Telecom Italia's priority is to reduce debt in 2008

The Telecom Italia group published its financial results for 2007 last week; it also held its yearly investor day where it presented the strategy for the next three years. Revenues for 2007, at €31.29 billion, were flat compared to 2006. EBITDA was down 5.5% at €11.62 billion (organic), while profit was €2.45 billion, down 18.8% on the previous year. Net financial position (NFP) or borrowings was at €35.7 billion and NFP/EBITDA ratio at 3.1. The new management's primary objective is to bring this down to 2.5 in the next three years.

Comment: The new management headed by Franco Bernabe, who has now been in place for only 75 days, has a huge challenge ahead; reduce debt to acceptable levels, while maintaining profitability and margins, in a market that is contracting and becoming more competitive. The good thing is that Bernabe is fully aware of the task ahead and makes no mystery of this to the financial community. However, the industrial plan that was presented gave few clear indications on how this is going to be achieved.

Prospects for the future are not rosy: the fixed domestic business is set to reduce by 4% in 2008, and mobile revenues are flat. IPTV subscribers, at the end of 2007,were only 80,000, and triple play is failing to deliver as a retention strategy. The company is focusing on mobile plus broadband offers, and fixed all-you-can-eat packages, to decrease churn. Mobile broadband (mobile modems) are booming in Italy (as everywhere else), but even with success here it is difficult to see how they can offset the contraction in the other lines of business.

Nothing describes the situation better than Pileri's own words when pushed by questions from the floor on how he is planning to deliver growth. He said, "I have found a company that has no international portfolio, a company that has divested in the last six to seven years all international operations while most of our competitors have built on it to offset falling domestic revenues. I cannot embark in international expansion because I have high leverage, this is the truth, it is not an exciting story, I know, so don't expect big fireworks from us."

Having only been in charge for 75 days, he can play the card that it is not his fault - it's down to the previous management - but he has committed himself to providing an updated version of the industrial plan before the end of the year. By then he will have had enough time to plan a strategy to get the house back in order and to prove to the market he is the leader and the successful financial reformer he has been in his earlier career.

Only a few minutes and one or two slides of the whole matinee were dedicated to Open access - the new wholesale division which is aimed at ensuring greater transparency for alternative providers. There has been great hype around functional separation in Italy and we were very curious to know the details, but we were disappointed.

Ovum will obtain more details, but for the time being it is suffice to say that there has been a complete change from the previous plans. Open access will not be a functionally separated division and no measure has been put in place to address the regulator's concerns. A whole year of consultation on separation seems to have been thrown out of the window. We think this is embarrassing for Italian national regulatory authority AGCOM and we expect it to return to this issue.

Stefano Nicoletti, Service Manager

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