Annual Report 2005 Contents The Year in Brief 1 Comments from the CEO 2 This is TeliaSonera 4 Strategy for Profitable Growth 5 The Market for Telecom Services 6 Growth Initiatives 7 Cost Efficiency 10 Personnel and Competence 12 TeliaSonera in Society 13 The TeliaSonera Share 14 Corporate Governance Report 16 Report of the Directors 23 Risk Factors 33 Consolidated Financial Statements 36 Parent Company Financial Statements 80 Proposed Appropriation of Earnings 92 Auditors’ Report 93 Ten-Year Summary 94 Forward-Looking Statements 97 Annual General Meeting 2006 98 TeliaSonera’s Annual Report is available at www.teliasonera.com/investorrelations under the Report section. Hardcopies of the Annual Report can be printed from the web or be ordered from the web or by phone at +46 (0) 372 851 42. We also publish an Annual Review, which is a summary of the year. The Annual Review is available at www.teliasonera.com/investorrelations under the Report section. A printed version can be ordered from the web or by phone at +46 (0) 372 851 42. TeliaSonera AB is a public limited liability company incorporated under the laws of Sweden. TeliaSonera was created as a result of the merger of Telia AB and Sonera Corporation in December 2002. In this annual report, references to “Group,” “Company,” “we,” “our,” “TeliaSonera” and “us” refer to TeliaSonera AB or TeliaSonera AB together with its subsidiaries, depending upon the context. The Year in Brief The Year in Brief Net sales increased 7.0 percent to SEK 87,661 million (81,937) driven by strong mobile and broadband growth. Strong customer growth year on year: – 2.7 million new customers in the majority owned Nordic, Baltic and Eurasian operations. – 14.8 million new customers in the associated companies MegaFon and Turkcell. Operating income, excluding non-recurring items, totaled SEK 20,107 million (20,859). International Mobile operations close to 30 percent of Group operating income. EBITDA margin, excluding non-recurring items, decreased to 33.6 percent (36.9) due to decreased earnings in Finland mobile and Sweden fixed. Mobile margins maintained in Sweden despite strong price pressure. Free cash flow increased to SEK 15,594 million (14,118). Net income totaled SEK 13,694 million (14,264) and earnings per share were SEK 2.56 (2.77). Proposed ordinary dividend of SEK 1.25 per share (SEK 5,613 million). In addition to the ordinary dividend, a distribution of SEK 10,104 million to the shareholders through an extraordinary dividend of SEK 2.25 per share is proposed. Financial Highlights SEK in millions, except per share data 2005 2004 Net sales 87,661 81,937 EBITDA excl. non-recurring items 29,411 30,196 Operating income 17,549 18,793 Operating income excl. non-recurring items 20,107 20,859 Net income 13,694 14,264 of which attributable to shareholders of the parent company 11,697 12,964 Earnings per share (SEK) 2.56 2.77 Please refer to page 96 for definitions. TELIASONERA ANNUAL REPORT 2005 1 Comments from the CEO Dear Shareholders, 2005 was another strong year for TeliaSonera. We posted a healthy 7 percent growth in revenue, welcomed more than 17 million new customers and earned an income of more than SEK 20 billion from our operations. TeliaSonera defended successfully its leading position on the market. The development clearly shows our ability to deliver appreciated services to our customers and good results to our owners despite intense competition. I want to thank all employees for their excel- lent contributions in these challenging times. Since the merger between Telia and Sonera three years ago, we have taken a number of important steps; acquisitions, improve- ments in efficiency and the launch of new services to name a few. During the past three years we have generated a positive cash flow of SEK 47 billion in a market characterized by fierce price pressure, increased competition and new technology. We have at the same time distributed SEK 22 billion to the shareholders. I believe we have succeeded in finding the right balance between returns to shareholders and financial strength, which is required for us to take an even more active role in the future development of the telecom service industry. Our strategy is built on creating profitable growth, both organi- cally and through acquisitions, in each of the two regions we are focusing on, i.e. the home markets in the Nordic and Baltic coun- tries and our eastern operations in Eurasia, Russia and Turkey. On the home markets, we are in the middle of a major transfor- mation that focuses on mobile and internet-based services at the same time as we are striving to maintain our good profitability. The challenge is to rapidly complete the extensive restructuring that all large incumbent telecom operators are currently dealing with. We are also looking for complementary acquisitions building on our strength in the region. So far we have acquired Orange’s Danish operations, Norwegian Chess and increased our sharehold- Fixed communications were, however, strong in Finland, Denmark ings in several of our Baltic operations. and the Baltics. We maintained sales and improved margins in these In the east, we aim for control. We have not yet been able to areas. Substantially increased broadband volumes also generally move our shareholding positions forward. We will, however, await offset decreased revenues for fixed voice, with the exception of the right opportunity since there is strong potential for value Swedish fixed communications, where, despite strong growth in development. We will also continuously evaluate various acquisition broadband, the migration to mobile voice and IP-based solutions opportunities to enhance our strength in the region. still affected total revenues negatively. By utilizing the opportunities available in our two regions, we During the year, we continued to renew and focus our service are creating value that will give us the operational and financial portfolio and launched a number of attractive mobile and internet- strength to actively participate in due course in the consolidation based services. I am referring to the possibility to access TV and of the European market, which will continue. In the telecom music via the mobile, which was popular among customers. The services market, the combination of local strength and global scale mobile content services were gathered on a portal, SurfPort, and advantages will be of great importance. are therefore easily accessible, which increases our attractiveness as During 2005, TeliaSonera continued to show strength in the a distributor of content services. Surf-Port was launched in several market. Mobile operations in Norway, Denmark and the Baltics countries. developed well. Our Swedish mobile operations showed very good We also introduced new broadband-based services in homes earnings, despite a tough market with falling prices. We defended such as internet-based digital TV and a pilot program to make and both our position as market leader and our margins. receive calls with the mobile phone at a lower price over broadband The mobile markets in Russia, Turkey and Eurasia showed the when at home. strongest growth and continued high margins. These operations On the business market, our mobile Connect services have contributed to 30 percent of the Group’s operating income, twice attracted a lot of customers. With Connect users can always con- as much as at the TeliaSonera merger. nect their laptops using the best connection wherever they are, The market with the most difficult conditions during the year was stay in touch with office IT resources and receive e-mails. We are the Finnish mobile market, which experienced extreme competition also testing the possibility to use the mobile phone via wireless and price erosion of approximately 20 percent. Our market position LAN in the office and as a normal mobile outside with a seamless was successfully defended, but at the cost of heavily decreased handover, a so-called voice over IP service. We are the first in earnings. A turnaround program has been initiated to restore profits. Europe to test this service. 2 TELIASONERA ANNUAL REPORT 2005 Comments from the CEO All of these services have one common denominator – to be easy to our costs to significantly lower levels. Our cost levels must be on use. We regard simplicity as the key to creating long-term growth par with the best in Europe to be able to compete in the future. and value. Our customers should experience an unparalleled level Our progress so far with these efforts has been satisfactory. of simplicity that makes it possible to do completely new things The TeliaSonera Group successfully maintained its position as with telecommunications, and this is just the beginning. Our tele- market leader during 2005 despite strong competition that included communications services should be useful, work well and provide price pressure and comprehensive internal restructuring in the home the highest level of service. markets. We have established a good operational and financial Telecom services is a growing business, despite the fact that platform for 2006. I expect that we will continue to demonstrate incumbent operators’ revenues are currently under pressure. In the sales growth, improved earnings and strong cash flow during the Swedish market, which has a legacy of fixed services, this pressure coming year. is all too evident. We decided therefore to take the lead in the Based on these expectations, the Board of Directors and I propose transformation away from the legacy services. an increased dividend during 2006. In total, SEK 15.7 billion is The future is in mobile services, broadband for consumers and proposed for distribution to the shareholders. If approved by the internet data communications for businesses, which are comple- owners, TeliaSonera will be one of the highest yielding stocks in its mented by internet-based services, managed services for businesses industry in Europe.