Telecom Italia bets on Lat Am for future growth

OvumWith domestic revenue still in decline, Telecom Italia's growth engine remains Brazil, as demonstrated in its recently-published 1H earnings.
 
TIM Brazil increased its mobile subscribers to 44.4 million, up 17.4% on the first half of 2009. The unit's success has prompted TI to eye market opportunities in neighboring Argentina, and the results and its M&A activities in the half prove it is betting on Latin America to drive future growth.
 
The unit continues to deliver strong results based on the solid growth of its mobile subscriber base, which in the first half increased 17.4% to 44.4 million.
 
TIM Brazil saw an acceleration of growth in post-paid lines, which increased 11.7% year-on-year in the second quarter, after growing only 6.9% in the first quarter.
 
The operation stabilized ARPU at 24.10 reai ($13.62) per month by the end of the second quarter, which will bring some relief to senior management because ARPU had been on a declining trend and had fallen by 2.60 reai at the end of first quarter.
 
Both voice and VAS revenues continued to grow sequentially, while handset revenues fell 42.1% during the quarter after TI stopped offering subsidies on handsets.
 
By comparison TI’s group revenues were €13.22 billion for the half year to 30 June 2010, down 0.7% on the first half of 2009. Group EBITDA grew 3.4% at €5.73 billion, but free cash flow declined 4.1% to €2.15 billion.
 
 
TI has made significant efforts to propagate its cost-reduction message, and has made significant strides on this front. Group-level opex and capex have been reduced, with opex down 11.2% and capex down 7.3%.
 
The reduction in opex was driven mainly by workforce rationalization, which enabled TI to prevent an EBITDA decline in the half that seemed inevitable given the overall decline in group revenues.
 
The fall in group revenues was a direct result of weak but recovering domestic operations in Italy, where revenues fell 7.4% to €10.09 billion. Consumer revenue fell 10.9%, with fixed-voice service revenue shrinking to €212 million.
 
However, the slowing decline in enterprise revenue indicates that the Italian market might be on the road to recovery. Sequential revenue decline in the second quarter was 5.4%, a substantial improvement on a sequential decline of 8% in the first quarter.
 
Telecom Italia is embarking on a structural transformation of its business, and the trade-union agreement it reached in early August will be a critical component in the success of this initiative.
 
The agreement will pave the way for voluntary retirement and relocation, which will be needed if TI is to achieve its target efficiency savings of €400 million by 2012.
 
 
Based on its success in Brazil, TI has now turned to the market in Argentina where it sees additional growth opportunities.
 
In early August it bought a 58% stake in Sofora, the parent company of Telecom Argentina, which provides mobile and fixed services.
 
Despite its struggles with high levels of debt, the move indicates that TI’s senior management has recognized the need to grow the business, because the alternative would be to continue to watch domestic revenues drag down a positive performance elsewhere.
 
Suvradeep Bhattacharjee is an analyst at Ovum

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