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

Price and promotional competition continued to erode no-moat Telecom Italia’s 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.