France Telecom (FTE) has reported third quarter 2011 consolidated revenue of EUR33.848 billion ($47.919 billion), down 1.6% year over year. Excluding regulatory measures, revenues barely nudged up 0.1% year over year due to a lack of momentum in mobile revenues because of weak mobile device sales.
Adjusted EBITDA dropped 5.4% to EUR11.611 billion ($16.44 billion), resulting in EBITDA margin of 34.3%, down 140 basis points from the year-ago quarter.
Revenues by Key Markets
Revenues in France, the operator’s largest market, slid 3.1% year over year to EUR16.9 billion ($23.9 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 1.3%.
Revenues in Spain rose 4.3% year over year to EUR3.0 billion ($4.2 billion) mainly attributable to the growth in mobile and ADSL broadband services. Excluding regulatory measures, revenue increased 6.9%.
Revenues in Poland were EUR2.8 billion ($4.0 billion), down 4.1% year over year and 2.8% excluding regulatory measures.
Revenues from rest of the world slid 1.1% and upped 1.0% (excluding regulatory measures) year over year to EUR6.5 billion ($9.2 billion). Africa and the Middle East revenues grew 6.1% (excluding regulatory measures), led by growth in Senegal, Jordan, Cameroon and new operations (Kenya, Guinea, Guinea-Bissau, Niger, the Central African Republic and Uganda) in Africa, more than compensated for the political unrest in Egypt and Ivory Coast.
In Europe, revenues upped 0.5% (excluding regulatory measures) on improved Mobile data services, representing 28.6% of network revenues in the reported quarter. Further, higher data sales and an increased customer base led to a 4.8% (excluding regulatory measures) increase in revenues from the Dominican Republic territory.
Revenues from the Enterprise segment dipped 1.4% year over year to EUR5.3 billion ($7.5 billion), primarily due to a sharp decline in legacy networks services. Revenues from International Carriers and Shared Services declined 3.0% to EUR1.2 billion ($1.7 billion).
Subscriber Trends
At the end of March 31, 2011, France Telecom had 221.0 million total subscribers across its operating territories, reflecting a 6.3% year-over-year increase. Mobile customer base climbed 8.9% year over year to 162.1 million, primarily attributable to a 20.1% growth in Africa and the Middle East to 70.4 million customers. The mobile customer base rose 1.2% to 26.6 million in France, 6.2% to 12.3 million in Spain, 3.3% to 14.6 million in Poland and 20.7% to 95.1 million in rest of the world.
Subscribers from fixed broadband services continued to grow, with a 5.4% increase in the third quarter to reach 14.2 million. Digital TV (IPTV and satellite) subscriber base grew 26.5% to 4.8 million.
Liquidity
Capital expenditure increased 7.5% year over year to EUR3.731 billion (11% of third quarter revenue).
During the third quarter, the company’s board of directors announced EUR142 billion free shares award for employees over a three-year period under its Conquest 2015 plan.
Guidance
The company continues to expect EUR9 billion in organic cash flow in 2011.
Our Analysis
We believe the company’s five-year growth strategy coupled with Conquest 2015 plan will bode well for future growth. In addition, the possible divestiture of minority holdings, expansion of networks, various alliances, deleveraging balance sheet and healthy dividend payoutmake 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) keep us cautious on the stock.
Hence, we maintain a long-term Neutral outlook on France Telecom. However, the company holds a short-term (1-3 months) Zacks #4 Rank (Sell).
