Shareholders letter

Dear shareholders

Swisscom can look back on a successful year. As in previous years, growth was driven by Internet access and TV business. The commitment demonstrated by our employees in continually improving the customer experience is the foundation on which our success on the market is based. 2012 was characterised by a high level of investment in next-generation ICT networks, the positive outcome of the mobile frequency allocation and the successful introduction of new price plans in Switzerland. Swisscoms Italian subsidiary Fastweb is on course: adjusted for one-off items, revenue was up slightly and EBITDA was up considerably on a like-for-like basis.

Marginal decline in operating profit

In 2012 Swisscoms net revenue fell by CHF 83 million or 0.7% to CHF 11,384 million. Operating income before depreciation and amortisation (EBITDA) declined by CHF 203 million or 4.4% to CHF 4,381 million. Net income rose by CHF 1,068 million to CHF 1,762 million, which is primarily attributable to the impairment loss recognised by Fastweb in the previous year. On a like-for-like basis and at constant exchange rates, revenue was up 0.3% while EBITDA declined by 0.6%. Swisscoms capital expenditure increased by CHF 434 million or 20.7% to CHF 2,529 million. In its Swiss business, Swisscom generated net revenue of CHF 9,268 million (+0.3%) and EBITDA of CHF 3,768 million (4.5%). After being adjusted for one-off costs, EBITDA of the Swiss business declined by 2.1% on a like-for-like basis. Price erosion of around CHF 400 million was offset by customer and volume growth. Capital expenditure in Switzerland increased by CHF 457 million or 29.7% to CHF 1,994 million. The causes for the rise in capital expenditure were the expansion of broadband networks and expenses of CHF 360 million for the mobile frequencies auctioned in the first quarter of 2012. Swisscom expects to close 2013 with net revenue of CHF 11.3 billion, EBITDA of at least CHF 4.25 billion and capital expenditure of CHF 2.4 billion.

Swisscom share performance in 2012

Taking the dividend into account, the Swisscom share achieved a total return of 16.8% over the course of the year. The total return on the Swiss Market Index (SMI), which comprises the 20 leading listed Swiss companies, amounted to 17.6% over the same period. The total return on the European Stoxx Europe 600 Telco index fell by 4.8% in Swiss francs. Payment of an ordinary dividend of CHF 22 per share (prior year: CHF 22) will be proposed to the Annual General Meeting of shareholders. This is equivalent to a total dividend payout of CHF 1,140 million. Swisscom is thus upholding the principle of continuity in its dividend policy

A powerful vision driving developments in the ICT sector

Having a clear insight into what the future will bring is part of a long-term, sustainable strategy in the unbelievably dynamic ICT market. At the centre of this strategy stands a vision: that of fulfilling the need of our customers to be able to access digital data during the course of a day through a variety of different devices for the purpose of keeping themselves informed, working, communicating and entertaining themselves. In the not-too-distant future, we will be able to access all our private and work-related data and applications on all of these devices in real time. We will no longer have to worry about synchronisation, nor will we need to wonder where our data are stored or whether our device supports the application we want. The data and applications will always be available instantly on every device. High-speed networks and state-of-the-art cloud services are making this possible. As simple and appealing as such a vision may sound, it places high demands on our infrastructure. Nevertheless, it is our mission to make this vision a reality. To do so requires large-scale investment: Swisscom invests per inhabitant around three times more in infrastructure than its European counterparts.

Our business model is changing as a result of global competition

What was once a domestic market for telephony and news services is now a global market: providers of online services such as Google, Apple and Microsoft & Co. can now offer all their services on our networks thanks to the Internet protocol. Many of these services are free, because although these providers rely on our networks, they don’t have to invest in them. This is forcing Swisscom to change its business model and tap new fields of business. As a result, we now provide network access with different performance features, allowing our customers to use all services on an unlimited basis via this network connection. Thanks to our new infinity subscriptions, this is already a reality in the field of mobile communication. Swisscom customers can simply choose between different data transmission speeds. The new price plans have been a resounding success: by the end of 2012, around 889,000 customers had opted for one of these new mobile phone offerings in the last six months of the year alone. This transition in our business model is already well underway and we are very optimistic about the future. Offering our customers a business model that provides them with network access and unlimited possibilities is a business with enormous potential for growth. The population is growing, as is the number of devices and network connections per inhabitant. Our customers’ demands as regards the security and performance of their network access will continue to increase in the coming years. At the same time, this business is subject to local and national competition.

Customer growth in the mobile sector – trend towards bundled offerings

The number of mobile customers in Switzerland increased by 168,000 or 2.8% year-on-year to 6.2 million. Swisscom sold 1.55 million mobile handsets (+6.7%), 68% of which were smartphones. In general, the trend is towards bundled offerings. Customers appreciate being able to get their fixed-line access, telephony, Internet and TV services all from a single source. By the end of 2012, a total of 788,000 customers were using bundled offerings, around 28% more than the previous year. The number of broadband lines with end customers grew by 66,000 or 4.0% year-on-year to 1.73 million, while the number of Swisscom connections used by alternative providers declined somewhat in 2012 to 486,000.

Leader in digital TV

Since 2011 Swisscom has been the leading provider of digital television in Switzerland. The focus of this strategic pillar is on extending the core business along the value chain. Swisscom TV’s customer base increased by over 30.1% to 791,000 customers in 2012. The functionality and range of programmes offered by Swisscom TV were expanded in the year under review. Regional programmes and national sporting events in particular are an effective means for Swisscom to distinguish itself from international providers. In local competition with cable providers, Swisscom offers much higher interactivity in its television services thanks to functionalities such as Catch Up TV, Pay per View and the various apps.

New areas of business through IT expertise

The Group's subsidiary Swisscom IT Services, which offers a broad portfolio of IT services, has been going from strength to strength in recent years. In IT outsourcing, Swisscom IT Services is now one of the largest providers on the Swiss market. The company is the market leader in banking solutions, with over 190 Swiss financial services providers now entrusting us with all their IT, which we operate in our state-of-the-art data centres. Swisscom sees a growth market in the “Internet of Things” (machine-to-machine); in future, machines will increasingly communicate with each other via the Internet. In concrete terms, Swisscom expects that in a few years from now, over 100 million devices will be connected to each other via the Internet in Switzerland. In addition, Swisscom is currently tapping new fields of business in the healthcare and energy markets.

Fastweb on course again

2012 was a very good year for Fastweb. Adjusted for one-off items, revenue was up slightly by 0.5% to EUR 1,613 million and EBITDA was up considerably by 11.1% to EUR 500 million on a like-for-like basis. Fastweb was the only Italian provider to report customer growth in 2012. Over the course of the year, it also further expanded its sales channels, intensified the partnership with pay-TV provider Sky and extended the range of mobile communications products. Market share and customer growth increased significantly in 2012 despite the adverse economic environment. In order to further increase efficiency, Fastweb implemented various cost-cutting initiatives. The measures for reducing bad debt losses were also further improved on those of the previous year. They are having a clear positive effect and are contributing to the significant increase in the operating result. To enhance its competitiveness, Fastweb will continue investing in fibre-optic expansion. Like Swisscom, Fastweb is focusing on rolling out Fibre to the Street (FTTS) to complement its existing Fibre to the Home (FTTH) network.

Strategic investments in infrastructure in Switzerland

The rapid growth in expectations resulting from the vision outlined at the beginning of this letter regarding the security and performance of infrastructure open up a wide variety of ways to enhance competitiveness through differentiation and growth opportunities. These necessitate long-term investments in our infrastructure. Swisscom spent a total of CHF 1.63 billion in 2012 on enhancing the performance and security of Swiss infrastructure, in particular the expansion of the fibre-optic network. That is about CHF 100 million more than in 2011. Switzerland is excellently positioned by international standards: according to an OECD study, Switzerland leads the world in terms of broadband penetration (OECD Broadband Portal, July 2012). By the end of 2012, around 552,000 homes and businesses had been connected to the fibre-optic network. Swisscom plans to market fibre-optic services more quickly in 2013. The number of homes and businesses connected to the fibre-optic network is set to rise to around a million by 2015, representing a third of all Swiss households. Some of these connections are being realised in cooperation with power utility companies or cable network operators. To enable all of Switzerland to benefit from a considerable increase in fixed broadband performance, Swisscom is deploying a new fibre-optic technology, Fibre to the Street (FTTS), which allows ultra high-speed broadband to be supplied more quickly and more efficiently. Pilot testing is currently underway in Grandfontaine (JU), Flerden (GR) and Charrat (VS). With FTTS, fibre-optic cable is laid to within a short distance of individual homes and businesses This enables bandwidths of up to 100 Mbps, with speeds as high as 400 Mbps expected in the next few years. For the fourth time in succession, the trade journal connect has rated Swisscom as the best network in Switzerland. The demand for bandwidth is continuing to grow rapidly. Mobile data traffic increased by 85% in 2012, with a year-on-year increase of even 120% in the fourth quarter of 2012. Swisscom is continuously investing in new mobile communication technologies. At the end of 2012, Swisscom became the first provider in Switzerland to launch a 4G/LTE network, giving customers with a 4G/LTE-enabled smartphone or notebook and a surf subscription even faster mobile Internet access while on the move. The network was initially available in 26 different towns and cities. Swisscom will push ahead with the further expansion of the 4G/LTE network next year: which should cover 70% of Switzerland’s population by the end of 2013. Swisscom is again planning to increase capital expenditure in Swiss infrastructure in 2013, taking it to a record level of CHF 1.8 billion. This investment makes a major contribution towards ensuring that Switzerland, as an information and knowledge society, will continue to boast one of the world's best telecoms infrastructures in the future.

Sustainability as a key element in a long-term strategy

Sustainable management and long-term responsibility are firmly enshrined in Swisscom’s corporate culture. Swisscom takes responsibility for the environment and the community – now and in the future – and is one of the top five telecom companies in Europe in terms of sustainability. The company is aiming to improve its energy efficiency by 20% and thereby help realise the Swiss Confederation’s 2050 energy strategy. Swisscom promotes media skills among Switzerland’s general population through initiatives such as “Internet for Schools” and media competency courses, enabling its customers to navigate the digital world securely and responsibly. Sustainability is also an important issue for our customers, as evidenced by the fact that corporate responsibility is a key driver of customer satisfaction. In the year under review, Swisscom set binding targets for all its operating divisions in Switzerland in order to fulfil the goals of our Corporate Responsibility Strategy in the four strategic priority areas of “Sustainable living and working”, “Sustainable use of resources and responsibility in the supply chain”, “Telecommunications for all” and “Responsible employer”. This year’s sustainability report again meets the requirements of level A+ in accordance with the GRI Index. Details about how Swisscom is meeting its objectives can be found in the section on “Corporate Responsibility” in this Annual Report.

Modification of Group structure – management changes

Swisscom’s management structure was modified as of 1 January 2013 with the aim of strengthening the management of the Swiss business and enhancing the Group’s efficiency. Urs Schaeppi will head up Swisscom Switzerland as of 1 January 2013 and will report to CEO Carsten Schloter. Urs Schaeppi will continue in his current function as head of Corporate Business ad interim. As Chairman of the Board of Directors of Swisscom Switzerland, Carsten Schloter continues to be closely involved in topics of strategic importance for Swisscom Switzerland. In addition to strategic topics in the Swiss business, the Group Executive Board will in future focus increasingly on further developing Swisscom IT Services, Fastweb and innovations. Group Communications & Responsibility and Group Related Businesses, which includes growth businesses in the areas of health, energy and home networking, will report directly to the CEO, who is also Chairman of the Boards of Directors of Swisscom IT Services and Fastweb. The Board of Directors appointed Mario Rossi as the new Chief Financial Officer (CFO), who previously headed Business Steering for Swisscom Switzerland. He is taking over from Ueli Dietiker, who stepped down as CFO at his own request. Ueli Dietiker now heads up Group Related Businesses and has also assumed other directorships at Swisscom. Andreas König was appointed the new CEO of Swisscom IT Services. He replaces Eros Fregonas, who left Swisscom at the end of April 2012. The Board of Directors also appointed Jürgen Galler as the new head of Group Strategy & Innovation and member of the Swisscom Group Executive Board. He succeeds Daniel Ritz, who left the company at the end of 2012.

Changes to the Board of Directors

Barbara Frei, Country Manager of ABB S.p.A., Sesto San Giovanni and Regional Manager of the Mediterranean region, was appointed a member of the Board of Directors at the Annual General Meeting in 2012. She replaces Othmar Vock, who had been a member of the Board of Directors for seven years. We would like to express our sincere thanks to Othmar Vock for the formative work he did as a member of the Board of Directors and as a member of various committees, as well as for the role he played as Chairman of the Audit Committee.

Financial outlook 2013

In 2013, Swisscom anticipates stable revenue of CHF 9.34 billion, excluding Fastweb. EBITDA (excluding Fastweb) is expected to decline to CHF 3.64 billion. A new standard for pension fund accounting will lead to a CHF 110 million increase in costs not affecting cash flow. Furthermore, the steady growth in customers and volumes will bring about an increase in direct costs, mainly in the acquisition of new customers and the procurement of handsets. The maintenance and further expansion of the network infrastructure will also result in a temporary increase in indirect costs.
In 2013, Swisscom expects capital expenditure (excluding Fastweb) to rise to CHF 1.75 billion. Capital expenditure of CHF 1.65 billion in 2012 was CHF 50 million below the original forecast for the year.
A slight acceleration in investment activity is anticipated in 2013, which should make up for the shortfall.
In 2013, Fastweb is forecast to enjoy stable growth in revenue in local currency, excluding hubbing, of EUR 1.6 billion. EBITDA at Fastweb is expected to stay at the previous year’s level of EUR 500 million. Due to the expansion of the fibre-optic networks in Italy, investments are expected to rise to
EUR550 million.
Based on the current CHF/EUR exchange rate of 1.23, Swisscom therefore expects Group revenue of around CHF 11.3 billion, EBITDA of at least CHF 4.25 billion and capital expenditure of around
CHF2.4 billion.
If all targets are met, Swisscom will again propose a dividend of CHF 22 per share for the 2013 financial year to the Annual General Meeting of Shareholders.

Thank you

We can look back on an intensive and successful year. We owe our achievements in 2012 to the trust of our customers, the loyalty of our shareholders and the tireless dedication and commitment of our employees. A warm thank you to you all.