ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. 2009 CONSOLIDATED ANNUAL REPORT 1 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. TABLE OF CONTENTS ZON IN NUMBERS SEE 1.1 Joint Message from the Chairman and CEO 9 1.2 About ZON 10 GROW 2.1 ZON Universe 2009 12 2.2 ZON’s Operations 14 2.3 Technology 20 ENTHRALL 3.1 Leadership 23 LISTEN 4.1 Employees 26 4.2 Customers 27 4.3 Community 30 DELIVER 5.1 Macroeconomic Background 34 5.2 Sector / Regulation 35 5.3 2009 Operational Performance 40 5.4 2009 Financial Performance 44 5.5 Share Performance 51 2 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. SURPRISE 6.1 ZON Future 54 STATEMENT UNDER THE TERMS OF ARTICLE 245, PARAGRAPH 1, C) OF THE PORTUGUESE SECURITIES CODE 55 CONSOLIDATED FINANCIAL STATEMENTS 57 DOCUMENTS OF APRECIATION OF CONSOLIDATED ACCOUNTS 143 CORPORATE GOVERNANCE REPORT 151 3 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. ZON IN NUMBERS Business Indicators (in thousands): Triple Play Customers: Triple Play Penetration in Cable Customer Base: +17.6pp +75 .9% +17.1pp +3 .0x 484 41% 275 23% 69 6% 2007 2008 2009 2007 2008 2009 RGUs: RGUs per Subscriber [units]: CAG R CAG R CAG R +2 0.6% CAG R +18.0% +11.6+11.6%%%% +9 .1% 3.507 2,17 2.982 1,84 2.413 1,56 2.112 1,43 1.937 1,31 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 4 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. Basic Subscribers: Broadband Subscribers: CAG R CAG R CAG R +1.5% CAG R +2 3 .5% +2 .3% +7.2% 1.614 1.595 611 1.547 1.479 1.480 519 400 348 362 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Fixed Voice Subscribers: Blended ARPU [euros]: +5 .6% +6 8 .5% +4 .0% +3 .2x 33,8 584 32,0 30,8 347 83 2007 2008 2009 2007 2008 2009 5 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. Pay TV Market Shares 2008: Pay TV Market Shares 2009: 2,4% 1,7% 10,4% 12,6% 13,8% 23,3% 63,9% 71,8% ZON PT Cabovisão Others ZON PT Cabovisão Others Source: Anacom 4Q09, ZON Broadband Market Shares 2008: Broadband MarketShares 2009: 3,9% 2,2% 2,8% 2,5% 8,0% 9,3% 32,2% 31,3% 9,2% 12,5% 44,5% 41,6% ZON PT Sonaecom Cabovisão Vodafone Others ZON PT Sonaecom Cabovisão Vodafone Others Source: Anacom 4Q09 Fixed Voice Market Shares 2008: Fixed Voice Market Shares 2009: 3,9% 0,8% 2,9% 1,1% 7,0% 16,8% 7,1% 10,5% 16,0% 18,0% 60,4% 55,5% ZON PT Sonaecom Cabovisão Vodafone Others ZON PT Sonaecom Cabovisão Vodafone Others Source: Anacom 4Q09, ZON 6 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. Financial Indicators * (in millions of euros) : Operating Revenues: Pay TV, Broadband and Voice Revenues: CAG R CAG R CAG R +7.2% CAG R +8.4% +6 .7% +6 .7% 739 823 678 766 630 716 591 666 553 628 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 EBITDA and EBITDA Margin: Net Income: CAG R CAG R CAG R (3 3 .5.5)%)%)%)% CAG R (5 .5)% CAG R +10.1% 45,0% 300 +6 .2% 267 112 242 40,0% 250 211 220 35,0% 195 200 31,7% 31,6% 32,4% 71 30,0% 31,1% 30,8% 150 49 25,0% 48 44 100 20,0% 15,0% 50 10,0% 0 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Total CAPEX: EBITDA - CAPEX: +3 2 .8% +7.2% +7.2% 81 214 78 70 161 150 53 10 2007 2008 2009 2005 2006 2007 2008 2009 Note: Adjustments have been made to 2008 operating revenue and cost lines to reflect the impact of the renegotiation, in 1Q09, of the SIC content contract, whereby ZON is no longer responsible for the wholesale of the SIC Pay TV channels to other operators. The cumulative pro- forma adjustments made in 2008 resulted in a reduction in revenues of 10.6 million euros, in costs of 8 million euros and in EBITDA of 2.6 million euros. 7 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. SEE 8 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. SEE 1.1. JOINT MESSAGE FROM THE CHAIRMAN AND CEO It is a great pleasure to be presenting another year of very strong operational and financial performance, in a market which continues to witness a significant level of competition between operators. ZON once again achieved the goals established in the strategic plan which was outlined and approved at the beginning of 2008. We have strived to innovate in our products and services, to renew our network, to introduce significant improvements in our customer support, as well as to seek new growth opportunities. This strategy has enabled us to diversify and to significantly grow the number of services provided to our Customers. We have reached record levels of Triple Play penetration with around 41% of our customers subscribing to our TV, Broadband and Voice services and we rank as the fastest growing triple play operator in Europe. At the end of 2009 we remained the uncontested leader in the Portuguese Pay TV market with almost 1.6 million subscribers. We were the second largest broadband operator with 611 thousand subscribers and became the second largest voice operator at the end of the year with 584 thousand subscribers. We successfully completed our mobile portfolio with the launch of mobile broadband and homezoning products, in addition to mobile voice, thus making it possible to provide triple play solutions to our satellite customers. We have also taken steps to renew our business offer with an independent team and tailor-made offer, targeting small and medium sized businesses in Portugal. In addition, our Audiovisuals and Cinema business is one of the most dynamic and creative in its peer group with more than 138 digitalized screens, 38 of which with 3D projection technology. Supporting our strong commercial performance is our ongoing investment in our network. ZON today leads the roll-out of Next Generation Networks in Portugal, already covering 2.4 million homes with EURODOCSIS 3.0, enabling the delivery of ultra-broadband speeds to our customer base. Testimony to our ability to lead in innovation, we are the only operator in Portugal today to provide widespread broadband offers of 100 Mbps and 200 Mbps and we became the first operator in Europe and the third worldwide to launch a 1Gbps residential offer. Our strategy to explore international growth opportunities took a significant step forward in 2009 with the development of a joint-venture to launch Pay TV services in Africa. The launch of our new operator for Angola, “ZAP” in 1Q10 represents the first stage of a broader strategy to develop operations with our Angolan partner for the African Continent. We are very excited with this area of development as it presents a very attractive avenue of future growth, leveraging upon our core skills and asset base developed in the domestic market. The strong operational performance we continue to deliver has been achieved against a difficult backdrop of global financial and economic conditions and a very competitive domestic fixed line market. Despite this challenging environment, we have translated our strong operational performance into very positive financial results. Our Consolidated Revenues grew by 7.5% in 2009 to 823 million euros and EBITDA grew by 10.4% to 267 million euros. Cash Flow generation has been affected by the commitment to invest in the growth of our subscriber base - we are faced with a unique opportunity to achieve a leading market position in our core markets, in particular in triple play penetration. Our performance is only possible due to the continued efforts of ZON’s highly skilled, motivated and energetic team. We strive to uphold an efficient, light and stimulating work environment capable of nurturing creativity, innovation and both personal and professional development. 9 ZON Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. On behalf of the management team of ZON, we extend our thanks to all our employees who work so hard every day to make our company a success. 1.2. About ZON ZON Multimedia is one of the largest companies in the PSI-20 index, and leads the Triple Play market in Portugal. It is also the nation-wide leader of the Pay TV market, the second largest Internet Provider and the second largest Fixed Voice services provider. ZON Multimedia’s offers are marketed with the brands ZON TVCabo, ZON Fibra, ZON Phone, ZON Lusomundo Cinemas, ZON Lusomundo Audivisuais and ZON Conteúdos. ZON TVCabo has approximately 64% of the Pay TV market, with approximately 1.6 million customers. Around 611 thousand of these customers are also subscribers of ZON’s Broadband offers, which are the technological leaders in the Portuguese market, already having launched a 1Gbps commercial offer. ZON’s portfolio was complemented in the first quarter of 2007 with a Fixed Voice service, which had more than 584 thousand customers by the end of 2009. Triple Play (TV, Broadband and Voice) became Quadruple Play in 2009, with the launch of an MVNO (Mobile Virtual Network Operator). ZON TVCabo thus acquired the dimension of a new, global telecommunications operator, with more than 3 million homes passed and a network that offers download speeds of 200Mbps to more than 2.4 million homes.