Investing for sustainable returns Mario Rossi, CFO Bank am Bellevue Seminar, Flims 11 January 2013

Agenda 2

1. Big picture - investing for sustainable returns A. B. C. D. E.

Fixed cost business Scale and market share Network and pricing (differentiation) Investments FCF generation

2. Group results – 9m 2012 A. B. C. D.

Revenues EBITDA P&L breakdown Outlook

1. Big picture - investing for sustainable returns

A. Telco, a fixed cost business - Capital intensive (Capex) 3

Networks by definition constructed to cover an entire country and all inhabitants (pop)

297

16.5% CAPEX to Sales CHF/year

13.9% CAPEX to Sales

194

121 61

CAPEX per Pop

CAPEX per Customer Swisscom

Based on 2011 figures

Domestic

European Average

(incumbents only, domestic business) source: Swisscom and broker research

Swisscom invested around 3x more than peers on a Pop basis and over 2x more on a per customer basis. The Capex / Sales is 20% higher than peers, pointing towards the benefits of high market share and premium which can be charged on the back of best network quality

1. Big picture - investing for sustainable returns

A. Telco, a fixed cost business - Capex & Opex at Swisscom 4

Operating a network involves mainly fixed, and only limited variable, cash out CHF mm

Swisscom Switzerland

Percentage of total cost in 2011

3'500 3'000

23%

30%

2'500 2'000

OPEX variable OPEX fixed CAPEX

1'500 1'000 500 0

47% OPEX variable

OPEX fixed

(COGS)

70% of cash out is fixed by nature

CAPEX

1. Big picture - investing for sustainable returns

B. Making money in a fixed cost business is about scale 5

Critical mass is crucial with minimum amount of customers to breakeven (on basis EBITDA – Capex) in Switzerland probably at around 1 million # customers (subs for fixed, TV and mobile access incl. prepaid) (thousands)

Based on 2011 figures

14'000

2'800

12'000

2'400

10'000

2'000

8'000

1'600

6'000

1'200

4'000

800

2'000

400

0

FCF in CHF mm

# customers (left axis)

FCF proxy (EBITDA-Capex) right axis

0 Swisscom

Sunrise

UPC Cablecom

Orange source: Swisscom research

Scale matters, with relative share of FCF higher than customer share

1. Big picture - investing for sustainable returns

B. Market share is crucial to generate significant FCF 6

Correlation FCF and Market share in the Swiss market % market share

80% 70% 60% 50% 40% 30% 20% 10% 0% Swisscom

Sunrise

UPC Cablecom

Orange Switzerland

Based on 2011 figures fixed voice

broadband

mobile

digital TV

FCF Proxy %

source: Swisscom research

Scale matters, with share of FCF higher than (blended) share of market

1. Big picture - investing for sustainable returns

B. Market share and FCF are correlated, also internationally 7

Blended market share in domestic operations versus FCF per pop and per customer FCF p.a. in CHF & Market share in %

600

65%

FCF per customer

FCF per POP

blended market share weigthed avg Capex/pop

63% 53%

500

54%

48%

48%

45%

45%

51%

48%

400 300

20%

200

17% Weigthed avg FCF/pop for incumbents without Swisscom: 122 CHF

100

Orange Switzerland

Sunrise Switzerland

Telekom Austria

Deutsche Telecom

France Telecom

Belgacom

Telefonica

KPN

TDC

Telenor

Telecom Italia

Based on 2011 figures

Swisscom excl. FWB

0

source: Swisscom and broker research

In quite some other countries, the minimum required market share for breakeven will be higher than in Switzerland, considering also large players create less FCF/pop

1. Big picture - investing for sustainable returns

B. Investing for market share pays off – also longer term

Swisscom market shares “more than” stable, with gap towards avg. incumbent increasing

8

Market share 70%

65%

Blended weighted market share Swisscom

60%

55%

Blended weighted market share of average incumbent

50%

45%

40% 2006

mobile

2007

fixed voice

Swisscom

2008

broadband (retail)

2009

2010

average incumbent

2011E

blended Swisscom

source: Swisscom and broker research

Strategy to invest pays off in terms of market share. Ability to offer bundles (incl. 4P as of lately) helps to cement market share and drive future FCF generation. Part of which again can be used to invest and sustain returns.

1. Big picture - investing for sustainable returns

C. Customers desire more predictable pricing (less variable) 9

Do not fight customers’ desire to move away from metered revenues, but create bundles which compensate this Swisscom Switzerland without wholesale and roaming revenue

2008 CHF 5.5 bln

2011 CHF 5.6 bln

11%

In around 3 years ~ CHF 5.6 bln

16%

20% 30%

43% 52% 37%

20%

29%

30% 12%

0%

1P Wireless Access

1P Wireline Access

Bundles Subscriptions

Domestic metered Voice, SMS, Data

Revenues from bundles to go from 0 in 2008 to well over CHF 1.5 bln (30% of total) in a few years

Variable metered revenues from >50% in 2008 to around 30% in a few years. Trend to continue. Challenge: to create bundles generating a compensating amount of new revenues. Sofar it worked.

1. Big picture - investing for sustainable returns

C. Change to behaviour and business model Customers increasingly desire Value for money: Classic rated products no longer an alternative for free-to-use alternatives Predictability of bill: Cost of (rapidly growing) data consumption increasingly unpredictable as customer has no idea how much data is being used (also in background) Speed: Speed is intuitive & visible – and therefore valuable. Data volume is not. Mobile data pricing should be aligned with what is known from the fixed line world: speed based Operators to grab the opportunity Best network getting more important: Network quality, spectrum, coverage & capacity increasingly important to experience reliable and consistent speed of connection. This requires capability to (continue) to invest. Swisscom invests 3x avg. European incumbent and operates 2x more antennas than nr. 2 and 3 in Switzerland Cloud offers opportunities: Long term vision of secure access to everything with every device: metered products will not work here, and operators have to grab the opportunity to offer an allinclusive alternative such as Swisscom’s Infinity program

OTT and cloud services with access from everywhere will offer great opportunities to operators who have the right (all-inclusive) pricing model on the back of superior network quality

10

1. Big picture - investing for sustainable returns

C. Speed is the only price criterion New mobile price plans from 25 June 2012 -> Offering 5 plans with all-inclusive domestic voice/SMS/data, designed for the following usage profiles

infinity XS

infinity S

infinity M

infinity L

infinity XL

Voice and SMS Mail w/o attachment + social media

typical usage

+ video small density + video HD +cloud

Bandwidth (max)

0,2 Mbit/s

1 Mbit/s

7,2 Mbit/s

21 Mbit/s

100 Mbit/s

59

75

99

129

169

-

-

30/30/30

100/100/100

200/200/200

Price (CHF/month) Roaming in W-Europe (min. voice, # SMS, Mb Data)

-> Special offers to the youth segment launched mid August at 10-25% discount of S, M and L plans

In each plan, all voice, SMS and data usage is included. Customer only has to pick the desired speed. Gives “total” control over monthly bill to customer. And “peace of mind” to Swisscom, as this pre-empts OTT threats and is not easily replicable by other operators due to required network quality/density

11

1. Big picture - investing for sustainable returns

C. Enthusiastic customer response Status after 3 months of operation (per 30.9.2012)

Immediate pick up 528k*)

Growing customer base 25-30k

12

High response rate 22%

13%

10-15% ~1pp.

infinity customers

penetration within postpaid

> 528'000*) customers on the new price plans with monthly flat rates > 110'000 of them prev. "BeFree" customers that have been transferred to NATEL infinity XL

new infinity cust. / week

increase in pen. per week

> Every week 25-30'000 existing/new customers chose NATEL infinity > Penetration of infinity within postpaid hence increases by 1pp./week

infinity campaigns

former campaigns

> Offers are well received by the end customer > Outbound call campaigns with extraordinary high response rates (22% vs. former 10-15%)

*) 630k per 31.10.2012

Overall customer reaction very positive – many of them moving quickly to infinity

1. Big picture - investing for sustainable returns

C. ARPU dynamics from infinity migrators Initial ARPU dilution by “rightgraders” rapidly improving

13

- During first 3 months, 85% of migrators have optimised (i.e. improved their average monthly bill) - Most other migrators will „buy security“ by moving to Infinity, but not necessarily improve their monthly bill Expectation 2013: Positive ARPU development

Launch infinity

ARPU development for customers who change ARPU impact to overall customer base

ARPU in CHF Currently: -6 CHF Initially: -11 CHF 2012

Net adds

Jul 12

Apr 12

Jan 12

Sep 12

2013 and ff. Dec 12

Q1:

Q2:

Q3:

39k

44k

60k: positive trend in postpaid net adds since launch Infinity

t

Most obvious rightgraders have moved to Infinity plans already. Expect positive ARPU development from 2013 through “wronggraders” and upselling to higher speed plans for existing customers

1. Big picture - investing for sustainable returns

C. Data consumption growing more rapidly The customers having changed to Infinity take advantage of the unlimited volume offering

Voice Domestic (Min)

Voice Roaming (Min)

+23%

Data Domestic (MB)

SMS Domestic (Number)

+126%

+14%

+4%

Infinity Group *)

+1%

+3%

+33%

+6%

Reference Group **) Before (Ø month in Q2)

before After (Ø month in Q3)

after

before

after

before

after

Although consumption increases more rapidly, network capacity is in place to handle a continuation of this trend *) customers having changed in July

**) average Postpaid

14

1. Big picture - investing for sustainable returns

C. Data only plans also launched Now offering data-only plans at a discount if taken in combination with a mobile Infinity subscription or an internet access subscription NATEL® data S

NATEL® data M

NATEL® data L

NATEL® data XL

Download up to Upload up to

1 Mbps 0.5 Mbps

7.2 Mbps 1.0 Mbps

21 Mbps 2 Mbps

100 Mbps 10 Mbps

Price for infinity/DSL custom. Price w/o NATEL data benefit

CHF 9.CHF 39.-

CHF 29.CHF 49.-

CHF 49.CHF 69.-

CHF 69.CHF 89.-

Unlimited1

surfing with

Saving data on the internet HD Video, photo upload, gaming Youtube, Live TV, music streaming News, e-mail, surfing, facebook

Unlimited surfing, speed differentiated

Special price for infinity/DSL customers

> Unlimited1 surfing with all NATEL® data offer > Offers are differentiated in terms of speed

> Special price for infinity and DSL customers to stimulate 2nd SIM pickup without cannibalizing infinity and DSL

capped at 5 GB (S/M), 10 GB (L/XL) to limit cannibalization

1

These offers are tailored to prevent cannibalization of fixed internet access, and to drive 2nd SIM card penetration

15

1. Big picture - investing for sustainable returns

C. Scale and share require best pricing strategy & best network Complete overhaul of (mobile) pricing was necessary to make cannibalisation irrelevant

Thoughts going forward

• Price differentiation on speed only

• Fine tune plans when necessary to meet (evolving) customer needs

 Tariff plans (all you can eat) delivering real, predictable and intuitive customer value

16

• Accept initial ARPU decline caused by “right graders” before “up-graders” start kicking in

• No regret move, as costs are fixed