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Telecom Italia SpA (NYSE:TI)

Q1 2014 Earnings Conference Call

May 13, 2014 06:00 ET

Executives

Alex Bolis – IR

Marco Patuano – CEO

Piergiorgio Peluso – CFO

Luca Rossetto – Head, Consumer Department

Analysts

Nick Delfas – Redburn Capital

Hannes Wittig – JPMorgan

Giovanni Montalti – UBS

Stefano Lustig – Equita SIM

Georgios Ierodiaconou – Citi

Mandeep Singh – Redburn Partners

Justin Funnell – Credit Suisse

Micaela Ferruta – Intermonte

Paul Marsch – Berenberg

Luigi Minerva – HSBC

Giles Thorne – Jefferies

James Ratzer – New Street Research

Nuno Matias – Espirito Santo

James Britton – Nomura

Jean-Francois Paren – Credit Agricole

Fabrizio Marchesi – Pramerica

Alex Bolis

[Starts in Progress] Q1 2014 Financial Results Conference Call. This is Alex Bolis speaking, Head of Investor Relations. First of all, I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those in the forward-looking statements as a result of various factors.

Analysts are cautioned therefore not to place undue reliance on those forward-looking statements, which speak only as of the date of this presentation, and are encouraged to consult the company’s periodic filings, which are done with the United States Securities and Exchange Commission.

Today, we have with us Mr. Marco Patuano, Group Chief Executive Officer, who will introduce to you the first quarter of 2014. Also Piergiorgio Peluso, Group Chief Financial Officer is with us today to present an update of the Group financial position, as well as the progress of plan extraordinary transactions. A Q&A session will follow. TIM Part’s CEO, Rodrigo Abreu will be following us by phone and will be available to take your questions.

As usual, this event is being recorded and all participants will be placed in a listen-only mode during the company’s presentation. After TI’s remarks are completed, we’ll be pleased to take your questions. There is a simultaneous webcast that may be accessed through the company’s website, www.telecomitalia.com.

The slide presentation may be downloaded from that website as well. And of course, feel free to view the slides throughout the conference call. Marco, over to you now.

Marco Patuano

Thank you, Alex. Good morning, ladies and gentlemen. After reviewing our results for the first quarter of 2014 with our newly appointed Board of Director yesterday, I am pleased to confirm that our Group operating and financial performance based on a new pace for innovative investment and commercial strategy, is on track with the targets of our 2014-2016 plan.

In the domestic mobile market, an improved and more rational context is confirmed. And the recovery from the 2013 price war continues, as shown by the better KPIs. However, as expected, service revenues from domestic mobile are still feeling the factor of adverse year-on-year price comparison, as the fiercest phase of last year’s competition struck in the summer.

As we speak, we are already seeing clear signs of improvement for the next quarters from better trend in prepaid reloads, both in unitary and aggregate terms, lower churn rate and MNP gross volumes and the holding of an overall positive trend in market repricing.

In the fixed market, we are keeping the fast pace in fiber investments, while fully unfolding our commercial strategy towards broadband penetration. We are posting positive broadband net adds for the second consecutive quarter, and the related ARPU is growing on an year-on-year basis.

At Group level, sharing of passive infrastructure costs and strong focus on procurement and processes are ensuring a timely rollout of our ultra-broadband networks, accelerating innovative CapEx, while saving in traditional.

In Brazil, we are dealing well with a slower economy and absorbing the fact of a 25% MTR cut, which occurred in February. From a cost-related point of view, TIM Part is also effectively taking full advantage of its improved infrastructure to increase EBITDA performance and deliver healthy margins.

While our acceleration on innovation in Italy and Brazil and our new convergent approach in domestic are leading us along the way of a progressive strengthening of our operations, the major corporate governance turnover that was acknowledged during the last AGM has introduced best-in-class public company standards for TI. But let’s now review our first quarter.

On Slide 3, we have a comprehensive view of our main financial results. In organic terms, Group revenues as of March 31, stood at EUR 5.2 billion, down 6.2% year-on-year. Consolidated EBITDA was impacted by a change we introduced this quarter in the way we accounted for subscriber acquisition costs, which are now fully expensed and no longer capitalized.

Net of this effect, Group and domestic EBITDA performance was minus 4.3% and minus 6.6% year-on-year respectively, in line with the last quarter. CapEx was EUR 684 million, down about 1.2% year-on-year in organic terms, net of the change in the SAC accounting policy.

This performance deserved to be highlighted as the increase of innovative CapEx was more than offset by a strict discipline in traditional investments supporting cash generation.

Total Group EBITDA less CapEx was EUR 1.5 billion, of which 86% generated by domestic. In Brazil, the lower contribution to the quarter was mainly due to a strong acceleration in investments, particularly innovative ones.

Moving now to domestic. Total revenues in Q1 were EUR 3.7 billion, showing a reduction of 8.3% year-on-year as service revenues stood at minus 8.8% following a gradually improving trend already seen in the past quarters that will accelerate during this year.

EBITDA was EUR 1.8 billion and CapEx totaled about EUR 500 million. The difference stood at minus 5.5% if compared with the first quarter 2013, showing a considerable improvement versus full year 2013.

Let’s now comment on our domestic mobile performance. Total first quarter revenues stood at EUR 1.18 billion, down 14.4%. As I briefly mentioned before, the comparison effect with the pricing environment of the Q1 2013 is still unfavorable, because as you know, the highest impact came last summer.

Value-added service are keeping up their pace moving around parity with broadband, still increasing double-digit and almost fully compensating SMS erosion. In line with our newly strengthened controlling device policies, we also largely discontinued subsidized handset leases in the business segment, where we are now selling mobile phones at their full price.

This reduced the zero margin revenues that are included in fees and others at the bottom left hand side of this slide. Also in the consumer market, we have put in place a tighter handset subsidy policy on lock-in offers.

Overall, retail service revenues follow last quarter trend, while a materially better comparison is building up for the rest of the year, thanks to the improved competitive environment and the forthcoming end of the MTR drag.

KPIs are already showing what will be next delivered financially. Slide 6 confirms the strong decrease in gross adds which indicates that hyper-competition has come to an end, a material reduction in MNP volumes for the whole market, while our MNP balance improves, as a consequence churns in 2014 dropped. These three factors contributed to a considerable decrease in commissioning costs, while the weight of our calling customer base is improving year-on-year.

Moving to fixed. First quarter total revenue stood at EUR 2.8 billion, showing a minus 6.9% year-on-year reduction, in line with the last quarter of 2013. Service revenues improved versus the previous quarter standing at minus 7.3% year-on-year. This result was mainly driven by its retail component, which closed the quarter at minus 7.5% versus minus 8.2% in the fourth quarter 2013.

Also Sparkle delivered a positive contribution, while the well-known regulatory discontinuities on copper wholesale prices played an adverse role.

TI fixed access customer base stood above 13 million units, equivalent to a market share of 62.5%, with the line reduction of 183,000 compared with the previous quarter. In the European incumbent space, this is a well-known phenomenon, driven by fixed mobile substitution in voice-only lines and by VoIP adoption in the corporate segment.

In this context, TI is fairing in line with its peers. The increasing use of ICT services acts as a partial offset. Revenue performance in this market area marks a mid-single-digit growth year-on-year.

As you can see in this quarter’s results, fixed broadband remains a positive driver. Accesses were 6.9 million, up 18,000, confirming the positive trend in quarterly net adds and ARPU. By adding up the recently acquired fiber clients and our growing high speed ADSL customers, we posted an increase of 67,000 units among our fast broadband clients in the quarter, reaching about 1.2 million. On fiber, we will expand later.

Our Brazilian first quarter revenue analysis needs to take into consideration the recent 25% MTR cut. Net of this effect, mobile service revenues were up 4.9% year-on-year. As already reported by TIM last week, EBITDA posted a strong organic performance of plus 7.8% year-on-year, reaching EUR 406 million. Our lines increased to 73.9 million with TIM confirming its leading position in prepaid adds, which grew by more than 0.5 million in the quarter.

We are increasingly devoting attention to the postpaid segment, introducing attractive and ARPU accretive offers as we can see in the next slide.

CapEx was up 30% in the quarter, 95% of which was infrastructure related, confirming TIM’s strong commitment to quality. This has allowed us to secure a good position in quality indicators.

As we detail in Slide 11, in a phase of strong offer evolution from all players, TIM confirms its innovative approach on the commercial front by introducing a series of new attractive offers in their postpaid segment. We are the first player to introduce off-net calls in the bundle together with entry level data package. Liberty Express offer these for R$70 a month, heavy users can scale it up to R$125, getting more minutes and data.

Let’s now move back to Italy, expanding from a financial driven analysis of the quarter to a broader business-oriented view of the actions that will drive the stabilization of our domestic results.

The pace taken by TI on innovative investments within its 2014-2016 plan is further strengthening our competitive position, thus leaving the other players behind. Recent take-up of innovative services has been quite impressive. We currently operate more than 1.5 million LTE devices in about 1.2 million fast fixed broadband lines. We are the first cloud provider in Italy.

Therefore, while we’re on track for our accelerated ultra-broadband plan deployment, we’re taking full advantage of all the efficiencies we can obtain on the CapEx front, while pushing ahead on network delayering and the phasing up out of obsolete segments.

Combining operating and financial discipline with increased innovative CapEx is the theme that will accompany us throughout our entire planned timeframe, both in Italy and Brazil. [Foreign Language – Italian] strategy we are following.

Let me show you, how we are translating fiber investments into services and revenues. Commercial take-up. We’re gaining momentum in customer acquisition. As of March, fiber consumer customers are ahead of our budget, and largest evidence that shows that we are further accelerating.

In addition, about 10% of the installed capacity of light cabinets has been already sold. At the end of the first quarter, we had covered about 19% of the population. We started a fiber geo-marketing strategy in April. Broadband market share opportunities are being particularly sought for in the areas where TI has a weaker position.

In customer satisfaction, we are witnessing a constant improvement in customer perception of fiber performance. And from the last December, we halved the delivery time for client activation. At the same time, quality appreciation is up both in the broadband speed and in VoIP.

Our CRM is getting very positive feedbacks from our fiber clients, confirming a constructive word of mouth effect. TI and SKY, the new groundbreaking agreement also signed on fixed, ensures the best quality content available for broadband adoption. Telecom Italia through its ultra-broadband networks can offer a complete experience, both on NGN and LTE technology.

In the following slide, we summarize the main features of this very important agreement, which although will be fully enforced at the beginning of 2015, already now opens up to content-driven applications.

TI and SKY have really formed a strong partnership. Here are the key elements of the deal. All SKY services, including interactive ones such as My Sky, Sky Go and Sky On Demand, will from now on become available on our ultra-broadband networks.

For video via our fixed broadband network, a dedicated My Sky HD set-top box will be available together with guaranteed quality of service provided by Telecom Italia. Only SKY-TI customers will enjoy Sky Go usage included in their mobile subscription and will access special interactive content and services, thanks to TI-SKY synergies.

There will be a strong integration in sales channel and billing, and the revenue sharing model will be implemented. For your information, approximately 1.5 million household in Italy cannot install a satellite dish primarily in historical city centers and are therefore a primary target for these proposition.

In the mobile business, after having successfully reshaped the market following the 2013 price war, we are now restoring value in the data segment through a reduction of the amount of giga we include in the bundle. Entry level data package have to reflect actual usage patterns of 3G smartphones, and therefore we have to progressively drive them down to 500 mega from the two giga per month, which were embedded in the last summer’s offers.

At the same time, we are allowing Italian mobile users to understand the beauty of our 4G experience, which has already proven to be a very effective tool to enhance our customer satisfaction and loyalty. The entire summer portfolio is 4G-enabled, moving the competition from price to quality and innovation.

What people want now in Italy are better broadband networks. The time for coffee size discount is over. So we are expecting a material ARPU uplift from the higher demand for data driven by 4G.

On Slide 19, you can take a quick look at how 4G devices and the adoption of LTE options are growing in our consumer customer base, enabling the increase in data usage and ARPU we just referred to.

Scaling down of data size in our bundles will also open up to more transparent pricing for 4G. Now, our clients will pay more to get more.

After having updated you on our operation, I kindly ask Piergiorgio to comment on the recent financial developments, after which, I will wrap up this presentation before the Q&A session. Thank you very much.

Piergiorgio Peluso

Thank you, Marco, and good morning to you all. Let’s now review the quarter evolution of our Group net financial position, together with cash flow generation and working capital dynamics. We’ll then move onto an update of our debt and liquidity position. And I will close the section telling you about the considerable progress we have made in our planned extraordinary transaction, and in particular, in the TI Media Broadcasting valorization process and the tower deal in Brazil.

Let’s start with the first quarter net debt evolution, which has already well known is subject to seasonal variations. On Slide 21, we note how the Group net debt as of March 31, 2014 decreased by about EUR 1.2 billion on a year-on-year basis.

In the first quarter, financial expenses and M&A positively contributed on a year-on-year basis for about EUR 37 million; lower cash taxes and other impacts by about EUR 10 million; and anticipation of our quarter two to quarter one of a portion of the Fistel payment in Brazil, which more than explains the negative year-on-year delta in operating free cash flow of EUR 78 million.

A significant FX impact on the conversion of the peso-denominated Telecom Argentina cash position into Euro, which after accounting for the related evaluation had a negative impact on our net financial position for about EUR 110 million.

As you very well know, working capital absorption in the first quarter of each year is quite considerable for Telecom Italia. While it materially decreased thereafter due to our operating cash flow generation.

In the next slide, I would like to focus on our working capital dynamics played out in the first quarter. Working capital assumption was broadly comparable with the one that occurred in the first quarter of 2013.

The main underlying driver was again linked to the higher amount of CapEx and OpEx, which becomes due to pay in first quarter, therefore the amount that gets booked in the same quarter, as you can see in the box in the lower left hand side of Slide 22. As of March 31, such seasonal effect stood at about EUR 1.2 billion.

On the right side, we recapped the effects on a full year basis of the Group working capital assumption of creation from 2011, 2012 and 2013. As you can see, the first quarter delta is progressively absorbed throughout the year.

On Slide 23, we show our ongoing domestic OpEx reduction. We posted a EUR 177 million year-on-year decrease. Net of personnel efficiency of EUR 53 million, the portion of savings which is consistent with the perimeter we gave you when we presented our EUR 1 billion OpEx reduction plan amounts to about EUR 122 million.

These highlights a proportional performance compared to our underlying EUR 200 million savings targets for this whole year.

In particular, we are accounting more than expected in the industrial and G&A area, while the commercial costs are in line with our expectations. Our transformation projects are helping as they introduce different ways to run the business.

Let’s now have a quick look at the debt maturities profile and the available liquidity margin at the end of March 2014.

Slide 24 provides you with our current Group debt profile featuring, an evenly distributed sales of maturities overtime, which is backed by a stable liquidity margins standing at EUR 11.7 billion. The margin is the sum of our liquidity position and the undrawn portion of our committed bank lines covering all debt maturities until well beyond our planned scenario. Our debt is currently leveraged cost of about 5.5% in an average life of about seven years.

In the next two slides, we’ll offer an update about our extraordinary projects. As already announced on the April 9, Telecom Italia Media signed a final agreement with the Espresso Group. The outcome subject to the Italian regulatory approval is the creation of an leading infrastructure operator that owns five multiplex operating in transmission of free-to-air Italian television.

Telecom Italia owns 70% of the new combined entity. We are already focusing on the integration. And the pro forma annual turnover is estimated at around EUR 100 million. The related market sounding process from this sale is going to be launched shortly and is expected to be finalized by the end of this year.

We are fully on track with the TIM Brasil tower portfolio process and we are recording increasingly interest by main investor, both strategic and financial, as they are attracted by the dynamic Brazilian tower market, which offers strong growth profile. The TIM Brasil tower portfolio features a high co-tenancy potential in a widespread geographic distribution.

We have already appointed our financial advisors and we are expecting to receive non-binding offers by the end of May.

Thank you very much for your attention. And back to Marco now for his final remarks.

Marco Patuano

Yes. So, time to wrap up now. Sorry, I forgot to switch on the microphone. Time to wrap up now. After having reviewed our Group first quarter numbers, let me give you clear indication which confirms that, the execution of our plan is now full progress.

Innovative investments have been accelerating, strengthening our leadership both in fixed and mobile ultra-broadband coverage. In doing so, we have not lost our focus on financial discipline, which we are pursuing through important efficiency programs, both in OpEx and traditional CapEx.

Our offers are leaving the price terrain to fully embark on a commercial strategy based on quality and innovation. These will allow us to fully leverage on the distinctive infrastructure we’re building and start collecting dividends from these long-term competitive advantage. Our agreement with SKY, which will be fully enforced at the beginning of 2015, already now enables us to offer our customer blockbuster contents.

I am proud to anticipate to you that we will be the sole mobile operator in Italy to transmit the World Soccer Cup on mobile. Also in Brazil, our primary focus is on quality and investments. On the basis of our recent experience in Italy, we are well aware of what MTR reduction process entail. The pace in Brazil is luckily milder. In any case, net of these regulatory effects, we continued growing by almost 5% in a highly competitive market. Therefore, we are in line with our planned targets that we fully confirm.

Thank you very much for your attention. Back to Alex and for the Q&A.

Alex Bolis

Thank you, Marco. We can now start with Q&A. To give maximum opportunity to participate, may I kindly suggest you to limit questions to one for each of you. Thanks very much.

Question-and-Answer Session

Operator

The Q&A session is now open. (Operator Instructions) First question comes from Mr. Nick Delfas of Redburn. Mr. Delfas, please.

Nick Delfas – Redburn Capital

Yes, thanks very much indeed. So if I have to limit myself to one. On the mobile side, you’re talking about expecting uplift from 4G and you’ve raised some of your entry prices in early April. Could you talk a little bit more about what’s happened since you did that? I guess the other operators haven’t yet followed, which is, I guess a concern. And if I could sneak one more in, I couldn’t quite hear what you said about what percentage of VDSL cabinets were already sold. I think you said it was 10%. Thanks very much.

Marco Patuano

Yes, sure. Marco speaking. You will truly remember that one year ago, the summer campaign was totally driven by prices. It was really a sort of atomic bomb on the market. The price went down till EUR 10 month, and data included in the bundle was up to two giga, which was an incredibly high amount of data.

We built up a very important – we gave in very important acceleration to our 4G infrastructure. Now we are well in excess of 55% of the population, and we are still working in order to accelerate it. And for the summer, what we did is we included LTE as the distinctive feature of our portfolio. We are not cutting prices any more. Prices for the summer campaign are still increasing or better, did not decrease since we increased prices few weeks ago.

And now what we did was reducing the level of data that is included in the portfolio, in the bundle. And it will be priced, 3G and 4G the same price, but simply if you use 4G, the quantity of data you get will not satisfy your need. And these will push you to buy a further package of data in order to satisfy your wishes.

Our device portfolio even without any component in the subsidy is mostly 4G enhanced. And this will increase quite significantly the number of 4G-enabled customers in an order of magnitude for the sole consumer area of one million customers more for the second half.

Also in the enterprise, we are cutting subsidies. We are pushing on LTE. And there are clear signs of the capability of keeping the price in the enterprise segment that went significantly down.

Last, the customer base – the active customer base is going up and this is once again extremely important from now on.

Nick Delfas – Redburn Capital

But you haven’t seen follow-on from Vodafone or Wind yet for the latest price increases you put through in early April?

Marco Patuano

From Vodafone and from Wind, yes, both of them have followed the strategy of price increases. Of course, Wind keeps sort of 20% discount on TIM and Voda. And this is quite normal, given the strength of TIM and Voda brand, but the three of us are moving up prices. And even if there had been some very cheap offer, it has been just for, I would say, more for – as part of advertising reasons than for real commercial success.

Nick Delfas – Redburn Capital

Okay. I’m sorry, just to finish off on VDSL. I didn’t hear the coverage number. I think the 19% coverage, and then I think you said something around the percent of cabinets already sold?

Marco Patuano

Yes, we have 19% of the population covered. And out of the 19%, 10% of the capacity has already been sold.

Nick Delfas – Redburn Capital

Perfect. Thanks very much.

Alex Bolis

Thank you very much, Nick. Next question please.

Operator

Next question comes from Hannes Wittig of JPMorgan. Mr. Wittig, please.

Hannes Wittig – JPMorgan

Yes, thank you very much. Just continuing on the subject of mobile. I just wondered if you could maybe comment on the nature of the customer losses that you are experiencing in the quarter, about 200,000. Is this sort of very low end? Is it prepaid? Is it postpaid? Is it – maybe you could give a bit more color in terms of how that works out, and how much of a concern it might be going forward as we go into the summer period?

Marco Patuano

Well, we decided to do something that is we anticipated cancelled some non-calling customers. It was a decision. And in fact, as you can see, the calling customer base, the percentage of calling customer base is increasing. So out of the 2,020 users that has been discontinued, there is more or less 150,000 were pre-cancellation of silent customers that we tried to contact more than once. And since they drive us just costs, we decided to start a phase of pre-cancellation of customers that are totally silent.

Hannes Wittig – JPMorgan

So that means that the customers were lost life here I guess, but does it – terms of the quality of the customer base, are those higher ARPU customers, lower ARPU customers, maybe you can comment on that a little bit? Thank you.

Marco Patuano

Yes, they were simply silent customers. So no ARPU customers. What is important is that – so let me expand a bit on the evolution of the value of the customer base. First of all, the comparison between the entry level offer and the ARPU. So what is our focus is to clearly reduce or even avoid that any new customer has an entry offer that is below the average ARPU.

This is extremely important, because otherwise every gross add ends being dilutive on the total ARPU. This is something that is almost done, because the entry level now is moving from EUR 15 to EUR 19, and with EUR 19 VAT included, we are very close to the average ARPU.

Second, even more important is the MNP balance that is now close to zero, is close to zero if I look at it in terms of number of lines is today positive in terms of value. So the value of the customer I am getting is higher of the value of the customer I am contributing.

And the churn is going down quite sharply. It’s extremely important. So we targeted to keep a lower churn. And the repositioning inside the customer base is lower than what we saw one year ago. So all in all, from the customer base – from the total number of active customers and from the movements inside the customer base, we are seeing clearly good signs of improvements.

And very last comment, there is one indicator that is clearly prodromic to further improvement that is the value of the top-ups. The value of the top-ups is growing. So if more customers are reloading their prepaid, it means that sooner or later, they will use this traffic, and it will end with a positive result on the financials. I hope I gave you all the information.

Hannes Wittig – JPMorgan

Thank you, Marco.

Alex Bolis

Thank you, Hannes for your question on mobile. The next question please.

Operator

Next question comes from Mr. Giovanni Montalti of UBS. Mr. Montalti, please.

Giovanni Montalti – UBS

Good morning. Thanks for the question. Just a quick one on mobile service revenues. Should we expect an improvement in Q2? You were pointing through some improvements in the current trending. So, should we expect an year-on-year trend improving in Q2? Thank you.

Marco Patuano

Yes. We are assuming some improvement in Q2, but the full comparison effect would be from Q3 onwards, but also in Q2 we do expect some improvements in mobile.

Giovanni Montalti – UBS

Thank you.

Alex Bolis

Thank you Giovanni. Next question please.

Operator

Next question comes from Mr. Stefano Lustig of Equita. Mr. Lustig, please.

Stefano Lustig – Equita SIM

Good morning. I was willing to going back to the increase in EBITDA, and there was a slide giving explanation. And the increase all in all was a higher than the one that occurred in Q1 2013. And so I was looking for some more color in terms of possible working capital evolution and the impact of other elements that impacted in this Q1 2014?

Alex Bolis

Thanks Stefano. Piergiorgio will take your question.

Piergiorgio Peluso

So thanks for the call. If I understood correctly, you were asking the evolution of the net debt compared to last year. Last year at the end of first quarter, the net financial debt was EUR 28.8 billion compared to an opening net financial position of EUR 20.3 billion. This year we had final net financial position of EUR 27.5 billion, compared with opening net financial position of EUR 23.8 billion.

I would say that more or less, the evolution of the trend, the dynamics of the first quarter is quite similar. Of course as you know in the first quarter, we had a significant impact of the networking capital compared to the last quarter of 2014, because in the last quarter of the year, we booked in terms of CapEx and OpEx, a significant amount which have a financial evolution in the first quarter of the year. So this explains the high absorption of networking capital in the first quarter.

Then, of course you should consider that in the first quarter of this year, we are consolidating Telecom Argentina in the net discontinued operations. And compared to last year, you are able to include the foreign exchange aspect of the pesos, which explains in the region of EUR 110 million, EUR 120 million of the increase of net financial position compared to the end of 2013.

So I would say that in principal, without considering the seasonal effect of the first quarter, considering the effects of the foreign exchange in Argentina, the evolution is more or less the same. And we expect also for the rest of the year to have an evolution and a dynamic which is in line with last year, of course considering, let’s say, the decrease in EBITDA. And if you consider – if you adjust, let’s say, in terms of EBITDA less CapEx, this year you can have a very similar dynamics to last year.

Stefano Lustig – Equita SIM

Yes, thank you very much. And in fact I was just willing to check if the nature of, let’s say, of the increase of the working capital was different from the one of last year, or if it is similar, do we have to expect a similar trend that you would get more or less?

Piergiorgio Peluso

No, as explained these are the similar trend, because if you compare the absorption in net working capital, this year of EUR 1.5 billion. It is more or less in line with last year, which was EUR 1.572 billion. So the difference between this year and last year was EUR 42 million, which is of course, I would say not material for our numbers.

Stefano Lustig – Equita SIM

Thank you very much.

Alex Bolis

Thanks, Stefano. Next question please.

Operator

Next question comes from Mr. Georgios Ierodiaconou of Citi. Mr. Ierodiaconou, please.

Georgios Ierodiaconou – Citi

Hello, and thank you for taking my question. I just wanted to ask a question around the personnel costs. You saw savings of around EUR 53 million this quarter versus last year. I believe as part of the two-year agreement you signed with the unions, we’re just entering the second year in the second quarter. Can you perhaps offer indication of what type of savings are you expecting starting from April 1, 2014 until the first quarter of next year? Thank you.

Marco Patuano

Yes. The EUR 53 million comes from the effect of the so-called solidarity program that entered into force in end of March last year. So it is something that we negotiated with the unions one year ago. And it is something that in the coming quarters would contribute less, given the fact that it entered into force in the second quarter last year. So this was ultimately the most important part of the effect.

Alex Bolis

Thanks Georgios. Moving on now to next question.

Operator

Next question comes from Mr. Mandeep Singh of Redburn. Mr. Singh, please.

Mandeep Singh – Redburn Partners

Hi, thank you. Maybe one and a half question if you don’t mind. I wanted to follow-up on the mobile service revenue. You said you see most of the improvement in Q3. Obviously given the summer campaign would have run part of the way into Q3, could you just give us a sense of when you see most of those – the price war anniversary out of the comparison? And the second question is, if you could just clarify on Argentina. I am not quite sure how – I thought this asset was sold in dollars and it was all fixed, and I just want to understand why there is a negative debt impact from the Argentinean peso, if you can just clarify please?

Alex Bolis

Thank you, Mandeep, for the one and a half questions. Let’s make it two. So the first one will be taken by Marco and the second one on Argentina by Piergiorgio. Thanks.

Marco Patuano

Yes, mobile, you’re absolutely right. The Q3 was the quarter with the maximum effect of the repositioning the price war. If you remember last year, we had what was called TIM Special. It was priced EUR 10. And it was 400 minutes, 400 SMS, and two giga. Today, the same quantity stands for something between EUR 15 and EUR 19 depending if you are specific segment or the overall customer, and it does not include two giga. It includes one giga. And it’s going to be moved down to 0.5 giga progressively.

So you’re absolutely right. In Q3, there will be the effect with the promo price. And in Q4, there will be also the effect of the fact that several customers repositioned themselves. So Q3, Q4 will be more and more comparable. And Piergiorgio for the dollar.

Piergiorgio Peluso

Yes, thanks. As you know, we have signed an agreement to sell our Argentinean stake, and we are waiting for the authorization process from the Argentinean authorities. For the moment, we book Argentina in the discontinuing operations as provided by the IFRS Number 5, which is of course. So for the moment we have our Argentina in our numbers.

Of course in the profit and loss, you see the, let’s say, loss you see in the Argentinean business booked in the discontinuing operation, which is one line of the profit and loss. In the balance sheet in particular in the net financial position, our net financial position consider the positive net financial position of Argentina.

I was referring to the devaluation of the peso, because given that the devaluation of the pesos that we had in the first quarter of 2014, we had a significant impact of EUR 149 million. EUR 149 million is the increase of the net financial position of Argentina. Out of this EUR 149 million, we have EUR 110 million or EUR 120 million, don’t remember, related to the foreign exchange.

In the residual part up to EUR 149 million related to lower cash flow of Argentina, which means that today we have compared to last year, let’s say this kind of impact.

If we consider the current value of the sale price that we have already hedged in our position. In this case, we would cash-in in the region of EUR 600 million, which is related to the dollars priced hedged into Euro, and we will then consolidated net financial position positive of EUR 581 million, which is the net financial position positive of Argentina, which means that, if we had the closing as at the end of March 2013, we would have a net financial positive related to the difference between the cash-in and net financial position.

Of course, this is just a simulation because we are waiting for the authorization. I don’t know if I have been able to explain you the question.

Mandeep Singh – Redburn Partners

Okay. Thank you very much.

Piergiorgio Peluso

Thank you.

Alex Bolis

Thank you, Mandeep. Let’s move on now to the next one, please.

Operator

Next question comes from Mr. Justin Funnell of Credit Suisse. Mr. Funnell, please.

Justin Funnell – Credit Suisse

Thank you. Yes. I have sort of two related questions please. Just obviously you’ve been making progress during Q1 and getting marginal prices up, but obviously also the revenue trends got worse, particularly when you’re looking at customer spend. So I was just wondering if you could give a bit more detail on what was going on to drive that worsening, and you’re seeing more cannibalization of SMS, are you seeing more customer spending down, a bit more color on that process would be very helpful. Thank you. And then with your new prices, obviously it’s a bit coming especially higher now than the prices you’re offering back in July last year. Is now the timing to start to think about trying to increase the prices of those customers that signed up last summer? Can you back actually look at your back book customers to pay more now? Thank you.

Alex Bolis

So I understand, Justin, just repeating, it wasn’t totally clear. The first one was related to the trend, a little more color on the mobile service revenues, and the second one was about, how do we deal with the repricing of the customers that signed up last year to the very low value offers, low price offers that happened during the summer. Is that correct?

Justin Funnell – Credit Suisse

Yes. Can you actually increase the price? I mean obviously putting up prices to new customers, but what about your existing base. Can you start moving those prices up as well?

Alex Bolis

Yes. Okay, that’s very clear. Both questions to Marco.

Marco Patuano

Yes. The first question is – I tried to split the question in three parts – the answer in three parts. One is pure voice. So pure voice is – the level of bundles we are including in our customer base is growing. Now, more or less half of the customers in the mobile consumer and most of even more in the enterprise, we are around 60% in the enterprise segment have bundle.

Now what is clear now is that bundles with – the EUR 400 million that was considered almost the low-end entry level satisfies most of the customer base. It satisfy ultimately something like something north of 80% of the customer base.

Now what are we doing? What we are doing is we are increasing the toll of these entry-level, both in the fixed and in the mobile. And what we try is to avoid as most as we can to create special offers for MNP. So mobile number portability has to be to not incentivate, both in the small medium enterprises and in the consumer.

So what we do expect is that these very heavy, more than 20% effect that you can see on Slide on Page 5, should improve starting from Q3. Of course, what we are doing is we are working much more consciously in this area in order to avoid to have entry level data so cheap. Just to give you an idea, 100 minutes that have been launched by one of our competitors simply had zero effect in the market. We didn’t even realized that the offer was there.

And the same for what we did in the past for the young segment. For the young segment, we are not including any more massive quantity of voice and we are trying to keep under control data.

So let’s move on the value-added services. Value-added services, we have mobile broadband that is still doing fairly well, both in the consumer and in the corporate segment.

LTE has been understood by the corporate segment first, but the willingness of the corporate segment to recognize an important price premium to 4G was relatively low, but it was so important to avoid the need of using the price for the 4G for the enterprise consumers.

The consumers. Consumers, we tried to sell 4G at the premium price just for the faster speed. And it was not really taking up better. It was taking up, but not completely letting us taking profit of the huge advantage in the network realization we have. Consider we have 30 percentage point more coverage than Vodafone and the quantity of coverage of the other two players is much lower than the second player.

But what we realized once we started to have a significant number of customers was that naturally customers with 4G tended to have a data usage that is from 2x to 3x more than the 3G. So this is the reason why we are giving the 4G. We’re using the 4G as a booster of our competitive offer.

The growth is still double-digit, is well double-digit, and both in the consumer and in the corporate segment. Yes, we had some acceleration in the SMS erosion in Q1, but honestly it wasn’t that important in terms of extrapolating a trend. What is sure is that also SMS have to be included in the bundle. And once the SMS is included in the bundle, what we see is that the customer uses both, the SMS and the over-the-top. So this is extremely important.

Is it possible to intervene in prices that have been offered one year ago to customers at EUR 10? From a legal standpoint, the answer is, theoretically speaking, yes. You have to give the customer the possibility to resign from the contract with zero cost of exit, but it’s theoretically speaking possible.

Now of course this has to be considered last resort, because the impact on the brand, the trustability, the credibility we’re working on is of course dramatic. Now we made a lot of analysis on the dynamic of our brand perception and our brand positioning. We changed completely our communication strategy. It is working. Now we are again growing in terms of brand awareness. And this is something we are now, of course, based on our figures we are number one. And this is something we have to keep in mind, because it’s extremely important. Hope, Justin, I gave you the information you were willing to receive.

Justin Funnell – Credit Suisse

And so that implies, Marco, I guess you’re not ready to make that move on the back book yet, but…

Alex Bolis

Yes, Justin, one point that we also should remember that those summer promos were never opened to our customer base, but as you remember just available for port-ins and new lines. So vis-à-vis other players that opened the market to all their customer base, the effect obviously is a little bit lower and thus the need to reprice is lower.

Marco Patuano

Yes. Just to give you number we never disclosed, but I think it’s worth to give right now. The number of customers who bought one year ago, the EUR 10 special price is slightly below one million. So of course it’s material in terms of the number of the total customer base, but since we closed it fairly soon in the fall, and since we did not give the possibility to the customer base to adopt this offer, the repositioning effect has been limited to one million customer, which was really a blooding toll to make the competition come to an end, but you know, we discussed more than once.

If we didn’t do such a disruptive move, it was a month-after-month bleed of EUR 0.50, EUR 1, EUR 0.75 and more quantity, more minutes, more giga and it was a never ending story. So it was tougher. We are – all the market is paying the bill. But after September, we built up – the whole industry built up a movement towards a new more safe price environment. And now what we want to do is not competing anymore. I don’t want to compete anymore on prices. I want to compete on the quality. And as I said in my speech, on the beauty of 4G.

Alex Bolis

Thank you very much, Justin. Next question please.

Operator

Next question comes from Ms. Micaela Ferruta of Intermonte. Ms. Ferruta, please.

Micaela Ferruta – Intermonte

Yes, thank you. Also one and a half question, if I may. Very quickly an update on the process and timing of the tower sale in Italy, and whether you confirm will be around the EUR 2 billion cash in from disposals which you announced in November, and which was included in Italy and Brazil and here in media? Thank you.

Alex Bolis

Yes, of course that was our overall figure. Micaela, I’ll pass it onto Piergiorgio to comment.

Piergiorgio Peluso

Yes, hi. We confirm of course these numbers. We have commented the presentation, the TI Media project and the Tim Brasil projects, since these two are already in, let’s say, in execution phase. TI Media as discussed, we are waiting for the authorization from AGCOM, and we are already defined advisors and we are preparing the information memorandum. So we have committed to complete the sale process before year-end.

And on TIM Brasil, also in this case, we have chosen the advisors and we are in the first phase of the sale process. And on the tower in Italy, we are – the project is confirmed. We are defining few items before launching the project in the market. That’s why we are not commented, because we have not in marketing phase right now.

Micaela Ferruta – Intermonte

But if field sites for the second half of the year, I mean the processes are within the second half of the year?

Piergiorgio Peluso

Yes.

Micaela Ferruta – Intermonte

Thank you.

Alex Bolis

Thank you very much, Micaela. Let’s move to the next question please.

Operator

Next question comes from Mr. Paul Marsch of Berenberg. Mr. Marsch, please.

Paul Marsch – Berenberg

Hi, thank you for taking the question. Apologies for bringing it back to the domestic mobile service revenue trend after you’ve explained a lot of detail and outlook. I am still not sure I really understand what happened with some of the trends in the first quarter. And particularly I think back in February, you even mentioned then that new customers’ entry level ARPU was actually accretive. So I suppose I am struggling to understand why if that was the case even in the first quarter? Why did we see things like outgoing voice revenues falling 25%, 3 percentage points worse than in Q4, when voice usage was increasing, so cost of minute must have fall already quite significant as well. I mean is this dilution from TIM Smart SIMs? What proportion is – maybe the question is, what proportion of your price additions on mobile are onto the TIM Smart offer?

Marco Patuano

Well, first of all I heard talking about 25%. It’s not 25%. For the voice, it’s 22%. It’s not worsening. It’s stabilized. So two different answer. So your question has two part. One is, why if the entry level is improving, why we don’t see the effects? Well, the gross adds are much less than one year ago.

Now, the contribution from the gross adds is fairly low. And I would say, thanks god, because in such a saturated market, every time we stimulate the customer to move around, to shop around, they always find something that can satisfy their need at the lower price. So the fact that we have reduced the total number of gross adds, and in particular, the total number of MNP is extremely sound.

So what we need to consider is that the contribution of this phenomena to an improvement was fairly limited. What was extremely important? What was important is the pace we set for the customer based dynamic. Now the customer based dynamic is improving. It’s improving quite significantly in the year-on-year comparison. So this is extremely safe.

And the second part is, are we sure that Smart is not contributing to a reduction in terms of price and revenue dilution? Well, we did – as you can easily imagine, we did a lot of analysis since we have learnt the lesson that other players, other operators had once they launched the convergent offer.

So the first is what’s the percentage of customers that are new customers in terms of adoption of the offer? And it is more or less half of the customers. Today, keep in mind that more or less 100,000 customers got the offer. So the total number of Smart customers is more or less now 12,000 a week, 13,000 a week, and we reached a total number of about 100,000.

So more than half of – or let me say, around half of the customer who adopt it from the fixed side are new. And of course, the fact that they are also brand new on the mobile side is less true. So we have a portion of customers who are new, both on the fixed and the mobile, which is a minority. Then we have a majority of customers which are new on the fixed, and were already customers of TIM in the mobile, but some of them are adding another SIM card to their portfolio, to their usage. And then there are customers who were already customers of Telecom Italia/TIM and which had tried to optimize their spending or just having a more simple offer to use.

Well, all in all, after the launch we are monitoring on a weekly basis and it is quite sound the benefit, because in terms of value revenue creation from the Smart, we are having positive effect and it’s extremely early – it’s too early to talk about churn, but for the time being, the churn is simply not existent, but we are having about few weeks from the launch, so it will be quite peculiar if we had some churn. Hope I answered your question.

Paul Marsch – Berenberg

Thank you very much.

Alex Bolis

And thank you, Paul. Next question please.

Operator

Next question comes from Mr. Luigi Minerva of HSBC. Mr. Minerva, please.

Luigi Minerva – HSBC

Yes, good morning. In the previous call, you mentioned your intentions into the something similar to be continuous model in Italy. So I just wanted an update on this, and whether you are seeing some traction from alternative players or some appetite for an multiyear wholesale fiber agreement on commercial terms? Thank you.

Marco Patuano

Yes. We signed a first agreement with an operator on contingent model base, which is not a secret. It’s Vodafone. So for the time being, we selected some specific areas with some specific quantities we have agreed. Let me say, the underlying theoretical model is quite in line with the one you can see in Germany. And of course it is open to replicability to all the others. Our wholesale responsible is offering also to other fixed operators in case they want to adopt it.

Of course we are also – we would be also pleased to increase the quantities that we have already negotiated with the first operator, in case they decided to furtherly boost on these fiber offer. And so we started with one, yes. And of course now also the alternative operators have to learn if it is convenient for them to play this game or if they want to create their own infrastructure.

If you ask me, of course I am in favor of using the contingent model because it can boost the adoption rate of the fiber. Ultimately what is extremely important is to increase the adoption rate of the fiber. It’s more than obvious that I prefer to do through my retail offer, but I think that what we need to create is a word of mouth. It’s quite interesting.

When you see that the fiber offers starts to take up in the neighborhood, once the word of mouth starts, you have very fast increase in the total number of lines that are asked to be activated in this area. So I think that for the relevance of the whole project, also having some OLOs starting selling fiber can be safe for the payback of the whole project.

Luigi Minerva – HSBC

So just wondering, is AGCOM supporting your approach or even implicitly endorsing it?

Marco Patuano

No, we clearly discussed and we clearly gave to AGCOM all the details of this offer, because it’s important of course maximum transparency and it did not need a formal approval, but it has been presented well in advance of signing the contract and we didn’t get any comment also, because as you can easily imagine, this model reduce the cost of the accesses. So the authority ultimately is just pleased that we do it. Of course what they ask is that we replicate with anybody who ask for it, which is of course the case.

Alex Bolis

Thank you, Luigi. Next question please.

Operator

Next question comes from Mr. Giles Thorne of Jefferies. Mr. Thorne, please.

Giles Thorne – Jefferies

Thank you. I had one and a half question too please on the Sky Italia deal, and a very brief follow-up on previous question around back to repricing. On the Sky Italia deal, I just wanted to touch around exclusivity in pricing. You used the word exclusive in your slide. It’s not clear if the whole offer is exclusive or just elements. You’ve obviously has faster than the market with the Sky distribution deal for some time. So are there any tense in your current deal that will prohibit Sky from going to Vodafone or to Wind? And on pricing, if we look at what FastWeb is doing obviously offering quite a steep discount at the moment. I appreciate you’re not going to launch until the beginning of next year, but if you needed to discount, how would that discounting mechanism actually be shared between yourselves and Sky? And the follow-up question was…

Alex Bolis

I guess the follow-up is we’ll leave for later. There is already two if you don’t mind. Can we start answering? Then maybe Marco will cover also what you have in your follow-up. I think the second part was on the possibility of discounting versus the current Sky price. Is that correct?

Giles Thorne – Jefferies

Correct.

Alex Bolis

Okay, thanks.

Marco Patuano

Okay. Well, Sky today has already in place an agreement with another operator namely with FastWeb. So it was not possible to have in writing an exclusivity. And since we could not get an exclusivity on their side, it would have been quite asymmetric if we gave an exclusivity on our side.

So what prevents Sky from making agreements with other players? Theoretically speaking, they can do it of course, since it’s not prohibited by the contract, but let me say that we are working really in good faith with them. And I think that what is clear to the two of us is that the level of synergies that we can have acting together, given the infrastructure we have or we are building, given the customer base we have, given the attitude we are having on designing new products and processes is something that make the two companies quite close each other.

And then deciding to have an integration of billing, of carrying, of processing is not something that you can underestimate in terms of replicability and in terms of capability to manage more than one at the same time. So I think that there is something that is what is prohibited or what is allowed by the contractor, but I think that then there is the reality. The reality is what we wanted to do working together.

So I think that our agreement is more than just a resale agreement. It’s really something we are creating in order to put together the best of our competencies so the best of the connectivity, with the best of the content and a differential CRM that we have.

In terms of discounting on prices. Well, the idea is, number one, touch base with this part of the customer base that today can’t be served with a dish. As you can easily imagine in downtown areas and especially in historically downtown areas in Italy is plenty of households that can’t be served with a dish. A first estimation of customer who really want pay services, PayTV services that can’t be served with the satellite infrastructure accounts for more than – around 1.5 million, which is an important number, really an important number.

So before we start talking about discounts, I think that what we need to talk is how big is the market we were not able to serve yesterday, and what is the potential market that we can address, also moving people to PayTV without working on the roof of the house.

Then you had Alex cut you, but I think that if you want to cut Alex’s lipping one second. So if you want to make your question.

Alex Bolis

Okay, follow-up now.

Giles Thorne – Jefferies

Okay, then. So I can ask it very quickly. It’s on the one million subscribers that took the summer special last year. We can see that you pushed 4G prices – 4G on a trial basis all the way down into your tariffs. It would be interesting to hear in the six weeks for those who have been in the market, how many of those one million subs have been successfully repriced upwards?

Piergiorgio Peluso

So you’re talking again about the summer offers that Marco was referring to TIM Special.

Marco Patuano

No, I think he was mentioning that some of the 4G customer got the 4G as a trial phase and then it had to be moved to a pay offer. Is it correct? This was the question.

Giles Thorne – Jefferies

No, it’s not. The question is you have a got a back book of very low priced subs who participated in the summer special last year. And you were earlier asked about how you could go about repricing those upwards. It seems to me that the 4G offers, the 4G capability you have and the fact that if I look at your websites, you pushed the 4G right down into the bottom end of your tariffs, is a tool for repricing the summer specials upwards. And my question is, have you had any success in the six weeks or so that the 4G price has been in the market and doing exactly that?

Alex Bolis

Okay, Luca Rossetto is going to deal with this question, Head of Consumer.

Luca Rossetto

Yes. In the sense that early signs are clear, the way on backward repricing has been disclosed before, there are some limitations. What we do and we strive to succeed to do is to put in the market extra benefits. And hence make people having a EUR 10 3G tariff move into a EUR 19 4G tariff. The young that subscribed the EUR 10 are particularly keen to use very innovative digital services, as younger people are overall in the world. So early signs are encouraging on that, but still six weeks is too early to tell also because a substantial part of those subscribing very low and cheap tariff have not switched their 3G smartphone into a 4G smartphone. It’s going to take time to substitute the device set in the market.

Alex Bolis

But you have pointed to a right direction, so thanks very much for your follow-on question. Move onto next one please.

Operator

Next question comes from Mr. James Ratzer of New Street Research. Mr. Ratzer, please.

James Ratzer – New Street Research

Yes, good afternoon. I had quick question please, which was just regarding the guidance statements you’ve given. At the moment your guidance is of three-year outlook. I mean back in 2013, you felt confident enough then to give a one year guidance outlook for 2013. Now we are on a 4.5 month through the year. I was wondering if you could give any more specific guidance statements for this year, particularly on your domestic business, especially was down 8% revenues and EBITDA in Q1. What guidance could you give us for the full year decline in 2014? Thank you.

Alex Bolis

Yes. Well, basically when we work on our plan, we were very careful in indicating a three-year horizon. As you will understand, there is a whole process of innovative investments of business transformation which is going on. So this is the precise reason why we did not include a 2014 projection guidance at all.

We obviously are speaking about progression. We are talking about transformation in our offers, which are accretive, KPI side, ARPU side. On the fixed of course, we are going to benefit of – as Marco was referring of this unique opportunity of the lack of cable operators in Italy, but this is why we’ve always said since the start, that’s a three-year project, it’s a three-year execution and so we are not aiming at any specific indication for the year.

However, consistency with the CAGR, which we were pointing out on our take-away slide is quite evidence. So we are referring to an important progression in mobile service revenues trends for the year, which we already have indicated in the last call. So from many points of view that we are saying are on track, confirm, but not elaborating on punctual years of 2014 versus 2015 or whatever. Does this answer your question?

James Ratzer – New Street Research

At the moment, mobile is roughly speaking about half the size of your fixed line business. Is the recovery in mobile you’re expecting in the second half of the year enough to offset the trends in wireline for an overall domestic improvement?

Alex Bolis

Marco, do you want to elaborate on this part?

Marco Patuano

Yes, you’re right when you say the mobile accounts for almost one-third of the revenues in the domestic side and two-thirds come from the fixed. If you see, we spent quite a lot of time talking about the dynamics of the mobile, because I perfectly understand that what the market wants to see is finally the progression of the improvement moving from two-digit to one-digit and from one-digit to a low-single-digit in the mobile, which is going to come is of course something that we are targeting it’s going to come.

The fixed has to be – it’s an analysis that have to be articulated much more, because we have customers with broadband where we are doing fairly well, and where as we were pointing out at the beginning, there is an increase in gross adds. There is an increase in net adds. And there is a good defense of the ARPU. And going forward, the fiber at full speed will be beneficial. New services will be built onto this infrastructure. So it’s a good story.

As everywhere around Europe, customers with fixed lines and without broadband are suffering, and we are not an exception. So we are losing customers. So it’s really plenty of actions that we are designing in order to tackle those customers who have not the broadband today. So that’s really the core of what we have to do Europe-wide all the operators in order to reduce the number of line losses.

And then we have the corporate segment. The corporate segment is clearly – once again, there are two trends that are particularly evident. One is the traffic erosion coming from VoIP, and this is something that is blocking technology, something simply that can be done. But on the other hand, what is important is to see that we are doing extremely well and extremely consistently in the ICT space.

The overall IT market in 2013 decreased about 5%. And we have been able to increase our revenues, and so our market share in the ICT and in the cloud, and especially in the cloud component. Today we are number one in cloud services. And it starts to be material, because we are not talking any more about a business that was few tens of millions. Now we are talking about something that is in obsolete number of three digits. So every time we say that it’s growing high-single-digit or mid-single-digit, we are referring to a number that today is well in excess of EUR 100 million.

So it’s extremely important. So clearly, you are right, we have to be – we are focusing very much today on the mobile, and it’s clearly probably what people want to see shorter term improving, but we are coming. All the signals are there, so we are coming.

Alex Bolis

Thanks very much for your question. Next one please.

Operator

Next question comes from Mr. Nuno Matias of Espirito Santo. Mr. Matias, please.

Nuno Matias – Espirito Santo

Hi, good afternoon. Thanks for the questions. And just a quick one. Can you expand on the dispute that you have with AGCOM regarding the local unbundling fees. Do you expect any decision in any time soon, and as such, it should favor you or in contrary, they would stick to their initial stance? Thank you.

Alex Bolis

The question was on the discussion with AGCOM on 2013 ULL and other copper wholesale prices. Was this correct?

Nuno Matias – Espirito Santo

Yes.

Marco Patuano

Okay. Let me figure out, sorry, the line was a little bit disturbed, so I understand that is our relation with AGCOM. So let me try to answer 360 degrees on AGCOM, so I can give you a clear picture.

2013 prices. What sort of prices? Chapter one is prices. So 2013 is still something where the discussion is ongoing. But the discussion is not anymore with AGCOM. The discussion now has been moved to the administrative court, because we asked – we appealed to the administrative court not to approve the prices for 2013, which is a process ongoing.

Of course what you see in our figures considers 100% of the new prices. So even in case, we are not successful in having a revision of the prices for 2013, you will not have a strange impact on 2013 or backwards.

2014-2016, the process is ongoing. The market analysis is open. And the reason why there had been such a delay is of course due to the delay we had in fixed in the 2013 price. Since that, we have to work on the common base of 2013 in order to elaborate to 2014-2016.

Of course, we are deeply involved in the discussion for 2014-2016. It’s a process. We offered to the authority to move the model from an equivalence of output to an equivalence of input. It has not been – it’s not clear yet if the authority will privilege the possibility of moving towards the equivalence of input or staying in a so-called reinforced equivalence of output. And what does the reinforce mean is something that is clearly under discussion in order to understand which kind of, let me say, better regulatory environment we can design acting on the system of equivalence.

Then enlarging a bit of scope of the discussion, there is not only the AGCOM, there is also the so-called AGCM, which is the antitrust. In 2013, the so-called A428 was ruled against us. We appealed. We had the first outcome of the appeal at administrative court, which was negative but today – yesterday, the Board of Directors decided to appeal to the Supreme Court what is called the Council of State which is the Supreme Court that will act at the second level. So the entire matter will be re-discussed.

Now what we have to decide and we are discussing with our lawyers is, if we will start paying the fine and then we will recover it in case the judgment is in our favor, or if we ask for a suspension of the payment. Of course the difference comes doing it or not doing it, it depends on the possibility of having to pay interests and accumulated extra payments on the original fine in case the judgment is unfavorable.

So our legal department is doing the evaluations. Even in case we decided to pay, it does not represent any acceptance or any self-declaration of negligence in the past area.

Since I didn’t get your question very well, I tried to answer very broadly. So I hope I gave you the answer you wanted.

Alex Bolis

Is this all right, Nuno. Are you still there?

Nuno Matias – Espirito Santo

Yes, very clear. Thank you.

Alex Bolis

Thanks. Next question please.

Operator

Next question comes from Mr. James Britton of Nomura. Mr. Britton, please.

James Britton – Nomura

Well, thanks very much. Can I ask about the change in accounting policy on subsidies? And this is multi-part question. So firstly, how much was the level of subsidy that you expensed in Q1? Is it more or less than the EUR 34 million last year? And secondly, if you removed EUR 200 million or so from domestic CapEx, but you haven’t changed your domestic guidance. Is this you’re trying to signal upgrade on CapEx? And then thirdly, just if you could just run through why the change in accounting now after you’ve capitalized the costs for so many years? Thanks.

Alex Bolis

Okay, James. So question number one and three are somewhat connected. I understand it’s on the accounting of the handset subsidy element. Piergiorgio will take this question. And you also had a broader question on CapEx. And then Marco will take this one.

Piergiorgio Peluso

Yes. In terms of the subsidy, we have considered this year to change our accounting policies. We have included in our OpEx all the subsidies related to the handset which account for EUR 25 million in first quarter of 2014.

In 2013, the same number was accounted for EUR 34 million, and they were capitalized. So the difference is between EUR 25 million and EUR 34 million. So this is in terms of numbers. This of course is applicable adjusted to the offers in 2014. So we have not changed our accounting policy for the offers for the previous years that there was accounting with remaining place, and of course will be depreciated along the life of the contract with the client. And this is applicable to all the offers that have a contractual arrangement for at least 24 months, so looking close for at least 24 months.

We have changed our accounting policy, because the new marketing scenario in our opinion was going in this direction we have decided to according change our accounting procedure as described in our annual report.

Alex Bolis

Over to Marco now on CapEx.

Marco Patuano

Yes. Well, as you can see on Page 13 of our presentation, our CapEx story does not imply – so the fact that we are excluding the subsidy does not imply that we will substitute the subsidy with other elements potentially affecting the free cash flow generation.

On the contrary, we are quite consistent in increasing innovative network investments. We did very well in the fixed especially. So I was talking with my guys of the network department because we are – on the one side, we are accelerating the rhythm of installation last week, which was the record high of cabinet we have been able to install. And we are even spending a little bit less than our original expectations, both for civil works. We are spending a bit less in civil works. Both for equipments, we are negotiating quite effectively the price of equipments.

In terms of LTE coverage, we’re fairly in line with our original plan.

Traditional services. Traditional services, the guys did really fantastic work. The result you see is the sum of the ton of tiny and small savings that we are doing here and there. But when you put everything together, you see that it becomes tens of millions. And it is extremely important what we are doing. Now we are planning something much more disruptive so the numbers you see right now are numbers coming from several small projects, but now we are talking about big ones.

And the big ones will be both on the transport layers where we have some platforms that are going to be phased out. Some important services like ATM. We’re going to close ATM and we are starting discussing – it’s the very beginning of talking about total replacement. Total replacement is something extremely important. We need to move from traditional switch to MSANs and what we are doing is extremely important.

Then you see almost the same stories in IT, but let me focus on the commercial and others. Not only we have cut the subsidy, but especially in the business segment, what we decided is also to reduce the rentals of handsets with almost zero margins.

So the EUR 33 million in commercial and others, most of this amount is less handsets that reading from another angle were very close to subsidy. Now, a lot of commercial efficiency in staffs that are not network-related and not related to our effectiveness on the commercial capacity to tackle the market.

Alex Bolis

Thanks very much. Let’s move on to the next one.

Operator

Next question comes from Mr. Jean-Francois Paren of Credit Agricole. Mr. Paren, please.

Jean-Francois Paren – Credit Agricole

Thank you very much. I wanted to ask quick question. You seem to keep pushing ahead 4G mobile with potentially fairly short time to market. On the other hand, with the fixed line upgrade will take some time. It seems looking for your numbers that there are some signs of cannibalization there. Aren’t you concerned that you may end up in such kind of trouble there? Thank you.

Alex Bolis

So we again didn’t understand, Francois. You’re not calling from the office, but I understood that you’re talking about 4G. 4G gradual improvement and you’re talking about fixed side upgrade which is implicit in our NGN rollout and related services. So you’re saying, is this slower than expected or you’re saying is this...

Jean-Francois Paren – Credit Agricole

The question was about potential cannibalization.

Marco Patuano

Exactly. So potential cannibalization from 4G. Yes, I heard kind of it. So it’s a bit difficult to understand your voice.

Well, when we see customers without fixed line or renouncing to their fixed line, one part of the question we are making ourself is how many customers are light users of broadband that satisfy their needs using the mobile infrastructure. And honestly, the difference – what makes the difference, I don’t think will be the technology, but the size of the entry level of the entry level package.

Today, if you consider 0.5 giga – well, 0.5 giga can satisfy your needs for some social networking, but very little video, like very, very little video. Maybe you can read the newspaper, but not that much on top of it.

So the answer to your question is how much video service we see in our network, which is exactly the effort we are doing in order to allow our customers to become video addicted on the network. So the more the customer uses video, the less a pure mobile infrastructure will be enough to satisfy their needs.

Today, the quantity of dongle we have in our network is a bit higher than other markets, which can mean to some extent that there are customers who satisfy their need using a dongle or using a tablet.

Now, what we see is very little demand of 4G dongles. We don’t see very much demand of 4G dongles. We did the summer convention a few days ago, and let me tell you that the demand for 4G dongles was extremely modest. And also for 4G tablet, the demand we got from our dealer was, let me say, in the lower part of the range of our expectations.

So today, I would say that I don’t see necessarily a cannibalization effect, but what – yes, we have to keep very much aware is how much of the user need is satisfied with mobile solutions. A typical circumstance can be second house like summer house or winter houses, which is a traditionally speaking the case in which people tend to use mobile infrastructure. So this is where our marketing department is working on.

Alex Bolis

Thank you very much. Now we move onto the final question please.

Operator

Last question for today comes from Mr. Fabrizio Marchesi of Pramerica., Mr. Marchesi, please.

Fabrizio Marchesi – Pramerica

Hello. Just one quick question. So domestic mobile revenue, that was down 14.4% year-over-year. Do you have the decline rates adjusted for mobile termination rate cuts?

Marco Patuano

Sorry, I didn’t switch the microphone on today. I am doing the same mistake more than once. It accounts more or less a couple of percentage points.

Fabrizio Marchesi – Pramerica

Okay. So 12.4% if you’re factoring the mobile termination rate cuts?

Alex Bolis

Give and take, yes. So thanks very much, ladies and gentlemen. And we appreciate your participation. Have a good afternoon.

Operator

Ladies and gentlemen, the conference is over. Thank you for your attention.

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Source: Telecom Italia's (TI) CEO Marco Patuano on Q1 2014 Results - Earnings Call Transcript

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