Telecom Italia: Board approves first half 2007 results

Telecom Italia Group revenues in-line, margins better than 2007 targets

Consolidated net profit in line with previous year (+4 million euro)

TELECOM ITALIA GROUP

REVENUES: 15,470 MILLION EUROS (UP 0.9% COMPARED WITH THE FIRST HALF OF 2006); + 0.2% ORGANIC GROWTH (UP 1.7% NET OF CONTRACT CHANGES RELATING TO NON-GEOGRAPHICAL NUMBERS; ANNUAL GROWTH TARGET BETWEEN 1.0% AND 2.0%)

EBITDA: 6,294 MILLION EUROS (-3.4% COMPARED WITH FIRST HALF 2006); ORGANIC VARIATION -2.8%

ORGANIC EBITDA MARGIN EQUAL TO 41.6% (-1.3pp COMPARED WITH FIRST HALF 2006, ANNUAL TARGET BETWEEN -2.5pp AND -2.0pp)

EBIT: 3,449 MILLION EUROS (-9.3% COMPARED WITH FIRST HALF 2006); ORGANIC VARIATION -5.4%

ORGANIC EBIT MARGIN 23.1% (-1.4pp COMPARED WITH FIRST HALF 2006, ANNUAL TARGET BETWEEN -3.0pp AND -2.5pp)

NET PROFIT: 1,500 MILLION EUROS; +0.3% COMPARED WITH THE SAME PERIOD IN 2006 (1,496 MILLION EUROS) 

NET FINANCIAL DEBT AT 30 JUNE 2007 WAS 39,175 MILLION EUROS (UP 1,874 MILLION EURO FROM 31 DECEMBER 2006) THANKS TO CASH FLOW FROM OPERATIONS OF 1,625 MILLION EUROS, PARTIALLY OFFSETTING CASH OUT FOR THE AOL ACQUISITION (669 MILLION EUROS) AND DIVIDEND PAYOUT (2,830 MILLION EUROS)

THE NET FINANCIAL POSITION ON JUNE 30 DOES NOT YET INCLUDE EQUITY DISPOSALS (OGER, SOLPART, CAPITALIA) WORTH MORE THAN 870 MILLION EUROS 

The accounts of the Telecom Italia Group for the first half of 2007 and associated comparable periods were prepared in application of the international accounting standards issued by the Internal Accounting Standards Board and approved by the European Union (“IFRS”).
This press release also contains alternative performance indicators not contemplated under IFRS standards (EBITDA; EBIT; Organic Difference in Revenues, EBITDA and EBIT; and Net Financial Borrowings). These terms are defined in the appendix.

Milan, September 7, 2007 – The Telecom Italia Board of Directors, chaired by Pasquale Pistorio, today examined and approved the company accounts for the first half of 2007.

TELECOM ITALIA GROUP
The consolidation area of the Telecom Italia Group as at 30 June 2007 differs from 30 June 2006 and 31 December 2006 as follows:

Inclusion: AOL Internet operations in Germany (consolidated from 1 March 2007);

Exclusions: Digitel Venezuela (sold in May 2006), previously stated as discontinued or soon-to-be discontinued operations, Ruf Gestion (sold in March 2006), Eustema (sold in April 2006), Telecom Italia Learning Services (sold in July 2006) and other minor businesses.

Telecom Italia confirms the revenues and organic margin figures stated in the 24 July preliminary report, while the 20 million euro penalty issued by the Italian Competition Authority on 3 August generated a corresponding provision resulting in reductions of the same amount in EBITDA and EBIT.

First-half 2007 revenues rose by 0.9% to 15,470 million euros, compared with a first half 2006 figure of 15,335 million euros. Excluding the effects of exchange rate fluctuations (-40 million euros) and changes to the scope of consolidation (+149 million euros), organic growth was equal to 0.2% (+26 million euros). In compliance with AGCOM Italian Communications Regulatory Authority resolution no. 417/06/CONS, from 1 January 2007 Telecom Italia only provides billing services for customer calls to other carriers' non-geographical numbers, and is therefore no longer liable for the insolvency risk associated with these receivables. Since that date, interconnection revenues and associated costs have no longer taken into account the traffic generated by such calls, which in the first half of 2006 totaled 230 million euros and were entered onto the Fixed Line Domestic unit accounts (along with the entry of a corresponding figure as costs). Excluding this item, organic growth was equal to 1.7%. Moreover, compared with the same period in 2006, revenues for the first half of 2007 have been impacted since March 2007 by the application of the so-called “Bersani Decree” (-163 million euros), by the effects of changes to termination rates that came into force in the second half of 2006 (-95 million euros), and by self-regulation of international roaming tariffs in compliance with European Commission rulings (-20 million euro). Compared with the first half of the preceding year, these changes (including the non-geographical numbering modifications) had a total value of 508 million euro.
The main drivers of organic growth in the first half of 2007 were increases in the voice services and VAS services of the Brazil Mobile BU (+620 million euros), a significant additional 114 million euro contribution from the European Broadband BU spurred by customer portfolio growth in France and Germany, and additional revenues from the Media BU, driven by advertising revenue growth and higher revenues from Digital Terrestrial operations.

Revenues breakdown by activities:

EBITDA (operating result before depreciation and amortization, capital gains/losses and write-backs/write-downs of non-current activities) amounted to 6,294 million euros, 3.4% lower than for the first half of 2006 (-224 million euros). The EBITDA margin for the first half of 2007 was equal to 40.7% (42.5% for the first half of 2006). Excluding the effects of exchange-rate fluctuations and changes to the consolidation area, the organic difference in Ebitda amounted to -2.8% (-186 million euros):

The organic EBITDA margin amounted to 41.6% (down 1.3pp on the figure of 42.9% registered for the first half of 2006; this is an improvement on the annual target of -2.5pp to -2.0pp versus 41.5% for FY 2006).
It should be noted that the above-mentioned changes had a negative impact on EBITDA of 191 million euros (163 million euros from the Bersani Decree, 28 million euros from fixed-line/mobile termination rates).

EBIT (operating result) amounted to 3,449 million euros, down 352 million euros compared with the first half of 2006 (-9.3%). The organic difference in EBIT was -204 million euros, or -5.4%, as follows:

The EBIT margin was down from 24.8% for the first half of 2006 to 22.3% for the first half of 2007.

The organic EBIT margin was 23.1% (down 1.4% on the figure of 24.5% registered for the first half of 2006; this is an improvement on the annual target of -3.0% to -2.5% on the FY 2006 figure of 24.0%).

The net consolidated result for the first half of 2007 amounted to 1,500 million euros (1,502 million euros prior to minority interests). This corresponds to 0.3% growth compared with the first half of 2006 (1,492 million euros). The above mentioned Ebit reduction was more than offset, in particular, by lower financial charges of 111 million euros (which include the bringing to market value of the call options on 50% of Sofora, a positive 93 million euros) and to lower taxation on income of 287 million euros.

Industrial investment in the first half of 2007 amounted to 2,474 million euros, 258 million euros more than in the corresponding period last year. This was mainly due to greater investment in the development of domestic telecommunications (+102 million euros), European Broadband (+24 million euros) and Brazilian Mobile (+78 million euros).

Net financial debt at 30 June 2007 amounted to 39,175 million euros (37,301 million euros at year-end 2006). Notwithstanding the 1,625 million euros generated by cash flow from operations since year-end 2006, debt increased as a result of the AOL acquisition (669 million euros) and dividend payouts (2,830 million euros). It should be noted that this net financial debt figure does not yet benefit from the sale of equity stakes (Oger, Solpart,
Capitalia) worth over 870 million euros which took place after 30 June 2007 (details at the end of the press release in “Events Occurring after June 30, 2007”).

Compared with 31 March 2007 (37,182 million euros), net financial debt increased by 1,993 million euros essentially due to dividend payments.

At 30 June 2007, the Group employed 83,812 people, compared with the year-end 2006 figure of 83,209. The 1,101-person rise was mainly due to the AOL acquisition.

BUSINESS UNIT RESULTS

On January 22, 2007, Telecom Italia announced a new corporate structure to respond to major changes in technology, the marketplace and the regulatory environment. The new structure provides greater operational flexibility while facilitating the company’s strategic orientation towards business area convergence (fixed-line and mobile communications, broadband internet and media content).

For organizational and accounting purposes, the new structure divides the company into the following categories:

Domestic

European Broadband

Brazil Mobile

Media

Olivetti

Other operations

Specifically:

The “Domestic” Business Unit is responsible for fixed-line and mobile telecommunications operations managed by Telecom Italia S.p.A. and by the Telecom Italia Sparkle Group, along with associated support operations;

The “European Broadband” Business Unit covers broadband services in France, Germany and Holland;

The “Brazil Mobile”, “Media” and “Olivetti” Business Units remain effectively as they were;

“Other operations” consists of finance enterprises, foreign operations not included under other business units (such as Entel Bolivia), and other minor enterprises not strictly involved in Telecom Italia Group core business.

Telecom Italia Media’s results for the first half of 2007 were reported in the press release distributed on 6 September 2005, following approval by the Board.

DOMESTIC

Revenues of 12,182 million euros decreased by 5.4% (-695 million euros) compared with the first half of 2006. On an organic basis, the decrease amounted to 5.3% (-679 million euros). Excluding changes relating to non-geographical numbers, the figure drops to -3.6%, compared with an annual target of -3.5% to -2.5%.
As noted earlier, performance was impacted by the introduction of the so-called “Bersani Decree” in March 2007, by reductions in fixed-line/mobile termination rates, and by self-regulation of international roaming traffic prices (in compliance with European Commission rulings). Taken together, these developments (including the non-geographical numbers effect) would have reduced revenues for the first half of the preceding year by 508 million euros.

Fixed-Line Telecommunications
Fixed-line telecommunications revenues amounted to 7,983 million euros, a reduction of 7.2% (-616 million euros) compared with the first half of 2006. The organic difference in revenues amounted to -4.4% excluding exchange rate fluctuations, changes to the scope of consolidation, the impact of new accounting practices introduced in relation to non-geographical numbers.

Retail Voice
Retail Voice revenues amounted to 4,285 million euros. Excluding the effect of the above-mentioned changes to non-geographical numbers, the 8.1% reduction compared with the first half of 2006 reflects a reduction in traffic and rates (reduced termination tariffs) for fixed-line/mobile calls, a migration of fixed-line market traffic towards mobile telephony, and competitive price pressure, particularly in the Top Clients segment.

Internet
Internet unit revenues amounted to 716 million euros. Excluding the effect of the above-mentioned changes relating to non-geographical numbers, this figure registered 6.5% growth (up 44 million euros) compared with the first half of 2006. Broadband revenues continued to register strong growth, up 10.0% (+61 million euros) compared with the same period in 2006.
Telecom Italia’s overall domestic market broadband access customer portfolio grew to 7.3 million customers at 30 June 2007, of whom 6.1 million are retail customers.
The unit continues to implement a traffic- and value-focused strategy. Flat-rate offerings accounted for 58% of the entire Alice Consumer customer portfolio; the VoIP customer portfolio registered strong growth to 924,000, corresponding to 15.2% of all retail broadband access lines.

Data Business
Data Business revenues amounted to 841 million euros, an overall 5.5% decrease (49 million euros) compared with the first half of 2006, all of which was registered during the first quarter of 2007. This was the result of increasing competitive pressure in the corporate clients market, and of a public sector contract price review. Leased lines and traditional data transmission services bore the brunt of this reduction. ICT services, however, continued to register dynamic growth, up 14.5% compared with the first half of 2006 (up 40 million euros).

Wholesale 
Revenues from wholesale services amounted to 1,950 million euros, an overall increase of 1.4% (+27 million euros) compared with the first half of 2006.
Revenues from domestic wholesale services grew by 15.6% compared with the first half of 2006 to 1,164 million euros (+157 million euros). Revenues from international wholesale services amounted to 786 million euros, down 14.2% (-130 million euros) compared with the first half of 2006.

Mobile Telecommunications
Revenues for the first half of 2007 amounted to 4,916 million euros, down 1.3%, while revenues from services were down -0.4%. Results were impacted by the negative effects of the so-called “Bersani Decree”, by changes to fixed-line/mobile termination rates, and by self-regulation of international roaming tariffs in compliance with European Commission rulings. These regulatory developments apart, overall domestic mobile revenues would have registered growth of 3.8%, and revenues from services alone would have risen 5.1%.
The first half of 2007 saw strong growth (+15.5%) in revenues from value-added services (VAS), which increased to 916 million euros (+123 million euros compared with the first half of 2006, of which +78 million euros in the second quarter). Revenues were boosted by ongoing innovation in the interactive services portfolio. VAS revenues accounted for 19.9% of revenues from services (compared with 17.2% for the first half of 2006). “Voice” revenues of 3,462 million euros decreased for outbound calls (-2.2%) and inbound calls (-7.8%). Revenues from the sale of handsets decreased 12.8% to 321 million euros (-47 million euros compared with the first half of 2006).
At 30 June 2007, Telecom Italia supplied 34.3 million mobile lines, of which 5.1 million (15.0% of total customers) using UMTS technology. The grand total rose by 1.9 million compared with year-end 2006, corresponding to a market share of 40.3%.

Domestic business unit EBITDA (operating resulting before amortization and depreciation, capital gains/losses, and write-backs/write-downs of non-current activities) amounted to 5,619 million euros, down 9.5% (-591 million euros) compared with the first half of 2006. The EBITDA margin was 46.1% (48.2% for the first half of 2006). Compared with 2006, the result was strongly impacted by the above-mentioned changes to the regulatory environment introduced under the “Bersani Decree” (corresponding to 191 million euros), changes in the revenue mix, and increasing competitive pressure in Italy which is having an effect both on price and on sales costs.
 
The organic difference in EBITDA compared with the first half of 2006 was -8.4% (-526 million euros):

The organic EBITDA margin was 47.2% (down 1.6pp on the figure of 48.8% registered for the first half of 2006, and in line with the 2007 target of between -2.0pp and -1.5pp).

Domestic business unit EBIT (operating result) was 3,456 million euros, down 14.4% (-581 million euros) compared with the first half of 2006. The EBIT margin was 28.4% (31.4% for the first half of 2006). The organic difference in EBIT was -10.2% (-405 million euros) compared with the first half of 2006:

The organic EBITDA margin was 29.4% (31.0% in the first half of 2006).

Industrial investment amounted to 1,895 million euros (+102 million euros compared with the same period in 2006). Industrial investment was equal to 15.6% of revenues (13.9% in the first half of 2006). Higher investment reflects the Group’s ongoing commitment to modernizing its network, technology and services.

On 30 June 2007, the headcount stood at 65,880, down by 955 from 31 December 2006.

EUROPEAN BROADBAND

European Broadband business unit revenues (France, Germany and Holland) grew by 62.8% to 695 million euros (+268 million euros) compared with the first half of 2006. Organic growth on an equal consolidation area basis amounted to 114 million euros (+19.6%). The broadband access portfolio stands at 3.2 million, most of which are dual or triple play customers.

EBITDA (operating result before depreciation and amortization, capital gains/losses, and write-backs/write-downs of non-current activities) amounted to 88 million euros, an increase of 74 million euros (+528.6%) compared with the first half of 2006, and equal to 12.7% of revenues (3.3% for the first half of 2006). Organic growth amounted to +164.7% (+56 million euros) compared with the first half of 2006:

EBIT came in at -52 million euros, a 26 million euro improvement (up 33.3%) compared with the first half of 2006. Organic EBIT improved by 11 million euros (+18.0%) compared with the first half of 2006:

Industrial investment amounted to 252 million euros, a rise of 24 million euros compared with the same period in 2006.
On 30 June 2007, the headcount stood at 4,455, an increase of 1,389 from 31 December 2006. This was mainly as a consequence of the acquisition of AOL (1,101 employees).

MOBILE BRAZIL 
(Average euro/real exchange rate: 0.36779)
As of June 30, 2007, the Brazilian market provided a total of 106.7 million lines (56.4% population penetration), compared with 99.9 million lines at year-end 2006 (53.2% penetration). The TIM Brasil Group has continued to consolidate its position as no.2 player on the market, totaling 27.5 million lines and holding a 25.8% market share.

TIM Brasil Group consolidated revenues for the first half of 2007 amounted to 6,313 million reais, a rise of 35.9% compared with the first half of 2006. Revenues from services rose 40.8%, boosted by strong growth in voice and value added services. Revenue growth excluding regulatory changes in 2006 (abolition of the “Bill and Keep” rule) was equivalent to 18.1% (+20.2% if solely considering service revenues).
Consolidated EBITDA (operating result before depreciation and amortization, capital gains/losses, and write-backs/write-downs of non-current activities) for the first half of 2007 amounted to 1,591 million reais, a rise of 66.8% (up 637 million reais compared with the first half of 2006).

The EBITDA margin corresponded to 25.2%, up 4.7 percentage points compared with the same period last year. Organic EBITDA growth compared with the same period in 2006 corresponded to 62.7%:

First half 2007 consolidated EBIT (operating result) was positive for 189 million reais (compared with -210 million reais for the first half of 2006). The 399 million reais improvement compared with first half 2006 was achieved despite higher depreciation and amortization (up from 1,164 million reais in 2006 to 1,399 million reais in 2007), principally as a result of investment in network infrastructure and IT systems, along with customer acquisition costs.

Organic EBIT for the first half of 2007 was up by 376 million reais compared with the same period in 2006:

Industrial investment amounted to 737 million reais (520 million reais for the first half of 2006), up 217 million reais in part as a result of investments to expand the customer base (158 million reais).

On 30 June 2007, the headcount stood at 9,661, an increase of 130 from 31 December 2006.

OLIVETTI 
Revenues amounted to 192 million euros, down 20 million euros compared with the first half of 2006 (-9.4%). Excluding exchange rate variations, changes to the consolidation area and the consideration received for the sale of research activities, the organic difference was -20 million euros (-9.4%).
EBITDA (operating result before depreciation and amortization, capital gains/losses, and write-backs/write-downs of non-current activities) amounted to -17 million euros, a 9 million euro improvement on the same period in 2006, principally as a result of last year's re-conversion and rationalization drives.
The organic variation, a positive 3 million euro, is as follows:

EBIT (operating result) amounted to -24 million euros, an 11 million euro improvement compared with the same period in 2006.

The organic variation, a positive 4 million euros, is as follows:

Industrial investment amounted to 5 million euros, in line with the same period in 2006.
ON 30 June 2007, the headcount stood at 1,355, a decrease of 73 from 31 December 2006.

EVENTS OCCURRING AFTER JUNE 30, 2007

On 3 July 2007, the disposal of TIM International’s 10.36% stake in Oger Telecom to Saudi Oger was completed for a total price of USD$477 million.

With the issuing of an “indemnity letter”, Saudi Oger also committed to substitute Telecom Italia in its undertaking to payout/guarantee a subordinated loan to Avea I.H.A.S. for a value of USD$150 million (111 million euros). The operations mentioned above will reduce Telecom Italia Group financial net debt by 462 million euros and have a positive impact on the income statement of 86 million euros.

Agreement was reached on 18 July 2007 for the sale by Brasilco S.r.l. – a company held in trust by Credit Suisse with Telecom Italia International NV’s as sole beneficiary – of its 38% stake in Solpart Partecipaçoes S.A., for USD$515 million. At current exchange rates, the transaction will reduce Telecom Italia Group’s net debt by 354 million euros, and have a 195 million euro positive impact on Group net income.

In July, August and September 2007, Telecom Italia sold 7,488,669 Capitalia shares with a consequent reduction of financial debt of 55 million euros and a positive impact of group net profit of 27 million euros.

In August 2007, the expiration date for an 8 billion euro revolving credit facility was extended from August 2012 to August 2014. 

Enclosures (file .pdf, 201 Kb)

Telecom Italia
Media Relations
+39.06.3688.2610
www.telecomitalia.com/media

Telecom Italia
Investor Relations
+39.02.8595.4131
www.telecomitalia.com/investor_relation