Loss-Making Telecom Italia Casts Doubt Over Debt Target

Telecom Italia swung to a net loss for the first nine months of the year after writing down the value of its domestic business and indicated that its target for debt reduction this year is in doubt.

The Italian phone incumbent blamed the impairment charge of about €2 billion ($2.3 billion) on deteriorating competitive and regulatory conditions in Italy. It accordingly suffered a net loss of roughly €800 million ($908 million) for the first nine months of 2018, compared with a net profit of about €1 billion ($1.1 billion) for the same period last year.

In a statement, Telecom Italia (TIM) also said it could no longer affirm its target for this year of a net-debt-to-EBITDA ratio of 2.7 because of the adverse conditions, a weakening of the Brazilian currency and a fine paid to Italian authorities after it failed to notify Italy's government about ownership changes.

At the time of publication, Telecom Italia's share price had fallen more than 5% in Milan this morning on news of the latest results and guidance.

The operator had a net debt of around €25.2 billion ($28.6 billion) at the end of September, a figure that represents about 3.2 times its EBITDA (earnings before interest, tax, depreciation and amortization) for 2017.

Having generated about €6.2 billion ($7 billion) in EBITDA for the first nine months of 2018, Telecom Italia would need to generate another €3.1 billion ($3.5 billion) for the final quarter, and realize full-year EBITDA of €9.3 billion ($10.6 billion), to achieve its fiscal target without any reduction in net debt. Last year, it made just €7.8 billion ($8.9 billion) in EBITDA.

While the company's net debt has fallen by more than €1 billion ($1.1 billion) since the end of September 2017, EBITDA fell 1.4% for the third quarter, to about €2.1 billion ($2.4 billion), compared with the year-earlier period.

Conditions have worsened in the Italian market following the launch in May of a low-cost mobile service by France's Iliad, which previously bought assets from 3 Italia and Wind before those companies merged operations. (See Wind Tre: The new weakling of Italian mobile.)

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Despite Iliad's arrival, Telecom Italia reported stable revenues in Italy for the first nine months of the 2018: At roughly €11.2 billion ($12.7 billion), sales were at about the same level as in the year-earlier period. But the number of subscribers on Telecom Italia's mobile network appears to have fallen by around 394,000 during the third quarter, leaving it with about 22.7 million customers at the end of September.

Overall revenues for the first nine months fell 3.1% year-on-year, to €14.2 billion ($16.1 billion), because of currency weakness in Brazil.

Investors may be worried about the impact of Italy's recent spectrum auction, during which Telecom Italia spent around €2.4 billion ($2.7 billion) on new 5G licenses. During a Light Reading conference in London this week, Giuseppe Ferraris, a senior technology executive at the operator, said its heavy investments would force Telecom Italia "to generate new revenue streams from 5G." (See Faster Mobile Will Not Justify €2.4B 5G Spectrum Fee, Says Telecom Italia Exec and Italy's $7.6B 5G bonanza puts telcos on the rack.)

Telecom Italia today said most auction payments would not become due until 2022 and therefore would not increase the "group net financial position until cash-out occurs."

A detailed breakdown of the payments schedule indicates that Telecom Italia owes about €477 million ($541 million) this year, another €183 million ($208 million) between 2019 and 2021 and then more than €1.7 billion ($1.9 billion) in 2022.

In its presentation, Telecom Italia said that its auction financial undertakings would be met with "the firmest determination to deleverage," raising the prospect of further asset sales.

The operator is trying to sell its Persidera broadcasting unit and is also in discussions about a disposal of wholesale unit Sparkle.

— Iain Morris, International Editor, Light Reading