Shareholders’ letter

Dear Shareholders

Marginal decline in operating income

In 2013 Swisscom’s net revenue rose by CHF 50 million or 0.4% to CHF 11,434 million, while operating income before depreciation and amortisation (EBITDA) was CHF 175 million or 3.9% lower at CHF 4,302 million. Revenue and EBITDA performance was impacted by the euro exchange rate, company acquisitions and hubbing revenues (wholesale revenues from low-margin interconnection services) at Fastweb. Excluding these special factors, and at constant exchange rates, net revenue and EBITDA fell by 0.8% and 2.0% respectively. Net income declined by CHF 120 million or 6.6% to CHF 1,695 million. Besides lower EBITDA, the fall in net income was mainly attributable to higher depreciation and amortisation. Excluding expenses for the mobile frequencies acquired by auction in the previous year, capital expenditure increased by CHF 227 million or 10.5% to CHF 2,396 million.

Solid business performance in Switzerland

In its Swiss business, Swisscom generated net revenue of CHF 9,358 million (+1.0%) and EBITDA of CHF 3,685 million (–4.6%). Adjusted for one-off special factors, EBITDA was down 2.0% year-on-year. Price erosion and price reductions for roaming services totalling CHF 560 million were largely offset by CHF 480 million in customer and volume growth. Excluding the costs of CHF 360 million for the mobile frequencies acquired in 2012, capital expenditure in Switzerland rose by CHF 52 million or 3.2% to CHF 1,686 million. This was mainly attributable to broadband expansion and to upgrading mobile networks with the latest technologies. In Switzerland headcount increased by 1,093 full-time equivalents or 6.7% to 17,362 as a result of company acquisitions, the insourcing of external staff and the strengthening of customer service operations.

Fastweb on track

Fastweb is on track in Italy and its strategy remains unchanged. Excluding hubbing business, net revenue dipped slightly by EUR 16 million to EUR 1,597 million. Fastweb’s broadband customer base increase to 175’000 with in a year and is growing faster than the broadband market in Italy. EBITDA increased by EUR 5 million or 1.0% to EUR 505 million year-on-year. Capital expenditure rose by CHF 124 million or 28.1% to EUR 565 million, due to spending on upgrading the fibre-optic network with the same technology as in Switzerland (notably Fibre to the Street) in order to significantly expand high-speed network access and geographical reach.

Swisscom share performance in 2013

The Swisscom share price rose by 19.6% in 2013, which is only slightly below the average price gain of 20.2% posted by the 20 leading Swiss companies on the Swiss Market Index (SMI).In terms of total shareholder return (share price movement and dividend payout) Swisscom outperformed the SMI due to the high dividend yield. 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.

Keeping pace with the development of national markets into global markets

What were once domestic markets for telephony and data communication are now, thanks to digitalisation, a single global market: providers such as Google, Apple, etc. are now able to offer their communication services globally thanks to the Internet protocol. Many of these services are free-of-charge for users, because although these providers rely on our networks for the provision of their services, they do not have to invest in them.

To counteract this trend, Swisscom has further developed its business model. As a trusted partner in today’s digital world, the company relies on having a secure and always-available network for its customers.The needs of its customers and a commitment to delivering outstanding quality of service is at the centre of its considerations and actions.

High investments

The increasing importance of the Internet for personal and professional use has resulted in a greater demand for high-performance, secure network access throughout Switzerland. In the high-investment network competition with cable network operators, mobile network operators and power utility companies, Swisscom wants to continue offering its customers the best network. As a result, Swisscom has this year invested CHF 1.7 billion in Switzerland, most of which on expanding the mobile network with 4G/LTE and on broadband expansion.

Modern fibre-optic technologies

At the end of 2013, some 750,000 homes and businesses were connected with FTTH (Fibre to the Home) and were able to take advantage of Internet-browsing speeds of up to 1 gigabit per second. This figure is set to rise to around a million or around a third of all households in Switzerland by the end of 2015. Swisscom has also rolled out new fibre-optic technologies such as FTTS (Fibre to the Street) and FTTB (Fibre to the Building). The work involved in expanding these technologies has already begun. Swisscom also intends to almost double the performance of the existing network from 2014 using vectoring technology, thus enabling the rapid and cost-effective nationwide rollout of ultra-fast broadband.

Fourth-generation mobile technology

In 2012, Swisscom became the first mobile provider in Switzerland to launch fourth-generation LTE technology on a commercial basis, with work being completed on the expansion this year. By the end of 2013, Swisscom had already extended 4G/LTE coverage to 85% of the Swiss population, and around one million Swisscom customers were regularly using the new high-speed LTE network.

Unlimited use of Swisscom services

In response to the growing trend among global providers in the global telephone and data communications market to offer services free of charge, Swisscom now also enables its customers to enjoy unlimited use of many communications services. The only differences in the offerings are the access speeds. The infinity mobile subscriptions launched in 2012 are popular.By the end of the year around 1.7 million customers were benefiting from such subscriptions. Occasional mobile phone users can also take advantage of two new subscription packages, featuring inclusive units and top Internet-browsing speeds. These offerings have enabled Swisscom to minimise the direct risks to which global Internet providers (OTT providers) are exposed. Swisscom also launched iO, a free telephony and messaging service which can be used worldwide.By the end of the year, around 400,000 users had installed the service.

New growth opportunities for Swisscom

In addition to optimising bundled offerings and developing new products and services, such as the expansion of the TV offering, Swisscom is coming up with further significant innovations in a dynamic market environment. In the Business Customers area, for example, Swisscom launched Mobile ID (a mobile phone-based authentication solution available as a managed service), Dynamic Computing Services (offering processing power and storage space from the cloud) and Storebox (a secure, highly available storage space for corporate data). Tapit – a platform for contactless services such as making payments or managing access control – and Docsafe – a platform for exchanging documents digitally – are just two of the numerous attractive products currently in pilot trials and therefore ready to be introduced onto the market.

In the Business Customers area, the focus is on migration from conventional solutions to voice-over-IP-based solutions. With ICT being used more and more, productivity in individual sectors is also improving in the long run. These new technical possibilities provide Swisscom with the opportunity for growth in areas outside of its traditional core business, primarily in the energy and healthcare markets. Consequently, Swisscom Energy Solutions has launched a product named BeSmart, which recovers balancing energy for the Swiss power network by flexibly controlling electric heat generators. There are further opportunities for Swisscom to launch new services in the machine-to-machine (M2M), security and cloud computing sectors, as well as in other communication and collaboration applications.

Change in the Group organisation – management changes

In July, we received the devastating news of the death of our CEO, Carsten Schloter. In Carsten, we lost someone whom we cared about deeply as well as an extraordinary CEO. He was a visionary and a strategist with an instinctive feeling for the market and the needs of customers and employees. Carsten transformed Swisscom into an exemplary company that has set standards in the industry and enjoys an excellent reputation well beyond the borders of Switzerland. Thanks to his efforts, Swisscom is now excellently positioned in the market and has a strong corporate culture and clear vision, which we continue to drive forward. We will always be grateful for everything that Carsten achieved.

Urs Schaeppi headed up the company ad interim from 23 July 2013 and was officially named as CEO from 7 November 2013. As the IT and telecommunication markets are increasingly converging, Swisscom has realigned its corporate customer business: the corporate business divisions of Swisscom Switzerland and Swisscom IT Services, which have traditionally managed corporate customer business, are being merged as of 1 January 2014 to create the new Enterprise Customers division. Swisscom is thereby laying the foundations upon which to offer customers convergent and cloud-based one-stop solutions and strengthen its competitive position. As a result of the reorientation, the Board of Directors has decided to streamline the Group structure. The Group Executive Board will comprise the following persons as of 1 January 2014: Urs Schaeppi (CEO), Marc Werner (Residential Customers), Roger Wüthrich-Hasenböhler (Small and Medium-Sized Enterprises), Andreas König (Enterprise Customers), Heinz Herren (IT, Network & Innovation), Mario Rossi (Group Business Steering) and Hans C. Werner (Group Human Resources). Stefan Nünlist (Group Communications & Responsibility), Martin Vögeli (Group Strategy & Board Services) and Roger Halbheer (Group Security) will also report directly to the CEO. Jürgen Galler (Chief Strategy Officer) left the Group Executive Board in November.

Sustainability as a key element in a long-term strategy

The Swisscom corporate strategy is geared towards longevity and sustainability. Swisscom has set itself the target of becoming an international forerunner in the field of corporate responsibility. Swisscom is currently one of the top five most-sustainable telecoms companies in Europe.

Swisscom promotes media skills through initiatives such as “Internet for Schools” and other media skills courses, enabling its customers to navigate the digital world securely and responsibly. Swisscom’s sustainability efforts focus on the following areas: “Sustainable living and working”, “Sustainable use of resources and responsibility in the supply chain”, “Telecommunications for all” and “Responsible employer”. Corporate responsibility is also an important driver of customer satisfaction.

Financial outlook for 2014

Swisscom expects moderate growth in revenue and EBITDA in 2014 and is targeting revenue of CHF 11.5 billion and EBITDA of CHF 4.35 billion. Network infrastructure expansion in both Switzerland and Italy will continue to call for high capital expendituretotalling an expected CHF 2.4 billion, of which CHF 1.75 billion in Switzerland. If all targets are met, Swisscom will once again propose a dividend of CHF 22 per share for the 2014 financial year to the 2015 Annual General Meeting.

Thank you

We can look back on an intensive and successful year. We owe our achievements in 2013 to the trust of our customers and the loyalty of our shareholders – we would like to say a huge thank you to you all. We would also like to particularly thank our employees, as their tireless dedication and work in these difficult times has helped ensure that Swisscom enjoys a solid footing and cultivates an excellent corporate culture.

Yours sincerely