Pirelli Broadband Solutions

The highlights of Pirelli Broadband Solutions for the year ending
December 31, 2007 can be summarized as follows:

pirelli broadband solutions (in millions of Euros)

12/31/2007

12/31/2006

Net sales

117.1

129.4

Gross operating profit (loss)

(11.1)

1.1

Operating loss

(13.5)

(0.3)

Earnings (losses) from investments

-

(1.0)

Operating loss incl. earnings (losses) from investments

(13.5)

(1.3)

Financial income (expenses)

(3.9)

(1.6)

Income taxes

-

(0.4)

Loss

(17.4)

(3.3)

Net financial (liquidity)/debt position

21.5

13.1

Employees (number at year-end)

196

166

Net sales

Net sales in 2007 amount to Euros 117.1 million, with a decrease of 9.5 percent compared to Euros 129.4 million in 2006. In the second half, however, net sales of Pirelli Broadband Solutions registered a gain of 8.1 percent over the prior year, reversing the negative trend of the first two quarters. The overall change from 2006 is due to a different mix of broadband access products and the temporary slowdown in world market demand for telecommunications infrastructures.

Operating result

The operating result in 2007 is a loss of Euros 13.5 million, compared to basically a breakeven in 2006. The change in the operating result, besides the contraction of revenues and the relative margins, is also due to the research costs incurred for developing and custom-designing the products in new-generation photonics area.

Loss

The loss for 2007 is Euros 17.4 million after financial expenses of Euros 3.9 million, compared to a loss of Euros 3.3 million in the prior year.

Net financial position

The net financial position is a net debt position of Euros 21.5 million. The higher debt position from the end of last year is due to an extension of the payment terms given to the major customers.

Employees

At December 31, 2007, there are 196 employees, 30 people more than in December 2006, concentrated in the Engineering and Sales functions.

Broadband access

The world broadband market continues to grow, thanks to the release of ADSL2+ technology and the introduction of the new VDSL2 technology which makes it possible to supply users with bands of 20Mb/s (Megabits per second) and 50-100Mb/s, respectively.

Triple play Slovak Telekom.jpg

A triple play device developed by Pirelli Broadband Solutions.

In addition to increasingly advanced surfing profiles, and the consolidation of the VOIP service, 2007 saw the commercial launch of the Internet IP-TV television service by the main operators.

These applications are seen by operators as fundamental steps for winning the loyalty of their customers and for reaching people who do not own a computer, who would otherwise not be able to subscribe to broadband services.

In order to confront the market situation, a portfolio has been developed consisting of five product lines (Access Gateways, Set-top Box, Extenders, Terminals and the PMPs (Pirelli Management Platform, that is, remote management and assistance platforms), and began to introduce the new product line of Small Business Gateways.

The product range of Access Gateways extends from simple USB modems to routers capable of supporting triple and quadruple play applications. In 2007, the transition of top range equipment towards Jungo (a market leader in the sector) software technology was completed. In addition to supplying PBS with a complete and exhaustive stack partly in view of the new Small Business product line, this innovation makes it possible to transfer all the applications developments implemented to various xDSL chipsets. This will guarantee a level of continuity to the services being offered on several platforms, thus augmenting the competitiveness of PBS’s proposals to the market.

During the year, as mentioned previously, a new line of Small Business routers was developed, with a modular product capable of supporting data configuration, voice (between 2 and 8 channels) and ISDN.

The product fits perfectly into the existing product portfolio, between small office routers derived from residential applications and the machines connected with the partnership with the French company OneAccess.

The product will be available as samples for customers from the first four months of 2008.

In 2007, the set-top box line reported the fastest acceleration, having received certification from Microsoft Mediaroom. At the same time, a range of HW and SW was developed which will allow the company to compete with the largest players on the world market. Cooperation with Alcatel-Lucent, begun in the past for Telecom Italia, also proved to be a winning strategy in the operation of the customer Arcor (Germany’s second-largest fixed telephone operating company) and made it possible to begin integration of the customer MiviewTv. This customer is also used for Telefonica, which put the company and one other vendor in the final shortlist of a competition, after a rigorous and competitive selection procedure.

In this product line, too, in the past, Pirelli Broadband Solutions acquired independent SW from the American company Confocus, which, in addition to making it possible to respond in a more flexible way to market demand, guarantees the possibility of launching an ‘open’ SW solution on the market in 2008 on which small customers can develop their own applications.

The extenders line, with regard to supplying connectivity between products in the portfolio, has been enhanced by a new generation of power line (200Mb/s) and wireless (802.11n) solutions, which will make it possible to supply high-definition (HD) video streaming between Access Gateways and Set-top Boxes, thus helping to solve the problem of installing an IP-TV service.

Fruitful collaboration with technology leaders Intellon, DS2, Ralink and Metalink allowed PBS to make proposals to important operators (Telecom Italia, Deutsche Telekom, Belgacom, Telefonica and Fastweb). These were met with great interest on account of the innovative nature and effectiveness of the solutions proposed.

The Terminals line (dual-mode telephones) did not result in the expected level of volumes since operators have not yet launched the service on the residential market, claiming that it is still too complex and expensive for the final user.

However the company continued to arouse the interest of many new customers by supplying the dual-mode telephone in bundled format, together with its broadband routers.

In 2008, there are plans to introduce a new mobile Windows phone which will be supplied with Small Business routers and will support the first concepts of value-added applications.

The PMP supported existing customers and has been structured to support the new concepts that PBS wants to introduce to the market (value-added services, domotics, healthcare and non-Telecom generic control devices).

New photonics products

In 2007 there was a contraction of sales of the optical Coarse WDM system – known as City8TM – compared to 2006. The contraction was due mainly to the slowdown in investments for IP-TV networks on the part of some important telephone operators and, in particular, some of Pirelli’s customers acquired in the past. The contraction was only partially compensated by the acquisition of new customers (Intracom-HOL in Greece). Despite this, more than 2,200 devices were sold Italy, France, Germany, Sweden, Spain, the United States and Greece. Furthermore, at the end of September 2007, a new release of the product (the 1.3) was announced, making it possible to increase the number of WDM optical channels from 8 to16 (hence the new trade name CityTM+ rather than City8TM) and introducing functions working at 10 Gbps in addition to those working at 2.5 Gbps present in previous releases. The homologation process of the new release has begun with the main customers and, in some cases, has already been installed on pilot systems.

The introduction of functions working at 10 Gbps and the increase in the number of channels of the system should enable customers in new areas of the network to use it in 2008, particularly in some core-metro segments in addition to the already consolidated metro access segment.

In the field of optical components, small volumes of tunable lasers continued to be supplied to customers both in North America and the Far East, completing the qualification phase at two of the world’s leading players in the sector (Huawei and Ciena). Consequently, there is expected to be a rapid growth in volumes starting in the first months of 2008. The qualification process is continuing and samples of the product are currently in the hands of many new potential customers in Europe, Japan and North America.

In the sphere of optical modules, the most significant event in 2007 was the signing of a supply agreement with Alcatel-Lucent to supply products such as MSA tunable modules and XFP modules. With regard to these modules, in 2007, the development of the MSA tunable module line, begun in December 2005, was completed. A special customized module is currently being developed for Alcatel-Lucent, whereas development of the XFP product line is nearing completion.

City8.jpg

City8™ second-generation optical system perfected by Pirelli Broadband Solutions.