:

Amortization from the business combination ProfitBricks refers to IONOS SE. ProfitBricks was merged into 1&1 IONOS SE.

12. Personnel expenses

Personnel expenses are divided among the various divisions as follows:

Personnel expenses include wages and salaries of € 472,059k (prior year: € 462,164k), and social security costs of € 80,788k (prior year: € 76,606k).

The number of employees increased by 3.1%, from 9,093 in the previous year to 9,374 employees at year-end 2019:

The average number of employees in fiscal year 2019 amounted to 9,222 (prior year: 9,051), of which 7,626 (prior year: 7,547) were employed in Germany and 1,596 abroad (prior year: 1,504).

With regard to company pension plans, the Group only has defined contribution plans. The Company pays contributions to the state pension fund as a result of statutory obligations. There are no other benefit obligations for the Company after payment of the contributions. The current contribution payments are disclosed as an expense in the respective year. In fiscal year 2019, they totaled € 29,025k (prior year: € 28,181k) and mostly concerned contributions paid to the state pension fund in Germany.

As a result of contribution exemptions, an amount of € 0k (prior year: € 0k) of this total referred to contributions paid to related parties.

13. Financial expenses

The year-on-year increase in borrowing costs results mainly from the subsequent measurement of derivatives as well as from interest expense due to IFRS 16.

The subsequent measurement of derivatives refers to the measurement through profit or loss of the purchase price liabilities from the acquisition of STRATO and InterNetX.

Please refer to Note 45 for an explanation of the financial expense from leases.

14. Financial income

The subsequent measurement of derivatives refers to the measurement through profit or loss of derivatives agreed in the course of the Warburg Pincus investment in the Business Applications segment. Income from dividends of € 992k mainly refers to dividends of Afilias, which was allocated to the measurement category “financial assets measured at fair value through other comprehensive income”. Other financial income mainly comprises interest income from credit balances with banks. With regard to income from loans to associated companies, please refer to Note 42.

15. Income taxes

The income tax expense is comprised as follows:

Under German tax law, income taxes comprise corporate income tax and trade tax, as well as the solidarity surcharge.

German trade tax is levied on a company’s taxable income adjusted for certain revenue which is not subject to such tax, and for certain expenses which are not deductible for purposes of trade tax. The effective trade tax rate depends on the municipalities in which the Group operates. The average trade tax rate in fiscal year 2019 amounted to approx. 15.2% (prior year: 15.2%).

As in the previous year, German corporate income tax was levied at 15% – irrespective of whether the result was retained or distributed. In addition, a solidarity surcharge of 5.5% is imposed on the assessed corporate income tax.

In addition to taxes on the current result, income taxes include tax expenses not relating to the period of € 912k (prior year: tax expense € 4,093k).

Deferred tax assets are recognized for tax loss carryforwards and temporary differences if it is probable that taxable profit will be available against which the deductible temporary difference can be utilized.

Deferred tax assets for tax loss carryforwards in certain countries are shown in the table below:

Deferred taxes for loss carryforwards mainly relate to the Versatel Group. Taking into consideration significant taxable temporary differences, the realization of loss carryforwards is based on the strategic importance that the Versatel Group will have for the business of expanding and using the 5G network.

Deferred tax assets of € 0k (prior year: € 2,744k) were formed for loss carryforwards of previous years.

The following time limits apply for the use of tax loss carryforwards in different countries:

• USA: 20 years for loss carryforwards incurred before 2018, indefinite for loss carryforwards incurred from 2018 onwards
• Germany: Indefinite, but minimum taxation
• Poland: 5 years

Tax loss carryforwards for which no deferred tax assets have been formed, refer to the following countries (excluding Germany):

* Tax rate 21,0 %

** Tax rate 10,0 %

A breakdown of income tax types results in the following loss carryforwards for Germany for which no deferred taxes have been formed:

Loss carryforwards in Germany for which no deferred tax assets have been formed mainly refer to loss carryforwards of 1&1 Energy GmbH. The use of loss carryforwards by 1&1 IONOS Cloud GmbH (formerly ProfitBricks), for which no deferred taxes were recognised in the previous year, resulted in a tax relief of € 5,209k.

The so-called “interest cap” enshrined in German tax law limits the deductibility of interest expenses for the assessment of company income taxes. Interest expenses that cannot therefore be deducted are carried forward indefinitely to the following fiscal years (interest carryforward).

The Group’s interest carryforward, for which no deferred taxes were formed, amounts to € 128,026k (prior year: € 92,167k).

In fiscal year 2019, loss carryforwards of € 9,477k were used (prior year: € 1,254k) for which deferred taxes had been recognised in the prior year.

Deferred taxes resulted from the following items:

The net balance of deferred tax liabilities of € 379,032k in the previous year changed to a net balance of deferred tax liabilities of € 341,387k. As a result, the total change in the net balance of deferred taxes amounted to € 37,645k (prior year: € 142,231k). This change was mainly due to the following factors:

• Increase in deferred tax liabilities on contract assets not recognized in the tax balance sheet (€ 24.8 million).
• Increase in deferred tax assets on accrued hardware subsidies, and assumed activation fees in the tax balance sheet (€ 16.6 million).
• Decrease of € 30.0 million in deferred tax liabilities from intangible assets in connection with the amortization of assets from company acquisitions.

The change in the net balance of deferred taxes compared to the previous year is reconciled as follows:

The aggregate tax rate is reconciled to the effective tax rate of continued operations as follows:

The tax-reduced profit from disposals and income from investments primarily relate to income from the sale of shares in Virtual Minds.

Non-taxable at-equity results mainly relate to the prorated results of associated companies.

The anticipated tax rate corresponds to the tax rate of the parent company, United Internet AG.

As in the previous year, income tax claims mainly relate to receivables from tax authorities in Germany and amounted to € 21,546k (prior year: € 129,611k) as of the balance sheet date.

As in the previous year, income tax liabilities relate primarily to liabilities to tax authorities in Germany and amounted to € 91,680k (prior year: € 187.938k) as of the balance sheet date.

16. Earnings per share

As in the previous year, capital stock as of December 31, 2019 was divided into 205,000,000 registered no-par shares each with a theoretical share in the capital stock of € 1. On December 31, 2019, United Internet held 17,338,513 treasury shares (prior year: 4,702,990). These treasury shares do not entitle the Company to any rights or proportional dividends and are thus deducted from equity. The weighted average number of shares outstanding used for calculating undiluted earnings per share was 199,273,597 for fiscal year 2019 (prior year: 200,167,199).

There was no dilutive effect from employee stock ownership programs of United Internet AG due to the strong decline in the share price as of reporting date, as these were not in the money as of December 31, 2019. In the previous year, a dilutive effect was taken into consideration for option rights resulting from the employee stock ownership programs of United Internet AG which were in the money as of December 31, 2018. All option rights existing on December 31, 2018 were considered in the calculation of diluted earnings per share, using the treasury stock method, insofar as the option rights were in money and irrespective of whether the option rights were actually exercisable on the reporting date. The calculation of the dilutive effect from conversion is made by first determining the number of potential shares. On the basis of the average fair value of the shares, the number of shares is then calculated which could be acquired from the total amount of payments (par value of the rights plus additional payment). If the difference between the two values is zero, the total payment is exactly equivalent to the fair value of the potential shares and no dilutive effect need be considered. If the difference is positive, it is assumed that these shares will be issued in the amount of the difference without consideration.

The calculation of diluted earnings per share was based on zero (prior year: 697,500) potential shares (from the assumed use of rights). Based on an average market price of € 31.80 (prior year: € 48.52), this would result in the issuance of zero (prior year: 119,119) shares without consideration.

The following table shows the underlying amounts for the calculation of undiluted and diluted earnings:

17. Dividend per share

The Annual Shareholders' Meeting of United Internet AG on May 23, 2019 voted to accept the proposal of the Management Board and Supervisory Board to pay a dividend of € 0.05 per share. The total dividend payment of € 10.0 million was made on May 28, 2019.

In accordance with section 21 of the Company’s articles, the Annual Shareholders' Meeting decides on the appropriation of the balance sheet profit. For the fiscal year 2019, the Management Board will propose to the Supervisory Board a dividend of € 0.50 for each share entitled to dividends for the past fiscal year 2019.

The Management Board and Supervisory Board will discuss this dividend proposal at the Supervisory Board meeting on March 25, 2020 (and thus after the preparation deadline for these Consolidated Financial Statements as of March 23, 2020).

Pursuant to section 71b AktG, the Company does not accrue any rights from treasury shares and thus has no pro-rated dividend rights. As at the date of signing the Consolidated Financial Statements, the United Internet Group holds 6,338,513 treasury shares (prior year: 4,702,990). The number of shares with dividend rights may change before the Annual Shareholders' Meeting. In this case, a proposal will be made to the Annual Shareholders' Meeting to maintain the dividend of € 0.50 per entitled no-par value share with a corresponding adjustment to the proposal for the appropriation of profit.