Cesar Bachelet
Telecom Italia: doing all the right things, yet outlook remains challenging
Yesterday, The Telecom Italia Group released its full-year results for 2005. Revenues were up by 5.8% year-on-year (equivalent to 3.8% organic growth) to €29.9bn, boosted by strong revenue growth from mobile operator TIM Brasil (+34.2% organic growth), as well as steady performance in its fixed line and domestic mobile units, where revenues grew by 2.1% (1.6% on an organic basis) and 1.5%, respectively. EBITDA was down by 1.7% to €6.9bn, whilst EBIT decreased by 0.6% to €4.1bn. As a result, profitability was reduced, with the EBITDA margin down by 3.4 percentage points to 39.9%, whilst the EBIT margin decreased by 1.8 percentage points to a still healthy 23.7%. Profitability was primarily impacted by the cost of the fusion with TIM, a necessary step towards the creation of the converged "One Company" model. Comment: Telecom Italia remains one of Western Europe's best performing incumbents. As opposed to the majority of its peers, Telecom Italia has managed to offset the impact of declining fixed voice revenues by capitalising on broadband growth both at home and abroad. Boosted by the acquisition of French ISP LibertySurf from Tiscali, revenues from non-domestic European broadband operations more than doubled to €566m. Its investment in Brazil has also paid off, as TIM Brasil has now emerged as a clear number-two mobile player, boosted by 48.4% subscriber growth in the year to December 2005. However, faced with an increasingly challenging domestic environment due to increasing regulatory pressure, higher levels of competition and slowing economic growth, Telecom Italia will have to keep running harder just to stand still. The operator acknowledged this when it revised its targets downwards at an investor day yesterday. Whereas the previous three-year plan (covering the period up to 2007) set out goals of 4-6% annual revenue growth on an organic basis, accompanied by annual EBITDA growth ranging from 7-9%, the new plan, which goes up to 2008, has a more modest target of 3-4% annual revenue growth, whilst maintaining EBITDA and EBIT margins at current levels. Key to achieving these less ambitious objectives will be the realisation of the synergies from its recently-introduced One Company model. The fact that successful operators such as Telecom Italia are facing these challenges is an indication of just how tough the market has become.
