Telecom Italia's revival under the leadership of Flavio Cattaneo gathered pace in the first quarter, with sales up in Italy and Brazil and earnings boosted by cost-saving measures.

The Italian incumbent saw revenues grow 8.5% in the first three months, to about €4.8 billion ($5.3 billion), compared with the year-earlier period, while EBITDA was up 16.2%, to around €2 billion ($2.2 billion).

Cattaneo, who replaced Marco Patuano as chief executive in March last year, has embarked on a major cost-saving drive at Telecom Italia (TIM) while channeling investments into the rollout of higher-speed fixed and mobile networks. (See Telecom Italia Names Cattaneo as New CEO.)

Helped by a lessening of competition in Italy, where mobile rivals 3 Italia and Wind Telecomunicazioni SpA completed a merger in November last year, Telecom Italia has also been making improvements to its line-up of fixed and mobile services.

In Italy, which accounts for about three quarters of Telecom Italia's sales, revenues grew 2.8%, to more than €3.6 billion ($3.9 billion), thanks to good progress in the residential sector and the take-up of new fixed-line services by business customers.

The only real black spots were a decline in the wholesale segment, which Telecom Italia blamed on regulation, and some weakness in the enterprise market for mobile services.

Overall Italian service revenues shrank 0.3%, to about €3.3 billion ($3.6 billion), but this marked a big improvement on the 1.3% decline that Telecom Italia witnessed in the final quarter of 2016.

"I expect revenues from domestic services to return to growth in the next quarter," said Cattaneo in a company statement. "Accelerating on ultra-broadband, renewing our commercial strategy and managing costs with discipline, we have, within a year, returned all the principal parameters to growth."

The big domestic challenge for Telecom Italia is likely to emerge later in the year with the arrival in the mobile market of France's Iliad, which last year acquired spectrum and network assets from 3 Italia and Wind as a regulatory condition of their merger.

The entry of Iliad (Euronext: ILD) into France's mobile market in early 2012 triggered a price war in the sector. There have been fears the company could have a similar impact in Italy, although current conditions in the Italian market look very different from those in France five years ago. (See Iliad's Italian Odyssey May Be a Hard Slog.)

Telecom Italia also heralded a return to growth in Brazil, where revenues in local currency units rose 2.5%, to nearly 4 billion Brazilian reais ($1.3 billion), after declining 1.7% in the preceding quarter. Thanks to favorable foreign exchange effects, sales in euro terms were up 31.5%, to nearly €1.2 billion ($1.3 billion).

The Brazilian sales increase came about mainly as a result of growth in average revenue per user, which rose to BRL19 ($6) a month from BRL17.2 ($5.4) a year earlier as customers opted for pricier mobile data deals.

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Telecom Italia attributed its EBITDA gains partly to the success of the "cost recovery plan" it launched in 2016. Among other things, the company has been making efforts to reduce the size of its bloated workforce, which had nearly 61,000 employees in March, including 51,000 in Italy alone.

Exact staff numbers fell from 61,229 in December to 60,930 in March, and are down from 65,107 in March 2016.

Telecom Italia is also working to reduce its net financial debt to about 2.7 times annual EBITDA next year. At nearly €26 billion ($28.4 billion), the current figure equals about 3.2 times EBITDA in 2016 but has fallen from a ratio of 3.9 in 2015. The operator is guiding for "low single digit growth" in EBITDA this year.

The latest earnings update comes after Telecom Italia announced plans in February to spend about €11 billion ($12 billion) on its Italian business over the next three years. (See Telecom Italia Renaissance Gathers Pace.)

About €5 billion ($5.5 billion) is being channeled into the rollout of ultra-broadband networks. The short-term goal is to extend fiber-based technologies to 86% and 4G to 99% of the population next year.

According to a Telecom Italia presentation in February, about 60% of the population could access fiber-based services at the end of last year, and more than 96% could use either 3G or 4G.

Despite the investment plan, Telecom Italia has expressed confidence that it can reduce capital intensity (or capital expenditure as a percentage of revenues) from about 25% in 2016 -- when it invested €3.8 billion ($4.2 billion) in Italy and €4.9 billion ($5.4 billion) across the entire group -- to less than 20% in 2019.

Investors have taken heart from the progress under Cattaneo. At the time of publication, Telecom Italia's share price was trading up nearly 4% in Milan, at about €0.86 ($0.94).

— Iain Morris, , News Editor, Light Reading