Telecom Italia Earnings: Italian Market Has Not Changed Despite First Positive Growth in 5 Years

No-moat Telecom Italia TIT grew revenue by 2.8% and EBITDA after leases by 5.5% in the second quarter, mainly aided by its Brazilian business, which grew sales by 9.5% and EBITDAaL by 21%. In Italy Telecom Italia reported its first quarter of domestic revenue growth in 5 years, with revenue up 0.9%. However, this was explained by the strong growth in handset sales. Italian service revenue declined by 0.9%, with the mobile market still under pressure and down 4.2% year over year. We maintain our EUR 0.25 fair value estimate and Very High Morningstar Uncertainty Rating for Telecom Italia.

The mobile market continues to be the main drag on Telecom Italia in Italy. Iliad and other mobile virtual network operators like Digi have already committed to not raising prices despite ongoing high inflation. This pricing strategy together with the large bundles of data and calls offered by these players will be a drag on leading mobile operators like Telecom Italia and Vodafone, which continue to bleed market share. Despite lowering their prices, Telecom Italia and Vodafone have lost 1.9% and 1% of their mobile customers in the past year with average revenue per user down 2.2% and 6%, respectively. In the wireline division, wholesale revenue was up due to updated 2023 wholesale prices, but was offset by a 2.8% decline in retail revenue, where the market remains competitive. Telecom Italia Brasil’s revenue was up 9.5%.

Operational expenses were flat year over year, which allowed Telecom Italia to keep EBITDAaL flat at EUR 972 million. We believe Telecom Italia should be more ambitious with its cost-cutting as we don’t expect revenue pressures to slow down any time soon.