Henning Dyremose Hans Munk Nielsen J. Kenneth Raley

Transcription

1 Annual Report 2003

2 Contents

3 3 Dear shareholder 4 Highlights of the year 8 TDC s strategy 11 Shareholder information 12 Vision and corporate governance 14 Our employees 18 TDC Solutions 21 TDC Mobile International 24 TDC Switzerland 26 TDC Cable TV 28 TDC Directories 29 TDC Services 32 Management s Discussion and Analysis 58 Significant Accounting Policies 65 Statements of Income 66 Balance Sheets 68 Statements of Cash Flow 69 Notes 110 Management Statement 111 Auditors Report 112 Financial calendar 114 Management 115 Board of Directors 116 Executive Committee TDC is a Danish-based provider of communications solutions with significant presence in selected markets in Northern and Central Europe. TDC is organized as six main business lines; TDC Solutions, TDC Mobile International, TDC Cable TV, TDC Directories, TDC Services and TDC Switzerland. TDC was privatized in Today, SBC Communications owns 41.6% of the shares, with the remainder held by individual and institutional shareholders all over the world.

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5 Henning Dyremose President and CEO Thorleif Krarup Chairman of the Board Dear shareholder In 2003, TDC s dedicated and disciplined efforts to rationalize the Group and improve earnings and cash flows produced healthy results. We have proudly defended our strong position in the mobile market despite intense competition and have won more customers. We are also satisfied with our consistent success in the broadband market, where both residential and business customers are now aware of the benefits of high-speed connections. This positive development has helped improve performance in both TDC Cable TV and our new business line, TDC Solutions, a merger of our landline and Internet operations, which is fulfilling its goal of con tinuing to focus on broadband expansion. This is an achievement, as regu lation of the Danish tele coms market is still negatively impacting our business. We were therefore pleased with the steps taken to abolish regulation of domestic traffic tariffs, but consider the move to increase ADSL regulation to be unnecessary, especially in the light of the widespread popularity of broadband in Denmark. Our rapidly developing industry is characterized by technological progress and constantly changing consumption patterns. In 2003, for example, we saw a clear customer interest in self-service and do-it-yourself installation. And as both competition and technological develop ment will continue, our organization must adapt. We have therefore introduced a redundancy program in our domestic operations to ensure that TDC continues to be a very profitable company that is even better positioned for the future. To emphasize that our dedicated employees are the key to future success and value creation, we have introduced an employee share program designed to motivate and commit them to focus on the Group s long-term performance. In Europe, our operations continue to thrive and contribute increasingly to our positive financial performance. TDC Switzerland has achieved a solid position as the secondlargest telecoms provider in the Swiss market. Its continued progress is illustrated by an increasing EBITDA margin and a positive net income development. We are very pleased to have been able to exploit the good growth opportunities outside Denmark. TDC actively participates in driving the developments that shape our industry. In 2003, we increased our earnings and improved our cash flows and are pleased to have created value for our shareholders despite challenging conditions. 3

6 Highlights of the year Percentage of net revenues from international activities Highlights of the year In 2003, TDC continued its positive trends and created significant growth in earnings and cash flows despite challenging market conditions, the dip in the Danish economy and extensive regulation. Group net revenues DKKbn Group EBITDA DKKbn % 6.8% % 16.6% 15.7% (0.8%) (1.7%) % 5.5% (1.1%)

7 Danish activities Competition in the Danish mobile market intensified in 2003 due to web-based service providers forcing prices down. In the landline market, self-services and do-it-yourself solutions are gaining in popularity while the migration to mobile telephony, ADSL and private IP-based networks means a fall in traditional landline voice traffic. We have dealt with the resulting surplus of employees through relocation, retraining and natural attrition, but the development made it necessary to supplement these measures with a redundancy program. Consequently, 1,626 employees will have left the Group before the end of the third quarter of The need for self-services and Internet-based solutions is general and affects all our business lines. TDC is adapting to meet these customer needs and consequently our web-based discount product, Mixit, has recorded customer growth and our ADSL and cable-tv products are selling increasingly well via our web site, tdc.dk. At year-end 2003, we had 473,000 broadband ADSL and cable-modem customers, up 60.9%, which proves our broadband success story is continuing. For example, we had great success with our innovative Employee Broadband Service. 5

8 Highlights of the year In the mobile market, we have launched a number of innovations. We repositioned MobilExtra, a postpaid module-based subscription that can be adapted to suit individual customers needs, and modified our business subscription Mobilflex Connect linking telephony in companies with mobile employees. We also acquired 20% ownership of Telmore, a successful Danish mobile service provider. International activities TDC s international earnings continue to grow. TDC Switzerland contributed impressive positive cash flows and EBITDA as well as an increasing EBITDA margin. Our Swiss company has attracted many new customers and further pursued efficiency and cost improvements in 2003 by continuing to optimize its organization. TDC owns 15.9% of Belgacom through ADSB Telecommunication B.V. In October 2003, ADSB, whose primary shareholders include SBC, Singtel and TDC, entered into an agreement with Belgacom and the Belgian government to proceed with preparations for a potential initial public offering of Belgacom that would open a route to possibly divesting the shares. In 2003, positive development and customer growth were also achieved through our international mobile activities, which catered for customer needs by e.g. launching new services and entering into valuable partnership agreements. Customers (pro rata) 000 Group customers (pro rata), million 20 Internet 1,872 Cable TV % 23.8% 19.0% 1.0% 14.5% Landline 4, Mobile 8,

9 Selected financial and operational data Statements of Income DKKm USDm EURm Net revenues 38,206 44,552 51,564 51,155 50,263 8,437 6,752 Total revenues 40,437 46,757 54,082 53,477 52,355 8,788 7,033 Total operating expenses (28,104) (33,742) (41,212) (39,164) (37,068) (6,222) (4,979) Earnings before interest, taxes, depreciation and amortization (EBITDA) 12,333 13,015 12,870 14,313 15,287 2,566 2,053 Depreciation, amortization and write-downs (5,640) (6,240) (8,531) (9,178) (9,328) (1,566) (1,253) Earnings before interest and taxes (EBIT), excl. one-time items 6,693 6,775 4,339 5,135 5,959 1, One-time items 0 6,161 (2,548) (1,133) (1,719) (289) (231) EBIT including one-time items 6,693 12,936 1,791 4,002 4, Net financials (224) (470) (787) 2,133 (587) (99) (79) Income before income taxes 6,469 12,466 1,004 6,135 3, Total income taxes (2,667) (3,212) (1,425) (1,686) (1,644) (276) (221) Income before minority interests 3,802 9,254 (421) 4,449 2, Minority interests (62) (15) (209) (35) (28) Net income 3,740 9,239 (14) 4,542 1, Net income excluding one-time items and fair value adjustments EBIT, excl. one-time items 6,693 6,775 4,339 5,135 5,959 1, Net financials (272) (614) (1,410) (1,124) (1,159) (195) (156) Income before income taxes 6,421 6,161 2,929 4,011 4, Income taxes related to ordinary income (2,660) (2,563) (1,843) (1,899) (2,125) (357) (285) Net income before minority interests 3,761 3,598 1,086 2,112 2, Minority interests share of ordinary income (62) (15) (209) (35) (28) Net income 3,699 3,583 1,441 2,169 2, Balance Sheets DKKbn USDbn EURbn Total assets Net interest-bearing debt Total shareholders equity Shares issued (million) Statements of Cash Flow DKKm USDm EURm Operating activities 8,504 8,947 7,000 12,541 11,441 1,920 1,537 Investing activities (11,318) (7,520) (20,841) (2,060) (12,627) (2,119) (1,696) Financing activities 2,997 3,277 10,511 (7,402) 4, Change in cash and cash equivalents 183 4,704 (3,330) 3,079 3, Capital expenditures DKKbn USDbn EURbn Excluding share acquisitions Including share acquisitions Key financial ratios Reported EPS DKK (0.1) Operating EPS 1 DKK Dividend per share DKK EBITDA margin 2 % Capital expenditures/net revenues 3 % Return on capital employed (ROCE) 4 % Subscriber base pro rata (end of period) ( 000) Landline 4,410 4,559 4,740 4,458 4,504 Domestic 3,203 3,182 3,139 3,076 2,981 International 1,207 1,377 1,601 1,382 1,523 Mobile 3,233 4,879 6,301 6,746 8,257 Domestic 1,294 1,639 1,896 1,975 2,471 International 1,939 3,240 4,405 4,771 5,786 Internet 662 1,063 1,579 1,495 1,872 Cable TV Total subscribers 9,130 11,302 13,448 13,584 15,557 Number of employees 5 18,158 19,946 22,485 22,263 21,125 DKK/USD exchange rate DKK/EUR exchange rate Operating EPS excludes one-time items and fair value adjustments. 2 Earnings before interest, taxes, depreciation and amortization divided by net revenues. 3 Capital expenditures excluding share acquisitions. 4 ROCE is defined as EBIT before one-time items plus interest and other financial income excluding fair value adjustments divided by total shareholders equity plus interest-bearing debt. 5 The number denotes end-of-year full-time employee equivalents including permanent employees, trainees and temporary employees. Proportionally consolidated companies are not included. 7

10 TDC s strategy TDC s strategy TDC s overall strategy in the Danish market is to expand our market leadership by: knowing and satisfying the needs of our customers for integrated as well as focused solutions designing, developing and marketing communications solutions which make life better and easier for our customers establishing and operating networks with advanced application platforms that provide scale and quality TDC s strategy is to create value, both long-term and short-term, by: focusing on the growth areas mobile, Internet and broadband access to provide communications solutions any time, any place for anyone securing outstanding financial performance and retaining flexibility through profitable revenue growth combined with cost efficiency and disciplined capital expenditure management Danish activities The Danish telecommunications market is one of the most advanced in Europe. Broadband penetration by the end of 2003 was 27%, mobile penetration was 89%, traditional telephone penetration was 67% and 68% of all households had a PC with Internet access. Revenues in the Danish communications market total approximately DKK 38bn and TDC s net revenues in Denmark in 2003 were DKK 23bn. The marketplace is very competitive with six large providers of landline services, five mobile networks and four large mobile resellers in a country with a population of only five million. To some extent, the advanced Danish market has been shaped by the competitive landscape. In the short term, it is TDC s strategy to address these developments by adjusting our cost base and introducing web-based self-services. Long term, we proactively follow the evolution of market trends so that we can change to meet customer requirements and be easy to do business with. The key drivers behind customer choice are quality of service and a broad selection of user-friendly products and services. TDC s strategy is therefore to be the leading provider of integrated communications solutions, supplying the market with innovative, userfriendly services.

11 The marketplace is changing from traditional landline telephony to mobile services, broadband and IP solutions. Within this framework, TDC continues its intensive broadband roll-out. Our goal is to make ADSL available to 98% of Danish households by Swiss activities Switzerland, TDC s second home market, is an advanced telecommunications market that represents significant opportunities. At year-end 2003, Switzerland s broadband penetration was 28%, traditional telephone penetration was 74%, mobile penetration was 83% and 63% of all Swiss households have Internet access via a PC. Total revenues in the Swiss communications market were approximately DKK 70bn in The Swiss market, covering 7.2 million inhabitants, is less competitive than the Danish market, with three large providers of landline services and three mobile networks. The Swiss welcome innovative products, which suits a progressive company like TDC Switzerland very well. For example, we have made good headway with Multimedia Messaging Services and bundling ADSL products with our other portfolio products. TDC Switzerland has one of the strongest alternative provider market positions, encompassing landline, Internet and mobile telephony in Switzerland. We are cutting costs by improving productivity and efficiency, process automation and streamlining operations. At the same time, we are focusing on increasing revenues by ensuring our customers enjoy an excellent service experience and feel loyalty toward the sunrise brand. 9

12 TDC s strategy / Shareholder information Other international activities Since the mid-1990s, TDC has been involved in international expansion to complement our domestic revenue and earnings growth and we are currently represented in 12 European countries. In 2003, international activities contributed about 55% of our revenues a rapid increase from DKK 0.4bn in 1995 to DKK 28bn in EBITDA from our international activities increased from DKK -0.2bn to DKK 6.4bn in the same period. TDC s strategy is based on our ability to achieve control of the activities in which we invest so that we can strengthen our management influence and create synergies. Furthermore, we want to build on our competencies and experience in developing and operating communicationsrelated infrastructure. Finally, we want to be in a leading position within the markets we serve.

13 Value drivers Group EBITDA growth Free cash flow growth Cash utilization Shareholder information Business lines Revenue growth EBITDA margin Capex-to-net revenues ratio A wide range of investor meetings are held every year to give existing and potential investors the best possible insight into TDC. Senior management conducts conference calls after every quarterly earnings release. These are supplemented by road shows and a number of individual meetings at our Copenhagen offices. In 2003, we held 331 meetings with investors and analysts. Presentations used at these meetings are available at tdc.dk. We focus on communicating to institutions, investors and financial analysts. We also have distinct activities that accommodate retail investors, as we believe a broad domestic investor base is important for TDC, and retail investors often act as ambassadors for TDC in many respects. TDC senior management and Investor Relations conduct large meetings that include questionand-answer sessions at which retail investors are introduced to TDC s strategy. We also conduct brief 10-minute quarterly web casts in Danish especially for retail investors. 11

14 Vision and corporate governance TDC s vision TDC will strive to be the best provider of communications solutions in Europe. To realize our vision, we will focus on: consistently delivering customer value through customer - focused solutions and outstanding customer care dedicated, enthusiastic and proud employees creation of outstanding shareholder value active and responsible participation in the development of society Environmental aspects At TDC, our vision is to fulfill environmental responsibilities beyond statutory requirements and we achieve this through systematic environmental efforts. Further information on our environmental performance is available in TDC s annual environmental report. Vision and corporate governance It is TDC s vision to strive to be the best provider of communications solutions in Europe. We keep this firmly in mind when working to accommodate the interests of our four major stakeholder groups: shareholders, customers, employees and society. In addition, corporate governance provides the basis for much of our decision-making and supports our aim to ensure that our stakeholders interests are best served. Corporate governance TDC s Board of Directors is responsible for constantly developing and updating TDC s approach to corporate governance. In 2002, the Board followed the recommendation of the Copenhagen Stock Exchange and carefully considered all 31 recommendations on corporate governance issued by the Nørby Committee, a Danish Corporate Governance Committee. The comments are available at tdc.dk. In October 2003, after further consideration, the following adjustments were made: The Board will evaluate the Executive Committee s work by defining targets and evaluating the degree to which they are achieved The total remuneration for individual Executive Committee members is now included in the Annual Report Board members will no longer receive stock options The age limit for Board members will be reduced from 70 to 67 years

15 TDC is subject to the Corporate Governance Rules of the New York Stock Exchange. Information on TDC s compliance with these rules is available at tdc.dk. Sarbanes-Oxley Act As the Company s shares are listed on the New York Stock Exchange, TDC is subject to the 2002 Sarbanes-Oxley Act. The Act mandates a number of reforms that among others provide for auditor independence, enhanced corporate responsibility and financial disclosures, and combat corporate and accounting fraud etc. In the process of incorporating these rules, TDC has implemented policies and procedures regarding pre-approval of audit and non-audit services and a process for the CEO and the CFO to certify the annual report on Form 20-F under the Sarbanes-Oxley Act. The implementation of policies and procedures to allow for Management s assessment of internal controls has also been initiated. The Board of Directors The Board has 12 members eight elected by the Annual General Meeting and four elected by the employees In 2003, the Board held 12 meetings and one strategy seminar A Compensation Committee consisting of the Chairman and Vice Chairman approves compensation packages and other terms of employment for members of the Group s Executive Committee, and approves the principles of the Group incentive program 13

16 Our employees Number of employees in each business line TDC A/S TDC Cable TV TDC Directories TDC Services TDC Switzerland TDC Mobile International TDC Solutions Our employees At year-end 2003, the TDC Group comprised 21,125 employees 1 with an average age of approx. 42 years and an average of approx. 16 years of service at TDC. Education and training are the key Being successful in a continually changing industry requires competent employees who can deal efficiently with the challenges of future markets. Systematic education, training and competence development are therefore key factors in our staff development program. In 2003, our Danish employees spent 4.8 days on average on in-house and external courses. In addition to traditional training courses, we focus on employee development and empowerment through e-learning, on-the-job training, changing work organization and coaching. Social responsibility TDC focuses on aspects of corporate social responsibility and diversity among staff as a lever for organizational development and optimization. For the past two years, TDC has been part of a project that has created schemes for mentoring, integrating ethnic minorities and persons with disabilities, and other initiatives. The project is supported by the European Social Fund. 1 Full-time equivalents including permanent employees, trainees and temporary employees proportionally consolidated companies not included.

17 Redundancy program In 2003, we reduced the number of employees in our domestic business lines to adapt to a market in which self-services and do-it-yourself installation products are gaining ground. At the same time, the range of IP-based telephony solutions and the migration to mobile telephony and ADSL have resulted in declining landline traffic. We have handled the resulting surplus in employees through relocation, retraining and controlled recruiting. However, the development has led us to introduce a redundancy program and consequently, 1,626 employees will have left the Group before the end of the third quarter of Employee shares TDC s employee share ownership program aims to motivate employees and encourages their long-term interest in TDC s stock market performance. In November 2003, all our domestic employees had an opportunity to purchase up to 90 shares of TDC stock at a discount price of DKK 100 per share. Of those eligible, 12,509 or 81% participated. The program is one way to clearly signal to our employees that they are the key to successful future value creation for the Group. We are investigating the possibility of offering a similar share ownership program in the foreign subsidiaries under TDC s control. TDC wishes to express its gratitude and appreciation to all our employees, who are both competent and committed to achieving our corporate vision on a daily basis. 15

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19 TDC Solutions TDC Mobile International TDC Switzerland TDC Cable TV TDC Directories TDC Services 17

20 TDC Solutions TDC Solutions TDC Solutions was created by merging our landline business, TDC Tele Danmark, with our Internet business, TDC Internet, on January 1, Creating TDC Solutions paved the way for continued broadband expansion and even more effective customer orientation. We have since improved and simplified our customer orientation in this strong business line, which offers a full range of communications services. Our activities include telephony services, broadband solutions, advanced security and hosting services, terminal sales, data communications services and leased lines. More ADSL customers In 2002, we concluded the first phase of our ambitious ADSL roll-out, bringing the option of ADSL to 95% of all Danish households. By the end of 2003, TDC Solutions ADSL customer base had reached 405,000 customers, an increase of 60.1%. This was driven partly by our popular Employee Broadband product, which allows employers ordering broadband to obtain special economical terms for their employees while benefiting themselves as employees advance their Internet skills. ADSL is used primarily for access to the Internet, but also for many other services ranging from streaming of sound and pictures to online gaming. In the years ahead, we will continue rolling out ADSL capability on the network to achieve 98% coverage by 2005, driving developments in Danish society and ensuring that Denmark is established among the world s broadband elite. New solutions and services Integrated communications products are another focus area. PlusNet Mobil, for example, groups all of a company s employees in a single extension plan covering both landline and mobile phones. After only 18 months, PlusNet Mobil has more than 51,000 users and plays an important strategic role for TDC Solutions in the technology shift from traditional landline telephony toward IP and mobile -based telephony. In 2004, TDC Solutions will accelerate the deployment of fiber in the access network in large city areas. TDC pioneered the roll-out of broadband via ADSL in Denmark to ensure that Denmark

21 is in a class of its own worldwide. We are now taking another step that will secure Denmark a world-ranking position within fiber optics. The infrastructure will then continue to have sufficient capacity as traffic in the network increases. CityMAN is a new, flexible, high-speed Metropolitan Area Network that allows higher levels of interaction, cooperation and knowledge sharing between users. Work on the CityMAN project is already in progress. The new gigabit communications network for companies and the public sector was launched in autumn 2003 and will initially cover the island of Funen. A further CityMANs are expected in highactivity areas in Denmark. Self-services and security In 2003, we made self-services via the Internet even easier by upgrading our systems and simplifying our customer-friendly interface at tdconline.dk. Customers can now use the Internet more efficiently when ordering products and services, as well as accessing call specifications and subscription information. More ADSL solutions are also being sold via the Internet, and this supported our ADSL success in The Danish Ministry of Science, Technology and Innovation has chosen TDC as its supplier of digital signatures to make using the Internet much safer. During the year, we signed contracts with e.g. the Danish Labour Market Supplementary Pension Fund and most local authorities throughout Denmark, which are busy introducing digital signatures for the benefit of customers and citizens. Regulation In 2003, new telecommunications regulation measures were implemented that impact TDC Solutions significantly. Firstly, a Long Run Average Incremental Cost model was introduced on January 1, 2003 to calculate a number of TDC s interconnection charges. This implied a significant reduction of TDC s already low charges and thereby a further reduction of the costs for other telcos using TDC s landline network. Secondly, the price cap for landline retail telephony services was amended in mid Landline telephony was previously subject to a price cap involving an annual decrease of 4% in real terms. Now the price cap for national landline traffic has been abolished. However, the price cap remained in place for other prices and in relation to a number of significant prices such as subscriptions, installation and call set-up charges, which were set at the current 2003 level until year-end

22 TDC Solutions / TDC Mobile International Key figures, TDC Solutions: Net revenues: DKK 18.6bn EBITDA: DKK 5.8bn Customers: 4.4m Employees: 11,765 Developments resulted in redundancy programs In 2003, we reduced our staff in TDC Solutions as a step toward ensuring a healthy future for our operations. As well as the general decline in traditional landline telephony, other contributory factors included more self-services on the Internet, more customers installing communications solutions themselves, and the current switch from traditional landline telephony to mobile phones and Internet-based telephony of the future. Telecommunications services can now be supplied efficiently by fewer employees. With a streamlined organization, TDC Solutions is better equipped to perform well and take part in future developments. Subsidiaries In 2003, Dan Net, our 100% owned Danish-based subsidiary and leader within mobile data clearing (exchange of billing information), continued its positive performance. Dan Net also established a new UK subsidiary that deals with financial clearing. Outside Denmark, we divested TDC Internet Polska, and centralized management of our Norwegian subsidiary, TDC Norge, and our Swedish subsidiary, TDC Internordia. This follows naturally from our strategy to attract Pan-Nordic companies with the same needs. With our joint future-oriented network-based platform, private companies can benefit from our enhanced focus on IP and data services across borders and infrastructure. EBITDA DKKbn ADSL customers

23 TDC Mobile International TDC Mobile International is the leading provider of mobile telecommunications services in Denmark, a position we strive to develop further. Also, we continue to strengthen our mobile enterprises in Germany, Lithuania, Poland and Austria. We aim to accomplish this through customer segmentation and growth, excellent customer service, efficient operations and by translating our presence in various markets into valuable synergies enhanced by attractive partnerships. Key figures, TDC Mobile International: Net revenues: DKK 15.4bn EBITDA: DKK 3.3bn Customers (pro rata): 6.1m Mobile broadband roll-out TDC Mobile International has UMTS licenses in Austria, which is currently in the roll-out phase, and in Denmark and Poland, where roll-out is being planned in accordance with license requirements. Commercial launch will take place when a reasonable selection of handsets and sufficient demand for data and content-based services are present. Ownership changes In spring 2003, we acquired a 20% share of Telmore, followed by the remaining shares in January Telmore is a successful Danish service provider for subscribers who prefer low-cost webbased subscriptions. These typically appeal to younger customers but this self-service concept is rapidly spreading to other segments. In 2003, we implemented our agreement with MTS (Mobile Tele System), a Russian mobile operator, and accordingly sold our 16.3% shareholding in UMC (Ukrainian Mobile Communications). This move is consistent with our strategy of either obtaining a controlling interest or divesting. TDC Mobil (Denmark) TDC Mobil, a 100% owned subsidiary, is the leading provider in the Danish mobile market, which is characterized by fierce competition evident in declining voice and SMS prices. TDC Mobil is strengthening its leading position in the voice market while stimulating future revenue streams and preparing for mobile broadband by launching mobile data services. TDC Mobil increased its traffic market share in 2003 via a dual TDC and service provider brand strategy. In addition to full-service solutions, self-services are offered in response to an increasing interest in web-based self-services. By year-end, more than half of all customer inquiries were being dealt with via the web. One of the initiatives taken to satisfy this interest and restructure and reduce the cost base was the launch of Mixit, a web-based mobile subscription that saw strong growth in TDC Mobil also re po sitioned its subscription offerings in 2003 through MobilExtra, a module-based subscription that can be adapted to suit individual customers needs, and modified its business subscription Mobilflex Connect. 21

24 TDC Mobile International Key figures, TDC Mobil: Net revenues: DKK 5.4bn EBITDA: DKK 1.7bn Customers: 2.1m Employees: 1,222 Key figures, Talkline: Net revenues: DKK 6.7bn EBITDA: DKK 0.5bn Customers: 2.1m Employees: 963 During the year, mobile GPRS traffic (General Packet Radio Services) accelerated. As 70-80% of mobile phones sold by TDC Mobil in Denmark are GPRS compatible, a significant share of our customers are functionally ready for mobile data services. TDC Mobil was the first Danish operator to launch picture messaging (MMS) to stimulate demand for mobile data services and thereby prepare for 3rd generation mobile telephony. TDC Mobil s marketing campaigns have resulted in a good position in a rapidly growing market, revealing customers keen interest in mobile services of the future. We continue to draw advantages from the cooperation with Vodafone, which has enabled TDC Mobil to quickly become a clear market leader in terms of international GPRS roaming agreements. These and the easy-to-use initiatives launched by TDC Mobil in 2003, such as Eurocall Platinum, provide our customers with superior solutions when traveling abroad. TDC Mobil s excellent network attracts service providers and their customers. During 2003, the number of service provider customers using our network increased 80.2% to 728,000. Of these, 455,000 belong to Telmore, which in 2003 increased its customer base by 120.9%. Talkline (Germany) TDC Mobile International owns 100% of Talkline, a German service provider. Talkline increased its mobile customer base by 22.1% in 2003, compared with market growth of 10%. Customers (pro rata) million TDC Mobile International EBITDA DKKbn One Bité Polkomtel Talkline TDC Mobil

25 Launching Vodafone live, i-mode and t-zones were successful ventures that offer customers picture messages, , Internet connection and many other popular services. Talkline has also introduced solutions for web-based customer care. Bité (Lithuania) Bité is a Lithuanian mobile operator 100% owned by TDC. Although competition has sharpened in the Lithuanian market, Bité expanded its mobile customer base by 9.3% in In 2003, Bité signed a partner network agreement with Vodafone enabling Bité s GSM subscribers to use Vodafone s international mobile services while traveling across Europe. Bité, the first operator in Lithuania to offer wholesale to service providers, now has a firm foothold and good opportunities for maximizing network utilization. Polkomtel (Poland) TDC Mobile International holds a 19.6% stake in Polkomtel, a significant Polish mobile operator that topped five million customers in 2003 and maintained its one-third share of the mobile market. Polkomtel has successfully maintained its leading position in the business customer segment and has implemented GPRS technology in its networks. In 2003, Polkomtel beat all other IT and communications companies in Poland to the title most innovative company because of the enormous variety of products and services it offers, especially in the business segment. Key figures, Bité: Net revenues: DKK 0.9bn EBITDA: DKK 0.2bn Customers: 0.5m Employees: 445 Key figures (pro rata), Polkomtel: Net revenues: DKK 1.7bn EBITDA: DKK 0.7bn Customers: 1.1m Key figures (pro rata), One: Net revenues: DKK 0.7bn EBITDA: DKK 0.2bn Customers: 0.3m One (Austria) TDC Mobile International owns 15% of One (formerly Connect Austria), the third-largest mobile operator in Austria. Mobile phone penetration is high in Austria and the Austrians are also among the highest spenders in terms of mobile telecommunications in Europe. Since fall 2003, One has been ready to launch UMTS, such as video telephony, whenever 3G handsets are available in sufficient quantities. WLAN (Wireless Local Area Network) services were launched through One s subsidiary ewave at more than 300 hotspots throughout Austria during One s intensified efforts to optimize its cost structure in 2003 included an agreement with Alcatel to outsource its backbone network. Together with TDC Switzerland and seven other European mobile operators, One entered into an alliance offering all-encompassing voice and data services for European customers. 23

26 TDC Switzerland TDC Switzerland It was another successful year for TDC Switzerland, the second-largest full-service provider in the Swiss market, with a growing customer base and popular new services launched under the sunrise brand name. In February 2003, TDC achieved full ownership of TDC Switzerland by acquiring the remaining shares from the minority shareholders. Positive financial development TDC Switzerland s financial results continued to improve. In local currency, net revenues increased 9.8% and the EBITDA margin increased from 14.2% in 2002 to 23.3% in New customers Mobile penetration in the Swiss market, though slowing slightly, is still growing steadily. We expanded our mobile customer base by 11.1% to a total of 1.3m at year-end 2003 through important initiatives that included bundling mobile, landline and Internet solutions. This encouraged more landline customers to buy mobile subscriptions and vice versa. Bundling ADSL products with our other portfolio products helped us achieve a tripling of the ADSL customer base. Customers 000 EBITDA DKKm EBITDA margin % 1, , Landline Mobile Internet 1Q 02 2Q 3Q 4Q 1Q 2Q 3Q 4Q

27 At year-end 2003, we had 92,000 ADSL, 824,000 landline and 434,000 Internet dial-up customers and had strengthened our foothold in the business market by signing contracts with important business customers. Altogether, at year-end 2003 our customer base totaled 2.6m. Key figures, TDC Switzerland: Net revenues: DKK 9.5bn EBITDA: DKK 2.2bn Customers: 2.6m Employees: 2,380 Focus on cost control We have aggressively pursued further efficiency and cost improvements in 2003 by continuing to optimize our organization. As of January 2003, the remaining networks from the merger between the former sunrise and diax were combined and significant synergies were realized. Across the business, continuous efficiency improvement programs were implemented aimed at eliminating non-value adding activities and streamlining our processes and procedures. We are also dedicated to optimizing our investments. Firstly, by strictly and continuously evaluating potential investment opportunities. Secondly, by consistently searching for more efficient ways of investing. New services TDC Switzerland aims to be the first in the market to offer new services that can stimulate future earnings growth. In 2003, we focused on mobile data services and pioneered sunrise live in Switzerland. With this major multifunctional new mobile phone portal, users can read and play via easyto-use navigation. These and many other attractive services and features are set to generate more network traffic and increase earnings. Our recently launched video streaming via existing GPRS services enables customers to watch news clips and video on their GPRS handsets. We are therefore promoting phones with MMS, color screens and cameras. More control of distribution channels In 2003, we opened 20 new shops dedicated exclusively to selling our own products, and now have 34 TDC Switzerland shops and shop-in-shops throughout Switzerland. 25

28 TDC Cable TV TDC Cable TV Key figures, TDC Cable TV: Net revenues: DKK 1.5bn EBITDA: DKK 198m Customers: 0.9m Employees: 733 TDC Cable TV installs and operates cable-tv network and access lines. Altogether, the network provides TV signals and broadband Internet access for 37.5% of Danish households. Financial growth and more customers In recent years, TDC Cable TV has moved through a comprehensive turn-around process. In 2003, we improved our financial performance by attracting many new customers, raising our customer service level, achieving 14.4% growth in revenues and freezing production costs. Revenues per customer rose, mainly because TDC Cable TV s customers are also increasingly buying Internet access. Our traditional cable-tv customer base grew 4.4% to 924,000 at year-end Focus on choice Choice is a vital aspect of the TDC Cable TV core business both in terms of products and services. We carefully tailor the range of programs in our standard packages to match customer requirements and have added new programs to our basic package for the year ahead. Customers wanting more flexibility can choose their own programs using Selector, our set-top box. EBITDA DKKm Net revenues DKKm Q 02 2Q 3Q 4Q 1Q 2Q 3Q 4Q

29 Full speed ahead for broadband This year, our progress with the return-path upgrade in our cable-tv network continued. By yearend 2003, more than 117,000 customers were using our cable-modem solutions for Internet access, up 88.7%, making TDC Cable TV the largest Nordic cable Internet provider. Of these, 68,000 customers had broadband access. In total, no less than 88.2% of TDC Cable TV s Internet customers are using do-it-yourself provisioning solutions. TDC Cable TV s dedication to continuously expanding and upgrading the high capacity and very cost-effective coax network is reflected in the success and growth of the Internet access customer base. This ensures ample capacity and new opportunities for future broadband solutions and services. Internet customers 000 Broadband access on or above 256 kbit Internet access below 256 kbit Q 02 2Q 3Q 4Q 1Q 2Q 3Q 4Q

30 TDC Directories / TDC Services TDC Directories Key figures, TDC Directories: Net revenues: DKK 1.4bn EBITDA: DKK 372m Employees: 1,091 TDC Directories publishes printed, electronic and Internet-based directories in Denmark and Sweden. In 2003, we acquired full control of the local directory Odense Telefonbog in line with our goal to maintain and further develop our position as leading provider of directories in Denmark. Our portfolio now includes a total of 106 local, regional and national directories. Restructuring and consolidating In 2003, restructuring and improving efficiency were both given high priority to combat intense competition. We have closed the business directory StorbyGuiden in Norway and the Swedish edition of the Yellow Pages, Gulan. TDC Directories remains one of the leading providers of Swedish businessto-business directories and leads the market for local business-to-consumer directories. We have centralized management of the Swedish activities to further strengthen and expand our position in the Swedish market, and are integrating our Danish and Swedish back-office activities to achieve further synergies. Internet products TDC Directories Yellow Pages web site (dgs.dk) has maintained its majority of Internet advertising in Denmark. We continuously improve features, combine databases and optimize our road planner and map functions to provide the best possible user interface and functionality. Net revenues DKKbn % 10.8% 1.8% (6.9)% 47.4% In 2003, we cooperated with TV 2 to increase our visibility in Denmark, which attracted more users and added value for advertisers. This was so successful that we have established a similar alliance with Spray, a portal in Sweden. While continuously improving our web sites, we remain focused on the electronic market. In 2003, our product Navne & Numre Erhverv (Names and Numbers Business) received the EADP (European Association of Directory and Database Publishers) award as the best European business-to-business electronic product.

31 TDC Services TDC Services supplies a number of business services for the TDC Group s domestic business lines. We ensure economies of scale and cost-effective solutions in billing, procurement, logistics, facility management, IT, accounting, payroll administration, risk management and security. Efficiency - our alpha and omega At TDC Services, operational efficiency is our alpha and omega, with a continuous focus on improving processes and productivity. We also explore the advantages of outsourcing and partnerships, as they can improve efficiency even further. A new five-year IT outsourcing agreement signed in 2003 means that CSC, a leading provider of IT services, will be operating and maintaining several of our existing IT systems, including customer care, order and billing systems for the landline business. Key figures, TDC Services: Net revenues: DKK 3.4bn EBITDA: DKK 707m Employees: 2,093 E-business and self-services in demand Setting up e-business platforms in TDC Solutions and TDC Mobil dominated our IT development activities in 2003, as eventually, many of TDC s customers will be served online. We focused on self-services in the areas ADSL and online services established for TDC Mobil covering residential customers, resellers and service providers. Consolidating platforms will facilitate self-services in 2004 in areas such as ordering mobile and broadband products, and reserving numbers and paying bills online. Within TDC Services we see e-business as a vital link in keeping the supply chain lean and efficient. We play an important role by integrating customer care and billing systems with our purchasing and warehouse systems to ensure that everyone reaps full supply chain benefits. 29

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33 Management s Discussion and Analysis Significant Accounting Policies Statements of Income Balance Sheets Statements of Cash Flow Notes 31

34 Management s Discussion and Analysis Management s Discussion and Analysis Introduction In 2003, TDC achieved strong earnings growth and reduced capital expenditures. Thus, earnings before interest, taxes, depreciation and amortization (EBITDA) grew 6.8% to DKK 15,287m and net income, excluding one-time items and fair value adjustments, increased 13.7% to DKK 2,466m, thereby outperforming the Outlook for 2003 described in the Annual Report for In addition, capital expenditures, excluding share acquisitions, decreased 13.9% to DKK 6,631m in Net revenues decreased 1.7% from 2002 to However, on an ongoing basis 1, net revenues rose DKK 289m or 0.6%. The above achievements were realized primarily through TDC s successful ADSL sales, stringent cost control in the domestic business and continued improvements in TDC Switzerland that reflect growth in the mobile business area and cost reductions. These achievements were partly offset by impacts from harsh competition and price decreases in the domestic mobile market, significant regulator-required price reductions on the domestic landline market and lower traditional landline market volumes. The revenue and earnings results were achieved despite an unfavorable general economic development in our two main markets, Denmark and Switzerland. Net income, including one-time items and fair value adjustments, amounted to DKK 1,800m, down DKK 2,742m in 2003, impacted by the divestment of the Dutch mobile operator Ben in One-time items before tax amounted to DKK (1,719)m with a net income impact of DKK (1,174)m in 2003 that reflected primarily the effect of the domestic redundancy program announced on May 12, 2003 and settlement of Belgacom s pension liabilities. In 2003, fair value adjustments amounted to DKK 572m before tax and DKK 508m after tax, and related primarily to UMC. Key financial figures DKKm TDC Group Growth in % Net revenues 50,263 51,155 (1.7) EBITDA 15,287 14, Net income, excluding one-time items and fair value adjustments 2,466 2, Net income, including one-time items and fair value adjustments 1,800 4,542 (60.4) EBITDA margin (%) Capex, excluding share acquisitions (6,631) (7,699) 13.9 Capex-to-net revenues ratio The development from 2002 to 2003 was impacted by certain major changes in activities and ownership shares comprising: Talkline restructuring (closure of the landline and Internet activities at April 1, 2002) as well as the change from gross to net accounting (EBITDA neutral) of content settlement in Talkline Infodienste as from April 1, 2003 as a consequence of transferring the debtor risk to the content providers, and deconsolidation of the Ukrainian mobile operator UMC as from October 1, In the remaining part of this Management Discussion and Analysis, ongoing basis refers to reported figures for the TDC Group or TDC Mobile International adjusted for the impact of these changes.

35 One-time items DKKm TDC Group Pre-tax After tax Pre-tax After tax Profit on sale of major enterprises Impairment losses (220) (164) (1,066) (1,030) Restructuring costs, etc. (1,670) (1,180) (533) (336) One-time items, total (1,719) (1,174) (1,133) (859) Capital expenditures, excluding share acquisitions, fell DKK 1.1bn or 13.9% to DKK 6.6bn in The reduction was supported by our increased focus on optimizing capital expenditures, particularly in TDC Solutions and TDC Mobile International. The capex-to-net revenues ratio for 2003 was 13.2% compared with 15.1% in Net interest-bearing debt amounted to DKK 28,697m at year-end 2003, an increase of DKK 3,140m compared with DKK 25,557m at the beginning of the year. The increase was due mainly to cash outflow of DKK 7,073m in the first quarter relating primarily to the acquisition of the remaining shares in TDC Switzerland. Net interest-bearing debt at the end of the first quarter was therefore DKK 32,630m. During the subsequent quarters, net interest-bearing debt was reduced by DKK 3,933m. This was impacted by payment of a DKK 2,453m dividend and pension liabilities in Belgacom of DKK 1,693m that was more than offset by cash generation of DKK 8,079m, net, from other business. Actual net revenues were DKK 0.2bn higher than stated in the latest Outlook for 2003 presented in the third-quarter Earnings Release, EBITDA was DKK 0.3bn higher and net income exceeded the Outlook by DKK 0.2bn. Compared with the Outlook for 2003 in the Annual Report for 2002, actual net revenues were DKK 2.3bn lower due to the disappointing market development in domestic landline telephony, lower revenues in the selected lowmargin areas of international transit traffic and Talkline Infodienste, and the unfavorable development in Polish and Swiss currencies. However, actual EBITDA was DKK 0.5bn higher than stated in the Outlook, as improved EBITDA in TDC Switzerland more than offset lower EBITDA in TDC Mobile International. Actual net income, excluding one-time items and fair value adjustments, exceeded the Outlook by DKK 0.6bn, reflecting the improved EBITDA and lower interest expenses. Fair value adjustments DKKm TDC Group Pre-tax After tax Pre-tax After tax Fair value adjustments of minority passive investments ,119 3,133 Other fair value adjustments Fair value adjustments, total ,257 3,232 33