Broadband services

Telecom Italia Sees Domestic Recovery

Telecom Italia's share price has risen in Milan after the operator said that investments in fiber broadband services and more competitive mobile offerings had triggered earnings improvements in Italy in the first three months of the year.

The Italian incumbent's share price was trading more than 1% higher on the Borsa Italiana around lunchtime after it reported that revenues at its domestic consumer business fell by just 1.5% compared with the first quarter of 2014.

The decline compared favorably with year-on-year drops of more than 5% in the second half of 2014 and nearly 12% in the same period last year.

In February, Telecom Italia (TIM) unveiled plans to spend €10 billion ($11.2 billion) on improvements in Italy over the next three years -- up from the €8.9 billion ($10 billion) it invested over the 2012-14 period -- including €3 billion ($3.4 billion) on the rollout of fiber broadband networks and €900 million ($1 billion) on extending 4G coverage. (See Telecom Italia Rejigs Services in Recovery Bid Telecom Italia to Invest €3B in Fiber to Spur Growth and Telecom Italia Forecasts Some Pain Relief.)

The aim is to stabilize EBITDA next year in Italy, which still accounts for about 70% of total sales, and ensure the operator returns to growth in 2017.

Telecom Italia claimed its strategy of upselling higher-speed services to existing broadband subscribers had stabilized average revenue per user (ARPU) in the January-to-March quarter.

Fiber broadband technology is now available to about 32% of the Italian population, up from 29% at the end of 2014, and Telecom Italia's goal is to cover 75% of the country with fiber networks by the end of 2017.

The operator also cited improvements in mobile, where it has been trying to resist engaging in a price war with its rivals by focusing on quality and popularizing higher-speed data services.

The €900 million ($1 billion) investment in 4G is aimed at extending coverage to 95% of the population by the end of 2017, up from about 80% today, and Telecom Italia claimed that its "competitive positioning" in the Italian consumer market was already better than a year ago thanks to its efforts so far.

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Despite signs of a turnaround in Italy, however, the company's headline results were typically underwhelming.

Overall revenues dropped by 2.7%, to approximately €5.1 billion ($5.7 billion), compared with the first quarter of 2014, while EBITDA sank by 7.7%, to roughly €2 billion ($2.2 billion), due largely to an increase in operating and personnel costs in Italy.

Moreover, the operator's net profit fell from €222 million ($249 million) in the first quarter of 2014 to just €80 million ($90 million). Telecom Italia insisted this drop was caused mainly by a recent bond buyback transaction and that its net profit would otherwise have been more than €300 million ($337 million).

Nevertheless, Telecom Italia's Brazilian operation has also crimped sales during the past few months.

Revenues from TIM Brasil , as the unit is branded, fell by 3.3%, to 4.55 billion Brazilian reais ($1.5 billion), largely because of reductions to mobile termination rates mandated by regulatory authorities.

Those cuts sent monthly ARPU down to BRL16.7 ($5.5) in the first quarter of the year, from BRL18 ($6) in the same period of 2014.

Another persistent concern for investors is Telecom Italia's mountain of debt. CEO Marco Patuano aims to reduce net debt to about 2.5 times EBITDA by 2017, from a ratio of about 3 last year, but the figure had grown to €27.4 billion ($30.7 billion) in March from €26.7 billion ($30 billion) in December.

In its earnings report, Telecom Italia blamed "the negative generation of cash from operations in the quarter" for the increase, indicating that it expects the situation to improve over the course of the year.

Even so, the operator's ambitious spending plans may threaten its balance-sheet objectives unless its earnings recovery remains on track.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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