Telecom Italia: Board Examines and Approves the Group's Q1 2009 Interim Report on Operations

05/07/2009 - 03:30 PM

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  • BERNABÈ: “A SATISFACTORY QUARTER IN LIGHT OF THE MACROECONOMIC CLIMATE, IN WHICH THE RECOVERY OF EFFICIENCY CONTINUES, AND THE GROUP’S COMMITMENT TO PROFITABILITY AND CASH GENERATION IS CONFIRMED”
  • REVENUES: 6,793 MILLION EURO (-3.8% ORGANIC VARIATION COMPARED WITH Q1 2008)
  • ORGANIC EBITDA: 2,835 MILLION EURO (-2.4% COMPARED WITH Q1 2008)
  • ORGANIC EBITDA MARGIN: 41.7% (41.1% IN Q1 2008), UP FOR THE THIRD QUARTER RUNNING
  • ORGANIC EBIT: 1.389 MILLION (-6.3% COMPARED WITH Q1 2008)
  • ORGANIC EBIT MARGIN: 20.4% (21.0% IN Q1 2008)
  • CONSOLIDATED NET INCOME: 463 MILLION EURO, EQUAL TO 6.8% OF REVENUES (+0.1 pp COMPARED WITH Q1 2008)
  • NET FINANCIAL DEBT: 34,518 MILLION EURO (34,039 MILLION EURO AT YEAR-END 2008; +479 MILLION EURO); -918 MILLION EURO COMPARED WITH Q1 2008 (35,436 MILLION EURO)
  • FREE CASH FLOW FROM OPERATIONS: 850 MILLION EURO, AROUND 13% OF REVENUES

This press release contains alternative performance indicators not contemplated under IFRS accounting standards (EBITDA; EBIT; Organic Variation in Revenues, EBITDA and EBIT; and Net Financial Debt). These terms are defined in the Appendix.
The Telecom Italia Group interim first-quarter 2009 Report on Operations was drafted in observance of article 154–ter (Financial Reports) of Legislative Decree no. 58/1998 (Unified Finance Law - TUF) and subsequent amendments and additions, and in observance of CONSOB Notice no. DEM/8041082 of April 30, 2008 (Quarterly corporate reports issued by companies whose shares are listed in Italy as the original member State).
This interim Report on Operations is unaudited and has been prepared in observance of the international accounting standards issued by the International Accounting Standards Board and approved by the European Union.
As noted in the Telecom Italia Group consolidated financial statements for 2008, a number of new Principles and Interpretations have been applied since January 1, 2009. In particular, following the retrospective application of IFRIC 13 (customer loyalty enhancement programs), data for the corresponding periods in 2008 have been appropriately restated for comparison purposes. The main effects of these restatements are illustrated as attached.

It should be noted that the “Outlook for operations in 2009” section contains forward-looking statements concerning the Group’s intentions, beliefs and/or current expectations with regard to future financial results and other aspects of its operations and strategies. Readers of the interim Report on Operations should not rely unduly on such forward-looking statements. The company’s actual results may differ significantly from those forecast herein owing to any number of factors that lie beyond the Group’s sphere of control.

Telecom Italia Board of Directors, chaired by Mr. Gabriele Galateri di Genola, today examined and adopted the Group’s Q1 2009 Interim Report on Operations.

Telecom Italia CEO, Mr. Franco Bernabè, stated: “It was a satisfactory quarter in light of the macroeconomic climate, in which the recovery of efficiency continues, and the Group’s commitment to profitability and cash generation is confirmed. The trend in revenues reflects the impact of sales networks restructuring, already announced in the Strategic Plan, and the effects of commercial policies tailored to customers who, particularly in the mobile business, showed greater care in telecommunications spending, in the current economic climate”.

TELECOM ITALIA GROUP

During Q1 2009, no significant changes were seen in the consolidation area.
In 2008, the following significant changes took place:

  • Entel Bolivia exit in Q2 2008 after the Bolivian government issued a decree on May 1, 2008 nationalizing the company. The equity interest is booked under current assets;
  • “Pay-Per-View” operations exit in December 1, 2008 following their disposal by Telecom Italia Media S.p.A. 

In Q1 2009, revenues amounted to 6,793 million Euro, down 6.7% compared with 7,279 million Euro for the same period in 2008 (-486 million Euro). In organic variation terms, consolidated revenues decreased by 3.8% (-270 million Euro).

The organic variation in revenues is calculated by:

  • excluding the impact of changes to the consolidation area (-52 million Euro, mainly regarding the exit of Entel Bolivia in Q2 2008);
  • excluding the impact of exchange rate fluctuations (-163 million Euro, owing to exchange rate fluctuations of -170 million Euro affecting the Brazilian Business Unit, and up 7 million Euro affecting other Business Units).

Revenues breakdown by sector of operations:

  1°Trimestre 2009 1°Trimestre 2008 Variazioni
(milioni di euro)   peso %   peso % assolute % %
organica
Domestic  5.357  78,9  5.600  76,9 (243)  (4,3)  (4,5)
Brasile  1.061  15,6  1.224  16,8 (163) (13,3)  0,7
European BroadBand  308 4,5  323  4,4 (15)  (4,6)  (4,6)
Media, Olivetti e Altre Attività  139 2,1  233  3,2 (94) (40,3)  
Rettifiche ed Elisioni  (72) (1,1) (101) (1,3)  29 28,7  
Totale consolidato 6.793  100,0 7.279 100,0 (486)  (6,7)  (3,8)

The Domestic Business Unit continued its upward trend that began in 2008 for fixed line telephony, alongside a decrease in revenues from mobile telephony.
In Q1 2009, domestic revenues presented the following characteristics:

  • fixed-line telephony: the number of Broadband lines continued to grow, fuelled by the expansion of IPTV and the success of new double- and triple-play offerings (Alice Casa); the increasing revenues from ICT business services as well as the growth in domestic wholesale services, partially offset a reduction in revenues from retail voice due to the natural customer base and traffic volumes contraction;
  • mobile telephony: the reduction in revenues can be attributed to differences regarding the calendar in the first quarters of 2008 and 2009, to the announced restructuring of the sales networks, and to the effects of the commercial policies tailored to those customers (lower spenders Consumer and Business) that showed greater care in the control of telecommunications spending – due to the difficult economic climate. Revenues were also affected by reduction in mobile termination fees that brought about a drop in “incoming voice” revenues. 

Brazil Business Unit revenue growth was boosted by a rise in revenues from VAS (+28.6%) and products (+19.9%).

EBITDA of 2,798 million Euro was down 145 million Euro (-4.9%) compared with the same period in Q1 2008. The organic variation in EBITDA was a negative 70 million Euro (- 2.4%). The EBITDA margin rose from 40.4% in Q1 2008 to 41.2% in Q1 2009. The organic EBITDA margin was 41.7% in Q1 2009 (41.1% during the same period in 2008), thanks to cost containment in both domestic and international markets.

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

  Q1 2009 Q1 2008 Change
(million Euro)   %   % absolute % Organic %
Domestic  5,357  78.9  5,600  76.9 (243)  (4.3)  (4.5)
Brazil  1,061  15.6  1,224  16.8 (163) (13.3)  0.7
European Broadband  308 4.5  323  4.4 (15)  (4.6)  (4.6)
Media, Olivetti and other activities  139 2.1  233  3.2. (94) (40.3)  
Adjustments and eliminations  (72) (1.1) (101) (1.3)  29 28.7  
Total 6,793  100.0 7,279 100.0 (486)  (6.7)  (3.8)

EBIT amounted to 1,352 million Euro, down 153 million Euro compared with Q1 2008 (-10.2%). The organic EBIT variation was a negative 94 million Euro (-6.3%).
The EBIT margin dropped from 20.7% in Q1 2008 to 19.9% in Q1 2009. The organic EBIT margin was 20.4% in Q1 2009 (21.0% during the same period in 2008).

The consolidated net result amounted to 463 million Euro, down 4.5% compared with the same period in 2008 (485 million Euro).

Capex in Q1 2009 amounted to 1,025 million Euro, down 203 million Euro compared with Q1 2008. Capex breakdown:

  Q1 2009 Q1 2008 Change
(million Euro)   %   % absolute % Organic %
Domestic 2,526  90.3 2,644  89.9 (118)  (4.5)  (4.4)
% of revenues 47.2   47.2   0.0pp    
Brazil  231 8.2  242  8.2. (11)  (4.5) 20.7
% of revenues 21.7   19.8   1.9pp    
European Broadband  62 2.2  61  2.1  1  1.6  1.6
% of revenues 20.1   18.9   1.2pp    
Media, Olivetti and other activities (18) (0.6) (2) (0.1) (16) N.M.  
Adjustments and eliminations (3) (0.1) (2) (0.1)  (1) (50.0)  
Total 2,798  100.0 2,943 100.0 (145)  (4.9)  (2.4)
% of revenues 41.2   40.4   0.8pp    

The capex reduction can be attributed to fluctuations in the Real/Euro exchange rate (-19 million Euro), and to the implementation of an investment/cost reduction plan during the course of 2008.

Operating Cash flow amounted to 850 million Euro. Despite the fall in revenues and EBITDA, cash flow fell by as little as 118 million Euro, compared with the first quarter of 2008, also thanks to actions to reduce costs and to monitor and select investment projects.

Net financial debt at March 31, 2009 amounted to 34,518 million Euro, a rise of 479 million Euro compared with December 31, 2008 (34,039 million Euro). Net financial debt was most notably affected by taxation, comprising 187 million Euros for fiscal disputes, already put aside in the previous years and the fair value evaluations from hedging derivatives, with a negative result in the first quarter 2009.  Excluding this non monetary component, the net financial debt would be reduced compared with December 31, 2008. Unlike the first quarter of 2008, net financial debt fell by 918 million Euro.

As of March 31, 2009, the Group employed 77,499 people, of whom 64,037 in Italy.

OUTLOOK FOR 2009

Telecom Italia Group confirms  FY 2009 profitability and cash generation targets announced in late 2008 during the presentation of the Telecom Italia Group’s three-year 2009-2011 strategic plan, specifically:
4 Domestic Business Unit: organic EBITDA 9.9 – 10 billion Euro;

  • Brazil Business Unit: organic EBITDA ~ 3.6 billion Reais;
  • A net debt/EBITDA ratio of around 2.9x at year end 2009.

At an Organic Group EBITDA level, the previous target is confirmed.  


BUSINESS UNIT RESULTS

Performance data is broken down into the following areas of operation:

  • The “Domestic” Business Unit, consisting of the Group’s fixed-line telecommunications operations in Italy (subdivided into Retail Voice, Internet, Business Data and Wholesale), Mobile operations, and ancillary support services;
  • The “Brazil” Business Unit, which runs Group Telecommunications operations in Brazil;
  • The “European Broadband” Business Unit, offering broadband services in Germany and the Netherlands;
  • The “Media” Business Unit, which is in charge of Group television operations;
  • The “Olivetti” Business Unit, responsible for digital print systems and office product manufacture;
  • Other operations”, including finance companies and other minor companies not strictly associated with the Telecom Italia Group’s core business.

Telecom Italia Media Group Q1 2009 data were published in a press release issued on May 5, 2009, following the Board meeting that approved the accounts.


DOMESTIC

Revenues amounted to 5,357 million Euro, recording a 4.3% decrease (-243 million Euro) compared with Q1 2008. The organic variation in revenues was -4.5%.

At March 31, 2009, the company provided around 17 million accesses in the retail market (-380,000 accesses than at December 31, 2008); the Wholesale customer portfolio increased, reaching 5.3 million accesses (+396,000 accesses since December 31, 2008).
The overall BroadBand portfolio was made up of 8.3 million accesses (+195,000 accesses since December 31, 2008), 6.8 million of which in the retail and 1.5 million in the wholesale market.
Telecom Italia had around 34.2 million mobile lines (7.3 million of which using UMTS technology), down 1.8% compared with December 31, 2008. This reduction can be attributed to the company’s increasing commercial focus on high-spend customers; confirming this strategy, the number of post-paid lines rose to 17.8% of the total (up from 17.3% at December 31, 2008).

Fixed-Line Telecommunications

Fixed-Line Telecommunications revenues amounted to 3,677 million Euro, a 1.8% reduction (-69 million Euro) compared with Q1 2008. At organic level, revenues went down by 2.0% (-76 million Euro), following the positive trend recorded in 2008.

Retail Voice
Retail Voice revenues amounted to 1,772 million Euro, down 196 million Euro (-10.0%) compared with 2008, attributed in particular to natural lower traffic volumes and to a reduction in accesses caused exclusively by a contraction in the average customer base. The lower earnings from accesses in the domestic market, is however offset by growth in domestic wholesale services.

Internet
Revenues from the Internet segment amounted to 421 million Euro, an increase of 3.7% (+15 million Euro) compared with Q1 2008. The domestic retail broadband portfolio rose to 6.8 million accesses, up 89,000 compared with the end of 2008. Broadband revenue growth was confirmed by a 5.9% rise compared with the same period in 2008. Excluding the fall in revenues from product sales, broadband revenues recorded a rise of 7.4% compared with the first quarter of 2008. The company continues to pursue its strategy of migrating customers towards higher-value offerings. Flat-rated packages now account for 79% of the total retail broadband customer portfolio (compared with 77% at the end of 2008). The IPTV service continues to make inroads onto the consumer market (with a portfolio of 365,000 clients, +36,000 compared with the end of 2008), while Web offerings and activities are continuing to be developed through the Virgilio portal. The Alice Casa package has achieved a portfolio of 233,000 customers (+115,000 since December 31, 2008), corresponding to 3.5% of the broadband portfolio (compared with 1.7% at the end of December 2008).

Business Data
Business Data revenues of 404 million Euro were up 21 million Euro (+5.5%) compared with Q1 2008 thanks to the development of ICT products and services (+15.2% reaching 23 million Euro) - especially services, which registered 18% growth. This more than offset the contraction in traditional data transmission and connectivity services supplied to businesses.

WholesaleRevenues from Wholesale Services reached 1,007 million Euro with a total increase of 11% compared with the same period in 2008 (+100 million Euro)

Revenues from Domestic Wholesale Services rose to 689 million Euro, with a 17.2% growth (101 million Euro) compared with first quarter of 2008. Though revenue growth in this segment was impacted by a reduction in incoming and collection traffic, this was more than offset by growth in revenues associated with expansion of the alternative operator client base, which is served by different types of line provision.
Revenues from the Telecom Italia Group’s International Wholesale Services, supplied through Telecom Italia Sparkle and its subsidiaries, were essentially stable compared with 2008 (-1 million Euro, 0.3%).


Mobile Telecommunications

Q1 2009 revenues of 2,059 million Euro were down 158 million Euro compared with the first three months of 2008. This reduction may be ascribed to: a contraction in traditional (SMS) and sale of content value added services; regulatory-imposed changes to interconnection pricing; and a reduction in the volume of terminals sold. These factors were impacted by calendar differences between the first three months of 2009 compared with 2008, and the fact that 2008 was a leap year; moreover, in 2009 there were fewer working days than in 2008 (working days yield higher average traffic levels than Sundays and public holidays).

Domestic Business Unit EBITDA amounted to 2,526 million Euro, down 4.5% compared with the same period in 2008 (-118 million Euro). The EBITDA margin corresponded to 47.2% of revenues (the same as in Q1 2008). The organic difference in EBITDA compared with the first quarter of 2008 was -4.4% (-116 million Euro).

The organic EBITDA margin was 47.5% (47.4% in Q1 2008).

Domestic Business Unit EBIT amounted to 1,392 million Euro, a reduction of 9.8% (151 million Euro) compared with Q1 2008. The EBIT margin corresponded to 26.0% (27.6% in Q1 2008). The organic variation in EBIT was a negative 8.0% (-122 million Euro).

The organic EBIT margin was 26.3% (27.3% in the first quarter of 2008).

In addition to the factors stated above for EBITDA, Q1 2009 EBIT was impacted by a 7 million Euro increase in amortization and depreciation, and by a 25 million Euro capital gain realized on a property sale in Q1 2008.

Capex amounted to 835 million Euro (- 135 million Euro compared with Q1 2008). Capex was equal to 15.6% of revenues (17.3% compared with the same period in 2008). The reduction can be ascribed predominantly to reduced commitments associated with terminal offerings (leased and subsidized), the Q1 2008 acquisition of WI-MAX licenses, and optimization of broadband network investments thanks to the rationalization of coverage expansion.

The company employed 61,591 people, down 225 compared with December 31, 2008.


BRAZIL
(average Euro/Real exchange rate 0.33108)

Brazil Business Unit revenues amounted to 3,205 million Reais (1,061 million Euro), up 22 million Reais compared with Q1 2008 (+0.7%). Revenues from products rose 19.9% compared with Q1 2008, while revenues from VAS were up 28.6% compared with the same period last year.

EBITDA amounted to 697 million Reais (231 million Euro), up 66 million Reais compared with Q1 2008 (+10.5%). This result was achieved through financial discipline, focusing on a strict cost control, without affecting customer base development, monitoring credit management and improving, as a result, bad debt figures. The EBITDA margin amounted to 21.7%, up 1.9 percentage points compared with Q1 2008. The organic variation of EBITDA compared with the same period in 2008 was 130 million Reais, corresponding to an EBITDA margin of 23.7% (19.8% in Q1 2008).

EBIT amounted to -16 million Reais (-5 million Euro), an improvement of 29 million Reais compared with Q1 2008 (+64.4%). This result may be attributed to a 45.5 million Reais increase in amortization and depreciation (for the 3G license and Capex), partially offsetting the higher EBITDA margin compared with Q1 2008.
The organic variation in EBIT compared with the same period in 2008 was 93 million Reais, corresponding to an EBIT margin of plus 1.5% (compared with a negative 1.4% in Q1 2008).

Capex amounted to 315 million Reais (104 million Euro), down 46 million Reais compared with the same period in 2008, predominantly as a result of lower network and commercial investments.

At March 31, 2009, the company employed 10,194 people, down 91 compared with December 31, 2008.


EUROPEAN BROADBAND

European BroadBand Business Unit revenues amounted to 308 million Euro, down 15 million Euro (-4.6%) compared with Q1 2008. The broadband customer portfolio, numbered around 2.5 million accesses, a figure that was essentially stable compared with December 31, 2008, and down slightly compared with 31 March, 2008. The narrowband customer portfolio amounted to 0.5 million accesses, stable compared with December 31, 2008 and down compared with the figure of 0.6 million accesses registered at the end of March 2008.

EBITDA amounted to 62 million Euro, up 1 million Euro (+1.6%) compared with Q1 2008. The EBITDA margin was 20.1%, compared with 18.9% for Q1 2008.

EBIT was a negative 4 million Euro, compared with a positive 6 million Euro in Q1 2008. EBIT worsened following a substantial rise in amortization and depreciation (+11 million Euro) associated with significant investments in network infrastructure and IT support systems between the end of 2007 and 2008, along with the capitalization of costs incurred in acquiring customers on contracts lasting at least two years.

Capex of 73 million Euro was down 27 million Euro compared with Q1 2008, principally as a result of lower investments in network infrastructure.

At March 31, 2009, the company employed 2,894 people, a fall of 18 compared with December 31, 2008.


OLIVETTI

Olivetti Business Unit revenues in Q1 2009 amounted to 71 million Euro, down 12 million Euro compared with Q1 2008. Revenues from products in Q1 2009 were down around 14% compared with Q1 2008, reflecting lower sales volumes. The largest falls were on European markets, notably Spain and the United Kingdom, where the Pound Sterling has suffered significant devaluation.

EBITDA was a negative 9 million Euro, down 2 million Euro compared with Q1 last year (when it was a negative 7 million Euro): lower levels of profitability associated with the drop-off in revenues was to a large extent offset by a containment of fixed costs. Taking into account the effect of exchange rate fluctuations on foreign currency turnover from clients outside the EU, and on the acquisition of goods and products in foreign currency, the Dollar’s fluctuation against the Euro had a net negative impact on EBITDA of 1 million Euro.

EBIT was a negative 10 million Euro, down 1 million Euro compared with Q1 last year (negative for 9 million Euro).

Capex amounted to 1 million Euro, unchanged compared with the same period in 2008.

At March 31, 2009, the company employed 1,163 people (1,069 in Italy, 94 outside Italy), down 31 compared with December 31, 2008 (1,194 people, 1,088 in Italy and 106 outside Italy).

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EVENTS OCCURRING AFTER MARCH 31, 2009

In April 2009:

  • Telecom Italia Finance S.A. bought back company bonds on the market worth a total face value of around 25 million Euro. The bond buyback concerned the “Telecom Italia Finance S.A., 2,103 million Euro 6.575% maturing July 30, 2009” issue;
  • Telecom Italia S.p.A. bought back company bonds on the market worth a total face value of around 46 million Euro. The bond buyback concerned the “Telecom Italia S.p.A., 850 million Euro variable rate maturing June 7, 2010” issue.

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ORGANIZATIONAL AND CORPORATE GOVERNANCE ISSUES

Following the decisions taken by the Shareholders’ meeting on 8 April 2009, relating to corporate bodies which confirmed Stefano Cao as Board member, (already co-opted by the Board meeting of 27 February 2009, replacing Gianni Mion) and appointed the new Board of Auditors, the Board of Directors called for Board member Cao to become member of the Executive Committee, which is now organized as follows: Gabriele Galateri di Genola, (Chairman), Franco Bernabè, Roland Berger, Stefano Cao, Elio Cosimo Catania, Julio Linares López, Aldo Minucci and Renato Pagliaro.

Taking into account that the newly appointed Board of Auditors also appointed Auditor Ferdinando Superti Furga as member of the company’s Supervisory Body (under legislative decree no. 231/2001), the Board of Directors confirmed the composition of the Body as it was before the Shareholders’ meeting (Auditor Ferdinando Superti Furga, Board member Paolo Baratta, and Federico Maurizio D’Andrea (President of Telecom Italia Audit & Compliance Services S.c.a.r.l.). 

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Pursuant to paragraph 2, Article 154-bis of Italy’s Financial Law, the Executive in charge of preparing the corporate and accounting documents (Marco Patuano), hereby declares that the accounting information contained herein corresponds to the Company’s documentation, accounting books and records.

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The Q1 2009 results shall be presented to the financial community during a conference call, starting at 4 pm (Italian Standard Time).
Journalists will be able to join the conference call in listen-only mode by dialing +39 06 33168.
Journalists who are unable to listen in live may access a recording of the presentation by calling +39 06 334843 (access code 244724#).