Telecom Italia SpA (TI) Thursday said its first-half net profit fell almost 14% due to higher tax payments, but confirmed its profitability and cash-flow targets for the full year as cost-cutting started to take effect.

Italy's largest telecom operator, which is focused on reducing debt and slashing costs, posted a net profit of EUR964 million, down from EUR1.12 billion a year earlier as it paid EUR484 million more in taxes. The results beat analysts' expectations for net profit of EUR945 million.

Revenue fell 5.8% to EUR13.95 billion from EUR14.8 billion a year earlier, as a slowdown in domestic sales was only partially offset by a better performance at Brazilian mobile-phone company TIM Participacoes SA (TSU).

The Brazilian unit of Telecom Italia posted a narrower net loss in the second quarter as restructuring measures improved its operating performance. Mobile revenue posted a 7.1% drop in the first half to EUR4.3 billion, confirming the fall in handset sales and value-added services, while fixed-line sales showed an improving trend.

Telecom Italia Chief Executive Franco Bernabe told analysts Thursday that the changes in the mobile division - which is shifting focus to higher-value customers - will start paying off in early 2010.

First-half earnings before interest, taxes, depreciation and amortization, or Ebitda, rose 3.1% to EUR5.67 billion, and Ebitda margin improved by 1.5 percentage points over a year ago, Telecom Italia said.

Still, shares fell as investors took profits following their recent rally.

Telecom Italia shares closed down 4.6% at EUR1.06 in an overall higher Italian market. The share has lost around 7% in value over the last year.

"It looks like a good set of results and I particularly like the improvement in Ebitda margins," said GestiRe asset manager Gianpaolo Rivano. "I'd say there's nothing to worry about and some profit-taking was expected," he added. Analysts at Societe Generale, which rates Telecom Italia at hold, noted that even though mobile revenue continued to shrink relatively fast, "the stabilization in domestic wireline may become a centre piece of the equity story."

Telecom Italia said Thursday its closely watched net debt stood at EUR35.2 billion at the end of June, up from EUR34.5 billion at the end of March.

As part of its 2009-11 business plan, Italy's largest telecom operator pledged to reduce its debt to Ebitda ratio to 2.9 times by the end of 2009 and to 2.3 times by the end of 2011, from about 2.99 times at the end of 2008.

Meanwhile, Telecom Italia kept its outlook for full-year 2009 Ebitda, adjusted for mergers and acquisitions, exceptional items and currency movements, of between EUR9.9 billion and EUR10 billion in Italy, and at about 3.6 billion reais ($2 billion) in Brazil.

Earlier Thursday, European peer Deutsche Telekom AG (DT) also confirmed its full-year targets, following the pattern set by rivals Telefonica SA (TEF), BT Group PLC (BT) and France Telecom (FTE).

Telecom Italia is the last major European operator to report in the current period.

Many of Europe's telecom companies have slimmed down costs in a fierce fight for dominance in the competitive European mobile and broadband market. The cost cuts are also designed to preserve margins as national and European regulators force down the cost to consumers of voice calls, text messaging and data.

Company Web site: www.telecomitalia.com

-By Giada Zampano, Dow Jones Newswires; +39 06 69766925; giada.zampano@dowjones.com

Order free Annual Report for BT Group PLC

Visit http://djnweurope.ar.wilink.com/?ticker=GB0030913577 or call +44 (0)208 391 6028