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ZTE Ban & Iliad Entry Blow Wind Tre Off Course

Iain Morris
8/1/2018

A US ban on ZTE and the arrival in Italy of low-cost rival Iliad have clobbered sales at Wind Tre and delayed work on a much-needed overhaul of its mobile network, the company revealed in an earnings update today.

Italy's second-largest mobile telco reported a steep fall in sales and customer numbers for the first half of the year as it confirmed the resumption of dealings with Chinese equipment vendor ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763).

Wind Tre was reported to have dumped ZTE for Ericsson AB (Nasdaq: ERIC) after US measures against the Chinese supplier forced it to cease business operations and threatened its survival.

Back in business after US authorities lifted a ban on its purchase of US components, ZTE claimed to have recommenced work for Wind Tre in late July, but the operator had made no official statement on the partnership until now. (See ZTE Racks Up $790M Q1 Loss on US Ban.)

In its earnings presentation, Wind Tre said Ericsson was only a "second radio supplier" and said it would aim to complete a network consolidation project that involves both ZTE and Ericsson by 2019.

Created from the recent merger of Wind and 3 Italia, Wind Tre is trying to combine and modernize two separate mobile networks while battling tough competition in the Italian phone market.

The US ban on ZTE, imposed after the Chinese vendor had violated trade sanctions, has delayed work on infrastructure consolidation by three months and affected its ability to retain customers, acknowledged Wind Tre in today's earnings update.

So far, about 35% of the mobile radio upgrade has been finished, including an overhaul in the major cities of Rome, Milan and Bologna.

Wind Tre's objective is to slash annual operating costs by €490 million ($572 million) and capital expenditure by €210 million ($245 million). On the opex side, it is now at a "run rate" of about €284 million ($331 million) in annual savings.

But recent figures show Wind Tre has been hard hit by the ZTE delay as well as the market entry of Iliad, a French company that launched a fourth mobile network service in May. (See Iliad Grabs 1M Customers by Day 50 of Italian Odyssey.)

Wind Tre has lost more than 600,000 mobile customers since March and had 28.6 million on its books at the end of June, down from 30.3 million a year earlier. Average revenue per user has fallen from €11.1 ($12.95) to €10.6 ($12.37) per month over that period as a result of price-based competition.


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Revenues for the first half came in at €2.77 billion ($3.23 billion), about 10% less than in the year-earlier period, and earnings (before interest, tax, depreciation and amortization) were down 8.5%, to €995 million ($1.16 billion).

With about €9.6 billion ($11.2 billion) in net debt, Wind Tre is now one of the most highly leveraged operators in Western Europe, with net debts equaling about 4.5 times annual earnings.

The ZTE ban has predictably caused a sharp fall in capital expenditure, down 17% year-on-year in the first half, to €417 million ($487 million), as investment activities were put on hold.

Ratings agency Moody's reckons Wind Tre, as a low-cost player, will feel the greatest impact from the arrival of Iliad, which recently claimed to have signed up around 1 million customers in its first 50 days in the market.

Moody's is forecasting an 8% to 9% decline in Wind Tre's mobile service revenues, to around €3.5 billion ($4.1 billion) next year. It expects earnings at Wind Tre to fall by 5% to 6%.

Vodafone, Italy's third-biggest mobile operator by customer numbers, saw Italian service revenues drop 6.5% for its recent April-to-June quarter, and lost 289,000 mobile subscribers in that period. (See Sales Squeeze to Drive Heavier Cutbacks at Vodafone.)

Market leader Telecom Italia (TIM) seemed to cope better than either Vodafone Italy or Wind Tre, with mobile revenues up 1.6% in the April-to-June quarter. Including machine-to-machine connections, it picked up 600,000 mobile subscriptions in that period to finish June with about 31.6 million in total. (See Telecom Italia Says 5G Auction May Force It to Sell Assets.)

— Iain Morris, International Editor, Light Reading

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