Nov. 7 (Bloomberg) -- Telecom Italia SpA, Italy's biggest phone company, said third-quarter profit fell 13 percent and confirmed it will meet full-year targets.

Net income dropped to 630 million euros ($805 million) from 720 million euros a year earlier, the Milan-based company said in a statement today. Sales declined 1.5 percent to 7.56 billion euros. Analysts predicted profit of 570 million euros on sales of 7.54 billion euros, the average estimates compiled by Bloomberg.

Chief Executive Officer Franco Bernabe said today he's ``confident'' the company will meet its guidance. He faces pressure from investors to come up with a new strategy to revive the stock and growth at the company while reducing debt. Telecom Italia is scheduled to unveil its new business plan, including forecasts for 2009 and beyond, Dec. 2.

``Results aren't bad, but what's more comforting is that they confirmed the guidance,'' said Alessandro Frigerio, a fund manager at RMJ Sgr in Milan.

Telecom Italia rose 1.4 euro cents, or 1.5 percent, to 97.64 cents in Milan, giving it a market value of 17.5 billion euros. The stock has fallen 54 percent this year, compared with a 37 percent drop of the 22-member Bloomberg Europe Telecommunication Services Index.

Lehman Hit

Telecom Italia had finance income of 265 million euros in the third quarter, compared with 1.03 billion a year earlier. ``Worse performance of financial operations and equity interests'' weighed on profit, the company said. The company said it wrote down 51 million euros linked to the bankruptcy of Lehman Brothers Holdings Inc. The U.S. bank had guaranteed derivatives that Telecom Italia used to hedge receivables from clients.

``In the third quarter, Telecom Italia's revenues and margins picked up again, which will allow us to hit our 2008 targets,'' Bernabe said in the release.

Telecom Italia is seeing increased competition in Italy, where rivals such as Vodafone Group Plc and FastWeb SpA offer fast Web access as well as fixed-line and mobile subscriptions.

While revenue in Italy dropped 5.3 percent to 17.2 billion euros in the first nine months because of fixed-line losses and a shift to mobile contracts, ``the positive trend in the domestic business'' helped earnings in the quarter, the company said.

Telecom Italia has been hurt by regulatory changes to mobile-phone termination rates, or the fees for routing calls that don't originate on its network; a reduction in international roaming rates; and rules abolishing fees for recharging prepaid mobile cards. The measures reduced sales by 542.5 million euros in the first nine months, it said.

`First Signs'

In August, Telecom Italia cut its 2008 revenue forecast to 30.4 billion euros to 30.5 billion euros, from a March prediction of about 31 billion euros. So-called organic earnings before interest, tax, depreciation and amortization were forecast to fall to about 38 percent of sales, compared with an earlier prediction of 38.5 percent. The targets were cut because of reduced outlooks in Brazil and Germany.

``We're now seeing the first signs of a turnaround in Brazil and Germany,'' the CEO said.

Ebitda dropped 2 percent to 3.09 billion euros in the third quarter, beating the median analyst estimate of 3.02 billion euros. Ebitda as a percentage of sales, excluding currency moves and acquisitions or disposals, was 39.9 percent in the nine months, compared with 41.2 percent a year earlier.

On Nov. 5, Tim Participacoes SA, Brazil's third-biggest mobile-phone carrier and a unit of Telecom Italia, posted its first profit in three quarters after adding higher-revenue customers.

Ownership Status

Telefonica SA and partners including Mediobanca SpA own a controlling stake in Telecom Italia through holding company Telco SpA. Telecom Italia is open to new investors and is looking with ``great attention'' to those who want to invest in the company, Bernabe said last month. Libyan sovereign funds are discussing a possible investment in the company, Saif al-Islam Qaddafi, son of Libyan leader Muammar Qaddafi, said Oct. 30.

Bernabe said today there is ``no news'' on possible new investors. He also said a capital increase isn't on Telecom Italia's agenda.

Telecom Italia's net debt fell to 35.8 billion euros at the end of September from 37.2 billion euros at the end of June. The company aims to bring debt to less than three times Ebitda by the end of 2008 and cut the ratio to about 2.5 times by the end of 2010. The ratio was about 3.1 at the end of 2007.

``Telecom Italia's wall of debt requires attention,'' Nomura International Plc wrote in a Nov. 4 note.

Available Credit

The company had net liquid assets of about 5.3 billion euros at the end of September. It also has 6.5 billion euros of long- term, irrevocable credit lines, it said.

Telecom Italia is negotiating financing of 600 million euros with a European investment bank, Chief Financial Officer Marco Patuano said on the call. The facility should be available in the fourth quarter, he said.

``Telecom Italia can afford a certain degree of flexibility in bond issues'' and can be ``very opportunistic'' in tapping the debt market, Patuano said. He also said the company ``doesn't need to sell bonds now.''

To contact the reporter on this story: Chiara Remondini in Milan at cremondini@bloomberg.net

Last Updated: November 7, 2008 12:58 EST