Explanations of items in the income statement

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”.

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 2020 was as follows:

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

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

In the fiscal year 2020, revenue of the Consumer Access segment from contracts with customers includes hardware sales of € 739,056k (prior year: € 702,582k). Revenue of the Business Access segment from contracts with customers for the fiscal year 2020 includes hardware sales of € 9,123k (prior year: € 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 reporting periods, there was no significant concentration of individual customers in the customer profile. As in the previous year, the United Internet Group did not generate more than 10% of total external sales revenue with any single customer. Foreign sales accounted for 8.5% (prior year: 8.3%) of total Group revenue.

In addition to investments, 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, as these are largely determined automatically once the relevant useful life has been determined.

Contract balances developed as follows in the fiscal year 2020:

Apart from customer growth, the main reason for the year-on-year increase in contract assets was the increased subsidizing of hardware in the fiscal year 2020.

In fiscal year 2020, revenue of € 149,930k (prior year: € 154,290k) 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 € 1,717,784k (prior year: € 1,604,511k) as of December 31, 2020. 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

The cost of services includes a non-scheduled write-off of prepaid expenses for an advance service agreement totaling €129.9 million. In the past, these were released over the originally agreed contract term. Due to the premature termination in connection with the conclusion of a new long-term advance service agreement, a reassessment was made, resulting in the unscheduled write-off. For further information, please refer to Note 22.

Cost of sales in relation to sales revenue increased to 70.2% compared with the previous year (prior year: 66.0 %), resulting in a decline in gross margin to 29.8% (prior year: 34.0%). Adjusted for the write-off of the above mentioned prepaid expenses of € 129.9 million, cost of sales in relation to sales revenue amounted to 67.8%. The adjusted gross margin amounts to 32.2%.

7. Selling expenses

Selling expenses rose from € 741,754k (14.3% of sales) to € 767,917k (14.3% of sales). They include personnel expenses of € 264,930k (prior year: € 245,718k), depreciation of € 138,646k (prior year: € 136,471k), and other selling expenses of € 364,341k (prior year: € 359,565k). 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 € 205,899k (4.0% of sales) to € 205,964k (3.8% of sales). They include personnel expenses of € 90,859k (prior year: € 81,644k), depreciation of € 28,553k (prior year: € 30,305k), and other general and administrative expenses of € 86,552k (prior year: € 93,950k). 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

Expenses relating to other periods include tax arrears, mainly for sales tax, due to a completed tax audit amounting to € 10,119k. 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 net income of € 3,446k (prior year: net loss of € 2,048k).

9.2 Other operating income

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.

Income from other periods mainly comprises sales tax refund claims due to a completed tax audit of previous years amounting to € 9,855k.

Income from the disposal of an associated company in the previous year relates to income from the sale of shares in Virtual Minds AG, Freiburg.

Income from trademark write-ups in the previous year refers to the write-up of the STRATO brand. Please refer to Note 29 for further information.

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 1&1 IONOS SE. ProfitBricks GmbH 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 € 507,093k (prior year: € 472,059k), and social security costs of € 85,231k (prior year: € 80,788k).

The number of employees increased by 2.8%, from 9,374 employees in the previous year to 9,638 employees at year-end 2020:

The average number of employees in fiscal year 2020 amounted to 9,504 (prior year: 9,222), of which 7,837 (prior year: 7,626) were employed in Germany and 1,667 abroad (prior year: 1,596).

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 2020, they totaled € 36,054k (prior year: € 29,025k) 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 subsequent measurement of embedded derivatives refers to the measurement through profit or loss of the derivatives agreed in the course of the Warburg Pincus investment in the Business Applications segment as well as purchase price liabilities from the acquisition of STRATO and InterNetX.

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

14. Financial income

The subsequent measurement of embedded 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 €842k mainly refers to dividends of investees. 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 2020 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 € 14,715k in connection with the tax audit (prior year: tax expense € 912k).

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 in particular on the considerable strategic importance of Versatel as an intercompany service provider for the existing Layer II products of 1&1 Telecom GmbH and significant positive earnings forecasts, as well as the planned provision of the backbone network for the establishment of the 5G mobile communications network of 1&1 Drillisch.

No deferred tax assets (prior year: € 0k) 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 0.2%

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 Versatel GmbH and 1&1 Energy GmbH.

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 € 118,520k (prior year: € 128,026k).

In the reporting period, deferred tax assets were recognized on interest carryforwards for the first time due to the positive tax planning and the reduction of interest-bearing liabilities and resulting reduction of the interest burden. The resulting tax relief amounted to € 10,901k in the financial period.

In fiscal year 2020, no loss carryforwards were used (prior year: € 9,477k) for which deferred taxes had been formed in the previous year.

Deferred taxes resulted from the following items:

The net balance of deferred tax liabilities of € 341,387k in the previous year changed to a net balance of deferred tax liabilities of € 311,227k. As a result, the total change in the net balance of deferred taxes amounted to € 30,160k (prior year: € 37,645k). This change was mainly due to the following factors:

• Increase in deferred tax liabilities on contract assets not recognized in the tax balance sheet (€ 37.1 million).
• Increase in deferred tax assets from leases of € 26.9 million
• Increase in deferred tax assets on accrued hardware subsidies, and assumed activation fees in the tax balance sheet (€ 13.4 million).
• Decrease of € 9.9 million in deferred tax liabilities from intangible assets in connection with the amortization of assets from company acquisitions.
• Increase in deferred tax assets from loss carryforwards of € 20 million

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

The deferred tax effects recognized in equity result mainly from the employee stock ownership programs, which are recognized in equity.

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

The item actual and deferred taxes mainly refers to actual tax expenses from the tax audit and relates to previous years.

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 € 64,822k (prior year: € 21,546k) 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 € 114,621k (prior year: € 91,680k) as of the balance sheet date.

16. Earnings per share

Capital stock as of December 31, 2020 was divided into 194,000,000 registered no-par shares (prior year: 205,000,000 shares) each with a theoretical share in the capital stock of € 1. On December 31, 2020, United Internet held 6,769,137 treasury shares (prior year: 17,338,513). 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 187,347,843 for fiscal year 2020 (prior year: 199,273,597).

As of the reporting date, there was a dilutive effect from employee stock ownership programs of subsidiaries of 1 cent per share.

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.

Based on an average market price of € 33.57 (prior year: € 31.80), this would result in the issuance of 1,025,323 shares (prior year: none) without consideration.

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

17. Dividend per share

The virtual Annual Shareholders' Meeting of United Internet AG on May 20, 2020 voted to accept the proposal of the Management Board and Supervisory Board to pay a dividend of € 0.50 per share. The total dividend payment of € 93.6 million was made on May 22, 2020.

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 2020, 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 2020.

The Management Board and Supervisory Board will discuss this dividend proposal at the Supervisory Board meeting on March 24, 2021.

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 6,769,137 treasury shares (prior year: 6,338,513). 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.