Annual Report 2007 - Financial StatementsReview of the Business Areas
TeliaSonera changed its business organization on January 1, 2007 from a country-based profit center organization into a product-based business area organization. The comparative information for 2006 has been restated accordingly. On January 1, 2008, TeliaSonera further refined its business area organization, by discontinuing Integrated Enterprise Services as a separate business area, and instead reporting its operations as part of Mobility Services, Broadband Services and Other operations. This Report of the Directors presents TeliaSonera's segment results for the business area organization that was in place up to the end of 2007.
Higher sales in all markets in Mobility Services
Strong mobile volume growth continued throughout 2007, driven by higher traffic volumes and an increased number of subscriptions. Growth in mobile data traffic continued strengthening during the year, especially in the fourth quarter. Price pressure persisted in all markets due to intense competition and regulatory intervention, the latter in the form of reduced interconnect fees.
To meet a growing demand for higher network speeds and data services, TeliaSonera launched turbo 3G in most Nordic and Baltic markets in 2007, and in Sweden demand for mobile broadband was particularly strong. In addition, a range of content services were launched in most of the markets, including Mobile TV Client, Music Shop and Windows Live Messenger.
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| SEK in millions, except margins and operational data | 2007 | 2006 |
|---|---|---|
| Net sales | 44,519 | 41,949 |
| EBITDA excl. non-recurring items | 13,332 | 13,845 |
| Margin (%) | 29.9 | 33.0 |
| Operating income | 8,635 | 9,096 |
| Operating income excl. non-recurring items | 8,998 | 9,610 |
| CAPEX | 4,168 | 3,252 |
| MoU | 190 | 182 |
| ARPU, blended (SEK) | 230 | 233 |
| Churn, blended (%) | 28 | 26 |
| Subscriptions, period-end (thousands) | 14,501 | 13,434 |
Additional segment information available at www.teliasonera.com/ir
Net sales increased 6.1 percent, with subscription growth and increased usage for both mobile data and voice, offsetting the downward pressure on prices. Net sales rose in all markets. The consolidation of debitel in Denmark, higher volumes in Sweden and continued good customer intake in Spain, where sales totaled SEK 589 million, contributed the most to the rise. Reduced interconnect fees that TeliaSonera receives from other operators in the Nordic and Baltic countries lowered sales by approximately SEK 725 million.
The number of subscriptions increased by 1.1 million to 14.5 million, with 403,000 new subscriptions in Spain, the consolidation of debitel in Denmark adding 268,000 and the purchase of ZetCOM in Latvia adding 137,000. In Sweden, the number of subscriptions increased by 310,000 excluding the deactivation of 106,000 old NMT subscriptions in the fourth quarter. In Finland and Estonia, the number of subscriptions rose slightly, while Norway and Lithuania showed a decrease of 64,000 and 62,000, respectively.
Blended churn was 28 percent (26 percent in 2006).
EBITDA, excluding non-recurring items, decreased by SEK 513 million, despite higher net sales in all markets and a positive net increase of SEK 246 million from the reversal of provisions for historical interconnect fees in Sweden. In Spain, costs for building the Yoigo brand resulted in an EBITDA of SEK -1,443 million (-337). In addition, price erosion, increased promotional spending and interconnect price reductions, especially in Norway, affected EBITDA negatively. Certain negative items in Denmark totaling approximately SEK 160 million, mainly related to balance sheet corrections, burdened EBITDA. In Denmark, the consolidation of debitel in April also had a dilutive impact on the margin, since the transfer of traffic to TeliaSonera's network was not yet completed.
CAPEX rose 28 percent to SEK 4,168 million, driven by investments to secure the network quality and increase coverage and capacity, including the start-up investments in Spain, extended 3G/HSPA roll-out and functionalities in all Nordic and Baltic markets.
In May 2007, TeliaSonera's Norwegian operator NetCom signed a MVNO agreement with Tele2 Norge AS. Under the agreement, Tele2 Norge will transfer all traffic from Telenor's network to NetCom's network before April 1, 2008. TeliaSonera estimates that after fulfillment of the transfer, the agreement will have a positive annual impact of approximately SEK 500 million on sales.
In June 2007, the European Union approved a price cap for pan-EU mobile-phone calls and also set ceilings on the wholesale prices for roaming calls. Total sales in the home markets related to roaming are less than five percent of TeliaSonera's total net sales. TeliaSonera estimates that the negative effect on EBITDA for 2008, excluding assumptions of increasing traffic due to lower prices, will be less than SEK 500 million.
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| SEK in millions, except margins | 2007 | 2006 |
|---|---|---|
| Net sales | 44,519 | 41,949 |
| of which Sweden | 12,528 | 12,029 |
| of which Finland | 9,602 | 9,517 |
| of which Norway | 8,985 | 8,910 |
| of which Denmark | 6,119 | 5,191 |
| of which Lithuania | 2,484 | 2,412 |
| of which Latvia | 2,654 | 2,495 |
| of which Estonia | 2,305 | 2,071 |
| of which Spain | 589 | 5 |
| EBITDA excl. non-recurring items | 13,332 | 13,844 |
| Margin (%), total | 29.9 | 33.0 |
| Margin (%), Sweden | 39.4 | 37.3 |
| Margin (%), Finland | 31.6 | 25.9 |
| Margin (%), Norway | 34.3 | 37.4 |
| Margin (%), Denmark | 13.2 | 18.6 |
| Margin (%), Lithuania | 36.8 | 40.2 |
| Margin (%), Latvia | 45.2 | 47.5 |
| Margin (%), Estonia | 34.9 | 37.7 |
| Margin (%), Spain | neg | neg |
Growth initiatives and migration in Broadband Services
Growth in broadband and the migration from fixed voice persisted. Bundling of services continued. By year-end TeliaSonera offered multi-service packages in all Nordic and Baltic markets and kept its market position in most of its markets. Investments were focused on bundled solutions to cater to TV and other value-added services requiring higher bandwidth. Price erosion continued in the form of increased bandwidth at the same price.
TeliaSonera sees television as an anchor for the new services we will bring to the households in the future. Increased efforts to handle the migration from traditional fixed-voice services were evidenced by the move into the TV-market, mainly in Sweden. The year was a success for TeliaSonera ending with approximately 770,000 TV subscriptions, of which 304,000 IPTV subscriptions in Sweden.
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| SEK in millions, except margins and operational data | 2007 | 2006 |
|---|---|---|
| Net sales | 41,273 | 40,880 |
| EBITDA excl. non-recurring items | 12,926 | 13,629 |
| Margin (%) | 31.3 | 33.3 |
| Operating income | 6,939 | 7,435 |
| Operating income excl. non-recurring items | 7,906 | 8,295 |
| CAPEX | 5,369 | 4,605 |
| Broadband ARPU (SEK) | 270 | 289 |
| Subscriptions, period-end (thousands) | ||
| Broadband | 2,326 | 1,990 |
| Fixed voice | 6,218 | 6,497 |
| Associated company, total | 757 | 720 |
Additional segment information available at www.teliasonera.com/ir
Net sales increased 1.0 percent. Overall strong growth in broadband sales and acquisitions more than compensated for the decline in fixed voice. In absolute terms, sales were strongest in Wholesale, even though certain negative items of approximately SEK 120 million mainly related to a provision for changed LLUB pricing in the fourth quarter had an impact. Development was strong in the Baltic countries. In Norway, net sales rose due to the consolidation of NextGenTel in June 2006. In Sweden, increased broadband sales did not compensate for the decrease in sales of fixed-voice services.
The number of subscriptions for broadband access rose by 17 percent to 2.3 million, with an increase of over 40 percent in Lithuania. Meanwhile broadband ARPU was affected by price erosion and fell 6.6 percent to SEK 270 as broadband access remained the key revenue source. The number of fixed voice subscriptions declined by four percent to 6.2 million. During the year, the total number of TV subscriptions rose by 74 percent to 770,000, of which 379,000 IPTV subscriptions. In Sweden only, the successful push for IPTV resulted in a total of 304,000 subscriptions at year-end and also helped attract new broadband customers.
Despite higher sales EBITDA, excluding non-recurring items, decreased by SEK 703 million with the largest drop, SEK 999 million, in Sweden, mainly due to the continued decline in fixed voice, and investments in future growth, such as IPTV. Certain negative items in Wholesale of approximately SEK 120 million, mainly related to a provision for changed LLUB pricing in the fourth quarter, and higher costs for weather-related damages in Sweden impacted profitability. In addition, price erosion in the form of increased bandwidth at the same price had an effect. On the other hand, EBITDA increased about SEK 490 million in Wholesale. A net increase of SEK 136 million from the reversal of provisions in Sweden also impacted positively.
CAPEX rose 17 percent mainly due to increased investments in broadband platforms to cater to the improved bandwidth and quality needed for IPTV and other services for the digital home. Investments were also made in common infrastructure, including the core network.
In June 2007, the Swedish telecommunications regulator (PTS) submitted to the Government of Sweden a recommendation that TeliaSonera be forced to place its fixed access network in Sweden in a separate unit of the company. TeliaSonera believes legislation would hamper the willingness to invest and consequently disadvantage consumers.
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| SEK in millions, except margins | 2007 | 2006 |
|---|---|---|
| Net sales | 41,273 | 40,880 |
| of which Sweden | 18,679 | 19,516 |
| of which Finland | 6,215 | 6,207 |
| of which Norway | 891 | 506 |
| of which Denmark | 1,959 | 1,847 |
| of which Lithuania | 2,104 | 1,960 |
| of which Estonia | 1,780 | 1,576 |
| of which Wholesale | 10,542 | 10,011 |
| EBITDA excl. non-recurring items | 12,926 | 13,629 |
| Margin (%), total | 31.3 | 33.3 |
| Margin (%), Sweden | 35.7 | 39.3 |
| Margin (%), Finland | 23.6 | 26.5 |
| Margin (%), Norway | 22.1 | 19.6 |
| Margin (%), Denmark | 13.7 | 17.8 |
| Margin (%), Lithuania | 43.6 | 47.2 |
| Margin (%), Estonia | 26.8 | 32.8 |
| Margin (%), Wholesale | 27.8 | 24.4 |
Integrated Enterprise Services growing through acquisitions
Net sales increased 6.1 percent, lifted by the consolidation of Cygate, Didata and Crescom, which together had a positive effect of 6.3 percent. Sales related to the distribution of mass-market services produced by business areas Mobility and Broadband Services decreased by SEK 367 million, mainly due to the migration from fixed voice services as well as price erosion in mobile and broadband services. Sales of integrated enterprise services and equipment sales increased by SEK 888 million, mainly due to the consolidation of acquired companies. The share of integrated enterprise services and equipment sales was about 43 percent of net sales.
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| SEK in millions, except margins | 2007 | 2006 |
|---|---|---|
| Net sales | 13,729 | 12,940 |
| EBITDA excl. non-recurring items | -162 | 360 |
| Margin (%) | neg | 2.8 |
| Operating income | -725 | -234 |
| Operating income excl. non-recurring items | -590 | 44 |
| CAPEX | 532 | 324 |
Additional segment information available at www.teliasonera.com/ir
EBITDA, excluding non-recurring items, turned negative in 2007 mainly due to the migration from traditional services altering the product mix and lowering the gross margin. Ongoing efficiency measures were not sufficient to offset these negative effects.
CAPEX was SEK 532 million (SEK 324 million in 2006), including investments in managed services, such as server operations.
Expansion and continued strong development in Eurasia
TeliaSonera further strengthened its footprint in the fast growing markets of Eurasia in 2007 by acquiring mobile operators in Uzbekistan and Tajikistan and a minority shareholding in Afghanistan's largest mobile operator. With low mobile penetration rates and a combined population of over 33 million, Uzbekistan and Tajikistan represent a valuable opportunity for rapid growth.
The competitive and regulatory environment is putting margins under growing pressure in all markets. Price erosion, increased sales and marketing efforts and overall cost inflation impacted margins negatively, particularly in Kazakhstan, where competition for new subscribers was intense. Market leadership was maintained in Azerbaijan and Kazakhstan and the strong positions were kept in Uzbekistan, Tajikistan, Georgia and Moldova.
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| SEK in millions, except margins and operational data | 2007 | 2006 |
|---|---|---|
| Net sales | 10,338 | 8,508 |
| EBITDA excl. non-recurring items | 5,255 | 4,757 |
| Margin (%) | 50.8 | 55.9 |
| Income from associated companies | ||
| Russia | 4,181 | 2,780 |
| Turkey | 2,725 | 2,020 |
| Operating income | 10,883 | 8,527 |
| Operating income excl. non-recurring items | 10,883 | 8,527 |
| CAPEX | 3,114 | 2,699 |
| Subscriptions, period-end (thousands) | ||
| Subsidiaries | 12,147 | 7,352 |
| Associated companies | 78,083 | 65,169 |
Additional segment information available at www.teliasonera.com/ir
Consolidated operations
Net sales rose 21.5 percent, fueled by strong subscription growth and increased usage in all markets, particularly in Kazakhstan and Azerbaijan. Consolidated since July 1, 2007, the operations in Uzbekistan and Tajikistan affected net sales positively by 3.2 percent. Net sales rose 27.6 percent in local currencies.
The number of subscriptions rose by 65 percent to 12.1 million, including 1.3 million subscriptions from the acquired operations in Uzbekistan and Tajikistan. Subscription growth during the year excluding acquisitions was 47.5 percent, or 3.5 million subscriptions, and was driven by 2.5 million net additions in Kazakhstan mainly due to increased subscriber acquisition campaigns.
EBITDA, excluding non-recurring items, increased by SEK 498 million as a result of higher sales. The margin, however, decreased from 55.9 percent to 50.8 percent due to price erosion, higher promotional spending and the dilutive effect from the acquired operations in Uzbekistan and Tajikistan. Overall inflation also drove costs higher, particularly for salaries, rents and energy.
CAPEX increased by 15 percent, equaling 30 percent of net sales, and was kept relatively high in order to build additional capacity, improve coverage and maintain a high service quality in the networks. Additional investment needs came from acquired operations in Uzbekistan and Tajikistan.
In December 2007, TeliaSonera finalized the negotiations to introduce a local partner to its Uzbek mobile operator Coscom. In the transaction, TeliaSonera received certain assets in exchange for 26 percent of TeliaSonera's 100 percent ownership in Coscom and a net cash consideration of approximately SEK 200 million (USD 30 million). The Uzbek partner was also granted a put option, giving the partner the right to sell the 26 percent stake back to TeliaSonera after December 31, 2009, when certain pre-agreed criteria are fulfilled.
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| SEK in millions | 2007 | 2006 |
|---|---|---|
| Net sales | 10,338 | 8,508 |
| of which Kazakhstan | 5,582 | 4,803 |
| of which Azerbaijan | 2,958 | 2,453 |
| of which Uzbekistan | 139 | - |
| of which Tajikistan | 184 | - |
| of which Georgia | 1,123 | 945 |
| of which Moldova | 365 | 317 |
Associated companies - Russia
MegaFon (associated company, 43.8 percent holding) in Russia continued to demonstrate strong performance and increased its subscription base by 20 percent to 35.7 million (29.7). MegaFon increased its market share in terms of subscriptions from 19 to over 20 percent, and also strengthened its position in terms of revenue. The Russian mobile market continued showing strong volume and revenue growth. The total market grew by 13 percent to 172 million. Mobile SIM-card penetration rose from 105 to 119 percent.
TeliaSonera's income from Russia rose by 50 percent to SEK 4,181 million (SEK 2,780 million in 2006), fueled by continued strong sales and earnings growth at MegaFon. The result was also positively impacted by SEK 240 million in the form of a gain from the sale of Petersburg Transit Telecom by Telecominvest and a partial reversal of write-downs on old equipment in MegaFon. The Russian ruble depreciated against the Swedish krona which had a negative impact of SEK 110 million. The comparative year was positively affected by a net of SEK 272 million from exchange rate fluctuations relating to MegaFon's borrowings and divestments.
Associated companies - Turkey
Turkcell (associated company, 37.3 percent holding, reported with a one-quarter lag) in Turkey increased its subscription base by 13 percent to 34.8 million (30.8), as a result of an expanded distribution channel network and well-received offerings. In Ukraine, the number of subscriptions rose by 65 percent to 7.6 million (4.6).
TeliaSonera's income from Turkcell, which showed continued strong sales and earnings growth, rose by 35 percent to SEK 2,725 million (2,020). The Turkish lira depreciated against the Swedish krona, which had a negative impact of SEK 165 million.
In 2007, Turkcell distributed to its shareholders a total net cash dividend of approximately SEK 2,800 million (USD 400 million), corresponding to 65 percent of the distributable income for the fiscal year 2006. TeliaSonera's share was approximately SEK 1,000 million.
Other operations
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| SEK in millions | 2007 | 2006 |
|---|---|---|
| Net sales | 647 | 527 |
| EBITDA excl. non-recurring items | -348 | -318 |
| Income from associated companies | 740 | 725 |
| Operating income | 361 | 633 |
| Operating income excl. non-recurring items | 219 | 243 |
| CAPEX | 347 | 215 |
Includes TeliaSonera Holding, Corporate Head Office and Common Services
Income from associated companies includes a SEK 631 million gain from sale of Eltel Network in 2007 by TeliaSonera's associated company Telefos AB, and a SEK 562 million gain from the sale of MTN Uganda in 2006 by TeliaSonera's associated company Overseas Telecom AB.
Non-recurring items were positively impacted by reversals of provisions related to the restructuring and integration of international carrier operations, by SEK 155 million in 2007 and by SEK 101 million in 2006. Additionally, in 2006, non-recurring items were positively impacted by a SEK 500 million reversal of a provision related to the settlement of a dispute regarding a real estate in the U.K.