Telecom Italia: Board of Directors examines and approves Group Interim Financial Statements at 31 March 2010

The results for the first quarter of 2010 will be illustrated to the financial community during a conference call scheduled for 4 pm (Italian time).Journalists may listen to the conference call, without asking questions, by calling: +39 06 33168. Those unable to connect live may follow the presentation until Thursday 13 May by calling: +39 06 334843 (access code 290874#).

In addition to the conventional financial performance indicators contemplated under IFRS, Telecom Italia Group uses certain alternative performance measures in order to give a clearer picture of the trend of operations and the company's financial position. These are: EBITDA; EBIT; organic difference in revenues, EBITDA and EBIT; accounting and adjusted net financial debt. For further details please see the attachment “Alternative performance measures”.

The Telecom Italia Group Interim Financial Statements at 31 March 2010 were drafted in accordance with art. 154–ter (Financial Reporting) of Leg. Decree 58/1998 (Unified Finance Law - TUF) and subsequent amendments and supplements and with Consob Communication DEM/8041082 of 30 April 2008 (Quarterly reporting by issuers of listed shares who give Italy as state of origin).

The Interim Financial Statements have not undergone an external audit and were drafted in accordance with the international accounting principles issued by the International Accounting Standards Board and approved by the European Union (“IFRS").

No events or circumstances occurred during the first quarter of 2010 that required us to update the impairment test on the value of goodwill carried out for the 2009 Consolidated Financial Statements.

The accounting and consolidation principles adopted in the preparation of the Interim Statements were consistent with those used for the Telecom Italia Group Consolidated Statements at 31 December 2009, with the exception of certain new Principles/Interpretations adopted by the Group from 1 January 2010 and already explained in the 2009 statements. These new Principles/Interpretations have no impact on the Interim Financial Statements at 31 March 2010 insofar as they apply to situations that did not arise during the period.

As a result of errors in previous years – as defined by IAS 8 – in relation to the Telecom Italia Sparkle case and described in detail in the Telecom Italia Group Consolidated Statements at 31 December 2009, restatements have been made to the economic and financial data for Q1 2009 provided for comparison. The main impacts are illustrated in the attachment “Effects on the consolidated statements of restatement due to errors”.

Note that the section "Outlook for the 2010 financial year", contains forward-looking statements about the Group’s intentions, beliefs and current expectations with regard to its financial results and other aspects of operations and strategies. Readers should not place undue reliance on such forward-looking statements, as final results may differ significantly from those contained in the statements owing to a number of factors, the majority of which are beyond the Group’s control.

The Telecom Italia Board of Directors, chaired by Gabriele Galateri di Genola, today examined and approved the Group’s Interim Financial Statements at 31 March 2010.

Franco Bernabè, CEO of Telecom Italia, said: “the positive results for Q1 2010 and the improving revenue performance confirm the efficacy of our repositioning strategy in the core markets, Italy and Brazil. The focus on high margin revenues together with efficiency gains and cost controls have enabled us to keep margins stable and close the quarter with strong growth in earnings. Rigorous financial discipline has also meant that we have been able to reduce the Group’s net debt by around €700 million, maintaining high levels of liquidity. These results demonstrate that we are on the right track to relaunch the Group and we are confident that the next quarters will continue to meet the commitments made in the Industrial Plan.”

TELECOM ITALIA GROUP

In Q1 2010 HanseNet Telekommunikation GmbH (a German broadband carrier), already classified under Discontinued Operations (Non-Current Assets Held for Sale and Discontinued Operations), was excluded from the consolidation area following the sale of the company on 16 February 2010.

The main changes during 2009 were as follows:

• on 30 December 2009 Tim Participações acquired 100% of the fixed network operator Brazil Intelig Telecomunicações Ltda, consolidated the same day under Telecom Italia Group, within the Brazil business unit;
• Telecom Media News S.p.A. was excluded from the consolidation perimeter from 1 May 2009, following the sale of a 60% stake by Telecom Italia Media S.p.A.

Revenues in Q1 2010 amounted to €6,483 million, down 0.7% from €6,527 million in the first quarter of 2009 (-€44 million). In organic variation terms, the fall in consolidated revenues was 4.7% (-€323 million).

In detail, the organic variation in revenues is calculated by excluding:

• the effect of changes to the consolidation area (+€57 million due to the entry in Q1 2010 of Intelig Telecomunicações Ltda within the Brazil BU);
• the effect of exchange rate variations (+€222 million, resulting from the balance between the gains of €225 million by the Brazil business unit and losses of -€3 million from the other business units).

Revenues, broken down by business unit, are as follows:

EBITDA was €2,826 million, up €87 million (+3.2%) on the previous year period, the EBITDA margin rising from 42% of revenues in Q1 2009 to 43.6% in Q1 2010. In organic terms EBITDA remained substantially unchanged at €2,836 million (+0.1%), though 2.1 percentage points in proportion to revenues (43.7% in Q1 2010 compared with 41.6% in Q1 2009).  

The following table shows a breakdown of EBITDA and EBITDA margin by business unit:

EBIT amounted to €1,408 million, up €54 million (+4.0%) from Q1 2009, with the EBIT margin standing at 21.7% (compared with 20.7% in Q1 2009). The organic EBIT variation was a positive €33 million (+2.4%) while organic EBIT margin rose 1.6 percentage points to reach 21.9% in Q1 2010 (20.3% in the same period of the previous year).

Consolidated net income amounted to €601 million, up €141 million (+30.7%) compared with the first quarter of 2009.

Capex for the first quarter of 2010 amounted to €1,042 million (up 88 million compared with Q1 2009) broken down as follows:

Operating cash flow stood at €754 million, down €150 million from the same period of the last year.

Adjusted net financial debt (excluding the purely accounting and non-monetary effects of the valuation at fair value of financial derivatives and related assets/liabilities) at 31 March 2010 is €33,262 million, down €687 million compared with 31 December 2009 (33,949 million euro). This includes the cash-in from the sale of Hansenet, which amply covers the impact of the preventive seizure of €282 million by the Judicial Authorities as part of the Telecom Italia Sparkle case. Compared with 31 March 2009 adjusted net financial debt fell by €1,207 million.

Accounting net financial debt stood at €34,134 million, down €613 million from 31 December 2009 (€34,747 million).

At 31 March 2009 Group headcount stood at 71,045 employees, of whom 60,801 in Italy.

***

BUSINESS UNIT RESULTS

Figures for Telecom Italia Group included in this press release refer to the following business units:

• Domestic Business Unit: includes domestic fixed-line and mobile-line voice and data services provided to end users (retail) and other carriers (wholesale), as well as associated support operations;

• Brazil Business Unit: refers to telecommunications operations in Brazil;

• Media Business Unit: includes TV network-related activities and operations;

• Olivetti Business Unit: focuses on the development and manufacturing of digital printing systems and office products;

• Other Operations: includes financial firms and other smaller operations not strictly related to Telecom Italia Group's core business.

Following the sale in Q1 2010 of HanseNet, already classified among Discontinued Operations, the European BroadBand business unit has been shown. The other companies originally included in that business unit have been moved under “Other Operations”

From 1.1.2010 the companies Shared Service Center and HR Services, previously consolidated under Other Operations, were included in the Domestic BU perimeter. In order to make a proper comparison possible, segment reporting for comparable periods has been restated accordingly.

Figures for Telecom Italia Media at 31 March 2010 can be found in the press release issued on 4 May 2010, following the Board Meeting's approval.

DOMESTIC

• Domestic revenues amounted to €4,974 million, down 7.1% (€5,357 million in Q1 2009) with an organic variation of -7.1%. The Services component alone shrank by 6.5%.

Highlights:

Core Domestic Revenues

Core Domestic revenues amounted to €4,714 million, down 7.2% (€5,078 million in Q1 2009) with an organic variation of -7.2%.

The performance of the individual market segments as compared with Q1 2009 is as follows:

• Consumer: revenues fell by €257 million (-9.5%), of which €231 million (-8.8%) in income from services. This was mainly due to the fall in revenues from voice services, in particular fixed-line telephony (-€104 million) and outgoing mobile calls (-€109 million), essentially due to the new marketing policies introduced in the second half of 2009, designed to reposition the offering more competitively, and a contraction of the customer base (though this is gradually improving thanks to the early impact of the new marketing policy). A further influence was the slide in mobile termination revenues (-€42 million, of which €28 million resulting from the lower tariffs). Other areas of non-traditional business (VAS and Internet), notwithstanding the decline in revenues from messaging (-€22 million) and mobile content (-€10 million), improved compared with 2009, thanks to continued growth in broadband services in both fixed-line (+€33 million) and mobile (+€30 million) segments;

• Business: revenues are beginning to show positive signs thanks to the new marketing policies introduced in the second half of 2009, aimed at more effectively protecting the customer base and the acquisition of higher quality new customers (above all in the mobile segment). The falloff in revenues compared with the same period of 2009 (-8.0%, -€77 million) was smaller than that seen in Q4 2009 (-10.2%), with improvement seen in both fixed-line and mobile business. In the fixed-line segment, broadband accesses grew the fastest since Q2 2008 (+27,000), while the contraction in voice subscribers in the quarter (-25,000) is the smallest seen in the last two years. In the mobile business the overall increase in lines (+77,000) is higher than that of any quarter of 2009 while VAS Alice continues to gain ground (+23,000).

• Top: total revenues fell by €64 million (-7.2%) compared with the corresponding period of 2009, confirming the steep contraction in voice and data revenues for the fixed-line segment. In addition, product sales for the quarter were also down. Countering these trends, at a time of persisting economic difficulty for business as a whole, are two positive signs: the continued ability to attract customers to ICT solutions (where revenues from services grew by 1%) and the penetration of the mobile segment, as evidenced by the expanding customer base and increasing revenues (+21%), driven mainly by VAS.

• National Wholesale: the increase in revenues (+€33 million, +7%) was driven by growth in OLO (Other Licensed Operators) Local Loop Unbundling, Wholesale Line Rental and Bitstream customers.

International Wholesale Revenues

In Q1 2010 the International Wholesale segment (Telecom Italia Sparkle Group) posted revenues of €398 million, down €41 million from the same period of 2009 (-9.3%), mainly as a result of weaker voice figures (-€38 million).

Besides the breakdown by market segment given above, the following revenue figures are distinguished by technology (fixed-line/mobile).

Fixed-Line Telecommunications Revenues

In Q1 2010 revenues amounted to €3,498 million, down €179 million (-4.9%) from the previous year period.  The organic change in revenues was negative by €176 million (-4.8%).

At 31 March 2010 retail accesses stood at 15.9 million (-196,000 compared to 31 December 2009). The wholesale customer portfolio grew to approx. 6.3 million accesses (+175,000 compared with 31 December 2009).

The total broadband portfolio at 31 March 2010 amounted to 8.9 million accesses (+118,000 compared to 31 December 2009), broken down into 7.1 million retail and 1.8 million wholesale accesses.

Retail Voice

Revenues from this area, totalling €1,569 million, suffered a physiological reduction in both customer base and traffic volumes as a consequence of the very competitive operating environment. This combined with the reduction in regulated fixed-to-mobile termination rates.

Internet

Revenues amounted to €450 million, up €29 million from the corresponding period of 2009. The narrowband component continues to contract and currently accounts for a mere 1% of total revenues. The total retail broadband portfolio reached 7.1 million accesses on the domestic market, up 71,000 accesses from the end of 2009. Flat-rate customers now account for 84% of total retail broadband customers (compared with 83% at the end of 2009). The Alice Casa package has 634,000 customers (+12,000 compared to 31 December 2009) and accounts for 9% of the total broadband portfolio (8.9% in December 2009). The development of Web-based offerings and services via the Virgilio portal continues apace.

Business Data

Revenues from the Business Data segment came to €351 million, down €53 million from the previous year (-13.1%), mainly due the contraction in products. In line with the shift in focus towards higher margin revenues, sales of ICT products fell (-€18 million), while services continued to buck the trend of the market, growing by 0.8% (+€1 million). 

Wholesale

In Q1 2010 the customer portfolio of Telecom Italia’s Wholesale division consisted of 6.3 million accesses for voice services and 1.8 million accesses for broadband services.

Overall, revenues from National Wholesale services were up by €60 million compared to the corresponding period of 2009 (+8.7%). The upwards trend in revenues in this sector is ascribable to growth in the alternative operator customer base, which is served by a variety of access types. Total Wholesale sector revenues for Q1 2010 were €1,035 million.

Mobile Telecommunications Revenues

Revenues from Mobile Telecommunications in the first quarter of 2010 came to €1,907 million, down €152 million (-7,4%). Revenues from services fell by 7.2% and revenues from products by 12.1%, though the YoY trend is improving with respect to same quarters of the previous year.

At 31 March 2010 Telecom Italia provided around 30.4 million mobile lines. The decline from 31 December 2009 can be ascribed to a more selective marketing policy that places special focus on high value-added customers.

Outgoing voice

Revenues amounted to €991 million, down €163 million from the same period of 2009 (-14.1%), mainly due to the new marketing policies introduced in Q4 2009 intended to make the TIM offer more competitive and in particular stimulate traffic within the TIM client community. These measures also served to invert the trend of a contracting customer base seen in the previous year.

Incoming voice

Revenues stood at €349 million, €19 million (-5.2%) down from the corresponding period of 2009, mainly due to the lower mobile termination rates and partly offset by better revenues from domestic and international visiting (customers of other carriers roaming on the TIM network).

Value added services (VAS)

Revenues came to €510 million, up 8.3% on the previous year period. This growth was mainly due to interactive VAS, which grew 29.3% thanks primarily to revenues from browsing (+38.2%). VAS revenues account for around 27.6% of total revenues from services.

Handset sales

Revenues amounted to €58 million, down €8 million (-12.1%) from the same period of 2009. Rationalization of the product portfolio continues with a greater focus on quality and profitability (smartphones and internet keys).

• EBITDA for the Domestic business unit amounted to €2,451 million, down €72 million from the corresponding period of 2009 (-2.9%). EBITDA margin was 49.3%, up 2.2 percentage points from the previous year period. The contraction in revenues is partly compensated by selective control of marketing expenses and strict containment of fixed costs.
  
• Organic EBITDA came to €2,461 million. The organic change was negative by €77 million (-3%), with the EBITDA margin standing at 49.5% of revenues, 2.1 percentage points higher than the same period of 2009.

• EBIT for the Domestic BU amounted to €1,366 million, €26 million lower (-1.9%) than the corresponding period of 2009, with EBIT margin of 27.5% (26.0% in Q1 2009).  The variation in EBIT, besides the factors given for EBITDA, was mainly due to a reduction in amortisations of €51 million. The organic change in EBIT was negative by €31 million (-2.2%) while EBIT margin came to 27.7% of revenues (26.3% in Q1 2009).

• Capex amounted to €752 million, down €81 million from the same period of 2009, mainly due to lower investments on wired access, network and service platforms and commercial offerings, only partly offset by higher spending on IT and service creation. The capex on sales was 15.1%.  

• The headcount came to 59,243 employees, 124 fewer than on 31 December 2009.

BRAZIL

(average real/euro exchange rate 2.49168)

Revenues of TIM Brasil Group in Q1 2010 came to 3,469 million reais, 264 million higher than Q1 2009 (+8.2%). Revenues for Q1 2009, restated to take into account changes to the consolidation area following the entry of the Brazilian fixed-line operator Intelig Telecomunicações Ltda, were 3,352 million reais. The organic growth in revenues is +3.5%. Revenues from services grew from 2,993 million reais in Q1 2009 to 3,336 million reais in Q1 2010 (+11.5%). Revenues from products fell from 212 million reais in Q1 2009 to 133 million reais in Q1 2010 (-37%). ARPU (Average Revenue Per User) stood at 25.4 reais in March 2010 compared with 27.6 reais in March 2009. The total number of lines at 31 March 2010 was 42.4 million, up 17.3% with respect to 31 March 2009, representing a 23.6% market share.

EBITDA amounted to 949 million reais, up 252 million reais from Q1 2009 (+36.2%). The EBITDA margin was 27.4%, up 5.7 percentage points from Q1 2009. This result was due to higher revenues and efficiency gains in areas other than marketing where costs have instead grown with respect to the previous year period. Compared to Q1 2009, the organic change in EBITDA amounted to +179 million reais, with the EBITDA margin standing at 27.4% (23% in Q1 2009). 

EBIT amounted to 162 million reais, an improvement of 178 million on Q1 2009. This can be ascribed to the higher contribution of EBITDA compared with Q1 2009, in part offset by higher amortisations of 67 million reais (785 million reais in Q1 2010, 718 million in Q1 2009). Compared to the same period of 2009, the organic change in EBIT was positive by 136 million reais, with EBIT margin standing at 4.7% (0.7% in Q1 2009).

Capex amounted to 689 million reais, an increase of 374 million with respect to Q1 2009, mainly due to higher spending on the network and IT platforms.  

Headcount at 31 March 2010 amounted to 9,517 employees, down by 266 from 31 December 2009.

OLIVETTI

Revenues in Q1 2010 were €73 million, up €2 million compared with Q1 2009. In terms of revenues from all distribution channels, this appears even more significant (+€4 million, a 6% increase on the previous year period), thanks in part to the first positive effects of the renewed offering following the company's strategic repositioning in the IT market. A particularly important contribution came from sales of new product lines (Data Cards, NetBooks and NoteBooks) through the Olivetti and Telecom Italia channels.

EBITDA was a negative €10 million, down €1 million on the first quarter of last year. The fall, in line with forecasts, is attributable to slimmer margins, due to a different sales mix and stiff competitive pressure in the continuing hostile economic environment.

EBIT was a negative €11 million, €1 million lower than in Q1 2009.

Capex amounted to €1 million, unchanged on the previous year period.

Headcount at 31 March 2010 came to 1,106 employees, (1,015 in Italy and 91 overseas).

***

OUTLOOK FOR THE 2010 FINANCIAL YEAR

As regards Telecom Italia Group's outlook for the financial year and its goals in terms of the economic indicators described in the 2010-2012 Industrial Plan, the company foresees the following outcomes for 2010 (equivalent consolidation area, exchange rate, and non-organic charges and income):

• Revenues  down by between 2% and 3% compared with the previous year;

• Organic EBITDA essentially stable compared with 2009 year;

• Capex of around €4.3 billion;

• Adjusted net financial debt of around €32 billion by year-end 2010.

***

IMPLEMENTATION OF THE GROUP EMPLOYEES STOCK OWNERSHIP PLAN

Following approval by the Shareholders' Meeting of 29 April last of the Employee Stock Ownership Plan, the Board of Directors, exercising its powers, approved a capital increase for implementation of the first phase of the initiative: a rights issue of a maximum 31,000,000 ordinary shares at a 10% discount to the market price, reserved for employees of Telecom Italia and its Italian subsidiaries. The capital increase (for which the Chairman and the CEO already have the necessary powers) will be effected by September 2010.

We remind you that the Plan foresees the award of one free Bonus Share for every 3 shares purchased to any subscribers who hold their shares for one year, providing they remain company employees.

We confirm the information contained in the tables enclosed with the prospectus pursuant to art. 84-bis of the Stockbroker Regulations on the Telecom Italia Group Employee Stock Ownership Plan, published on 13 April 2009 and available at www.telecomitalia.it

***

The Manager designate for the preparation of accounting and corporate documents, Andrea Mangoni, hereby declares, pursuant to paragraph 2, Art.154-bis of Italy’s Financial Law, that the accounting information contained herein corresponds to the company’s documentation, accounting books and records.  

> Attachments to the press release (file .pdf, 225 KB)

Milan, 6 May 2010