Inventing the future with you Telekom Austria Group Annual Report by alicejenny


									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

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

     Free cash flow = cash flow generated from operations after capital expenditures in existing business areas.

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