SPARKLE: RISK PROVISION CREATED FOR A TOTAL OF €507 MILLION
ECONOMIC IMPACT IN 2009 LIMITED TO €10 MILLION FOR FINANCIAL CHARGES
TELECOM ITALIA GROUP PRELIMINARY RESULTS CONFIRMED:
REVENUES: €27,163 MILLION, -6.3% COMPARED WITH THE END OF 2008; -5.6% ORGANIC VARIATION
EBITDA: €11,115 MILLION, +0.2% COMPARED WITH THE END OF 2008;
ORGANIC EBITDA: €11,327 MILLION, -0.5% COMPARED WITH 2008;
ORGANIC EBITDA MARGIN: 41.7%, +2.2 pp COMPARED WITH 2008;
INCOME BEFORE TAXATION: €3,339 MILLION, AN INCREASE OF 15.4% COMPARED WITH 2008
NET INCOME: €1,581 MILLION, A REDUCTION OF €596 MILLION COMPARED WITH 31 DECEMBER 2008 MAINLY DUE TO THE EFFECT OF THE WRITE-DOWN FROM HANSENET GOODWILL, HIGHER TAXES FOR THE YEAR AND THE TERMINATION OF SOME FISCAL BENEFITS
FREE CASH FLOW FROM OPERATIONS: €6,298 MILLION (+€662 MILLION COMPARED WITH 2008) EQUAL TO 23.2% OF REVENUES, AN INCREASE OF 3.8pp COMPARED WITH 2008
ADJUSTED NET DEBT: €33,949 MILLION, A DECREASE OF €577 MILLION (€34,526 MILLION AT THE END OF 2008); A DECREASE OF €1,144 MILLION IN Q4 (€35,093 MILLION AT 30 SEPTEMBER 2009). IN 2009 TAXES PAID FOR €2,301 MILLION (€633 MILLION IN 2008)
NET FINANCIAL DEBT WAS €34,747 MILLION (€34,039 MILLION AT THE END OF 2008)
INVESTMENTS MADE FOR AROUND €4.5 BILLION IN 2009, WITH APPROXIMATELY €3.5 BILLION DEDICATED TO STRENGTHENING THE NETWORK AND TECHNOLOGY PLATFORMS IN THE DOMESTIC MARKET THUS ANTICIPATING AND SATISFYING CUSTOMER NEEDS
PROPOSED DISTRIBUTION OF DIVIDENDS OF 5 EURO CENT PER ORDINARY SHARE AND 6.1 EURO CENT PER SAVINGS SHARE, EQUAL TO A PAY OUT RATIO OF 74%
STRATEGIC GUIDELINES AND TARGETS FOR THE 2010-2012 THREE-YEAR PERIOD:
> STRONGER CASH FLOW GENERATION: OPERATING FREE CASH FLOW OF €21 BILLION OVER THE THREE YEAR PERIOD; CASH FLOW FROM OPERATIONS TO REPRESENT 26% OF REVENUES IN 2012
> DEBT REDUCTION OF €5 BILLION CONFIRMED FOR THE 2008-2011 PERIOD; 2012 DEBT TARGET LESS THAN €28 BILLION
> 2009-2012 EFFICIENCY PLAN EXTENDED AND INCREASED ON CASH COSTS OF €2.7 BILLION (VS 2 BILLION IN THE PREVIOUS 2009-2011 PLAN) OF WHICH €900 MILLION ALREADY CREATED IN 2009 AND AROUND €1 BILLION EXPECTED IN 2010
> THE HEADCOUNT REDUCTION PLAN BY THE END OF 2010 ALMOST COMPLETED
> INVESTMENTS EXPECTED FOR APPROXIMATELY €12 BILLION IN THE THREE YEARS, OF WHICH APPROXIMATELY €9 BILLION IN ITALY FOR THE COMPETITIVE DEVELOPMENT OF FIBRE, THE STRONG BOOST IN INNOVATION AND THE IMPROVEMENT OF RADIO NETWORK PERFORMANCE
The FY 2009 results and the will be presented to the financial community during the Telecom Italia Analyst & Investor Briefing scheduled for today, beginning at 9.20 am, at Rozzano (MI). The event may be followed live by video and audio streaming, plus slide show, at: www.telecomitalia.it/investormeeting2010/ita; www.telecomitalia.it/investormeeting2010/eng or via conference call by calling: +39 06 33168. Those unable to connect live may follow the presentation by calling: +39 06 334843 (access code 287409#) from 20 April. Please call +39 0633444551 or +39 06334844 if you experience any problems connecting.
This press release contains alternative performance indicators not contemplated under IFRS accounting standards (EBITDA; EBIT; Organic Difference in Revenues, EBITDA and EBIT; Net Financial Debt and Adjusted Net Financial Debt). These terms are defined in the Appendix.
The financial results of theTelecom Italia Group for FY 2009 and previous years provided for comparison were drafted in accordance with the international accounting principles issued by the International Accounting Standards Board and approved by the European Union (“IFRS”).
The principles applied by the Group in 2009 are consistent with those used in previous years with the exception of IFRS 3 revised (Business Combinations), IAS 27 revised (Consolidated and Separate Financial Statements), adopted in advance, and IFRIC 13 (Customer Loyalty Programmes), adopted retrospectively, whose main effects are described in the Appendix.
As a result of errors – as outlined by IAS 8 – which have emerged from the Sparkle case, restatements have been made to the economic and financial data for previous financial years as highlighted in the paragraph “Sparkle”, in this press release. Also following the implementation of IFRIC 13, comparative data for the corresponding periods of fiscal year 2008 were restated accordingly. Furthermore, following the implementation of IFRS 8 the expressions “business sector” and “business unit” are to be construed as having the same meaning in this press release.
This press release and particularly the "Outlook for the 2010 financial year” section, and the “Three Year Plan 2010-2012” section, 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 such statements owing to a number of factors to consider, also in relation to the uncertainty connected with the crisis in the financial markets the majority of which are beyond the Group’s control.
With reference to the US Reporting Requirements, the restatement of the economic and financial data relating to the financial years 2005, 2006, 2007 and 2008 entails - pursuant to the audit principles as applicable in the United States (PCAOB rules) - the withdrawal of the audit opinions for the correspondent years on Form 20-F . The company intends to file the 2009 Annual Report on Form 20-F with the US Securities and Exchange Commission in May. In the meantime, Investors are invited not to use the aforementioned financial statements on Form 20-F in their investing decisions. Finally, it should be noted that the audit report of the consolidated and separate financial statements of Telecom Italia at 31 December 2009 was issued today by Reconta Ernst & Young SpA according to the principles and criteria issued by Consob.
The Telecom Italia Board of Directors, chaired by Gabriele Galateri di Genola, yesterday examined and approved the Group’s Annual Report on Operations at 31 December 2009.
Today in Milan, Telecom Italia CEO Franco Bernabè, CFO Andrea Mangoni, Head of Domestic Market Operations Marco Patuano, CTO Oscar Cicchetti and the Diretor Presidente of Tim Brasil Luca Luciani, present to the financial community and media the Group’s strategic guidelines and targets for the 2010-2012 period.
Franco Bernabè, CEO of Telecom Italia, said: “The results achieved during 2009 are very satisfactory in light of the profound changes implemented in the mobile business both in Italy and in Brazil; the ability to recover efficiency has enabled the Group to reach the objectives of profitability and to look more calmly towards 2010. The strong cash generation and the further reduction in the debt level allow us to strengthen Telecom Italia’s role as leader in technological development, moving closer to the customer and its needs. In view of the full year results, and convinced of the effectiveness of the actions taken, that will continue in the near future, the Board of Directors has decided to propose to the shareholders the distribution of a 5 euro cent dividend for ordinary shares and 6.1 euro cent for savings shares, a decision which is coherent with the results and the trust in the evolution of the Group.”
“Telecom Italia today has the opportunity to highlight the stages reached in the path outlined a year ago in the presentation of an industrial plan which was focused on a return to fundamentals. 2009 was a year of great challenges characterised by a profound economic crisis and, for what concerns Telecom Italia, by important commercial and organisational changes. The actions taken this year by the company allow us to confront future challenges. We will continue to focus on keeping under control operating and investment costs which are concentrated in those business sectors which are considered most profitable. This selective approach will allow us to increase cash generation, which remains our primary objective, together with debt reduction. Geographically, our growth will come from Italy and Brazil. With Tim Brasil, which has now completed its re-positioning, we are ready to successfully compete as a pure mobile operator, in one of the emerging countries with higher growth potential”.
TELECOM ITALIA GROUP RESULTS
The consolidated financial statements at 31 December 2009 take into account the restatements and provisions as a result of information obtained from the the information available under the Court order issued in relation with the ongoing investigation involving, among others, the subsidiary Sparkle, and of subsequent auditing of financial statements starting from 2005. As a result, the 2008 comparative data as well as the main economic/financial data from the 2005, 2006, 2007 financial periods have been coherently restated.
Risk provisions totalling €507 million were set aside up to the end of 2009 (of which €10 million in 2009) and are intended to address risks and additional charges of a fiscal and legal nature. Telecom Italia considers that certain operations carried out in the years 2005, 2006 and 2007 presented severall anomalies, as outlined by IAS 8, such to conclude today that the financial statements of the years in question must be restated.
Restatement of the 2005, 2006, 2007 and 2008 financial statements following the investigation involving Sparkle (IAS 8)
The liquidity margin at 31 December 2009 stood at €7,347 million (€5,581 million at 31 December 2008). During 2009 the status of the European and American financial markets allowed Telecom Italia to issue new bonds and to access new financing at advantageous conditions. In addition, €6.5 billion are also available on non revocable long term credit lines (maturing 2014), which are not subject to covenants that may limit their availability. In the current uncertain climate on financial markets, the Telecom Italia Group maintains a high level of financial cover, while at the same time optimising the average cost of debt.
At 31 December, 2009 the Group’s headcount (excluding employees from discontinued operations) stood at 71,384, of whom 60,872 in Italy.
BUSINESS UNIT RESULTS
Figures for Telecom Italia Group included in this press release refer to the following business units:
> Business unit Domestic: 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;
> Business unit Brazil: refers to telecommunications operations in Brazil;
> Business unit Media: includes TV network-related activities and operations;
> Business unit Olivetti: 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 the core business of the Telecom Italia Group.
Following the inclusion of HanseNet among Discontinued Operations, the European Broadband business unit has been removed. The other companies originally included in that business unit have been moved under “Other Operations”. In order to make a proper comparison, segment reporting for comparable periods has been restated accordingly.
Figures for Telecom Italia Media at 31 December 2009 and related events after 31 December 2009 can be found in the press release issued on 25 February 2010 after the Board Meeting of the company that approved them.
> Revenues amounted to €21,662 million, down 6.7% (-€1,565 million) compared with 2008. The organic change was -6.8%.
Core Domestic Revenues
Core Domestic revenues stood at €20,579 million, down 6.9% (-€1,525 million) from 2008. The organic change was -6.9%.
The following highlights the performance of individual market segments as compared with 2008:
Consumer: Our marketing policy underwent a radical change in 2009. Against a challenging macroeconomic backdrop, as certain customer groups reined in their spending and competition ratcheted up in the marketplace, TIM rapidly repositioned its offer by moving away from its previous focus on mobile terminals as a significant driver of end-customer choices, coupled to a series of incentives for the sales network, and shifted to a new approach based on effective advertising communication, increasingly customer loyalty focused offers, and remuneration of sales channels on the basis of the actual quality of the customers they acquire.
Consumer segment revenues registered a decrease of €1,196 million (down 9.8%). This figure included €742 million (6.6%) less from revenues from services, and €454 million (49.1%) less from product sales, most notably on mobile devices. The €742 million reduction in revenues from services is attributable to fixed-line telephony (down €333 million, 8%) and outgoing mobile calls (down €213 million, 6%). Outgoing mobile calls were impacted by a contraction in the customer base and the effects of the regulatory interconnection rate review, which had a significant impact on revenues from mobile termination (down €168 million, of which €122 million attributable to the cut in rates), alongside a contraction in revenues from traditional value added services (revenues from messaging were down €76 million, 9%) and content (down €61 million, 24%). Performance in traditional areas of business was partially offset by growth in the customer base and revenues from fixed-line broadband services (up €114 million, 13%) and mobile broadband services (up €42 million, 12%);
Business: The contraction in revenues (down €394 million compared with 2008 (down 9.6%, or down 9.5% in organic terms) may predominantly be ascribed to the challenging economic conditions faced by SMEs in 2009, which consequently exerted downwards pressure on consumption. This was compounded by the contraction in the customer base, which slowed compared to a year earlier in the Fixed-line sector, but accelerated in the Mobile sector. The reduction in revenues intensified in both of these sectors (Fixed line revenues were down 11%, Mobile revenues were down 9%), though negative growth was less pronounced in the final quarter of the year compared to the previous quarter. Against this backdrop, a number of positive year-on-year trends emerged: Fixed-line broadband revenues remained stable; Fixed-line data services posted growth of 3%; and mobile browsing revenues registered 16% growth;
Top: Revenue performance (down €131 million – a reduction of 3.4% year on year, and of 1.9% in the fourth quarter) was predominantly effective by a contraction in the overall telephony and data market (down 8.7% year on year, and down 7.7% in the fourth quarter), as a result of the economic circumstances and, in consequence, of businesses reducing consumption. This trend was partially offset by the strong, ongoing rise in revenues from ICT solutions and offerings (up 15.3% year on year, and up 15.3% in the fourth quarter), as the company increased its market share from around 9.2% in December 2008 to 11.4% in December 2009. The mobile segment essentially held up from the previous year (down 0.1% year on year, down 0.1 % in the fourth quarter);
National Wholesale: The rise in revenues (up €258 million or 14.8%; 14,9% in organic terms) was generated by growth in the Other Licensed Operator (OLO) customer base for Unbundling of the Local Loop, Wholesale Line Rental and Bitstream services.
International Wholesale Revenues
In 2009 the International Wholesale business segment (Telecom Italia Sparkle Group) posted revenues of €1,710 million, down €120 million from 2008 (-6.6%; -7.1% at organic level), following a decline in voice services in both the captive and the third-party markets. The good performance of the IP/Data, Multinational Corporations and Consulting businesses partially offsets the above decline in voice services.
Besides the market segment overview given above, the following revenue figures are broken down by technology (fixed-line/mobile).
Fixed-Line Telecommunications Revenues
Revenues amounted to €14,739 million, down €261 million (-1.7%) from 2008. The organic change in revenues was negative by €279 million (-1.9%).
At 31 December 2009 retail accesses stood at approx. 16.1 million (-1,255,000 compared to 31 December 2008). The wholesale customer portfolio grew to approx. 6.2 million accesses (+1,221,000 compared with 31 December 2008). The total access market was substantially stable compared with December 2008.
The total broadband portfolio amounted to 8.7 million accesses (+607,000 compared to 31 December 2008, broken down into 7 million retail and 1.7 million wholesale accesses.
Revenues from the Retail Voice business amounted to €6,804 million, down €720 million (-9.6%) from 2008.
Revenues from all market segments suffered a physiological reduction in both customer base and traffic volumes as a consequence of a very competitive operating environment. Additional factors were a decline in regulated fixed-to-mobile termination rates and the disabling of a number of Premium services executed by the company on both a compulsory and voluntary basis (the decline in revenues from VAS services compared to 2008 amounted to €45 million). However, the economic impact of lower access revenues (-€177 million) was offset in the domestic business segment by the good performance of wholesale services (+€170 million from regulated intermediate services such Local Loop Unbundling and Wholesale Line Rental).
Revenues from the Internet business segment amounted to €1,707 million, up €77 million from 2008 (+4.7%). The Narrowband component declined even further and currently accounts for a mere 2% of total revenues. The total retail Broadband portfolio reached 7 million accesses on the domestic market, up 246,000 accesses from the end of 2008. Flat-rate customers now account for 83% of total retail Broadband customers (compared to 77% at the end of 2008). Also on the rise is the IPTV service in the Consumer segment, with a portfolio of 401,000 customers to date (+72,000 compared to the end of 2008) and the Web-based offerings and services provided through the Virgilio portal. The Alice Casa package has 621,000 customers (+503,000 compared to December 31, 2008) and accounts for 8.9% of the total Broadband portfolio (1.7% as of December 2008).
Revenues from the Business Data segment were €1,730 million, up €10 million (0.6%) on 2008. This was driven by the good performance of ICT products and services, for which revenues grew by €72 million (up 9.5%), spearheaded by 13.8% growth in services.
At the end of December 2009, Telecom Italia’s Wholesale division customer portfolio consisted of approx. 6.2 million accesses for voice services and 1.7 million accesses for Broadband services. Overall revenues from domestic Wholesale amounted to €2,888 million, corresponding to growth of €429 million (17.4%) compared with 2008. The upwards trend in revenues in this sector is ascribable to growth in the alternative operator customer base, which is served via a variety of access types. Total Wholesale sector revenues in 2009 were €4,117 million.
Mobile Telecommunications Revenues
As noted previously, a wide-ranging review of consumer sector sales policy in the mobile business generated a significant reduction in mobile terminal sales, which decreased from 7.9 million in 2008 to around 4.8 million in 2009. This policy had evident benefits on helping to hold up Domestic Business Unit profit margins.
However, revenues from Mobile telecommunications over the year decreased by €1,090 million (down 11.3%) to €8,597 million compared with the same period in 2008. The company's new strategic orientation resulted in a sharp contraction in revenues from terminals (down 44%). This was compounded by the impact of the planned introduction of revised regulatory interconnection rates, and the reduction in the customer base, which was at its strongest in the first half of the year. The excellent results achieved by mobile broadband offerings partially offset the negative trend in traditional value added services (text messages).
At year-end 2009, Telecom Italia supplied around 30.8 million mobile lines. The reduction in this figure compared with year-end 2008 may be ascribed to a more selective sales policy focused on higher value clients – a strategy borne out by the number of post-paid lines, which now account for around 20% of the total, compared with around 17% at year-end 2008. At the same time, the company undertook a termination of unused lines. In 2009, verification continued of prepaid SIM cards to detect cards not properly associated with an ID document. Over the year, this led to the termination of more than 2.9 million SIM cards; in excess of 760 thousand SIM cards were re-registered properly.
> EBITDA for Domestic business was €9,895 million, down €64 million from the same period of 2008 (-0.6%). The EBITDA margin was 45.7%, up 2.8 percentage points from 2008. The organic change in EBITDA compared to 2008 was negative by €211 million (-2.1%), with the EBITDA margin standing at 46.5% (44.2% in 2008).
> EBIT was €5,394 million, down 11 million (-0.2%) from 2008, with the EBIT margin standing at 24.9% (compared to 23.3% for 2008). The organic change in EBIT was negative by €93 million (-1.6% from 2008).
> CAPEX was €3,523 million, down €135 million from 2008. The capex margin was 16.3% (compared to 15.7% in 2008). This decline was mainly a consequence of the optimisation and rationalisation of network investments and lower investments in handsets (rentals or multi-year contracts) and the purchasing of the Wi-MAX license.
> Headcount was 58,736 employees, down 3,080 from 31 December 2008.
(average real/euro exchange rate 2.76933)
In December 2009 Tim Brasil Group reached 41.1 million lines (+12.9% against 31 December 2008) with a market share of 23.6%.
Revenues for 2009 amounted to 13,907 million reais, down 0.3% (-44 million reais) from 2008 (revenues from VAS +16.1%). Average monthly revenues per customer amounted to 28.2 reais in December 2009, compared to 31.6 reais in December 2008.
EBITDA for 2009 amounted to 3,476 million reais, up 6.7% (+217 million reais) from 2008. The EBITDA margin was 25.0%, 1.6 percentage points higher than for 2008. This result was achieved through efficiency measures designed to streamline the cost structure and release resources to boost Tim Brasil's sales. Compared to 2008, the organic change in EBITDA amounted to +312 million reais, with the EBITDA margin standing at 25.7% (23.4% 2008).
In 2009 EBIT stood at 580 million reais (compared to 507 million reais in 2008). This result can be ascribed to an improved EBITDA compared to 2008, partially offset by depreciation & amortisation related to the 3G licence acquired in the second quarter of 2008, by capex associated to the new UMTS network and by actions aimed at preserving the capacity and quality of the 2G network. Compared to 2008, the organic change in EBIT was positive by 168 million reais, with EBIT margin standing at 4.9% (3.6% in 2008).
CAPEX in 2009 amounted to 2,671 million reais, a decline of 941 million reais compared with 2008, the year in which the 3G licence was acquired.
The headcount at 31 December 2009 stood at 9,783 employees.
On 30 December 2009 Tim Participações completed the acquisition of 100% of the Brazilian fixed network operator Intelig Telecomunicações Ltda via the merger by incorporation in Tim Participações S.A. of the parent (Holdco Participações Ltda).
2009 revenues were €350 million, down €2 million compared to 2008 (-0.6%).
EBITDA was a negative €14 million, €16 million better than 2008 thanks to a dramatic cut in fixed costs.
EBIT was a negative €19 million, an improvement of €18 million compared to 2008.
CAPEX in 2009 came to €4 million, an increase of €1 million compared with the previous year.
The headcount at 31 December 2009 stood at 1,098 employees.
TELECOM ITALIA S.p.A. RESULTS
Revenues were €20,474 million, down €1,510 million (-6.9%) from 2008. The organic variation in revenues is -6.9%.
This is due to the physiological decline in revenues from traditional business in the Consumer (-9.8%) and Business segments (-9.7%) and, to a lesser extent, in the Top segment (-3.5%). Revenues were positive, however, for innovative services such as broadband (fixed-line and mobile) in both the Consumer and Business segments, while the Top segment reported strong growth in ICT solutions and packages (+15.3%).
The year also saw a significant increase in revenues for the National Wholesale segment (+14.8%) driven by growth in OLO (Other Licensed Operators), Local Loop Unbundling, Wholesale Line Rental and Bitstream customers.
EBITDA was €9,508 million, down €30 million (-0.3%) from 2008. The organic change in EBIT was a negative 1.7% (-€170 million). The EBITDA margin came to 46.4% (43.4% in 2008); in organic terms the EBITDA margin stood at 47.3% of revenues (44.8% in 2008).
EBIT was €5,161 million, up 33 million from 2008 (+0.6%). The organic change in EBIT was -0.8% (-€43 million). The EBIT margin was 25.2% (23.3% in 2008); in organic terms the EBIT margin stood at 26.3% of revenues (24.6% in 2008).
The net income of Telecom Italia S.p.A. was €1,399 million, down €74 million from 2008 (€1,473 million).
The headcount at 31 December 2009 stood at 54,236 employees.
The ongoing criminal investigation involving Telecom Italia Sparkle, and the Rome court Order issued in relation with this investigation (the “Order”) which was served on the company on 23 February 2010 allege that a number of former directors, former employees and current employees of Telecom Italia Sparkle committed crimes of cross-border criminal conspiracy, tax evasion, international money-laundering, reinvestment of proceeds from criminal activities, and registering assets under false names. The crimes of a cross-border criminal conspiracy, international money-laundering and reinvestment of proceeds from criminal activities are offences that may entail administrative liability for a corporation under the Legislative Decree no. 231/2001.
As part of the proceedings, the Rome Judge issued a seizure order for €298 million, corresponding to the alleged unlawful deduction of VAT related to the transactions under investigation. A hearing was scheduled in chambers to discuss the request for the appointment of an Administrator for Telecom Italia Sparkle pursuant to Legislative Decree no. 231/01. On 6 April 2010, the Preliminary Investigations Judge cancelled this hearing as there were no longer any grounds to proceed on this matter.
In addition to the amounts seized, Telecom Italia Sparkle provided guarantees for an amount of €195 million, of which €72 million correspond to the potential confiscation of profits generated by the sales transactions noted above, and €123 million corresponding to the difference between the amount already seized and corresponding to the VAT deducted during tax years 2005, 2006 and 2007 (€298 million), and the highest amount the company could potentially owe in settlement of its tax position regarding the use of VAT credits on the basis of one of the various settlement procedures with the Italian Tax Authorities.
The sales transactions effected, in the financial years 2005, 2006 and 2007, related to “Premium” telecommunications services carried over the Telecom Italia Sparkle network and were conducted with a number of smaller telecommunications carriers resident in the European Union (EU).
Internal investigation – 2007
In November 2006, the Rome Judge interviewed a number of Telecom Italia Sparkle officials, directors and employees as witnesses with knowledge of the facts with regard to an investigation on a VAT fraud alleged to have been committed by a number of Italian telecommunications operators, including the clients and suppliers identified in the Order. Subsequently, in January 2007 Telecom Italia Sparkle launched an internal investigation into contracts and commercial relations with these particular clients and suppliers. On completion of the internal investigation, which was undertaken with the assistance of independent tax consultants, in June 2007commercial relations with the above-mentioned parties were terminated for precautionary reasons. As part of the investigation, Telecom Italia assessed its VAT position and particularly the tax paid with regard to the above-mentioned commercial transactions. On the basis of information available at the time, the conclusion of the investigation was that deduction of VAT on these purchases was appropriate.
Analyses and information acquired since the Order have provided additional elements for assessment of the events under investigation and the analysis undertaken in the past, adding previously unknown information which has become available through investigations undertaken by the Rome Prosecutors, using their specific powers and faculties.
Internal investigation – 2010
Subsequent to the issue of the Order, the company appointed independent legal, accounting and tax advisors to undertake a documentary investigation into activities between 2005 and 2009. The advisers’ analysis concerned contracts and relations maintained by Telecom Italia Sparkle other than those covered under the Order, referring in particular to counterparties other than major telecommunications carriers and other Telecom Italia Group companies, with a particular focus on traffic data and associated revenues, costs and payments. The Corporate Organs were informed about the extent and results of this analysis.
Drawing upon further information available under the Order, along with data acquired as part of the 2010 internal investigation, Telecom Italia concluded that a number of transactions in the financial years 2005, 2006 and 2007 were affected by certain anomalies regarding the actual existence of the transactions and traffic, in addition to the progress and routing of traffic itself, to such an extent that the company now believes that these operations were subject to errors as defined under IAS 8.
Therefore, in compliance with IAS 8, but without acknowledging any liability whatsoever, the company is restating the revenues and costs recorded in 2005, 2006 and 2007 for these operations as follows:
· 2005-2007: adjustment of revenues and costs for the operations concerned; the surplus of revenues over costs has been adjusted and recognized against provisions for risks and charges under “Trade and miscellaneous payables, sundry payables and other current liabilities” in regard to legal risks and charges connected with this matter;
- 2005-2007: provisions for risks and charges – included under “Trade and miscellaneous payables, sundry payables and other current liabilities” – for further tax risks and charges;
- 2005-2009: provisions for risks and charges concerning legally-applicable interest associated with the above provisions, for the year to which they apply.
After making these adjustments and provisions, the data for the 2008 financial year used in comparisons (including the statement of financial position as of 1 January 2008) have been restated as previously mentioned.
The Board of Directors of Telecom Italia Sparkle, has included in the agenda of the Shareholders’ Meeting, called to approve the 2009 financial statements, the following item “Actions of Responsibility against the former CEO; related and consequent decisions”.
EVENTS SUBSEQUENT TO 31 DECEMBER 2009
Sale of HanseNet Telekommunikation GmbH
On 16 February 2010 the sale was completed of Telecom Italia Group's entire stake in HanseNet TeleKommunikation GmbH, a German retail broadband carrier, to Telefonica via the subsidiary Telefonica Deutschland GmbH. The estimated impacts of the sale, calculated on the basis of an Enterprise Value of €900 million, are already fully incorporated in the Consolidated Accounts at 31 December 2009.
Specifically, the operation had a negative effect on consolidated net income of €561 million, including a goodwill writedown for €558 million. The relating cash-in for €900 million will go towards reducing the Group’s debt.
OUTLOOK FOR THE 2010 FINANCIAL YEAR
With regards to the Telecom Italia Group results for the current financial year, the objectives linked to the main economic indicators, as outlined in the 2010-2012 industrial plan, which is reported in the section 2010-2012 Three Year Plan, foresee the following for the full year 2010:
Revenues (equivalent consolidation area and exchange rate) fell by 2% - 3% compared with the previous year;
· organic EBITDA substantially stable compared with the previous year;
· Capex was approximately €4.3 billion;
· Adjusted Net Debt approximately €32 billion.
Along with the approval of the annual financial statements, a proposal will be put before the Shareholders’ Meeting, convened for 29 April - in second call in ordinary session and in third call in extraordinary session - at Rozzano (MI), to distribute a dividend of 5 euro cents per ordinary share and 6.1 euro cents per savings share. The dividend shall be paid out from 27 May, ex-coupon on 24 May.
CORPORATE GOVERNANCE ISSUES
The Board of Directors has approved the statement on corporate governance and the holding structure, in which it reports the outcome of the checks which confirm that the requisites have been fully met for the composition of the board and the criteria of independence in the persons of Paolo Baratta, Roland Berger, Elio Cosimo Catania, Jean Paul Fitoussi and Luigi Zingales.
The Manager designate for the preparation of accounting corporate documents, Andrea Mangoni, hereby declares, pursuant to paragraph 2, Art.154-bis of the Italian Consolidated Financial Law, that the accounting information contained herein corresponds to the company’s documentation, accounting books and records.
THREE-YEAR PLAN 2010-2012
The update to the 2010-2012 Strategic Plan confirms the strategic priorities that the Telecom Italia Group set in December 2008 and in particular:
· a focus on the strategic Italy and Brazil markets, with the target of a rapid return to growth in domestic turnover and an acceleration of revenue growth on the Brazilian market;
· boost cash flow generation by focusing on high profit margin revenues, operating efficiency gains, and selective investment;
· an ongoing reduction in Group debt.
Group Targets 2010-12
Key earnings targets (equivalent consolidation area, exchange rate, and non-organic charges and income) for the 2010-2012 period:
> average annual revenue growth of around 1% (CAGR 2009-2012);
> EBITDA of around €12 billion in 2012;
> cumulative capex of around €12 billion between 2010 and 2012;
> adjusted net financial debt below €28 billion by year-end 2012.
Group Targets 2010
Key earnings targets (equivalent consolidation area, exchange rate, and non-organic charges and income):
> revenues down by between 2% and 3% compared with the previous year;
> EBITDA essentially stable compared with 2009;
> capex of around €4.3 billion;
> adjusted net financial debt of around €32 billion at year-end 2010.
On the domestic market, Telecom Italia is keen to continue along the path it began in 2009 in pursuit of the following priorities:
· reverse the trend in revenues by accelerating mobile sector turnaround and building on good fixed-line performance;
· rationalize costs and implementation of the new operating model;
· excellence in customer satisfaction;
· ongoing improvement in dialogue with the regulatory authorities.
The Plan confirms the seven areas of Lean Company model intervention for efficiency enhancement, leading to a further €0.7 billion cash cost reduction in addition to the previously announced €2 billion over the three-year period 2009-2011, for a total of €2.7 billion by 2012.
Domestic business targets 2010-12
Organic revenues are forecast to remain essentially stable between 2009 and 2012 (CAGR). Organic EBITDA is forecast to exceed €10 billion in 2012; cumulative investments between 2010 and 2012 will reach around €9 billion.
Domestic business targets 2010
> organic revenues down by between 4% and 5% compared with the previous year;
> organic EBITDA of between €9.8 and €9.9 billion;
> capex of around €3.1 billion.
Brazil remains a solid emerging market on which Telecom Italia is keen to continue strengthening its position by leveraging TIM Brasil's status as the country's sole pure mobile operator capable of fully exploiting opportunities arising from migration from fixed line to mobile.
The Brazil plan for growth is based on three pillars:
· penetration and expansion of market share;
· boost traffic by leveraging the concept of community, and by targeting mobile replacement of fixed lines;
· selective development of mobile broadband, with the focus on micro-browsing.
Drivers on the Brazilian market remain the focus on quality of service, innovation leadership, and a customer-centric approach. Integration with Intelig will also enable the pursuit of convergence, as well as giving a substantial boost to efficiency and cash cost projects.
Brazil targets 2010 - 2012
These figures are organic, in compliance with IFRS standards, and are stated in local currency.
> revenues from services to register high single digit growth between 2009 and 2012 (CAGR);
> EBITDA margin of around 30% in 2012;
> cumulative capex of below 8.0 billion between 2010 and 2012.
Brazil targets 2010
> revenues from services up 6%;
> EBITDA up 4 billion reais;
> capex of around 3 billion reais.