TELECOM ITALIA GROUP Telecom Italia Morgan Stanley 11th Annual Technology Media & Telecoms Conference Chief Operating Officer
Safe Harbour These presentations contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 199. These statements appear in a number of places in this presentation and include statements regarding the intent, belief or current expectations of the customer base, estimates regarding future growth in the different business lines and the global business, market share, financial results and other aspects of the activities and situation relating to the Company and the Group. Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected or implied in the forward looking statements as a result of various factors. Forward-looking information is based on certain key assumptions which we believe to be reasonable as of the date hereof, but forward looking information by its nature involves risks and uncertainties, which are outside our control, and could significantly affect expected results. Analysts are cautioned not to place undue reliance on those forward looking statements, which speak only as of the date of this presentation. Telecom Italia S.p.A. undertakes no obligation to release publicly the results of any revisions to these forward looking statements which may be made to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Telecom Italia S.p.A. business or acquisition strategy or planned capital expenditures or to reflect the occurrence of unanticipated events. Analysts and investors are encouraged to consult the Company's Annual Report on Form 20-F as well as periodic filings made on Form 6-K, which are on file with the United States Securities and Exchange Commission. 1
Agenda TI Group 3Q11 Progress Report Focus on Domestic Mobile Market Focus on Domestic Fixed Market Conclusions 2
TI Group: Revenues & Ebitda Euro mln, % Reported Revenues Organic Revenues IIIQ 19,899 6.676 +2,160 M +10.9% +840 +12.6% 22,09 7.16 IIIQ +407 M +1.9% 21,62 22,09 +270 7.246 +3.7% 7.16 IIQ 6.810 +660 +9.7% 7.470 IIQ +12 7.318 +2.1% 7.470 IQ +660 6.413 +10.3% 7.073 IQ -1 7.088-0.2% 7.073 9M10 9M10 Reported EBITDA Organic EBITDA % on Revenues 42.6% -1.0p.p. 41.6% % on Revenues 43.1% -1.2p.p. 41.9% IIIQ IIQ IQ 8,47 +700M +8.3% 9,17 2.742 +46 +16.6% 3.198 2.907 2.826 +141 +4.9% +103 +3.6% 3.048 2.929 IIIQ IIQ IQ -9M -1.0% 9,329 9,234 3.186 +27 +0.8% 3.213 3.066 3.077-11 -0.4% -111-3.6% 3.0 2.966 9M10 9M10 3
Strong Free Cash Flow Generation and Net Debt Reduction Euro mln, Reported Data Operating Free Cash Flow Adjusted Net Financial Position (3,037) Revenues 19,899 +2,160 22,09 32.98 (1,20) Opex 11.424-1,460 12.884 31.468 29.948 Capex D WC 2.938 2.086-22 +62* 3.190 1.461 OFCF 3.41 +1,073* 4.24 9M10 9M10 FY10 * o/w 389 mln TI Sparkle settlement 4
Domestic: 3Q11 Organic Results Euro mln, Organic data, % Revenues by Technology EBITDA Mobile -18 M -3.8% 4,927 4,742-6.% 1.914 1.790 Retail Revenues -.9% % on Revenues 1.6% 2.2% +0.6 p.p. -64 M 2.42-2.% 2.478 Wireline 3.444-2.8% 3.349 3Q10 Total Service Rev YoY -7.% % on Revenues CAPEX OPEX (EBITDA-CAPEX) 61.9% 3Q11 3,01 2,921-1.4% 666 67 -.1% 2.38 2,264 3Q10 Cash Cost reduction - 0.3 p.p. -130 M -4.3% 61.6% 3Q11 Revenues 38.1% 38.4% -9-121 3Q10 Highlights 3Q11 Further improvement in Revenues trend, in both Fixed and Mobile On Fixed, performance was sustained by July tariff simplification and by a successful value-driven approach in a slowing market On Mobile, voice price stabilization and data growth delivered further trend improvement, despite MTR reduction in July Year-on-Year trend on Int l Wholesale close to stabilization Continued focus on cash cost delivered a 0.6pp growth on EBITDA Margin, now at 2.2% Ebitda-Capex on Revenues reached 38.4% in Q3
Agenda TI Group 3Q11 Progress Report Focus on Domestic Mobile Market Focus on Domestic Market Fixed Conclusions 6
Mobile Revenues: 3Q11 Results Breakdown Euro mln, Organic Data Total Mobile Revenues Mobile Handset Revenues Trend YoY % change 3Q10 4Q10 1Q11 2Q11 3Q11 26,2% 34,0% Total Mobile Wholesale Total Retail Handset 1,914 70 1,844-124 -6.% -109 -.9% +34.0% 1,790 1,73-8,0% -39,9% -22,4% Mobile Retail Service Revenues Trend YoY % change Service 1.796-6.9% 1.672 3Q10 4Q10 1Q11 2Q11 3Q11-10,6% -9,0% -10,9% -7,7% -6,9% - 4.3% Excluding MTR reduction on Q3 3Q10 3Q11 7
Domestic Mobile: Customer Base Trend Gross Adds Churn Rate % 1.822 2.029 2.12 +20% Monthly YTD Annualized low twenties 000 1Q 2Q 3Q 2011 2010 Total SIM cards CB Change YoY +1,047K 1Q 2Q 3Q 2011 2010 Highlights Gross Adds combined with a controlled churn generates a sound Customer Base growth: Focus on acquisition delivered a double-digit growth in Gross Adds (+20% YoY) Churn rate still improving, driven by CRM focus and increasing lock-in offerings on Customer Base 8
Small Screen Large Screen Morgan Stanley 11 th Annual Technology Media & Telecoms Conference Domestic Mobile Focus on Mobile BB Consumer Highlights KPIs Retail Browsing Revenues 3Q YoY growth +19.3% Weight on Retail Business Generated Revenues: From 13% in 3Q10 to 17% in 3Q11 +23.7% TIM market share leadership confirmed (>36% 3Q11) TIM users continued to increase (+22% YoY vs. +20% YoY in previous quarter) sustained by internet pack YoY double-digit growth of Internet Pack uptake Large Screen users mln +22% 2.10 2.6 3Q10 3Q11 mln Internet pack uptake Successful pricing approach on yearly basis ~0. 3Q10 +33% ~0.66 3Q11 Total Retail Of which Consumer 3Q11 Leadership among operators: Confirming a sound growth in Smarthphone sales iphone market share leadership confirmed Small screen revenues +39% YoY combining users (+28% YoY) and solid Arpu growth mln Total H/S* % Smartphone on Handsets sold * Source GFK survey ~0.7 ~0% 3Q11 Smartphones +127% YoY mln Small Screen users 1.4 3Q10 TIMX Smartphone gross adds +38% YoY +28% 1.86 3Q11 9
Marketing Mobile: Strategic Evolution 2010 2011-2012 Offer portfolio review with a focus on competitiveness and a «value-for-money» approach Ongoing «value-for-money» and marketing strategy with a segmented and selective approach on key targets Mass Market Target Young High Value Massive Ethnic 10
2H 2011: Main Marketing Initiatives Young High Value TIM Young: Internet &SMS Marketing mix enrichment: Innovative services: mytim Context on web & social ntw New strategy of CRM micro-segmentation aimed at caring, upselling and loyalty one to one Leadership on all-inclusive offers, focus on Smartphone Target-driven Smartphone promos in bundle offer via web/social ntw (i.e. Facebook-phone HTC) Mobile Broadband and Devices 42 Mega offer launch Leadership on tech innovation on Smartphones and Tablets Tablet Pack concept launch Focus on value-for-money and transparency through unlimited internet offers Focus on entry-level Android smartphone Ongoing focus on Internet Pack Multilanguage Internet Pack launch Leadership on market acquisitions focus on service quality ARPU stabilization through voice/sms options and CRM actions New compensation policy with focus on Value Massive Focus on simple and value-for-money offer for international traffic directories Target-driven Communication and co-marketing Ethnic 11
Agenda TI Group 3Q11 Progress Report Focus on Domestic Mobile Market Focus on Domestic Fixed Market Conclusions 12
Domestic Fixed: Revenues Dynamics Euro mln, Organic Data, % Total Fixed Revenues Highlights Total Fixed 3,444 Products 126 Service Rev. 3,318-2.8% -2.1% 3,349 102 3,247 Material improvement in Core Domestic Service Revenues: -2.1% YoY in Q3 vs -3.% in Q2 & Q1, as a result of: Positive impact of Monthly fee revision and tariff simplification Successful value-oriented approach on Broadband Core Domestic 3,010-2.1% 2,946 Confirmed Positive trend on ICT Service Revenues growth Sparkle Revenues trend stabilization Sparkle Group Eliminations 388 3Q10 369 3Q11 13
Domestic Fixed: TI Access Performance Telecom Italia Retail Access Evolution & Line Losses Highlights 000 TI Access 000 Line losses OLO Access Growth Quarter Trend Stable Market Share ~ 67% Stable Market Share For the first time negative growth of OLO access OLO aggressive promotions derive from a tough market, leading to a higher intra-olo flow Improvement in TI line losses trend despite market contraction 000 +12 33 9 83 +190 38 14-2 +181 60 12 109 +1 2 0-1 -41 18-17 -42 3Q10 4Q10 1Q11 2Q11 3Q11 ULL Naked WLR TI s winning value oriented strategy 14
Domestic Fixed: Focus on Broadband TI Retail Broadband Accesses BB Net Adds 000 TI retail accesses 7,194 7,169 7,141 000 172 188 213 Free BB Market 6 Flat (%) % Premium Offers on Consumer Segment 87% 87% 87% 1Q11 2Q11 3Q11 3.6% 4.3%.% TI 2-11 19-34 -2-28 Market Share 4.1% 3.7% 3.6% 3Q10 4Q10 1Q11 2Q11 3Q11 BB Service Revenues Highlights Mln Stable Defending Broadband Market Share at 3.6% Stabilizing BB reduction trend vs Market contraction BB ARPU increase proving an healthy BB Strategy ARPU /month 18.7 18.4 18.7 18.3 18.6 18.6 Growing Stable Confirming the stable BB Service Revenues since 2010 1
% of users on BB Morgan Stanley 11 th Annual Technology Media & Telecoms Conference Super Internet Offer 80% Video Streaming 70% Social Networking 60% 0% 40% 30% 20% 10% Source: Between Osservatorio Banda Larga- lug 2010 Gaming A strong acceleration of services that require high network performance are driving demand for higher speeds in both Download, for video streaming, and Upload, for social networking. Consistent with our quest for value in Fixed BB Super Internet is a bolt-on option enabling speed increase (up to 1Mb/s in upload, 10 or 20 Mb/s in download) against a monthly fee increase starting from 4/month. Proactive customer care approach: service only to clients who can fully benefit of the high speed. Take up rate is greater than 80%, mainly due to the effective delivery of broadband promise. CB BB SuperInternet 3x Usage confirms that the product has intercepted a real need of higher bandwidth and speed. IIQ '11 IIIQ '11 16
Agenda TI Group 3Q11 Progress Report Focus on Domestic Mobile Market Focus on Domestic Fixed Market Conclusions 17
2011 Domestic Performance Dashboard Organic data Mobile Business Fixed Business 000 lines Delta Customer Base YoY mln lines Line Losses +64 +71 +1,047 Acceleration in Customer Base growth -206-183 -13 Good performance in line losses evolution despite weak market D% YoY Business Generated Revenues (*): D% YoY Total Fixed Service Revenues -9,8% -6,6% -,2% Mobile Recovery in progress -4,9% -4,9% -2,1% Improvement in all fixed service metrics D% YoY Retail Browsing Revenues /mese ARPU BB 2,8% 19,3% Users growth and ARPU control combined 18,4 18,3 18,6 Sound BB ARPU increase thanks to a better free/flat mix -6,% (*) Mobile Retail Service Revenues net of Incoming 2011 Quarters in sequence 2011 Quarters in sequence 18
TI Group Key Achievements Domestic Latam Financial Discipline Mobile: 1) Solid Customer Base growth (+419K QoQ), with a focus on quality acquisition, 2) outgoing prices stabilization QoQ, 3) YoY still positive trend on outgoing voice volume (+8% YoY), 4) Retail Browsing Revenues accelerated growth (+19.3% YoY, delivered a in Domestic sound growth in Mobile Revenues (-6.% YoY in Q3 vs -7.6% YoY in Q2), despite MTR reduction. Wireline: 1) Improving trend in line losses reduction, 2) stabilization in BB Market Share, 3) BB ARPU QoQ increase and 4) tariff measure from July, delivered an improvement in Core Domestic Wireline Service Revenues (-2.1% YoY in Q3 vs -3.% YoY in Q1 and Q2). Brazil : 1) TIM confirmed as #2 operator in volume and value (about 3.7 million lines added in the last Quarter), 2) brilliant Revenue growth on 3Q2011 (+18.9% yoy), 3) sound Ebitda performance: +11% YoY in 3Q11 Argentina: 1) Personal # 2 Mobile Operator, with 17.8 mln clients and solid growth in postpaid segment, 2) steady growth in fixed BB accesses (+13% vs 9M10), 3) important Revenue growth (+27%) delivered Operating Free Cash Flow: 4.2 bln (+1.07 bln YoY, +684 mln excluding Sparkle settlement) Adj. Net Financial Position: 29.9 bln (-1.2 bln vs FY10, -3.04 bln vs 9M10, after 1.3 bln Dividend Payment) 19
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TI Group - Main Results of Core Markets Euro mln, Organic Data TI Group Domestic Brazil Argentina D % yoy D % yoy D % yoy D % yoy Weight on TI Group Revenues 22,09 +1.9% 14,098 -.7%,39 +17.% 2,324 +27.4% 3% EBITDA 9,234-1.0% 7,069-4.9% 1,447 +10.7% 79 +23.8% 24% EBITDA-CAPEX 6,044-1.0%,04-4.4% 640 +16.3% 428 +26.7 % Lines (mln) Weight on TI Group 130 ~36% ~46% ~19% * Revenues based on net contributions 21
Italy: Revenues & Ebitda Trend Euro mln, Organic Data, % IIIQ IIQ IQ % on Revenues IIIQ IIQ IQ 14,96 4.927.064 4.742 4.760-369; -7.4% 4.96 Mobile: -12.0% 4.96 Fixed: -4.% 9M10 7,437 2.42 Revenues -88 M -.7% -18; -3.8% Mobile: -6.% Fixed: -2.8% -304; -6.0% Mobile: -7.6% Fixed: -.1% EBITDA -368 M -4.9% -64-2.% 14,098 49.7% 0.1% +0.4 p.p. 7,069 2.478 2.43-117 -4.8% 2.318 2.460-187 -7.6% 2.273 Continued Improvement in Core Markets Visible improvement of Fixed Business Better progressive trend in Mobile Top Line 3Q11 Year-on-Year Ebitda at -2.% Leadership in Gross Mobile Acquisitions confirmed in 3Q11 Positive impact from Fixed Pricing Simplification and reduction in Fixed Line Losses in 3Q (-13k) vs 2Q11 (-183k) BB Achievements Upbeat double-digit performance in Mobile Small Screen Browsing Leading in smartphones market share Value-oriented approach on Fixed BB delivers r an increasing ARPU and a stable market share QoQ Developing Innovation Successful introduction of bolt-on offers on Fixed BB paves the way for Personal Cloud services 9M10 22
Brazil: Revenues & Ebitda Trend Euro mln, Organic Data, % Revenues Size IIIQ IIQ 4,91 1.9 1.0 +804M +17.% +301 +18.9% +303 +19.%,39 1.896 1.83 TIM Brasil confirmed as #2 operator in volume and value Data revenues on the rise YoY in 3Q11 at +47,6% vs YoY in 2Q11 +33% About 3.7 million lines added in the last Quarter IQ +200 1.446 1.646 +13.8% Revenue Growth % on Revenues IIIQ IIQ 9M10 28.% 1,308 41 441 EBITDA + +12.% -1.7 p.p. 26.8% +139 M +10.7% +48 +11.0% 1,447 499 496 Confirmed Voice outgoing revenues double-digit performance in 3Q (+21% YoY) Brilliant Data Revenues performance thanks to continued smartphone penetration increase (now at 19.%) Value Creation Sound Ebitda performance: +11% YoY in 3Q11 IQ +36 416 +8.6% 42 9M10 23
Argentina: Revenues & Ebitda Trend Euro mln, Organic Data, % IIIQ IIQ IQ % on Revenues IIIQ IIQ IQ 1,824 641 91 92 9M10 613 204 199 23 249 +47 210 +22.% 27 9M10 Revenues +00 M +27.4% +172 +26.7% +167 +28.4% +161 +27.2% EBITDA +146 M +23.8% +49 +23.7% +0 +2.2% 2,324 813 78 73 33.6% -0.9 p.p. 32.7% 79 Size Steady growth in fixed BB accesses (+13% vs 9M10) Argentina # 2 Mobile Operator, with 17.8 mln clients and steady growth in postpaid segment Revenue Growth Mobile Personal: strong VAS Revenue growth still driven by SMS & Internet ARPU Personal: ARS 49,8 YTD, +16% YoY VAS: +8% vs 9M10 Sound Broadband growth: 3Q11 BB ARPU +14% YoY Value Creation Confirmed double-digit EBITDA Growth: +23.7% YoY in 3Q YTD OFCF stands at 428 million Solid cash position (around 300 million in September) also due to the delay in spectrum auction 24
Even and Back-Loaded Maturities Euro mln Bonds Loans (of which long-term rent, financial and operating lease payable 1,82) Drawn bank facility.16 bln Group Liquidity Position + 7.83 bln Undrawn Portion of Facility/Committed = 12.99 bln Group Liquidity Margin 138 4,04 3.19 138 89 4,937 3.481 1.46,436 1.00 2.839 1.097 2,82 1.734 1.118 2.20 36 12.19 2.442 1.00 2.622 Within 2011 FY 2012 FY 2013 FY 2014 FY 201 FY 2016 Beyond 2016 Total M/L Term Debt 2,786 14,601 34,804 (1) (1) 34,804 mln is the nominal amount of outstanding medium / long-term debt. By adding IAS adjustments ( 1,072 mln) and current liabilities ( 467 mln), the gross debt figure of 36,343 mln is reached. N.B. Debt maturities are net of: 180 mln (face value) of repurchased own bonds (TI Spa 80 mln.2 % Notes due 206); 77 mln (face value) of repurchased own bonds (TI Spa 70 mln 4.7 % Notes due 2014); 3 mln (face value) of repurchased own bonds (TIF 1,060 mln 7.7 % Notes due 2033); and 199 mln (face value) of repurchased own bonds (TIF 1,000 mln 7.2 % Notes due 2012). 7.682 2
Progress on Domestic Efficiency Plan Euro mln, Organic Data, % Cash Cost Delta Cash Cost YTD 11 vs YTD 10 9.672-330 +221-19 9.044 Ytd 11 D Abs 11 vs 10 Total Opex 7.029-490 -628 Ytd 10 Intercon- Volume Efficiency Ytd 11 nection Driven Cash Cost on Revenues % 64.7% - 0. p.p. 64.2% ITX Handset Mktg & Comm. Industrial Personnel Total Capex 1.74 1.42 699 G&A & Other * 368 2.203 2.01-330 89 +30-81 +1-138 +28-138 Fixed Opex -109 19 Efficiency 0% Opex Capex % on FY Target 80% 10% 6% 9 M 10 9 M 11 Total Cash Cost 9.044-628 *Includes Other Operating cost/income and Capitalized Costs 26
Italian Spectrum Auction - Outcome 800 1800 2600 FDD 2600 TDD 1 1 Specific Block 27
TIM Brasil Capital Increase Base Offer Price: 8.60 R$ Shares Offer: 190.796.88 Value: R$ 1.640.82.978,80 Greenshoe Price: 8.60 R$ Additional Shares: 9.461.10 Additional Value: R$ 81.368.986 + = TI Minorities 66.94% 33.06% + TI Minorities 0% 4.96% = Final Capital Increase TI Minorities Shares: 200.28.368 Value : R$ 1.722.221.96 (~ 700 million) 63.74% 36.26% TI paid ~1.1bln R$/40 mln 28
TIM Brasil Shareholders Structure After capital increase and including greenshoe ON: 66.68% Total : 66.68% ON: 33.32% Total : 33.32% 29
Telecom Argentina Shareholders Structure Los W TI 32.0% 32.% 100.0% 3.% TI Int. TI Economic Interest in TA: 22.61% (as of 27 October 2011) 68.0% 8.0% Sofora (1) Pfd A shares Pfd B shares 1.04% econ. 92.99% voting 0.00% econ. 7.01% voting 48.96% econ. 0.00% voting 90.0% 10.0% Nortel Anses Public Employees (PPP) (2) Inversiones Milano 4.74% econ. 4.74% voting 24.98% econ. 24.98% voting 18.19% econ. 18.19% voting 0.62% econ. 0.62% voting 1.47% econ. 1.47% voting TEO (1) Considering the payment of the dividends due for the previous years, Nortel s Preferred A Shares will lose their voting rights. (2) Data as of October 31, 2011. 30