Telecom Italia, half-year report approved

09/12/2001 - 00:00 PM

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Telecom Italia Group
- Revenues: 15,589 mn euros (+9.7%)
- Ebitda: 7,053 mn euros (+9.3%)
- Expansion costs (1,604 mn euros) weigh heavily on net income
- Net income net of goodwill: 1,100 mn euros (-4.2%)
- Net income post minorities: 483 mn euros (-50.7%)
- Net financial indebtedness: 24,459 mn euros

Telecom Italia S.p.A.
- Revenues: 8,553 mn euros (-2.3%)
- Ebitda: 3,703 mn euros (-2.4%)
- Operating income: 2,018 mn euros (+11.3%)
- Net income: 654 mn euros (-6.4%)

- Turnover and Ebitda trends meet objectives for 2001
- Wireline and wireless telephony operating margins grow further
- Tiws: Ebitda up (+1.9%) despite tariff cuts (- 20%) broadband access and web services: +67%
- Tim: over 50 million customers worldwide
- Seat PG: Isp approaches Ebitda break even

International Operations:
- Revenues (+65%) and Ebitda (+54%) up sharply

At its meeting in Milan today, the Telecom Italia Board of Directors examined and approved the consolidated and parent company financial statements for the first half of 2001.
During the first six months of 2001 Group results are in line with the forecasts presented to the markets at the beginning of the year.

Specifically:
- In the second quarter Group growth rates remained high; revenues grew by 12% and EBITDA was up 14%; • The EBITDA margin (EBITDA/Revenues) remained particularly high (45.2%), in line with that of the first half of 2000;
- increased productivity and efficiency have given rise to an increase of 299 mn euros (579 bn lire) in EBITDA from wireline and wireless telephony in Italy, despite tariff reductions worth 1,138 mn euros (2,203 bn lire);
- significant increases were registered in the traffic volumes and customers of domestic fixed telephony (up respectively, by 28% and 2%) and mobile telephony (respectively, +17% e +13%).

Telecom Italia Group first half 2001 performance
Group revenues, including amounts due to other telecommunications operators, amounted to 15,589 mn euros (30,185 bn lire), an increase of 9.7% with respect to the figure of 14,217 mn euros for the first half of 2000.

This increase is a consequence both of the good performance posted by mobile telephony services, and of changes to the basis of consolidation: Entel Chile and the Seat Pagine Gialle Group are now included, while companies operating in the installation and manufacturing sectors have been excluded.

EBITDA reached 7,053 mn euros (13,657 bn lire), up 9.3% (an increase of 599 mn euros) on the first half of 2000, while remaining high as a proportion of revenues (45.2%).

Around 6% of the significant rise in EBITDA may be attributed to improved management of existing operations, while around 3% derives from changes to the basis of consolidation.

Operating income amounted to 3,491 mn euros (6,759 bn lire), up by around 3% on the first half of 2000 (3,391 mn euros). This figure takes into account the major increase in goodwill amortisation arising from acquisitions, which totalled 426 mn euros (826 bn lire), which was only partially offset by a reduction in Telecom Italia Parent company depreciation.

Consolidated income before tax and minorities equalled 2,059 mn euros (3,986 bn lire), down 28% with respect to the first half of 2000 (2,877 mn euros). Consolidated income gross of minorities equalled 849 mn euros (1,643 bn lire), down 40.4% on the first half of 2000 (1,424 mn euros).

This result was adversely affected by the significant increase in financial expenses, which were up by 536 mn euros (1,038 bn lire) as a result of increased indebtedness, and value adjustments that rose to 772 mn euros (1,495 bn lire), an increase of 397 mn euros with respect to first half 2000. These adjustments reflected, in particular, the loss of 210 mn euros registered by Is Tim, and the write-downs on Stream (123 mn euros), of TIM shares held in trading portfolio (114 mn euros), and the further amortisation of 154 mn euros of goodwill deriving from the acquisition of participations in related companies.

The expenses for expansion (financial charges for new acquisitions, goodwill amortisation, start-up costs) more than doubled with respect to the same period of the prior year (654 mn euros), reaching 1,604 mn euros.

Consolidated net income post-minorities was 483 mn euros (934 bn lire), a reduction of 50.7% compared to the same period in 2000 (979 mn euros).

Net goodwill amortisation, the parent company net income was 1,100 mn euros (2,131 bn lire), in line (-4.2%) with the first half 2000 result.

Cash flow (profit + depreciation) for the period totalled 4,115 mn euros (7,966 bn lire). In the first six months of 2000 cash flow was 4,208 mn euros.

Investments during the first half of 2001 amounted to a total of 7,210 mn euros (13,960 bn lire), of which 3,806 mn euros (7,369 bn lire) for capital expenditures, 1,000 mn euros (1,936 bn lire) of goodwill and 2,404 mn euros (4,655 bn lire) of financial investments.

Net financial indebtedness as at 30 June 2001 was 24,459 mn euros (47,360 bn lire), compared to the figure of 19,029 mn euros (36,845 bn lire) as at 31 December 2000. The 5,430 mn euros increase was essentially due to investments exceeding 5 bn euros for international activities (Turkey, Brazil and Chile) and to dividends distributed by the Group (3.1 bn euros).

As at 31 June 2001 the Group employed 120,211 people, an increase of 5,542 on 31 December 2000. Offsetting a significant reduction in the number of people employed by the Parent company, the figure has increased through the enlargement of the basis of consolidation.

Telecom Italia S.p.A.
Parent company revenues amounted to 8,553 mn euros (16,560 bn lire), a reduction of 2.3% compared to the same period in 2000. Net of amounts due to other telecommunications carriers, revenues amounted to 6,831 mn euros, a reduction of 5.3% compared to the same period in 2000 (7,213 mn euros).

Specifically, revenues from traffic were down by 8.9%, despite a 28.2% increase in minutes of traffic. This reduction was partially offset by increases in monthly charges and by growth in data business, especially in the innovative areas of broadband access and web services (+67%).

EBITDA equalled 3,703 mn euros (7,167 bn lire), down 2.4% compared to the same period in 2000. The EBITDA margin stood at 43.3%, in line with the first half of 2000 figure.

Excluding the effects of changes to the basis of consolidation as a result of the exit of real estate and other minor business activities, EBITDA registered growth of 4.6%, thanks to the significant reduction of external and labour costs.

Operating income was equal to 2,018 mn euros (3,906 bn lire), +11.3% on the first half of 2000. This result benefited from reduced depreciation essentially owing to changes to the mix of assets to be depreciated, and from a reduction in overall depreciable amounts following the transfer of certain company activities (real estate and IT services).

Net income amounted to 654 mn euros (1,266 bn lire), down 6.4% in comparison to the same period in 2000 (698 mn euros). This result was conditioned particularly by higher net financial expenses and by the value adjustments, which were partially offset by reductions in taxes and extraordinary charges, that do not include (in contrast with the first half of 2000) the topping up contributions for social security relating to Law 58/1992 which were paid in July 2001.

Cash flow (profit + depreciation) in the first half of 2001 totalled 2,276 mn euros (4,406 bn lire). In the first six months of 2000 cash flow was 2,595 mn euros (5,026 bn lire).

Investments in the first half of 2001 amounted to 2,391 mn euros (4,631 bn lire), of which 1,062 mn euros (2,058 bn lire) was spent on capital expenditures and 1,329 mn euros (2,573 bn lire) for financial investments.

Net financial indebtedness as at 30 June 2001 amounted to 17,386 mn euros (33,665 bn lire), an increase of 547 mn euros with respect to the figure recorded at 31 December 2000.

Parent company employees as at 30 June 2001 numbered 64,554, down 1,987 from the end of 2000.

Management forecast for the rest of the year
In the second half of 2001 the Group will intensify its commitment to industrial renewal, in pursuit of the objective of achieving further improvements in productivity, maintaining growth rates at high levels, and seizing opportunities for development arising from technological evolution.

The 2001 financial year will be characterised by three main factors:
- strong growth in industrial operations in terms of revenues and EBITDA;
- maintenance of high levels of profitability, despite the significant number of businesses currently in start-up phase, through prudent management of resources and the containment of operating costs in companies that are already operational;
- strict financial discipline, with regard to containing overall levels of debt, and to the ability to generate dividends for shareholders.

On the basis of available information, it is expected that industrial operations will register double-digit growth in turnover and EBITDA. The overall trend and individual breakdown figures will substantially meet market expectations.
Total Group turnover will approach 33 bn euros, demonstrating significant growth in comparison to 2000. This will be determined essentially by the consolidation of new acquisitions (Seat Group, Entel Chile Group, Maxitel in Brazil), by the good performance of wireless telephony services, and by development of data/Internet services offered in Italy by TIWS.
The trend of Group EBITDA should maintain the acceleration registered during the first half of the year, resulting not only from changes to the area of consolidation but also from the excellent results achieved by domestic telephony business, both wireline and wireless, in terms of higher volumes and cost cutting.
As regards the objectives communicated to the market and the financial community, the slight difference in the rate of EBITDA growth will be the result of a lower overall net contribution of international business, both wireline and wireless, as a result of the ramp-up of Latin American businesses currently in their start-up phase, and as a result of less favourable exchange rates relative to initial forecasts.
As is evident from the first half results, as a whole 2001 will be characterised by a marked increase in costs sustained for expansion, as represented by the amortisation of goodwill for acquisitions undertaken and valuation adjustments for companies consolidated by the equity method, which register start-up losses and are subject to higher interest charges.
Expansion-related costs will, therefore, compared to 2000, result in a significant reduction, in line with that reported in the half year financial statements, in Telecom Italia Group consolidated net income. Group levels of net financial indebtedness, which increased during the first half of the year as a result of the completion of international wireless telephony acquisitions and the payment of dividends for 2000, will be maintained at around 25 bn euros. This is essentially in line with the level of the half year financial statements.

Telecom Italia SpA, whose accounts are not affected by the amortisation of goodwill and consolidation value adjustments, will maintain very high levels of net income. The parent company accounts will continue to benefit as usual from the dividends of its subsidiaries and affiliated companies as well as from the cost cutting and efficiency drives being undertaken in the domestic fixed telephony activities.

Individual business units

Telecom Italia Wireline Services
Telecom Italia Wireline Services (TIWS), the business unit of Telecom Italia for fixed telephony (including international wholesale services and network, accounted for in TIWS during the course of 2001) ended the first six months of 2001 with a 1.9% increase in EBITDA (3,784 mn euros; 7,326 bn lire), as well as achieving improved management indicators with an EBITDA margin that rose from 42.4% to 44.5%.

Domestic market operations, (representing almost all of TIWS operations and the same accounting basis of the first quarter) continued with their particularly positive trend: in the first half of 2001 EBITDA was equal to 3,687 mn euros (7,139 bn lire), a 4.1% increase over the same period in 2000. As a proportion of turnover, EBITDA improved from 43.3% to 46.9%.

During the second quarter this business area saw a significant increase in EBITDA of 8.1% (1,797 mn euros; 3,480 bn lire). This was the fourth consecutive quarter of growth, and completes the process of repositioning the business.

A similar trend permits the confirmation of the EBITDA growth target for the year for TIWS of 2-3%.

The reduction in revenues from traditional voice services during the first six months of 2001 was approximately 9% (roughly -12% during the first quarter of the year), attributable to a 20% reduction in average prices (-23% in the first quarter of 2001). TIWS market share for voice traffic stood at around 82%, in particular as a result of the commercial success of the Teleconomy offer. The latter at the beginning of September had attracted more than 3.5 million customers.

Overall levels of retail traffic continued to grow. The total of around 68 billion minutes (+6% compared to the first half of 2000) was fundamentally boosted by the good performance of on-line traffic (23.7 billion minutes, up 44% compared to the first half of 2000), and fixed-mobile traffic (+6.8%).

The success of marketplace strategies for data transmission and Internet services to companies (around 82,000 Broadband accesses utilising xDSL and Fiber-optic technology, at the beginning of September) through the Full Business Company offers, enabled revenues to grow at 9% in the first half of 2001 (+17% not including revenues from equipment).

Rollout of broadband in Italy is accelerating. Over 410 cities are covered by ADSL technology. The BB·B "Try and Buy" offer for the consumer market (around 83,000 at the beginning of September) and the wholesale offer for ISPs/OLOs (around 135,000 accesses sold by the beginning of September) are meeting with significant success.

As of today, the total number of broadband accesses provided to companies and the consumer market stands at around 300,000.

Cost reduction trends are being vigorously maintained. Savings compared to the first half of 2000 exceeded 500 mn euros (more than 15%), substantially as a result of rationalisation initiatives launched in 2000, as well as through continuous network efficiency improvements.

TIM
In the first half of 2001 TIM Group revenues amounted to 4,930 mn euros, up 9.2% compared to the same period in 2000 (4,516 mn euros). Consolidated EBITDA reached 2,376 mn euros, an increase of 11.3% on the first half of 2000 (2,135 mn euros), equivalent to 48.2% as a proportion of total revenues (47.3% in the first six months of 2000).

Consolidated operating income was equal to 1,617 mn euros, registering a growth of 10.1% on the first half of 2000 (1,468 mn euros).

Parent company consolidated net income over the period was equal to 720 mn euros, up 7.1% compared to the same period last year.

As at 30 June 2001 the TIM Group´s number of lines exceeded 50.4 million worldwide, inclusive of Telecom Italia Group wireless lines. This is an increase of more than 12 million compared to the same period in 2000.

Consolidated net financial indebtedness as at 30 June 2001 amounted to 1,959 mn euros, arising principally from TIM Group investments undertaken in Brazil for the acquisition of licences, and in Turkey for development of Is Tim.

As at 30 June 2001, TIM Group employed 16,033 people, an increase of 776 with respect to December 2000.

TIM S.p.A. closed the first half of 2001 with net income of 1,152 mn euros, up 31.4% compared to the same period in 2000 (877 mn euros). EBITDA amounted to 2,086 mn euros, a gain of 12.3% with respect to the first half of the previous year (1,857 mn euros). As a proportion of revenues, EBITDA equalled 52% (49.1% in the first six months of 2000).

Seat Pagine Gialle
Seat Pagine Gialle closed the first half of 2001 with consolidated revenues equal to 825 mn euros (1,598 bn lire), up 47.7% compared to the same period during the previous year.

EBITDA was equal to 151 mn euros (293.2 bn lire). Compared to the figure of 167 mn euros (324.5 bn lire) for the first half of 2000, this was a fall of 9.6%. Operating income amounted to 64 mn euros (124 bn lire), against 133 mn euros (258 bn lire) for the first half of 2000.

As at 30 June 2001 the Parent company recorded a net loss of 77 mn euros (148.7 bn lire), compared to a profit of 12.5 mn euros (24.2 bn lire) in the first six months of 2000.

These results are based on a new area of consolidation, which as at 30 June for the first time on a half-year basis, included the results of a number of companies such as Consodata of France (business information), TDL Infomedia of Great Britain (publisher of the Thomson Yellow Pages Directories), Telegate of Germany (directory assistance) and the Cecchi Gori Communications television group (La7, formerly known as TMC).

In addition to the results achieved by the Italian Directories Division (192 mn euros, corresponding to over 50% of revenues from sales), Internet operations registered a positive performance. On an basis comparable with the first half of 2000, this business line reduced losses from 49 mn euros to 29.5 mn euros. Efficiency gains and the extremely positive ADSL subscription sales figures (up over a single quarter from around 19,000 to more than 70,000) permitted EBITDA from Internet access services to approach break even (posting a loss corresponding to 3% of revenues). The income statement for the area continues to be adversely affected by the start-up costs generated by new B2B ventures.

Consolidated net financial indebtedness increased over the six-month period by 283.5 mn euros (549 bn lire) to 745 mn euros (1,442.6 bn lire).

In the light of the results achieved during the first half of the year, and principally owing to the negative trend in the advertising market, end of year EBITDA is forecast to fall slightly below the estimates given to the market. Net income will also be negative, principally as a result of extraordinary items.

International Operations
This business unit encompasses all companies operating outside Italy in fixed telephony and integrated fixed-mobile telephony services. Revenues registered a growth of 64.5%, to reach 1.8 bn euros (3,493 bn lire), principally as a result of expansion in the basis of consolidation after the inclusion of Entel Chile, which in the first half of the year registered an excellent performance. The company reported revenues up +29% and a growth in EBITDA of +24%.

EBITDA for this Business Unit amounted to 648.7 mn euros (1,256 bn lire), up 53.9%. On the basis of an unchanged basis of consolidation, revenues increased by 14.3%, while EBITDA rose by 12.7%.

Other Business Units
Information Technology Services achieved good results with EBITDA up by 6.7% to 164 mn euros (318 bn lire), this despite a 7.4% drop in revenues to 885 mn euros (1,713 bn lire).

Satellite Services reported revenues of 140,5 mn euros, in line with the figure for the first half of 2000. EBITDA fell once again, principally as a result of lower earnings due to the developments regarding contracted work with Astrolink. Operating income, however, registered a significant improvement.

Telecom Italia Lab, the Group´s innovation and research business unit, turned in revenues of 62 mn euros (120 bn lire). EBITDA was negative 9.8 mn euros (19 bn lire).