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Ailing Telecom Italia Gets Serious About Cuts

Depersonalizing your entire workforce can make job cuts more palatable. That might explain why Telecom Italia has stopped referring to “employees” a word it was happy with in previous financial reports and plumped for the less emotional “units” in its latest earnings statement. Some 361 units were taken out of service in the first three months of the year. Around 3,700 have gone since December 2016, leaving it with 57,540 units at the end of March.

Cutbacks have become standard practice for the world’s largest telcos, but Telecom Italia needs to be more ruthless about efficiency than most. Last year, it agreed to splurge €2.4 billion ($2.7 billion) on new 5G spectrum — way more than operators have spent in other countries — despite the weak business case. “Based on our analysis, we believe that the conditions for an acceptable return on investment (ROI) on 5G infrastructure are poor,” said George Notter, an equity analyst with Jefferies, in a research note issued today. “Moreover, the 5G investment ROI looks drastically lower than the ROI associated with prior investment cycles — specifically 3G and 4G.”

Telecom Italia’s outlay would not be half so troubling were the operator in healthy shape. Instead, its current net debt of about €25.1 billion ($28 billion) is more than 3.2 times what it realized in earnings (before interest, tax, depreciation and amortization) last year, making it more indebted than most of its peers. Competition from Iliad, an aggressive new entrant, is hammering mobile sales, which fell 11.4% in Italy in the first quarter, to €916 million ($1 billion), compared with the year-earlier period. If that weren’t enough, a boardroom battle between major shareholders remains an unwelcome distraction for senior managers.

Struggling to fund the construction of a new 5G network, Telecom Italia has teamed up with Vodafone, a mobile rival with similar financial problems, to build one jointly. This network-sharing deal will generate annual “synergies” of €100-150 million ($111-167 million), say the companies. Telecom Italia also hopes to raise some cash by selling Persidera, its broadcasting business. Earlier this month, it was reported to have received a binding offer worth €240-250 million ($268-279 million) from F2i, an Italian infrastructure fund.

In the meantime, Telecom Italia’s operational focus is now heavily on cost savings and efficiency measures after total revenues fell 3% in the first quarter, to about €4.5 billion, compared with the year-earlier period. Thanks to cost cutting, the company’s EBITDA margin improved to 40.7%, from 40.4% a year earlier. Net debts fell by €190 million ($212 million) in the first quarter.

The big challenge will be to fund the rollout of higher-speed networks amid tough competition and without a compelling return on investment. Telecom Italia plans to invest around €3 billion ($3.3 billion) in capital expenditure this year in Italy, a €200 million ($223 million) drop on spending last year (excluding spectrum licenses) and €900 million ($1 billion) less than it spent in 2017. Domestic service revenues are expected to fall this year and stabilize “from 2020.”

Spinning off the fixed network and merging this with Open Fiber, a government-backed broadband business, would address the business challenges, according to Elliott, one of the warring shareholders. France’s Vivendi, the other, is opposed to that plan, partly because it thinks fixed-line ownership will be important in the 5G era. The Italian government appears to support Elliott, and has been increasing its stake in Telecom Italia through an investment vehicle called Cassa Depositi e Prestiti (CDP). At the end of last year, CDP held about 5% of shares, but media reports say the government’s aim is to increase this to about 10%. Vivendi had a 24% stake in Telecom Italia in December, while Elliott’s share was then about 9%.

A merger with Open Fiber could attract new investors, bolster Telecom Italia’s valuation and support its services focus. But the company’s problems go deeper. Speaking at a conference in Nice last week, Elisabetta Romano, Telecom Italia’s chief technology officer, complained that equipment vendors are still not developing the “cloud-native” products Telecom Italia needs to pursue 5G-related business opportunities. Her company must also make better use of the data it collects as it tries to improve network performance and the customer experience, she said.

While those challenges are not unique to the Italian incumbent, Telecom Italia is under more pressure than most operators to find answers. Its shares were trading up 2% in Milan this morning, after the publication of results on Monday night, but they have fallen about 36% in the last year, to around €0.47 ($0.52), as markets worry about the company’s next steps. With little immediate prospect of revenue growth, Telecom Italia is likely to remain focused on bolstering efficiency and trimming the number of employees. Or units, as they are now called.―Light Reading

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