France Telecom (FTE) reported second quarter 2011 consolidated revenue of €22.569 billion ($32.47 billion), up 1.3% year over year. Excluding regulatory measures, revenues nudged up 0.3% year over year on the back of strong adoption of smartphones and broadband market share gains.
The year-over-year growth was restricted by crises in Egypt and Côte d’Ivoire and a VAT raise in France from January 2011.
Adjusted EBITDA dropped 5.9% to €3.879 billion ($5.22 billion), resulting in EBITDA margin of 34.2%, down 170 basis points from the year-ago quarter. The decline was a result of the downturn in Egypt, Côte d’Ivoire and Romania and regulatory issues, particularly in Belgium and Switzerland.
Revenues by Key Markets
Revenues in France, the operator’s largest market, fell 2.2% year over year to €5.682 billion ($8.17 billion) in the reported quarter, largely due to the change in VAT rates, partly offset by strong growth in data services and handset sales. Excluding regulatory measures, revenue dipped 0.5%.
Revenues in Spain rose 4.2% year over year to €0.984 billion ($1.42 billion) mainly attributable to growth in mobile and ADSL broadband services. Excluding regulatory measures, revenue increased 6.7%.
Revenues in Poland were €0.946 billion ($1.29 billion), down 5% year over year and 3.8% excluding regulatory measures.
Revenues from rest of the world decreased 1.8% and increased 0.8% (excluding regulatory measures) year over year to €2.145 billion ($2.54 billion). Africa and the Middle East revenues inched up 0.8% (excluding regulatory measures), led by new operations in Africa, Cameroon and Mali that more than compensated for the political unrest in Egypt and Ivory Coast.
In Europe, revenues upped 0.8% (excluding regulatory measures), led by a 4.1% growth in Belgium. Further, higher smartphone sales and an increased customer base led to a 2.1% (excluding regulatory measures) increase in revenues from the Dominican Republic territory.
Revenues from the Enterprise segment dipped 2.1% year over year to €1.765 billion ($2.54 billion), primarily due to a sharp decline in legacy networks services. Revenues from International Carriers and Shared Services declined 1.5% to €0.396 billion ($0.57 billion).
Subscriber Trends
At the end of March 31, 2011, France Telecom had 217.3 million total subscribers across its operating territories, reflecting a 9.2% year-over-year increase. Mobile customer base climbed 10.1% year over year to 158.4 million, primarily attributable to a 23.5% growth in Africa and the Middle East to 67 million customers.
The mobile customer base rose 1.7% to 26.7 million in France, 8.2% to 12.2 million in Spain, 3.6% to 14.5 million in Poland and 22.5% to 91.5 million in rest of the world.
Subscribers from fixed broadband services continued to grow with a 5% increase in the second quarter to reach 14 million. Digital TV (IPTV and satellite) subscriber base grew 29% to 4.6 million.
Liquidity
Capital expenditure increased 10.6% year over year to €2.469 billion (10.9% of second quarter revenue).
Guidance
The company continues to expect €9 billion in organic cash flow in 2011. Further, France Telecom reiterated its commitment to pay dividends of €1.40 per share for 2011 and 2012.The board of directors have also announced interim dividend of €0.60 for 2011 payable on September 8.
In 2011, the company also plans to launch a low-cost mobile brand, Sosh for smartphone users without fixed contracts through an online sales model.
Sale of Switzerland, Austria and Portugal Operations
Additionally, the company announced that it has launched the sale process of its consumer business in Switzerland to improve profitability. Management confirms that the disinvestment plan is a part of its broader European asset portfolio review.
The company is also looking forward to selling its operations in Austria and Portugal. Management confirmed that the procedure has been initiated and no advancement has yet been registered in lieu of the selling process.
Given the lackluster economy in the European market, France Telecom is keen on selling it stakes in countries where it is not position a top player or where it holds lesser stakes and operational control. The demand surge in Middle East and Africa has encouraged to company to expand its footprint in these emerging markets.
The decision to sell the Switzerland operation came as an aftereffect of the denial of merger between Orange Switzerland and Sunrise, the second-largest Swiss operator as of April 2010. The company planned the merger to gain competitive advantage over the flagship Swiss telecom company, Swisscom (SCMN).
Further, the company confirmed that the plan to sell operations in Austria and Portugal remains in line with its decision to remove minority stakes from its asset portfolio.
We believe the company’s five-year growth strategy coupled with Conquest 2015 plan bodes well for future growth. In addition, the possible divestiture of minority holdings, expansion of networks, various alliances, deleveraging balance sheet and healthy dividend payout make the stock attractive.
Moreover, France Telecom is also trying to strike deals with companies such as Google Inc. (GOOG) and Apple Inc. (AAPL) to lower costs of deploying upgraded networks in France
However, sustained fixed access line erosion, increased VAT, reduced MTRs, unfavorable regulatory measures in Europe and intensifying competition with rivals like Vivendi, Iliad , Bouygues and Telecom Italia spA (TI) in the telecom market keep us cautious on the stock.
Hence, we maintain a long-term Neutral outlook on France Telecom. The company holds a short-term (1–3 months) Zacks #4 Rank (Sell).
