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Telecom Italia S.p.A. (NYSE:TI)

Q3 2011 Earnings Call

November 11, 2011 4:00 AM ET

Executives

Alex Pierre Bolis – Head, IR

Franco Bernabè – Chairman and CEO

Marco Patuano – Managing Director and COO

Stefano de Angelis – Group Controller

Analysts

Giovanni Montalti – Cheuvreux

JP Davids – Barclays Capital

Tim Boddy – Goldman Sachs

Mathieu Robilliard – BNP Paribas

Micaela Ferruta – Intermonte Sim

Nick Lyall – UBS

Nick Delfas – Morgan Stanley

Georgios Ierodiaconou – Citigroup London

Justin Funnell – Credit Suisse

Chris Alliott – RBS

James Britton – Nomura

Ottavio Adorisio – Société Générale

Alex Pierre Bolis

Good morning, ladies and gentlemen. This is Alex Bolis, Head of TI Investor Relations and I wish to welcome you to the Presentation of Telecom Italia Group Nine Months 2011 Results. Today’s conference call is hosted by Mr. Franco Bernabè, the Group Chairman and CEO, and by Mr. Marco Patuano, Chief Operating Officer.

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 will be happy to take your questions. You may follow us today via simultaneous webcast that may be accessed through the company’s website, www.telecomitalia.com, from which you can download or view our slide presentation during the conference call.

We would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation and 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 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 on file with United States Securities and Exchange Commission.

I’ll turn now over the conference to Mr. Franco Bernabè.

Franco Bernabè

Thank you, and good morning, ladies and gentlemen. Thanks for attending Telecom Italia nine months 2011 results conference call.

The third quarter of 2011 has been very important for our group. While delivering a domestic up trend and insuring a continued double-digit performance in our Latin American operations, we also undertook important initiatives to secure future growth opportunities in both markets.

In Brazil, we acquired AES Atimus and successfully completed a EUR700 million equivalent capital increase of TIM Participações aimed at funding future CapEx requirements. In Italy, we’ve reached the successful outcome in the LTE spectrum auction, the active bidding which characterized the process indicated the importance that all mobile players in Italy ascribe to LTE development.

The final allocation of the essential 800 megahertz frequencies were able to satisfy only three out of the four infrastructure mobile operators. Notwithstanding the current difficult in the euro context, our domestic commercial value-focused strategies met with resilient consumer demand in the summer months and paved the way to visible improvements for both top-line and profitability.

In Latin America, TIM Participações lines grew in this quarter by about 3.7 million, securing its position as the second mobile player in Brazil. In Argentina, our fixed operations performed well in broadband and our mobile operator, Personal, registered a positive result for us. Overall, after a period of robust growth in Latin America and of TIM market shares strengthening in Italy, we reached a total of about EUR130 million consolidated lines on September 30, 2011.

Now let’s focus on the key results for the Group for the last nine months. Reported Group revenues increased by 10.9% year-on-year including the positive results of Telecom Argentina. Organically, the Group top line grew by 1.9% year-on-year, featuring an acceleration in third quarter to 3.7% year-on-year. Reported Group EBITDA was up 8.3% year-on-year, while it was down 1% on an organic basis, reaching EUR9.23 billion in the nine months of 2011.

In the third quarter, year-on-year performance turned positive, as we continued to benefit from TIM Brazil and Telecom Argentina’s contribution, as well as from ongoing operational efficiency at domestic level.

We will focus later on net income performance. The nine-month Group operating free cash flow was up EUR684 million. That is equivalent to 17.8% year-on-year, excluding the Sparkle settlement of EUR389 million paid out in the third quarter of 2010. Net debt visibly decreased from year end 2010 by EUR1.52 billion. In the last quarter of 2011, we will book the cost of the spectrum auction for an amount of EUR1.2 billion.

During the fourth quarter, we will also have a cash-out of around EUR700 million for the AES Atimus acquisition, which as we already anticipated, will have no impact on the Group net financial position, due to the better overall Group performance and to the free float contribution of TIM Participações recent capital increase.

In this framework, given the third quarter results, I will further comment on – we can confirm our main targets for 2011, including the pre-auction debt target of EUR29.5 billion for the full year. Including the auction of course, the full debt target is now EUR30.7 billion.

Operating free cash flow generation in the first nine months of 2011 totaled EUR4.524 million. Net cash flow was EUR2.846 billion, a 45.3% increase compared with the same period of last year. This important nine month net cash generation continues to allow the group to strengthen the core business within its geographic footprint and to reduce debt without deviating from our shareholders remuneration policy.

Investing in our core business, of course, remains a priority. Year-to-date, CapEx totaled EUR3.19 billion, up 8.6% year-on-year. In the first nine months of 2011, we increased our economic interest in Telecom Argentina from 18.3% to 21.1%. This gradual approach does not and will not make us deviate from our deleveraging priorities. Also, thanks to divestments from non-core assets such as EtecSA or Loquendo. More recently, at the end of the quarter, we raised this percentage to 22.6% with a further disbursement of about EUR50 million.

On an organic basis, in the nine months of 2011, group revenues grew by 1.9% year-on-year, while EBITDA declined by 1% compared with the same period of last year. We reported a sound quarter-on-quarter improvement in both values, due to the contribution of both domestic and Latin American operations.

Now let us briefly review the break-up of the Group results by core markets. On slide number six, you see the main results by core markets, where contribution to our Group results from Brazil and Argentina in the nine months of 2011 account for approximately 35% of our revenues and 24% of our EBITDA, up 5.4 and 3.3 percentage point respectively compared to the same period of last year.

Let’s now comment on net income evolution. Following the goodwill write-down in the second quarter, the nine months 2011 post-minority Group net income was negative by EUR1.206 billion.

As you already know, the EUR3.182 billion write-down was a non-cash one-off item that does not, in any way, impact either our key targets nor our dividend policy, since at the end of September 2011, distributable capital reserves stood at about EUR10 billion. Before the write-down, the nine month post minorities net income was EUR1.976 billion. As you can see in the call-out, the third quarter net income is up 32.7% year-on-year.

Moving on to net debt, in line with our Group deleveraging goals, we delivered a nine month 2011 decrease of EUR1.52 billion, landing at EUR29.948 million. Moving to the right box of the slide, the slide number eight, you can appreciate how on a year-on-year basis, this represents a sound decline over EUR3 billion.

Moving to slide number nine, in order to keep a high safety buffer on our refinancing requirements during deleveraging and the current market difficulties, we made sure that our liquidity margin remained at about EUR13 billion as of September 30, 2011. This amount allows us to meet debt maturities well into 2014.

Even more importantly, Telecom Italia demonstrated its ability to access the debt capital market even during the current economic downturn, by successfully issuing a total of EUR1 billion bonds in October. As of September 30, 2011, the average cost of Telecom Italia debt remains almost stable at approximately 5.5%, and deleveraging will continue to be a key priority for the group.

Moving to the domestic business, as you see in slide 11, quarter-on-quarter results registered an improvement trend both in our wireline and in our mobile businesses. In the domestic wireline business in the third quarter, we registered our best results so far this year, reducing the year-on-year top line erosion by only 2.8%. This outcome was driven by a better trend in usage, following the pricing simplification introduced last July, and by an improved year-on-year result in international wholesale top line.

In the business data segment, ICT services continued displaying a high single-digit growth, partially offsetting the weak four months of traditional data. In the domestic mobile business, a sequential improvement was achieved in the top line. We are now at minus 6.5% compared to the third quarter of 2010, after TI mobile termination rate was reduced by 19.7% from July.

This is a significant progress from the previous quarters of 2011, also due to the interplay of consumer outgoing voice price stability and growing volumes, the increase in revenue trend on value-added services, driven by double-digit growth in browsing and the substantial increase of our customer base.

In this quarter, the EBITDA trend improved substantially from minus 4.8% in the second quarter to minus 2.5% on a yearly basis. In the first nine months of 2011, total EBITDA stood at EUR7.069 billion, with the margin that increased from 49.7% in the first months of 2010 to the current 50.1%.

In terms of key performance indicators, in the wireline business, we registered the positive impact of the fixed price and simplification implemented in July, coupled with a reduction in fixed-line accesses by 135,000 in this quarter, compared with 183,000 in the second quarter. In the mobile business, the customer base increased, reaching nearly 31.7 million lines. That is 3.4% year-on-year.

Now let’s take a quick look at the Latin American operations. On slide 13, we have a summary of Brazil. During the third quarter of 2011, Brazil further improved its very positive key metrics performance shown in the first half of 2011. Year-on-year revenues were up 18.9% compared to the third quarter 2010, driven by both services and handset sales.

EBITDA increased by 11% in the same period, totaling approximately EUR500 million in the quarter with a margin of 26.3%. In the month of September, our Brazilian operations reached 59.2 million lines, confirming the second position in the Brazilian mobile market.

In slide 15, we have a summary of Argentina. In the third quarter of 2011, Telecom Argentina confirmed its double-digit growth on top line and EBITDA. Revenues grew by 26% year-on-year, reaching EUR813 million, underpinned by its positive performance in the mobile business, where the customer base grew by 17.8 million. EBITDA reached EUR253 million in the last quarter, confirming a marginality of about 31%.

As you can see, this was indeed a busy quarter. Group operations reported sound results and important decisions were taken both domestically and in Latin America. Notably, success for the executing of capital increased in this macro-international context further confirms our confidence in our Brazilian operations.

But before asking Marco Patuano to review the important performance he delivered with his team in the domestic business last quarter, allow me to share with you our couple of comments on some effects of the current difficult economic environment we have witnessed in the last quarter on the telecom services segment in Italy.

On the consumers’ behavior front, I would like to highlight that Italian households are the least indebted, with a debt to disposable income ratio of 66% compared to a Eurozone average of 99% at mid 2011 among the G7 countries.

Furthermore, Italy does not have structural imbalances in the private sector. In particular, according to the quarterly national accounting data, household spending in telecom sector seems resilient. This appears to be borne out by our recent and current performance in the mobile consumer segment. On the other hand, the Italian business segment appears to be impacted by the financial crisis and is taking a more selective approach in spending.

And Marco will now tell you how our domestic operations are dealing constructively with this economic phase.

Marco, it’s your turn. Thanks for your attention.

Marco Patuano

Thank you, Franco. Good morning, ladies and gentlemen. Effectively, in the last quarter, our consumer segment has shown resilience in spending. In particular, on mobile, we registered an increased allocation of resources in our innovative offers, which compensated some bouncing off in traditional services.

In the business segment, macro environment is really challenging. In order to protect the overall ICT spending, we are accelerating the development of our cloud-based offers. In fact, this allows our clients to swap fixed capital allocation with the variable usage related cost and to reduce overall cash-outs, thanks to the use of our automation enabling infrastructure.

Helped by such approach, in third quarter 2011, our domestic operation delivered an improvement in its overall performance versus the previous quarters, following the path of our main targets for the full year.

Let me walk you through the main results that were achieved. Slide number three, please. Starting from mobile business, we posted a continued improvement in domestic mobile revenues. Notwithstanding an MTR cut of about 20% effective from July 1, mobile top-line was minus 6.5% year-on-year in the third quarter, while it was minus 7.6% in the second.

A significant customer base growth, with plus 419,000 incremental SIM cards versus second quarter 2011 and with more than 1 million SIM increase in one year, a substantial stabilization in outgoing prices since the beginning of 2011, with still a solid growth in terms of volumes, and the double digit growth in mobile browsing, also driven by our focus on smartphones as mobile internet enablers.

Looking now at the Wireline business. On core service revenues, we benefited from the monthly fee increase and pricing simplification introduced in July, which reduced third quarter year-on-year top-line erosion to 2.1% versus minus 3.5% of the previous two quarters.

TI curbed the line losses trend despite the market slowdown, with a stabilization of TI market share. In the broadband segment, for the first time, the third quarter saw a reduction of the market, while TI maintained the trend already registered in the previous quarter. In the last three months, TI increased the broadband ARPU versus second quarter ‘11 and stabilized it versus third quarter 2010. ICT service performance was further improved to plus 9.8%, from prior quarter’s 8.2%.

In terms of financial discipline, in the nine month of 2011, TI delivered a strong performance with an operating cash flow reaching almost EUR4 billion, which grew by 15% year-on-year, still at plus 3% year-on-year if considering the TI Sparkle settlement of EUR389 million paid in third quarter 2010. EBITDA minus CapEx on revenues improved to 35.8% year-to-date.

Slide number four. In third quarter 2011, the overall organic performance on domestic top line showed a sound improvement versus the previous quarter, minus 3.8% year-on-year in Q3 ‘11 versus minus 6% year-on-year in Q2 ‘11, as a consequence of better results both in fixed, which posted a minus 2.8% year-on-year versus minus 5.1% on the same basis in second quarter and mobile, where we closed last quarter at minus 6.5% year-on-year against minus 7.6% in the previous one.

If we focus on the more significant total mobile retail year-on-year revenues trend, third quarter results shown an improvement from minus 6.6% in previous quarter to minus 5.9%. In terms of profitability in third quarter ‘11, the organic EBITDA improved, closing at minus 2.5% year-on-year while on a year-to-date basis, it stands at minus 4.9% year-on-year, approaching the full year minus 4% landing strip.

Moving to EBITDA margin, we stand at a remarkable 52.2%, up 0.6 percentage points from the third quarter ‘11, again proving that TI is one of the most efficient operators across Europe. Cash cost on revenues were down to 61.6% in Q3 ‘11 improving on a year-on-year basis. In other words, EBITDA minus CapEx and revenues in third quarter of 2011 is up to 38.4%, showing an upbeat versus the 35.8% year-to-date of the pervious slide.

Moving to slide six, we are now showing that our positive retail mobile revenues evolution is backed by a continued sound plus 34% year-on-year increase in handset revenues versus last quarter’s plus 26.2% on the same basis, better on smartphones, in line with our mobile broadband strategy, and a further positive evolution of retail service revenues from a minus 7.7% year-on-year in the second quarter ‘11 to a minus 6.9% in the third quarter.

For a better comparison of the quarterly trend, if we keep constant the mobile termination rate, which in fact were brought down for TI from EUR6.06 to EUR5.03 from July 1, mobile retail service revenues in third quarter would have been minus 4.3% versus third quarter 2010.

Moving to the commercial KPIs, our sound customer base growth has been generated by another strong quarter in terms of gross adds, up 20% year-on-year, where we confirmed our market share leadership combined with a good control in terms of churn rate, still in the low 20s on an annualized basis. Total customer base is at 31.7 million, more than 400,000 above previous quarter and more than 1 million above a year ago.

On slide eight, I’d like to spend a minute to characterize our quality performance path in the consumer domestic mobile. First quadrant, as far as the increase in our SIM lines in the consumer segment is concerned, there is a strong increase in MNP recipient, up 69% compared to the same quarter of the last year and Gross Adds, which include bundles, up 42%.

Moving to the upper right box, TIM in the third quarter has consolidated its smartphone market share leadership among operators. This is a key driver to attract high value customers.

Consistently with these two drivers, in consumer, we are successfully delivering voice and defending voice, while a continued price stability confirmed in the third quarter has been again combined with an increase in outgoing volumes, also benefiting for our customer base growth.

On price, I wish to point out that a 1% VAT increase will marginally reduce our average outgoing price per minute in the next quarter by about EUR0.001. VAS is delivering a healthy performance with its ARPU trend turning positive, driven by mobile browsing and as better detailed in the next slide.

We come now to our very good performance in mobile browsing. In the third quarter, the related retail revenues were up 19.3% year-on-year. For the consumer segment, mobile browsing growth in top line was even higher, standing at plus 23.7% year-on-year and confirming the consolidation of our leadership in large screens with a market share of about 36% and almost 2.6 million users and were out where our Internet Pack yearly pricing approach locks in revenues for the period.

In the small screen segment, revenue performance was brilliant, plus 39% year-on-year versus plus 26% in the second quarter, thanks to the combination of users and ARPU growth, which benefited from a price increase of weekly browsing fee from EUR2 to EUR2.5. Please note that our small screen segment results were made possible by the important increase in smartphones sold, now at 50% of the total handset and continuously increasing.

Slide number 10. In this slide, in which I’ll conclude my overview on mobile, I would like to underline again the pro forma revenues performance net of the July MTR reduction. In the incoming line, you can spot out how in this revenue stream, we did bit the termination rate reduction impact via an increase in volumes.

Let’s now move to the fixed business, slide 12, please. Talking about the core domestic fixed services, let me highlight another step in terms of improvement. In this last quarter, we were able to limit its decline to 2.1% year-on-year compared to minus 3.5% posted in the first part of the year.

This good performance was mostly driven by the monthly fee increase and tariff reshaping, which have been implemented without any negative impact in terms of customer satisfaction and churn rate; a successful broadband approach focused on value more than volume; a confirmed positive trend in the ICT service revenues.

Moving to the access line performance, we have stabilized our market share, thanks to both TI better performance on line losses and to a meaningful OLOs customer – client-based erosion. This underlines once again TI’s right choice to preserve prices and to up-sell service performance, as shown by the success of bolt-on offers, such as Super Internet. This new market phase explain why competitors are resorting to promos to compensate for loss in clients, mainly generating further intra-OLO customer flow.

Slide 14. This picture is even more evident in the broadband market. OLOs customer base is prevailingly double play and it has been already demonstrated that hard discounts tend to fuel intra-OLO migration. TI’s reward for its consistent in value for money and portfolio development has been an ARPU increase.

On slide 15, we update for third quarter 2011 the revenue breakdown of Wireline. On EBITDA, we were unable to achieve in the first nine months of 2011 the best indicator of our target delivery process for the year. The overall value as of September 30 stands at EUR7.07 billion, with an organic year-to-date decline of 4.9%.

If we look at the third quarter of 2011 only, it is minus 2.5% versus third quarter 2010, showing an important acceleration in the trend. This outcome has been driven by a better service revenue mix as you can see looking at the smaller EBITDA erosion related to service revenue margin contribution in the third quarter. The final result benefit also from the strong performance in our OpEx efficiency plan, where we delivered in the first nine months more than our full year target.

Thank you for your attention, ladies and gentlemen. Let’s now move to our question-and-answer session.

Question-and-Answer Session

Operator

Ladies and gentlemen, the Q&A session is now open. (Operator Instructions) Thank you. This question comes from Mr. Giovanni Montalti from Cheuvreux. Mr. Montalti, please?

Marco Patuano

Hello?

Operator

Mr. Montalti?

Giovanni Montalti – Cheuvreux

Yes, sorry. Sorry, just two questions, if I may? The first one on the M&A strategy, some shortness of yours over the last weeks were commenting about the opportunity for TI to assess growth through M&A, value creation through M&A. If you might or also might indicate to us the area where you might focus or if this might involve TI as a whole? And second, if we might have more comments on the deal with F2i? Thank you.

Franco Bernabè

On the first question, growth through M&A, I think that it is enough what we have done this year. We have acquired AES Atimus for a total expenditure of EUR700 million and it shows that whenever there are opportunities that fit with our strategy and are consistent with our objective of maintaining the deleveraging trend that we have promised, we do them. So, there is no – there is nothing next to talk about.

And second, the project that we have approved at the board yesterday of cooperating with F2i on the development of verticals in Milan, is a project that is consistent with our strategy of pursuing the growth of fiber optics to the home in a market-driven perspective. Thank you.

Giovanni Montalti – Cheuvreux

Sorry, can I follow up very briefly?

Franco Bernabè

Sorry?

Giovanni Montalti – Cheuvreux

Can I follow-up very briefly? I wanted just understand, if you might...

Franco Bernabè

Yes please.

Giovanni Montalti – Cheuvreux

You might focus just in Milan for this process – for this project, as it seems from your press release, or if you might consider to, let’s say, extend the perimeter of this fiber rollout even to other main cities in Italy? Thank you.

Franco Bernabè

Well, the company will be operating in Milan.

Giovanni Montalti – Cheuvreux

Thanks.

Operator

Next question from Mr. JP Davids from Barclays Capital. Mr. Davids, please?

JP Davids – Barclays Capital

Good morning. Two questions, please. The first one is on the efficiency savings and the other one is on IPTV. And starting with the efficiency savings, you mentioned, Mr. Patuano, that at the nine months, you had delivered the 2011 target. As you look into the fourth quarter and more specifically, 2012, what is your thinking in terms of how you’re going to balance OpEx savings versus growth, i.e. targeting growth at the expense of maybe some OpEx pressure?

And then on – secondly, on the IPTV offering that you have or at least, the KPIs you’re reporting, they seem to be now in steady decline. What are you going to do to revitalize your triple play offering in the market? Thank you.

Franco Bernabè

You’re welcome. I’ll ask Marco to answer the second one.

Marco Patuano

Yes. Let me start first from the potentialities of IPTV. We do not consider IPTV as the best way to deliver multicast video services. Multicast video services in Italy, where there are no cable operators, is in the end of the open air TV and it is quite inefficient, technically speaking, to build up a platform in order to deliver online and live broadcasting services.

What we are doing is, we have developed and already presented and now it is in the commercial phase, a unicast platform, which is named Cubovision, which is a platform that allow our customer through the Internet to have video-on-demand, to have catch-up TV, to access to video services over the open net.

This is quite an innovative product. It has been awarded and considered one of the most innovative at the last CES in Las Vegas. So we are pretty much confident that this is the right way, so not to push on IPTV and focusing on unicast Internet video services.

Savings, for savings, we have been able to reach savings for 2012. I think that we have demonstrated that we have been quite selective in approaching the saving topic. We have not penalized any commercial investment. We have not penalized commercial expenditure, such as commissions for the sales channel or expansion of the sales channel or advertising for – in especially defending the level we reached last year. The areas in which we have been able to work were platform, IT efficiency, network efficiency, by chance, the partial switch-off of the IPTV responds also to a cost efficiency program. So I’m not really worried about the fact that we can change our approach, and this will drive us also in 2012. Thank you.

Franco Bernabè

Thank you. Next question, please?

Operator

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

Tim Boddy – Goldman Sachs

Yes, thanks for the question. I wanted to ask about the mobile business and just any update you’ve seen in October on trends. You mentioned that you think the consumer is more resilient in the business sector. I guess it would be helpful to understand whether you still think the mobile business can at some point this year reach a flat trajectory in terms of service revenue development?

The second question would then be on MTRs; obviously there is still controversy around what will happen next year with MTRs? What’s your understanding of the status and what’s your approach to the regulator on that? Thank you.

Franco Bernabè

Marco will answer to both questions then. Marco?

Marco Patuano

Yes, thank you. Well, it’s a little bit early for October results. So, let me stay on October KPIs. October KPIs have continued the trend of September, some post-vacation weakness. But it is seasonality, it’s not a weakness, specific weakness of the market in consumer results.

In the business and corporate environment, if we focus onto mobile, really not very much change versus what was happening before summertime, even if gross acquisitions are lower than one year ago. And this is potentially a sign of attention for the mobile market.

Keep in mind that the mobile market is mainly consumer, so if we look at the overall figure is consumer. So, looking forward, the price decrease last year happened mainly in Q4. So month-over-month we will benefit from a better comparison with prices that in Q4 2010 were down quite significantly. And this year, apart from VAT absorption, apart for seasonality, we are defending much better than in the past. And there is no irrationality in the market, so also, our competitors are quite consistent in keeping prices.

Customer base. Customer base, as you have seen, the customer base is contributing positively and mobile broadband is up. So all is in the right trend and it seems that we are in the right trend. So I can confirm the positive view also based on our healthy acquisition process.

MTRs, we said more than once that any MTR change is very little or even no impacting our EBITDA. Two days ago, I have been asked to participate to a Parliamentary Commission in order to give our view and what I said is that, of course, we do not recommend an acceleration in MTR decrease. But what we do recommend is no more asymmetries among the operators. The operators in the market are in the market since 10 years. Our market is competitive, so there is no more need of any asymmetry among the operators. Then if we have to face the European Commission requests, Telecom Italia will not do any barricade.

Franco Bernabè

Thanks. The next question, please?

Operator

The next question comes from Mr. Mathieu Robilliard from BNP Paribas. Mr. Robilliard, please?

Mathieu Robilliard – BNP Paribas

Yes, good morning. Thank you, two questions. First, with regards to the fixed line network, you highlighted that IPTV, you’re focusing on unit cost. Surely, that requires an increasing amount of speed or much faster speed. And you even had the pressure of cable to invest a lot in your network, but ultimately, I guess you will have. So maybe, if you could give us a sense of what kind of average speed the population has access to and how you’re going to increase the speed in your network, so maybe if you could give a little bit of details into that?

And second, just an accounting question, very low level of G&A in the domestic business in Q3. Is there any one-off there or is that kind of a recurring level of G&A going forward? Thank you.

Franco Bernabè

I didn’t get quite a second – the second question, can you repeat it?

Marco Patuano

Depreciation.

Mathieu Robilliard – BNP Paribas

Sure.

Franco Bernabè

Depreciation, you want to talk about depreciation-amortization?

Mathieu Robilliard – BNP Paribas

Correct.

Franco Bernabè

Okay, okay. Now, let’s first answer the first question and Marco will answer and then I’ll do the second.

Marco Patuano

Yeah, thank you. The – our approach in terms of ultra broadband is very much articulated, because what we say is, we have to be at the same time cost-driven – so cost-efficient and demand-driven. Demand-driven means that for the time being, there is very little demand of consumer ultra broadband, or what I would say, ultra-ultra broadband, I mean 100 mega per consumer use. So, of course, what we have to do is we have to strengthen the ADSL. So, we will work with the VDSL and Fiber to-the-Cabinet in order to start with having much more fiber downtown in the cities, getting closer to the customer.

Then, in every time we have industrial concentrations, we will go directly with fiber. And industrial districts will be covered progressively in 2012 with a very selective approach and increasing the number of points of presence for GPON or FTTH solutions for enterprises.

Then there is the topic of the rural areas. Rural areas will be covered mainly thanks to LTE. So, LTE will be the key driver for digital divide, but not only let me say a best effort digital divide coverage, but a good quality digital divide coverage. So, this is our strategy and I leave the floor to Mr. Bernabè for the second question.

Franco Bernabè

Yeah, on the second question, on the trend of the depreciation-amortization, I mean there is nothing really special about this trend, except for the fact that since we are much more efficient in terms of capital expenditure and the nominal price of capital goods are decreasing. There is an apparent downtrend in slow, very smooth downtrend in depreciation and amortization. But there is nothing special about this. Our capital expenditure in real terms is up and definitely, there is nothing really to comment about this.

Mathieu Robilliard – BNP Paribas

Thank you. If I can just follow up on the network question, would it be possible to get a sense of today, what’s the percentage of household that can get more than 20, what are the percentage of people that are below, say, 2 or 5 megabytes per second? Is that something that you can share with us?

Franco Bernabè

Yes. I’ll have Marco to answer. But on the – there is, unfortunately, in Italy, there is strong difference between the supply side and the demand side. While on the supply side, our infrastructure allows approximately 60% to have a 20 megabit coverage. On the demand side, that is much lower, because the subscription rate to broadband is much lower than the actual coverage that are on infrastructure assures. But I’ll have Marco, if he has to add something to this.

Marco Patuano

Yes. I think that on the percentages, Franco gave you the figures. I just want to add you two further comments. What we are developing are offers that are specifically dedicated to some kind of usage that we see in the network. For example, people who like social media, we are delivering an offer which increase quite dramatically the upload.

And now we are ready to launch a new offer for gamers. So, people who is gaming-addicted, that wanted to game online, and so the new offer will be with very little latency on the network, because gamers need very low latency on the network. Those offers are all premium offers, because what we do is we satisfy a specific need that we discover, thanks to a CRM approach and a behavioral analysis of our customers, of course, well within the limits of the privacy.

Mathieu Robilliard – BNP Paribas

Very clear. Thank you very much.

Franco Bernabè

Thank you. Next question, please?

Operator

Next question comes from Miss Micaela Ferruta from Intermonte. Miss Ferruta, please?

Micaela Ferruta – Intermonte Sim

Yes, good morning. I have three questions. The first one is on broadband, which is the fixed problem, the only weak spot, I would say, yet. At wireline, do you think that the steady price approach that you adopted is still sustainable next year, given the deterioration in macro environment?

And the second question would be on consolidation. I understand you ruled out M&A. However, we spoke about consolidation during the last call, so can you give us an update on the issues or thoughts, or?

And finally on dividend, are you confirming that the 15% annual increase dividend, which is the target, despite the fact that rating agencies are now more rigid, of course, versus Italy and in general, and considering the fact that the cash-out for the spectrum auction came earlier than initially expected? Thank you.

Franco Bernabè

I’ll have Marco to answer on the first and then I’ll answer to the second and the third question.

Marco Patuano

The answer is, yes. We wanted to keep prices at the level that we see today. Two reasons why. First, traditionally, if I look backwards some years, Telecom Italia and the other OLOs tried to combat with a lower penetration of the market – of the broadband on the market, lowering prices. So I make it more accessible in order to speed up the acquisition rate.

And at the end, the final answer is, it did not work. We have one of the lower price in Europe and one of the lower penetration rate in Europe. So simply, we did the pie smaller. Almost the same happened last year. Last year, when the OLOs started to decrease quite significantly their prices, at the beginning, we had a relatively small total market increase, but at the end, the market did not expand that much. We did not follow this. We defended our total revenues and the total market revenues for broadband decreased, so the OLOs lost revenues.

If I look forward, even if we do imagine a market situation complicated as it is now, I don’t think that lowering prices is the right way to expand the market. More quality, innovative offer and very much attention to what the customers are needing. Franco?

Franco Bernabè

On the consolidation side, let me say the following. I think that in Europe, we need consolidation. There are too many actors in a world that is dominated by Internet, which is consolidating, and which sees big players on the other side of the Atlantic.

In our domestic markets, including Italy, it has been for a long time a very easy game. There was a fairly inefficient incumbent. There were aggressive new entrants, and there was a regulator that was favoring competition.

Now, competition is strong and the incumbents, and in our case especially, are much more competitive, much more efficient and provide a much better and much higher quality service. So, I think that the number of actors in our markets both in fixed and in mobile, I think needs to be rationalized long-term. So I think that there will be consolidation. And of course, I think we are much, much better placed than in the past to be the winners in this consolidation process.

On the last question you asked, I think we are on track to deliver our targets. Nothing has changed. We have shown that we are capable, despite the fact that we have invested quite heavily in Latin America, in Brazil with the acquisition of AES Atimus. So we are perfectly in line with – to reach our targets and so nothing has changed, and therefore, nothing has changed also in terms of our dividend policy.

Micaela Ferruta – Intermonte Sim

Thank you.

Franco Bernabè

Next question, please?

Operator

The next question comes from Mr. Nick Lyall from UBS. Mr. Lyall, please?

Nick Lyall – UBS

Hi, there. Morning. Just to ask firstly on TIM, your volumes slipped a bit this quarter and year-on-year growth was quite a bit slower. So I just wonder, could you explain, is that the first signs of a corporate effect or is that something different that I’ve missed?

And then secondly, again on the – how the government might try and recoup some money for you. You’ve seen the reserve price go up in the auction and the VAT go up. Are you quite satisfied now there is no further telecom-specific moves the government might make that you can see at present? Is this now a focus on the consumer, do you think? Thank you.

Franco Bernabè

Well, on the government, I think that we have given enough, and I expect not to give anything else. Of course, the new government will be in place, I hope, in a couple of days and we will see. But definitely, what we hear from the people that are involved in the process is that what we really need is growth and therefore, I think that the new government will not take depressionary measures. On the first question, I’ll ask Marco to answer.

Marco Patuano

Yes, on volumes. Volumes, if you look volumes quarter-on-quarter instead of year-on-year, we are improving that. We are still improving. Now, the decrease in the growth rate is mainly a comparison effect. So last year, when we started cutting prices once again, we boosted up volumes. Now we are keeping prices constant. We are just changing a little bit the portfolio but with pretty much attention to the average prices.

So we give more flexibility to the customers. We give them more possibility to talk. We attempted to stimulate their usage, but we are pretty conscious in defending the total expenditure of the customer. We don’t want to cut the voice total expenditure as we did in the past. So this is the reason why volumes are still up, but with, let me say, less speed than in the past. Then, keep in mind that our customer base is growing. So we have more customers and more customers generate more – more volumes, with a usage which is fairly constant. Thank you.

Nick Lyall – UBS

Okay. Thank you.

Franco Bernabè

Next question, please?

Operator

The next question comes from Mr. Nick Delfas from Morgan Stanley. Mr. Delfas, please?

Nick Delfas – Morgan Stanley

Yeah, thanks very much. Three questions. First of all, you’ve invested more this year in Argentina. I just wonder whether you could comment on the various capital controls that are being instituted there against, at least, oil and mining companies. In certain respects, the country seems to be approaching Venezuela in these situations. Could you talk a little bit about whether you can take money out of Argentina right now and whether you think that will change?

And secondly, on the broadband market, the overall total market seems to be shrinking at the moment. Is that an impact of the economy? Is that because household formation has gone into reverse? Thanks very much.

Franco Bernabè

On Argentina, I think that what is happening now is that the government is taking a very positive approach on problems that have been developing for over long period of time. And we see very positively the actions that have been taken recently or are taken recently by President Cristina Kirchner in terms of eliminating the subsidies in the economy that distorted royalty prices, cooling off wage negotiations and reestablishment – reestablishing a healthier macroeconomic environment.

I think that President Cristina Kirchner is on the right track. We, by the way, since we have put money in Argentina although to a somewhat limited amount, we don’t see any reason for taking out money from Argentina, and I think that the comparison with Venezuela is totally inappropriate

Marco Patuano

I answer...

Nick Delfas – Morgan Stanley

Is there any restriction on taking dividends out today? I mean presumably, you will want to take dividends at some point?

Franco Bernabè

No. There are no restrictions. There is a, how can I say, a moral pressure from the government. But there are no restrictions at this point in time.

Marco Patuano

On broadband. Yes. Total market in Q3 shrinked. It’s the very first time that OLOs lost customers in broadband. Of course, there is a slowdown. This is a matter of fact. So what we have to understand is that how deep was the cleanup that our competitors have to do.

Keep in mind that the number of lines with double play in the fixed market of the OLOs is significantly higher than the total number of broadband lines in TI. This means that when you refer to OLOs, a decrease in the total number of lines of the OLOs ends up with a decrease, a possible or potential decrease also in the broadband, which is much less the case for Telecom Italia.

So I think that some cleanup happened, because I see the October figures, and October is not explosive, of course, but is not as depressionary as it has been the third quarter. When I see the number of petabytes that have been transported on our network, it’s growing. And the usage profile of our customer base or the rate of activity of the customers is not changed. So I think that OLOs did a massive clean-up, because this means some cost reduction or some efficiency they had to do.

We have been – another element. We have been in 2011 very strict in terms of anti-fraud procedures. And these fraudulent users, when they find the door closed on one side, they try another side. And maybe, I – of course, I’m just making speculations, but maybe that there was also some fraud clean-up to do in the market. So all-in-all, the market is not exciting. There is – I would say that a stable market is a better definition than a shrinking market.

Nick Delfas – Morgan Stanley

Thanks very much.

Franco Bernabè

Next question, please?

Operator

Next question comes from Mr. Georgios Ierodiaconou from Citigroup London. Mr. Ierodiaconou, please?

Georgios Ierodiaconou – Citigroup London

Hello. I have two questions. The first one is on direct capital increase at Telecom Italia, Brazil. The effect of the increase was – it increased leverage of the parent company and further reduced the leverage you have in Brazil. Do you have any plans to change that balance over the next few years? And if not, can you explain to us, what are the benefits of you increasing the leverage in Italy and keeping it low in the international businesses? And whether you have any way of hedging currency risk?

My second question is on the value-added services performance. It has improved and the growth was around 6.5% this quarter, but if I was to compare with Vodafone, they are running at around 20% growth in data. Given that you’re gaining share, can you please explain the reasons why the revenue side is still weaker than your main competitor?

Franco Bernabè

I’ll have Marco to answer the second and I’ll answer the first afterwards.

Marco Patuano

Okay. On total VAS, the comparison between TIM and Voda has a pretty different – have to consider a pretty different profile of the users. The customer base of Voda is younger and so the propensity in order to use some kind of VAS has been traditionally very high. For example, you can see very easily looking at SMS, messaging. So this is the reason why we have developed some dedicated offer in VAT for young guys, the so-called TIM Young offer, which is intended to stimulate the usage of not only of the browsing, which is going well in any case, so even without stimulating it particularly, but especially on those VAS on which we were weaker, like SMS, for example.

So, if we look the trend, this is an explanation. Then, on innovative portfolios, we are developing a lot of stuff. We launched a service for music streaming for young guys and so on and so forth. Keep in mind another topic, which is specifically related to browsing. Browsing, we are doing extremely well on small screen. And on large screen, the growth rate is not very big. But we were number one, and we still are number one. We have more than 36% market share. And we are defending it, and we are growing, also in this case, more than the market.

So, if I go inside the value-added services line-by-line, I see that I am still significantly smaller than Voda in terms of messaging, but the momentum is very good, because we were weaker and we are improving very well and fast. In browsing, we outperformed what Voda did. Voda grew less than 18% and I grew close to 19%. And then there is content services that honestly, I don’t know where are booked in Voda. I know where I do book them. And traditional contents are slowing down, I mean, ringtones, wallpapers and so on. And so, we are developing new services, Internet-based, in the past.

We never mentioned, but since you asked me, I do it, that last year, we decided to end the DVB-H service which was in the content – booked in the content for TIM. The value of the closing process was EUR16 million that entered positive, that entered into the content revenues third quarter 2010 and of course, they do not exist anymore this year. Keep in mind that last year when we booked those revenues, those revenues had no impact on EBITDA. So this was just a transaction – a settlement we did with Mediaset Group in order to shut down the DVB-H services. So we are doing well on value-added services.

Franco Bernabè

On the capital increase in Brazil, I think it’s important to note that most of the capital expenditure that was envisaged in our plan is dedicated, of course, to the expansion of our fiber-optic networks, is covered by the acquisition of AES Atimus. So considering the fact that minorities have contributed to the capital increase and the capital increase was very successful, this is positive for us in terms of the overall financial position looking at the three years’ plan in Brazil.

Moreover, given the fact that we have moved the listing of TIM Participações to Novo Mercado, we think it was fair to the market to allow minorities to enjoy the benefits of this success that we are experiencing in Brazil. Thank you very much. Next question, please?

Operator

Next question comes from Mr. Justin Funnell from Credit Suisse. Mr. Funnell, Please?

Justin Funnell – Credit Suisse

Thank you. Yeah, just a couple of questions, please? Firstly, on the European commission proposal to potentially lower copper wholesale prices to encourage fiber investments, targets of trying to get half of the people in Europe onto 100 Megs by the end of this decade. It seems a little bit crazy to me. I guess you have similar views? I am just wondering to what degree you’re able to fight off this threat? Do you think, for example, AgCom is going to take a particular position on this? Obviously, if you have to go roll out fiber, it could threaten the balance sheet quite significantly?

Secondly, just generally on CapEx. I was just wondering if it’s too early in the year, too early in the process, but whether you can give a bit of an outline for CapEx next year, if there’s a need for more 3G build in Brazil, I guess you’ve got an LTE build in Italy. Should we expect CapEx at the group level to rise next year, please?

Franco Bernabè

Yeah. On the first question, you know that I’ve taken a very strong position, because I think it’s not to the politician to dictate the architectures and the technology solution that we have to implement. I think that from our point of view, we want to serve our customers and give them the highest bandwidth possible and the highest bandwidth that they demand. And I think that there are lots of technological opportunities. I mean, including copper, I think that when some politicians stated that copper was outdated, I think that they’ve taken a big risk in saying so.

In fact, as you’ve seen, technology developments, vectoring and so on and so forth gave new life to copper and revaluate the value of the copper network. I think that long-term, we will have plenty of bandwidth available for our customers, fixed, mobile, with a variety of solutions. So I think that either at the national or at the European level, they simply need to stick to the desire to increase bandwidth for the entire population. But, of course, there is something that we do because we think that it is our duty and this is the reason why we are on the market, to serve better our customers.

On the capital increase, on the expenditure, on the CapEx increase, I think that what will happen in the next few years is that the face value or the nominal price of capital goods will keep decreasing. The infrastructural, the architectures through which we will be serving our customers will be less expensive than in the past.

And therefore, despite the fact that in real terms, we will have higher bandwidth, better services to our customers, we will not be seeing increases in the nominal level of our capital expenditures. Thank you. Next question, please?

Operator

Next question is from Mr. Chris Alliott from RBS. Mr. Alliott, please?

Chris Alliott – RBS

Good morning, thanks. Yeah. I just wanted to ask, I am going back to broadband again, whether you could provide some comments on gross adds that you are seeing possibly across the market, if that’s possible, but certainly at TI? And the levels of churn, I am just wondering if we are seeing similar trends to the net adds and gross adds as well or whether there is any slight difference in the trends there? Thank you.

Franco Bernabè

Marco?

Marco Patuano

Sorry. Yes, of course. Gross additions, gross additions, we saw in total, less gross additions in total. But the most important phenomena that is brand new, and I think it has been stimulated by the price policy that the OLO launched last year was the intra-OLO churn, so which is to some extent, also good, because they make money on the wholesale twice with the same customer, activating and deactivating the same customer twice.

But being serious once again, the most relevant phenomena, as I told you, is on one side, intra-OLO churn, on the other side, a very important clean-up, a very important disconnection phase that happened during the summer in the OLOs. We did not see inside our customer base a disruptive phenomenon in term of churn. And we did not see any change in the customer satisfaction. We perform on a monthly basis a review and we make something between 2,000 and 3,000 interviews in order to understand the perception on quality, price, value for money and so on. So we did not see inside our customer base any disruptive change.

So what we do see is, more on the order side, better. I would say that, in Telecom Italia the broadband churn rate is decreasing year-on-year. So this is probably the reason why I was saying that in October, I do see an OLO market relatively safer, which is a good sign. Believe me, I am happy that they are not shrinking, because I assume that part of this decrease was a cleanup.

Franco Bernabè

Thank you. Next question, please?

Chris Alliott – RBS

Okay, thank you.

Operator

The next question is from Mr. James Britton from Nomura. Mr. Britton, please?

James Britton – Nomura

Thanks. Good morning. The first question is on mobile; can you tell us what the mobile service revenue growth trend was through the quarter and particularly, exit rate in September? And then secondly on the fixed line side, you’ve worked to improve the access line loss trend. Can you just specify the key reasons for lower churn, despite the increase in prices that you put through? There is a current level of 130,000, 140,000 a quarter sustainable for next year.

Franco Bernabè

Marco?

Marco Patuano

Okay, Marco speaking. Service mobile revenue first. First of all, let me just remind you a figure that we are showing in our presentation, because I think it’s important talking about numbers and then, we talk about phenomena.

Talking about numbers, when we look at the service revenues, we have to look carefully to the retail service revenues, because there are also some wholesale service revenues that tend to influence the overall numbers. So, if I look to the – when I talk about wholesale service revenues, there is the contractor for the national roaming of Hutchison, and there are some transits that we manage in our network.

So, if we take out this, because it’s not really very much related to our commercial performance or what we do in terms of marketing and sales, the service revenues are below 7% year-on-year change, which is a little – slightly better than what we expected. That was in the range of 7%. And I think it is a little bit better than what the most of the analysts had in their models. So I know that it’s not easy to isolate those wholesale revenues, but this is.

Looking to the phenomena and your question to what kind of contribution we do expect, as I told before, the three major phenomenas here are in continuity with what is happening. I mean, price stability, I would say, and prices almost stable. Customer base is still growing and volumes growing at a slower pace than in the past, of course, but supporting. So in terms of value, better, in terms of contribution to the year-on-year comparison, better and a very safe process, a lot of attention of keeping safe the acquisition process, both in terms of gross adds and in terms of mobile number portability.

Fixed, here too, it is counterintuitive the fact that keeping prices, we are performing well in terms of churn. And this is exactly the reason why I am saying that I am not willing to change our strategy for the future. We can lose a customer for pure price, but we win him back for quality. And quality is overall quality. It is default rate, it is service post-sale care, it is – 70% of the win-backs when we interview them about the reasons of their return to Telecom Italia is better quality and better post-sale – better quality of the service and better post-sale. So I think that this is key and so, I don’t see any reason to change our value-based approach. Thank you.

Franco Bernabè

Thank you, Marco. We are now taking the last question.

Operator

Next question comes from Mr. Ottavio Adorisio from Société Générale. Mr. Adorisio, please?

Ottavio Adorisio – Société Générale

Hi. Good morning, gentlemen. I had a couple of questions. The first is related to operating free cash flow in the domestic and the second on the Consip. So, kicking off from the operating free cash flow, today you basically announced a quite good trend, 15% increase. But I see working capital at minus EUR1 billion and that almost consume 20% of the cash. I was wondering if you can give us a bit of an update what you expect going forward and if that EUR1 billion could be absorbed for the full year?

The second question is on the Consip contract. Now, you recently won back the contract from Fastweb, a successful contract. So I was wondering if the migration from Fastweb has already started and if that migration has contributed to the improvements we’ve seen in the quarter on the fixed line or the main impact would be until next year? Thanks.

Franco Bernabè

Thank you. The first question will be answered by Mr. de Angelis and the second will be answer by Marco Patuano.

Stefano de Angelis

Regarding the EUR1 billion operating free cash flow absorption from the working capital for the fourth quarter, we expect as happened in 2010 and 2009, a substantial recover. This recover will be driven by the same reason that is generating the negative contribution to the nine months results. That is the payable impact. As you know, we have more than 30% of our cash cost that is concentrated in the fourth quarter. In these nine months, we are paying the cash cost of the fourth quarter 2010.

When we will book the cash cost of the fourth quarter 2011, that will be paid in the first quarter of 2012, will be generate a positive impact that we can estimate of approximately EUR600 million in the fourth quarter.

Marco Patuano

Thank you to the guru of the working capital. I’m answering on Consip. You are right, Consip was a very important contract for Fastweb. So, they are fiercely battling in order to defend it. And so there have been – they did two separate things. The first, the auction has been challenged in front of the administrative court. And we are in the process of – we have been declared right the first time. So, now, we are looking for the second level of judgment. But we are convinced that our rights will be defended.

And second, you asked if the migration started. The answer is, very slow – very slowly. So, better, very slowly in the fixed. It’s full steam in the mobile. In the mobile, we won for the second time in a row the mobile contract and the mobile contract expanded the total number of lines that we were entitled to underwrite. So the bulk of the Consip IV, which is the fixed one, will be 2012 now, I assume.

Alex Pierre Bolis

Okay. Thank you very much. Thanks all for attending this presentation, and have a good weekend.

Operator

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

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