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Dear Shareholders

Swisscom is holding its ground in a challenging environment

Swisscom’s net revenue declined by CHF 25 million (–0.2%) to CHF 11,678 million in 2015 compared with the prior year. At constant exchange rates and excluding company acquisitions and disposals, revenue increased by CHF 83 million (+0.7%), of which the Swiss core business accounted for CHF 57 million. Swisscom increased its adjusted operating income (EBITDA) by CHF 103 million (+2.3%). However, due to non-recurring items such as provisions for ongoing proceedings, restructuring costs and currency effects, reported EBITDA fell by CHF 315 million (–7.1%) to CHF 4,098 million. Net income declined to CHF 1,362 million (–20.2%), largely due to non-recurring items. Swisscom’s capital expenditure dropped slightly by CHF 27 million (–1.1%) to CHF 2,409 million.

Solid business performance in Switzerland

Revenue of the Swiss business rose CHF 178 million (+1.9%) to CHF 9,764 million; on a like-for-like basis, revenue grew CHF 27 million (+0.3%). The higher number of customers was partially offset by lower roaming prices. Swisscom cut its roaming prices even further during the year under review, meaning that Swisscom not only has the most attractive roaming prices on the Swiss market but also has actually included roaming in a majority of its subscriptions: Over 90% of Natel infinity plus customers use their mobile phones within the EU without incurring any additional costs as a result.

The number of revenue generating units (RGUs) in the Swiss business increased year-on-year by 170,000 (+1.4%) to 12.5 million. EBITDA in the Swiss business decreased by CHF 327 million (–8.6%) to CHF 3,461 million due to the aforementioned non-recurring items; on a like-for-like basis, EBITDA increased by CHF 21 million (+0.6%). Capital expenditure in Switzerland increased by CHF 71 million (+4.1%) to CHF 1,822 million. Swisscom continued to expand and upgrade its fixed network infrastructure and had connected around 2.9 million Swiss households and businesses with ultra-fast broadband (speeds in excess of 50 Mbps) by the end of 2015. Of these, some 2 million are fitted with the latest fibre-optic technology. In Switzerland, the number of employees increased by 693 FTEs (+3.8%) to 18,965. Adjusted for company acquisitions and disposals, headcount increased by 258 FTEs (+1.4%).

Fastweb developing nicely

As a result of customer growth, revenue of Fastweb in Italy was EUR 48 million (+2.8%) higher at EUR 1,736 million. Despite difficult market conditions, Fastweb’s broadband customer base grew by 129,000 (+6.2%) to 2.2 million in 2015. Revenue from residential customers increased year-on-year by EUR 36 million (+4.8%) to EUR 789 million, while revenue from business customers rose EUR 11 million (+1.4%) to EUR 800 million. The segment result before depreciation and amortisation (EBITDA) amounted to EUR 576 million, an increase of EUR 61 million (+11.8%) over the prior year. At EUR 541 million, capital expenditure was EUR 21 million lower than the prior-year level. Fastweb achieved a free cash flow of EUR 77 million in 2015.

Swisscom share performance in 2015

The Swisscom share price fell by 3.7% in 2015. In terms of total shareholder return (share price movement and dividend payout), Swisscom achieved 0.12% thanks to the high dividend yield. Payment of an unchanged ordinary dividend of CHF 22 per share 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.

The best in today’s networked world – everywhere and any time

The world is in the midst of the fourth industrial revolution: people, machines and applications are being networked, controlling themselves and improving continuously through applications in the cloud and smart data. The Internet of Things continues its triumphant march: in 2015, there were 4.9 bil­lion machines communicating around the globe – and in 2020 they will number 25 bil­lion. People, too, are networking in an entirely different manner: the “Wisdom of Crowds” has given rise to a completely new type of collaboration, thus allowing companies to share their most valuable Swiss commodity – knowledge – at the touch of a button.

Products in a store begin to speak. They know their own size, make-up and origin. Any information distributed until then, such as availability, technical specifications or accessories, is combined directly in a single application. Plus the collaborative economy enables people to procure things of all kinds from one another effectively and efficiently.

This unlocks new opportunities and new markets while also giving rise to new value chains. Successful “digitisation” depends on establishing networks and on high-performance, secure data transmission: Swisscom is transforming into an integrated technology provider that develops high-quality communication and IT solutions. In an increasingly networked and digitised world, Swisscom always offers its customers the best – regardless of their location. This is because Swisscom wants people and businesses in Switzerland to be able to fully exploit the opportunities of the networked world. Swisscom is leading the way as a pioneer in the networked world, serving as a companion to its customers by providing them with networked, end-to-end solutions in many areas of the economy and life in general. In doing so, Swisscom boosts the competitiveness of its customers, strengthens Switzerland as a business hub through its top-notch network infrastructure and thus plays an active role in successfully shaping Switzerland’s future.

Capital expenditure for high bandwidth – building the best infrastructure

High-performance IT and communications infrastructures lay the foundation for success in the networked world. Swisscom meets this goal and fulfils the ever-growing requirements with a network infrastructure that is second to none in terms of security, availability and performance. In 2015, Swisscom invested CHF 1.8 bil­lion in Switzerland’s infrastructure, the majority of which was devoted to expanding the ultra-fast broadband network for mobile and fixed-line telephony.

Expansion with broad technology mix in the fixed network

Nationwide, an intelligent technology mix ensures that cities, agglomerations and rural areas benefit from ultra-fast broadband. Swisscom is committed to expanding its fibre-optic technology with fibre-to-the-building (FTTB), fibre-to-the-home (FTTH), fibre-to-the-street (FTTS) and fibre-to-the-curb (FTTC), combined with the latest technologies such as vectoring and G.fast, which is planned for 2016. This will enable speeds of up to 500 Mbps to be reached on traditional copper telephone cables. By end-2015, Swisscom had already connected some 2.9 million households and businesses in Switzerland with ultra-fast broadband exceeding 50 Mbps. Swisscom will push ahead with expansion in the coming years so that, by the end of 2020, 85% of all households and businesses have ultra-fast broadband with at least 100 Mbps and every Swiss municipality is provided with almost 100% ultra-fast broadband coverage in the long term. These investment projects are subject to general legal conditions that protect capital expenditure in network expansion and the company’s ability to generate the funds it needs for the investments.

More bandwidth in the mobile network

Data traffic growth on the mobile network continues unabated and the volume of data carried by the network doubles each year. Swisscom is expanding its position as a leading mobile service provider through the right capital expenditure, a strategic partnership with Ericsson and innovative solutions like proprietary microcells in fixed network conduits. The 4G network also received an additional boost: Swisscom now offers LTE Advanced in 28 cities featuring speeds of up to 300 Mbps, to be increased up to 450 Mbps in the first locations beginning 2016. The new 5G mobile communication standard, set to launch in 2020, will pave the way for even higher bandwidths and shorter response times. The rollout of 5G will mark the end of support for 2G (GSM) technology, which will have been around for 27 years by that time.

All IP – Internet protocol as a uniform language

The phase-out of traditional fixed-network technology and its replacement with All IP (“everything via the Internet protocol”) is continuing. By end-2015, 40% or over one million customers were already benefiting from the possibilities offered by the new technology – such as access to your own data irrespective of device and location. All customers should have been converted to AII IP by the end of 2017.

Further development of core business and innovations – best experience

So good, so simple and so unmistakable that you would never want to be without it again: Swisscom creates unforgettable customer experiences with its products and offers. Through these, it seeks to differentiate itself in its core business, for example with the enhanced television offering Swisscom TV 2.0, which now recommends programmes based on individual preferences and groups them for replay; or with numerous Smart Enterprise Services, which facilitate companies achieving digital transformation. A superior customer experience was also the primary motivation behind new offers such as MyService, the all-round carefree service package for customers, or Swisscom Friends, the neighbourly help for technical matters.

New opportunities for growth for Swisscom

In its core business activities, Swisscom continues to focus on the successful priorities of bundled offerings, Swisscom TV and ultra-fast broadband connections. It will increase its added value depth around its own network infrastructure in sectors such as banking, energy or healthcare through targeted ICT solutions.

The cloud is becoming a foundation for future business like the Internet of Things or decentralised working. Swisscom is leading the pack in cloud development thanks to its reputation for high quality and security. It will also launch new digital services in selected areas. Swisscom strengthened its position in the directory business by integrating local/search, collaborated with Coop to create the “Siroop” marketplace and joined up with Ringier and SRG to launch an innovative advertising opportunity, which is open to all market players.

Additionally, Swisscom is continuing to actively develop the Italian subsidiary Fastweb. The ongoing expansion of ultra-fast broadband and improvements to service quality have strengthened the company for the long term in the aim of covering approximately 30% of the Italian population by end-2016.

Sustainability as an integral component of the corporate strategy

Sustainable trading is part of Swisscom’s DNA. This includes topics such as climate protection, working and living, media skills, attractive employer, fair supply chain and networked Switzerland. Since autumn 2015, for example, the operation building in Zurich-Herdern has been heated solely by the waste heat emitted by servers: that not only supports climate protection, but in the long term will also have a positive impact in the form of lower operating costs. Thanks to its over 900 apprentices in seven vocational areas, Swisscom also has an attractive pool of junior staff it can draw upon to fill future qualified positions, while at the same time offering promising career prospects for young people. Finally, Swisscom fosters a corporate culture that gives every individual the room they need to develop and, through their personal ideas, commitment and passion, contribute to Swisscom’s long-term success.

Strengthening of customer-facing areas and focus on cost management

Swisscom streamlined its organisational structure effective from 1 January 2016, strengthened customer-­facing areas and created more scope for innovation. Distribution and Service for Residential Customers and SME merged to form a single business unit each. In addition, the new “Digital Business” area has commenced operations, with a targeted focus on growth options that arise through digitisation.

The Swiss market is becoming more challenging and competition is persisting. Swisscom wants to reaffirm its position as market leader going forward and seize the opportunities presented to it by digitisation. This requires the willingness and the ability to make investments, among other things. Swisscom is stepping up its cost management in order to free up funds to develop new business opportunities: It has set a goal of reducing the cost base by more than CHF 300 million by 2020. This is to be achieved through the organisational changes, headcount reductions, optimised processes and transformation to All-IP technology which were implemented at the start of 2016.

Currently distributed across 14 locations, Swisscom will reduce the number of call centers for customers to eight by the end of 2016. All in all in 2016, Swisscom will create up to 500 jobs in growth areas in Switzerland while simultaneously reducing the workforce by several hundred positions in other areas, primarily in supporting units. A well-developed social plan is in place for those employees affected by these changes. Swisscom anticipates that the reductions will prompt around 700 employees, particularly from supporting units, to make use of the social plan in the current year. The associated costs have a one-off negative impact of CHF 70 million on Swisscom’s income statement in the 2015 financial statements. By the end of 2016, Swisscom expects the overall workforce in Switzerland to be slightly smaller than in the prior year.

Ensuring general business conditions

In 2015, Swisscom was threatened with penalties of around CHF 350 million in connection with antitrust proceedings. A consultation began on the revision of the Telecommunications Act which, among other things, calls for a departure from the proven ex-post regulation. Both the ruling of the Competition Commission as well as the subject matter of the consultation are based on the shared assumption that Switzerland does not have effective competition. This is not the case, however. For years we have been seeing extremely intense infrastructure competition in Switzerland between three providers in the mobile telecommunications market as well as between Swisscom and the cable network operators in the area of fixed networks. With the fibre-optic projects undertaken by the electrical utilities since the last revision of the Telecommunications Act (TCA), another provider has entered the fixed network market. Some 90% of all Swiss households now have a cable network connection and can therefore choose between at least two infrastructure providers and a wide variety of different services. The fact that this competition is effective is evidenced by the top rankings Switzerland repeatedly earns in all infrastructure comparisons or the innovative products offered in the television business which Swisscom has rolled out in competition with cable network operators. Switzerland depends on high-performance infrastructures. These require corresponding investing activity on the part of the operators of those infra­structures. This should be ensured both in the regulation as well as in the ruling. Swisscom is vehemently committed to promoting investment security and an entrepreneurial Switzerland.

Financial outlook for 2016

For 2016, Swisscom expects net revenue in excess of CHF 11.6 bil­lion, EBITDA of around CHF 4.2 bil­lion and capital expenditure of more than CHF 2.3 bil­lion. For Swisscom (excluding Fastweb), a slight decline in revenue is expected due to heightened competition and price pressure. A slight increase in revenue is expected for Fastweb. Adjusted for the provisions recognised in 2015 for the legal proceedings on broadband services and for headcount reduction, EBITDA is expected to be around CHF 200 million lower for Swisscom (excluding Fastweb) year-on-year. In addition to the price-based decline in revenue, the costs for roaming are expected to increase in particular. EBITDA will be positively affected by approximately CHF 50 million in cost savings and growth at Fastweb. A slight reduction in capital expenditure in Switzerland of over CHF 1.7 bil­lion will result in a reduction in overall capital expenditure of over CHF 2.3 bil­lion. Subject to achieving its targets, Swisscom will propose an unchanged dividend of CHF 22 per share for the 2016 financial year at the 2017 Annual General Meeting.

Thank you

We can look back on a successful year in a challenging market environment. We owe our achievements in 2015 to the trust of our customers and the loyalty of our shareholders. A huge thank you to all of you. Special thanks also go to our employees again this year: it is thanks to their creative ideas, wholehearted dedication and commitment that Swisscom is able to offer its customers the very best every day of the year.

Yours sincerely

WSGE_DP_Unterschrift_Loosli

Hansueli Loosli

Chairman of the Board of Directors

Swisscom Ltd

WSGE_DP_Unterschrift_Schaeppi

Urs Schaeppi

CEO Swisscom Ltd