Swisscom Reports 2005

Swisscom reports revenue fell by 3.2% to CHF9.7B during 2005 while net income rose 26.7% to CHF2.02B; lays out strategy to consolidate core businesses

March 8, 2006

6 Min Read

BERN, Switzerland -- Swisscom's net revenue fell by 3.2% to CHF 9.7 billion, primarily as a result of two one-time effects (sale of the International Carrier Services to Belgacom and a reduction in termination rates for mobile telephony, amounting to CHF 279 million). Customers also benefited from substantial price reductions. These, however, were entirely offset by growth in new businesses. Earnings before interest, taxes, depreciation and amortization (EBITDA) fell by 4.9% to CHF 4.17 billion. Net income after deduction of minority interests increased by 26.7% to CHF 2.02 billion. A dividend of CHF 16 (previous year: CHF 14) per share will be proposed to the General Meeting of Shareholders. In the current year, Swisscom is planning a share buyback program worth CHF 2.25 billion. As part of a new strategy, Swisscom is focusing on strengthening its core business with convergent offerings, on driving growth in the area of business customer solutions and on targeted expansion projects. A realignment of operations resulted in a number of changes at Executive Board level. Swisscom expects revenue in the 2006 financial year of around CHF 9.5 billion and an EBITDA of CHF 4.0 billion. The main reason for the decline in EBITDA is the reduced mobile termination rates, which will impact the full year results for the first time in 2006 (7 months in the previous year). Pressure on prices in fixed and mobile business is to be offset again this year by growth in new businesses.

Swisscom’s net revenue dipped in 2005 compared with the previous year by 3.2% to CHF 9,732 million. The decline in revenue could not be fully compensated by cost savings, so that earnings before interest, taxes, depreciation and amortization (EBITDA) also saw a drop of 4.9% to CHF 4,171 million. Lower depreciation, higher financial income and elimination of the loss from discontinued operations (debitel), boosted net income by 20.4% to CHF 2,346 million. After deduction of minority interests, net income rose by 26.7% to CHF 2,022 million. Net earnings per share increased by 37.0% to CHF 33.79 due to higher net income and the share buyback program. Equity free cash flow came out CHF 710 million below the previous year, at CHF 2,203 million.

Shareholders to benefit from payouts of over CHF 3 billion

In accordance with current policy, the ordinary annual distribution of equity free cash flow (EFCF) will be paid in the form of a dividend (around half of the adjusted net income) and a share buyback. The Board of Directors will propose a dividend of CHF 16 per share (CHF 14 in the previous year) or a total of CHF 907 million to the General Meeting of Shareholders. The remainder of the equity free cash flow, around CHF 1.25 billion, will be paid to shareholders in a share buyback program. As announced on February 16, 2006, the share buyback will be further increased by an exceptional distribution of CHF 1 billion to reduce distributable reserves. The CHF 2.25 billion share buyback is to take place by allocating free options (put structure), similar to the transaction carried out successfully by Swisscom in 2002. The timing and other details of the share buyback are yet to be decided; however, it will not be launched before the General Meeting of Shareholders on April 25, 2006. This means that shareholders will benefit this year from distributions totaling around CHF 3.16 billion.

Again this year Swisscom will offer employees the opportunity to purchase shares on preferential terms; this has always proved very successful in past years. In addition, the Board of Directors has decided to introduce a stock program for management employees. In this connection, Swisscom will purchase up to 150,000 shares (less than 0.3 % of shares outstanding) on the open market.

New strategy based on three pillars: strengthening of core business with convergent offerings; further growth in business customers solutions and targeted expansion projects

The most important pillar of the strategy is the strengthening of core business by offering a comprehensive portfolio of multimedia services and first-class customer service. Swisscom aims among other things to provide customers with highly attractive offerings from a comprehensive range of products, services, and network access options. Individual products will be increasingly bundled into all-round packages. Customers’ trust will be won with an improved, rapid and competent customer care with simplified access to customer contact points. Swisscom is looking to position itself as a Swiss role model in the field of customer service.

The second pillar of the strategy consists of expansion in activities in the business customer market. Swisscom plans to offer international companies with a decision-making center in Switzerland a one-stop shop for international services, e.g. with the help of cross-border alliances. Swisscom's broad-based competence in banking, healthcare and telecoms solutions is to be further expanded. In addition, Swisscom is looking to achieve substantial growth in the outsourcing market.

The third pillar covers expansion projects in areas where Swisscom has proven core competences. Firstly, opportunities are available to add value to the different customer segments in other countries by incorporating the Group's specialized know-how. Possibilities are emerging in countries where, for example, there is a pent-up demand for new technologies in order to address unsatisfied customer needs. There is also expansion potential in parts of the current business in Switzerland where Swisscom is not the market leader. Secondly, Swisscom plans to penetrate areas close to its current core business that are undergoing major changes under the influence of digitization and broadband market penetration (e.g. telemedicine).

Rigorous investment criteria will apply in implementing the strategy. Synergies or business logic must justify the price of an acquisition.

Closer collaboration between Group companies – management changes

Successful implementation of the new strategy calls for a broad understanding by management of Swisscom's business areas and very close collaboration between the Group companies.In response to a proposal submitted by Swisscom CEO Carsten Schloter, the Board of Directors agreed on March 8, 2006, to a number of changes at management level: Adrian Bult, until now CEO of Swisscom Fixnet, will take over as CEO of Swisscom Mobile. Adrian Bult has an outstanding knowledge of the telecoms and IT business; before switching to Swisscom Fixnet in 2000, he was Head of IT at Swisscom.

Ueli Dietiker, until now Chief Financial Officer, has been appointed the new CEO of Swisscom Fixnet. As CFO and member of the Board of Directors of the various strategic companies as well as former CEO of a large cable network company, Ueli Dietiker has an in-depth knowledge of the industry. Mario Rossi, until now CFO of Swisscom Fixnet, has been appointed the new CFO of Swisscom AG. Prior to joining Swisscom Fixnet, Mario Rossi held a management function in finance within the Swisscom Group and has extensive experience and excellent knowledge of the company.

Urs Schaeppi, until now Head of Commercial Business at Swisscom Mobile, will become the new CEO of Swisscom Solutions AG, which is responsible for telco business customers. Under Urs Schaeppi the successfully restructured Swisscom Solutions will now focus on addressing the changing needs of Swisscom's key accounts including the provision of convergence offerings. René Fischer, until now CEO of Swisscom Solutions, will leave the company by mutual agreement. The Board of Directors and the CEO expressed their warm appreciation to René Fischer for his services to the company.

Swisscom AG (NYSE: SCM)

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