Telecom Italia wrestles with Europe’s biggest COVID-19 dent

Telecom Italia (TIM) has released its latest financial results, revealing painful battle scars as European nations continue to fight the coronavirus pandemic.

While it should come as little surprise when you look at which countries were most severely impacted by COVID-19, the figures have confirmed it. Telecom Italia is still profitable, which is often forgotten when companies miss expectations, but the impact of the coronavirus pandemic has been very notable.

Total revenues for the three-month period to March 31 stood at €3.9 billion, down 11.3% year-on-year, while profits declined 10.8% year-on-year to €1.7 billion.

Financial results for European telcos through to March 31 (Euro (€), thousands)
Telco Revenue Year-on-year Profit Year-on-year
BT (£) 5,632 -4% 2,007 -2%
Telecom Italia 3,964 -11.3% 1,735 -10.8%
Orange 10,394 1% 2,602 0.5%
Telefonica 11,366 -5.1% 3,760 -11.8%
DT 19,943 2.3% 6,940 7.4%

Although it does look like business as usual at Deutsche Telekom, let’s not forget that as well as the country effectively combatting the coronavirus, the Group also contains T-Mobile US, which has been flying over the last few years. Total revenues in the US grew 0.3% to $11.1 billion over the quarter, while profits shot up 11.6% year-on-year to $3.6 billion.

What is worth noting is that it is not all bad news at Telecom Italia. This is a company which is under extraordinary pressure because of a truly unforeseeable event, but previous initiatives to create a healthier and more sustainable business are seemingly working. Improvement in cash generation (14% year-on-year increase) and debt reduction (down €923 million) have continued through the three-month period thanks to strategic initiatives launched in 2019. The underlying business model and strategy is still theoretically sound.

One of these projects, the network sharing agreement with INWIT and Vodafone, and subsequent sale of a stake in the towers joint venture, contributed €650 million to the debt reduction mission. Negotiations with KKR, for the sale of a minority share of the secondary fibre network, are continuing which will also reduce debt. It is not necessarily perfect scenario to be offloading assets, but needs must occasionally when pressure mounts on the spreadsheets.

It might be tempting to look at the surface figures, but it is always important to remember that COVID-19 is creating trading conditions no-one could foresee. TIM is still a business which is under threat from a highly competitive landscape in Italy, but the reaction from the team still looks competent.

Looking at the non-financial performance data, TIM Vision, the content platform saw a 20% increase in active users across the period, though mobile subscriptions dropped 579,000 year-on-year. IOT connections slightly compensated, but not enough. In fixed broadband, net customer losses across both consumer and wholesale totalled 233,000. It is clear the business is still adjusting to the new market dynamic with Iliad on the scene.

Segment Subscriptions Year-on-year
TIM Vision (TV) 1.85 million 21%
Mobile 20.42 million -2.8%
Fixed (retail) 8.98 million -1.5%
Fixed (wholesale) 8.01 million -0.6%

Vodafone and TIM both flog a bunch of INWIT shares to pay off debt

Less than a month after completing the merger of their towers businesses, Vodafone and TIM have sold an equal chunk of it each to raise some cash.

The merger was finalised late last month, giving Vodafone and TIM 37.5% of INWIT (Infrastrutture Wireless Italiane) each. They have now both placed 41.7 million shares, which equates to 4.3% of the total, at €9.60 per share. This will raise around €400 million for each telco group, which they are both saying will be used to ‘reduce leverage’ – i.e. pay down some debt.

Each operator group now owns 33.2% of INWIT and the two of them issued almost identical announcements, showing how tightly coordinated this move was. The fact that it comes so soon after the merger itself strongly implies the share placement was all part of the grand plan. Furthermore, at these prices, the tow of them have room to raise a few hundred million more euros if they still feel strapped for cash.

While TIM is still reeling from the cost of the last Italian spectrum auction, the nature of the Indian market means it maybe Vodafone that feels in need of fresh funds the soonest. The company announced yesterday that it has channelled $200 million into Vodafone Idea, despite the amount not being due until September.

“Vodafone Group has accelerated this payment to provide Vodafone Idea with liquidity to manage its operations, and to support the approximately 300 million Indian citizens who are Vodafone Idea customers as well as the thousands of Vodafone Idea employees during this phase of emergency health measures, taken as a result of the COVID-19 pandemic,” said the announcement.

Vodafone Idea owes the Indian government a ton of cash and it remains unclear whether it will be able to pay. In the meantime, thanks to the recent dominance of Reliance Jio, the cashflow situation at Vodafone Idea remains dicey, so Vodafone Group is presumably grateful for any extra cash injections.

AT&T follows Italian lead by temporarily unlocking data limits

AT&T has announced it will suspend download limits on its broadband products in response to the coronavirus outbreak.

The restrictions on data usage, which accounts for both downloads and uploads, are dependent on the amount charged for customers. Those with a DSL service are limited to 150 GB per month, FWA customers are limited to 250 GB, and for those who have a service with maximum speeds between 768 Kbps to 300 Mbps, the data restriction is 1 TB per month.

These limitations will now be lifted as the telco reacts to the on-going global pandemic.

In response to the more significant impact COVID-19 is having on the US, more than 1,000 cases have been confirmed to date, a group of 17 Senators have written to the major telcos to suggest the same actions are taken across the industry.

“No one should be penalised or suffer financial duress for following guidance from the CDC, their employer, local health public officials, or school leaders,” the letter, addressed to CEOs of the major telcos, states.

“While its likely that your networks will experience significantly greater traffic as a consequence of social distancing measures, we encourage you to forebear from application of broadband caps and associated fees or throttling as workers and families cope with the effects of this health emergency.”

Comcast is another which has taken action against to assist low income families. New customers for the Internet Essentials Service, the $9.99 a month broadband product, will be able to sign-up with without a long-term contract, credit checks will be dropped as will shipping fees for routers.

These actions seem to be following the actions of the Italian telcos who have been lifting data restrictions for all mobile and broadband products for customers in the impacted areas. Italy is the worst affected country outside of China and Iran.

Interestingly enough, as more people are forced to self-isolate or work from home, the more strain communications infrastructure will come under.

In Italy, Telecom Italia has said it has seen internet traffic across its network of 70%, mostly thanks to the increased use of video and gaming applications. The telco has said Fortnite and Call of Duty are applications which have seen notable increases over the last few weeks as schools have been closed and children need to be entertained.

With more companies asking employees to work from home and the potential for more schools to be closed, home broadband networks might be strained in a way never seen before. These are elements of the network which have not been designed to deal with this intensity of data traffic; how this is managed will certainly be an interesting story to unfold over the coming weeks.

Telefonica and TIM circling bankrupt Oi for Brazil expansion

With the troubles of Brazilian telco Oi plain for everyone to see, Telecom Italia and Telefonica are sniffing out an opportunity for growth in market with significant potential.

Telecom Italia (TIM) has confirmed in a letter to shareholders that it and Telefonica have approached Bank of America Merrill Lynch, Oi’s financial advisor, to jointly purchase the telco’s mobile operations. This should not be taken as a sign of any merged business operations, but more corporate opportunism in a market which has potential for riches as the digital society beds-in.

What is worth noting is this acquisition would only be for the mobile business unit. The broadband and fixed line units would continue as an independent operation. As the country’s largest broadband business, the collapse of the wider group would certainly be a much larger problem.

Telco Subscriptions Market share
Telefonica – Vivo 77,793,156 34.5%
TIM Brazil 55,044,418 24.4%
Oi 35,844,975 15.8%

Statistics curtesy of Omdia World Information Series (WIS)

What is slightly unusual is the level of competition which will be left in the market. Outside of these three service providers, only Claro offers a competitive threat, meaning the market will shrink from four to three. Many regulators would get twitchy at such a thought, though it seems this is not a worry for Telefonica or TIM.

Although the extinction of the Oi brand is not something Brazilian authorities would have wanted to see, it is an entirely predictable outcome. Oi has been searching to offload the mobile business unit, and the financials have not been painting a pretty picture.

Period Total revenue Net income
Q3 2019 5,001 -5,747
Q2 2019 5,091 -1,559
Q1 2019 5,130 568
Q4 2018 5,365 -3,359
Q3 2018 5,481 -1,336
Q2 2018 5 545 -1,258
Q1 2018 5,668 30,543

Figures in Brazilian real (millions)

The incredibly large net income figure during Q1 2018 is down to a cash injection from various different distressed asset funds. Roughly $1 billion was injected into the business as part of the restructuring process following the telcos decision to file for bankruptcy in 2016. In the years following this saga, financial reform was introduced in Brazil thanks to this saga, though the capital raised could not entirely save the business.

Oi’s misery is a gain for the European duo, both of whom have big plans for the Brazilian market moving forward. There are of course many questions which still remain, for example, how will the assets be split between the pair, but it is still early days in the acquisition process.

TIM annual revenues drop 5.1% but eyes future through convergence

Telecom Italia has reported its financial results for 2019, with Group revenues standing at €17.97 billion, a 5.1% year-on-year decline.

While performance in the Brazilian business stood relatively stable in comparison to the previous year, the domestic Italian unit saw the dramatic drop. Revenues in Italy were €14.08 billion, a 6.3% decline, as competition in the market continues to take a bite out of the operator’s fortunes.

Although this does not make for the prettiest of pictures, the Board of Directors has also approved the 2020-2022 Strategic Plan. As part of the plan, TIM has outlined several key objectives for the next 24 months:

  • Increase Equity Free Cash Flow to €4.5-5 billion
  • Bring group net debt below €20 billion by 2021. Proceeds from the sale of 12.4% of INWIT will contribute towards this element of the plan
  • Group Organic Services Revenues will decline slightly over this period, as are Revenues from Domestic services
  • Domestic Capex is expected to be roughly €2.9 billion each year

In the consumer division, convergence is the key word. The core business of connectivity is key to this drive, though adjacent services (TV, smart home, security or gaming for example) are expected to grow revenues and improve the resilience of the business. The deployment of ultrabroadband services is another area to bolster the offering here.

Another interesting element of the consumer business unit is the ‘TIMVision’ initiative. This content proposition is taking more of an aggregator approach and is starting to look very healthy. Partnerships with Disney, Netflix, Sky, Dazn and Amazon are creating an attractive platform, which when bundled effectively, might give TIM an edge in the ultra-competitive environment.

Looking at the business and whole elements of the business, these are two areas which have been primed for growth by the team. The recently announced partnership with Google Cloud will certainly open up new opportunities in the increasingly important cloud services market, while tie-ups with the likes Olivetti in IoT and Telsy in cybersecurity have the potential to open new revenue streams.

In wholesale, the full-fibre deployment plan will see 5.1 million homes passed in 2022. Opening up this network does increase competition in the market, though the wholesale opportunity does look like an attractive one.

Looking at the financials and competition elements of TIM alone does not create the most comfortable reading. Italy is a tricky market, though TIM is pivoting to create a more diversified and future-proofed business. The groundwork looks to be effective but soon enough the team will have to enter into execution phase. There is opportunity, but Italy is a fast-evolving market.

TIM gets fined for rigging Italian fibre market, will appeal

The Italian Antitrust Authority (AGCM) reckons operator TIM acted to restrict competition in certain parts of the domestic fibre market. TIM disagrees.

We’re relying on Google Translate here, as the decision hasn’t been published in English yet, but the decision refers to ‘white areas’, which are parts of the country that offer relatively poor returns on fibre investment. TIM had initially decided it couldn’t be bothered with them, it seems, but then changed its mind when competitors stepped in with a bit of help from the tax payer.

“The Authority has ascertained that TIM has hindered the holding of tenders, launched under the Government’s ultra-broadband national strategy, for the support of investments in ultra-broadband network infrastructures in the most disadvantaged areas of the national territory ( so-called white areas),” said the translated AGCM announcement.

“In particular, TIM decided to make an unprofitable modification of the coverage plans of these areas during the tenders and at the same time undertook legal initiatives instrumentally aimed at delaying the same.” Accordingly TIM is being fined €116 million.

TIM doesn’t see what the problem is since it has already sorted all this stuff out with the Italian telecoms regulator AGCOM, and accordingly will appeal. “AGCM’s decision also raises concerns, not least because the Italian telecoms watchdog AGCOM has taken an entirely different view of TIM’s alleged anti-competitive behaviour,” said the TIM response. “In fact, AGCOM has on several occasions dealt with the issues discussed in the preliminary investigation, adopting specific regulations on most of the cases covered by the provision.

“The main objection of the decision refers to an investment project in market failure areas (so-called White Areas), considered by AGCM to be abusive towards Open Fiber which should build a fibre infrastructure to the homes with public resources (as recalled by the AGCM), which though did not take place as also highlighted by several institutional offices.”

It all seems fairly technical and the size of the fine by itself is not that significant. Having said that, if TIM doesn’t think it has done anything wrong and the regulator agrees then still got to hurt. The most intriguing part of this is that it seems to pitch the regulator in direct opposition to the antitrust authority and it will be interesting to see which prevails.

EU reportedly set to approve TIM/Vodafone tower JV

After announcing their intention to merge their tower businesses last July, TIM and Vodafone have had to wait nine months for the EU to give it a look.

While there had been no formal announcement at time of writing, Reuters spoke to some people who reckon the European  Commission is about to green-light the move. The mergers of the telecoms tower businesses of the two operators would apparently create Europe’s biggest mobile tower company, so antitrust authorities were bound to take an interest.

Presumably the activities of competing tower giants such as Cellnex reassured the EC that even such a major bit of M&A wouldn’t damage competition. Furthermore the whole European tower scene seems to be stampeding towards consolidation, so this presumably won’t be the last such case it has to scrutinise.

The combined tower holdings will be run by INWIT, the tower company TIM is currently the 60% owner of. After the €10 billion merger TIM and Vodafone will each own a 37.5% stake in INWIT, with equal governance rights.

Antitrust authorities will presumably only start thinking about blocking this sort of M&A when it gives one company to great a share of the mobile towers in a single country. TIM is not international, but Vodafone is an MNO in the Italian market. The report says they offered to give rival, presumably Italian, operators access to their towers as a condition for the deal being approved.

TIM secures exclusive Disney+ deal in Italy

Telecom Italia has been announced as the exclusive partner for Disney+ in the country, with services set to be launched on March 24.

With the content and connectivity worlds becoming increasingly intertwined, telcos who are not able to offer a TV service within a bundle might look less attractive. This is the theory, which still needs to be genuinely ratified, though bundling content into connectivity packages is certainly not going to do any harm. With Disney+, Telecom Italia (TIM) has found a very attractive partner.

“We are proud that Disney has chosen TIM as its strategic partner in Italy,” said CEO Luigi Gubitosi. “This agreement comes within the strategy adopted by TIM to pursue alliances with major international players in various segments, to offer cutting-edge products and services.

“Adding Disney+ gives a major boost to the strategy of TIMVision as Italy’s leading aggregator of premium content in the Italian TV industry, in a context where convergence between telecommunications and content will play an increasingly key role in the group’s future, thanks to the development of ultrabroadband and 5G.”

Available across all devices, the TIMVision content platform does look to be an attractive proposition. While some telcos have chosen to secure fortunes through owning content rights, TIM has gone the more steadfast, and perhaps more sensible, direction of becoming a content aggregator. In fairness to TIM, it has done a pretty good job in creating a decent offer, one which will only be enhanced by Disney+ content.

Although Disney has been quite quiet over the last few weeks, it did proclaim during the earnings call that Disney+ had secured 28 million subscriptions in the first six weeks. Perhaps more impressive, is these numbers are only representative of the US market.

Outside the US, streaming video on-demand (SVoD) services have been gathering momentum. Uptake has not been on the same aggressive scale everywhere compared to the US, though bundling content packages in with local connectivity service providers has been a successful venture for Netflix to date. Taking these lessons to heart, Disney is targeting Italy with TIM, has partnered with Sky in the UK and Verizon in the US.

Google Cloud gathers telco momentum with new partnerships

Google Cloud has announced two new partnerships with Telecom Italia, T-Systems and AT&T in an effort to build momentum in the burgeoning enterprise connectivity world.

Starting with Telecom Italia (TIM), Google will help the telco build public, private and hybrid cloud services as enterprise customers become more important in the new era of connectivity. As with every telco, the enterprise segment is one being heavily targeted by TIM, with plans to exceed €1 billion in annual revenues with more attention being paid to cloud and edge services.

“This strategic partnership with Google places TIM among the Italian key players in Cloud and Edge computing, two markets that will become more and more central with the deployment of 5G technology and Artificial Intelligence,” said TIM CEO, Luigi Gubitosi. “By choosing to join forces with a recognised global technological and innovation leader we confirm our commitment to promote and accompany Italy’s digital progress.”

As part of the agreement, Google Cloud will partner with TIM to open new cloud regions in Italy, with the telco suggesting it has developed training programmes involving 6,000 people in the commercial, pre-sales and technical areas. With a larger data centre footprint across the region, new services will be developed focusing on low latency and high-performance cloud-based workloads and data.

Over in Germany, the tie-up between Google and T-Systems will focus on digital transformation and managed services, with T-Systems providing consulting services, migration support and managed services to enterprise customers leveraging Google Cloud capabilities.

“Our joint goal is to support organizations in their digitization and to improve business processes with the cloud,” said Adel Al-Saleh, CEO of T-Systems. “This partnership is a core element of our strategy, generating value-add for our clients with managed cloud services.”

As part of the partnership, T-Systems will create a Google Cloud competence centre which will focus on creating customised cloud solutions and services for its customers. Services will focus on large-scale workload migrations to the cloud, SAP application modernization, development of new AI and ML solutions, as well as solutions for data warehouse and data analytics in the cloud.

Finally, the partnership between Google and AT&T will aim to develop 5G edge solutions in industries like retail, manufacturing and transportation.

“Combining AT&T’s network edge, including 5G, with Google Cloud’s edge compute technologies can unlock the cloud’s true potential,” said Mo Katibeh, CMO of AT&T Business. “This work is bringing us closer to a reality where cloud and edge technologies give businesses the tools to create a whole new world of experiences for their customers.”

Partnerships between local telecoms companies and the internet giants are starting to become more common and Google has been leveraging local expertise and presence. In India, Google has struck a deal with Airtel to offer its productivity suite. This deal was announced a few months after a similar tie up between telco Reliance Jio and Microsoft Azure.

Elsewhere, Google has partnerships with CenturyLink for areas such as cloud enablement, migration services, SAP and big data, NTT Data in Japan, BICS in Belgium and China Mobile, just to name a few.

As the lines between telecoms and ICT continue to blur, these partnerships will become much more common and deeply entrenched. However, there does seem to be a slight shift in mentality, with the telcos bringing network assets to the party and leveraging the cloud power of Silicon Valley. Telcos are highly unlikely to be able to compete with the likes of Google Cloud and AWS when it comes to software and services, so why bother?

There is clearly a lot for both parties to gain from these partnerships, though telcos are leaning more towards working with the cloud giants as opposed to competing with them directly. Perhaps a much more sensible approach.

VC money continues to flow into European fixed networks

KKR is the latest investment firm to pump cash into European telecoms infrastructure, and with traditional investments on wobbly ground, the trend is set to continue.

While it not 100% finalised just yet, Telecom Italia (TIM) has entered into a non-binding agreement to be a partner is the rollout of a fibre-based network in Italy. While Italy has proven to be a stifled market for broadband in recent months, the Italian Government is attempted to force TIM and Open Fiber into partnership to reduce network overbuild, this deal is another example of the telco industry coming back into vogue for the investment community.

For years, the telecommunications industry was largely ignored by the financial heavyweights. According to Ronan Kelly, CTO of Adtran, this distaste for telco was largely driven by returns. Telco investments were offering investors 4-5% returns annually, but when there are options to get 7% or more through government bonds or other means, why would anyone consider pumping cash into a telco.

That said, the tables are certainly turning. Government bonds are barely offering anything in return, and in some cases are turning negative interest rates back onto investors, while the aggressive political climate is making it very difficult to figure out which companies are a good bet. All of a sudden, the 4-5% return many were turning their noses up at are starting to look attractive.

There are of course another couple of factors to consider here. Firstly, the telcos are under financial pressure thanks to decreasing profitability and demands to invest significantly in both 5G and fibre networks. The equation isn’t balanced, and it has the telcos scrambling to source cash. This presents a financially attractive opportunity for the crafty investor.

Secondly, Kelly highlighted the way in which these deals are now being structured makes investment a more compelling case. Some telcos are going through the process of structurally separating the retail business from the infrastructure assets, meaning investments can be attracted to the infrastructure without having to worry about the performance of the retail business.

Considering how cut-throat and price sensitive the retail markets are becoming, the structural separation protects investments in the network if the retail business fails. Investors, who are after long-term returns not a quick buck which a retail environment can offer, will like this strategy.

With fixed infrastructure investments coming back into fashion, money is starting to flow into the pockets of the telcos. Goldman Sachs spent $750 million to purchase CityFibre in the UK, though this followed $2.5 billion which had already been invested in the infrastructure firm by Goldman. Alt-net HyperOptic always seems to be able to attract additional investment, while Brookfield Infrastructure seems to have an almost endless back account to fire funds into various telco and infrastructure companies.

Interestingly enough, an interesting consequence of this trend is the dilution of influence the telcos have on their own industry.

Investment companies are buying controlling stakes in fixed networks, while tower companies are purchasing the passive assets from MNOs who are desperate for cash. Elsewhere, companies like Vodafone and Telefonica are structurally separating towers assets into another business unit in preparation to a potential IPO. In each of these examples, the telcos are handing away influence and control of the industry in the pursuit of investment.

While fragmentation of influence in the telco industry would be considered a significant negative to the telcos and lobby organisations such as the GSMA, there is seemingly little choice in the matter. This is an industry which needs money, and it might have to carve out more than a pound of flesh to fund the big connectivity dreams.