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Executives

Franco Bernabe – CEO

Marco Patuano – Head of Domestic Market Operations

Andrea Mangoni – Head Administration, Finance & Control

Analysts

Mandeep Singh – Berenberg

Mathieu Robilliard – Exane

Robin Bienenstock – Bernstein

James Britton – Nomura

Micaela Ferruta – Intermonte

Frederic Boulan – Morgan Stanley

Justin Funnell – Credit Suisse

Tim Boddy – Goldman Sachs

Telecom Italia S.p.A. (TIT) Q3 2010 Earnings Call Transcript November 4, 2010 11:30 AM ET

Operator

Good evening, ladies and gentlemen. Welcome to the presentation of Telecom Italia Group nine months 2010 results. Today’s conference call is hosted by Mr. Franco Bernabe, the Group’s CEO; Mr. Marco Patuano, Head of Domestic Market Operations.

We would like to inform you that this event is being recorded. And all participants will be in listen-only mode during the company’s presentation. After Telecom Italia’s remarks are completed, there will be a question-and-answer session.

Today, we have a simultaneous webcast that might be accessed through the company website, www.telecomitalia.com. The slide presentation may be downloaded from that website as well. Please feel free to view the slide show during the presentation – the conference call.

Now I’ll turn it over to Mr. Franco Bernabe.

Franco Bernabe

As you know, we increased our stake in Sofora with no cash disbursement. And this allows us to fully consolidate the economic results of Sofora Telecom Argentina starting from the fourth quarter of 2010.

The European Commission – and there’s a second very important point – endorsed the new costing model on the basis of the long run in incremental cost model of the Italian regulator to calculate the local loop unbundling monthly rental fee and required an assessment of some input parameters. We are confident that a forthcoming final decision is going to substantially confirm the local loop unbundling target price that was notified to the European Commission.

And now to spend a few words on the memorandum of understanding for the development of the ultra-broadband fiber-based infrastructure that will be underwritten by Telecom Italia and by other operators in the next few days. The agreement aims at creating a private-public partnership to invest in the development of a passive infrastructure in geographical areas, where the NGAN [ph] payback period would exceed the one which is acceptable for private initiatives. And therefore, the MOU is an opportunity to broaden the full tenant of Telecom Italia’s NGAN with shared investments in the public funds.

Finally, on October 29, Telecom Italia announced a commercial launch of its retail ultra-broadband offer for consumers and business customers in the city of Milan and Rome by December 2010 and in the cities of Catania, which will start approximately the same period and Torino, Venice, Naples, Genoa, and Bari, throughout the year 2011.

Moving to the results of the period, we kept our focus on the structural transformation of our company. This resulted in a further streamlining of our cost structure in all business units and in consistently reducing the slowdown wireline revenues while posting very positive commercial KPIs.

These results were, of course, partially overshadowed by the higher-than-expected and yet inevitable effects of certain promotional initiatives of the customer-based cannibalization – sorry about this – and of competition of the wireless business. We will fully elaborate on this in awhile.

Let me summarize the key financial achievements of the period. Group revenues were largely stable in reported terms, thanks to the good performance of our Brazilian subsidiary. EBITDA is in line with this year’s target, supported by the ongoing double-digit growth in the profitability of TIM Brazil and by the cash cost reduction program that keeps delivering as expected.

In Brazil, service revenues grew 5.9% year on year, improving when compared to the first half of the year. The overall outcome was a solid growth in group net income, namely a 57% increase year on year, about 15% on a normalized basis, excluding the effects of the headcount reduction provision that we took on the second quarter and the 2009 handset goodwill write down and other minor nonrecurring items.

I’d like to remind you that the positive one-off effect of EUR280 million that are caused by the Sofora transaction will be posted in the fourth quarter of this year. So we’ll have an extra positive effect on net profit at the end of the year.

Focus on financial discipline remains strong. We increased our net cash flow by EUR1.5 billion year on year. And we decreased our adjusted net debt by EUR1 billion since the end of 2009 to EUR33 billion, which is in line with our target.

Given the recent evolution of our group, I would like to give you an update on Latin America. As you know, Brazil and Argentina are two very attractive countries within the emerging markets and offer great opportunities to all those foreign companies operating in the country.

In the mobile business in particular, Brazil is the fourth market worldwide in terms of revenues. And it is growing double digits. In Argentina, although it’s a much smaller market, shows a healthy 14% growth. With the consolidation of the Telecom Argentina Group, as of the fourth quarter of this year, Telecom Italia international presence will be strengthened.

On a pro forma basis, the percentage of international mobile customers would have reached 67% in September 2010 vis-a-vis 55% in September 2009. In terms of financial contribution on a pro forma basis, the weight of revenues from Argentina and Brazil in September 2010 would have accounted for 30% of the consolidated revenues, almost double when compared to September 2009, while EBITDA generated outside Italy would have increased from 10% to 21%.

From an industrial standpoint, I reckon reaching the control, Telecom Argentina Group was a milestone for Telecom Italia, as we have been able to reverse a situation that was negatively affecting our interest. We are convinced about the value of these assets as it is performing very well in a country that benefits from the macroeconomic growth of the rest of Latin America and shows a growing telecommunications sector.

In the TLC market, mobile customers are growing 11% year on year. Broadband lines reached 3.8 million in the third quarter of 2010. And fixed line remains stable at 8.7 million.

In this overall environment, Telecom Argentina posted outstanding results in the first nine months of the year with consolidated revenues and EBITDA growing double digit year on year. Let me also underline that the top line has been growing at rates above 15% year on year since December 2008.

The growth was also confirmed at net income level with a plus 30% increase when compared to the same period of last year. The Group, the Telecom Argentina Group has a cash position, positive cash position of around EUR160 million as of September 30, showing continuous improvement when compared to the end of last year. If we consider the whole control chain from Telecom Argentina to Sofora, the net financial position amounts to EUR15 million.

As for the main KPIs, the market share in the mobile business reached 31.4% with Telecom Personal customers growing more than the market. And the performance was good also in the fixed and in the broadband businesses.

Let’s now move onto the Group results. Reported revenues are clearly benefiting from the appreciation of Brazilian real that is providing a further boost to TIM Brazil top line growth. This positive effect is more evident at reported EBITDA level, where the combination of the double-digit growth in real terms and the foreign exchange revaluation resulted in a 2.2% year-on-year growth, excluding the effects of the headcount reduction provision posted in the third quarter of this year.

On an organic basis, the ongoing efforts on OpEx reduction, down by almost EUR1 billion in the first nine months of the year allowed us to partially offset the pressure on the top line, leading to a very contained decline in EBITDA to approximately EUR8.7 billion.

Coming to the domestic business, in the wireline segment, we continue to improve the trend of line losses with a – sorry – with a 157,000 reduction in the quarter. In the broadband business, the incremental market share stands at 30.4% with a 4% year-on-year increase of TI broadband cost on base.

Moving to financials, these KPIs translated into an improved trend in wireline revenues that posted minus 3.3% year on year in the third quarter. In the mobile business, this quarter, we again reached positive net adds, allowing us to confirm the stabilization of our customer base and the percentage of calling customers at 85%.

A major push on our community and band offers coupled with a very aggressive summer campaign by some of our competitors led to the deterioration of the mobile revenues trend. Marco Patuano will fully elaborate on this in awhile, as the weak results we posted call for a total explanation. And I think that we will have time to discuss about this later.

As far as profitability is concerned, we reached an EBITDA of around EUR7.5 billion in the first nine months of the year. Analyzing in more detail the progress made in our efficiency program, out of a total domestic cash cost reduction worth EUR1.9 billion, savings stood at almost EUR700 billion vis-a-vis the EUR925 million as a full-year target.

In the first nine months, we mainly addressed OpEx savings, achieving 90% of the annual target. We have also successfully brought forward savings initially scheduled for future years. These actions would allow us to achieve approximately 120% of the full year 2010 – sorry – efficient target of the original plan.

This extra saving in OpEx will come mainly from personnel costs, while the effect of the recent agreement with the unions will become apparent in the fourth quarter, as we have recently signed the implementation agreement with the three unions.

Let’s now move to TIM Brazil, very solid performance, both in terms of financial and KPIs. In the first nine months of the year, the company customer base continued to grow faster than the market, posting an outstanding 49% incremental market share in September. The customer base increased together with higher usage, up 37% year on year, translated into a 6.1% year-on-year service revenues quote in the third quarter.

EBITDA posted a double-digit growth, contributing, as I said at the beginning, to the Group EBITDA stabilization. EBITDA margin grew 3.6 percentage points year on year, reaching 28.5%. The fact that the company succeeded in combining a 19% customer base growth with an 18% growth in EBITDA proves that the turnaround has been accomplished and that TIM Brazil has turned into a more innovative, dynamic, aggressive, and quality-oriented company.

I already talked about the sound growth in net income. I just want to point out that net income-to-sales ratio reached 9.1% with a 3.3 percentage points improvement when compared to 2009.

Turning to the Group financial performance, after the settlement of the Sparkle case, the operating free cash flow the first nine months of 2010 amounts to around EUR3.5 billion, broadly in line with last year’s performance on a normalized basis.

Net cash flow reached EUR964 million, increasing by EUR1.5 billion when compared to the same period of last year. This was also due to the net effect of the cash in of HanseNet and the settlement of the Sparkle case. This net cash flow of almost EUR1 billion allowed for a reduction of the adjusted net financial position that reached EUR33 billion as of September 30, 2010, from approximately EUR34 billion at the end of last year.

Net debt dynamics were affected by cash taxes for EUR700 million paid in July down by approximately EUR900 million when compared with the same period of last year, EUR1 billion dividend distribution in May, almost in line with 2009, and cash financial expenses slightly lower than last year.

We have already reached a debt reduction of EUR2.1 billion compared to September 2009. And we are therefore fully on track to achieve the 2010 deleveraging targets.

Based on the results presented today, we reaffirm our commitment to achieving our full-year 2010 EBITDA target and continue to deliver free cash flow generation, deleveraging, and shareholders’ remuneration.

Thank you very much for your attention. And excuse me for my bad health situation. But I will give the floor now to Marco Patuano, who is in a better shape than I am and will focus now on the domestic business.

Marco Patuano

Thank you, Franco. Let’s have a look at the results of this quarter. Also, in third quarter 2010, our KPIs were strong, both in the fixed and the mobile domestic business. In the fixed segment, leveraging quality of service and stronger focus on win-backs, we are still recording a reduction in line losses, while for our broadband upselling strategy towards flat offers, it keeps adding value to volume.

In the mobile segment, the fierce competition picture in this quarter resulted in a customer base growth lower than expected. On the other hand, customer loyalty and traffic indicators are performing in line with expectation, making us confident about the soundness of our strategy.

In terms of revenues, third quarter 2010 results can be interpreted in two different ways, an improvement in the fixed business, both voice access and broadband, and the mobile turnaround that is more complex than expected, also due to stronger competition on the market.

Looking at the customer base year on year, TIM recovered from minus 11% in first quarter to minus 6% in second quarter to minus 4% in third quarter. Still, given that our offering was welcomed by the market right from its launch, we thought we could fill the gap even more rapidly.

In third quarter 2010, Vodafone’s strong reaction convinced us not to boost the already overheated competitive scenario to avoid triggering a price war that could destroy value for the whole industry. Thus, we accelerated the repositioning process, topping our traditional summer promotions with our community offers, particularly TIMxTutti Italy.

The huge success of this initiative in terms of subscription led to an unforeseen cannibalization peak in August. Results in terms of profitability and cash costs keep showing the Group’s strong commitment on cash generation and our capability of maintaining costs under close control.

In terms of EBITDA, Q3 performance partly suffers from the top line slowdown. The already specified actions will allow us to keep costs in line with revenue expectation so as to meet our EBITDA 2010 target.

In terms of cash generation, the reduction of commercial CapEx together with our savings achieved through our network investments allowed us to offset the reduction of EBITDA versus last year, showing our free cash flow could remain stable, despite the unfavorable economic circumstances.

Let’s look to slide number four. Looking at the Q3 revenues by market segment and by technology, we can better understand the particularities of each business. The consumer segment is the only one which is still underperforming, mainly due to the situation of its mobile business, which counts for approximately 55% of the total consumer performance.

The business and top client segments instead posted a much more positive performance, which despite the slower macroeconomic recovery confirms the positive signals recorded in the previous quarter. In order to better appreciate the meaning of the results, we’re reminded fixed services contributed for approximately 70% of the total of those two segments.

If we analyze the market by technology, the wireline segment shows once again a very positive performance, which becomes even stronger when we focus on retail. In Q3, the decrease in revenues in mobile services are the most exclusively depends on the consumer segment. Anyway, we will further expand on this later.

Slide number six, in the fixed access business, in third quarter 2010, we have been able to further improve the already positive trend achieved in second quarter, losing only 157,000 lines in this period. We beat our best quarterly performance another time.

Results were very satisfactory across all customer segments, with consumer reporting 113 line losses and confirming our excellent performance in the business arena. Our market share on access remains approximately at 70%, stable and confirming our best-in-class positioning amongst European peers.

The customer satisfaction index keeps improving. And more specifically, it reflects our work on customer care and offerings. The churn rate improved both in voice and broadband access. Our customers like our new flat and bundled offer. And now more than 40% of our fixed customer base has opted for these services. Broadband offers confirm the trend toward flat offering.

A rapid glance at broadband confirms that all indicators are positive. Access grew. And the market share remains above 55%. ARPU grew 2.2%. And the combined effect of the customer base in ARPU resulted in a plus 5.1% growth in broadband revenues.

Focusing on ICT, the Italian market shrank by more than 6% in the first nine months of 2010, significantly worse than our regional expectations. Telecom Italia defended and slightly increased its market share, mainly focusing on services with higher profitability. As you can see, service revenues declined only 2.2% versus a minus 4.9% in total ICT revenues.

Last September, we launched first in Italy a new line of services fully based on cloud computing. And in less than two months, we signed contracts worth over EUR30 million revenues on a yearly basis.

Next slide shows the wireline results by type of services, voice, internet, data, and wholesale. Let’s skip to slide number 12. We’re not going to deeply analyze mobile service dynamics. If we look at the revenue trends by customer segment, it’s clear TIM is facing a two-tier momentum. The business top segment has already achieved a leveling off of its sales, while the consumer segment keeps experiencing the negative impact of the repositioning process.

Let’s briefly analyze the winning elements of the business segment to then move onto the consumer segment. In the business, customer-based dynamic, the customer base shows a positive trend, both in the low- and the high-end private segment and in the public segment, thanks to the extension of the constant [ph] contract.

Voice offering, the winning element in protecting our service revenues was the offering segmentation that allowed us to avoid a generalized price reduction, only limited to very high-end customers.

Lastly, data offering, we’re gradually broadening our customer base, using both big-screen and small-screen data offering. In the consumer segment, multiple evidences still confirm that our strategic approach is viable. However, financial results are suffering for the negative trend triggered by the acceleration in the customer base repositioning process.

Let me briefly summarize the milestone of the strategy we undertook over the past 12 months so we can better understand TIM consumer momentum and the meaning of the positive KPIs we had also in this quarter. Our main objectives are, first, the repositioning of customers, who due to price differential versus our competitors are still dissatisfied; second, the defense of high-value segments; and third, the strengthening of team leadership as a benchmark in Italian market.

To reach these objectives, our strategy essentially leverages on offerings, streamlining, and transparency, focusing on TIM brand awareness and customer satisfaction; broadening TIM communities to strengthen customer loyalty and at the same time to reposition price sensitive customers with an accretive effect on low-spending customers; attracting high-value customers to make them loyal with offerings coupled with a wide range of innovative services that’s encouraging high usage. As we shall see, fiercer competition and high cannibalization due to a faster repositioning process caused a temporary delay in the mobile turnaround.

Let’s focus on the customer base. For the second consecutive quarter, the customer base reversed its trend and resumed its growth with plus 240,000 net adds versus the end of the first quarter, which was the bottom of our curve. The year-on-year differential is decreasing, moving from minus 11% to minus 4%, though still being negative.

We initially forecast a faster recovery positively impacting our top line. In third quarter, competition got fiercer. And a further push on customer acquisition by TIM would have triggered a price war with negative effect, both in the medium and long term. This channel summer results suffer as a consequence, also considering that the restructuring process is still underway.

Communities, once again, the community strengthening is core to TIM strategy for specific customer segment since it develops a positive net present value in the medium and long term. The market reacted very positively to our proposition that’s shown by over 5 million customers of community and branded products at the end of September 2010.

In third quarter 2010, TIM choice was to accelerate and anticipate the repositioning of tariffs with the launch of the new TIMxTutti Italy promotion, which was highly successful. But the acceleration of the repositioning plan caused a cannibalization spike in Q3 with ARPU dilution higher than originally expected.

Keeping cannibalization under control is crucial. In fact, once faced with a spike, we promptly reshaped our offering, reconsidered our promotions model, strengthened our CMM approach. And already in September and October, we again gained control of the situation.

The price paid for cannibalization can be viewed as an investment of our customer base, whose return is guaranteed by the reduction in silent customers and by the increase in customer loyalty and usage, as it is shown in slide number 17. In other words, repositioned customers become more active and are more satisfied.

Slide number 18 shows that we have – that what we have done contributed to enhancing the customer satisfaction index by almost six points.

In 2010, we accelerated the repositioning of a relevant share of our customer base. And this allowed us to secure over 5 million customers, whose cost consciousness was significantly risky for us. Our customer base started growing again. But this does not mean that the process is complete. What is certain is that we have in front of us two well-defined paths.

For a share of our customer base, the repositioning can translate itself in an accretive exercise in terms of value by combining a greater satisfaction in terms of usage and customer service with a slight ARPU increase. We are talking about approximately 3 million customers.

For another group of customers, the repositioning will need to be managed with caution, reinforcing the CRM approach in analyzing the value profile of each customer cluster, finding the most appropriate offering to all of them. We’re talking about another 3 million customers.

We keep working on the development and growth of the mobile broadband market, both for small screen and big screens. We’re working on broadening our range of smart products. Our Christmas campaign will largely focus on this. In Q4, we expect to sell around 400,000 smart phones. Our flat offering for smart phone users launched just for summer is giving interesting results.

In any case, we confirm we want to keep our handset subsidy policy under control also for smart phones, having already trained the market and our distribution network in this direction. We keep recording a big screen market share of over 35%. That confirms our leadership position in a four-player market.

Domestic mobile revenues, in third quarter 2010, the service revenues decreased by 9.9%, worsening versus the second quarter 2010 trend, minus 7.5% year on year. And it is essentially due to the outgoing traffic revenues decrease by 12.7% year on year, as already anticipated. Thus, revenue slowdown, minus 2.7% year on year versus plus 2.8% year on year in second quarter 2010, mainly due to a strong push in Try & Buy in third quarter 2009 when the push on handsets still represented an acquisition lever for TIM.

Net of 2009 Try & Buy, the year-on-year value would be plus 2.9% also in the third quarter. The double-digit decline in the business received traffic, minus 11.7% year on year, is fully explained by the mobile termination rate reduction and by the customer base delta.

In the fourth quarter, we have to keep doing three things, grow our customer base, lock in our customer base, and push on VAS and mobile broadband. To grow our customer base, we need to leverage on acquisitions driven not only by price and promo but also by service, VAS, and equipment. Our Christmas campaign will be aimed at sustaining seasonality and pushing on elasticity.

Our available customers must be protected through dedicated bundle offers also leveraging on smart phones. On the other hand, CRM approach will be key to reposition our customers and community and bundle offer with an increase in ARPU.

On value-added services and mobile broadband, we have to protect our leadership, both in sales performance and in innovation. We announced the launch of the 21-meg product for business and high professionals. And we’re working on the smart phone portfolio in order to widen the range also in the mid-low end.

Finally, as anticipated by Mr. Bernabe, our commitment to free cash flow generation remains unchanged, notwithstanding the top line performance. This is shown by the trend in a free cash flow proxy, EBITDA minus CapEx, which was stabilized in the first nine months of 2010.

It has been a very long presentation. We decided not to comment on the slide about costs that you will find in the backup material. But in any case, I will be here to answer to all your questions if necessary. Thank you.

Franco Bernabe

Thank you very much. We’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question from Mr. Mandeep Singh from Berenberg. Mr. Singh, please?

Mandeep Singh – Berenberg

Thank you. The question I really have is on your specific guidance regarding fourth quarter. You’ve previously said that mobile service revenues will inflect at some stage during the fourth quarter. I was just wondering, in light of today’s results, whether you’re happy to repeat that guidance.

Franco Bernabe

Well, let me say that the – what comes out of the presentation very clearly is the fact that the time that is needed to reverse the trend in – mostly in domestic mobile is longer than expected but, however, considers that 70% of the Group is on – the domestic revenues are in the fixed line business. And then there is an expanding portion of the international group.

So I would be happy to say that we are – at the Group level, we are – I think we are quite confident that basically the 2010 – 2012 forecast can be confirmed. We do not envisage any meaningful deviation from our Group targets. But certainly not the domestic in general but specifically the mobile will be more complicated than we thought at the beginning.

But overall, I’m confident. I mean, I think that we know exactly what happened. We know exactly what the problems are. Probably, we have accelerated, as Marco Patuano has said, too much the process of migrating the customer base from the older profiles to the new profiles. There may have been mistakes in the execution. But the strategy is the right strategy. The timing is longer also because in the meantime I think that the macroeconomic environment has not helped a lot.

So I think that overall I’m fairly confident for the perspective of the Group as a whole. I think that we have a tougher job on the consumer domestic mobile sector. But as Marco pointed out very specifically, we are seeing signs of recovery in the business sector, in the mobile business sector, and in the mobile top customer sector. So it’s basically one segment of the domestic market that is affected by this and we are fairly confident that at some point we’ll fix.

Now I think that it is not very useful to say whether this will be fixed in one month or in six months. But we are on the right track. We are fixing the problem. And at some point, it will turn around. I don’t know if Marco has something to add on this.

Marco Patuano

Market share is a tradeoff between what you want to put on the BBA level and what you decide – how much you decide to be aggressive. The market has shown the significant overheating elements during the summer. And we and I personally consider the total value of the market as something that we need to protect, we need to depend. And so I think that the concept of accepting a delay instead of heating the market, the whole market is safe in the midterm, in the long term for the whole industry.

Mandeep Singh – Berenberg

Thank you.

Franco Bernabe

Next question, please?

Operator

Next question from Mr. Mathieu Robilliard from Exane. Mr. Robilliard, please?

Mathieu Robilliard – Exane

Yes, good afternoon. A few questions, you highlighted that market share had to be considered in light of costs and expenses and therefore EBITDA. What would you say is the priority for Q4? Is it absolutely maintaining the EBITDA? Or are you ready to make some sacrifices so that the top line recovers a bit because it does seem that there is a bit of a link between the fact that you keep cutting marketing expenses and on the other hand the mobile revenue doesn’t improve. So that’s the first question. What’s the priority?

Second, just to clarify, you mentioned that part of the disappointment comes from excess cannibalization. You also mentioned that competition has been a bit tougher than expected. Would you qualify competition as irrational at this stage? And are you factoring that as something that can continue into Q4 and into 2011? Thank you.

Franco Bernabe

Marco, do you want to answer to this, or –?

Marco Patuano

Yes, of course.

Franco Bernabe

But I will –

Marco Patuano

Market share, I think that we said more than once that our commitment on the free cash flow is there. And we will protect our market share. And we will protect our free cash flow generation. So if gaining more market share means a sacrifice in terms of free cash flow generation, I think it’s safer to protect the whole market.

Cannibalization, we decided to push. And we understand the peer message. Every time you push, you lose control on your CRM approach. And you tended to address an offer to a widened number of customers. And you have an uncontrolled effect of cannibalization. This can be put under control. And this is what we did in September and October. We have taken again a CRM approach. And I think that it has been a spike September, October demonstrated.

Mathieu Robilliard – Exane

And with regard to competition, I mean, do you believe that competition will maintain its current aggressiveness? I mean, is that something – a risk that you’re factoring in? Or are you hoping that they become a bit more rational, as you seem to be?

Franco Bernabe

I think we will see more rational competition in the next few months.

Mathieu Robilliard – Exane

Thank you very much.

Franco Bernabe

You’re welcome. Next question, please?

Operator

Next question from Ms. Robin Bienenstock from Bernstein. Ms. Bienenstock, please?

Robin Bienenstock – Bernstein

Yes, thanks very much. I’ve got two questions if I may. The first is for Mr. Bernabe. I’m just wondering if you can tell me whether or not you’re happy with the shape and population of your organization right now in terms of the management team. The second question is that you’re saying in terms of wireless that you want customer growth but that you don’t want it through subsidy, promotions, or price. And I’m kind of wondering how that’s going to work.

And then my third question is can you tell me specifically why it is that you’re optimistic about unbundling regulation? Thanks very much.

Franco Bernabe

You’re welcome. First of all, on the management team, of course, I think that if we’re talking about the management team as a whole, I’m very happy. I think we have a very strong and motivated team. Marco Patuano is doing a good job and is following the path that we decided a couple of years ago, one year and a half ago. And I think that we will be getting to exactly to where we want to be.

So I’m – I have no problems with the management team as a whole. Probably there can be adjustments at some levels, but nothing that changes our strategy. The second question was on customer growth.

Robin Bienenstock – Bernstein

Yes, given – you say you want customer growth, but without subsidy, promotions, or price.

Franco Bernabe

Marco, will you answer this?

Marco Patuano

Yes, the smart phones, what we say is that if you have, for instance, an EUR80 customer, it’s not a big problem if you invest some money on this customer. What is wronger is to invest in a more generalized way. So what we did is, first of all, we are working with the handset manufacturer in order to have smart phones also in the EUR100, EUR150 range in which there is no need of subsidy.

And second, we started at the beginning of this year selling the phones in installments that dramatically reduce the subsidy. And the perception of the customer is that almost every single device is accessible. So this is what we will do.

Franco Bernabe

On the unbundling of the local loop rates, the reason why I’m optimistic is very simple. I think that the model that we adopted and that especially the regulatory authority has adopted is the right one. We were asking for that model to – we have been asking for that model to be adopted for long period of time. And finally, it has been adopted. The calculations were based on the right parameters. The outcome of the calculations on the side of the regulatory authority were in line with our expectations.

On the European Union side, after an enormous pressure from our competitors, I must say that I think that our competitors have dedicated to this to blocking us on the increase of unbundling rates very, very aggressively in a battle that lasted almost six months.

But at the end of all this battle, the only thing that the European Union could say concerning this was that the maintenance fees that were calculated in the model were a little bit high because if the model was calculated on the long-term incremental cost of an efficient competitor or deficient (inaudible) in the market, it should have a little bit lower maintenance cost. And therefore, all the calculations should be revised, like in consideration to lower maintenance cost.

I think that this is really a marginal point. I don’t know if the regulatory authority will take it or not. But certainly, in our opinion, it should not take it. But if they take the point from the European Union, I think it cannot be but a very marginal – it cannot have but a very marginal impact.

Robin Bienenstock – Bernstein

Thank you.

Franco Bernabe

Thank you. Thank you. Next question, please?

Operator

Next question from Mr. James Britton from Nomura. Mr. Britton, please?

James Britton – Nomura

Thanks very much. I was just wondering whether you can clarify the level of smart phone penetration in your base. I don’t I think quite extrapolate it from slide 20. And also, can you just highlight what market share you think you have in the smart phone segment and also in your small screen segment in Italy?

And the second question I have on the Argentina impact. Can you just clarify how the credit agencies are likely to treat Argentina for the purposes of calculating your leverage ratios such as their adjusted net debt to EBITDA?

Franco Bernabe

The first question Marco will answer. The second question will be answered by Andrea Mangoni.

Marco Patuano

Yes, the penetration today of the smart phones on the consumer segment is approximately 10% let me say. Of course, it grows if we add the business and top segment in which it is significantly higher. So the total number is approximately 16%, 17%.

Of course, if you look at the number of phones that we’re selling, it is definitely unbalanced. We sell approximately – I would say between 35% and 40% of our sales are on smart phones. There is, of course, a positive impact. What we’re doing is we have specific target plans in order to let the smart phone be used. But what we’re doing is also we are preparing some specific products in order to have a sort of simplified internet access also to the ones who have older phones. The impact in the ARPU is quite significant.

James Britton – Nomura

And what’s your market share in – what’s your market share of the small screen segment in Italy?

Marco Patuano

Yes, in the sales, it’s approximately 20% in the sales of new equipment. So keeping in consideration that the free market counts approximately 50%, between 50% and 55%. And it is a percentage which is growing. So the handset factor is selling more and more directly on the market through the GDO.

James Britton – Nomura

Thanks.

Andrea Mangoni

About Argentina, at the end of this year, consolidating line by line the economic and financial results of Telecom Argentina, so on a pro forma basis, our net debt/EBITDA ratio will be 2.7.

James Britton – Nomura

And can you confirm that credit agencies are happy to give you full credit for all of Argentina’s EBITDA and obviously your net debt won’t change very much?

Andrea Mangoni

The current net financial position of Telecom Argentina is more or less zero because the company’s cash positive. So we’re able to consolidate just our EBITDA.

James Britton – Nomura

My question is does the credit agencies make any adjustment to that net debt to EBITDA on a reported basis to reflect the fact that you have a – I guess a 16% economic interest rather than a very high level of economic interest.

Andrea Mangoni

About the problem of the credit agencies, the – I don’t think the credit agencies can consolidate the impact of Telecom Argentina on our profit and loss account considering our current share holding fully diluted. So to have some kind of impact in financial terms, from the consolidation of Telecom Argentina, we will need to increase our current shareholding.

Franco Bernabe

Next question, please?

Operator

Next question from Ms. Micaela Ferruta from Intermonte. Ms. Ferruta, please?

Micaela Ferruta – Intermonte

Yes, good evening. Micaela Ferruta from Intermonte SIM. I have three questions if I may, one on mobile. I’d like to know if you have an idea of when do you expect the cannibalization effect that you mentioned to end, given the customer basis prepaid I guess. The impact was strong. But maybe it could also end quicker than all your customers have been on contract.

The second is the wireline is actually doing quite well and how much further you think wireline can improve the performance and then compensate for a weaker mobile top line.

And last question regards dividends. You – when you presented the business plan, you were actually talking about increasing shareholder remuneration. Is the slowdown or the delay in the turnaround of mobile impacting the dividend distribution policy and for 2010 in particular, given that – looking at the bottom line actually, the numbers look pretty good. Thank you.

Franco Bernabe

Okay. Marco will answer the first two questions. And I will answer the third.

Marco Patuano

Yes. Cannibalization, you are right. I think that we reached the lowest, so the highest amount of cannibalization also because the first customers who repositioned themselves are the ones who get the higher benefit from the repositioning. From now on, it’s a mix of two different factors. One is that we will reposition also customers that are accretive. And the good position itself will make them happier and have a positive impact on the financials.

And the second is that the last part is much smaller than before. We have approximately 3 million customers that we have to handle with care with a very delicate CRM approach. But there is another phenomenon that will help us is that several of the promotions that we launched during this year will expire at the end of this year. So 2011 will benefit progressively of the expiring of those promotions. That will help us. So on the first topic, you are right. We can significantly benefit in the next quarter.

Wireline, the exit speed of our wireline, especially the retail one is definitely better than what we expected in the recent past. It’s very interesting to have – we had the confirmation that the line losses are now – we can consider that the number is solid. So I think that 2011, the wireline can be really a positive surprise in our case. So I leave to Franco for the very last.

Franco Bernabe

Well, as Marco said, of course, the domestic mobile slowdown could entail total sales lower than the target. But on the one hand, it would be partially offset by a better expected wireline trend, by the excellent results in Brazil, expect positive surprises also from Argentina.

So the Group is larger than this obsessive attention, which is correct on the consumer mobile, leads everybody to think – I mean, the mobile itself is larger than consumer mobile and the big problem we had in the consumer mobile. Business mobile is growing well. It’s improving at least, despite all the nasty microeconomic environment that we are seeing.

Top mobile is doing better. So I mean, of course, I understand there’s something that attracts a great deal of attention that causes a great deal of concern. But I’m really astonished that seeing the fact that there are cousins of ours that had 9% lower EBITDA level and that are treated much better than we are treated by the market. So I mean, I’m really surprised.

And what I can say is that what will happen is that we will confirm our policies, the indications that we have given. I think that given the strong cash flow generation that we have – and you’ve seen it in the results, in the reduction of the debt. We will be proposing to the Board that, of course, will decide at the appropriate time. But we will propose to the Board a kind of policy that we have declared to the market.

So they – we want to maintain the dividend policy with a very, very cautious increase if the conditions – if the Board thinks – of course, it’s the Board’s responsibility – if the Board thinks that the conditions are there. But from my point of view, I think that we will be fixing this problem that we have. And the rest of the Group is doing very well.

Micaela Ferruta – Intermonte

Thanks.

Operator

Next question is from Mr. Frederic Boulan from Morgan Stanley. Mr. Boulan, please?

Frederic Boulan – Morgan Stanley

Good evening. Quick question on your domestic target, so if I understand what you just said, I guess you’re happy to confirm your guidance for domestic EBITDA for this year of EUR9.8 billion to EUR9.9 billion. And more importantly, can you comment on your guidance for 2012 of both EUR10 billion EBITDA for the domestic business? Is this something you’re considering? You think the market should focus on the EBITDA level? Is it something you’re happy to confirm today?

Franco Bernabe

Excuse me. I had – we confirm the 2010 target at the EBITDA level. And again, I think that it’s important to remind that the wireline business represents 70% of our total domestic market revenues. And the fixed segment shows an improving trend quarter on quarter. Telecom Italia’s main strategy is to focus on cost control. And to go back to one question that was posed I think back earlier, it is, well, we see probably an impact of lower costs, on lower revenues. I mean, you spend less. You invest less.

No, it’s not true. I mean, on the commercial side, we are not spending less. And we think that we will be investing what is necessary. We don’t think – I mean, what we did because normally – Marco said it before. You can trade EBITDA for revenues. We are not doing this. We maintain the EBITDA through an extraordinary effort in terms of cost cutting. We did an excellent job. And I think that the management team deserves all the praise for what has been done, an excellent job in terms of cost cutting and cost cutting that has not affected the commercial part of the business.

These cost cutting are doable. And of course, I mean, we’ve done a great deal of – I mean, we’ve gone a long way in cutting costs. And this cannot go on forever. That is for sure. I mean, it would be unreasonable to think so. But I think that – given the fact that I consider that we have structurally reduced and quite substantially reduced our breakeven point, as soon as we see the turnaround in the domestic revenues, I mean, the impact, the leverage that we have, the operating leverage that we have on profits will be greatly enhanced.

I mean, it’s a structural work that we’ve done. We have confidence that it’s permanent. And we are confident that the decision we have taken not to trade EBITDA for higher revenues is the right one to protect the company long term.

Of course, the – we had sacrificed revenues. I mean, what Marco explained before in terms of the positioning of our customers has cost us a lot in terms of revenues. But the customers now are much more valuable than the customers we had before.

Now I think I suggest to everybody to make the following exercise. What is the net present value of a customer in a situation where you have 35%, 36% of churn rates? And what is the net present value of a customer in a situation where you have 23% or 26% of churn rate?

Although at present the revenue stream this year is lower or even much lower, if you will, the net present value is much higher. And this is what we are looking at very intensely. Thank you very much.

Frederic Boulan – Morgan Stanley

Maybe if I can follow up on 2012, so right now, Q3 EBITDA was down 5% domestic. To reach EUR9.8 billion, you need around 1% growth in Q4. Then to reach EUR10 billion by 2012, you need another 1% growth in ‘11 and ‘12. So you’re happy you can grow EBITDA from Q4 2010 in the next two years. That’s what you’re telling us today.

Franco Bernabe

Well, my answer is that, yes, we confirm at the Group level the EBITDA for 2004 – or for 2012, sorry.

Frederic Boulan – Morgan Stanley

All right. Thank you.

Franco Bernabe

Thank you very much. Next question?

Operator

Next question from Mr. Justin Funnell from Credit Suisse. Mr. Funnell, please?

Justin Funnell – Credit Suisse

Thanks. Yes, just some of this is follow up really. I just wondered firstly what you thought was going on at the market level in domestic mobile. Do you think the overall market has worsened? And what does that all mean if that’s the case? I mean, can we really expect TI to do better than the market? The market’s down 4% or 5% this quarter year on year. Why is that going to get better next year?

If so, should we just really accept that you’re essentially minus 3%, minus 4% next year, that sort of idea and just rebase our expectations on that? In particular, your thoughts on how Vodafone is doing on the back of their own price move in Q3, that would be quite interesting.

Secondly, wonder if you can quantify this cannibalization a bit more. You gave us very helpfully in previous quarters some figures on the number of TIM per adds that were downshifting versus either upshift or win-backs. I think you hit 70% in Q2 that were upshift or win-back, just wondering if you had a figure for Q3 and also for August in particular just for us to understand a bit better what you’re talking about on cannibalization.

And just thirdly, given the Vodafone price change in the last month or so, we seem to be essentially copying your approach, perhaps trying to go for slightly lower-spend customers. Just wondered what your thoughts were now we’re well into November, well, first week, of how that has affected you since the launch of that offer by Vodafone. Thanks very much.

Franco Bernabe

Marco?

Marco Patuano

First of all, mobile domestic market, I think that the fact that the market – the business market is, despite the fact that there is an overall macroeconomic situation which is not very favorable, has slowed down the decrease. And keep in mind that we have a significant market share in the business segment. I think that the market can be healthy unless we overhit it too much.

Let me say that to some extent the fact that the team was mispositioned is something that we said a ton of times. And it was mandatory in our case to review our price policy. And in order to avoid, to do it in a very direct way, we decided to work with a complete different price scheme. So I skip for a second the question on the cannibalization. I will come back later.

And the fact that we were right was – has been demonstrated by the fact that Voda has decided to replicate quite exactly our offer. I think that the market perception on our offering was very evident. When we said that the customer satisfaction index improved, the demonstration is that it improved very much on the perception on the offering side. We have always been perceived good in terms of network quality but a little bit too expensive compared with the competitors. And today, we’re closing the gap versus our competitors. And this is good.

So what we will do, given the fact that Voda has replicated our strategy, nothing. We will not further – as I told you more than once, we decided not to insist overheating the market. Now we are stepping into the Christmas campaign. But the Christmas campaign is completely another story. It’s something that – in which you have to work on seasonality. You have to work on the fact that there are movements of the customer base for a specific moment.

Cannibalization, as you can see on page I think it was 15 or 16, we had clearly a spike in the cannibalization. We were very close to 30% of the customer adopting community or bundle offer, which were in a cannibalization situation. And 70% were not.

This spike means that the percentage was higher than 50%. And what is bad is that not only was it higher than 50%, but some high ARPU customers moved onto this offer. This is the reason why it is not only a matter of the percentage of the cannibalization but also the quality of this cannibalization that has been painful.

September, we completely changed, started from end of August I would say. We completely changed our approach back to a very, very disciplined CRM approach. Those extremely convenient offerings are offered mainly or primarily to customers whose effect is accretive and not cannibalizing.

Justin Funnell – Credit Suisse

Thanks. Any thoughts on the market itself, I mean, not split consumer business, but overall Italian mobile service revenue growth? Do you think it’s worsening or not really changing?

Marco Patuano

I don’t think it will worsen. It will worsen structurally. I think that 2010 has to be read in a very – it’s difficult to read 2010 on a standalone basis. 2009, we had a moment in which TIM was relatively out of the market in terms of price. And there has been some free-riding for a couple of our competitors.

Now 2010, TIM has decided not to leave any more market share to the competitors. So we decided to defend the customer base. As you see, we (inaudible) the trend in terms of customer base. And this, as I said at the beginning, when the battle ends onto the market share, it’s expensive. So the fact that, as Mr. Bernabe said – and I fully agree with him – we do expect a much more rational environment for the end of 2010 and for 2011.

Justin Funnell – Credit Suisse

Okay. Thanks very much.

Franco Bernabe

I think we have one more question.

Operator

Okay. Next question from Mr. Tim Boddy from Goldman Sachs. Mr. Boddy, please?

Tim Boddy – Goldman Sachs

Yes, thanks. I just wanted to focus back onto the fixed business. Obviously, the line loss trend’s improving this quarter. Could you just talk about the potential for those improvements to continue as we look into the next year and the potential drivers of that, whether there’s seasonality, et cetera?

And then just a quick question on the mobile business, it looks like the VAS is actually declining. Can you just articulate what’s happening with your – I guess the mix between data and other services in that mix and then whether with your EBITDA kind of rationality you’re happy to be a number two player in the market in Italy or whether it’s strategically critical that you stay in the number one spot? Thank you.

Franco Bernabe

Marco?

Marco Patuano

Fixed, I think that the good momentum in the fixed is very solid because it’s not only a matter of price or a matter – it’s a matter of the distinctive quality, a matter of having worked the very – having done a very solid work on all the elements.

Now there were some trends that are let me say written in the starts. The fact that fixed traffic will decline, it’s a matter of fact. But in any case, what we are doing, this is exactly the reason why we’re moving our customer base onto flat offers for the voice. This is exactly the reason why we’re defending the value of the access. The reason why we are investing so much on the broadband and working in order to increase the ARPU of the broadband, we’re launching service, new services on the broadband and so on, so forth.

So keep in mind that, as Franco said more than once, fixed services are 70% of our total revenues. So it’s extremely important to keep this positive momentum. And finally, I’m very satisfied of what we are doing on the ICT segment in which every single product we launch is really well received by the market. And let me say that we have a very unique position in Italy. We are really the only one who is very much integrated between network, net generation data centers, competence. And so this is something that the customers are really appreciating.

On the mobile, first of all, in order to read – maybe I was a little bit fast when I explained at the beginning. The minus 2.7%, if we want to compare apples with apples, has to be read as a plus 2.1%. Why? Because we have an approach which is called, which is a Try & Buy approach, in which we give customers who buy some products, namely smart phones, products or some credit that they can use in order to experiment the new mobile internet or also simply the SMS.

So this is something that is – makes part of those revenues to be those revenues, to be linked to the sale of handsets. Sorry if I’ve been a little bit long. But just to be clear that the performance of the third quarter has not been that bad.

This is – once again, this is demonstrated by the fact that if you look at the VAS quarter after quarter, the VAS quarter after quarter are still growing. So it has been very much stable. So one year ago, there was – there were fluctuation. And now it’s much more stable.

Now what’s happening? It’s happening that broadband is going up. It’s still going up quite well. SMS is still suffering, SMS, because it’s – there are two main influences. One is the customer base. Of course, a lower customer base means a lower number of people who sends handsets or sends SMS. And on the other side, there is the fact that a very good offer on the voice cannibalize also some SMS. But all in all, we are defending the traditional VAS services. And we’re still growing very well on the broadband mobile, especially the downward market.

Franco Bernabe

Well, thank you very much. And we’ll see you at the end of the year. Thank you. Bye, bye.

Operator

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

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