Annual Report2010Relazione intermedia di gestione al 30 giugno 2010   1Telecom Italia Group
ContentsLetter to the Shareholders                                                    4Report on Operations               ...
Consolidated Cash Flow Statements                                                                     163Notes to the Cons...
Letter to the ShareholdersTo the Shareholders,The restructuring and re-launching process undertaken by Telecom Italia in 2...
Thirdly, we strengthened our capacity to regain efficiency in all corporate areas of activity.The major re-scaling of indu...
The Telecom Italia Group consolidated financial statements for the year ended December 31, 2010 and thecomparative figures...
Key Operating and Financial DataTelecom Italia Group2010 HighlightsArgentina Business Unit    On October 13, 2010, the Tel...
The trend of the key operating and financial measures in 2010 can be summarized as follows:Organic consolidated Revenues: ...
Organic consolidated EBIT: totals 6,231 million                                                                          O...
Consolidated Operating and Financial Data (*)(millions of euros)                                      2010         2009   ...
Consolidated Profit Ratios (*)                                                                    2010              2009  ...
Corporate Boards at December 31, 2010► Board of DirectorsThe board of directors of Telecom Italia was elected by the share...
The board of statutory auditors is composed as follows:Chairman                                          Enrico Maria Bign...
Macro-Organization Chart at December 31, 2010           Telecom Italia Group                                              ...
Information for Investors►    Telecom Italia S.p.A. share capital at December 31, 2010Share capital (in euros)            ...
Holder                                                  Type of ownership    % stake in ordinary share capital Telco S.p.A...
►        Performance of the stocks of the major companies in the Telecom Italia GroupRelative performance by Telecom Itali...
Relative performance by Tim Participações S.A.1/1/2010 – 12/31/2010 vs. BOVESPA Index and ITEL Index (in Brazilian reais) ...
Telecom Italia S.p.A. ordinary and savings shares, Tim Participações S.A. preferred shares andTelecom Argentina S.A. Class...
Financial ratios - Telecom Italia S.p.A. and the Telecom Italia GroupTelecom Italia S.p.A.                                ...
Review of Operating and Financial PerformanceTelecom Italia Group2010 Consolidated Operating PerformanceThe main profit in...
RevenuesRevenues amount to 27,571 million euros in 2010, increasing 2.5% compared to 26,894 million euros in 2009(+677 mil...
The following chart summarizes the changes in organic revenues in the years under comparison:(millions of euros)          ...
Details of EBITDA and EBITDA margins by operating segment are as follows:                                                 ...
EBITDA was particularly impacted by the change in the line items analyzed below:Acquisition of goods and servicesAcquisiti...
The remaining amount of mobility expenses (13 million euros) refer to the mobility procedures underLaw 223/91 signed with ...
Other operating expensesDetails are as follows:(millions of euros)                                                        ...
• gain, net of the related transaction costs, for a total of 19 million euros, in connection with the completion    of the...
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2010 Annual Report

  1. 1. Annual Report2010Relazione intermedia di gestione al 30 giugno 2010 1Telecom Italia Group
  2. 2. ContentsLetter to the Shareholders 4Report on Operations 6Key Operating and Financial Data 7 Corporate Boards at December 31, 2010 12 Macro-Organization Chart at December 31, 2010 14 Information for Investors 15 Review of Operating and Financial Performance Telecom Italia Group 21 Research and Development 41 Events Subsequent to December 31, 2010 41 Business Outlook for the Year 2011 41 Consolidated Financial Statements – Telecom Italia Group 43 Highlights – The Business Units of the Telecom Italia Group 48 The Business Units of the Telecom Italia Group 50  Domestic 50  Brazil 71  Argentina 75  Media 79  Olivetti 85 International Investments 88 Review of Operating and Financial Performance - Telecom Italia S.p.A. 89 Financial Statements – Telecom Italia S.p.A. 100 Reconciliation of Consolidated Equity 105 Related Party Transactions 106 Sustainability Section 107  Customers 111  Suppliers 113  Institutions 115  Competitors 117  The Environment 119  The Community 127  Human Resources 131 Shareholders 144 Alternative Performance Measures 146 Equity Investments held by Directors, Statutory Auditors and Key Managers 148 Glossary 149 Telecom Italia Group Consolidated Financial Statements 155Contents 156Consolidated Statements of Financial Position 158Separate Consolidated Income Statements 160Consolidated Statements of Comprehensive Income 161Consolidated Statements of Changes in Equity 162Annual Report 2010 2Telecom Italia Group
  3. 3. Consolidated Cash Flow Statements 163Notes to the Consolidated Financial Statements 165Certification of the Consolidated Financial Statements pursuant to art. 81-ter of Consob Regulation11971 dated May 14, 1999, with Amendments and Additions 308Independent Auditors’ Report 309Telecom Italia S.p.A. Separate Financial Statements 311Contents 312Statements of Financial Position 314Separate Income Statements 316Statements of Comprehensive Income 317Statements of Changes in Equity 318Cash Flow Statements 319Notes to the Separate Financial Statements 321Certification of the Separate Financial Statements pursuant to art. 81-ter of Consob Regulation11971 dated May 14, 1999, with Amendments and Additions 447Independent Auditors’ Report 448Other Information 450Board of Statutory Auditors’ Report 451Motions for Resolutions 473Useful Information 491This document has been translated into English solely for the convenience of the readers.In the event of a discrepancy, the Italian-language version prevails.Annual Report 2010 3Telecom Italia Group
  4. 4. Letter to the ShareholdersTo the Shareholders,The restructuring and re-launching process undertaken by Telecom Italia in 2008 hasproceeded relentlessly, despite the fact that it coincided with one of the stormiest periodsin the international economy since the Second World War – with a decisive and prolongeddecline in earnings in the most advanced economies, a loss of jobs, and the downscaling ofinvestments and consumption. By paying scrupulous attention to governance in order toprotect the interests of all stakeholders and thanks to a corporate culture in whichresponsibility and transparency are of prime importance, our Group has given concreteproof that it is, and wants to be, a reliable and credible company. A healthy company, notonly in terms of its accounts but also in its behavior, very much aware of the needs of all itsstakeholders, open to dialog and to collaboration with national and internationalinstitutions, with the regulatory authorities and its social partners. The direction we havefollowed so far is the result of this clear orientation shared by all, not only by the board ofdirectors and management but by every single person who works for our Group.More particularly, 2010 was a year of great transformation: we stepped up our presence inLatin America, we considerably improved our equity structure, we recovered our level ofcompetitiveness and we continued to grow the loyalty of our customers.The strengthening of our business in Latin America is due both to the re-launching of ouroperations in Brazil and the consolidation of the Group’s investment holding in the TelecomArgentina group, thanks to the resolving of the dispute with the partners of the holdingcompany Sofora Telecomunicaciones which had dragged on for almost three years.Thus the international component has once again become the pillar of the Group’s growthstrategy, making it possible to compensate the trend in a domestic market suffering fromincreasing levels of saturation and a consequent escalation of the competition.The second important achievement of 2010 was the net improvement in the company’sequity structure. The overall debt of the Telecom Italia Group fell by almost 2.5 billioneuros, settling at year-end to about 31.5 billion euros.Letter to the Shareholders 4Telecom Italia Group
  5. 5. Thirdly, we strengthened our capacity to regain efficiency in all corporate areas of activity.The major re-scaling of industrial costs was transferred almost entirely to our customers inthe form of a general lowering of prices, a move which enabled us to improve thecompetitiveness of our fixed network services and even more of our mobile networkservices. In 2010 the number of mobile network services customers began to grow again,while the decline in the number of fixed network services customers settled at levels whichwere much lower than in previous years. In addition, the generally higher level of customersatisfaction was partly due to our constant efforts to improve the quality of service.The combined effect of these factors (cost reduction, recovery of competitiveness in thedomestic market and strong growth in our foreign operations) led to a net profit which,even if we leave aside extraordinary or non-recurring transactions, is approximately 18%higher than in 2009.Overall, therefore, today, Telecom Italia is leaner, more efficient, more flexible. It is moreinternational and is closer to its customers, in line with the aims and the time frames it setitself previously.We are fully aware that we cannot allow ourselves to relax, even for a moment. The futureof the Italian economy is still fraught with uncertainty. Furthermore, the evolution of thehabits of consumers with regard to telecommunications products and services will have tobe supported by new investments in network infrastructures, for which it will be necessaryto identify new remuneration equilibriums. Lastly, we shall have to face up to a market thatis ever more competitive and dynamic, in which new subjects are emerging with businessmodels that are different to those of telecommunications operators.However, the new solid framework of the Group, its capacity to develop innovation and itsprimary role in supporting and promoting the vital process of digitizing the Italian economyand society allow us to look ahead calmly and confidently. However great the challengesthat lie ahead, we are ready to seize them, in the interests of our stakeholders, the peoplewho work for us, our partners and, more generally speaking, the countries where weoperate, whose economic and social development we fully intend to support.Letter to the Shareholders 5Telecom Italia Group
  6. 6. The Telecom Italia Group consolidated financial statements for the year ended December 31, 2010 and thecomparative figures for the prior year have been drawn up in accordance withinternational accounting standards issued by the International Accounting Standards Board and endorsed bythe European Union (“IFRS”).The Telecom Italia Group, in addition to the conventional financial performance measures established by IFRS,uses certain alternative performance measures in order to present a better understanding of the trend ofoperations and financial condition. Specifically, these alternative performance measures refer to: EBITDA, EBIT,the organic change in revenues, EBITDA and EBIT, net financial debt carrying amount and adjusted netfinancial debt. Additional details on such measures are presented under “Alternative performance measures”.Furthermore, the part entitled “Business Outlook for the Year 2011” contains forward-looking statements inrelation to the Group’s intentions, beliefs or current expectations regarding financial performance and otheraspects of the Group’s operations and strategies. Readers of the Annual Report are reminded not to placeundue reliance on forward-looking statements; actual results may differ significantly from forecasts owing tonumerous factors, the majority of which is beyond the scope of the Group’s control.PRINCIPAL CHANGES IN THE SCOPE OF CONSOLIDATIONOn October 13, 2010, the Sofora group – Telecom Argentina entered the scope of consolidation following theacquisition of an 8% stake in the share capital of Sofora Telecomunicaciones S.A., the holding company of theTelecom Argentina group. As a result, the stake in the Telecom Argentina group became 16.2%. The data of theSofora group are represented in the Telecom Italia Group by the new business unit denominated “ArgentinaBusiness Unit”.During 2010, the following companies exited the scope of consolidation: • HanseNet Telekommunikation GmbH (a company operating in the broadband sector in Germany), which was already classified in Discontinued operations/Non-current assets held for sale; the sale took place on February 16, 2010; • Elettra (a company included in the Domestic Business Unit – International Wholesale) sold on September 30, 2010 and the BBNed group (included in Other Operations) sold on October 5, 2010.During 2009, the following principal changes in the scope of consolidation occurred: • entry, on December 30, 2009, of the Brazilian fixed-line operator Intelig Telecomunicações Ltda following the acquisition of a 100% investment by Tim Participações, consolidated in the Brazil Business Unit; • exit, on May 1, 2009, of Telecom Media News S.p.A. following the sale of a 60% stake by Telecom Italia Media S.p.A..Report on operations 6The Business Units of the Telecom Italia Group
  7. 7. Key Operating and Financial DataTelecom Italia Group2010 HighlightsArgentina Business Unit On October 13, 2010, the Telecom Italia Group formalized the agreement to increase its stake in Sofora Telecomunicaciones S.A. - the holding company which controls Telecom Argentina group – from 50% to 58%. The Sofora group - Telecom Argentina is one of the largest operators of fixed and mobile telecommunications in Argentina and mobile communications in Paraguay. Increasing the stake in Sofora did not require any cash disbursement on the part of Telecom Italia and allowed the Telecom Italia Group to consolidate line-by-line the results of the Sofora/Telecom Argentina group starting from the fourth quarter of 2010. Under IAS/IFRS (IFRS 3 revised), the transaction generated a one-time net positive effect on the separate consolidated income statement of the Telecom Italia Group in the last quarter of 2010 of 266 million euros. Since its entry in the scope of consolidation of the Telecom Italia Group, the Argentina Business Unit has reported revenues of about 800 million euros, EBITDA of approximately 245 million euros (EBITDA margin 30.6%) and EBIT of around 100 million euros (EBIT margin 13.1%). The net financial position at December 31, 2010 shows a cash balance of about 86 million euros.Revenues and EBITDA In this year 2010, the Telecom Italia Group’s commitment is stronger as it follows a path towards the transformation of its business in both Italy and Brazil. Revenue performance in the fourth quarter confirms the trend of continuing improvement, aided by both the consolidation of the Argentina Business Unit and the appreciation of the real/euro exchange rate. In terms of organic revenues, the fourth quarter confirms this improvement over the previous quarters (-0.8% in the fourth quarter of 2010, -4.4% in third quarter of 2010, -5.3% in the second quarter of 2010 and - 4.9% in the first quarter of 2010) thanks to the positive results achieved by Brazil and better performance by the Domestic area over last year. Careful control over costs combined with the benefits obtained from the Efficiency Projects begun under the Business Plan 2009-2011 have allowed the Group to reach EBITDA in 2010 of 11,412 million euros and an EBITDA margin of 41.4% and ensure stability in terms of both reported and organic figures.Profit attributable to Profit attributable to owners of the Parent is 3,121 million euros in 2010. Thisowners of the Parent profit figure was reached partly as a result of the above net positive impact connected with the acquisition of control of Sofora and also because of the tax benefit of more the 600 million euros recognized by Brazil for deferred tax assets. Excluding these factors and other non-recurring items, net profit would be 18.4% higher than in the year 2009 (2,608 million euros in 2010 compared to 2,203 million euros in 2009) thanks to better operating results and positive effects from financial management and investment management.Financial discipline and Adjusted net financial debt is 2,481 million euros lower than atdebt reduction December 31, 2009 and 1,517 million euros lower compared to September 30, 2010. Disposals of investments and rigorous financial discipline led to this improvement and also neutralized the impact of distributing dividends, the payment of a total of 418 million euros to the Revenue Agency over the Telecom Italia Sparkle case and the payment 1.4 billion euros of income taxes.Report on operations 7Telecom Italia Group
  8. 8. The trend of the key operating and financial measures in 2010 can be summarized as follows:Organic consolidated Revenues: amount to Organic Revenues Reported revenues27,578 million euros. The organic change (*) is (millions of euros)-3.8% compared to last year. Reported -1,083 (-3.8%) +677 (+2.5%) 28,661 27,571consolidated revenues show a positive change 27,578 26,894of 2.5% (+677 million euros) owing to the entry IVQ 7,737 -0.8% 7,679 IVQ 6,899 +11.2% 7,672 -58 +773of the Argentina Business Unit in the scope ofconsolidation (798 million euros) and also the IIIQ 6,986 -4.4% 6,676 -310 6,674 0.0% 6,676 +2 IIIQBrazil Business Unit’s positive real/euroexchange rate effect. IIQ 7,194 -5.3% 6,810 -384 IIQ 6,843 -0.5% 6,810 -33 6,744 6,413 -331 6,478 -1.0% 6,413 -65 IQ -4.9% IQMore to the point: 2009 2010 2009 2010- the organic reduction in the Domestic Business Unit Revenues is 7.4%; as concerns performance by customer segment in 2010 compared to the prior year, revenues are down by 11.5% in the Consumer segment, 6.0% in the Business segment and 4.8% in the Top Clients segment. However, it should be noted that both the consolidated Domestic Business Unit and the Consumer and Top Clients segments report gains in the fourth quarter compared to the previous quarters.- Organic Revenues in Brazil are up 5.1% over 2009 (+303 million euros). The marketing policy for SIM without a correlated handset sale, although causing a reduction in Revenues from handset sales, is compensated by the positive organic change in Service Revenues of 5.8% in 2010 compared to the prior year. This gain is supported by the growth of the customer base which records an increase of about 10 million lines in 2010 over 2009 and the expansion in voice traffic which rose by more than 60% in 2010 compared to the prior year.Organic consolidated EBITDA: shows a focus on Organic EBITDA Reported EBITDArevenues with higher margins, efficiency (millions of euros)measures and cost controls aimed at keeping 42.8% 41.3% 41.4% 41.1% EBITDAcash costs in check. This is borne out by the Margin +10 (+0.1%) +297 (+2.7%)trend in the organic EBITDA margin and organic 11,791 11,801 11,412 11,115consolidated EBITDA in 2010. IVQ 2,974 +2.7% 3,054 +80 2,937 +348 IVQ 2,589 +13.5%Specifically, the organic consolidated EBITDAmargin: gains 1.7 percentage points in 2010, IIIQ 3,058 -2.0% 2,998 -60 2,979 -8.0% 2,742 -237 IIIQreaching 42.8% (41.1% in 2009). Organic EBITDAin absolute terms is 11,801 million euros, in line IIQ 2,926 -0.4% 2,913 -13 IIQ 2,808 +3.5% 2,907 +99with the prior year (11,791 million euros). IQ 2, 833 +0.1% 2,836 +3 IQ 2,739 +3.2% 2,826 +87Reported EBITDA posts an increase of 297million euros (from 11,115 million euros in 2009 2009 2010 2009 2010to 11,412 million euros in 2010). EBITDA is positively impacted by the entry of the Argentina Business Unit inthe scope of consolidation (245 million euros), making it possible to offset the negative impact of the provisioncharge for non-recurring expenses relating to the union agreement for mobility under ex law 223/1991 signedduring the course of the year 2010 (258 million euros).(*) The organic change in revenues, EBITDA and EBIT is calculated by excluding the effects of the change in the scope ofconsolidation, exchange differences and non-organic components constituted by non-recurring items and other non-organicincome/expenses.Report on operations 8Telecom Italia Group
  9. 9. Organic consolidated EBIT: totals 6,231 million Organic EBIT Reported EBITeuros in 2010. The organic change is positive and is (millions of euros)+5.3% higher than in 2009 (reported EBIT: +320 22.6% 21.1% 20.6% 20.4%million euros, +5.8%). EBIT +316 (+5.3%) +320 (+5.8%) MarginOrganic consolidated EBIT margin: is 22.6% in 5,915 6,231 5,493 5,8132010, gaining 2 percentage points over the IVQ 1,482 +12.8% 1,672 +190 IVQprevious year (20.6%). 1,200 +25.8% 1,509 +309 IIIQ 1,611 1,662 +51 +3.2% IIIQ 1,608 -11.5% 1,423Finance income/expenses, Investment Results and -185Income Taxes: show the financial component, IIQ 1,437 +2.9% 1,479 +42 IIQ 1,331 +10.7% 1,473 +142investment management and the equity valuation IQ 1,385 1,418 +33 1,408of associates, recording an overall improvement of +2.4% IQ 1,354 +4.0% +54468 million euros over 2009. The investment 2009 2010 2009 2010results, in particular, include the positive impact ofthe fair value adjustment of the stake already held in the Sofora group (266 million euros). The financialincome/expense balance, in particular, improves by 96 million euros largely due to lower interest rates and thereduction in net financial debt.Excluding the aforementioned benefit from the recognition of deferred tax assets in Brazil, income taxes arebasically unchanged compared to 2009.Profit for the year attributable to owners of the Parent: is 3,121 million euros, increasing 1,540 million euroscompared to 2009. Net profit in 2010 is the highest reported in the last five years. Even excluding the cited netpositive impact connected with the acquisition of control of Sofora, the other non-recurring items as well as thedeferred tax assets of Brazil, the profit is significantly higher (+405 million euros; +18.4%) compared to 2009,also restated excluding non-recurring items.Operating free cash flow: is 6,213 million euros and is reduced by the negative change due to the utilization ofoperating provisions set aside in previous years in connection with the Telecom Italia Sparkle case(389 million euros compared to a total of 418 million euros: the remaining amount of 29 million euros producesan impact on non-operating items since it refers to finance interest).Excluding such impact, operating free cash flow during the period (6,602 million euros) increases by 304 millioneuros compared to 2009 (6,298 million euros). As a confirmation of this trend, operating free cash flow in thefourth quarter is up by 396 million euros compared to 2009.Adjusted net financial debt: is 31,468 million euros at Adjusted Net Financial DebtDecember 31, 2010, down 2,481 million euros (millions of euros)compared to December 31, 2009 (33,949 million 33,949 -2,481euros) and 1,517 million euros compared to 31,468September 30, 2010 (32,985 million euros).Operations management, combined with the sales ofHanseNet, Elettra and BBNed and the reimbursementreceived upon the nationalization by Entel Bolivia,amply covered the cash requirements for the paymentof dividends (1,093 million euros), the foregoingpayment of 418 million euros for the Telecom ItaliaSparkle case and payment of income taxes of about 12/31/2009 change 12/31/20101.4 billion euros.Liquidity margin: amounts to 6.8 billion euros at December 31, 2010. During 2010, a new bond issue of1.25 billion euros was placed on the European market and bonds were repaid and bought back for about5.8 billion euros. There is another 7.8 billion euros of liquidity in irrevocable long-term credit lines (of which6.5 billion euros expires in 2014 and 1.25 billion euros, relating to a credit line obtained in February 2010,expiring in 2013), not subject to events which limit utilization. In the present environment of financial marketuncertainty, the Telecom Italia Group keeps a high level of financial coverage, optimizing, at the same time, theaverage cost of debt.Report on operations 9Telecom Italia Group
  10. 10. Consolidated Operating and Financial Data (*)(millions of euros) 2010 2009 2008 2007 2006Revenues 27,571 26,894 28,746 29,554 29,575EBITDA(1) 11,412 11,115 11,090 11,295 12,498EBIT(1) 5,813 5,493 5,437 5,738 7,269Profit before tax from continuing operations 4,127 3,339 2,894 4,120 5,366Profit from continuing operations 3,579 2,218 2,217 2,459 2,855Profit (loss) from Discontinued operations/Non-current assets held for sale (7) (622) (39) (99) (159)Profit for the year 3,572 1,596 2,178 2,360 2,696Profit for the year attributable to owners of theParent 3,121 1,581 2,177 2,353 2,707Capital expenditures 4,583 4,543 5,040 5,031 4,698Consolidated Financial Position Data (*)(millions of euros) 12/31/2010 12/31/2009 12/31/2008 12/31/2007 12/31/2006Total assets 89,131 86,267 86,223 88,593 90,322Total equity 32,610 27,120 26,328 26,494 26,702- attributable to owners of the Parent 28,819 25,952 25,598 25,431 25,622- attributable to non-controlling interests 3,791 1,168 730 1,063 1,080Total liabilities 56,521 59,147 59,895 62,099 63,620Total equity and liabilities 89,131 86,267 86,223 88,593 90,322Share capital 10,600 10,585 10,591 10,605 10,605Net financial debt carrying amount (1) 32,087 34,747 34,039 35,701 37,301Adjusted net financial debt (1) 31,468 33,949 34,526 35,873 37,200Adjusted net invested capital (2) 64,078 61,069 60,854 62,367 63,902Debt Ratio (Adjusted net financial debt/Adjusted net invested capital) 49.1% 55.6% 56.7% 57.5% 58.2%Headcount, number in the Group at year-end (3)(number) 12/31/2010 12/31/2009 12/31/2008 12/31/2007 12/31/2006Headcount (excluding headcount ofDiscontinued operations/Non-current assets 84,200 71,384 75,320 79,238 80,373held for sale)Headcount of Discontinued operations/Non- - 2,205 2,505 4,191 2,836current assets held for saleHeadcount, average number in the Group (3)(equivalent number) 2010 2009 2008 2007 2006Headcount (excluding headcount ofDiscontinued operations/Non-current assets 70,150 69,964 73,508 75,735 77,374held for sale)Headcount of Discontinued operations/Non- - 2,168 3,277 3,893 2,898current assets held for saleReport on operations 10Telecom Italia Group
  11. 11. Consolidated Profit Ratios (*) 2010 2009 2008 2007 2006EBITDA(1) / Revenues 41.4% 41.3% 38.6% 38.2% 42.3%EBIT(1) / Revenues (ROS) 21.1% 20.4% 18.9% 19.4% 24.6%Adjusted net financial debt /EBITDA(1) 2.8 3.1 3.1 3.2 3.0The operating data of the Argentina Business Unit for the years 2006 – 2009 are only reported for illustrativepurposes. The Argentina Business Unit has been consolidated by the Telecom Italia Group from the date ofOctober 13, 2010.Operating Data 12/31/2010 12/31/2009 12/31/2008 12/31/2007 12/31/2006Fixed-line network connections Domestic BUat year-end (thousands) 17,609 18,525 20,031 22,124 23,698Physical accesses at year-end (Consumer +Business) (thousands) 15,351 16,097 17,352 19,221 20,540Fixed-line network connections BU Argentinaat year-end (thousands) 4,107 4,060 4,010 3,918 3,821Mobile lines at year-end (thousands) 100,244 71,958 71,199 67,585 57,860 Mobile lines Domestic BU (thousands) 31,018 30,856 34,797 36,331 32,450 Mobile lines Brazil BU (thousands) 51,015 41,102 36,402 31,254 25,410 Mobile lines Argentina BU (thousands) 18,211 16,281 14,390 12,292 9,589Broadband accesses Domestic BUat year-end (thousands) 9,058 8,741 8,134 7,590 6,770 of which retail broadband accesses (thousands) 7,175 7,000 6,754 6,427 5,600Broadband accesses Argentina BUat year-end (thousands) 1,380 1,214 1,032 768 448(*) During the course of 2010, the provisional amounts of assets and liabilities recorded as of the acquisition date of control of theBrazilian company Intelig Telecomunicações Ltda have been adjusted, as set forth in IFRS 3 (Business Combinations), withretroactive effect, to take into account their fair value at the acquisition date (December 30, 2009) with the consequent re-measurement of the value of goodwill initially recognized.Moreover, starting from 2010, some taxes paid in Brazil, that were not significant, were reclassified from “Other operating expenses”to “Revenues” and “Other income” as deductions. Specifically, such reclassifications allow the Telecom Italia Group to align itsaccounting presentation to that of the main telecommunications operators, thus ensuring better comparability and understanding ofits income statement and financial information. All periods under comparison have been reclassified on a consistent basis.The amounts reclassified are as follows: (millions of euros) 2010 2009 2008 2007 2006 Income taxes and other income of the companies in Brazil (PIS and COFINS) (334) (271) (282) (266) (221)(1) Details are provided in the section “Alternative Performance Measures”.(2) Adjusted net invested capital = Total equity + Adjusted net financial debt.(3) Headcount includes the number of people with temp work contracts.Report on operations 11Telecom Italia Group
  12. 12. Corporate Boards at December 31, 2010► Board of DirectorsThe board of directors of Telecom Italia was elected by the shareholders’ meeting held on April 14, 2008 forthree years, up to the approval of the 2010 annual financial statements.The shareholders’ meeting held on April 29, 2010 appointed Mauro Sentinelli director of the Company, in placeof Stefano Cao who, in turn, in 2009 had replaced the director Gianni Mion.The director Berardino Libonati passed away on November 30, 2010.As of December 31, 2010, the board of directors of Telecom Italia is composed of 14 directors:Chairman Gabriele Galateri di GenolaChief Executive Officer Franco BernabèDirectors César Alierta Izuel Paolo Baratta (independent) Tarak Ben Ammar Roland Berger (independent) Elio Cosimo Catania (independent) Jean Paul Fitoussi (independent) Julio Linares López Gaetano Micciché Aldo Minucci Renato Pagliaro Mauro Sentinelli Luigi Zingales (independent)Secretary to the Board Antonino CusimanoThe board of directors formed the following internal committees: - Executive Committee composed of: Gabriele Galateri di Genola (Chairman), Franco Bernabè, Roland Berger, Elio Cosimo Catania, Julio Linares López, Aldo Minucci and Renato Pagliaro; - Committee for Internal Control and Corporate Governance composed of: Paolo Baratta (Chairman), Roland Berger, Jean Paul Fitoussi and Aldo Minucci; - Nomination and Remuneration Committee, composed of: Elio Cosimo Catania (Chairman), Aldo Minucci(*) and Luigi Zingales.(*) On December 16, 2010, the board of directors appointed Aldo Minucci a member of the Nomination and RemunerationCommittee to replace Berardino Libonati.► Board of Statutory AuditorsThe board of statutory auditors of Telecom Italia was elected by the shareholders’ meeting held on April 8, 2009and will remain in office until approval of the 2011 annual financial statements.Report on operations 12Telecom Italia Group
  13. 13. The board of statutory auditors is composed as follows:Chairman Enrico Maria BignamiActing Auditors Gianluca Ponzellini Lorenzo Pozza Salvatore Spiniello Ferdinando Superti FurgaAlternate Auditors Silvano Corbella Maurizio Lauri Vittorio Giacomo Mariani Ugo Rock► Independent AuditorsThe shareholders’ meeting held on April 29, 2010 appointed the audit firm of PricewaterhouseCoopers S.p.A.,to audit the Telecom Italia financial statements for the nine-year period 2010-2018.► Manager responsible for preparing the corporate financial reportsAndrea Mangoni (Head of the Group Administration, Finance and Control Function) is the manager responsiblefor preparing the corporate financial reports of Telecom Italia.Report on operations 13Telecom Italia Group
  14. 14. Macro-Organization Chart at December 31, 2010 Telecom Italia Group CHAIRMAN GABRIELE GALATERI DI GENOLA CORPORATE LEGAL TI AUDIT AND RELATIONS WITH RELATIONS WITH THE AFFAIRS COMPLIANCE INSTITUTIONS TERRITORY AND SERVICES INSTITUTIONAL MARKETING FEDERICO MAURIZIO FRANCO ROSARIO ANTONINO CUSIMANO PAOLO ANNUNZIATO d’ANDREA BRESCIA CHIEF EXECUTIVE OFFICER FRANCO BERNABÈ ADMINISTRATION, HUMAN RESOURCES PURCHASING LEGAL AFFAIRS STRATEGY AND EXTERNAL EQUIVALENCE AND SECURITY FINANCE AND AND ORGANIZATION INNOVATION RELATIONS REGULATORY CONTROL AFFAIRS ANDREA MANGONI ANTONIO MIGLIARDI STEFANO CIURLI a.i. ANTONINO CESARE SIRONI CARLO FORNARO ALESSANDRO TALOTTA DAMIANO TOSELLI CUSIMANO BUSINESS UNIT TECHNOLOGY & NATIONAL DOMESTIC MARKET TIM BRASIL INTERNATIONAL MEDIA OPERATIONS WHOLESALE OPERATIONS BUSINESS SERVICES GIOVANNI STELLA OSCAR CICCHETTI RICCARDO DELLEANI MARCO PATUANO LUCA LUCIANI a.i. ANDREA MANGONI QUALITY & INDUSTRY RELATIONS PROGRAM AND ROAMING MANAGEMENT GIUSEPPE ZAZA LUCY LOMBARDI TECHNICAL FRAUD MANAGEMENT BROADBAND PLANNING & REVENUE CONTENT ASSURANCE FILIPPO BENTIVOGLIO DANIELE GULINATTI PAOLO D’ANDREA RAVASIO OPEN ACCESS NETWORK INFORMATION TECHNICAL CONSUMER BUSINESS TOP CLIENTS PUBLIC SECTOR CUSTOMER INTERNATIONAL INTERNATIONAL TECHNOLOGY INFRASTRUCTURES OPERATIONS SUPPORT POSITIONING AND OPERATIONSGIUSEPPE ROBERTO GIANFILIPPO OPILIO STEFANO NOCENTINI a.i. STEFANO GIGLI VENANZIO IACOZZILLI a.i. MARCO PATUANO PIETRO LABRIOLA SIMONE BATTIFERRI CARLOS LAMBARRI FRANCESCO S. BRUNO FRANCESCO ARMATO D’AGOSTINO Report on operations 14 Telecom Italia Group
  15. 15. Information for Investors► Telecom Italia S.p.A. share capital at December 31, 2010Share capital (in euros) 10,688,746,056.45Number of ordinary shares (par value 0.55 euros each) 13,407,963,078Number of savings shares (par value 0.55 euros each) 6,026,120,661Number of Telecom Italia ordinary treasury shares 37,672,014Number of Telecom Italia ordinary shares held by Telecom Italia Finance S.A. 124,544,373Percentage of ordinary treasury shares held by the Group to total share capital 0.83%Market capitalization (based on December 2010 average prices) 18,020 million euros► ShareholdersComposition of Telecom Italia S.p.A. shareholders according to the Shareholders Book at December 31, 2010,supplemented by communications received and other available sources of information (ordinary shares): Foreign Companies Italian Companies 4.12% 1.03% Other Italian Shareholders 21.17% Other Foreign Shareholders Foreign Institutional 0.23% Companies 38.37% TELCO 22.40% Telecom Italia Group Italian Institutional 1.21% Companies 11.47%The shareholders of Telco (Generali Group: 30.58%; Mediobanca S.p.A.: 11.62%; Intesa Sanpaolo S.p.A.:11.62%; Telefónica S.A.: 46.18%) signed a Shareholders’ Agreement, relevant for Telecom Italia pursuant toLegislative Decree 58/1998, art. 122.The description of the fundamental contents of the agreement is contained in the annual Report on theCorporate Governance and Ownership Structure, published on the website www.telecomitalia.com.Major holdings in share capitalAt December 31, 2010, taking into account the results in the Shareholders Book, communications sent toConsob and the Company pursuant to Legislative Decree 58 dated February 24, 1998, art. 120 and othersources of information, the principal shareholders of Telecom Italia S.p.A. ordinary share capital are as follows:Report on operations 15Telecom Italia Group
  16. 16. Holder Type of ownership % stake in ordinary share capital Telco S.p.A. Direct 22.40% Findim group S.A. Direct 4.99%Furthermore, the following companies, as investment advisory firms, notified Consob that they are in possessionof Telecom Italia S.p.A. ordinary shares: • Brandes Investment Partners LP: on July 23, 2008, for a quantity of ordinary shares which at December 31, 2010 is equal to 4.02% of total Telecom Italia S.p.A. ordinary shares; • Blackrock Inc.: on May 20, 2010, for a quantity of ordinary shares which at December 31, 2010 is equal to 2.89% of total Telecom Italia S.p.A. ordinary shares; • Alliance Bernstein LP: on November 14, 2008, for a quantity of ordinary shares which at December 31, 2010 is equal to 2.06% of total Telecom Italia S.p.A. ordinary shares.► Common representativesThe special meeting of the savings shareholders held on May 28, 2010 elected Emanuele Rimini as thecommon representative for three financial years (up to the approval of the financial statements atDecember 31, 2012).Francesco Pensato is the common representative of the bondholders for the following bonds: • Telecom Italia S.p.A. 2002-2022 bonds at floating rates, open special series, reserved for subscription by employees of the Telecom Italia Group, in service or retired (with a mandate for the three-year period 2008-2010); • Telecom Italia S.p.A. 1,250,000,000 euros 5.375% notes due 2019 (with a mandate for the three- year period 2009-2011).Up to the extinguishment of the bonds, Francesco Pensato was also the common representative of thebondholders for the Telecom Italia S.p.A. 750,000,000 euros, 4.50% notes due 2011, repaid in full onJanuary 28, 2011.► Annual Report on Corporate GovernanceThe annual Report on Corporate Governance and Ownership Structure is published on the corporate websitewww.telecomitalia.com under the Corporate menu in Governance.Report on operations 16Telecom Italia Group
  17. 17. ► Performance of the stocks of the major companies in the Telecom Italia GroupRelative performance by Telecom Italia S.p.A.1/1/2010 – 12/31/2010 vs. FTSE - All Shares Italia and DJ Stoxx TLC Index (*) 120 1.3034 115 1.2491 110 1.1948 105 1.1405 100 1.0862 95 1.0319 90 0.9776 85 0.9233 80 0.8690 75 0.8147 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Telecom Italia Ord. (*) Telecom Italia Sav. (*) FTSE Italy All-Shares Dow Jones Stoxx TLC (*) Stock market prices. Source: Reuters.Relative performance by Telecom Italia Media S.p.A.1/1/2010 – 12/31/2010 vs. FTSE - All Shares Italia and DJ Stoxx Media Index (*) 130 0.68617 120 0.63339 110 0.58061 100 0.52783 90 0.47504 80 0.42226 70 0.36948 60 0.31670 50 0.26391 40 0.21113 30 0.15835 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Telecom Italia Media Ord. (*) Telecom Italia Media Sav. (*) FTSE Italy All-Shares Dow Jones Stoxx Media (*) Stock market prices. Source: Reuters.Report on operations 17Telecom Italia Group
  18. 18. Relative performance by Tim Participações S.A.1/1/2010 – 12/31/2010 vs. BOVESPA Index and ITEL Index (in Brazilian reais) (*) 120 8.6160 115 8.2570 110 7.8980 105 7.5390 100 7.1800 95 6.8210 90 6.4620 85 6.1030 80 5.7440 75 5.3850 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Tim Participações Ord. Tim Participações Pref. BOVESPA ITEL (*) Stock market prices. Source: Reuters.Relative performance by Telecom Argentina S.A.1/1/2010 – 12/31/2010 vs. MERVAL Index (in Argentine pesos) (*) 160 20.5691 150 19.2835 140 17.9980 130 16.7124 120 15.4268 110 14.1413 100 12.8557 90 11.5701 80 10.2846 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Telecom Argentina MERVAL (*) Stock market prices. Source: Reuters.Report on operations 18Telecom Italia Group
  19. 19. Telecom Italia S.p.A. ordinary and savings shares, Tim Participações S.A. preferred shares andTelecom Argentina S.A. Class B ordinary shares are listed on the New York Stock Exchange (NYSE). The sharesare listed through American Depositary Shares (ADS) representing, respectively, 10 Telecom Italia S.p.A.ordinary shares and 10 savings shares, 10 Tim Partecipações preferred shares and 5 Telecom Argentina S.A.Class B ordinary shares.► Ratings at December 31, 2010 Rating OutlookSTANDARD & POORS BBB StableMOODYS Baa2 StableFITCH RATINGS BBB StableDuring the course of 2010, the three rating agencies - Standard & Poor’s, Moody’s and Fitch Ratings –confirmed their ratings of Telecom Italia. Specifically:• Standard & Poor’s confirmed its BBB rating with a stable outlook for the Group;• Moody’s confirmed its Baa2 rating with a stable outlook for the Group;• Fitch Ratings confirmed its BBB rating with a stable outlook for the Group.Report on operations 19Telecom Italia Group
  20. 20. Financial ratios - Telecom Italia S.p.A. and the Telecom Italia GroupTelecom Italia S.p.A. 2010 2009 2008(euros)Share prices (December average)- Ordinary 0.98 1.08 1.09- Savings 0.81 0.76 0.73Dividends per share (1)- Ordinary 0.058 0.050 0.050- Savings 0.069 0.061 0.061Pay Out Ratio(1) (*) 34% 74% 70%Market to Book Value (**) 0.76 0.83 0.82Dividend Yield (based on December average) (1) (***)- Ordinary 5.93% 4.63% 4.59%- Savings 8.47% 8.03% 8.36%Telecom Italia Group 2010 2009 2008(euros)Earnings per share (basic is equal to diluted) – ordinary shares 0.16 0.08 0.11Earnings per share (basic is equal to diluted) – savings shares 0.17 0.09 0.12(1) For the year 2010, the ratio was calculated on the basis of the resolution for the approval of the profit for the year proposed in the shareholders’ meeting held on April 12, 2011.(*) Dividends paid in the following year/Profit for the year.(**) Capitalization/Equity of Telecom Italia S.p.A..(***) Dividends per share/Share prices.Report on operations 20Telecom Italia Group
  21. 21. Review of Operating and Financial PerformanceTelecom Italia Group2010 Consolidated Operating PerformanceThe main profit indicators in 2010 compared to 2009 are the following: 2010 2009 Change (a-b)(millions of euros) (a) (b) amount % % organicREVENUES 27,571 26,894 677 2.5 (3.8)EBITDA 11,412 11,115 297 2.7 0.1EBITDA MARGIN 41.4% 41.3% 0.1ppORGANIC EBITDA MARGIN 42.8% 41.1% 1.7ppEBIT 5,813 5,493 320 5.8 5.3EBIT MARGIN 21.1% 20.4% 0.7ppORGANIC EBIT MARGIN 22.6% 20.6% 2.0ppPROFIT BEFORE TAX FROM CONTINUINGOPERATIONS 4,127 3,339 788 23.6PROFIT FROM CONTINUING OPERATIONS 3,579 2,218 1,361 61.4PROFIT (LOSS) FROM DISCONTINUEDOPERATIONS/NON-CURRENT ASSETS HELD FORSALE (7) (622) 615 98,9PROFIT FOR THE YEAR 3,572 1,596 1,976 123.8PROFIT FOR THE YEAR ATTRIBUTABLE TOOWNERS OF THE PARENT 3,121 1,581 1,540 97.4The following chart summarizes the main line items which had an impact on the profit attributable to owners ofthe Parent in 2010:(millions of euros) +615 -436 3,121 +573 +202 +266 +320 1,581 +1,540 (+97.4%) 2009 Δ Δ Δ Δ Δ Δ 2010 EBIT Sofora fair Financial Income tax Profit/loss Profit/loss value management expense from attributable measurement Discontinued to Non- Operations controlling interestsReport on operations 21Telecom Italia Group
  22. 22. RevenuesRevenues amount to 27,571 million euros in 2010, increasing 2.5% compared to 26,894 million euros in 2009(+677 million euros). In terms of the organic change, the reduction in consolidated revenues is 3.8% (-1,083 million euros).In detail, the organic change in revenues is calculated by: • excluding the effect of the change in the scope of consolidation (848 million euros, referring to the entry in the scope of consolidation in 2010 of Intelig Telecomunicações Ltda (Brazil Business Unit) and the consolidation of the Argentina Business Unit (specifically, in the fourth quarter of 2009, revenues of the Argentina Business Unit amounted to about 642 million euros); • excluding the effect of exchange differences (+902 million euros, mainly due to the positive exchange rate effect of the Brazil Business Unit (*), equal to +890 million euros); • excluding non-organic other revenues, in 2009 and in 2010, respectively equal to 17 million euros and 7 million euros.The breakdown of revenues by operating segment is the following: 2010 2009 Change(millions of euros) % of % of amount % % total total organicDomestic 20,068 72.8 21,663 80.5 (1,595) (7.4) (7.4)- Core Domestic 19,065 69.1 20,580 76.5 (1,515) (7.4) (7.4)- International Wholesale 1,569 5.7 1,710 6.4 (141) (8.2) (8.4)Brazil 6,199 22.5 4,753 17.7 1,446 30.4 5.1Media, Olivetti and Other Operations 713 2.6 670 2.5 43 6.4Adjustments and Eliminations (199) (0.8) (192) (0.7) (7) (3.6)Total consolidated revenues 26,781 97.1 26,894 100.0 (113) (0.4) (4.4)(excluding Argentina)Argentina 798 2.9 - - 798 - 24.3Adjustments and Eliminations (8) - (8)Total consolidated revenues 27,571 100.0 26,894 100.0 677 2.5 (3.8)(*) The average exchange rate used to translate the Brazilian real to euro (expressed in terms of units of local currency per 1 euro), isequal to 2.33215 in 2010 and 2.76933 in 2009. The effect of the change in the exchange rates is calculated by applying, to theperiod under comparison, the foreign currency translation rates used for the current period.Report on operations 22Telecom Italia Group
  23. 23. The following chart summarizes the changes in organic revenues in the years under comparison:(millions of euros) +902 +17 28,661 -1,607 +848 +303 +156 +31 +40 -6 27,578 -7 27,57126,894 organic change: -1,083 (-3.8%)2009 Change in Foreign Non- 2009 Domestic Brazil Argentina Media Olivetti Other 2010 Non- 2010 scope of exchange organic on a Operations on a organic consolidation effect revenues comparable and comparable revenues effect basis eliminations basis +677 (+2.5%)The Domestic Business Unit (divided into Core Domestic and International Wholesale) reports a declining trendin organic revenues of -7.4% compared to 2009, in line with the decrease reported in the first half. Servicerevenues (19,208 million euros in 2010) post a contraction of -6.6% (compared to -6.3% in the first half). Theeffect of such change in the mobile area (-8.4% in 2010 compared to -7.3% in the first half) comes from thesignificant investment made in terms of prices from the standpoint of the competitive repositioning of TIM’s rateplans in order to regain market share. Conversely, in the fixed area, a decreasing trend is confirmed (-4.3% in2010 compared to -4.2% in the first half). As far as handset sales are concerned, revenues total867 million euros in 2010, with a rallying trend recorded (-22.9% in 2010 compared to -29.1% in the first half)in the fixed area (-5.0% in 2010 compared to -16.6% in the first half) thanks to an improving trend in ICT sales;the mobile area of handset sales, on the other hand, posts a slight decline (-46.9% in 2010 compared to -45.8%in the first half) but with a better trend in the fourth quarter (-39.9%) owing to the launch in the last part of theyear of new internet plans which boosted the sale of handsets (smartphones and tablets) that can be used forthe new internet services.As for the Brazil Business Unit, organic revenues grew 5.1% in 2010 compared to 2009 (+2.1% in the first half).Service revenues confirm the positive trend (+5.8% in 2010, in line with the first half) driven by the increase inthe customer base (+9.9 million lines compared to the end of 2009), while handset revenues post a sharpcheck in the trend of decreasing sales (-4.4% in 2010 compared to -39.5% in the first half).An in-depth analysis of revenue performance by individual Business Unit is provided in the “The Business Unitsof the Telecom Italia Group”.EBITDAEBITDA is 11,412 million euros, increasing 297 million euros (+2.7%) over the prior year. The EBITDA margin is41.4% (41.3% in 2009). In organic terms, EBITDA is basically stable (+0.1%) while the organic EBITDA marginrose 1.7 percentage points (42.8% in 2010 compared to 41.1% in 2009).Report on operations 23Telecom Italia Group
  24. 24. Details of EBITDA and EBITDA margins by operating segment are as follows: 2010 2009 Change(millions of euros) % of % of amount % % total total organicDomestic 9,393 82.3 9,883 88.9 (490) (5.0) (2.9)EBITDA margin 46.8 45.6 1.2 pp 2.3 ppBrazil 1,801 15.8 1,255 11.3 546 43.5 16.6EBITDA margin 29.1 26.4 2.7 pp 2.9 ppMedia, Olivetti and Other Operations (27) (0.2) (26) (0.2) (1) 3.8Adjustments and Eliminations 1 - 3 - (2) -Total consolidated EBITDA 11,168 97.9 11,115 100.0 53 0.5 (0.2)(excluding Argentina)EBITDA margin 41.7 41.3 0.4 pp 1.7 ppArgentina 245 2.1 - - 245 16.2EBITDA margin 30.7Adjustments and Eliminations (1) - - - (1) -Total consolidated EBITDA 11,412 100.0 11,115 100.0 297 2.7 0.1EBITDA margin 41.4 41.3 0.1 pp 1.7 ppThe following chart summarizes the changes in organic EBITDA:(millions of euros) +247 +212 11,791 -290 +256 +34 +21 - -11 11,801 -389 11,41211,115 +217 organic change: +10 (+0.1%)2009 Change in Foreign Non-organic 2009 Domestic Brazil Argentina Media Olivetti Other 2010 Non-organic 2010 scope of exchange items on a Operations on a items consolidation effect comparable and comparable effect basis eliminations basis +297 (+2.7%)(Revenues and income) / costs and expenses excluded from the calculation of organic EBITDA are the following:(millions of euros) 2010 2009 ChangeExpenses for mobility under Law 223/91 258 - 258Disputes and settlements 91 154 (63)Costs for services of the Brazil Business Unit associated with theconclusion of a dispute - 22 (22)Other 40 36 4Total net non-organic (revenues and income) / costs and expenses 389 212 177Report on operations 24Telecom Italia Group
  25. 25. EBITDA was particularly impacted by the change in the line items analyzed below:Acquisition of goods and servicesAcquisition of goods and services stands at 11,383 million euros, decreasing 97 million euros (-0.8%) comparedto 2009 (11,480 million euros). The reduction is considerably higher (-974 million euros), when excluding theimpact of the entry of the Argentina Business Unit in the scope of consolidation (impact of 347 million euros in2010) and the positive exchange rate effect of the Brazil Business Unit (+530 million euros).This reduction, mainly in the Domestic Business Unit, refers to purchases of goods and products for marketingpurposes and the portion of revenues to be paid to other operators.In detail:(millions of euros) 2010 2009 ChangePurchases of goods 1,568 1,852 (284)Portion of revenues to paid to other operators and interconnectioncosts 4,275 4,282 (7)Commercial and advertising costs 2,100 2,012 88Power, maintenance and outsourced services 1,258 1,254 4Rent and leases 594 572 22Other service expenses 1,588 1,508 80Total acquisition of goods and services 11,383 11,480 (97)% of Revenues 41.3 42.7 (1.4) ppEmployee benefits expensesDetails are as follows:(millions of euros) 2010 2009 ChangeEmployee benefits expenses – Italian companies: Ordinary expenses of employees 3,313 3,467 (154) Expenses for mobility under Law 223/91 258 - 258Total employee benefits expenses - Italy 3,571 3,467 104Total employee benefits expenses - Foreign 450 267 183Total employee benefits expenses 4,021 3,734 287% of Revenues 14.6 13.9 0.7 ppAs for the Italian component of ordinary employee benefits expenses, the decrease of 154 million euros ismainly due to the reduction in the average headcount of the salaried workforce (-3,237 compared to 2009, ofwhom -565 are under so-called “solidarity contracts” in Telecom Italia S.p.A. and Shared Service Center S.r.l.).Expenses for mobility under Law 223/91 total 258 million euros for the Group and of that amount about245 million euros refers to the Parent, Telecom Italia S.p.A., as a result of the August 4, 2010 Agreement signedwith the labor unions. The agreement covers the steps to be taken regarding employment levels during theyears of the Business Plan 2010–2012, with the expectancy, among other things, of recourse to a newvoluntary mobility procedure for 3,900 people in the period 2010-2012.In determining the amount of the provision charge, account was taken of the estimated of the cost of the newmobility procedure and the estimate of the higher mobility expenses for any integration of the cost for thoseterminated under pre-June 2010 mobility, due to the coming into force of the so-called Economic Maneuver asa result of the postponement of the pension windows. Such expenses are determined by the eventuality that thecompetent institutions would not issue an adjusting maneuver and that Telecom Italia, of necessity, would berequired to safeguard the effectiveness of the agreements that have already been reached.Report on operations 25Telecom Italia Group
  26. 26. The remaining amount of mobility expenses (13 million euros) refer to the mobility procedures underLaw 223/91 signed with the labor unions by the following companies: • Shared Service Center, on November 16, 2010 (2 million euros); • Telecom Italia Sparkle, on December 7, 2010 (7 million euros); • Olivetti, on September 30, 2010 (3 million euros); • Olivetti I-Jet, on January 11, 2010 and Advalso on March 8, 2010 (1 million euros in total).As for the foreign component of employee benefits expenses, the increase of 183 million euros is mainly due tothe entry of the Argentina Business Unit in the scope of consolidation (impact of 114 million euros in 2010) andthe positive exchange rate effect of the Brazil Business Unit (+39 million euros).Average headcount of the salaried workforce is the following:(equivalent number) 2010 2009 ChangeAverage salaried workforce – Italy 57,087 60,324 (3,237)Average salaried workforce – Foreign 13,063 9,640 3,423Total average salaried workforce (1) 70,150 69,964 186Discontinued operations (2)– Foreign - 2,168 (2,168)Total average salaried workforce –including Discontinued operations 70,150 72,132 (1,982)(1) Includes the average headcount with temp work contracts: 84 in 2010 (68 in Italy and 16 foreign). In 2009, the average headcount was 316 (279 in Italy and 37 foreign).(2) In 2009, the figure refers to HanseNet Telekommunikation GmbH, sold at the beginning of 2010.The increment in the average headcount of the salaried workforce – foreign in 2010 compared to the prior yearis largely due to the addition of 3,711 persons as a result of the consolidation of the Argentina Business Unitstarting from October 13, 2010.Headcount at December 31, 2010 is the following:(number) 12/31/2010 12/31/2009 ChangeHeadcount – Italy 58,045 60,872 (2,827)Headcount – Foreign 26,155 10,512 15,643Total (1) 84,200 71,384 12,816Discontinued operations (2) – Foreign - 2,205 (2,205)Total - including Discontinued operations 84,200 73,589 10,611(1) Includes headcount with temp work contracts: 71 at December 31, 2010 and 56 at December 31, 2009.(2) At December 31, 2009, the figure refers to HanseNet Telekommunikation GmbH, sold at the beginning of 2010.The increase in the headcount - foreign at December 31, 2010 compared to December 31, 2009 is largely dueto the consolidation of the Argentina Business Unit (15,650 persons at December 31, 2010).Other incomeDetails are as follows: (millions of euros) 2010 2009 Change Late payment fees charged for telephone services 72 71 1 Recovery of employee benefit expenses, purchases and services rendered 47 46 1 Capital and operating grants 38 49 (11) Damage compensation, penalties and sundry recoveries 18 30 (12) Sundry income 80 84 (4) Total 255 280 (25)Report on operations 26Telecom Italia Group
  27. 27. Other operating expensesDetails are as follows:(millions of euros) 2010 2009 ChangeWritedowns and expenses in connection with credit management 478 565 (87)Provision charges 80 168 (88)Telecommunications operating fees and charges 484 318 166Indirect duties and taxes 200 128 72Penalties, settlement compensation and administrative fines 105 73 32Association dues and fees, donations, scholarships andtraineeships 24 26 (2)Sundry expenses 51 67 (16)Total 1,422 1,345 77Other operating expenses grew 77 million euros compared to 2009 mainly due to the entry of the ArgentinaBusiness Unit in the scope of consolidation (impact of 83 million euros in 2010) and the increase of the BrazilBusiness Unit (+121 million euros including an exchange rate effect of +87 million euros), countered by thereduction of 140 million euros of the Domestic Business Unit.In particular: • writedowns and expenses in connection with credit management include 317 million euros referring to the Domestic Business Unit (404 million euros in 2009) and 133 million euros to the Brazil Business Unit (153 million euros in 2009); • provision charges recorded mainly for pending disputes include 53 million euros referring to the Domestic Business Unit (136 million euros in 2009) and 18 million euros to the Brazil Business Unit (25 million euros in 2009).The increase of 166 million euros in telecommunications operating fees and charges refers principally to theBrazil Business Unit which contributes a positive exchange rate effect of +50 million euros.Finally, with regard to the Domestic Business Unit, indirect duties and taxes include expenses for15.6 million euros for the payment, made during the year, of VAT relating to invoices of the period 2005-2009for exports to operators in San Marino because the tax documentation was found to be incomplete.Depreciation and amortizationDetails are as follows: (millions of euros) 2010 2009 Change Amortization of intangible assets with a finite useful life 2,216 2,251 (35) Depreciation of property, plant and equipment – owned and leased 3,331 3,300 31 Total 5,547 5,551 (4)The increase in amortization and depreciation charges is due to the entry of the Argentina Business Unit in thescope of consolidation (impact of 140 million euros in 2010) and higher charges by the Brazil Business Unit(+72 million euros, including the Brazilian real/euro exchange rate effect of +195 million euros), countered bythe decrease in amortization and depreciation charges of the Domestic Business Unit (-207 million euros).Net gains (losses) on disposals of non-current assetsNet gains on disposals of non-current assets in 2010 total 11 million euros. Details are as follows:Report on operations 27Telecom Italia Group
  28. 28. • gain, net of the related transaction costs, for a total of 19 million euros, in connection with the completion of the Elettra sales transactions, realized through the sale of one of the ships and the subsequent disposal of the investment by the Domestic Business Unit – International Wholesale; • gain, net of the related transaction costs, for about 1 million euros, in connection with the disposal, on October 5, 2010, of the entire investment held in BBNed N.V.; • other net losses on the sale of non-current assets for a total of 9 million euros.In 2009, net losses on disposals of non-current assets were recorded for 59 million euros. Of that amount,39 million euros referred to the final divestiture of the platform for credit management of the DomesticBusiness Unit’s fixed consumer clientele segment and 11 million euros to the sale of a 60% stake in TelecomMedia News S.p.A.Impairment reversals (losses) on non-current assetsThe writedowns of non-current assets amount to 63 million euros and include 46 million euros for theimpairment of the goodwill allocated to the Media Business Unit; the writedown was based on the results of theimpairment test. The remaining amount comprises other writedowns of intangible and tangible assets and theprovision charge for expenses connected with the transactions for the sale of BBNed and Elettra.EBITEBIT is 5,813 million euros, increasing 320 million euros compared to 2009 (+5.8%). The EBIT margin is up 0.7percentage points (from 20.4% in 2009 to 21.1% in 2010). The organic change in EBIT is an increase of315 million euros (+5.3%) and the organic EBIT margin grew to 22.6% in 2010 from 20.6% in 2009.The following chart summarizes the changes in EBIT: (millions of euros) +422 -26 +21 - -14 6,231 -418 +268 5,915 -87 5,813 5,493 +105 +49 organic change: +316 (+5.3%) 2009 Change in Foreign Non-organic 2009 Domestic Brazil Argentina Media Olivetti Other 2010 Non-organic 2010 scope of exchange items on a Operations on a items consolidation effect comparable and comparable effect basis eliminations basis +320 (+5.8%)(Revenues and income) / costs and expenses excluded from the calculation of organic EBIT are the following:(millions of euros) 2010 2009 ChangeNon-organic costs and expenses already described under EBITDA 389 212 177Losses (Gains) from the sale of buildings, investments and other-non-current assets and net writedowns on non-current assets (17) 50 (67)Impairment loss on the Media Business Unit 46 46Other expenses, net - 6 (6)Total net non-organic (revenues and income)/costs and expenses 418 268 150Report on operations 28Telecom Italia Group

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