Investing for sustainable returns Swisscom Presentation Ueli Dietiker CFO UBS Best of Switzerland 2012 Wolfsberg Conference Centre, Ermatingen 20 September 2012

1. Big Picture – investing for sustainable returns 2

A. Telecoms is a fixed cost business • Capital intensive (Capex) • Low COGS, high fixed Opex

D. To sustain is about • Willingness and financial ability to (continue to) invest • Selecting the right investments from both technology and competition perspective at the right time

E. FCF generation supported by Capex, Marketshare & Pricing power

C. To achieve scale and share requires best network & pricing (differentiation) • Transparent offers reflecting changing customer demand • Superb network availability

B. Making money in fixed cost business is about scale and share • Scale: # customers • Share: position within market

1A. 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

1A. 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

1B. 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

1B. 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

Based on 2011 figures

fixed voice

Sunrise

broadband

UPC Cablecom

mobile

Orange Switzerland

digital TV

FCF Proxy %

source: Swisscom research

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

1B. Market share and FCF are correlated, also internationally 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%

400

45%

45%

51%

48%

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

7

1B. 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.

1C. 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.

1C. Scale and share require best pricing strategy & best network 10

Pricing differentiation can only be maintained through transparency and superior quality • Intuitive pricing should be on “speed” as experienced by customers, not on “data consumed”: the average customer has no idea how much data was used, and customers value what they can experience: speed of connection • Differentiating on speed is more sustainable: preempts inroads by OTT providers (e.g. Apps such as “iVoice”) and is difficult to replicate by competitors as network quality ensuring the factual delivery of speed must be top-notch New mobile price plans from 25 June 2012: offering 5 plans with all-inclusive voice/SMS/data, which differentiate on speed only Natel infinity XS

Natel infinity S

Natel infinity M

Natel infinity L

Natel infinity XL

Bandwidth (max)

0,2 Mbit/s

1 Mbit/s

7,2 Mbit/s

21 Mbit/s

100 Mbit/s

Price (CHF/month

59

75

99

129

169

-

-

30/30/30

100/100/100

200/200/200

Roaming in W-Europe (min. voice,nr SMS, Mb Data)

Swisscom plans to continue investment into best networks, services and availability. This will ensure market share, which in turn is the precondition for generating surplus FCF

1D. To sustain is about ... capacity to invest Financial strength compared

11

Debt/interest ratios in 2011

Net debt and avg. cost of debt in 2011

Bubble size = OpFCF proxy in bn CHF*

Net interest/ avg. net debt

Net debt **

Net interest / OpFCF proxy

[bn CHF*]

Liberty Global**

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

Orange ****

5.3x/57%/ 2.14 bn CHF

3.1x/58%/0.25bn CHF

15 5

1.8x/9%/ 2.49 bn CHF

3

4

0

5

6

8.0%

5.6%

21.7 8.3 Swisscom Group

6.0% 4.0%

2.8%

10

Swisscom Group

2

30 20

3.5x/39%/ 0.46 bn CHF

1

8%

25

Sunrise ***

0

7%

35

1.3 Orange CH

2.0%

2.1 Sunrise

Liberty Global

0.0%

Net debt / EBITDA Sources: all figures based on latest publicly available data in reports of Sunrise and Liberty Global (mother company of UPC Cablecom) *1 USD = 0.94 CHF ** Liberty Global assumption: Operating cash flow = EBITDA *** Sunrise based on figures as published **** Orange CH: estimate derived from publicly available data

Not just the will, but esp. the ability plays a role in who can stay at the forefront of offering best quality networks & services. With recent changes in ownership in Swiss market, competitors will face more budget constraints than Swisscom – both relatively and absolute – which is a clear window of opportunity. Where Swisscom pays 9% of its FCF in interest, the others pay 39 to 58%....

1D. To sustain is about ... Finding the right mix of technologies to invest into – at the right time Area

Competition

Current deployment

Potential technologies

0% VDSL

8-30 Mbps

Top 20 cities

Utilities as partner

FTTC/VDSL 20-50 Mbps

FTTH

100-1000 Mbps

30%

Vectoring

50-100 Mbps

Smaller cities Agglos

Large CATVs

VDSL

FTTDP

8-30 Mbps

up to 500 Mbps

FTTC/VDSL 20-50 Mbps

FTTH

100-1000 Mbps

60%

80%

Rural areas and remote municipalities

Small or no cable operators

xDSL

HSPA+/LTE

VDSL

Vectoring

up to 8 Mbps

up to 100 Mbps (shared)

8-30 Mbps

50-100 Mbps

FTTC/VDSL 20-50 Mbps

FTTDP/(H)

up to 500/(1000) Mbps

100%

Finding the right technology mix is a constantly evolving process of optimization. It needs to take account also of competitors’ ability and speed of rollout. Swisscom will invest up to CHF 100 mm extra p.a. over the next few years (from 2012) in an extended technology mix and footprint, in order to be ahead of competition, cement future market share, and generate best excess returns.

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1E. Superior FCF generation from higher Capex and market share Investments (Capex) done by definition to cover entire country, therefore should be compared with other incumbents on a per pop basis EBITDA p. pop

CHF/pop

Capex p. pop

13

FCF p. pop

600 498

400

194 315

304

133

183

200

61

182

122

0 Swi s s com Swi tzerl a nd

a vg i ncumbent

Switzerland

ba s ed on enti re popul a ti on

CHF 182 extra FCF/pop esp. from higher capex (better network justifying better pricing) and higher market share (as a result)

extra FCF through hi gher ca pex

source: Swisscom and broker research

Spending 133 CHF / pop p.a. more than peers leads to higher market share, better pricing and CHF 182 more FCF p.a. per pop : “Capex is a good investment” leading to sustainable returns.

1E. Conclusion – investing for sustainable returns 14

A. Telecoms is a fixed cost business

D. To sustain is about investing in right technology mix at the right time – to drive future FCF generation

E. FCF generation supported by Capex, Market share & Pricing power

B. Making money in fixed cost business is about scale and share

C. To achieve scale and share requires best network & pricing (differentiation)

In a fixed cost business, size & scale drive incremental FCF. To make this sustainable, offering intuitive pricing differentiation and best networks is key, as this also drives market share. Therefore, continued investment is the most important driver for future cash flow generation.

2. Half-year 2012 results – same history 15

Change in CHF mm, total Swisscom Group, comparable *

Net revenue EBITDA

Q1/Q1

Q2/Q2

H1/H1

Δ%

-8

-10

-18

-0.3%

+10

+11

+21

+0.9%

* w/o FX, hubbing (Fastweb), extra termination & pension fund cost

Comparable key results fully in line with last year

2A. Group revenues Change YoY (1st HY 2011 versus 1st HY 2012) in CHF mm, total Swisscom Group Fastweb: -82

Q1: -36 Q2: -17

-16 -14

16

Swisscom w/o Fastweb: -19

+0 +1

+92 +86

-17 -33

-62 -58

-15 -10

∑ -7 +3

+1 +1

-60 -41

Sum of Bundles+1P revenue +8

+1 -53

Hubbing

-101

-120

+2 -25

- Consumer decrease - Enterprise increase - Wholesale increase

FX Appreciation Fastweb (a)

-50

-30

5,722

Reported Revenues Ytd 2011

+178

Fastweb w/o Hubbing

especially traffic

Bundles

1P Wireless

-4

Decrease for access & traffic

1P Wireline

5,621 (-1.8%)

Inbound roaming, wholesale data/broad band and Other

Reported Other IC Revenues segments Elimination Ytd 2012

(a) Average exchange rate CHF/€ ytd 2011: 1.266 vs. ytd 2012: 1.2035, i.e. a weakening of Euro against Swiss Franc of 4.9%

Core business stable. Low margin business at decline (hubbing and wholesale). Sequential improvement QoQ

2B. Group EBITDA Change YoY (1st HY 2011 versus 1st HY 2012) in CHF mm, total Swisscom Group Fastweb: -11

17

Swisscom w/o Fastweb: -23

∑ Q1: Q2:

-9 -6

+1 +3

- 23 - 17

+16 - 6

+0 +0

- 7 +14

- 22 - 12

Swisscom Switzerland, comparable

- 15

+10 -40 Incl. CHF 12 mm higher SAC in 2012

FX Appreciation Fastweb

+0

+4

2,270

Reported EBITDA ytd 2011

+7

- 34

Fastweb Underlying (excl FX effect)

Termination benefits up 12mm Pension cost up 28mm

Termination benefits Pension cost

Revenue down 17mm

2,236 (-1.5%)

overall stable indirect cost

direct cost down 27mm

Higher contribution margin

Other indirect cost

Other segments Headquarters Intercompany elimination

Reported EBITDA ytd 2012

Reported EBITDA down 1.5%, only driven by FX and higher termination and pension cost. Sequential improvement QoQ

2C. Group results: P&L breakdown 18

-963

(962)

(-8)

921 (954) (EPS CHF 18.42) income

(-237) tax rate 19.8%

-7

SCM net

Net interest

(+9)

928

Minorities

EBIT

Net income slightly down

(-27)

EPS CHF 17.78

Net income

(-109)

-222

Tax expense

(1‘326)

+14

Aff. comp.

(-944)

-13

result

(2‘270)

Depreciation

-124

EBITDA

(prior year)

1‘273

tax rate 19.3%

Other fin.

in CHF mm

2‘236

2D. Swisscom payouts 19

22

Dividend per share (in CHF)

21 20 19 18 17 16

CHF + 2.0 extraordinary DPS

14 13 12 11

CHF + 8.0 per share par value reduction

2002

+share buy back (7.1% of capital)

+ share buy back (10% of capital)

2003

2004

2005

+ hare buy back (7.8% of capital)

2006

+ cancellation of all remaining treasury shares (3.1% of capital)

+ share buy back (8% of capital)

2007

2008 2009

of which CHF 9.0 from paid-in capital (being the maximum available), which is tax free income to Swiss private holders. For institutions the initial payment net of withholding tax is higher (CHF 16.80 instead of CHF 13.65 which normally would have been paid out)

2010

2011 2012

Year of payment

Cautionary statement regarding forward-looking statements ”This communication contains statements that constitute "forward-looking statements". In this communication, such forward-looking statements include, without limitation, statements relating to our financial condition, results of operations and business and certain of our strategic plans and objectives. Because these forward-looking statements are subject to risks and uncertainties, actual future results may differ materially from those expressed in or implied by the statements. Many of these risks and uncertainties relate to factors which are beyond Swisscom’s ability to control or estimate precisely, such as future market conditions, currency fluctuations, the behaviour of other market participants, the actions of governmental regulators and other risk factors detailed in Swisscom’s and Fastweb’s past and future filings and reports, including those filed with the U.S. Securities and Exchange Commission and in past and future filings, press releases, reports and other information posted on Swisscom Group Companies’ websites. Readers are cautioned not to put undue reliance on forward-looking statements, which speak only of the date of this communication. Swisscom disclaims any intention or obligation to update and revise any forward-looking statements, whether as a result of new information, future events or otherwise.” For further information, please contact: phone: +41 58 221 6278 or +41 58 221 6279 [email protected] www.swisscom.ch/investor

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