Global Insight Perspective | |
Significance | Poor results at home have dampened Telecom Italia's nine-month results, despite a strong performance in its European broadband project. |
Implications | Continued deterioration in its domestic revenues means Telecom Italia will have to look further away from home to guarantee revenue growth in its business. |
Outlook | A new management for Telecom Italia will grapple with balancing political expectations and securing funds to invest in high-growth foreign operations. |
The Italian telecoms group, Telecom Italia, has posted a marginal 0.4% year-on-year (y/y) rise in nine-month revenue for the period ending September 2007, as slowing growth in Brazil failed to offset the effect of the Bersani Decree and cuts in mobile-roaming tariffs in Italy. Revenue rose to 23.21 billion euro (US$34.16 billion), trailing the group's target of a 1–2% rise in revenue. Despite a 29% rise in Brazilian operations, and a 67% rise in European broadband business, a 5.8% fall in Italian domestic revenues held overall group revenue down. Earnings before interest, tax, depreciation and amortisation (EBITDA) were down 3.6% y/y, falling to 9.43 billion euro and worse than the group's target of about a 2% fall in EBITDA. Accordingly, the revenue and EBITDA results forced group-wide net profit down 18.2% to 720 million euro, from 880 million euro for the first nine months of 2006. In a boost to its gearing, Telecom Italia said it has reduced its net debt by 1.73 billion euro over the last three months, with total debt as of end-September standing at 37.44 billion euro.
Contrary to speculation, Telecom Italia failed to unveil a new management yesterday, as the new shareholders continue to deliberate on the composition of the company's board and management. In October, a Telefónica-led consortium, Telco, secured the requisite regulatory approval to take over Pirelli's stake in Telecom Italia.
Outlook and Implications
The Need to Look Abroad: Telecom Italia's results highlight the company's urgent need to look abroad for its revenue. As Europe's fifth-largest telecoms group, Telecom Italia is unique in deriving the least proportion of its overall revenue from foreign operations compared to the other four larger telcos. The Italian group generates about 20% of its revenue abroad whereas Deutsche Telekom and Vodafone generate more revenues away from their home market. With domestic revenues remaining flat or declining across Europe, the continent's leading telcos have all shifted focus to target higher growth overseas markets. In contrast, Telecom Italia spent much of 2006 selling off its assets in bid to pay down its debilitating debt stock. The company only went back to foreign acquisition to buy Club Internet in France and AOL Germany as part of its European broadband initiative, and that helps explain the 67% rise in revenue from the European broadband project. Without any reprieve from competition at home, Telecom Italia would have to look externally more often, or face further embarrassment from erosion in its domestic revenues.
Management Concerns: Inasmuch as political overtures have hurt Telecom Italia's performance over the past 12 months, the finalisation of the takeover saga needs to catalyse a concerted appraisal of the company's survivability under its current strategy. Telecom Italia needs to look abroad more and any incoming management will be faced with that stark choice. Hopefully, the involvement of Telefónica will open up new funding avenues and the opportunity for partnership in entering new markets. A new management will also have to grapple with an impending demand for functional separation of the company's fixed-line network, and the uncertainties over whether the Italian government will assist in the roll-out of a next generation high-speed network. The eventual composition of the board and management, especially with regards to its "Italianness", will inevitably shape the relationship between the company and the Italian government.