1&1 Drillisch AG: Annual Report 2020 - MoneyController (ID 47524)

ANNUAL REPORT 2020

DATA & FACTS

Selected Performance Indicators

PROFIT (IN €M)

Revenues

Service revenues

Hardware and Other revenues

EBITDA

EBITDA margin in % of revenue

EBIT without PPA write-oﬀs

EBIT margin in % of revenue without PPA write-oﬀs

EBIT

EBIT margin in % of revenue

EBT

EBT margin in % of revenue

Proﬁt per share in € excluding PPA write-oﬀs

Proﬁt per share in €

CASH FLOW (IN €M)

Net inﬂow of funds from operating activities

Net outﬂow of funds in investment sector

Free cash ﬂow

HEADCOUNT

(INCL. MANAGEMENT BOARD)

Total per end of December

CUSTOMER CONTRACTS (IN MILLIONS)

Access, contracts

of which mobile internet of which broadband (ADSL, VDSL, FTTH)

BALANCE SHEET (IN €M)

Short-term assets

Long-term assets

Shareholders' equity

Balance sheet total

Equity ratio

2020

3,786.8	3,674.9
3,020.0	2,943.0
766.8	731.9
468.5	683.5
12.4 %	18.6 %
411.2	641.8
10.9 %	17.5 %
313.1	528.5
8.3 %	14.4 %
312.6	522.4
8.3 %	14.2 %
1.64	2.57
1.25	2.12

450.7	375.7
-397.4	-230.5
243.7	355.4
31/12/20	31/12/19

3,191	3,163

14.83	14.33
10.52	9.99
4.31	4.34

1,553.3	1,309.2
5,137.0	5,152.7
4,853.8	4,640.8
6,690.3	6,461.9
72.5 %	71.8 %

ChangeQ4 '20

Q4 '19

Change

3.0 % 2.6 % 4.8 % -31.5 %

211.1

762.0

973.1

202.6

742.7

945.3

2.9 % 2.6 % 4.2 %

11.9

174.8 -93.2 %

1.2 %

18.5 %

-35.9 %

-6.9

165.0

-104.2 %

-0.7 %

17.5 %

-40.8 %

-28.0

137.2

-120.4%

-2.9 %

14.5 %

-40.2%

-28.3

139.3

-120.3%

-2.9 %

14.7 %

-36.4 % -41.2 %

-0.03 -0.12

0.72 -104.7 %
0.60 -119.6 %

20.0 % -72.4 % -31.4 %

60.2
148.2 -59.4 %

2.8
-221.7 101.3 %

46.2
136.5 -66.2 %

Change

31/12/20

31/12/19 Change

0.9%

3,191

3,163

0.9%

3.5% 5.3%

14.83 10.52

14.33 9.99

3.5% 5.3%

-0.7%

4.31

4.34

-0.7%

18.6 % -0.3 % 4.6 % 3.5 %

1,553.3

1,309.2 18.6 %

Q3 '20

Q2 '20

932.6

940.4 940.7

761.0
749.2 747.8

171.6
191.2 192.9

127.0
165.6 164.0

13.6 %

108.4

17.6 % 155.5

11.6 %

16.5 %

87.0 127.7
9.3% 13.6 %
87.0 127.7

9.3 %

0.40 0.32

Q1 '20

17.4 % 154.2

16.4 %

126.4

13.4 %

126.2

13.6 %

13.4 %

0.66 0.61 0.55 0.50

192.8

92.7 105.0

-190.6

-86.0 -123.6

18.1

81.9 97.5

30/09/20

30/06/20 31/03/20

3,154

3,191 3,159

14.68 10.36

14.57 14.43

10.24 10.10

4.32

4.33 4.33

1,549.2

1,578.1 1,454.4

5,137.0

5,152.7

-0.3 % 4.6 % 3.5 %

5,229.8
5,086.8 5,089.9

4,853.8

4,640.8

4,873.8
4,817.5 4,729.3

6,690.3

6,461.9

6,778.9
6,664.9 6,544.2

72.5 %

71.8 %

71.9 %

72.3 %

INDEX

2 DATA & FACTS
4 TO OUR SHAREHOLDERS

4 Letter from the Management Board
7 Management
8 Report of the Supervisory Board
14 Corporate Governance Report
29 CONSOLIDATED MANAGEMENT REPORT

30 General information about the Company and Group
37 Business report
57 Supplementary report
58 Risk report
72 Opportunities report
76 Forecast report
79 Remuneration report
82 Supplemental information
87 Dependency report
89 CONSOLIDATED ANNUAL ACCOUNTS

91 Consolidated Comprehensive Income Statement
92 Consolidated Balance Sheet
94 Consolidated Cash Flow Statement
96 Consolidated Change in Equity Statement
97 Consolidated Notes per 31 December 2020
176 Change in intangible Assets and Fixed Assets

179 AFFIDAVIT BY LEGAL REPRESENTATIVES (BALANCE SHEET OATH)
181 INDEPENDENT AUDITOR'S REPORT
193 INVESTOR RELATIONS CORNER

194 Investor Relations, Price Performance of the Share
195 Latest Research Notes, Shareholder Structure
197 OTHER

198 Glossary
202 Publications, Information and Order Service
202 Financial Calendar
202 Contacts
203 Legal Information
204 Brand Portfolio of 1&1 Drillisch AG

TO OuR SHAREHOLDERS

LETTER FROM THE MANAGEMENT BOARD

Dear Shareholders,

Fiscal year 2020 was an extraordinary one for both our Company and for the German economy as a whole. The coronavirus pandemic has confronted many industries with unexpected challenges. Despite the diﬃculties of this environment, 1&1 Drillisch per- formed well, increasing the number of customer contracts by 500,000 to 14.83 million (31/12/2019: 14.33 million). While broadband lines declined slightly to 4.31 million contracts, customer contracts in the mobile internet business increased by 530,000 (5.3 percent) to 10.52 million (31/12/2019: 9.99 million).

Total revenues increased by €111.9 million (3.0 percent) to €3.787 billion (2019: €3.675 billion) in fiscal year 2020. The high-margin service revenues increased by €77.0 million (2.6 percent) to €3.020 billion (2019: €2.943 billion). Adjusted for negative impacts of €24.1 million caused by the coronavirus pandemic (in particular the decline in international roaming), comparable total revenue would have increased by 3.7 percent and service revenues by 3.4 percent. These earnings are the focus of our attention be- cause they are sustainable and determine proﬁt.

The low-margin other sales - essentially from the realisation of hardware sales brought forward (in particular from investments in smartphones that will be reimbursed by the customers over the minimum contract term in the form of higher package prices) - in- creased by €34.9 million (4.8 percent) to €766.8 million (previous year: €731.9 million). This business ﬂuctuates seasonally and its development depends heavily on the attrac-tiveness of new devices and the model cycles of manufacturers.

The earnings were burdened in ﬁscal year 2020 by a one-oﬀ, non-cash derecognition of prepaid expenses for existing VDSL contingents in the amount of €129.9 million. But even without taking this special eﬀect into account, the consolidated EBITDA of just un- der €600 million fell short of the previous year's ﬁgure (€683.5 million).

This shortfall was due in particular to the advance services prices charged by Telefónica for the use of its network capacity from 1 July 2020. Our acceptance of Telefónica's im- proved oﬀer for national roaming in February 2021 will retroactively reduce expenses for the second half of 2020 by about €34.4 million. However, this amount can only be recognised as income related to other periods in 2021 as the conclusion of a national roaming agreement is a prerequisite for this. Negotiations on such an agreement are scheduled between March and May 2021. In addition, the earnings ﬁgures were bur- dened by the regulatory decisions of the EU on text messaging rates (since 15 May 2019) and the Federal Network Agency on the subscriber line charge (since 1 July 2019) total- ling €-13.7 million. One-oﬀ expenses from integration projects, on the other hand, de- creased to €-1.1 million (previous year: €-3.2 million). In addition, there were burdens on earnings due to the temporarily changed use behaviour of our customers as a result of the coronavirus pandemic, especially in the areas of telephony and international roam-ing (among other factors, because of regulations for working from home and contact bans as well as the severe restrictions on travel activities), amounting to €-25.2 million. The burden on earnings in 2020 from the aforementioned special factors was approxi- mately €204.3 million.

Costs of €-13.9 million (previous year: €-5.7 million) were incurred for the planning and preparation of our 5G mobile network.

Proﬁt per share in ﬁscal year 2020 came to €1.25 (previous year: €2.12). Precluding the ef- fects of the PPA write-oﬀs, the proﬁt per share amounted to €1.64 (previous year: €2.57).

Free cash flow in 2020 amounted to €243.7 million (previous year: €355.4 million). A contractually agreed one-oﬀ payment of €165.0 million was scheduled to be made to Telefónica in the third quarter of 2020 for the ﬁrst ﬁve-year extension phase of the MBA MVNO contract that began on 1 July 2020. Precluding this payment, the free cash ﬂow amounts to approximately €409 million, an increase of approximately 15 percent. Per 31 December 2020, we had about €404 million as freely available cash at our disposal.

Besides business operations, ﬁscal year 2020 was characterised by the preparations for the construction of the Company's own mobile network and the ongoing negotiations for a national roaming agreement that will be required during the transition period while we are gradually establishing our own network. We have successfully completed these preparations. In our ad hoc announcement of 15 February 2021, we reported that we had accepted the oﬀer from Telefónica Germany - which was improved following a review by the EU Commission - for national roaming and the associated MBA MVNO advance services. The conditions oﬀered by Telefónica with retroactive eﬀect from July 2020 will in future again be based on the pricing mechanisms of the ﬁrst ﬁve years of the MBA MVNO contract. In particular, the agreements provide once again for annually decreasing data prices that are lower than the ﬁxed prices Telefónica charged in the sec- ond half of 2020.

With the conclusion of the contract, which Telefónica's oﬀer stipulates for about mid- May 2021, another essential prerequisite for the planned rollout of a high-performance 5G network would be realised. This sharing of the Telefónica network assures our cus- tomers of nationwide mobile coverage even during the rollout phase of our 5G network.

In the same ad hoc announcement on 15 February 2021, we reported on the expansion of our ﬁbre optic service. Our goal is to provide more and more households with guar- anteed gigabit speeds because ﬁbre optic is increasingly becoming the standard for fast communication even in private households. FTTH lines to private households oﬀer bandwidths of up to 1 Gbit/s. Households not yet equipped with FTTH will be connected to VDSL lines (up to 250 Mbit/s).

In addition to the access to FTTH connections now provided by well-known city carriers, the number of marketable FTTH lines of Deutsche Telekom will increase by an average of 2 million households per year during the next few years. To this end, we have concluded an agreement with our aﬃliate 1&1 Versatel for the long-term procurement of FTTH andVDSL complete packages, including voice and IPTV, as 1&1 Versatel's nationwide trans- port network is largely connected to Deutsche Telekom's regional broadband networks. The advance services contract strictly for VDSL services previously in place between 1&1 Drillisch and Deutsche Telekom was prematurely terminated by agreement of the parties in view of the beneﬁts of the new combined VDSL/FTTH agreement. The new agreement between 1&1 Versatel and Deutsche Telekom is subject to approval by the Federal Network Agency, the competent regulatory authority.

Thanks to the positioning of our brand names and products in mobile internet and landline services, we can be counted among the leading service providers in Germany, oﬀering comprehensive services and outstanding price-beneﬁt ratios. In the respected landline network test conducted by the trade magazine connect for 2020, our premium brand 1&1 took ﬁrst place for the third time since 2015 and received especially high marks in the categories stability, reliability, fast internet and good supplementary servic- es. 1&1 is also a leader in customer satisfaction. According to the connect Customer Ba- rometer 2020, we posted the highest customer satisfaction rating of all mobile network providers for the ﬁfth time since 2015.

We expect the number of customers to continue to grow throughout all of 2021. We fore- see an increase in high-margin service revenues to approximately €3.100 billion (2020: €3.020 billion). EBITDA is expected to increase (precluding the possible income of approxi- mately €34.4 million related to other periods because of the planned signing of the nation- al roaming agreement) to approximately €650 million (2020: €468.5 million). This forecast includes expected negative impacts on revenues and earnings relating to the coronavirus pandemic of approximately €25 million (2020: €25 million) as well as initial costs for the 5G network rollout of approximately €30 million (2020: approximately €14 million). This forecast is subject to uncertainties as it is not possible at present to make an exact assessment of the duration and ongoing impact of the coronavirus pandemic.

In view of the upcoming investments for the 5G network expansion, the Management Board and Supervisory Board will propose an unchanged dividend of €0.05 per voting share to the Annual General Meeting. Our Company is in a good position to take the next steps in our corporate development, and we are optimistic as we look ahead to the future. We want to express our special thanks to all of our employees for their commit- ment and work and to our shareholders and business partners for the trust they have placed in 1&1 Drillisch.

Best regards from Maintal,

Ralph Dommermuth

Markus Huhn

Alessandro Nava

Maintal, in March 2021

MANAGEMENT

RALPH DOMMERMUTH Chief Executive Oﬃcer

In 1988, Ralph Dommermuth, born in 1963, founded 1&1 EDV Marketing GmbH, the company that was to grow into what is today United Internet AG. His initial business was the provision of systematised marketing services to small software providers. He later developed additional market- ing services for large customers such as IBM, Compaq and Deutsche Telekom. When acceptance of the internet began to accelerate, Ralph Dommermuth gradually cut back on these marketing services for third parties and began to build up his own internet services and direct customer rela- tionships. In 1998, the trained banker managed the IPO of 1&1, which was the ﬁrst internet company on the Frankfurt stock exchange. In 2000, Ralph Dommermuth restructured 1&1 into United Internet AG and developed the company into one of the leading internet specialists in Europe. Mr Dommermuth has also been Chief Executive Oﬃcer of 1&1

Drillisch AG since 1 January 2018.

MARKUS HUHN

Chief Financial Oﬃcer

Markus Huhn began his professional career in financial controlling at DLW Group in 1990; he simultaneously enrol- led in advanced training courses and obtained certiﬁcation in business administration from an academy of adminis- tration and economics (VWA). In July 1994, he moved to 1&1 Holding GmbH to become ﬁnancial controller. From 1998 to 2007, he was commercial director of 1&1 Internet AG and guided the corporation's growth strategy. Mar- kus Huhn held the position of CFO at 1&1 Internet in the time between 2008 and 2012, and in this role he guided the business sectors Access and Business and Consumer Applications. In addition, he was in charge of the central finance departments, which operate as shared services within United Internet Group. He has been a member of the 1&1 Telecommunication SE Management Board since 2013 and is head of the division Finances for the business unit Access. He has been a member of the 1&1 Drillisch AG Management Board since 1 July 2019.

ALESSANDRO NAVA Chief Operations Oﬃcer

studied business administration at Heinrich-Heine-Univer- sity in Düsseldorf, earning a degree as a certiﬁed merchant (Dipl.-Kaufmann) with a special focus on marketing and ﬁnancial controlling in 1997. Mr Nava began his professional career as a consultant for KPMG Consulting GmbH. As of 2000, he held the position of senior head of department, initially in landline and later in combined landline/mobile services busi- ness, at Vodafone Germany (Vodafone GmbH). His progress took him through several diﬀerent business sections of the company; for instance, he was in charge of IT requirements management & business analysis, customer care and product development and was responsible for the online platforms. Following the merger of the landline and mobile services busi-ness, Mr Nava was in charge of the company's IT development as well as other areas. Since March 2014, Mr Nava has been the head of the division «Technology and Development» (CIO) at 1&1 Telecommunications SE. Since September 2018, he has been in charge of the division «Product Management». He has been a member of the Management Board of 1&1 Drillisch AG (COO) since 1 July 2019.

REPORT OF THE SuPERVISORY BOARD

Supervisory Board Members in Fiscal Year 2020

» Michael Scheeren (since 16 October 2017)

Supervisory Board chairman (since 13 November 2017 and until 23 February 2021)
» Kai-Uwe Ricke (since 16 October 2017)

Deputy chairman (since 13 November 2017)
» Dr Claudia Borgas-Herold

(since 12 January 2018)
» Vlasios Choulidis (since 12 January 2018)
» Kurt Dobitsch

(since 16 October 2017, since 16 March 2021 Chairman of the Supervisory Board)
» Norbert Lang

(since 12 November 2015)

In ﬁscal year 2020, the Supervisory Board of 1&1 Drillisch AG fulﬁlled the duties and responsibilities assigned to it by legal statutes, the articles of association and by-laws and rules of procedure, regularly advised the Management Board in its leadership of the Company and monitored its management of the Company's business. The Supervi- sory Board was at all times able to determine the legality, expediency and correctness of the Management Board's work. The Supervisory Board was directly involved in all decisions that were of fundamental signiﬁcance for the Company. The Management Board regularly instructed the Supervisory Board, in writing as well as orally, compre- hensively and contemporaneously, including between meetings, regarding all relevant questions of strategy and the related opportunities and risks, corporate planning, development and course of business, planned and ongoing investments, the Group's position, including risks and risk management, and compliance. The Company's stra- tegic orientation is determined by Management and Supervisory Boards in joint con- sultation. The Management Board submitted a comprehensive report on the course of business, including revenue development and proﬁtability, the Company's position and its business policies to the Supervisory Board at quarterly intervals. The reports included as well information about any aberration in the course of business from plan- ning. The Management Board's reports satisﬁed the requirements of legal statutes, good corporate governance and the instructions issued to it by the Supervisory Board with respect to both subject matter and scope. The reports were made available to all Supervisory Board members.

The Supervisory Board reviewed the reports submitted by the Management Board and all other information with respect to plausibility; the materials were the subject of in- tensive discussions, critical examination and in-depth questions. The Supervisory Board gave its consent to speciﬁc business transactions if and when this was required by legal statutes, by-laws or rules of procedure for the Management Board.

The Supervisory Board regularly received reports from the Management Board concern- ing the internal controlling system and the Group-wide risk management that had been set up by the Management Board. Based on its reviews, the Supervisory Board has come to the conclusion that the internal controlling system, the Group-wide risk management and the internal auditing system are eﬀective and functional.

Supervisory Board activities, meetings

A total of five meetings of the full Supervisory Board was held in the 2020 reporting year, of which only one was in-person (on 18 June 2020) because of the coronavirus pandemic.

In addition to the regular reporting required by legal statutes, the following subjects in particular were discussed and reviewed intensively:

» The separate and the consolidated annual ﬁnancial statements per 31 December 2019
» 2020 revenue and proﬁt budget of the Company
» Planning and investment projects of the corporate group for ﬁscal year 2020
» The considerations and planning for a 5G mobile network as well as the negotiations for a national roaming agreement
» The Supervisory Board's report to the Annual General Meeting for ﬁscal year 2019, the updating of the Declaration of Conformity pursuant to the German Corporate Governance Codex, the Declaration on Corporate Management and the Corporate Governance Report
» The resolution on the Company's revenue and earnings planning for 2021 and the planning of expenses and investments for the 5G mobile network
» The announcement, the agenda and proposals for the adoption of resolutions for the Annual General Meeting 2020
» The adoption of the resolution regarding the Management Board's proposed alloca- tion of proﬁts
» The proposal to the Annual General Meeting for the disbursement of dividends
» Audit schedules and the quarterly reports

» Monitoring of the eﬀectiveness of the implemented compliance system
» Quarterly reports on risk management and risk management strategy
» Dependency Report 2019, review and approval of the Dependency Report 2019
» Corporate development during the year
» The review of the independence of Ernst & Young GmbH and the acting persons, in- cluding the additional services provided, as well as the coordination with the selected auditors Ernst & Young on the focal points of the audit
» Adoption of a resolution regarding the Sustainability Report

Personnel changes on the Management Board and Supervisory Board

There were no changes in the membership of the Management Board during ﬁscal year 2020. Current members of the Management Board are Messrs Ralph Dommermuth (CEO), Markus Huhn and Alessandro Nava.

There were no changes in the membership of the Supervisory Board during fiscal year 2020.

In accordance with Section 96 (1), Section 101 (1) Stock Corporation Act [Aktiengesetz; AktG] and Section 10 (1) of the Company by-laws, the Supervisory Board consisted of six members in 2020 and corresponds in its competence proﬁle to its previous and current objective; in particular, the memberships of Dr Claudia Borgas-Herold and Mr Norbert Lang satisfy the requirement of a minimum of two independent members on the Board. The proportion of women on the Supervisory Board in ﬁscal year 2020 came to 16.66 percent. Supervisory Board chairman in the reporting period 2020 was Mr Michael Scheeren, and Mr Kai-Uwe Ricke was Supervisory Board deputy chairman.

In its meeting on 21 March 2018, the Supervisory Board decided not to set up any com- mittees in future, but to perform all of its duties and responsibilities as a full body. This will give all Supervisory Board members the opportunity to participate in any and all Supervisory Board topics at peer level.

Corporate Governance

All members took part in the total of ﬁve meetings of the Supervisory Board.

In accordance with recommendation D.13 of the German Corporate Governance Code, the Supervisory Board regularly assesses how eﬀectively it performs its duties as a body. For this purpose, the Supervisory Board conducts a self-assessment based on question- naires approximately every two years. The results of the survey are evaluated anony- mously and subsequently discussed in a plenary session. The Board acts on any need forimprovement that is revealed during the process. The next self-assessment is scheduled for spring/summer 2021.

The Supervisory Board did not conduct any investor meetings during the reporting period.

Supervisory Board members Michael Scheeren, Kurt Dobitsch and Dr Claudia Borgas- Herold are simultaneously members of the United Internet AG Supervisory Board. A conﬂict of interest requiring attention has not arisen for any of the Supervisory Board members. If necessary, the Supervisory Board members consult the Supervisory Board chairman about the handling of any conﬂicts of interest that arise.

Management Board and Supervisory Board report on corporate governance pursuant to C.22 of the German Corporate Governance Codex within the scope of the Declaration on Corporate Management. Management Board and Supervisory Board issued a joint Dec- laration of Conformity pursuant to Section 161 AktG during the reporting period, most recently on 16 December 2020, showing that the Company is in compliance with most of the recommendations of German Corporate Governance Codex. The declarations and related explanatory comments are permanently available to the shareholders on the Company's internet site. In all other respects, reference is made here to the remarks in the corporate governance report included in the Annual Report 2020.

Discussion of separate and consolidated annual ﬁnancial statements 2020

The separate annual ﬁnancial statements and the consolidated annual ﬁnancial state- ments per 31 December 2020, the management reports for the stock corporation and Group for ﬁscal year 2020 (each including the explanatory report on the disclosures pursuant to Section 289a (1) and Section 315 (2a) Commercial Code [Handelsgesetz- buch; HGB]) prepared and submitted in good time by the Management Board and the accounting and risk management system were audited by Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, the accounting ﬁrm elected by the Annual General Meeting on 19 May 2020 for this task, and an unqualiﬁed auditor's opinion was issued to the documents.

The separate and consolidated annual ﬁnancial statements, the management report and the consolidated management report and the related audit reports from the auditor were submitted to all of the Supervisory Board members. Focal points of the engage- ment of the auditors were in particular the key audit matters (KAM), which included the following points (among others): for the consolidated annual ﬁnancial statements, reve- nue recognition, the recognition of contract initiation costs and contract fulﬁllment costs and the impairment of goodwill; for the separate annual ﬁnancial statements of 1&1 Drillisch AG, the impairment of ﬁnancial assets.

Finally, the concluding documents were examined and discussed during a meeting of the Supervisory Board on 24 March 2021 in the presence of the auditor. At that time, the auditor reported on the most signiﬁcant results of its audit, explained the results andgave detailed answers to questions posed by the Supervisory Board members. Subject matter of this discussion included in particular the results of the audit regarding the de- ﬁned key audit matters and the accounting process. The internal controlling system, the risk report and the risk management system were discussed in detail with the auditor during the Supervisory Board meeting on 24 March 2021. Regarding the system for the early detection of threats, the auditor determined that the Management Board had im- plemented the measures required pursuant to Section 91 (2) AktG, in particular with re- spect to the implementation of a monitoring system, in an appropriate manner and that the monitoring system was suitable to detect in good time any developments that might jeopardise the continued existence of the Company. Following its own audit, the Super- visory Board agreed with the audit results reached by the auditor and, after considering the ﬁnal results of its own audit, does not raise any objections. In a resolution adopted during its meeting on 24 March 2021, the Supervisory Board approved the separate and the consolidated annual ﬁnancial statements 2020. The annual ﬁnancial statements have been adopted pursuant to Section 172 AktG. In its meeting on 24 March 2021, the Supervisory Board reviewed and adopted the non-ﬁnancial declaration ("Sustainability Report 2020").

Review of the Management Board's report on relationships to aﬃliated companies

The Management Board submitted the report it had prepared on the relationships to aﬃliated companies (Dependency Report) for ﬁscal year 2020 to the Supervisory Board in good time.

The Management Board's report on the relationships to aﬃliated companies was the subject of the audit by the auditor. The following auditor's opinion was issued in this context:

Following our conscientious audit and assessment, we hereby conﬁrm that:

1. The factual contents of the report are correct;
2. The performance of the Company was not unreasonably high in view of the legal transactions described in the report;
3. No circumstances indicate an assessment diﬀering essentially from that of the Management Board for the actions described in the report.

The auditor submitted the audit report to the Supervisory Board. The Supervisory Board reviewed the Management Board's Dependency Report and the audit report. The ﬁnal review by the Supervisory Board took place during the Supervisory Board meeting on 24

March 2021.

The auditor attended the meeting and reported on his audit of the Dependency Report and his key audit results, explained his audit report and answered questions from the Supervisory Board members. In accordance with the concluding results of its audit, the Supervisory Board accepts the Management Board's Dependency Report and audit re- port and does not have any objections to the Management Board's explanations at the conclusion of the report concerning the relationships to aﬃliated companies.

The Supervisory Board wishes to express its thanks to the members of the Manage- ment Board and to all of the Company's associates for their successful work for, and commitment to, 1&1 Drillisch Group in the past fiscal year as in the years before. Our special thanks go to our customers and shareholders for the trust they have placed in the Company.

Maintal, 24 March 2021

On behalf of the Supervisory Board Kurt Dobitsch

CORPORATE GOVERNANCE REPORT

Fundamentals of Corporate Governance

The corporate governance of 1&1 Drillisch AG as a listed German stock corporation is de- termined primarily by the Stock Corporation Act [Aktiengesetz; AktG] and by the require- ments of the German Corporate Governance Code (DCGK).

The term corporate governance stands for responsible management and control of com- panies geared towards long-term value creation. Eﬃcient cooperation between Manage- ment and Supervisory Boards, respect for shareholders' interests as well as openness and transparency in corporate communication are essential aspects of good corporate governance.

The Management and Supervisory Boards of 1&1 Drillisch AG consider it their duty to ensure the continued existence of the Company and sustainable value creation through responsible corporate governance oriented to the long term.

The following report issued by the Management and Supervisory Boards contains the "Declaration on Corporate Governance" pursuant to Section 289f Commercial Code [Handelsgesetzbuch; HGB] for the single Company and pursuant to Section 315d HGB for the corporate group and in accordance with Principle 22 of the German Corporate Gov-ernance Code.

Declaration pursuant to Section 161 AktG regarding compliance with the recommendations of the German Corporate Governance Code

The current Declaration of Compliance by the Management and Supervisory Boards, which was issued on 16 December 2020 and has since been permanently accessible on the internet atwww.1und1-drillisch.de(to be found under "Corporate Governance" un- der the sub-heading "Declaration of Compliance"), has the following wording:

1&1 Drillisch Aktiengesellschaft

Declaration of the Management Board and Supervisory Board of 1&1 Drillisch AG Regarding the Recommendations of the "Government Commission on the German Corporate Governance Code" Pursuant to Section 161 AktG

The Management Board and Supervisory Board of 1&1 Drillisch Aktiengesellschaft declare that the Company has been in compliance (although with the stated exceptions) with the recommendations of the "Government Commission on the German Corporate Governance Code" (Code) as last revised on 7 February 2017 and published by the Fe- deral Ministry of Justice in the oﬃcial section of the Federal Gazette on 24 April 2017 since the issue of the last declaration of conformity on 17 December 2019. 1&1 Drillisch AGcomplies with, and will in future continue to comply with, the recommendations of the Code as most recently revised on 16 December 2019, which entered into eﬀect upon pub- lication in the Federal Gazette on 20 March 2020, although with the following exceptions:

Clause A.2, second sentence

Possibility of whistleblowing for Company employees

The Company has not established a speciﬁc whistleblowing system for employees. In view of the statutory provision of Section 612a of the Civil Code (Bürgerliches Gesetzbuch; BGB) establishing labour law regulations prohibiting disciplinary measures, the Compa- ny sees no reason to establish further protective mechanisms for whistleblowers. The statutory prohibition of disciplinary measures prohibits the discrimination of employees because of the reasonable and lawful exercise of their rights. Moreover, given the open solution-oriented communication culture in the Company, the Company does not see any practical need for a complicated whistleblowing system.

Clauses D.2/D.3

Formation of committees

The Supervisory Board performs all its tasks as a whole rather than forming committees. The Supervisory Board considers it appropriate for all Supervisory Board members to have the opportunity to participate equally in all Supervisory Board issues. Even a supervisory board with six members is small enough for the eﬀective conduct of discussions and the intense sharing of views as a group. Consequently, the Supervisory Board does not believe that the establishment of committees would serve to enhance the eﬃciency of its work.

Clauses G.1 to G.5

Remuneration of the Management Board - remuneration system

The recommendations from G.1 to and including G.5 of the Code refer to a system of remuneration for Management Board members within the sense of Section 87a AktG ("Remuneration System") that, following the reform of the German Stock Corporation Act by the Act Implementing the Second Shareholders' Rights Directive (ARUG II), must now be adopted by the Supervisory Board and submitted to the Annual General Meeting for approval. The remuneration system must be presented for approval for the ﬁrst time at the 1&1 Drillisch AG Annual General Meeting in 2021.

A remuneration system is currently being developed by the Supervisory Board and will be submitted to the 2021 Annual General Meeting for approval. The remuneration sys- tem will not become the basis for determining the remuneration of the Management Board members in future until it has been submitted to the Annual General Meeting. Since the recommendations from G.1 to and including G.5 of the Code presume the ex- istence of a remuneration system, an exception is declared in this respect. The remuner- ation system currently in preparation is expected to take into account the recommenda- tions from G.1 to and including G.5 of the Code without any restrictions.

Clause G.10

Remuneration of the Management Board - long-term variable remuneration

According to G.10 of the Code, the variable remuneration components granted to mem- bers of the Management Board should be granted primarily as shares of company stock or granted on the basis of company stock. Moreover, any such grants to board mem- bers should be subject to a blackout period of four years. Share-based remuneration is awarded in the form of the Stock Appreciation Rights (SARs) programme as a long-term remuneration programme for the Management Board. The term of this programme to- tals six years. Within this period of six years, a Management Board member can redeem a portion (25 percent) of the vested SARs at certain points in time - at the earliest, how- ever, after two years. This means that a Management Board member can obtain a part of the long-term variable remuneration after only two years.

The Supervisory Board is of the opinion that this system of long-term remuneration has proven its value and sees no reason to postpone any further the possibility of obtaining remuneration earned under the programme. The Supervisory Board believes that the linking of the programme to the 1&1 Drillisch AG share price and the opportunity for Management Board members to redeem their shares to satisfy the claims from the programme secure reasonable participation of Management Board members in the risks and opportunities of the company 1&1 Drillisch AG. Since the programme has been designed with a term of six years and the awarded SARs are vested proportionately over this term and at the earliest after two years, the Supervisory Board is of the opinion that the programme achieves an optimal commitment eﬀect and incentive control in the in- terest of 1&1 Drillisch AG and does not require any changes.

Clause G.11

Remuneration of the Management Board - withholding/clawback of variable remuneration

According to G.11 of the Code, the Supervisory Board should have the possibility to withhold or claw back variable remuneration in justiﬁed cases. The current service con- tracts of the Management Board members do not contain any such provisions. However, there are plans to include a so-called "claw back clause" regulating the return of variable remuneration in the remuneration system and to include the clause in future service contracts of the Management Board members.

Clause G.13

Remuneration of the Management Board - beneﬁts upon termination of contract

According to G.13 of the Code, payments to a Management Board member in the event of premature termination of Management Board membership should not exceed the value of two years' remuneration and should not remunerate the member for a period longer than the remaining term of the service contract. If and when there is a post-con- tractual non-competition clause, any such severance payment should also be oﬀset against the waiting period compensation. The service contracts for Management Boardmembers do not currently provide such an oﬀset option. However, there are plans to incorporate this option into the remuneration system and into future service contracts of the Management Board members (and any related termination agreements).

Clause G.17

Consideration of the deputy chairmanship in the remuneration of Supervisory Board members

The remuneration of Supervisory Board members does not take into account the deputy chairmanship of the Supervisory Board as the deputy chairperson of the Supervisory Board does not currently perform any additional duties that would place a greater bur- den on him or her in comparison with an ordinary member of the Supervisory Board.

Maintal, 16 December 2020

On behalf of the Supervisory Board The Management Board

Michael Scheeren Ralph Dommermuth Markus Huhn Alessandro Nava

Management and corporate structure

As appropriate to its legal form, 1&1 Drillisch AG has a two-tier management and super- visory structure with the governing bodies Management and Supervisory Boards. The third governing body is the general meeting. The governing bodies are obliged to act in the best interests of the Company.

Management Board

Working methods of the Management Board

The Management Board is the managing body of the Group. It consisted of three per- sons in ﬁscal year 2020 (namely Ralph Dommermuth, Markus Huhn and Alessandro Nava). The Management Board conducts the Company's aﬀairs in accordance with statutory provisions and the articles of association, the rules of procedure approved by the Supervisory Board and the pertinent recommendations of the German Corporate Governance Code insofar as no exceptions have been declared in accordance with Section 161 AktG.

When appointing Management Board members, the Supervisory Board strives for a diversified and mutually complementary composition for the best possible service to the Company and considers long-term succession planning. Above all, experience and knowledge of the industry as well as professional and personal qualifications play an important role. The maximum age for Management Board membership has been set at 70.

As part of the long-term succession planning, the Supervisory Board, with the involve- ment of the Management Board, regularly examines highly qualiﬁed executives who are potential candidates for Management Board positions.

The Management Board is responsible for preparing the interim and annual ﬁnancial statements and for ﬁlling key personnel positions in the Company.

Decisions of fundamental importance require the approval of the Supervisory Board. The Management Board reports to the Supervisory Board in accordance with the legal provisions of Section 90 AktG and provides the chairperson of the Supervisory Board with an overview of the current status of the reporting items viewed as relevant in ac- cordance with Section 90 AktG at least once a month orally and also, at the request of the Supervisory Board chairperson, in writing. The chairperson or spokesperson of the Management Board or the chief ﬁnancial oﬃcer informs the Supervisory Board chairper- son without delay of any important events that are of signiﬁcance for the assessment of the situation, development and the management of the Company. Any signiﬁcant devia- tion from the Company's budgetary planning or other forecasts shall also be considered an important event. The chairperson or spokesperson of the Management Board or the chief ﬁnancial oﬃcer also informs the Supervisory Board chairperson (in advance if pos-sible, otherwise immediately thereafter) of any ad hoc announcement of the Company pursuant to Art. 17 of the Market Abuse Regulation [MAR].

The Management Board has overall responsibility for the management of the Compa- ny's business in accordance with uniform objectives, plans and guidelines. The Man- agement Board's overall responsibility notwithstanding, each and every member of the Management Board acts on his/her own responsibility in the purview assigned to him/ her, but is required to subordinate the interests of his/her purview to the overall good of the Company.

In fiscal year 2017, the Management Board set targets of 5.3 percent for the propor- tion of women in each of the two management levels below the Management Board in accordance with Section 76 (4) first sentence AktG and set a deadline of 30 June 2022 for the achievement of the targets. The set targets have been and are currently achieved.

The allocation of duties within the Management Board is regulated by the Supervisory Board in a business allocation plan proposed by the Management Board.

The Management Board members inform one another about important events within their purviews.

Irrespective of their responsibility to their own purviews, all members of the Manage-ment Board constantly monitor the events and data that are decisive for the course of business of the Company so that they are able to work at any and all times towards the prevention of impending harm and the implementation of desirable improvements or expedient changes by addressing the full Management Board or in any other appro- priate manner.

The full Management Board adopts decisions regarding any and all matters that are of particular importance and scope for the Company or its subsidiaries and its participating interests.

The Management Board as a whole adopts its decisions by a simple majority of votes. In the event of a tie, the Board chairperson casts the deciding vote. Management Board decisions are recorded in the minutes of the meeting.

The full Management Board meets every fortnight as a rule; further meetings are con- vened as required by circumstances.

Each and every Management Board member discloses any and all conﬂicts of interest to the Supervisory Board without delay.

Current composition of the Management Board

The 1&1 Drillisch AG Management Board consisted of the following three members in ﬁscal year 2020:

» Ralph Dommermuth, Chief Executive Oﬃcer
» Markus Huhn, Chief Financial Oﬃcer
» Alessandro Nava, Chief Operations Oﬃcer

Supervisory Board

Working methods of the Supervisory Board

The Supervisory Board elected by the Annual General Meeting consisted of six mem- bers in ﬁscal year 2020. As a rule, the term of oﬃce of the Supervisory Board members is ﬁve years.

The Supervisory Board maintains regular contact with the Management Board and mo- nitors and advises the Management Board in the management of the business and the risk and opportunity management of the Company in accordance with statutory provi- sions, the articles of association, the rules of procedure and the pertinent recommen- dations of the German Corporate Governance Code (insofar as no exception has been declared in accordance with Section 161 AktG).

At regular intervals, the Supervisory Board discusses with the Management Board any and all questions of strategy and its implementation, planning, business development, risk situation, risk management and compliance that are relevant to the Company. It dis- cusses the quarterly and semi-annual reports with the Management Board prior to their publication and approves the annual budget. It reviews the separate and consolidated annual ﬁnancial statements and approves the ﬁnancial statements if no cause for objec- tion is found. Its review takes into account the audit reports of the auditor.

The Supervisory Board's responsibilities also include the appointment of the members of the Management Board as well as the determination of the Management Board's remuneration and its regular review in compliance with the pertinent applicable legal provisions as well as the recommendations of the German Corporate Governance Code insofar as no exception has been declared pursuant to Section 161 AktG.

In accordance with Recommendation D.13 of the German Corporate Governance Code, the Supervisory Board regularly assesses the eﬀectiveness of the performance of its duties as a body. For this purpose, the Supervisory Board conducts a self-assessment based on questionnaires approximately every two years. The results of the survey are evaluated anonymously and subsequently discussed in a plenary session. The Board acts on any need for improvement that is revealed during the process. The next self-as- sessment is scheduled for spring/summer 2021.

The Supervisory Board members assume on their own initiative responsibility for any training and advanced training measures required for their tasks, and their actions are appropriately supported by the Company.

Supervisory Board meetings are convened by written announcement from the chairper-son issued, as a rule, at least 14 days in advance.

The agenda shall be included with the convocation announcement. If an agenda has not been properly announced, resolutions may be adopted solely if and when no Superviso- ry Board member objects before the vote on the resolution.

Supervisory Board resolutions are as a rule adopted during meetings. Meetings are chai- red by the Supervisory Board chairperson. Outside of meetings, resolutions may also be adopted by other means (e.g. by phone or by email) on the chairperson's instruction provided that no member objects to this procedure.

The Supervisory Board has a quorum if and when the meeting has been properly announced to all members and at least three members participate in the vote on the adoption of the resolution. A member participates in a vote on a resolution even if he/ she abstains.

Supervisory Board resolutions are adopted by a simple majority unless otherwise man- dated by law.

Minutes of the proceedings and resolutions of the Supervisory Board are recorded in writing.

The Supervisory Board chairperson is authorised to submit on behalf of the Supervisory Board any and all declarations of intent required to implement the Supervisory Board resolutions.

Objectives for the composition of the Supervisory Board/Competence proﬁle for the full body

The rules of procedure for the Supervisory Board require that care be taken during the nomination of candidates for election to the Supervisory Board to ensure that the Super- visory Board members at all times have the knowledge, skills and professional experi- ence required for the orderly performance of their duties. Determining the suitability of candidates should take into account the international activities of the Company, potenti- al conﬂicts of interest and the age limit of 70 for Supervisory Board members.

In accordance with C.1 of the German Corporate Governance Code, the Company's Supervisory Board has also set the following objectives for its composition (including certain competence requirements for the body as a whole) that have been consistently observed since the objectives were set for elections of Supervisory Board members and, most recently, for the election of the current Supervisory Board members by the Annual General Meeting on 17 May 2018:

» The Supervisory Board membership should include at least two representatives from the telecommunications, media and/or IT sectors. Currently, all members of the Supervisory Board have relevant industry knowledge and the required competence.
» The Supervisory Board should have at least one member with international experi- ence (e.g. in ﬁnancial engineering, telecommunications, M&A). All members of the Supervisory Board have the relevant experience and skills and meet this criterion.
» The Supervisory Board should not include more than two former members of the

Management Board. This criterion is also met as solely Mr Vlasios Choulidis served as a Management Board member and spokesman prior to his election to the Supervi- sory Board. Furthermore, Supervisory Board members should immediately disclose to the Supervisory Board any conﬂicts of interest that may arise and resign from the Supervisory Board whenever there are permanent conﬂicts of interest. No such con- ﬂicts of interest arose in the reporting year.
» The Supervisory Board should include at least two members who do not have a per- sonal or business relationship with the Company, its governing bodies, a controlling shareholder or an enterprise aﬃliated with the latter that could constitute a mate-

rial and not merely temporary conﬂict of interest. In the opinion of the Supervisory Board, at least two members - Dr Claudia Borgas-Herold and Mr Norbert Lang - are independent.
» Supervisory Board members should step down from the Supervisory Board at the end of the annual general meeting following their 75th birthday. This criterion is also met.
» There should be at least one woman on the Supervisory Board. This criterion is met through the membership of Dr Claudia Borgas-Herold on the Supervisory Board.

The 1&1 Drillisch AG Supervisory Board consisted of the following members in fiscal year 2020:

» Michael Scheeren, Chairman of the Supervisory Board (since October 2017)
» Kai-Uwe Ricke, Deputy Chairman of the Supervisory Board (since October 2017)
» Dr Claudia Borgas-Herold

(since January 2018)
» Vlasios Choulidis

(since January 2018)
» Kurt Dobitsch

(since October 2017)
» Norbert Lang

(since November 2015)

In the reporting year, the Supervisory Board again addressed the above objectives for its composition, in particular with regard to the competence proﬁle for the Board as a who- le, and conﬁrmed their continued standing. The composition of the Supervisory Board complies with the deﬁned objectives as well as the competence proﬁle.

The Supervisory Board nominations for the election of Supervisory Board members should continue to be oriented towards the welfare of the Company, also taking into account these objectives and the endeavour to satisfy the competence proﬁle for the body as a whole.

When setting the targets for the proportion of women on the Supervisory Board and the Management Board in accordance with Section 111 (5) ﬁrst sentence AktG in ﬁscal year 2018, the Supervisory Board also maintained its position that the proportion of women on the Supervisory Board should be 16.66 percent and the proportion of women on the Management Board should be 0 percent. The deadline for achieving the aforementioned targets was set at 30 June 2022. Irrespective of this, the selection should always be made according to the individual competence proﬁle of the potential board members, whereby the Supervisory Board endeavours to give preference to women whenever candidates' qualiﬁcations are otherwise equivalent. The set targets have been and are currently achieved.

Subject to the formation of stub periods, the term of oﬃce of each Supervisory Board member ends at the conclusion of the annual general meeting that adopts a resolution discharging the Supervisory Board members for ﬁscal year 2022.

Disclosures on relevant corporate governance practices within the sense of Section 289f (2) no. 2 HGB - Risk management/Compliance - Diversity concept

If the Company's success is to be assured over the long term, it is essential to identify and analyse the risks of business actions eﬀectively and to eliminate or restrict their eﬀects by means of the appropriate steering mechanisms. The Company's risk manage- ment system ensures the responsible handling of these risks. It has been designed speci- ﬁcally with the aim of recognising risks early and of assessing and controlling them. The system is subject to constant development and adaptation to changing circumstances. The Management Board regularly reports to the Supervisory Board whenever necessary on existing risks and their management. The eﬀectiveness of the internal control system and the risk management system was monitored by the Supervisory Board as a body.

The primary features of the internal control and risk management system relating to the accounting process are described in detail in the management report in accordance with Section 289 (4) HGB and in the consolidated management report in accordance with Sec- tion 315 (4) HGB. The Management Board also reports in detail on any existing risks and their development in these reports.

Compliance is an important component of the management and corporate culture of 1&1 Drillisch Group. In the Company's view, compliance encompasses the totality of all measures to comply with the law and its own internal standards, principles and rules. From the Company's perspective, legally and ethically irreproachable conduct is the basis of any sustainable entrepreneurial success. This has led the Management Board to implement a compliance management system that is based on a central compliance directive. The compliance guideline applies to the members of all governing bodies and to employees of the corporate group and ensures that the value system is practised con- sistently and continuously across a broad spectrum.

Central areas of the compliance guideline concern, for example, fair, respectful and trustworthy dealings with colleagues and business partners as well as conduct towards competitors. Bribery and corruption are not tolerated at the Company; and the com- pliance guideline clearly underscores this attitude with appropriate prohibitions and instructions. Violations of compliance standards are unacceptable to us. We consistently follow up on any reports of violations and clarify the related facts. If and when violations are determined, they are stopped immediately and, if necessary, sanctioned consistently within the appropriate framework.

Diversity aspects are always taken into account in the composition of the Manage- ment and Supervisory Boards. The Company regards diversity as not only desirable, but indeed as crucial to its success. In consequence, the Company strives to main- tain overall a corporate culture of appreciation in which individual diversity in terms of culture, nationality, gender, age group and religion is desired and equal oppor- tunities irrespective of age, disability, ethnic-cultural origin, gender, religion and ideology or sexual identity are promoted.

Individual strengths - that is, everything that makes the individual employees within the Company unique and distinctive - have made it possible for the Company to become what it is today. A workforce that is made up of a wide variety of personalities oﬀers op- timal conditions for creativity and productivity and fosters as well employee satisfaction. The resulting potential for ideas and innovation strengthens the Company's competi- tiveness and increases opportunities on future markets. In keeping with this thought, diversity (in terms of age, gender or professional experience, for example) should be the object of close attention; certainly the ﬁeld of activity and the position in which an indi- vidual's potential and talents can be exploited in the best possible way should be found for each and every employee, but in the Company's own interests, it should also be a factor for the composition of the Management and Supervisory Boards.

In view of the size of its workforce and the open and trusting interaction, however, the Company does not pursue a more explicit diversity concept beyond this. The fostering of diversity cannot take a one-size-ﬁts-all approach that would be dictated by such a con- cept. The selection of candidates and appointments to board positions should also be based on objective factors such as qualiﬁcations, professional suitability and the indivi- dual competence proﬁle of the potential executives, whereby the Company endeavours to give preference to women with equal qualiﬁcations.

Financial publicity/Transparency

1&1 Drillisch has the declared goal of informing institutional investors, private sharehol- ders, ﬁnancial analysts, employees and the interested public simultaneously and equally about the Company's position through regular, open and up-to-date communication.

To this end, all essential information such as press releases, ad hoc announcements and other mandatory disclosures (such as directors' dealings or voting rights notiﬁcations) as well as all ﬁnancial reports are published in accordance with legal requirements. Furthermore, 1&1 Drillisch also provides extensive information on the Company's web- site (www.1und1-drillisch.de). Documents and information about the Company's general meetings as well as other economically relevant information can be found on the site.

1&1 Drillisch reports to shareholders, analysts and representatives of the press on the development of business as well as the ﬁnancial and earnings situation four times in each ﬁscal year in accordance with a ﬁxed ﬁnancial calendar. The ﬁnancial calendar is published and regularly updated on the Company's website in accordance with legal requirements.

In addition, the Management Board notiﬁes shareholders without delay by issuing ad hoc announcements concerning circumstances that are not publicly known and that are likely to have a signiﬁcant impact on the share price.

As part of its investor relations, management meets regularly with analysts and instituti- onal investors. Moreover, analyst conferences, to which investors and analysts also have telephone access, are held to present the semi-annual and annual ﬁgures.

Accounting and auditing

The Group's accounts are prepared in accordance with the principles of the Internati- onal Financial Reporting Standards (IFRS, as applicable in the EU), taking into account Section 315e HGB. The annual ﬁnancial statements relevant for disbursement and tax purposes, on the other hand, are prepared according to the provisions of the German Commercial Code (HGB). The separate and consolidated annual ﬁnancial statements are audited by independent auditors. The auditor is elected by the general meeting. Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Eschborn/Frankfurt am Main, was appointed as auditor for ﬁscal year 2020. The Supervisory Board issues the audit mandate, determines the focal points of the audit and the audit fee and reviews the independence of the auditor.

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft has been the auditor for 1&1 Dril- lisch AG and the group since ﬁscal year 2018. Mr Jens Kemmerich has been the auditor in charge of the audit since ﬁscal year 2018.

Remuneration for Management Board and Supervisory Board

The basic features of the remuneration system for the Management and Supervisory Boards are presented in the remuneration report on pages 79 and 81 (point 5) of the management report. The disclosure of the remuneration of the Management and Su- pervisory Board members, individualised and broken down by components (in accor- dance with legislative requirements and the German Corporate Governance Code) can be found in the remuneration report and on page 163 of the notes to the consolidated ﬁnancial statements.

Stock option programmes

The basic features of the employee participation programme at 1&1 Drillisch AG are described in the remuneration report on pages 79 and 81 (point 5) of this management report. Further details can be found on page 147 et seqq. (point 38) of the notes to the consolidated ﬁnancial statements.

CONSOLIDATED MANAGEMENT REPORT

30 General information about the Company and Group
36 Business Report
57 Supplementary report
58 Risk report
72 Opportunities report
76 Forecast report
79 Remuneration report
82 Supplemental information
87 Dependency report

GENERAL INFORMATION ABOUT

THE COMPANY AND GROUP

1. General information about the Company and Group

1.1. Business model

1&1 Drillisch Group

1&1 Drillisch Group, together with 1&1 Drillisch Aktiengesellschaft, Maintal, the listed parent company (hereinafter: "1&1 Drillisch AG" or, along with its subsidiaries, "1&1 Drillisch" or "1&1 Drillisch Group"), is a telecommunications provider that operates sole- ly and exclusively in Germany. Serving more than 14.8 million contracts, 1&1 Drillisch is a leading internet specialist and is authorised to use one of the largest ﬁbre optic networks in Germany because of its aﬃliation with the company 1&1 Versatel GmbH, Düsseldorf (hereinafter: "1&1 Versatel GmbH"), which is a member of the United Internet AG corporate group. As a virtual mobile network operator, 1&1 Drillisch has guaranteed access to up to 30 percent of the capacity of Telefónica's mobile network in Germany (so-called Mobile Bitstream Access Mobile Virtual Network Operator = MBA MVNO). In addition, 1&1 Drillisch utilises capacities in Vodafone's mobile network. The Group's business unit Access oﬀers landline and mobile network-based internet access products. They include, among others, chargeable landline and mobile access products and the re- lated applications such as home networks, online storage, telephony, video on demand or IPTV. In addition, 1&1 Drillisch is currently planning to build its own mobile network using the 5G mobile frequencies that were acquired in the auction in 2019.

1&1 Drillisch - sole MBA MVNO on the German mobile market

Pursuant to the MBA MVNO agreement concluded with Telefónica in June 2014, Telefóni- ca grants to 1&1 Drillisch via its wholly-owned subsidiary Drillisch Online GmbH, Maintal (as the only competitor on the German mobile market), access to up to 30 percent of the utilised network capacity of Telefónica in the mobile network of Telefónica and E-Plus that is controlled after the merger of the two companies. This right applies to all future as well as current technologies, including 5G. At the same time, 1&1 Drillisch obtains access rights to the so-called "Golden Grid Network" of Telefónica that has been created by the merger. This means access to the enhanced footprint of the mobile network of Telefónica, includ- ing all necessary technical speciﬁcations and the technical capability to reduce speed and restrict transport in the event of excessive data utilisation by end customers.

In 2019, 1&1 Drillisch exercised the ﬁrst option to extend the MBA MVNO agreement as planned so that the contract now runs until 30 June 2025. The MBA MVNO agreement pro-vides for an option to become a licensed mobile network operator for which, among other things, the conclusion of a national roaming agreement is indispensable.

Pursuant to these agreements, 1&1 Drillisch secures access to the Telefónica mobile net- work over the long term and guarantees seamless coverage during the construction phase of its own nationwide network.

Preparation of its own 5G mobile network

The course was set for the construction of the Company's own 5G mobile network when it acquired 5G frequencies in 2019.

In 2019, 1&1 Drillisch acquired frequency blocks in the 2 GHz and 3.6 GHz ranges. While the frequency blocks in the 3.6 GHz range are already available, the frequency blocks in the 2 GHz range will not become available until 1 January 2026. To bridge this period, 1&1 Drillisch has leased additional frequencies in the 2.6 GHz range from Telefónica until its own frequencies become available.

On 5 September 2019, 1&1 Drillisch concluded an agreement with the Federal Ministry of Transport and Digital Infrastructure (BMVI) and the Federal Ministry of Finance (BMF) regarding the construction of hundreds of mobile base stations in so-called "white spots." 1&1 Drillisch's actions in this regard will help to close existing coverage gaps and contribute to the improvement of mobile communications coverage in rural regions. In return, 1&1 Drillisch will be allowed to pay the costs for the acquired 5G frequencies in twelve annual instalments. The licence costs originally due in the years 2019 and 2024 can now be paid to the federal agencies in instalments scheduled through 2030. This agreement ﬁts in with 1&1 Drillisch's long-term ﬁnancing strategy, which provides for the majority of the expenditures for the construction of a modern 5G network to be ﬁnanced from current income.

Another prerequisite is the conclusion of a national roaming agreement for uninterrupt- ed coverage during the construction phase of the Company's own network. On 15 Feb- ruary 2021, 1&1 Drillisch announced that it would accept the oﬀer for national roaming submitted by Telefónica, which had been improved once again following the review by the EU Commission. With the conclusion of the contract, which Telefónica's oﬀer stipu- lates for about mid-May 2021, another essential prerequisite for the planned rollout of a high-performance 5G network would be realised.

During the ﬁscal year, intensive planning activities and preparations for the construction of the necessary infrastructure continued. In particular, negotiations with potential mo- bile network outﬁtters were conducted; they can be concluded by the middle of 2021. The acceptance of the oﬀer for national roaming has laid the groundwork for a suc- cessful and permanent positioning as the fourth mobile network operator in Germany, and following the conclusion of the national roaming agreement, the construction of a high-performance 5G mobile network can begin.

1&1 Drillisch AG is the Group's holding company

Within 1&1 Drillisch Group, 1&1 Drillisch AG, the parent company, concentrates on the holding tasks such as management, ﬁnances and accounting, ﬁnancial controlling, cash management, human resources, risk management, corporate communications and investor relations along with the deﬁnition, management and monitoring of the corporate strategy.

The operating business is essentially conducted by 1&1 Telecom GmbH and by Drillisch Online GmbH.

1&1 Drillisch AG is a listed subsidiary of United Internet AG, Montabaur, which is also listed.

1&1 Telecommunication SE

1&1 Telecom Holding GmbH

1&1 Telecom GmbH

1&1 Telecom Sales GmbH

1&1 Telecom Service Montabaur GmbH

1&1 Telecom Service Zweibrücken GmbH

1&1 Logistik GmbH

Drillisch Online GmbH

Drillisch Netz AG

IQ-optimize Software AG

Drillisch Logistik GmbH

1&1 Drillisch AG

Business activities

Chargeable contracts with 14.83 million subscribers make 1&1 Drillisch one of the lead- ing providers of broadband and mobile services products in Germany.

Company management and group reporting encompass the segments "Access" and "5G" (previously three reporting segments: "Access", "5G" and "Miscellaneous").

The reporting segment "Miscellaneous" was integrated into the segment "Access" during the reporting year to optimise the informative value and the presentation of related business activities. The ﬁgures for the previous year were restated appropriately.

Segment "Access"

The Group's chargeable wireless access and landline products, including the related applications (such as home networks, online storage, telephony, video on demand or IPTV), are grouped together in the segment "Access". 1&1 Drillisch operates solely and exclusively in Germany. The Company uses the landline network of the aﬃliate 1&1 Versatel GmbH, a member company of United Internet AG Group, and its access right to the Telefónica network; in addition, it purchases standardised network services from various providers of advance services. Access to the networks is enhanced by oﬀerings of devices, own developments of applications and services to set the Company apart from its competitors.

The Access products are marketed via the well-known brand name 1&1 and discount brands such as yourfone or smartmobil.de, which address speciﬁc target groups on the market.

"5G" Segment

The expenses and income relating to preparations for the future establishment, ex- pansion and operation of the Company's own 5G mobile network are disclosed in the segment "5G".

Major locations

LOCATION

MAJOR ACTIVITIES

COMPANY

Headquarters, holdings, IR, PR, ﬁnance, accounting, ﬁnancial controlling, risk management, legal matters, compliance, HR

1&1 Drillisch AG

Maintal

IQ-optimize Software AG

Accounting, marketing, sales, customer service

Drillisch Online GmbH

Krefeld

Marketing, sales, logistics, customer service, ﬁnancial controlling, receivables management and risk management

Drillisch Online GmbH

Düsseldorf

Network planning

Drillisch Netz AG

Munich

Marketing, sales, logistics, sales controlling

Drillisch Online GmbH

Montabaur

Finance, PR, marketing, sales, logistics, customer service

1&1 Telecom GmbH, 1&1 Telecom Sales GmbH

Karlsruhe

Development, product management, data centre operation, marketing, sales, purchasing, customer service

1&1 Telecom GmbH, 1&1 Telecom Sales GmbH

1&1 Telecom Service

Zweibrücken

Customer service

Zweibrücken GmbH

In ﬁscal year 2020, an average headcount of 3,177 (previous year: 3,119) was employed at 1&1 Drillisch Group.

1.2 Strategy

The 1&1 Drillisch business model is based primarily on customer contracts characterised by ﬁxed monthly payments and ﬁxed contract terms. Contracts without ﬁxed terms are also marketed, although to a lesser degree. A business model of this type secures stable and plannable revenues and cash ﬂows, provides protection from short-term economic ﬂuctuations and opens up ﬁnancial manoeuvring room so that opportunities arising in new business ﬁelds and on new markets can be exploited.

A large number of customer relationships also helps the Company to take advantage of so-called scaling eﬀects; the greater the demand for the products, the better ﬁxed costs can be covered and the higher the realised proﬁt. These proﬁts can then be invested in acquiring new customers and in developing new products and business areas.

From today's perspective, mobile internet and high-speed broadband lines along with the related applications represent the growth markets of the coming years. Thanks to its clear positioning on these markets, 1&1 Drillisch, operating under the umbrella of United Internet Group, is strategically well placed to exploit the expected market potential.

The Company has established an outstanding position for itself thanks to its many years of experience as a telecommunications provider; to its competence in software develop- ment and data centre operation, marketing, sales and customer care; to its brands (suchas 1&1, smartmobil.de and yourfone); and to the existing customer contract relationship with more than 14.83 million subscribers in Germany.

1&1 Drillisch will continue to invest heavily in new customers and new products so that it can steadily expand its market positioning by building on this expected growth.

1&1 Drillisch's successful participation in the 5G frequency auction in 2019 opens up further strategic potential for strengthening and expanding its position on the German mobile communications market.

While not neglecting organic growth, 1&1 Drillisch continuously examines as well possi- ble corporate acquisitions, holdings and cooperative ventures as further methods for the expansion of market position, competencies and product portfolios.

Thanks to its plannable and high free cash ﬂow, 1&1 Drillisch has at its disposal the re- sources to fund activities itself while securing solid access to debt capital markets.

Additional information about opportunities and objectives can be found under "Risks, opportunities and forecast report" under item 4.

1.3 Steering systems

The internal steering systems support management in the steering and monitoring of the group. Among other elements, the system includes budgetary and as-is calculations and is based on the group's strategic planning that is revised annually. Factors given par- ticular consideration are market developments, technological developments and trends, their impact on the Company's own products and services and the ﬁnancial opportuni- ties available to the group. The goal of the corporate steering activities is to continue the development of 1&1 Drillisch AG and its subsidiaries continuously and sustainably.

Group reporting encompasses monthly proﬁt and loss statements along with quarterly IFRS reports of all consolidated subsidiaries and presents the assets and liabilities, the ﬁnancial position and the earnings of the group and the business units. Financial report- ing is supplemented by further detailed information necessary for the assessment and steering of operating business.

The key steering indicators are described in the section "Segment reporting" of the con-solidated notes.

The reports on the major risks to the Company that are prepared quarterly are another component of the steering system.

These reports are discussed during the meetings of Management and Supervisory Boards and serve as fundamental pillars for analyses and decisions.

The key performance indicators are revenue, gross proﬁt and the adjusted consolidated EBITDA based on IFRS (earnings before interest, taxes, depreciation and amortisation,adjusted for extraordinary and one-oﬀ factors). Moreover, actions of Company manage- ment include consideration of non-ﬁnancial indicators, in particular the number of, and growth in, contracts subject to charge. Use and deﬁnition of relevant ﬁnancial perfor- mance indicators can be found under point 2.2. 1&1 Drillisch AG (separate company) in its role as the group holding concentrates on the operating values of the Group.

As in the previous year, the existing goodwill is attributed to the "Access" reporting seg- ment and is monitored at this level by the competent corporate positions.

Item 2.2 "Course of business" in the section "Actual and projected course of business" and item 2.3 "Position of the group" in the section containing the general statement on the development of business present a comparison between the performance indicators designated in the forecast with the as-is values of these performance indicators.

1.4. Focus on products and innovations

Product development in ﬁscal year 2020 focused on the following areas:

» Launch of a ﬁbre optic gigabit tariﬀ for private customers
» Development of new "IPTV applications" for smart TVs based on Tizen/Samsung
» Extension of streaming options for IPTV users from 3 to 4 parallel streams
» Introduction of a process for the marketing and installation of Apple Smart Watches with LTE and eSIM in cooperation with Apple and Telefónica
» Marketing start of 5G rate plans

BuSINESS REPORT

2. Business Report

2.1. General economic and industry-related conditions

Development of the overall economy

The International Monetary Fund (IMF) expects Germany's economic performance to decline by -5.4 percent in 2020 as a consequence of the coronavirus pandemic. The IMF's calculations for Germany remain below the provisional calculations of the Federal Statisti- cal Oﬃce (Destatis), which determined a decline in (price-adjusted) gross domestic product (GDP) of -5.0 percent (previous year: +0.6 percent). After a ten-year period of growth, the German economy has fallen into a deep recession in the coronavirus crisis year 2020, simi- lar to what happened most recently during the ﬁnancial and economic crisis of 2008/2009. However, the economic slump was less severe than in 2009 when it was -5.7 percent.

Changes during the year in the growth forecasts 2020 for primary target countries and regions of 1&1 Drillisch

January	April	June	October	Actual	Deviation from January
forecast	forecast	forecast	forecast	2020	forecast
World	3.3 %	-3.0 %	-4.9 %	-4.4 %	-3.5 %	-6.8 percentage points
Germany	1.1 %	-7.0 %	-7.8 %	-6.0 %	-5.4 %	-6.5 percentage points

Source: International Monetary Fund, World Economic Outlook (Update), January 2021

Multi-period overview: development of GDP in primary target countries and regions of 1&1 Drillisch

Change over

2016	2017	2018	2019	2020	previous year
World	3.2 %	3.7 %	3.6 %	2.8 %	-3.5 %	-6.3 percentage points
Germany	1.9 %	2.5 %	1.5 %	0.6 %	-5.4 %	-6.0 percentage points

Source: International Monetary Fund, World Economic Outlook (Update), January 2021

Multi-period overview: development of GDP adjusted for price and calendar factors in Germany

Change over

2016	2017	2018	2019	2020	previous year
GDP	2.1 %	2.8 %	1.5 %	0.6 %	-5.0 %	- 5.6 percentage points

Source: Federal Statistical Oﬃce, January 2021

Development of the industry/core markets

As announced during its annual press conference (13 January 2021), the industry asso- ciation Bitkom assumed a decline for the German ICT market of -0.6 percent (previous year: +1.9 percent) to €169.8 billion in 2020. At the beginning of 2020 (i.e. before the coronavirus pandemic), BITKOM was still projecting revenue growth of +1.5 percent. Despite the decline, the German ICT sector has so far weathered the coronavirus crisis comparatively well.

As in the previous year, the telecommunications market in Germany continues to move sideways. While sales revenues increased by 0.1 percent in 2019, the association fore- casts a decline in revenue of -0.1 percent for 2020. Devices (+0.3 percent) and telecom- munications services (+0.1 percent) increased slightly, but there was a decline in revenue of -2.4 percent in telecommunications infrastructure.

The decline in the overall ICT market is due in particular to declining revenues in infor- mation technology. According to the BITKOM forecast 2020, revenues in this largest sub-market fell by -0.7 percent (previous year: +4.0 percent) to €94.6 billion, a signiﬁcant change from the growth of +2.7 percent projected at the beginning of the year. Yet the individual sectors developed very diﬀerently: +3.2 percent for IT hardware (previous year: +3.2 percent), -1.0 percent for software (previous year: +7.3 percent), -3.2 percent for IT services (previous year: +2.4 percent).

The most important ITC market for 1&1 Drillisch is the German telecommunications market (broadband lines and mobile internet) in the "Access" business unit, which is ﬁnanced largely by subscriptions.

(Landline) broadband market in Germany

The demand for new broadband landlines in Germany has slowed down in recent years because household coverage is already extensive and because of the strong trend in the direction of mobile internet use. An expected plus of 1.0 million new lines (2.8 percent) to 36.2 million in 2020 meant that the number of new activations was signiﬁcantly below the record ﬁgures of earlier years. This was the conclusion reached by the Association of the Providers of Telecommunications and Added-value Services (VATM) and Dialog Consult in their joint 22. TK-Marktanalyse Deutschland 2020 (October 2020). Of the growth described above, the lines relevant for 1&1 Drillisch in the two technology sectors DSL and FTTB/FTTH rose by 0.3 million to 25.6 million and by 0.4 million to 1.9 million, re- spectively. The number of cable connections rose by 0.3 million to 8.7 million. Another 0.05 million connections are operated via satellite/Powerline in Germany.

Revenues generated in the landline business of €33.0 billion were slightly higher (+0.6 percent) in 2020 than the previous year's level (€32.8 billion). The aforementioned revenue ﬁgures include inter alia advance service, interconnection and device revenues in addition to the end customer revenues.

According to a projection from Dialog Consult/VATM, the average consumption of data volume developed much more strongly than the number of newly activated lines and the revenues realised from landline connections, rising by 25.0 percent to 168.1 GB (per line and month), an indicator of the continuing rise in the use of IPTV or cloud ap- plications (for example). The demand for high-speed broadband lines developed at a correspondingly high rate. The number of activated broadband lines with speeds of at least 50 MBit/s rose by 6.4 percentage points from 40.3 percent in the previous year to 46.7 percent in 2020.

The total number of active broadband lines in Germany grew in 2020, as in the previous year, by 1.0 million (+2.8 percent) to the present 36.2 million lines. At the end of 2020, 70.8 percent is expected to be (V)DSL/vectoring lines (25.6 million), 24.0 percent cable network lines (8.7 million) and 5.2 percent FTTB/FTTH lines (1.9 million). Gigabit lines increase by another 700,000 while there are 300,000 more DSL lines.

Key market ﬁgures: landlines in Germany

2020	2019	Change
Landline revenues (in €bn)	33.0	32.8	+ 0.6 %

Source: Dialogue Consult/VATM, TK-Marktanalyse Deutschland 2020, October 2020

Mobile internet market in Germany

According to estimates from Dialog Consult/VATM published in the joint 22. TK-Markta- nalyse Deutschland 2020, the number of active SIM cards on the German mobile com- munications market increased by 8.6 million (6.1 percent) to 148.7 million in 2020. The growth results from the so-called M2M SIM cards (machine-to-machine SIM cards), which are used, for example, for the automated exchange of information among machines, vending machines, vehicles etc. and/or with a central control centre and which increased by 9.5 million to 39.1 million. The number of personal SIMs, on the other hand, fell by 0.9 million to 109.6 million.

Revenues for mobile services increased at the same time by +1.6 percent to €25.9 billion. These revenue ﬁgures also include - in addition to revenues from end customers - inter- connection, advance service and device revenues.

According to forecasts by Dialog Consult/VATM, the average data volume consumed per line and month rose by 45.4 percent to 3.0 GB, a rate much faster than the number of SIM cards and mobile revenues and a sign of the increasing use of mobile data services. At the same time, the number of SIM cards suitable for the faster 4G/5G networks also increased by 12.9 million to 75.4 million while the number of 2G/3G SIM cards declined by 13.8 million to 34.2 million.

Key market ﬁgures: wireless services in Germany

2020	2019	Change
Mobile internet revenues (in €bn)	25.9	25.5	+ 1.6 %

Source: Dialogue Consult/VATM, TK-Marktanalyse Deutschland 2020, October 2020

General legal conditions/Major events

The legal framework for the business activities of 1&1 Drillisch remained essentially un- changed in ﬁscal year 2020 compared to the previous year.

Conclusion of a contract for broadband advance services with 1&1 Versatel

1&1 Drillisch AG has concluded an agreement with its aﬃliate 1&1 Versatel for the long- term procurement of FTTH and VDSL complete packages including voice and IPTV from 1 April 2021. At the same time, 1&1 Versatel concluded an agreement with Deutsche Tele- kom regarding the use of the latter's FTTH/VDSL household lines. This means an expan- sion of the optic ﬁbre services oﬀered by 1&1 Drillisch and will encompass all FTTH/VDSL advance services from 1&1 Versatel in future. The FTTH/VDSL agreement has a term of 10 years and is expected to increase the number of FTTH lines accessible to 1&1 Drillisch by approximately 750,000 right away. According to information from Deutsche Telekom, the total number of marketable FTTH lines is scheduled to increase by an average of two million households per year over the next few years.

The advance services contract, strictly for VDSL advance services, previously in place between 1&1 Drillisch and Deutsche Telekom with a term until 31 March 2024 will be prematurely terminated by agreement of the parties in view of the beneﬁts of the new combined FTTH/VDSL agreement. As a result of the reassessment of the term of the contract, the item of prepaid expenses for VDSL existing customer contingents still avail- able in the amount of €129.9 million has been reversed. The one-time derecognition is non-cash and will be signiﬁcantly exceeded in the long term by positive eﬀects in the fol- lowing years from the expanded cooperation with 1&1 Versatel and Deutsche Telekom.

The new FTTH/VDSL agreement between 1&1 Versatel and Deutsche Telekom is subject to approval by the Federal Network Agency, the competent regulatory authority.

Status of the negotiations regarding a national roaming agreement

Besides business operations, ﬁscal year 2020 was characterised by the preparations for the construction of our own mobile network and the ongoing negotiations for a national roaming agreement that will be required during the transition period while 1&1 Drillisch is gradually establishing its own network. In an ad hoc announcement of 15 February 2021, 1&1 Drillisch reported that it had accepted the oﬀer from Telefónica Germany - which was improved following a review by the EU Commission - for national roaming and the associated MBA MVNO advance services. With the conclusion of the agreement,which Telefónica's oﬀer stipulates by mid-May 2021, another essential prerequisite for the planned rollout of a high-performance 5G mobile network would be realised.

The prices oﬀered for national roaming are set to apply retroactively to the current MBA MVNO agreement from July 2020. Telefónica has been charging the same high advance service prices in the MBA MVNO agreement since July 2020 while until then the advance services prices have been steadily sinking. This had a negative impact on the result for ﬁscal year 2020. Telefónica's national roaming oﬀer reverts to the pricing mechanisms of the ﬁrst ﬁve years of the MBA MVNO agreement. In particular, it again foresees annual decreases in data prices, which are lower than the prices currently charged under the MBA MVNO agreement. A conclusion of the agreement would result in a positive eﬀect on earnings of approximately €34.4 million (which would be recognised as income in ﬁscal year 2021) for 1&1 Drillisch.

Status of the price adjustment procedures

As 1&1 Drillisch has described in its ﬁnancial reports, certain advance service prices are the subject of several arbitration proceedings initiated by 1&1 Drillisch, in the course of which 1&1 Drillisch expects binding decisions on the type and amount of permanent price adjustments in the form of retrospectively lower advance service prices. In the arbi- tration proceedings for the review of a price increase initiated by Telefónica in December 2018 in reference to the 2015 frequency auction in the one-oﬀ amount of approximately €64 million, the arbitrator submitted his ﬁnal assessment on 17 December 2020. The assessor comes to the conclusion that this price increase during the reviewed period (2016 to 2020) is unjustiﬁed in full and there are no payment obligations for 1&1 Drillisch. Otherwise, no further arbitrator proceedings initiated by Telefónica are pending.

Conversely, 1&1 Drillisch is demanding substantial retroactive reductions in the advance services prices pursuant to the MBA MVNO agreement from Telefónica in its price review procedures 2, 5 and 6.

Coronavirus pandemic

Despite the stable business model that is largely independent of economic cycles, the business activities of 1&1 Drillisch in 2020 were also impacted by the eﬀects of the coro- navirus pandemic.

While in the ﬁrst quarter of 2020 there were still positive revenue eﬀects from the tem- porarily changed use behaviour of customers as a result of the coronavirus pandemic (especially in the area of telephony resulting from factors such as provisions for working from home and contact bans), these were overshadowed in the rest of the year by rev- enue losses (especially a lack of international roaming revenues) that resulted primarily from the temporary, but highly restricted travel options of customers. Overall, there was a negative impact on revenues of €-24.1 million. At the same time, the aforementioned temporary change in customers' use behaviour (especially in the areas of telephony and international roaming) had a negative impact of €-25.2 million (in comparison with thebudget for 2020) on the segment's earnings ﬁgures. There were no negative eﬀects in the form of increased bad debts.

No other signiﬁcant events with a decisive inﬂuence on the course of business occurred in ﬁscal year 2020.

2.2. Course of business

Use and deﬁnition of ﬁnancial performance indicators relevant for business

Financial performance indicators such as gross profit, gross profit margin, EBITDA, EBITDA margin, EBIT, EBIT margin or free cash ﬂow are used in addition to the disclo- sures required by the International Financial Reporting Standards (IFRS) in the group's annual and interim ﬁnancial statements to ensure a clear and transparent presentation of 1&1 Drillisch's business development.

These performance indicators as used at 1&1 Drillisch are deﬁned as shown below:

» Gross proﬁt: gross proﬁt is calculated as the diﬀerence between sales and expendi- tures for procured services and merchandise.
» Gross proﬁt margin: the gross proﬁt margin is the ratio of gross proﬁt to revenue.
» EBIT: the EBIT (earnings before interest and taxes) shows the results of operating activities disclosed in the comprehensive income statement.
» EBIT margin: the EBIT margin is the ratio of EBIT to revenue.
» EBITDA: the EBITDA (earnings before interest, taxes, depreciation and amortisation) is calculated as the EBIT plus the write-oﬀs on intangible and tangible assets (items disclosed in the cash ﬂow statement) and write-oﬀs on assets capitalised during the acquisition of companies.
» EBITDA margin: the EBITDA margin is the ratio of EBITDA to revenue.
» Free cash ﬂow: the free cash ﬂow is calculated as the net payments from operating activities (items disclosed in the capital ﬂow statement) less investments in intangible and tangible assets plus payments from the disposal of intangible and tangible assets.

The above-mentioned performance indicators are adjusted for special factors/special eﬀects to the extent this is necessary to ensure a clear and transparent presentation. As a rule, the special eﬀects are related solely to those eﬀects that, because of their nature, frequency and/or scope, are capable of negatively aﬀecting the meaningful- ness of the ﬁnancial performance indicators for the ﬁnancial and income development of the group. All special eﬀects are pointed out and explained in the relevant chapter of the ﬁnancial statements for the purpose of the rollover to the unadjusted ﬁnancial performance indicators.

Actual and forecast course of business

Forecast course of business 1&1 Drillisch

1&1 Drillisch published the forecast for ﬁscal year 2020 as part of its 2019 annual ﬁ- nancial statements; during the year, ﬁgures were corrected or stated more precisely as shown below:

Actual 2019

Forecast 2020 (March 2020)

Concretisation1

(August 2020)Correction2 (September 2020)Concretisation3 (November 2020)Correction4 (February 2021)

Actual 2020

Revenue

€3,674.9munchanged

Approximately + 4.0 %

Approximately

+ 3.0 %

Approximately + 3.0 %

Service revenues

€2,943.0m

Approximately + 2.0% - +3.0 %

Approximately

+ 2.5 %

Approximately + 2.6 %

EBITDA

€683.5munchanged

Approximately €600m

Approximately €470m

(1) Concretisation based on course of business to date.
(2) Correction of EBITDA forecast due to price changes by Telefónica for advance services since July 2020.
(3) Concretisation based on course of business to date.
(4) Announcement of the provisional ﬁgures for ﬁscal year 2020. In this sense, the EBITDA forecast was corrected due to the derecog- nition of the prepaid expenses for existing contingents required by the broadband advance service agreement with 1&1 Versatel.

Actual course of business - 1&1 Drillisch

In ﬁscal year 2020, 1&1 Drillisch was able to increase the number of chargeable custom- er contracts from 14.33 million to 14.83 million. The increase of 0.53 million contracts is attributable to the Mobile Internet division, where the contract portfolio rose to 10.52 million contracts. The number of contracts for broadband lines (4.31 million) re- mained essentially constant in comparison with the end of ﬁscal year 2019.

Sales revenues in fiscal year 2020 amounted to €3,786.8 million (previous year: €3,674.9 million). The high-margin service revenues grew by 2.6 percent compared to the previous year and amounted to €3,020.0 million in ﬁscal year 2020. The previous year's forecast (by and large no change in sales revenues) was clearly exceeded.

The EBITDA in the group fell from €683.5 million in the previous year to €468.5 million, so results fell short of the previous year's forecast of a constant EBITDA compared to the previous year. The decline resulted in particular from the derecognition of the prepaid expenses item relating to the premature termination of the VDSL advance services con- tract (€129.9 million). At the same time, the aforementioned temporary change in cus- tomers' use behaviour because of the impact of the coronavirus pandemic resulted in a shortfall of €-25.2 million in the segment's earnings ﬁgures in comparison with the fore- cast for 2020. Moreover, there were negative eﬀects from the costs for procured mobile advance services that had risen since the middle of the year. A conclusion of the nationalroaming agreement scheduled for the middle of May would result in a positive eﬀect on earnings for the period from 1 July to 31 December 2020 of approximately €34.4 million (which would be recognised as income in ﬁscal year 2021) for 1&1 Drillisch.

Forecast course of business - 1&1 Drillisch AG

The Management Board expected sales revenues for 1&1 Drillisch AG in 2020 at the level of the separate ﬁnancial statements to be of roughly the same magnitude as in ﬁscal year 2019 and a moderate improvement in the proﬁt for the year.

Actual course of business - 1&1 Drillisch AG

As the holding company within the 1&1 Drillisch Group, the earnings of 1&1 Drillisch AG are highly dependent on the development of the operating results of the subsidiar- ies. Sales revenues from intercompany services amount to €2.3 million (previous year: €2.1 million). Other operating expenses increased from €6.9 million to €13.8 million. This is due in particular to higher costs related to the planning of the 5G mobile net- work. Income from proﬁt and loss transfer agreements amounts to €256.7 million (previous year: €544.3 million). The background for the lower earnings from proﬁt and loss transfer agreements include in particular the aforementioned one-oﬀ eﬀects (derecognition of a prepaid expenses item and increased costs for procured mobile advance services) at the operative subsidiaries 1&1 Telecommunication SE and Dril- lisch Online GmbH. The development of the annual proﬁt fell short of the Management Board's expectations.

Segment development

Segment "Access"

The Group's chargeable wireless and broadband access products, including the related applications (such as home networks, online storage, telephony, video on demand or IPTV), are grouped together in the segment "Access."

1&1 Drillisch operates exclusively in Germany and its 14.83 million contracts mean it is one of the country's leading providers in the telecommunications sector. The Company uses the landline network of the aﬃliate 1&1 Versatel GmbH, a member company of United Internet AG Group, and the access right to the Telefónica network; in addition, it purchases standardised network services from various providers of advance services. Access to the mobile or landline networks is combined with devices, own developments of applications and services to create an extended portfolio that sets the Company apart from its competitors.

The Access products are marketed via (for example) the well-known brands 1&1, smart- mobil.de or yourfone, which address speciﬁc target groups on the market.

In ﬁscal year 2020, 1&1 Drillisch again invested in the acquisition of new customers and in the retention of current customer relationships. Focus was on the marketing of mobile internet contracts.

The number of chargeable contracts in the segment "Access" rose in the current product lines by 0.50 million to 14.83 million contracts in ﬁscal year 2020. In the mobile internet business, it was possible to acquire 0.53 million customer contracts, raising the number of contracts to 10.52 million. The number of contracts for broadband lines (4.31 million) remained essentially constant in comparison with the end of ﬁscal year 2019.

Development of Access contracts in ﬁscal year 2020 (in millions)

Access, total contracts

of which mobile internet

of which broadband lines

Development of Access contracts in Q4 2020 (in millions)


31/12/2020
Access, total contracts	14.83
of which mobile internet	10.52
of which broadband lines	4.31

31/12/2020	31/12/2019	Change
14.83	14.33	+ 0.50
10.52	9.99	+ 0.53
4.31	4.34	- 0.03
30/09/2020	Change
14.68	+ 0.15
10.36	+ 0.16
4.32	- 0.1

The group's operating business activities take place primarily in the reporting seg- ment "Access". The segment reporting is aligned with the internal organisation and reporting structure.

Revenue in the segment "Access" rose by €111.9 million (3.0 percent) to €3,786.8 million (previous year: €3,674.9 million).

In the segment "Access", the cost of materials rose by €307.0 million to €2,787.8 million (previous year: €2,480.8 million).

The segment EBITDA amounts to €482.4 million and is below the previous year's value of €689.2 million. The decrease results in particular from the derecognition of prepaid expenses related to the premature termination of the VDSL advance services contract (€129.9 million) as well as the increased costs for procured mobile advance services since the middle of the year. A retroactive reduction of expenses for the second half of 2020 as a consequence of the acceptance of Telefónica's oﬀer for national roaming in the amount of about €34.4 million will not become eﬀective until after the conclusion of the agreement in 2021.

In addition to these eﬀects, the EBITDA includes other extraordinary or one-oﬀ eﬀects. The EU's regulatory decisions on text message rates (since 15 May 2019) and the Ger- man Federal Network Agency's decisions on the subscriber line charge (since 1 July 2019) have negative eﬀects on the EBITDA totalling €-13.7 million. The one-oﬀ expenses from the ongoing integration projects amounted to €-1.1 million (2019: €-3.2 million). In addition to these expected negative eﬀects, the temporary change in customer use behaviour as a result of the coronavirus pandemic (particularly in the area of telephony and international roaming) had a negative impact of €-25.2 million in comparison with the budget on the segment's key earnings ﬁgures.

The aforementioned eﬀects have an impact of about €-204.3 million on ﬁscal year 2020.

Major revenue and proﬁt indicators in the segment "Access"

(in €m)

2020

2019

3,786.8

Revenue

+ 3.0%

3,674.9

999.0

Gross proﬁt -16.3%1,194.0

482.4

EBITDA -30.0% 689.2

Comparable "5EGBI"TDSAegment

731.3 693.4

+ 5.5%

The expenses and income relating to the preparation and conduct of the 5G frequency auction and resulting from the establishment, expansion and operation of the Compa- ny's own 5G mobile network are disclosed in the segment "5G".

Fiscal year 2020 was characterised by preparatory and planning measures for the devel- opment of the necessary infrastructure and the conclusion of a national roaming agree- ment. The segment EBITDA amounts to €-13.9 million euros (previous year: €-5.7 million) and results from the costs incurred within the framework of our planning activities.

2.3. Position of the Group

Earnings position in the Group

1&1 Drillisch Group continued to grow in a highly competitive market environment in ﬁscal year 2020. This growth was driven above all by the contract customer business. It was possible to increase the number of chargeable contracts in comparison with the previous year by 3.5 percent to 14.83 million contracts.

Sales revenues rose in ﬁscal year 2020 by 3.0 percent from €3,674.9 million in the pre- vious year to €3,786.8 million. Of this revenue increase, €77.0 million is attributable to service revenues and €34.9 million to other revenues.

Service revenues, which result essentially from the billing of current customer relation- ships, increased by 2.6 percent to €3,020.0 million. The positive development of service revenues results from the ongoing rise in the number of contract customers and the related monthly payments. These are sustained earnings that determine proﬁt. Other revenues, which consist mainly of revenues from the realisation of hardware revenues (especially from investments in smartphones that are repaid by customers over the con- tractual minimum term in the form of higher package prices), increased by 4.8 percent owing to the growing number of contracts and the higher sales prices of the sold hard- ware compared to the previous year. However, this business ﬂuctuates seasonally and its development depends heavily on the attractiveness of new devices and the model cy- cles of manufacturers. Regardless, these revenue ﬂuctuations have no signiﬁcant impact on EBITDA development.

The consequences of the coronavirus pandemic have a negative impact of €24.1 million on revenue development. While the changed use behaviour in the area of telephony (caused, among other things, by regulations for working from home and contact bans) initially still had a positive eﬀect on revenue, the signiﬁcant restrictions on customers' travel in particular had a negative impact on revenue development in the further course of the year because of a lack of international roaming revenue.

Cost of sales increased in 2020 by €307.1 million (11.9 percent) to €2,881.8 million (pre- vious year: €2,574.7 million). The gross margin, 29.9 percent in the previous year, came to 23.9 percent. Gross proﬁt fell by €195.2 million from €1,100.2 million in the previous year to €905.0 million. The reduction in the gross margin results in particular from the

derecognition of prepaid expenses related to the premature termination of the VDSL advance services contract (€129.9 million) as well as the increased costs for procured mobile advance services since the middle of the year. A retroactive reduction of expens- es for the second half of 2020 as a consequence of the acceptance of Telefónica's oﬀer for national roaming in the amount of about €34.4 million will become eﬀective after the conclusion of the agreement in 2021.

Furthermore, the cost of sales compared to 2019 includes additional expenses from regulatory decisions of €-13.7 million as well as higher advance services costs of €-1.1

million relating to the temporarily changed use behaviour of customers as a result of the coronavirus pandemic. Excluding these additional expenses that were not incurred in the previous year, the cost of sales would have risen by 5.0 percent (€128.0 million).

An adjustment of these special eﬀects leads to a gross margin of 28.6 percent (pre- vious year: 30.0 percent). The change results especially from a stronger increase in low-margin other revenues (4.8 percent) in comparison with the high-margin service revenues (2.6 percent).

Distribution costs rose from €426.5 million in the previous year to €442.3 million in 2020, in particular as a consequence of increased marketing activities and in conjunc-tion with the sponsorship agreement at Borussia Dortmund. In relation to revenue, distribution costs in 2020 amounted to 11.7 percent (previous year: 11.6 percent). Ad- ministration costs rose from €92.2 million in the previous year (2.5 percent of revenue) to €99.4 million (2.6 percent of revenue).

The other result from other operating expenses of €1.7 million (previous year: €3.3 million) and other operating income of €33.9 million (previous year: €33.6 million) is almost unchanged from the previous year. Impairment losses from ﬁnancial assets declined from €83.3 million in the previous year to €82.3 million in ﬁscal year 2020.

The EBITDA in 2020 amounted to €468.5 million (previous year: €683.5 million). The rea- sons for the decline are in particular the derecognition of prepaid expenses as a result of the premature termination of the VDSL advance services contract (€129.9 million) as well as the increased costs for procured mobile advance services since the middle of the year as a result of the price increases (excluding the retroactive price adjustment of €34.4 million for the second half of 2020). Moreover, the EBITDA is impacted by the reg- ulatory decisions of the Eu on text message rates (since 15 May 2019) and the Federal Network Agency on the subscriber line ctharge (since 1 July 2019) totalling €-13.7 million (and one-oﬀ expenses from integration projects of €-1.1 million (previous year: €-3.2 million). Furthermore, results were reduced by €-25.2 million in comparison with the forecast for 2020 because of the temporary change in use behaviours of our customers as a consequence of the coronavirus pandemic. The aforementioned eﬀects had a nega- tive impact on proﬁts of €204.3 million in ﬁscal year 2020. The adjusted EBITDA came to €672.8 million (previous year: €686.7 million).

The EBITDA includes costs related to planning and preparations for our 5G mobile net- work of €-13.9 million (previous year: €-5.7 million).

The EBITDA margin came to 12.4 percent (previous year: 18.6 percent).

Earnings before interest and taxes (EBIT) in 2020 amounted to €313.1 million (previous year: €528.5 million). The EBIT margin came to 8.3 percent (previous year: 14.4 percent). The eﬀects of PPA write-oﬀs continue to weigh on the result. Precluding the eﬀects from these write-offs, the EBIT amounted to €411.2 million and the EBIT margin to 10.9 percent (previous year: €641.8 million and 17.5 percent, respectively).

Financing expenses in 2020 amounted to €1.6 million (previous year: €7.3 million). The change over the same period of the previous year results by and large from the con- clusion of a credit line with a European bank syndicate in January 2019 and the related one-oﬀ fees together with expenses relating to the provision of this credit line. This credit line was terminated during ﬁscal year 2019. Financial income in 2020 amounted to €1.1 million (previous year: €1.2 million).

Earnings before taxes (EBT) in 2020 amounted to €312.6 million (previous year: €522.4 million). Tax expenses amounted to €93.0 million (previous year: €148.8 million), resulting in a tax rate of 29.7 percent (previous year: 28.5 percent).

Consolidated earnings amounted to €219.6 million (previous year: €373.6 million).

The undiluted proﬁt per share in 2020 came to €1.25 (previous year: €2.12). Excluding the eﬀects of the PPA write-oﬀs, the undiluted proﬁt per share in 2020 amounted to €1.64 (previous year: €2.57).

Major revenue and proﬁt indicators (in €m)

2020

2019

Revenue	+3.0%
Gross	-16.3%
proﬁt
EBITDA	-31.5%
EBITDA
margin	-6.2 percentage points
in %
EBIT	-40.8%
EBIT
margin	- 6.1 percentage points
in %

3,786.83,674.9

999.01,194.0

468.5

683.5

12.4

18.6

313.1528.5

8.3

14.4

Financial position in the Group

Cash ﬂow from operating activities in 2020 was slightly above the previous year's value at € 511.3 million (previous year: € 510.5 million). Net inﬂow of funds from operating ac- tivities increased substantially from €375.7 million in the previous year to €450.7 million in 2020. The primary reasons for this are the continued success of 1&1 Drillisch's oper- ating business and a lower tie-up of funds in working capital. The contrary development is the increased tie-up of funds in the contract assets because of the renewed increase in hardware sales compared to the previous year, for which repayment is usually made over the contract terms.

Cash ﬂow from investments shows total net outgoing payments of €397.4 million during the reporting period (previous year: outgoing payments of €230.5 million). Investments in intangible and tangible assets result in outgoing payments of €207.2 million and incoming payments of €0.2 million (previous year: outgoing payments of €20.5 million and incoming payments of €0.2 million). Investments of €165.0 million relate in particu- lar to payments in conjunction with the extension of the MBA MVNO agreement. The extension of the MBA MVNO agreement laid the groundwork for the later negotiationsfor national roaming. The investment of free cash resulted in outgoing payments of €190.0 million (previous year: €210.0 million). They relate to the short-term investment of free cash with United Internet AG.

Free cash ﬂow, deﬁned as net inﬂow of funds from operating activities less investments in intangible and tangible assets plus inﬂow of funds from disposals of intangible and tangible assets, amounted to €243.7 million in 2020 (previous year: €355.4 million). Ad- justed for the one-oﬀ payment related to the extension of the MBA MVNO agreement, the adjusted free cash ﬂow amounts to €408.7 million, which is 15.0 percent above the previous year's value.

As in the previous year, the cash outﬂows from ﬁnancing activities of €61.3 million re- sulted from the repayment of liabilities related to the acquisition of the 5G frequencies. In addition, there were payments in the ﬁscal year related to the dividend disbursement and the repayment of liabilities from ﬁnance leases.

Cash and cash equivalents per 31 December 2020 amounted to €4.4 million (previous year: €31.8 million).

Assets and liabilities in the Group

The balance sheet total increased from €6,461.9 million per 31 December 2019 to €6,690.3 million per 31 December 2020. On the assets side, short-term assets rose by €244.1 million while long-term assets declined by €15.7 million.

The increase in short-term assets is in the form of €185.6 million in accounts due from associated companies. The development is the result of the investment of free cash at United Internet AG. The short-term contract assets include in particular receiva- bles from the sale of hardware. The increase of €67.7 million is due above all to the increase in hardware sales, which are recognised as soon as contract are concluded while the repayment is usually made over the terms of the mobile services contracts. Prepaid expenses declined from €211.7 million to €187.1 million and concern essen- tially contract costs and prepaid utilisation fees that will not be recognised through expenditures until later periods. The decline relates mainly to the short-term share of prepaid expenses for the prematurely terminated VDSL advance service contract. Recognised contract costs, which are included in prepaid expenses at €143.5 million (previous year: €149.7 million), include prepaid expenses to obtain and fulﬁl contracts over the terms of the contracts.

Long-term assets decreased by €15.7 million to €5,137.0 million. The rise in tangible as- sets by €58.3 million results in particular from the conclusion of new long-term leases. The increase in intangible assets of €54.6 million results primarily from the payment in the amount of €165.0 million relating to the extension of the MBA MVNO agreement. The assets determined as part of the 1&1 Drillisch purchase price allocation were re- duced by scheduled depreciation and amortisation attributable to these items. Goodwill remains unchanged from the previous year at €2,932.9 million. Long-term contract as- sets increased by €22.3 million in line with the development of revenues.

Long-term prepaid expenses decreased by €151.2 million. The change is related above all to the premature termination of the VDSL advance services contract.

On the liabilities side, €25.7 million of the increase in the balance sheet total is attribut- able to short-term liabilities and €212.9 million to equity. Long-term liabilities declined from €1,272.2 million in the previous year to €1,262.0 million.

The increase in short-term liabilities results in particular from an increase in trade paya- bles due to a rise in hardware business at the end of the year compared to the previous year. Contrary to this movement, accounts due to related parties per the closing date declined by €23.5 million and are related to accounts due to group undertakings of United Internet Group pursuant to the procurement of advance services and other cost allocations. Short-term other non-ﬁnancial liabilities fell by €12.0 million to €17.3 million and concern in particular value-added tax.

Contract liabilities include short-term liabilities from reimbursement obligations for one- time fees for revoked contracts and deferred income from one-time fees related to the application of IFRS 15.

In long-term liabilities, other ﬁnancial liabilities decreased by €17.2 million. The repay- ment of the frequency liability of €61.3 million is partially oﬀset by increased leasing liabilities as a result of IFRS 16 accounting.

Deferred tax liabilities increased by €4.3 million from €229.7 million per 31 December 2019 to €234.0 million per 31 December 2020. The contract liabilities in the amount of €6.9 million (previous year: €5.0 million) include long-term income from one-time fees that is to be deferred in accordance with the application of IFRS 15.

Group equity rose from €4,640.8 million per 31 December 2019 to €4,853.8 million per 31 December 2020. While dividends of €8.8 million were distributed, the increase in eq- uity results in particular from the consolidated result of €219.6 million. The equity ratio rose from 71.8 percent in the previous year to 72.5 percent per 31 December 2020.

The share capital is distributed in 176,764,649 no-par shares issued to the bearer with a proportionate share in the share capital of €1.10 each and represents the share capital of 1&1 Drillisch AG. As of the balance sheet closing date 31 December 2019, a total of 500,000 1&1 Drillisch AG shares had been acquired as part of the stock repurchase pro- gramme. No treasury shares were repurchased in ﬁscal year 2020.

General statement from the Management Board regarding the Group's economic position

The Management Board of 1&1 Drillisch looks back on a challenging year. As a conse- quence of the coronavirus pandemic, the general economic conditions have undergone a diﬀerent development than originally hoped. Even though total sales on the German telecommunications market remained comparatively stable with a decline of only 0.1 percent, the market did not provide the hoped-for impetus for business.

Even under these challenging conditions, 1&1 Drillisch nevertheless developed positively with an increase of 0.5 million customer contracts to 14.83 million, further solidifying its strong position in a highly competitive market environment. Service revenues were increased beyond expectations by 2.6 percent to €3,020.0 million. The decline in the EBITDA of €215.0 million to €468.5 million was caused in particular by negative special factors in the amount of €204.3 million.

The ﬁnancial position of 1&1 Drillisch AG remained positive in ﬁscal year 2020 as well. Free cash ﬂow of €408.7 million, adjusted for the one-oﬀ payment as part of the exten- sion of the MBA MVNO agreement, surpassed the comparable ﬁgure for the previous year as well as the forecast. At the same time, targeted investments in preparations for the construction of our 5G mobile network and in our customer and contract structure have created the conditions for sustainable growth.

Overall, the Management Board regards 1&1 Drillisch Group to be in an excellent po- sition for its continued corporate development per the closing date of ﬁscal year 2020 as well as at the point in time of preparation of this report. The Board has a positive as- sessment of the assets and liabilities, the ﬁnancial position and earnings - subject to the reservation of unforeseen special eﬀects - and is optimistic in its outlook for the future.

2.4 Position of the Company

Earnings of 1&1 Drillisch AG

At the level of the annual ﬁnancial statements of 1&1 Drillisch AG, sales revenues rose slightly to €2.3 million (previous year: €2.1 million). The sales revenues result largely from intercompany services. Other operating income increased from €0.5 million to €1.0 million, in particular due to higher intercompany recharges.

The increase in personnel expenses from €3.1 million to €3.5 million results in particular from the 17 percent increase in the average number of employees. Other operating ex- penses increased from €6.9 million to €13.8 million. The rise was caused in particular by higher costs related to the planning of the 5G mobile network.

The balance of income and expenses from proﬁt and loss transfer agreements at €256.7 million is €287.6 million below the previous year's value. The change is caused in par- ticular by the derecognition of prepaid expenses related to the premature termination of the VDSL advance services contract (€129.9 million) as well as the increased costs for procured mobile advance services since the middle of the year for two subsidiaries.

Interest income amounts to €5.8 million (previous year: €3.6 million) and results primar- ily from interest income within the framework of group-wide cash management. Interest expenses amount to €0.4 million (previous year: €7.3 million). The previous year includ- ed interest expenses from fees for the provision of a credit line that was terminated later in the same year.

The deduction of taxes on income of €88.4 million euros (previous year: €172.6 million) leaves a net proﬁt for the year of €159.7 million (previous year: €360.6 million).

Assets, liabilities and ﬁnancial position

The balance sheet total for 1&1 Drillisch AG rose by €247.7 million to €7,259.2 million in ﬁscal year 2020 (previous year: €7,011.5 million). Fixed assets did not change appreciably compared to the previous year, rising by €1.5 million.

The increase in the balance sheet total on the assets side of €246.1 million is attributable in particular to current assets, above all to €238.4 million in accounts due from associ- ated companies, which increased to €709.8 million (previous year: €471.4 million). The major cause is the short-term investment of free cash at United Internet AG.

The liquidity of 1&1 Drillisch AG is ensured by the positive cash ﬂows from the operating activities of its subsidiaries and the account due from United Internet AG that can be called in at any time. In addition, within the framework of the cash management agree- ment concluded between 1&1 Drillisch AG and United Internet AG in ﬁscal year 2018, 1&1 Drillisch AG can draw on up to a maximum of €200.0 million in cash from United Internet AG, thus securing the ﬁnancing of 1&1 Drillisch.

Other assets rose from €12.7 million per 31 December 2019 to €48.1 million per 31 De- cember 2020 and essentially comprise claims for the reimbursement of tax.

Cash and cash equivalents amount to €3.4 million, down from €31.1 million in the previ-ous year.

In comparison with the previous year, equity increased by a total of €150.9 million to €7,091.2 million (previous: €6,940.3 million). The change results from the net proﬁt for the year of €159.7 million and the disbursement of dividends of €8.8 million. An equity ratio of 97.7 percent (previous year: 99.0 percent) means that almost all assets continue to be ﬁnanced by equity.

Tax provisions amount to €25.3 million (previous year: €26.9 million) per 31 December 2020. At €2.0 million (previous year: €1.4 million), other provisions are slightly above the previous year's ﬁgure.

The increase in liabilities from €42.9 million to €140.7 million comes in particular from an increase by €84.6 million to €100.8 million (previous year: €16.2 million) in accounts due to associated companies. As in the previous year, the accounts due to associated com- panies concern primarily liabilities from cash pooling to companies within 1&1 Drillisch Group. Other liabilities, which relate essentially to VAT liabilities, amount to €14.4 million (previous year: €25.5 million).

As in the previous year, there was a surplus of deferred tax assets in ﬁscal year 2020 that was not recognised in exercise of the option pursuant to Section 274 (1) second sen- tence Commercial Code [Handelsgesetzbuch; HGB].

General statement regarding the Company's economic position

The assumption made in the previous year that sales revenues would remain constant was exceeded slightly. The development of the annual proﬁt was below the forecast val- ues because of the described one-oﬀ eﬀects. Restated for the one-oﬀ eﬀects, however, the development is clearly positive, so that the Management Board is satisﬁed overall with operational development.

Overall, the Management Board regards 1&1 Drillisch AG to be in an excellent position for its continued corporate development per the closing date of ﬁscal year 2020 as well as at the point in time of preparation of this report. It assesses the net assets and lia- bilities, ﬁnancial and earnings position - subject to possible special eﬀects - as positive and is optimistic about the future, particularly in view of the agreements reached on the VDSL/ FTTH advance services contract as well as the progress in the negotiations for a national roaming agreement and the associated advanced planning for the Company's own 5G mobile network.

In view of the additional investments that will be required for the establishment and expansion of its own 5G mobile network, the Management Board of 1&1 Drillisch AG submits the following dividend proposal (which is in harmony with the dividend policy) for ﬁscal year 2020 to the Supervisory Board:

» Disbursement of a dividend of €0.05 per share. This proposal is oriented to the minimum dividend required by Section 254 (1) Stock Corporation Act [Aktiengesetz; AktG]. Assuming 176.3 million shares entitled to dividends, this would result in a total disbursement of €8.8 million for ﬁscal year 2020.

Management Board and Supervisory Board will discuss this dividend proposal in the Su- pervisory Board meeting on 24 March 2021. The Annual General Meeting of 1&1 Drillisch AG will decide about the motion proposed jointly by Management Board and Superviso-ry Board on 26 May 2021.

2.5 Principles and objectives of the ﬁnancial and capital management

The ﬁnancing of the group is handled centrally by the parent company 1&1 Drillisch AG. The top priority of the ﬁnancial management at 1&1 Drillisch is to secure the Company's liquidity at all times. Liquidity reserves are always maintained in such an amount that any and all payment obligations can be met on time. Liquidity is secured on the basis of detailed ﬁnancial planning. Business operations are ﬁnanced from cash ﬂow and free cash. The Company strives to develop further and to optimise the ﬁnancial management continuously. As a general principle, the company law provisions form the framework of capital management in 1&1 Drillisch Group. In cases in which contractual provisions must be observed, equity is managed additionally in accordance with the principles deﬁned in these provisions. In cases in which no special provisions need be observed, the managed equity is the equity as disclosed in the balance sheet. During the reporting period, the Company complied with both company law and contractual provisions at all times.

2.6 Non-ﬁnancial performance indicators

According to 1&1 Drillisch's perception of itself, entrepreneurial activities go beyond the straightforward pursuit and achievement of economic targets to encompass as well an obligation and responsibility to society and the environment. 1&1 Drillisch ful- ﬁls this responsibility in various ways.

We refer to the Non-Financial Declaration 2020 (Sustainability Report) of 1&1 Drillisch AG athttps://www.1und1-drillisch.de/corporate-governance#nachhaltigkeitsberichtre- garding these and other sustainability topics that will be published in April 2021.

In addition to the development in the number of subscribers explained in the business report, the non-ﬁnancial performance indicators described below along with eﬃcient, value-oriented corporate management are major factors contributing to 1&1 Drillisch's success.

Customer loyalty: In addition to acquiring new customers, the most important fac- tor in expanding the customer base is retaining and securing the loyalty of current customers. Customer satisfaction is a management criterion at 1&1 Drillisch. For this reason, structures and processes have been established in the "Access" segment to measure, analyse and ultimately improve customer satisfaction on a continuous and sustainable basis.

Service quality: The introduction of the so-called 1&1 Principle as well as the constant optimisations of the service processes in the following years represented continuous investments in the optimisation of service quality. Customer experience in terms of excellent service was enhanced once again with the introduction of the 1&1 Card in ﬁscal year 2020.

In the test conducted by the established trade magazine "connect", 1&1 took ﬁrst place in the category of the most satisﬁed customers, but that was not all. 1&1 won all eight sub-categories in the test, including service quality, by a large margin in the areas of friendliness and quality.

Network quality: 1&1 once again won the broadband and landline network test of the trade magazine "connect" in ﬁscal year 2020, its third victory since 2015. The annual test examines the categories "Language", "Data", "Web Services" and "Web TV". The results of crowdsourcing analyses by the Federal Network Agency are also included in the overall ranking. In telephony, 1&1's convincing performance included short connection times, and we posted "Outstanding services" when it came to high-speed internet. And 1&1 also delivered top performances in web services such as accessing websites, uploading to photo book services or playing videos.

Knowledge of the markets: Thanks to 1&1 Drillisch's many years of operation on the telecommunications market, the Company has established a position of trust among its customers. This is what enables 1&1 Drillisch to recognise upcoming trends in good time and to exploit them to raise value. Realising innovative marketing ideas and alter- native distribution solutions has repeatedly led to 1&1 Drillisch's success in oﬀering at an early stage products that meet the needs of the customers.

Eﬃciency of business processes: 1&1 Drillisch works constantly on the improvement of eﬃciency in business processes, eﬀorts which have led to sustained increases in

productivity.

SuPPLEMENTARY REPORT

3. Supplementary report

In 2021, a general agreement regarding the procurement of FTTH/VDSL advance services was concluded with 1&1 Versatel. The agreement has a term of ten years and was in- tended to increase the number of FTTH lines available to 1&1 Drillisch.

On 15 February 2021, 1&1 Drillisch announced its acceptance of the improved oﬀer for national roaming submitted by Telefónica. The oﬀer also has an eﬀect on the prices that have been billed pursuant to the MBA MVNO agreement since July 2020, which, once the agreement has been concluded (expected in mid-May 2021), is expected to result in income related to other periods of approximately €34.4 million in ﬁscal year 2021.

A detailed description of the circumstances can be found under point 2.1, "General Legal conditions/Major events".

Statements on the economic position of the Group and the Company at the time of preparation of this report are provided under item 4.3 in the "Forecast report".

RISK REPORT

4. Risks, opportunities and forecast report

The risk and opportunity policy of 1&1 Drillisch Group is oriented to the goal of maintain- ing and sustainably increasing the Company's value by taking advantage of opportunities and identifying and controlling risks at an early stage. The risk and opportunity manage- ment as practised ensures that 1&1 Drillisch can carry out its business operations in a controlled corporate environment.

The risk and opportunity management regulates the responsible handling of uncertain- ties that are always a part of entrepreneurial activities.

4.1 Risk report

Risk management

The risk management system is an integral component of corporate policy aimed at early exploitation of opportunities as well as the detection and limitation of risks. 1&1 Drillisch operates a risk management system throughout the group that includes con- tinuous observation to ensure early recognition and the standardised recording, as- sessment, control and monitoring of risks. The objective is to obtain information about negative developments and the related ﬁnancial eﬀects as early as possible so that appropriate countermeasures can be initiated. The management of the company results and corporate value utilises the instruments of risk management. They can become a strategic success factor for corporate management - for 1&1 Drillisch AG itself as well as for the subsidiaries.

If the Company is to be consistently successful in the conﬂict between opportunities for proﬁt and the threat of loss, risks must be taken into consideration during the deci- sion-making process systematically and in accordance with standards that are uniform throughout the group. Risk management includes the deﬁnition of risk ﬁelds, the record- ing and communication of risks by the operating units, the assignment of responsibilities and tasks and the documentation of these steps. The concrete implementation of the procedures which have been issued is secured by a monitoring system. The 1&1 Drillisch risk management process utilises the following building blocks for the exploitation of opportunities without delay and the early discovery of risks:

» The internal controlling system

» The daily, weekly and monthly management reporting, especially in the areas con- trolling, cash management and the operating business segments

» The continuous monitoring of the market

» The quarterly risk inventory

The coordination of risk management is handled at the group level by Group Con- trolling and Legal. Based on monthly close-outs, the regular comparison of budget and as-is ﬁgures as well as market analyses and market observations, opportunities and risks from operating and strategic areas can be recognised early and addressed in the risk portfolio by implementation of suitable measures. Lines of responsibility and accountability are clearly regulated at 1&1 Drillisch and are based on the corporate structure of 1&1 Drillisch Group. Adequate insurance policies, provided that they are regarded as being economically justiﬁable, have been concluded to cover incidents of loss and liability risks arising in the course of daily business.

Risks are assessed as far as possible by determining the probability of their occurrence and possible impact on the EBITDA and equity. The probability of occurrence and the impact are classiﬁed and assessed appropriately. The assessment of the degree of the risk and the possible ﬁnancial impact is based on the criteria Very low, Low, High, Very high and Extremely high; the assessment of the probability of occurrence is classiﬁed according to Very low, Low, High and Very high. The group Management Board and operating management level in each of the business segments are directly responsible for the early and continuous identiﬁcation, assessment and management of oppor- tunities. The system complies with the legal requirements for an early risk detection system, is in harmony with the German Corporate Governance Code and in its design is based on the guidelines deﬁned in the international ISO standard ISO 31000:2018.

The Supervisory Board reviews the eﬀectiveness of the risk management system in accordance with the provisions of the Stock Corporation Act.

RISK ASSESSMENT MATRIX

Extremly high > €100m

Very high

> €50m - €100m

Degreeofrisk

High

> €10m - €50m

Low

> €2.5m - €10m

Very low

> €0 - €2.5m

Very low	Low	High	Very high
> 0% - 5%	> 5% - 20%	> 20% - 50%	> 50% - 100%

Probability of occurrence

The limits for the scope of risks were adjusted in the management reports of the Company and the Group for the year 2020. The change was made to better reﬂect the relationship of the impact of the risks on the EBITDA and equity.

The Management Board and Supervisory Board are regularly provided with reports on the risk situation and the eﬀectiveness of the risk management system with all of its controlling functions. The results are discussed by both the Management Board and Supervisory Board.

Description of the major features of the internal controlling and risk management with respect to the accounting process

The internal controlling system in 1&1 Drillisch Group includes all of the principles, pro- cedures and measures needed to secure the eﬀectiveness, correctness and economic eﬃciency of the accounting and to assure compliance with the pertinent legal require- ments. Besides the manual process controls in the form of the "two sets of eyes prin- ciple," automatic IT process checks also form a major part of the integrated controlling measures. The risk management system in 1&1 Drillisch Group as a component of the internal controlling system is oriented, with respect to the accounting, to the risk of incorrect representation in the bookkeeping and the external reporting. A "monitoring system for the early recognition of risks threatening the Company's existence" has been set up in 1&1 Drillisch Group to ensure the systematic early detection of risks so that other risks besides those threatening the existence of the enterprise are detected early, controlled and monitored. The bookkeeping systems from the manufacturers Sage and SAP are used for the posting of accounting items in 1&1 Drillisch Group while the consol- idation software from the manufacturer IDL is used at the group level.

Risks related to accounting can arise from the conclusion of unusual or complex trans- actions, for example. Moreover, business transactions that are not handled as a matter of routine entail latent risks. The measures of the internal controlling system oriented to the correctness of the accounting ensure that all of the business transactions are recorded completely and contemporaneously in conformity with legal and statutory requirements. Furthermore, it is assured that assets and debts are correctly recognised, measured and disclosed in the annual ﬁnancial statements. The controlling activities include the analysis of material circumstances and developments, for example, using special indicator systems. The organisational separation of administrative, executive, billing and approval functions signiﬁcantly reduces vulnerability to fraud. The internal controlling system also assures the representation of changes in the economic or legal environment of 1&1 Drillisch Group and ensures the application of any new or amended legal provisions for the accounting.

Risks

Strategy

Business development and innovation

A major factor for continuing the success of 1&1 Drillisch is the development of new and continuously improved products and services so that new customers are acquired and current customer relationships are strengthened. The risk here is that the introduction of new developments to the market will be too late or that the target group will not ac- cept them as expected.

1&1 Drillisch counters these risks by closely and constantly monitoring market, products and competition and by responding to customer feedback at all stages of product development.

Within the context of the diversiﬁcation of the business model and the expansion of the value-added chain, 1&1 Drillisch occasionally enters new markets or upstream or down- stream markets. On 24 January 2019, the 1&1 Drillisch AG Management Board, with the consent of the Supervisory Board, decided to submit an application to the Federal Net- work Agency in accordance with the decision BK1- 17/001 for participation in the auction for the awarding of mobile network frequencies in the ranges 2 GHz and 3.6 GHz and, in the event of the successful acquisition of frequencies, to establish and operate a 5G mo- bile network. At this time, the mobile services provided by 1&1 Drillisch are based on the use of third-party networks. On 12 June 2019, 1&1 Drillisch successfully completed its participation in the auction of 5G frequencies and purchased two frequency blocks of 2 x 5 MHz each in the 2 GHz range and ﬁve frequency blocks of 10 MHz each in the 3.6 GHz range for a total price of €1.07 billion. The Company plans to use these frequencies for the step-by-step buildup of its own 5G mobile network, increasing its added value in the mobile communications business as well and developing new business areas. The establishment and expansion of the Company's own 5G mobile network depend on the conclusion of national roaming agreements with one or more mobile network operators. 1&1 Drillisch accepted Telefónica's oﬀer for national roaming in February 2021. If the agreement is not concluded by mid-May 2021 as stipulated in the Telefónica oﬀer and no agreements can otherwise be concluded on competitive terms, this could jeopardise the establishment and expansion of the Company's own 5G mobile network. In this case, there is a risk of impairment losses on intangible assets through proﬁt and loss resulting from the acquisition of the frequencies insofar as that they cannot be resold, which is always a possibility. Due to the limited capacities relating to available network equip- ment outﬁtters, there are in addition risks with regard to time, quality and budget arising from the establishment and expansion of a proprietary mobile network. The Company is countering these risks with intensive discussions and negotiations to conclude appro- priate agreements.

A business decision of this type involves risks as well as oﬀers opportunities. The main areas of risk are "operations of technical systems," "procurement market" or "legal dis-putes". 1&1 Drillisch strives to minimise these risks through detailed, long-term planning, cooperation with specialist partner companies and other methods.

Participations and investments

The acquisition and holding of equity interests and the making of strategic investments represent a signiﬁcant success factor for 1&1 Drillisch AG. Besides enabling better access to existing and new growth markets and to new technologies/know-how, par- ticipations and investments also serve to develop synergy and growth potential. These opportunities are accompanied by risks. There is a risk that the hoped-for potential cannot be exploited as expected or that acquired investments will not develop as ex- pected (write-downs of going-concern value, losses on disposals, loss of dividends or reduction in hidden reserves).

All participations are therefore subject to a continuous monitoring process. This risk is largely irrelevant for the EBITDA as its occurrence results primarily in non-cash impair- ment losses. The recovery value of the investments that have been made is regularly monitored by management and ﬁnancial controlling.

Cooperation and outsourcing

In some of the business units, 1&1 Drillisch cooperates with specialist cooperation and outsourcing partners. The primary objectives of such cooperative activities include (among others) the concentration on the Company's actual core business, cost reduc- tions or participation in the partner's expertise. These opportunities simultaneously entail risks in the form of dependencies on external service providers as well as risks related to contracts and failures.

To reduce these risks, a detailed market analysis and a due diligence review are carried out before a contract is concluded with an external service provider, and even after the conclusion of the contract, close interaction in the spirit of partnership is maintained with the cooperation and outsourcing partners.

Organisational structure and decision-making

The selection of a suitable organisation structure is essential for the eﬃciency and suc- cess of the Company. Besides the organisational structure, however, business success is also decisively dependent on making the right decisions. The basis for decisions is aﬀected by existing business processes and structures. If eﬃciency is jeopardised by one or more factors, this represents a strategic risk for 1&1 Drillisch that, insofar as econom- ically justiﬁable, should be avoided.

1&1 Drillisch sees itself well positioned here due to the high level of agility in the organi- sation and is carrying out a variety of measures to optimise and standardise structures, processes and key ﬁgures.

Personnel development and retention

Highly qualiﬁed and well trained employees are the foundation for the commercial success of 1&1 Drillisch. In addition to the successful recruiting of qualiﬁed personnel (see also the risk "Personnel recruitment"), personnel development and the long- term retention of key employees in the Company are of strategic importance for 1&1 Drillisch. If the Company does not succeed in recruiting, developing further and retaining executives and employees with special professional or technological exper- tise, there is a danger that 1&1 Drillisch might no longer be in a position to carry out its business activities eﬀectively and to achieve its growth targets. Where strategic knowl- edge and skills have been brought together in such a concentration (so-called brain monopoly), the loss of one of these key employees can have a signiﬁcant impact on the Company's ability to perform.

1&1 Drillisch counters this risk by ensuring the continuous further development of employee and managerial competencies and establishing rules for representation. Speciﬁc measures for professional advanced development, mentoring and coaching programmes and special programmes for high-potential candidates that are designed to foster and promote the talents and managerial competence of the staﬀ are oﬀered.

Market

Sales market and competition

The German telecommunications market is characterised by stiﬀ and constant com- petition. Depending on the strategy of the players participating in the market, various eﬀects can appear that may require inter alia a modiﬁcation of the Company's own business model or adjustments in its own price policies. The delivery of hardware within one working day or an on-site replacement of defective devices on the next working day requires an adequate stock of devices. This may result in impairment losses over time if market prices for devices change. Market entries of new competitors can also pose a danger to market shares, growth targets or proﬁt margins.

1&1 Drillisch seeks to minimise these risks with detailed planning based on in-company experience values and external market studies as well as the constant monitoring of market and competition.

Procurement market

A gap in the procurement or supply of resources required for company operations can lead to bottlenecks or operational disruptions at 1&1 Drillisch. This is true of both the purchase of hardware and the procurement of advance services. Changes to the existing models of the terms and conditions for advance services (for example, price increases or changes in billing modalities) may result in margin and earnings risks. A price increase in the pur- chased products and other services also represents a risk for the product margin targets.

1&1 Drillisch counters these risks by cooperating in partnership with multiple service providers and suppliers bound by long-term contracts and - insofar as economically jus- tiﬁable - expanding its own value-added chain.

Personnel recruitment

The eﬀective management of personnel resources is of key importance for 1&1 Drillisch so that the short-, middle- and long-term demands for employees and the required professional expertise can be secured. If the Company does not succeed in recruit- ing executives and employees with special professional and technological expertise, 1&1 Drillisch might no longer be in a position to carry out its business activities eﬀective- ly and to achieve its growth targets.

In terms of its position as an employer, 1&1 Drillisch sees itself in a good position to at- tract and hire qualiﬁed professionals and managers with the potential to enhance busi-ness success in the future as well.

Service performance

Work procedures and processes

Demands on the continued development of internal work procedures and processes are rising at an accelerating pace in this setting of steadily increasing complexity and interoperability of the oﬀered products. This goes hand in hand with steadily growing alignment and coordination eﬀorts. The special challenge in this sense - besides assur- ing quality standards - is above all the adaptation to market events that are occurring in ever shorter cycles.

The Company counters these risks with constant further development and improve- ment of internal procedures and processes, the speciﬁc bundling and binding of ex- perts and personnel with key competencies and the continuous optimisation of the organisational structures.

Cyber and information security

1&1 Drillisch essentially realises its corporate success in the internet sector. Within the scope of the business processes, information and telecommunications technologies (data centres, transmission systems, switching nodes etc.) are used for service perfor- mance; they are tightly meshed with the internet and their availability can be jeopard- ised by threats from the internet. For instance, DDoS attacks (DDoS = Distributed Denial of Service) can result in an overload on technical services or in server failures.

The current monitoring and alert system, including the necessary processes and doc- umentation, is continuously optimised so that such risks can be warded oﬀ more and more quickly.

There is also the risk of a hacker attack with the objective of illegally obtaining or delet-ing customer data or of misusing services.

1&1 Drillisch counters this risk by using virus scanners, ﬁrewall concepts, tests it has ini-tiated itself and various technical control mechanisms.

The potential for threats from the internet represents for 1&1 Drillisch one of the larg- est risk groups in terms of possible impact; overall, they are monitored by a large and varied number of technical and organisational measures. Particularly noteworthy in this context are the operation and the continuous improvement of the security management system and the constant expansion of the systems' resilience.

Capacity bottlenecks

The planned service performance can be jeopardised because of temporary or long-lasting shortages of resources, and this can in turn lead to losses of revenues.

There is close interaction with suppliers regarding the emergency concepts agreed with them to counter this risk.

Technical system operation

The 1&1 Drillisch products and the business processes required for them are based on a complex technical infrastructure and a broad range of software systems critical for success (servers, customer management databases, statistics systems etc.). The constant adaptation to changing customer needs leads to ever growing complexity of this techni- cal infrastructure and the need for regular modiﬁcation. In consequence of these actions as well as because of more extensive transitions such as migrations of data records, there are many diﬀerent possibilities of disruptions or service failures. If, for instance, service systems were aﬀected, 1&1 Drillisch would no longer be able to provide the war- ranted services to its customers, either long-term or temporarily.

The Company counters these risks by means of speciﬁc architectural adaptations, quality assurance measures and a spatially separate (geo-redundant) design of the core functions.

Moreover, various security precautions based on software and hardware have been implemented to protect infrastructure and availability. The distribution of tasks ensures that actions or business transactions involving risks are not performed by one employee alone, but are carried out in accordance with the "two sets of eyes principle." Manual and technical access restrictions also ensure that employees are active solely in their purviews. An additional security measure to prevent data loss is the regular backup of existing data records and storage in geo-redundant data centres.

Compliance

Data protection

The possibility that data protection regulations will be violated because of human error, technical weak points or other factors can never be completely precluded. In such a case, 1&1 Drillisch would be at risk of having to pay ﬁnes and of losing the trust of its customers.

1&1 Drillisch stores its customers' data on servers in data centres certiﬁed in accordance with international security standards and operated by the Company itself as well as in in leased facilities. The handling of these data is subject to extensive statutory require- ments, and compliance with these requirements is regularly reviewed.

The Company is aware of its immense responsibility and places a high value on data protection, paying especially close attention to ensuring customers' privacy. 1&1 Dril- lisch continually invests in the improvement of its data protection standards by em- ploying the latest technologies, constantly reviewing data protection and other legal requirements, conducting an extensive training programme on data protection laws for employees and integrating privacy aspects and requirements in product development at the earliest possible stage.

The new provisions of the EU General Data Protection Regulation (GDPR) have been in force since May 2018. Because of the stricter sanctions for breach of obligations that have been implemented, the impact of data protection risks has risen. In addition to implementing tougher sanctions, the EU GDPR contains new regulations regarding dec- larations of consent and new reporting obligations to government authorities and data subjects in the event of loss of data.

Legislation and regulation

Changes in current legislation, the passage of new laws and changes in government regulatory actions can have unexpectedly negative eﬀects on the business models in place at 1&1 Drillisch and on further developments. Decisions of the Federal Network Agency and the Bundeskartellamt [Federal Cartel Oﬃce] inﬂuence network access and the design of the internet access rate plans, above all in the segment "Access." Price in- creases by the grid operators from which 1&1 Drillisch procures advance services for its own customers could have negative eﬀects on the proﬁtability of the rate plans. Equally, there is the possibility that a lack of regulation will cause the market environment for 1&1 Drillisch to worsen.

1&1 Drillisch counters the regulation risk, which has a tendency to rise, through its collaboration with multiple advance services partners and proactive association work. Moreover, 1&1 Drillisch has access to the landline network via 1& 1 Versatel GmbH, an aﬃliated company in United Internet Group. This access to the network infrastructure gives 1&1 Drillisch the opportunity to extend the depth of its added-value generation and to reduce the procurement of broadband advance services from third parties.

Moreover, 1&1 Drillisch has a long-term entitlement to a share of the entire network capacity of Telefónica Germany that can be raised to a maximum of 30 percent, the only MBA MVNO in Germany to have such an entitlement, giving the Company exten- sive access to the largest mobile network in Germany and to all available mobile tech- nologies such as 5G.

Legal disputes

1&1 Drillisch is currently involved in various litigation and arbitration proceedings that result from its normal business activities. One advance services provider reported claims in a low range of hundreds of millions in 2019. 1&1 Drillisch regards the claims from each of the opposing parties to be unfounded and does not consider an outﬂow of resources to be likely. By their nature, the results of legal disputes are uncertain and therefore represent a risk. To the extent that the amount of the obligation can be relia- bly estimated, the risks from the legal disputes have been given due consideration in the provisions.

Tax risks

1&1 Drillisch is subject to legal tax provisions that are in eﬀect. Risks can arise from changes in tax laws or court precedents and from varying interpretations of existing provisions.

1&1 Drillisch counters these risks by continuously expanding the scope of its tax management.

Finances

Financing

Financial liabilities that are primarily incurred by 1&1 Drillisch AG as part of the ﬁnancing of its business activities include loans, overdraft facilities and other ﬁnancial liabilities. 1&1 Drillisch at its disposal various ﬁnancial assets that result immediately from its business activities. They basically include holdings as well as accounts due from group undertakings.

1&1 Drillisch and its activities are by their nature vulnerable to risks on the ﬁnancial mar- ket. This is especially true of risks from changes in interest rates.

Interest rates

The Company is vulnerable to interest rate risks because funds are generally obtained from and invested with United Internet AG at variable interest rates (1M EURIBOR + margin) and for terms of varying lengths. The Company constantly reviews the various investment and acquisition opportunities for cash and the terms and conditions of theﬁnancial obligations on the basis of its liquidity planning. Any need to obtain ﬁnancing is covered by suitable instruments for liquidity management.

The goal of the ﬁnancial risk management is to limit risks through ongoing operating and ﬁnance-oriented activities.

Fraud and bad debt losses

Ordering and delivery processes at 1&1 Drillisch - as is true of many large companies in mass market business - are largely automated so that dynamic customer growth can be handled eﬀectively and services and products can be provided as quickly as possible, all in the interest of our customers. Automated processes of this type are by their nature vulnerable to fraudulent activities. As a consequence of the high appeal of the oﬀered products and services, the number of defaulters and fraudsters increases along with the number of customers. The consequence is growth in bad debt losses. For instance, 1&1 Drillisch could suﬀer losses from hardware orders that are placed using a false identi- ty and are never paid. Losses can also be incurred from the misuse of SIM cards, e.g. through massive call diversions or roaming calls.

1&1 Drillisch seeks to prevent fraud attacks or, as a minimum, to recognise such at- tempts at an early stage and to stop them by permanently expanding the scope of its fraud management, through close cooperation with advance services providers and through the appropriate design of its products and services.

Liquidity

1&1 Drillisch's liquidity risk arises essentially from the possibility that the Company will be unable to meet its ﬁnancial obligations (e.g. the repayment of ﬁnancial debt). The Company's objective is to cover continuously its ﬁnancial requirements and to ensure ﬂexibility by using overdrafts and loans as well as by investing and raising cash and cash equivalents at United Internet AG.

Demand and surplus of cash and cash equivalents are determined centrally for the entire group in cash management. The number of external bank transactions is held to a minimum by netting of demand and surplus within the group. The Company has established standardised processes and systems for the management of its bank ac- counts and the internal clearing accounts and for the execution of automated payment transactions.

External events - Force majeure

External events such as natural disasters (earthquakes or ﬂoods), personnel crises (pan- demics or epidemics) or infrastructural crises (damage to the road network, restriction of the energy supply) can lead to obstruction of the business operations of 1&1 Drillisch. 1&1 Drillisch counters these risks as far as possible with a variety of diﬀerent measures; their scope is being further expanded in response to the coronavirus pandemic. Exam-ples include extensive hygiene precautions (provision of disinfectants and masks), regu- lar checks on compliance with social distancing rules and mandatory wearing of masks to ensure health and infection protection. Flexible workplace concepts at all sites with in- dividual arrangements for working at home that are geared to the speciﬁc requirements of the pandemic have been introduced. The use of modern communications media has been expanded to avoid travel. Regular development and review of the emergency con- cepts and training in their provisions are part of the standards at 1&1 Drillisch AG.

The further spread of the coronavirus may have a negative impact on demand from consumers and businesses as well as on their purchase of advance services (e.g. smart- phones, routers, servers or network technology) or their liquidity. As of the moment, there have been no notable bad debts. The restrictions on international travel may lead to a reduction in roaming contribution margins as the pandemic continues, just as work- ing from home over the longer term may lead to additional costs for voice use. An es- sential factor for the successful mastering of the pandemic is also reﬂected in the health and operational capability of the employees and ultimately also aﬀects the performance of 1&1 Drillisch.

General statement from the Management Board regarding the risk situation of Com-pany and group

The assessment of the overall risk situation for 1&1 Drillisch and 1&1 Drillisch Group is the result of a consolidated consideration of all major risk areas and speciﬁc risks, taking into account interdependencies.

From today's perspective, the most signiﬁcant challenge for 1&1 Drillisch AG and 1&1 Drillisch Group is presented by the risk areas "business development and innovation" and "information security". There was a lowering of the risk classiﬁcation for the risk area "procurement market" during the year.

By continually expanding the scope of its risk management, 1&1 Drillisch counters these risks and limits them, in so far as justiﬁable, to a minimum by implementing speciﬁc actions.

The assessment of the major risk ﬁelds or speciﬁc risk positions were, as is natural, sub- ject to ﬂuctuations during ﬁscal year 2020 because of the development of external con- ditions as well of the impact of the Company's own countermeasures. The overall risk sit- uation for 1&1 Drillisch AG and 1&1 Drillisch Group has improved slightly in comparison with the previous year because of the conclusion of the procedure regarding advance services prices. In assessing the overall risk situation, the opportunities available to 1&1 Drillisch AG and to 1&1 Drillisch Group are not taken into account. Risks threatening the existence of 1&1 Drillisch AG and 1&1 Drillisch Group from either speciﬁc risk positions or the overall risk situation were not discernible during ﬁscal year 2020 nor on the date of preparation of this report.

Over the course of ﬁscal year 2020, the risk situation changed as a consequence of the continuing global spread of the coronavirus (Sars-CoV-2) in the risk areas of "Procure- ment market" and "External risks - Force majeure" and others. The spread of the virushas a negative impact on demand from consumers and businesses and may equally im- pair the procurement of advance services (e.g. smartphones, routers, servers or network technology) or the health and ﬁtness of employees. Ultimately, the spread of the corona- virus also aﬀects the performance capability of 1&1 Drillisch. A precise risk assessment is still not possible at the time this report was issued as the assessment of health experts and the measures introduced by the federal government and the German states are subject to frequent changes, creating uncertainty about future development.

Probability of occurrence, potential damage and risk classiﬁcation of the risks from the Company's and the group's point of view and their relevance (development compared to

the previous year is presented on the basis of a comparable risk level):

Probability of	Risk
occurrence	Degree of risk	classiﬁcation	Development
Risks in the area of "Strategy"
Business development and innovation	Low	Extremely high	Signiﬁcant	g
Participations and investments	Low	Very low	Low	g
Cooperation and outsourcing	Low	Very low	Low	g
Organisational structure and decision-making	Low	Very low	Low	g
Personnel development and retention	Low	Very low	Low	g
Risks in the area of "Market"
Sales market and competition	Low	High	Moderate	g
Procurement market	Low	Very low	Low	
Recruitment market	Low	Very low	Low	g
Risks in the area of "Service performance"
Work procedures and processes	Low	Very low	Low	g
Information security	Low	High	Moderate	g
Capacity bottlenecks	Low	Very low	Low	g
Technical system operation	Low	Very low	Low	g
Risks in the area "Compliance"
Data protection	Low	Low	Low	g
Legislation and regulation	Low	Very high	Moderate	g
Legal disputes	Low	Extremely high	Signiﬁcant	g
Tax risks	Low	Very low	Low	g
Risks in the area "Finances"
Financing	Very low	Very low	Low	g
Interest rates	Very low	Very low	Low	g
Fraud and bad debt losses	Very high	Low	Moderate	g
Liquidity	Low	Very low	Low	g
External events - personnel crises	Low	Very low	Low	g
k Worsened

 Improved

g unchanged

*The probability of the occurrence of the risk described under "Business development and innovation" - the failure to conclude a national roaming agreement - has been signiﬁcantly reduced by the acceptance of Telefónica's oﬀer at the end of the ﬁscal year. The principle of the closing date on which the risk report is based dictates that the risk be described here without any changes. This will be modiﬁed in later reports.

OPPORTuNITIES REPORT

4.2. Opportunities report

Opportunities management

The opportunities management is rooted in the strategic planning and related actions for the development of products and their positioning in the various target groups and on the diﬀerent markets during the product lifecycle.

The group Management Board and the operating management level (management boards and managing directors of subsidiaries) are directly responsible for the early and continuous identiﬁcation, assessment and management of opportunities.

The 1&1 Drillisch AG management concerns itself intensely with detailed analyses, mod- els and scenarios related to current and future industry and technology trends, products, markets/market potential and competitors in the Company's environment. The potential of the opportunities identiﬁed during such strategic analyses are evaluated subsequently in the context of the critical success factors and of the existing general conditions and possibilities for 1&1 Drillisch AG, discussed among Management Board, Supervisory Board and the operations managers during the planning meetings, then embodied in concrete actions, targets and milestones.

Progress and success of the actions are continuously monitored by the operations man- agers and by the managing directors and executive oﬃcers of the Company.

Opportunities

1&1 Drillisch's stable business model, which is largely unaﬀected by economic ﬂuctua- tions, secures plannable revenues and cash ﬂows, thereby opening up the ﬁnancial ﬂex- ibility necessary to take advantage of opportunities in new business ﬁelds and on new markets, whether organically or through participations and corporate takeovers.

Broad strategic positioning on growth markets

In view of the positioning on today's growth markets, the Company's growth opportuni- ties from a strictly strategic perspective are obvious: increasingly powerful landline and mobile access products that are available everywhere and at all times make possible new and more complex applications. 1&1 Drillisch believes that these internet-based applications for private users, freelancers and small companies will, from today's per- spective, be the growth drivers in the coming years in the segment "Access".

Participation in market growth

Despite the uncertain general economic conditions, 1&1 Drillisch as well as many of the leading industry analysts expect a positive development on the German telecommuni- cations market that is of major importance for the Company. Thanks to its highly com- petitive Access products, the strong and well-known brands, the high selling power and the current business relationships with millions of customers (potential for cross- and upselling), 1&1 Drillisch is in a good position to secure its share of the expected market growth in the business segment "Access."

Expansion of market positions

1&1 Drillisch is today one of the leading companies in Germany, serving more than 14.8 million customers in the ﬁeld of internet-based access services. By building on its availa- ble technological know-how, the high quality of products and services, the brand aware- ness of the group's brand names such as 1&1, smartmobil.de or yourfone, the business relationships with millions of customers and the strength of customer loyalty, 1&1 Dril- lisch believes that its chances to expand its current market shares are good.

Entry into new business ﬁelds

The core competencies at 1&1 Drillisch also include the ability to recognise customer wishes, trends and the related new markets at an early stage. The breadth of the add- ed-value chain (from product development and data centre operation to eﬀective market- ing and an eﬃcient sales force to active customer care) makes it possible for 1&1 Drillisch to introduce innovations on the market quickly and to market them intensely.

Development of our own 5G mobile network

On 12 June 2019, 1&1 Drillisch successfully completed its participation in the auction of 5G frequencies and purchased two frequency blocks of 2 x 5 MHz each in the 2 GHz range and ﬁve frequency blocks of 10 MHz each in the 3.6 GHz range for a total price of €1.07 billion. In addition, 1&1 Drillisch has leased frequencies from Telefónica for the con- struction of its own 5G mobile network. These are two frequency blocks of 10 MHz each in the 2.6 GHz range. The two frequency blocks will be available to 1&1 Drillisch until 31 December 2025. The Company plans to use these frequencies for the step-by-step build- up of a high-performance 5G mobile network, increasing its added value in the mobile communications business as well and developing new business areas.

In February 2021, 1&1 Drillisch accepted Telefónica's oﬀer for national roaming, and the parties have agreed to negotiate and conclude a national roaming agreement by mid- May 2021, thereby fulﬁlling yet another major prerequisite for the launch of the network construction.

More than 10.5 million mobile customers and 4.3 million broadband customers together with access to one of the largest ﬁbre optic networks in Germany indicate that 1&1 Dril- lisch has the best prerequisites for exploiting the high potential of 5G in Germany.

Access to the second-largest optic ﬁbre network in Germany

As it is a member company of United Internet Group, 1&1 Drillisch has access to the 1&1 Versatel telecommunications network, one of the largest and most powerful ﬁbre optic networks in Germany. The network infrastructure provided by 1&1 Versatel gives 1&1 Drillisch the chance to enhance further its own added value and to procure from United Internet Group broadband advance services produced within the group. In addition, 1&1 Drillisch will have access to Deutsche Telekom's ﬁbre optic network via 1&1 Versatel from April 2021. 1&1 Drillisch will be able as of this time to oﬀer initially about 750,000 more ﬁbre optic lines for marketing. The number of marketable ﬁbre optic lines from Deutsche Telekom is supposed to increase by an average of two million households per year over the next few years.

The special opportunity for 1&1 Drillisch becomes clearly evident when we consider the sharply rising data consumption among private users (according to an estimate by Dialog Consult/VATM: + 25.0 percent to approximately 168.1 GB used data volume per broadband line and month in 2020) and, simultaneously, Germany's extremely high lag in the provision of direct ﬁbre optic lines. According to the most recent analysis by the OECD (Organisation for Economic Cooperation and Development) from December 2019, only 4.1 percent (previous year: 3.2 percent) of all broadband lines in Germany were ﬁbre optic lines. This puts Germany in 34th place (previous year: 32nd place), far to the rear among the 37 OECD member states that were examined and even well below the OECD average of 28.0 percent (previous year: 26.0 percent).

Access to Telefónica mobile network

1&1 Drillisch, the only MBA MVNO in Germany in this position, is entitled long-term to as much as 30 percent of the utilised network capacity of Telefónica Germany, assuring the Company of extensive access to the largest mobile services network in Germany. 1&1 Drillisch has contractually assured, unlimited access to all products and technologies available at this time (e.g. LTE) and in the future (e.g. 5G) in the Telefónica network and, on this basis, can continue to expand its market position and business volume in the coming years. Unrestricted access to LTE as well as to even more sophisticated future technologies guarantees to 1&1 Drillisch the long-term ﬂexibility it needs to be inde- pendent in the design of new products, thus allowing fair competition on equal footing with the three German mobile network operators.

The contract with a term until the middle of 2025 and the option of a further extension for another ﬁve years oﬀer 1&1 Drillisch the opportunity for further long-term and con- tinued successful corporate development as well as a high degree of planning security.

In addition, the agreement concluded with Telefónica gives 1&1 Drillisch the opportunity to become a licensed mobile network operator. The latter can initially and with technical support from Telefónica ("national roaming") be limited to speciﬁc regions in Germany. This is substantiated by the agreement reached on national roaming, which stipulates the conclusion of a contract by May 2021.

Moreover, 1&1 Drillisch can coordinate its brand management and customer address for activities aimed even more speciﬁcally at the premium and discount segment on the German mobile services market and take advantage of the diﬀering positions of its brand names to realise the broad and comprehensive address of various target groups

Acquisitions and participations

Along with its organic growth, 1&1 Drillisch continuously examines opportunities to ac- quire companies and to obtain strategic participations. Thanks to the plannable and high cash ﬂow, 1&1 Drillisch has powerful resources to ﬁnance its activities itself and has as well good access to debt capital markets so that it can seize opportunities that present themselves in the form of acquisitions and participations.

Summary of opportunity and risk position

Compared to the previous year, the opportunities and risks related to the development of the Company's own mobile communications network have improved signiﬁcantly as a result of the agreement on national roaming reached with Telefónica.

Furthermore, the opportunity and risk situation in relation to ongoing business remains unchanged. The opportunities and risks described here are the major opportunities and risks which have been identiﬁed at this time. The possibility that additional major oppor- tunities and risks that at this time have not been recognised by management exist or that the probability of the occurrence of such opportunities and risks has been wrongly assessed as negligible cannot be precluded. Adequate precautions have been taken to counter any probable risks. There are at this time no known risks which would threaten the Company's existence.

FORECAST REPORT

4.3. Forecast report

This report contains certain statements oriented to the future which are based on the current assumptions and projections of the Company's management. Various risks, uncer- tainties and other factors, both known and unknown, can cause the actual results, ﬁnan- cial position, development or performance of the Company to deviate substantially from the assessment shown here.

Economic expectations

Following a decline of -5.4 percent in 2020, the IMF expects economic growth for Ger- many of +3.5 percent in 2021 and +3.1 percent in 2022. With the expected growth of +3.5 percent for 2021, the IMF is above the forecast of the German government, which assumed a growth of the price-adjusted gross domestic product of 3.0 percent in its An- nual Economic Report 2021 on 26 January 2021.

Industry/market expectations

The industry association Bitkom expects a plus on the German ITC market of 2.7 percent (previous year decline of -0.6 percent) to €174.4 billion in 2021.

The market for IT hardware is expected to show the greatest growth, posting an increase in revenues of +8.6 percent. Growth is also forecast for the software segment (+4.1 per- cent) and the IT services segment (+1.1 percent), while a decline in sales of -2.0 percent is expected for the consumer electronics segment.

The most important ITC market in the sense of 1&1 Drillisch's business model is the Ger- man telecommunications market (broadband lines and mobile internet) in the "Access" business unit, which is ﬁnanced largely by subscriptions.

Telecommunications market in Germany

For the German telecommunications market, the industry association Bitkom expects growth of 1.0 percent in 2021 following the decline in revenues by -0.1 percent in 2020 brought about by the coronavirus pandemic. Total sales are forecast at €67.4 billion.

The association expects the relatively highest growth in the telecommunications in- frastructure sector (+3.2 percent) and in telecommunications devices (+2.8 percent.) Growth of +0.3 percent is forecast for telecommunications services.

Market forecast: telecommunications market in Germany

2021e

2020

Change

Revenues

67.4

66.7

+ 1.0 %Source: Bitkom, Annual Press Conference, January 2021

Forecast for ﬁscal year 2021

In view of the continued high relevance of the telecommunications industry for the Ger- man economy, the 1&1 Drillisch Management Board expects continued positive develop- ment for the group. Signiﬁcant growth stimulus is no longer expected from the market; although use of services is increasing, consumers continue to be sensitive to prices.

Data communications will remain the most important growth segment in telecommuni- cations. Network quality and the availability of fast data connections continue to gain in importance for consumers. Simplicity in making phone calls and surﬁng at fair prices will remain the focus of interest for mobile services customers.

In view of the comparatively high household coverage at present and the trend to mo- bile internet use, the Management Board expects growth to remain only moderate on the German (landline-based) broadband market,

so 1&1 Drillisch will once again strive to achieve additional customer growth in the com- ing ﬁscal year. For the year 2021, 1&1 Drillisch expects an increase in the high-margin service revenues to approximately €3,100 million as well as the equivalent development of total revenues. The 1&1 Drillisch Management Board expects the EBITDA to amount to about €650 million. This earnings forecasts does not include income related to other periods in the amount of €34.4 million which will presumably be recognised upon con- clusion of the national roaming agreement with Telefónica.

The budget presumes use behaviour comparable to that of ﬁscal year 2020 because of the coronavirus pandemic and consequently a comparable burden on revenues and proﬁts.

At the separate ﬁnancial statements level, the Management Board expects sales reve- nues for 2021 to be roughly similar to ﬁscal year 2020, but to see a signiﬁcant improve- ment in the proﬁt for the year.

This forecast is subject to uncertainties as it is not possible at present to make an exact assessment of the duration and ongoing impact of the coronavirus pandemic.

General statement from the Management Board on presumable development

The Management Board believes that 1&1 Drillisch is well positioned for the future steps in the Company's development and is optimistic as it looks ahead to the future.

The acquisition of the 5G mobile frequencies in 2019 and the acceptance of Telefónica's oﬀer on national roaming have set the course for the construction of the Company's own mobile network, and 1&1 Drillisch will continue to drive forward the network development energetically. For one, operating our own mobile network allows the expansion of the value-added chain and the related reduction of cost components. For another, the opera- tion of our own network gives Sales the opportunity to market customised products and services.

The Management Board also expects further growth in the Access segment. The plan for the division Mobile Access is to continue growth and beneﬁt from the market growth. The new agreement on the procurement of VDSL/FTTH advance services will also open up new potential in the marketing of landline products in the future.

Thanks to a business model that is based for the most part on electronic subscriptions, 1&1 Drillisch views its position as by and large stable and secure from economic ﬂuctua-tions.

1&1 Drillisch will continue to pursue this sustainable business policy in the coming years.

In view of the successful start to the year and of the situation at the time of the issue of this report as well, the Management Board believes that the Company is well on its way to realising the goals explained in greater detail in the above section "Forecast for ﬁscal year 2021"

Future-oriented statements and forecasts

This report on the position of the Company and the Group contains future-oriented state- ments that are based on the current expectations, assumptions and forecasts of the 1&1 Drillisch AG Management Board and on the information available to the Board at this time. The future-oriented statements are subject to various risks and uncertainties and are based on expectations, assumptions and forecasts that may possibly prove in future to be false. 1&1 Drillisch does not guarantee that the future-oriented statements will prove to be true, and it neither assumes any obligation, nor does it have the intention, to adjust or update any future-oriented statements made in this report.

REMuNERATION REPORT

5. Remuneration report

The structure of the remuneration system for the Management Board is determined by the Supervisory Board. The criteria for the reasonableness of the remuneration include in particular the duties and responsibilities of each of the Management Board members; their personal performance; the performance of the Management Board as a whole; and the economic position, success and future prospects of the Company, taking into account its comparative environment. The remuneration for the Management Board members com- prises short-term components and factors with long-term incentive components. The short- term components consist of elements not contingent on success and merit-based elements. The elements not contingent on success comprise ﬁxed remuneration as well as payment in kind and other beneﬁts. The ﬁxed remuneration as basic remuneration not contingent on success is paid monthly as a salary. In addition, the Management Board members receive other beneﬁts, in particular allowances for health and long-term care insurance, as well as payments in kind comprising essentially the use of a company vehicle. The Management Board's remuneration always includes variable merit-based remuneration elements. These elements are redeﬁned every year by the Supervisory Board on the basis of targets.

A remuneration component with the eﬀect of a long-term incentive exists for Manage- ment Board members Markus Huhn and Alessandro Nava in the form of a participation programme based on virtual share options (SAR). The exercise threshold of the pro- gramme is 120 percent of the exercise price. The payment of the growth in value is limit- ed to 100 percent of the stock exchange price of 1&1 Drillisch AG determined at the time the virtual options were granted. The option right can be exercised as described here: for a partial amount of up to 25 percent at the earliest upon expiration of 24 months from the point in time of the vesting of the option, for a partial amount totalling up to 50 per- cent at the earliest 36 months from the point in time of the vesting of the option, for a partial amount totalling up to 75 percent at the earliest 48 months from the point in time of the vesting of the option and for the full amount at the earliest upon the expiration of 60 months after the point in time of the vesting of the option.

The CEO of 1&1 Drillisch AG, Mr Ralph Dommermuth, does not receive any compensation for his work.

As in the previous year, the members of the Management Board did not receive any remuneration from their Supervisory Board activities at various subsidiaries in the 2020 ﬁnancial year. The Management Board members did not receive any loans or advance payments in the reporting period.

No pension commitments have been made to the Management Board.

The following expenses for stock-based remuneration for the Management Board are recognised in the IFRS consolidated annual ﬁnancial statements for 1&1 Drillisch AG: Mr Ralph Dommermuth: €0k (previous year: €0k); Mr Markus Huhn: €300k (previous year: €0k); and Mr Alessandro Nava: €500k (previous year: €0k).

Remuneration for the members of the Company's Management Board comprises the following elements: Ralph Dommermuth, the Management Board chairman, did not receive any remuneration for his work (as in the previous year):

(in €k)	Markus Huhn1	Alessandro Nava1
Beneﬁts granted	Beneﬁts granted

Inﬂows

2019 2020

2020 (Min)

2020 (Max)

2019

2020

2019

2020

2020 (Min)

2020 (Max)

2019

2020
Fixed remuneration 225 450
Ancillary beneﬁts 6 11

450 11
- 450 225
450

200

400

400

400

200

400

11

6

11

6

14

14

14

6

14
TOTAL 231 461

461

461

231

461

206

414

414

414
- 206 414
One-year variable remuneration 50 50

100

200

0 100

Multi-year variable remuneration

- SAR scheme 2020

1,310

2,183

TOTAL

50 1,360

0 1,370

100 2,383
- 0 2,383
  - 0 100
    
    Pension expenses
    
    2
    
    5
    
    5
    
    5
    
    2
    
    5
7 14

14 14

7 14

TOTAL REMUNERATION

283

1,826

466

1,836

233

516

313

2,811

428

2,811

213

528

(in €k)

André Driesen2

Martin Witt3

Beneﬁts granted

Inﬂows

Beneﬁts granted

Inﬂows

2019 2020

2020 (Min)

2020 (Max)

2019

2020

2019

2020

2020 (Min)

2020 (Max)

2019

2020

Fixed remuneration

400 0

0 400

Ancillary beneﬁts

12 0

0
0 12

0 0

150

0 0

150

0 0

TOTAL

412 0

412

157

157 0

One-year variable remuneration

350 0

286

350

100

200 100

Multi-year variable remuneration

- Bonus 2018 - 2020

100

200

TOTAL

450

286

550

100

200 100

Pension expenses

0 0

TOTAL REMUNERATION

863

699

550

257

357

100

(1) From 01/07/2019
(2) until 31/12/2019
(3) until 30/06/2019

Markus Huhn, Alessandro Nava and Martin Witt, Management Board members of 1&1 Drillisch AG, received their remuneration from 1&1 Telecommunication SE.

The remuneration system for the 1&1 Drillisch AG Supervisory Board adopted by the An- nual General Meeting 2018 provides for ﬁxed remuneration for an ordinary Supervisory Board member in the amount of €45,000 for each full ﬁscal year and for the Supervisory Board chairman in the amount of €55,000 for each full ﬁscal year. Supervisory Board members who belong to the Supervisory Board or act as chairperson of the Supervisory Board for only part of the ﬁscal year receive the ﬁxed remuneration on a pro rata tempo- ris basis, rounded up to full months. Moreover, an attendance fee of €1,000 is paid per meeting for each participation in an in-person meeting or in a telephone or video con- ference of the Supervisory Board. The ﬁxed remuneration and the attendance fees as a whole are due and payable upon the expiration of a ﬁscal year. The Supervisory Board members are also reimbursed for all of their expenses and for any value-added tax which must be paid on their remuneration and expenses. In its own interest, the Compa- ny provides reasonable insurance at its own expense to the members of the Supervisory Board to cover the exercise of their Supervisory Board activities. There is no stock option

plan for the members of the Supervisory Board.

The Supervisory Board remuneration breaks down as follows:

Supervisory Board remuneration (in €k)	2020	2019
Michael Scheeren	59.0	62.0
Kai-uwe Ricke	49.0	52.0
Vlasios Choulidis	49.0	52.0
Kurt Dobitsch	49.0	52.0
Dr Claudia Borgas-Herold	49.0	52.0
Norbert Lang	49.0	52.0
304.0	322.0

SuPPLEMENTAL INFORMATION

6. Supplementary information

6.1. Supplementary information pursuant to Section 289a HGB and Sec-tion 315a HGB (information relevant for acquisitions)

The subscribed capital amounts to €194,441,113.90 and is distributed in 176,764,649 no- par shares issued to the bearer with a proportionate share in the share capital of €1.10. Each share is the equivalent of one vote. The securitisation of the stock is precluded. In accordance with Sections 84 and 85 AktG in conjunction with Section 7 of the Company by-laws, the Management Board is appointed and recalled by the Supervisory Board. Any amendments to the Company by-laws must be adopted in conformity with legal statutes (Sections 179 et seqq. AktG) by the General Meeting. Moreover, the Supervisory Board is authorised to amend the Company by-laws provided that such amendments aﬀect only the wording. Per 31 December 2020, United Internet AG, Montabaur, held 75.10 percent of the 1& 1 Drillisch AG stock.

Approved Capital 2018

The extraordinary General Meeting of 12 January 2018 authorised the Management Board, subject to the approval of the Supervisory Board, to increase the Company's share capital by as much as a total of €97,220,556.40 by a single or multiple issue of new shares against cash contributions and/or contributions in kind before the lapse of 11 January 2023 (Approved Capital 2018).

In the event of cash contributions, the new shares issued by the Management Board may, subject to the consent of the Supervisory Board, also be taken over by one or more banks or other companies fulﬁlling the prerequisites of Section 186 (5) ﬁrst sentence AktG, subject to the obligation to oﬀer them for subscription solely and exclusively to the shareholders (indirect subscription right). As a matter of principle, a subscription right is to be granted to the shareholders. However, the Management Board is authorised, subject to the consent of the Supervisory Board, to exclude shareholders' subscription rights:

» If the capital increase is achieved by cash contributions and the issue price of the new shares is not signiﬁcantly lower than that of the shares already traded on the exchange at the time of the final determination of the issue price, which should take place as contemporaneously as possible with the placement of the shares. The number of shares issued subject to exclusion of the subscription pursuant to Section 186 (3) fourth sentence AktG may not exceed 10 percent of the share capital, neither at the point in time at which this authorisation becomes eﬀective nor at the point in time that it is exercised. Any shares that are issued or that are to be issued pursuantto options or convertible bonds must be attributed to this ﬁgure to the extent that the bonds are issued during the term of this authorisation in application mutatis mutandis of Section 186 (3) fourth sentence AktG in exclusion of subscription rights; moreover, any shares that are issued or sold during the term of this authorisation in direct application or application mutatis mutandis of Section 186 (3) fourth sentence AktG must be attributed to this ﬁgure;

» To the extent required to ensure that a subscription right can be granted to holders or creditors of option and/or conversion rights or of equivalent option and/or con- version obligations from bonds that have been or are issued by the Company and/or by companies dependent on the Company or in which the Company holds a majority interest, either directly or indirectly, equivalent to the subscription right to which such holders or creditors would be entitled after exercise of their option and/or con- version right or after fulﬁlment of the option and/or conversion obligation;
» If the capital increase against contributions in kind is carried out for the purpose of issuing shares within the framework of corporate mergers or of acquiring companies or parts of companies, holdings in companies or other assets;
» So that new shares up to a proportionate amount of the share capital totalling €9,722,055.20 may be issued as staﬀ shares to employees of the Company or of aﬃl- iated companies within the sense of Section 15 et seqq. AktG.

Furthermore, the Management Board is authorised, subject to the consent of the Su- pervisory Board, to determine the further content of the stock rights and the terms and conditions of the issue of the shares. The Supervisory Board is authorised to amend the current version of the Company by-laws in accordance with the speciﬁc utilisation of the Approved Capital 2018 or after the expiration of the authorisation.

Contingent Capital 2018

The share capital has been contingently raised by up to €96,800,000.00 by the issue of up to 88,000,000 new no-par shares issued to the bearer (Contingent Capital 2018). The contingent capital increase will be carried out solely to the extent that the holders or creditors of option and/or convertible bonds, proﬁt sharing rights and/or income bonds (or combinations of these instruments) that include option and/or conversion rights and/ or option and/or conversion obligations or tender rights of the Company and that are issued by the Company, or by companies dependent on the Company or in which the Company, directly or indirectly, holds a majority interest, pursuant to the authorisation resolution of the General Meeting of 12 January 2018, by no later than 11 January 2023, exercise their option or conversion rights pursuant to these bonds or fulﬁl their obliga- tion to exercise the option or for conversion; or, to the extent the Company exercises an option, to grant no-par shares of the Company in lieu of the payment of a cash amount that is due and to the extent that no cash compensation is granted or that own shares or shares of another company listed on the stock exchange are not used to satisfy theclaims. The new shares will be issued in each case at the option or conversion price to be determined in accordance with the authorisation resolution stipulated above. The new shares participate in proﬁts as of the beginning of the ﬁscal year in which they are issued; to the extent legally permissible, the Management Board, subject to the Supervi- sory Board's consent, may also determine the participation in proﬁts for a previously ex- pired ﬁscal year for new shares in abrogation of this provision and of Section 60 (2) AktG. The Management Board is authorised, subject to the consent of the Supervisory Board, to determine the details of the conduct of the contingent capital increase.

Treasury stock

Per the closing date 31 December 2020, 1&1 Drillisch AG held 500,000 shares of its own stock.

The Annual General Meeting on 21 May 2015 adopted a resolution authorising the 1&1 Drillisch AG Management Board to acquire treasury stock totalling up to 10 % of the share capital at the time of the Annual General Meeting 2015 on or before 20 May 2020 (including the use of derivatives).

The granted authorisation for the acquisition and utilisation of treasury stock was re- voked by the extraordinary General Meeting of 12 January 2018 and superseded by the new authorisation below.

The Company is authorised to acquire shares of the Company's own stock in an amount totalling no more than 10 percent of the share capital at the time of the adoption of the resolution or - if this value is lower - at the time of the exercise of the authorisation; this authorisation expires on 11 January 2023. Any shares acquired pursuant to this authori- sation, together with any other treasury stock in the Company's possession or attributa- ble to the Company pursuant to Sections 71a et seqq. AktG, may not exceed at any time a value of 10 percent of the share capital.

The authorisation may be exercised in one full amount or in partial amounts, once or on multiple occasions, in pursuit of one or multiple objectives, directly by the Company or also by companies dependent on the Company or in which the Company, directly or indirectly, holds a majority interest, or by third parties instructed by the Company or by companies dependent on the Company or in which the Company, directly or indirectly, holds a majority interest.

At the option of the Management Board, the shares may be acquired on the stock ex- change or on the basis of a public purchase oﬀer or by means of a public invitation to submit oﬀers to sell.

The Management Board is authorised, subject to the Supervisory Board's consent, to sell any Company shares acquired pursuant to this authorisation on the stock exchange or by oﬀer to all shareholders in the ratio of their holdings. Moreover, Company shares acquired pursuant to this authorisation may be used for any and all other legally permis- sible purposes, including in particular, but not limited to, the following purposes:

» The shares may be sold to third parties against cash payment at a price that does not fall signiﬁcantly short of the stock exchange price of shares of an equivalent nature at the point in time of the sale. In this case, the number of shares to be sold may not ex- ceed in total 10 percent of the share capital at the time of the adoption of the resolu- tion by extraordinary General Meeting of 12 January 2018 or - if this amount is lower - 10 percent of the share capital at the time of the sale of the Company's shares. Any shares issued or sold in application, whether direct or mutatis mutandis, of Section

186 (3) fourth sentence AktG during the term of this authorisation must be attributed to this limitation of 10 percent of the share capital. Furthermore, any shares that must be issued to satisfy option and/or convertible bonds must be attributed to this limit of 10 percent of the share capital, provided that the bonds have been issued during the term of this authorisation in application mutatis mutandis of Section 186 (3) fourth sentence AktG and excluding the subscription right.
» The shares may be used for the fulfilment of obligations pursuant to bonds with option and/or conversion right or option and/or conversion obligation issued by the Company, or by companies dependent on the Company or in which the Company, directly or indirectly, holds a majority interest,
» The shares may be issued against assets, including claims against the Company, in particular, but not solely, in relation to the acquisition of companies, holdings in com- panies or parts of companies, or corporate mergers.
» The shares may be used in relation to stock-based compensation or employee stock option programmes of the Company or of its aﬃliates and may be oﬀered and trans- ferred to persons who are or were in an employment relationship with the Company or one of its aﬃliates as well as to directors and oﬃcers of the Company's aﬃliates.
» The shares may be redeemed without requiring any additional General Meeting res- olution for the redemption or the execution of the redemption. The Management Board may determine that the share capital will be decreased during the redemption; in this case, the Management Board is authorised to reduce the share capital by the proportionate amount of share capital attributable to the redeemed shares and to ad- just the information regarding the number of shares and the share capital in the Com- pany Charter. The Management Board may also determine that the share capital will remain unchanged by the redemption and that instead the share of the other shares

in the share capital is increased by the redemption pursuant to Section 8 (3) AktG. The Management Board is authorised is this case as well to adjust the information regard- ing the number of shares in the Company by-laws.

» The Supervisory Board is authorised to assign treasury stock acquired pursuant to this authorisation to the members the Company's Management Board in fulﬁlment of applicable compensation agreements.

The subscription right of the shareholders is excluded to the extent that treasury stock is utilised in accordance with the authorisations described above. Furthermore, the Man- agement Board, subject to the Supervisory Board's consent, is authorised, in the event of the sale of acquired treasury stock based on an oﬀer to the shareholders, to grant to the holders or creditors of bonds with option and/or conversion rights or corresponding option and/or conversion obligations issued by the Company, or by companies depend- ent on the Company or in which the Company, directly or indirectly, holds a majority interest, a subscription right to the shares in the scope to which they would be entitled after exercise of the option or conversion right or fulﬁlment of the option or conversion obligation; the shareholders' subscription right is precluded in the same scope.

As of the closing date 31 December 2020, United Internet AG, Montabaur, Germany, held 75.10 percent of the stock in 1&1 Drillisch AG. Per 31 December 2020, Mr Ralph Dommermuth; Montabaur, Germany, in turn holds indirectly through holding companies 42.27 percent of the share capital of United Internet AG as reduced by his own shares of United Internet AG.

6.2. Declaration on Corporate Management pursuant to Section 315d HGB in conjunction with Section 289f HGB

1&1 Drillisch has published the Declaration on Corporate Management pursuant to Section 289f and Section 315d HGB, which also contains the Declaration of Conformity pursuant to Section 161 AktG, on the Company's internet site at www.1und1-drillisch. de/corporate-governance  Declaration of Conformity. Moreover, Management Board and Supervisory Board describe in detail the principles of good, value-oriented corpo- rate management in full awareness of responsibility as pursued at 1&1 Drillisch in the corporate governance report in the Annual Report and on the Company's internet site. In addition, the working methods of the Management Board and Supervisory Board as well as the composition and working methods of the committees are described.

6.3. Non-ﬁnancial declaration pursuant to Section 289b HGB and Section 315c HGB

The Company's declaration pursuant to Section 289b and Section 315c HGB is pub- lished in compliance with statutory deadlines on the internet site of 1&1 Drillisch AG atwww.1und1-drillisch.de/corporate-governance  Sustainability Report.

DEPENDENCY REPORT

7. Dependency report

Pursuant to Section 312 AktG, the Management Board declares: that the Company re- ceived consideration for each and every legal transaction and action listed in the Report on relations to aﬃliated companies; that in view of the circumstances known to the Company at the time the transactions were carried out or the actions were executed or not executed, the consideration was reasonable; and that the Company was not disad-

vantaged because the actions were executed or not executed.

Maintal, 19 March 2021

The Management Board

Ralph Dommermuth

Markus Huhn

Alessandro Nava

CONSOLIDATED ANNuAL ACCOuNTS

91 Consolidated Comprehensive Income Statement
92 Consolidated Balance Sheet
94 Consolidated Cash Flow Statement
96 Consolidated Change in Equity Statement
97 Consolidated Notes per 31 December 2020
176 Change in Intangible Assets and Fixed Assets

CONSOLIDATED COMPREHENSIVE INCOME STATEMENT

from 1 January to 31 December 2020

2020	2019
January - December	January - December
Remarks	€k	€k
Sales	4	3,786,788	3,674,846
Cost of sales	5,11,12	-2,881,797	-2,574,677
GROSS PROFIT FROM REVENUES	904,991	1,100,169
Distribution costs	6,11,12	-442,338	-426,467
Administration costs	7,11,12	-99,371	-92,165
Other operating expenses	8	-1,735	-3,345
Other operating income	9	33,908	33,634
Impairment losses from receivables and contract assets	10	-82,374	-83,341
RESULTS FROM OPERATING ACTIVITIES	313,081	528,485
Financing expenses	13	-1,604	-7,262
Financial income	14	1,110	1,213
PROFIT BEFORE TAXES	312,587	522,436
Tax expenses	15	-92,994	-148,816
CONSOLIDATED PROFIT	219,593	373,620
Proﬁt per share (in €)
- undiluted	49	1.25	2.12
- diluted	49	1.24	2.12
Weighted average number of shares outstanding
(in millions)
- undiluted	49	176.27	176.27
- diluted	49	177.84	176.27
Rollover to total consolidated proﬁt
CONSOLIDATED PROFIT	219,593	373,620
Categories that may subsequently be reclassiﬁed in the
proﬁt and loss account (net)	0	0
Categories that will not subsequently be reclassiﬁed in
the proﬁt and loss account (net)
- Net proﬁts or losses from equity instruments that are
measured at fair market value as non-operating results
in other results	40	-44	-272
Other results	40	-44	-272
TOTAL CONSOLIDATED PROFIT	219,549	373,348

CONSOLIDATED BALANCE SHEET

Per 31 December 2020

31/12/2020	31/12/2019
Remarks	€k	€k
ASSETS
Short-term assets
Cash and cash equivalents	16	4,360	31,785
Trade accounts receivable	17	232,437	228,261
Receivables due from associated companies	19	400,885	215,329
Inventories	20	85,366	79,227
Contract assets	18	565,793	498,111
Prepaid expenses*	21	187,081	211,745
Other ﬁnancial assets	22	23,639	28,923
Other non-ﬁnancial assets	23	53,736	15,844
1,553,297	1,309,225
Long-term assets
Other ﬁnancial assets	24	1,992	1,678
Tangible assets	25	122,800	64,496
Intangible assets	26,27	1,740,591	1,686,027
Goodwill	27	2,932,943	2,932,943
Contract assets	18	196,049	173,747
Prepaid expenses*	28	142,665	293,828
5,137,040	5,152,719
TOTAL ASSETS	6,690,337	6,461,944

* The item "Prepaid expenses" combines the items "Costs to fulﬁl contracts", "Costs to obtain contracts" and "Prepaid expenses" that were disclosed separately in the previous year.

31/12/2020	31/12/2019
Remarks	€k	€k
LIABILITIES AND EQUITY
Short-term liabilities
Trade accounts payable	29,37	319,866	266,369
Liabilities due to associated companies	30,37	55,800	79,294
Contract liabilities	31,37	44,110	40,314
Other provisions	33,37	5,299	6,559
Other ﬁnancial liabilities	34,37	106,283	102,634
Other non-ﬁnancial liabilities	35,37	17,269	29,256
Income tax liabilities	32,37	25,933	24,469
574,560	548,895
Long-term liabilities
Contract liabilities	31,37	6,917	4,960
Other provisions	33,37	46,444	45,670
Other ﬁnancial liabilities	36,37	974,651	991,825
Deferred tax liabilities	15	234,005	229,748
1,262,017	1,272,203
TOTAL LIABILITIES	1,836,577	1,821,098
Equity
Share capital	39	193,891	193,891
Capital reserves	40	2,432,054	2,429,876
Cumulative consolidated results	2,228,835	2,018,055
Other equity	40	-1,020	-976
TOTAL EQUITY	4,853,760	4,640,846
TOTAL LIABILITIES AND EQUITY	6,690,337	6,461,944

CONSOLIDATED CASH FLOW STATEMENT

from 1 January to 31 December 2020

2020	2019
January - December	January - December
Remarks	€k	€k
RESULTS FROM OPERATING ACTIVITIES
47
Consolidated proﬁt	219,593	373,620
Allowances for rollover of consolidated proﬁt
to incoming and outgoing payments
Amortisation and depreciation on intangible
and tangible assets	11	45,403	29,091
Depreciation on assets capitalised within
the framework of corporate acquisitions	11	109,992	125,923
Personnel expenses from employee stock
ownership programmes	38	2,178	79
Changes in the adjustment items for deferred
tax assets	15	4,264	-18,018
Correction proﬁts/losses from the sale
of tangible assets	2	-158
Other items not aﬀecting payments	5	129,828	0
CASH FLOW FROM OPERATING ACTIVITIES	511,260	510,537
Changes in assets and liabilities
Change in receivables and other assets	-37,098	41,571
Change in contract assets	-89,983	-90,828
Change in inventories	-6,139	10,321
Change in prepaid expenses*	45,935	14,674
Change in trade accounts payable	53,502	-98,833
Change in other provisions	-241	-23,628
Change in income tax liabilities	1,463	-13,516
Change in other liabilities	-14,619	12,273
Change in receivables due from/liabilities
due to associated companies	-19,161	18,512
Change in contract liabilities	5,753	-5,376
Changes in assets and liabilities, total	-60,588	-134,830
Net inﬂow of funds from operating activities	450,672	375,707

2020	2019
January - December	January - December
Remarks	€k	€k
CASH FLOW FROM INVESTMENTS	47
Investments in intangible and tangible assets	-207,245	-20,452
Inﬂow of funds from disposal of intangible and tangible assets	233	184
Investments in other ﬁnancial assets	-390	-326
Outﬂow of funds for the grant of loans to associated companies	43	-190,000	-210,000
Repayments from other ﬁnancial assets	50	45
Net outﬂow of funds in investment sector	-397,352	-230,549
CASH FLOW FROM FINANCING SECTOR	47
Acquisition of treasury stock	41	0	-3,844
Dividend payment	50	-8,813	-8,813
Repayment of liabilities related to the acquisition of 5G spectrum	47	-61,266	-61,266
Repayment of leasing liabilities and rights of use	34, 46	-10,666	-11,418
Outﬂow of funds to associated companies in repayment of loans	43	0	-32,000
Net outﬂow of funds in ﬁnancing sector	-80,745	-117,341
Net increase/decline in cash and cash equivalents	-27,425	27,817
Cash and cash equivalents at beginning of ﬁscal year	31,785	3,968
Cash and cash equivalents at end of reporting period	4,360	31,785

* The "Change in prepaid expenses" includes the "Changes in costs to obtain contracts and to fulﬁl contracts" that were disclosed separately in the previ-ous year.

CONSOLIDATED CHANGE IN EQUITY STATEMENT

in Fiscal Years 2020 and 2019

Share capitalRemarksCapital reservesCumulative con-solidated results

39,41

Other equityTotal equity

40,41

Denomination

k€

Per 01 January 2019

176,363,945

194,000

2,433,531

1,653,248

-704

4,280,075

Consolidated proﬁt

Other consolidated results

373,620

-272

Total results

373,620

-272

373,348

Dividend payments

Employee stock ownership programme

Acquisition of own shares

-99,296

-8,813

-109

-3,734

-3,844

Per 31 December 2019

176,264,649

193,891

2,429,876

2,018,055

-976

4,640,846

Per 01 January 2020

176,264,649

193,891

2,429,876

2,018,055

-976

4,640,846

Consolidated proﬁt

Other consolidated results

219,593

-44

Total results

219,593

-44

219,549

Dividend payments

Employee stock ownership programme

-8,813

2,178

-8,813

2,178

Per 31 December 2020

176,264,649

193,891

2,432,054

2,228,835

-1,020

4,853,760

CONSOLIDATED NOTES PER 31 DECEMBER 2020

1. General information about the Company and the ﬁnancial statements

1&1 Drillisch Group, together with 1&1 Drillisch Aktiengesellschaft, Maintal, the listed parent company (hereinafter: "1&1 Drillisch AG" or "Company" or, along with its sub- sidiaries, "1&1 Drillisch" or "Group"), is a telecommunications provider that operates solely and exclusively in Germany. With more than 14.8 million contracts, 1&1 Drillisch is a leading internet specialist and is authorised to use one of the largest ﬁbre optic networks in Germany because of its aﬃliation with the company 1&1 Versatel GmbH, Düsseldorf, a member of the United Internet AG corporate group. As a virtual mobile network operator, 1&1 Drillisch has guaranteed access to up to 30 percent of the capac- ity of Telefónica's mobile network in Germany (so-called Mobile Bitstream Access Mobile Virtual Network Operator = MBA MVNO). In addition, 1&1 Drillisch utilises capacities in Vodafone's mobile network. The Group's business unit Access oﬀers landline and mobile network-based internet access products. They include, among others, chargeable land- line and mobile access products and the related applications such as home networks, online storage, telephony, video on demand or IPTV.

Company headquarters of 1&1 Drillisch are at Wilhelm-Röntgen-Strasse 1-5 in 63477 Maintal, Germany, and the Company is registered under the number HRB 7384 at Hanau Local Court.

The consolidated ﬁnancial statements of 1&1 Drillisch AG have been prepared in accord- ance with the International Financial Reporting Standards (IFRS) as they are applicable in the European Union (EU) and with the commercial law provisions that must be observed in supplement pursuant to Section 315e (1) German Commercial Code (HGB).

1&1 Drillisch AG is included in the consolidated ﬁnancial statements of United Internet AG, Montabaur. The consolidated annual ﬁnancial statements are published in the Ger- man Federal Gazette [Bundesanzeiger].

The euro is the currency of the reporting. The ﬁgures in the notes are shown as designat- ed in each speciﬁc case in euros (€), thousand euros (€k) or million euros (€m). The ﬁnan- cial statements are prepared by applying the principle of cost of acquisition. This principle is not applied to certain ﬁnancial instruments, which are measured at fair value.

The balance sheet date is 31 December 2020.

In its meeting on 24 March 2020, the Supervisory Board approved the consolidated annual ﬁnancial statements for 2019. The consolidated annual ﬁnancial statements for 2019 were made public in the Federal Gazette on 03 April 2020.

The consolidated annual ﬁnancial statements for 2020 were prepared by the Manage- ment Board on 19 March 2021 and subsequently submitted to the Supervisory Board. The consolidated annual ﬁnancial statements will be presented to the Supervisory Board for approval on 24 March 2021. Until the consolidated annual ﬁnancial statements havebeen approved and released for publication by the Supervisory Board, it is theoretically possible that changes will be made. The Management Board, however, is assuming that the consolidated annual ﬁnancial statements will be approved in their current form. They will be published on 25 March 2021.

Shareholdings of 1&1 Drillisch AG in accordance with Section 313 (2) HGB

The Group includes per 31 December 2020 the following companies in which 1&1 Dril- lisch AG, directly or indirectly, holds a majority interest.

Capital share
Name and registered oﬃce of the company	%
1&1 Telecommunication SE, Montabaur	100
1&1 Telecom Holding GmbH, Montabaur1	100
1&1 Telecom Sales GmbH, Montabaur1	100
1&1 Telecom Service Montabaur GmbH, Montabaur1	100
1&1 Telecom Service Zweibrücken GmbH, Zweibrücken1	100
1&1 Logistik GmbH, Montabaur1	100
1&1 Telecom GmbH, Montabaur2	100
Drillisch Online GmbH, Maintal	100
IQ-optimize Software AG, Maintal	100
Drillisch Netz AG, Düsseldorf3	100
Drillisch Logistik GmbH, Münster	100
(1) Wholly-owned subsidiary of 1&1 Telecommunication SE
(2) Wholly-owned subsidiary of 1&1 Telecom Holding GmbH
(3) Wholly-owned subsidiary of Drillisch Online GmbH

The scope of consolidation has been modiﬁed as follows in comparison with 31 Decem- ber 2019:

The shares in 1&1 Berlin Telecom Service GmbH, Berlin, were sold eﬀective per 30 June 2020. This did not have any signiﬁcant eﬀects on the Group's earnings or ﬁnancial position or on its assets and liabilities. In addition, Mobile Ventures GmbH, Maintal, was merged with Drillisch Online GmbH, Maintal, with retroactive eﬀect per 1 January 2020.

As in the previous year, no companies were acquired in the 2020 reporting period.

Moreover, the Company has holdings, either direct or indirect, in the following com- panies; they are not included in the consolidated ﬁnancial statements because of their minor signiﬁcance.

Capital share
Name and registered oﬃce of the company	%
Blitz 17-665 SE, Maintal	100
Blitz 17-666 SE, Maintal	100
CA BG AlphaPi AG, Vienna/Austria	100

In addition, 1&1 Drillisch holds interests in the following companies, which are disclosed under the other long-term ﬁnancial assets:

Capital share
Name and registered oﬃce of the company	%
POSpulse GmbH, Berlin	1
High-Tech Gründerfonds III GmbH & Co. KG, Bonn	1

During the ﬁscal year, 1&1 Drillisch held 15 percent of the shares in PipesBox GmbH, Rostock. Insolvency proceedings were opened against the company's assets in ﬁscal year 2020 and the company was dissolved. The equity shares are a ﬁnancial asset (equity in- strument) measured at fair value through other comprehensive income in other results. Accordingly, there was no reclassiﬁcation of accumulated gains and losses in the proﬁt and loss statement (note 40).

2. Accounting and valuation methods

This section begins with a description of all of the accounting principles that have been applied uniformly to the periods covered in these ﬁnancial statements. Following these remarks, the accounting standards applied for the ﬁrst time in these ﬁnancial state- ments as well as the recently issued accounting standards that have not yet been ap- plied will be explained.

2.1 Explanatory comments on major accounting and valuation methods

Consolidation principlese

The consolidated ﬁnancial statements include 1&1 Drillisch AG and all of the subsidiar- ies it controls (majority interests). In accordance with IFRS 10, an investor has control of a company when he has the authority to make decisions, is vulnerable to variable returns or is entitled to rights related to the returns and he is in a position to inﬂuence the variable returns as a consequence of his authority to make decisions. The ﬁnancial statements of the subsidiaries are prepared per the same balance sheet date and in application of uniform accounting and valuation methods as the ﬁnancial statements of the parent company. As necessary, restatements are made in the separate ﬁnancial statements of subsidiaries to ensure conformity of their accounting methods with those of the Group.

All assets and liabilities, equity, income and expenditures within the Group as well as payment ﬂows from business transactions between Group companies are completely eliminated during consolidation.

The consolidation of a subsidiary begins on the day the Group gains control over the subsidiary. It ends when the Group loses its control over the subsidiary. Assets, liabilities, income and expenditures of a subsidiary acquired or sold during the reporting period are recognised in the consolidated financial statements from the day on which the Group obtains control over the subsidiary until the day on which this control ends.

With the loss of the controlling inﬂuence, any gain or loss from the departure of the subsidiary is recognised in the consolidated comprehensive income statement in the amount of the diﬀerence between (i) the income from the sale of the subsidiary, the fair value of any retained shares, the carrying value of the non-controlling shares and the cumulative amounts of the other consolidated results attributable to the subsidiary and (ii) the carrying value of the departing net assets of the subsidiary.

Any change in the amount of participation in a subsidiary without loss of control is dis- closed in the balance sheet as an equity transaction.

Non-controlling interests represent the share of the results and net assets that are not attributable to the Group's shareholders. Non-controlling interests are disclosed separately in the consolidated balance sheet. The disclosure in the consolidated bal- ance sheet is shown within equity, but separate from the equity attributable to the 1&1 Drillisch AG shareholders. Whenever interests without a controlling inﬂuence (minority interests) are acquired or shares with controlling inﬂuence are sold without a loss of the controlling interest, the carrying values of the shares with and without controlling interest are restated to reﬂect the change in the corresponding participation rate. The amount by which the consideration to be paid or received for the change in the partic- ipation rate exceeds the value of the pertinent interests without controlling inﬂuence must be recognised directly in equity as a transaction with the companies.

Revenue from contracts with customers

Revenue from contracts with customers is disclosed in the balance sheet on the basis of the following ﬁve steps:

» Identiﬁcation of the contract or contracts with a customer
» Identiﬁcation of the independent performance obligations in the contract
» Determination of the transaction price
» Allocation of the transaction price to the performance obligations
» Revenue realisation upon satisfaction of the performance obligations

Sales revenues comprise essentially revenues from the provision of access to a tele- communications network and the billing of these services on the basis of the existing customer relationships (sales revenues from access services) and sales revenues from the sale of hardware.

The Group realises revenues primarily from the provision of the access products and from services such as internet and mobile telephony. The transaction price comprises ﬁxed monthly basic fees and variable additional utilisation charges for certain services (e.g. for foreign and mobile connections that are not covered by a ﬂat rate) as well as revenue from the sale of the relevant hardware.

The revenue realisation is based on a breakdown of the transaction price from the cus- tomer contract on the basis of the relative single selling prices of individual performance obligations. As a rule, 1&1 Drillisch Group oﬀers comparable rate plans both with and

100

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1&1 Drillisch AG published this content on 25 March 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 March 2021 10:32:23 UTC.

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