Telecom Italia Earnings: Domestic Revenue and Profit Down by Midsingle Digits

Price and promotional competition continued to erode no-moat Telecom Italia’s TIT financials in the first quarter. Italian service revenue was EUR 2.6 billion, down 2.4% year over year organically (on a 5.3% decline a year ago). This translated into EBITDA after leases of EUR 1.2 billion (3.5% organic decline and 31% margin). Group service revenue increased 2.8% organically, but this is only because management includes the acquisition of Oi Brazil assets as organic, a decision we highly disagree with. Should this be excluded, overall service revenue would have declined. We are maintaining our EUR 0.25 fair value estimate and warn investors of the very high uncertainty surrounding Telecom Italia, given its high debt burden (4.3 times net debt/EBITDA after leases), tough competitive environment, and poor capital allocation rating.

In Italy, Iliad continued to take market share from Telecom Italia and Vodafone, gaining more than 1 million customers (from 8.5 million to 9.6 million) during 2022. The company has pledged not to increase its mobile prices in Italy or France, something that we believe is very appealing for consumers in a high inflationary environment. Mobile virtual operators like PosteMobile and Digi keep contributing to an unhealthy competitive environment in Italy with aggressive promotional offers. Digi recently revamped its plans and now offers 100 gigabytes of 4G data at only EUR 10 per month.

Telecom Italia is still in negotiations with KKR and other partners to sell its fixed-line assets. According to Corriere delle Comunicazioni, the board received two offers for the assets at a EUR 20 billion-EUR 22 billion enterprise value in April, which it rejected. Bidders have until June 9 to submit improved offers. We would be surprised if a deal is reached, given that Telecom Italia’s largest shareholder, Vivendi, has already rejected several offers and values the assets at a much higher price than what the company has received.