Tiscali Reports Q1 Results

CAGLIARI, Italy -- Tiscali’s Board of Directors has approved 1Q05 results.The Board of Directors has confirmed Ruud Huisman as CEO of the Group and hasappointed Vittorio Serafino as Chairman of the Board.

1Q05 results were in line with the forecasts set out in the 2005-2007 business plan,which was announced a few weeks ago. The focus on growth in broadband and relatedvalue-added services in four countries (Italy, Germany, the Netherlands and the UK)has already produced clear improvements in profitability. The analysis of pro-formaresults, on the same perimeter as the 2005-2007 business plan, shows that the grossmargin improved from 48% in 1Q04 to 51% in 1Q05, while the EBITDA marginexpanded from 9% to 15% over the same period (EBITDA was 13.3 million in 1Q04,and EUR 25 million in 1Q05).

At the end of the first quarter of 2005, the Tiscali had 150,000 ADSL additionalsubscribers in the countries included in the business plan compared with end-2004,taking the total number of ADSL customers to over 1.2 million (pro-forma).The growing profitability of investment activities, in line with the business plan, andother measures currently being implemented (such as the sale of the Spanishsubsidiary and network infrastructure of TiNet), will enable Tiscali to complete itsfinancial programme aimed at the repayment of outstanding debt and at supportingfurther growth.

Revenues and gross profit

Tiscali Group revenues totalled EUR 239.7 million in the first quarter of 2005. Proformarevenues were up 11% vs 1Q04, at EUR 171.6 million.At 31 March 2005, the Group had 1.2 million ADSL customers (pro-forma), comparedwith around 1 million at 31 December 2004—an increase of over 150,000 (+20%). Thisincrease was mainly achieved in the UK thanks to Tiscali’s competitive offers. The UKmarket is expanding rapidly, and therefore offers excellent prospects over the next fewmonths.

The number of active users totalled 5.2 million (pro forma) at the end of the quarter, ofwhich 4 million were dial-up users. The decrease in the dial-up user base comparedwith the previous quarter reflects the smaller structure of the Group, as well as usermigration to ADSL, in line with the Group’s strategy of promoting broadband services—particularly in unbundled mode. By the end of March, around 235,000 ADSL customerswere receiving unbundled services.

With the launch of commercial offers aimed at increasing the take-up of double play(voice and data) services, already available in the Netherlands, the UK and Germany,highly competitive access packages in the UK and Italy, and the imminent launch ofadditional services and content, we expect an increasing number of customers toreceive unbundled, rather than wholesale services. In May double play services havebeen launched also in Italy.

Access revenues came in at EUR 178.0 million in 1Q05: the dial-up businesscontributed EUR 85.5 million, which was exceeded by ADSL revenues, at EUR92.5 million.

The pro-forma figure rose by 17% versus 1Q04, from EUR 109.4 million to EUR127.9 million (75% of total revenues), and by 2% versus the previous quarter(EUR 125.4 million). In detail, ADSL revenues totalled EUR 65.8 million (51% ofaccess revenues) in the quarter, almost double the EUR 36.9 million (34% ofaccess revenues) recorded in 1Q04, and 7% ahead of the EUR 61.7 million (49%of access revenues) reported the previous quarter. Dial-up revenues totalled EUR62.1 million (49% of access revenues), reflecting the increasing contribution ofADSL and the marked change in the access revenue mix.

Revenues from voice services for 1Q05 were EUR 30.3 million. The pro-formafigure, EUR 21.5 million (13% of total revenues), was down 11% versus 1Q04,and down 6% compared with the previous quarter. This decline was due to arefocus of the offer of traditional voice services in favour of VoIP services, whichare more profitable.

Revenues from business services for 1Q05 were EUR 19.8 million. The proformafigure was EUR 13.9 million (8% of revenues), a 6% increase versus 1Q04(EUR 13.1 million), and a 3% advance on the previous quarter (EUR 13.5 million).

Note that for the first quarter of 2005, the business services division only reportedrevenues from business services, such as housing, hosting, domain names andleased lines. Therefore, it does not include revenues from providing accessservices to the corporate sector (these are now included under access revenues).Portal (Media & VAS) revenues for 1Q05 were EUR 9.6 million. The pro-formafigure, EUR 6.3 million (4% of total revenues), was down 1% versus 1Q04, anddown 25% compared with the previous quarter. This performance was due tothe seasonal factors that typically affect the first quarter of the year. Anincreasing focus on valued added services (VAS) has contributed to theincrease at gross margin YoY (69% vs 50%).

In the first quarter of 2005, gross profit was EUR 106.8 million. The pro-forma figurestood at EUR 86.6 million (gross margin: 51%), up 16% versus 1Q04 (EUR 74.4 million,48% of revenues), and 4% ahead of the previous quarter (EUR 83.6 million).The substantial improvement in both the gross profit and gross margin, related directlyto the decision to focus on markets offering greater potential for value creation, and tothe implementation of the network unbundling strategy, which will mean that asignificant proportion of ADSL customers can gradually be migrated to unbundledservices.

Operating performance

Operating costs down as a proportion of revenues

Operating costs stood at EUR 85.5 million for the first quarter of 2005. Thepro forma figure was EUR 61.6 million, broadly flat in absolute terms versus1Q04 (EUR 61.0 million). However, these costs accounted for a smallerproportion of revenues, falling from 40% in 1Q04, to 36% this time. Comparedwith the previous quarter (EUR 55.9 million), operating costs were higher in1Q05, and also increased as a proportion of revenues, from 33% to 36%.This increase relates to the substantial amount spent on marketing to supportgrowth (see below), particularly in March 2005. We underline that in a positivetrend that shows an increase in pro forma revenues, together with theGroup’s efficiency improvement, general and personnel costs reduced.Operating costs break down as follows.

First-quarter marketing costs totalled EUR 32.6 million.

The pro-forma figure for 1Q05, EUR 24 million (14% of revenues) was up10% versus 1Q04 (EUR 21.9 million; 14% of revenues), and 38% higher thanin the previous quarter (EUR 17.5 million; 10% of revenues). Most of thecosts incurred over the quarter involved promoting ADSL services.Personnel costs were EUR 35.1 million in the first quarter of the year. Thepro-forma figure of EUR 27.3 million was broadly flat versus 1Q04 (EUR 27.5million), and 2% lower than in the previous quarter. As a percentage ofrevenues, these costs fell from 18% in 1Q04 to 16% in 1Q05 (and werebroadly unchanged from the previous quarter).General and administrative costs were EUR 17.8 million in the first quarterof the year.

The pro-forma figure for 1Q05, EUR 10.3 million (6% of revenues) was up11% versus 1Q04 (EUR 11.7 million; 8% of revenues), but down 3% versusthe previous quarter (EUR 10.7 million; 6% of revenues).In the first quarter of 2005, EBITDA was EUR 21.3 million. The pro-forma figure stoodat EUR 25.0 million, an 87% increase on 1Q04 (EUR 13.3 million). Over the sameperiod, the EBITDA margin expanded from 9% to 15%. However, first-quarter EBITDAwas 10% lower than in the previous quarter (EUR 27.7 million), since high marketingcosts pushed up overall operating costs.

Depreciation, amortisation, provisions and write-downs totalled EUR 49.6 million,compared with EUR 51.1 million in 1Q04. The decrease, which occurred despite higherinvestments, is attributable to the deconsolidation of the companies sold in 2004 and inthe first quarter of 2005. Specifically, depreciation of tangible assets totalled EUR 22.3million in the quarter, while amortisation of intangible assets was EUR 22.4 million, ofwhich EUR 10.6 million related to goodwill (consolidation difference). Note that goodwillamortisation was reported in 1Q05, because the first quarter results were drawn upaccording to Italian accounting principles. International principles (IAS/IFRS) will beadopted for the report on the first six months of 2005.

The loss at EBIT level was EUR 28.3 million, versus losses of EUR 27.2 million in1Q04 and EUR 19.6 million in the previous quarter. The pro forma figure if goodwillamortisation is excluded, as per international accounting principles falls to EUR 5.4million.

The group made a pre-tax loss (EBT) of EUR 17.9 million in the quarter, a 30%improvement on the loss of EUR 52.1 million reported in 1Q04. This result benefitedfrom extraordinary income from the sale of subsidiaries in South Africa and Denmark(some EUR 25 million), or EUR 8 million, stripping out goodwill amortisation.

Tiscali SpA