Telekom Austria Group Annual Report 2010 Corporate Strategy 7 Consolidation of Existing Markets, Convergence, Growth Solid Basis For Profitable Growth Overview of Strategic Goals In 2010, the Telekom Austria Group successfully In the years to come the operating markets of In the highly developed Austrian market, future The Telekom Austria Group will play an active faced up to the challenges presented by its mar- the Telekom Austria Group will again be marked growth can be predominantly generated through role in shaping this development, while leverag- kets such as the impact of strong competitive by rapid technological change and highly inten- innovative integrated communications solutions ing its existing know-how and innovation power. pressure and restrictive regulatory measures in sive competition. Furthermore, the regulation of and data traffic. In Croatia, the strategy is aimed The acquisition of two fixed line operators in Bul- almost all its mobile communication operations. roaming and termination tariffs will continue to at enhancing value generation through innova- garia in 2010 represents a first step in this direc- Against the backdrop of a challenging market impact the Group’s revenue and earnings develop- tive and convergent products. Si.mobil in Slovenia tion. In the other foreign markets, the company environment, the Telekom Austria Group pur- ment going forward. With a view to safeguarding is strengthening its position in the SME business seeks to promote a similar development depend- sues its vision of becoming the most innovative competitiveness and stabilizing future earnings segment, while creating the prerequisites for cus- ing on the stage of maturity and specific condi- and efficient telecommunications provider in power, the Telekom Austria Group pursues a cor- tomer uptake of mobile broadband and smart- tions in the individual markets. Central and Eastern Europe. In the year under porate strategy that rests upon three main pillars, phones by upgrading network capacity. In these review, important prerequisites for achieving this with operational excellence forming the basis of markets the Telekom Austria Group benefits from Value-Enhancing Growth Projects goal were met: all strategic activities: a differentiated pricing structure in line with the The Telekom Austria Group’s core geographic corporate multi-brand strategy. footprint encompasses the emerging markets of The persistent decline in fixed access lines over Strategic Goals Central and Eastern Europe. Potential acquisition recent years was stopped in 2010 and slight In Bulgaria and Belarus, the base level in terms of targets are only pursued if they increase share- growth was recorded against the general Consolidation of existing markets both average revenues per customer and data rev- holder value, generate synergy effects with exist- market trend. Convergence of the fixed line and enues as a proportion of total revenues is consid- ing business activities or contribute to improving mobile communication operations erably lower than in Austria and Croatia. As there the Group’s strategic positioning in the target mar- The merger and restructuring of the Austrian in Austria and in selected foreign markets is still considerable scope for improvement, the kets mentioned above. In addition, clearly defined operations considerably strengthened the Value-enhancing growth projects within the Telekom Austria Group intends to leverage this financial criteria and the potential implications Group’s domestic positioning as a provider of current regional footprint catch-up potential by pushing ahead with attrac- for the enhancement of shareholder value must be convergent products, whilst the foundation tive products and services and expanding net- taken into consideration. Under the terms of the for this was laid in Bulgaria with the first-time work capacities. In Bulgaria, the company is also current cash use policy, acquisitions are always acquisition of two fixed line operators. Operational Excellence focusing on the gradual development of a conver- benchmarked against share buybacks with re- With a view to improving operational efficiency gent product portfolio. In the growth markets of spect to cash flow generation per share. The mobile communication markets continued on an ongoing basis, the Telekom Austria Group the Republic of Serbia and Macedonia, where the the growth trend of previous years, recording analyses all in-house processes and interfaces at Telekom Austria Group did not start operations Balanced Cash Use Policy an increase in subscriber numbers of approxi- regular intervals. The focus is on reducing fric- until 2007, the main focus is on increasing the In December 2010, the Telekom Austria Group mately 940,000 to 19.9 million customers. tion losses and making effective use of financial share of contract customers to create a solid basis presented an update of its cash use policy at its resources. Close cooperation between all in- for high-value products. Capital Markets Day. The distribution of a dividend In the year under review, the Group’s mobile ternational corporate units ensures significant amounting to 55% of free cash flow was deemed operations in the Republic of Serbia were able advantages when introducing new technologies Convergence of Fixed Line and a top priority as free cash flow generation better to achieve the EBITDA comparable break-even and products. Based on the group-wide imple- Mobile Communication reflects the operational performance of the target according to plan. In the Republic mentation of ideas management, employees’ ex- The persistent migration away from fixed line to Telekom Austria Group. Up until now, net income of Macedonia, the Group also registered a pertise and know-how can be leveraged across mobile communication in recent years reflects has been used as the basis for calculation. For the substantial improvement in results. all operations. The common goal is to develop in- a radical change in customer usage patterns. years 2011 and 2012, a minimum dividend floor of novative products and solutions that create clear The demand for comprehensive and flexible at least EUR 0.76 per share will apply. At the same time, investments in capacity up- added value for customers. telecommunication solutions, which function grades and the modernization of the network independently of location and the underlying infrastructure were intensified and operating Consolidation of Existing Markets transmission technology, is increasingly gather- expenses further optimized. The markets of the Telekom Austria Group are ing momentum. By offering convergent product at different stages of development and therefore packages, the Telekom Austria Group has been The newly established Telekom Austria Group require a differentiated approach. The main ob- able to successfully respond to this new market Business School is playing a crucial role in the jective is to fully leverage the market potential of trend since 2007. In the CEE markets a compa- group-wide transfer of know-how and know- each country, while consolidating and expanding rable industry development is expected to unfold ledge management. the Group’s position across all markets. over the medium term. Continued on page 8 Values In a world of continuous change we work to deliver the best communications solutions that seamlessly integrate into people’s lives. As an innovation and quality leader, we are always a step ahead of our competitors, focusing not just on today, but on a future that is truly worth living. INNoVATIoN QUALITy DIVERSITy RESPoNSIBILITy Innovating with You Improving with You Sharing with You Caring with You The Telekom Austria Group is a responsible Quality at the Telekom Austria Group The Telekom Austria Group is formed by and Responsibility at the Telekom Austria enabler of progress, not a reckless innovator. combines innovation with reliability, home to a variety of strong, local brands. In Group means appreciative collaboration We add true value to new developments and stability and safety. We can be trusted to the heart of Central and Eastern Europe, the with employees, customers and other make them applicable in everyday life. The deliver smart, best-in-class products and Telekom Austria Group embraces the diversity stakeholders, a strong focus on quality, Telekom Austria Group connects people with services. It also means that we are a reliable of culture, background and heritage and operational excellence, profitability and the future of telecommunications, taking on and stable business partner, delivering incorporates it into its ”DNA” as a valuable sustainable growth, as well as the support the challenge of building the 21st century’s key profitability to our stakeholders. This is all resource. Diversity at the Telekom Austria of the communities it serves. We are infrastructure, thus enabling people to truly part of our heritage as a long-standing, Group plays to the different cultures, skills committed to an integrative approach to enjoy the benefits of knowledge-based soci- experienced and responsible telecoms leader. and know-how that build synergies within our the economic, ecological and social aspects ety, digital education and modern healthcare. group. It’s an open, two-way approach where of sustainable management to create a we learn from each other. world that is worth living in for everyone. Inventing the future with you 8 Corporate Strategy Telekom Austria Group Annual Report 2010 Continued from page 7 Interview 1.65 billion at year-end 2010, we were able to achieve we updated our cash use policy, but have not fun- our full-year targets. However, this has not been an damentally changed it. The main focus remains on Hans Tschuden, easy undertaking. Price pressure across all our oper- providing our shareholders with a balanced and reli- Vice Chairman of the ating markets not only meant that the entire staff of able remuneration. However, the basis of calculation The company’s leverage corridor was increased Management Board, the Telekom Austria Group was called upon to deliver will no longer be net income but free cash flow, as from 1.8x–2.0x to 2.0x–2.5x net debt/EBITDA com- CFO outstanding performance on a daily basis, intrusive it better reflects the operating performance of the parable, providing greater flexibility to balance regulatory measures to reduce roaming tariffs and Telekom Austria Group. We intend to distribute 55% share buybacks against value-enhancing growth interconnection fees also had a significant impact on of free cash flow as dividends and carry forward the investments. In the future, growth projects will the revenue and earnings development of the Group. remaining amount. The minimum dividend floor for continue to be benchmarked against share buy- the years 2011 and 2012 is set at EUR 0.76. backs in terms of their capacity to generate a high- Can you please explain these effects in a little er cash flow per share. more detail? Will you pursue any growth projects within the Since the First EU Roaming Regulation came into framework of this strategy? Cash will always be returned to shareholders via ”In 2010, the Telekom Austria Group was force back in 2007, price caps on both outgoing and Investments in growth projects will be required to share buybacks if leverage falls below 2.0x net able to successfully secure its position in incoming calls have been gradually decreased by generate a higher cash flow per share than share debt/EBITDA comparable (2010: 2.0x). A stable a challenging market environment” approximately 20% and 40% respectively. The same buybacks in accordance with our corporate strat- business and currency environment remains a applies to interconnection charges, resulting in a egy. Besides, we have to keep our net debt develop- prerequisite for share buybacks. A stable invest- Hans Tschuden, Vice Chairman of the Management total negative impact on EBITDA comparable of ap- ment in line with clear financial guidelines. However, ment grade rating of at least “BBB” (stable outlook) Board and CFO, in an interview about the revenue proximately EUR 47 million in the year under review. we definitely want to continue along the Telekom is a precondition. and earnings development of the Telekom Austria And further reductions are expected in the years to Austria Group’s growth path in future: potential ex- Group in the 2010 business year. come. Given these circumstances, the revenue and pansion steps will be considered very carefully and Strict Cost Management earnings performance of the Group in 2010 can be benchmarked against the parameters mentioned External factors such as regulatory measures and In 2010, you were able to reach the expected deemed satisfactory. above. A stable investment grade rating of at least competitive pressure will continue to impact the revenue and earnings targets. Are you satisfied ”BBB” (stable) remains a basic prerequisite in this Telekom Austria Group’s revenue and earnings with this accomplishment? Why did you change the Telekom Austria Group’s context. development. Additional cost optimization and a In principle yes. With group revenues totaling EUR cash use policy? consistent focus on operational efficiency across all 4.65 billion and EBITDA comparable amounting to EUR At our last Capital Markets Day in December 2010, corporate units are therefore essential to strength- en the company’s earnings power and achieve operational excellence. potential of each individual business unit with a velcom in Belarus was able to launch a commercial year under review, the Telekom Austria Group also view to making a significant contribution to im- UMTS and HSPA+ network only a few months af- initiated four fiber-optic pilot projects in the prov- Along with the creation of group-wide synergies proving cash flow generation. ter the license had been granted in 2010. With the ince of Carinthia and in Vienna acquiring valuable in the area of procurement and product develop- gradual introduction of Dual Cell technology based hands-on experience in terms of rollout costs, cus- ment, the continuation of the integration process High-Performance Network Infrastructure on HSPA+ and Long Term Evolution (LTE) technolo- tomer acceptance, product development and pric- in Austria also plays a crucial role. The main goals The increasing relevance of convergent products gy in 2010, transmission capacities in Austria were ing structure. The upgrade of the switching cen- for the 2011 business year encompass the harmo- and the dramatic surge in data traffic require high- expanded to 42 Mbit/s and 150 Mbit/s respectively. ters on the basis of FTTEx (Fiber to the Exchange) nization of internal processes, the stabilization of performance and reliable transmission networks. technology was accelerated and the transmission personnel expenses and the reduction of overhead Against this backdrop, the Telekom Austria Group However, the further rollout of these two technol- speed of conventional copper lines increased to administration and operating costs. In a further is pursuing a demand-oriented and cost-efficient ogies depends on the connection of mobile base 30 Mbit/s. At year-end 2010, the Telekom Austria step, the complexity of IT systems, procurement implementation strategy. stations to the high-performance fiber-optic net- Group was able to provide approximately 1.75 mil- and accounting processes will be reduced, and work of the Telekom Austria Group. Key strategic lion or 42% of all Austrian households with high- market analysis and development more strongly Following the introduction of HSPA+ in Austria, importance is therefore being given to the mod- speed Internet. In the course of 2011, coverage coordinated. As of the 2014 business year, the Bulgaria and Croatia in 2009, which led to a signifi- ernization of the company’s fixed line infrastruc- should be extended to 50% of all Austrian house- Telekom Austria Group will seek to realize the full cant increase in mobile transmission capacities, ture, which was started in the previous year. In the holds. Balanced Cash Use Policy Free Cash Flow1) Dividend Policy 55% of free cash flow 1) 1st Priority Gearing Net Debt / EBITDA comparable DPS 2011–2012 of 0.76 EUR ~ 2.0x – 2.5x Growth Investments 2nd Priority Share Buybacks Stable investment grade rating of at least ”BBB” (stable outlook) Returning cash to shareholders whilst allowing ample financial flexibility 1) Free cash flow = cash flow generated from operations after capital expenditures in existing business areas.
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