France Telecom (FTE), which operates one of world’s leading telecom brands “Orange”, reported results for first-quarter 2010 with consolidated revenues falling 2% year-over-year to €10.96 billion (US$15.2 billion), primarily due to reduced mobile termination rates (inter-operator fees) as a result of new regulations in some of the key markets. Revenues were also hurt by the discontinuation of landline phone use by customers.
EBITDA & Margin
EBITDA fell 4.8% of €3.76 billion (US$5.2 billion), resulting in a fall in EBITDA margin to 34.3% from 35.4%. The decline is a result of stringent price regulation and the impact of new taxes.
Revenue by Key Markets
Revenues in France (53% of group sales), the operator’s largest market, declined 2.4% year-over-year to €5.77 billion (US$8 billion), largely attributable to the erosion in legacy fixed-line voice business and regulatory pricing measures, partly offset by growth in wireless and data services.
The company’s second largest market by sales, UK posted a 2.3% year-over-year increase in revenues to €1.28 billion (US$1.8 billion) on the back of favorable exchange rate swings. However, termination rate cuts continue to affect the operating results of this unit.
France Telecom is merging its Orange UK operation with Deutsche Telekom’s (DT) subsidiary T-Mobile UK in a 50-50 joint venture. The merger, which was approved by the European Commission in March 2010, will make the combined entity the largest wireless carrier in the UK with a roughly 37% market share, dethroning Telefonica (TEF) O2 UK.
Revenues in Spain fell 3.3% year-over-year to €923 million (US$1.3 billion) due to price regulation while the Polish unit posted sales of €970 million (US$1.3 billion), up 1.1%, helped by favorable exchange rate fluctuations (British pound versus Polish zloty).
Revenues grew 7% in Africa and the Middle East, buoyed by growth across markets such as Ivory Coast, Kenya, Senegal and Cameroon. Given the highly matured European wireless markets, France Telecom is seeking new avenues for growth in incipient markets, especially the lucrative African wireless market, which offers ample scope for growth with only 45% mobile penetration.
Subscriber Trends
At the end of the quarter, France Telecom had 183.3 million subscribers across its vast operating territories, a 4% year-over-year increase. Mobile broadband customer base in France grew 20% year-over-year to 13.9 million while momentum for ADSL broadband Internet remains strong with a 4% year-over-year growth in subscriber base to reach 8.9 million (with 47% market share). Digital TV subscriber base grew 34% to 2.9 million. Fixed-line subscriber base in France fell 5.8% to 20.3 million.
In Spain, mobile customer base rose 1.1% to 11.6 million whereas ADSL broadband subscriber base contracted 6.7% to 1.09 million. The Polish operation registered 0.7% and 0.9% annualized growth in wireless and ADSL subscriber bases, respectively, while fixed voice lines fell 6.3%. France Telecom’s Rest of World segment posted 12.8% year-over-year growth in mobile customers reaching 55.8 million.
Outlook
France Telecom has confirmed its 2010 guidance and expects revenue (excluding the impact of regulatory measures) to remain stable year-over-year. Capital expenditure as a proportion of revenues is forecasted at roughly 12%, taking into account the investment of €100 million (US$139 million) in fiber optics in France. Besides the network deployments in emerging markets, France Telecom will continue to invest on 3G wireless network expansions in 2010.
The company continues to expect generating €8 billion (US$11.2 billion) in organic cash flow in 2010. France Telecom remains firm in its aggressive cost-cutting initiatives as it aims to prevent EBITDA margin from further declines and to cope with the tighter regulatory environment.
France Telecom will continue its debt reduction policy as it targets achieving a net debt to EBITDA ratio of less than 2. Moreover, France Telecom will continue to pursue acquisitions in high-growth markets to boost revenues. The carrier plans to spend as much as €7 billion (US$9 billion) on deals in Africa and Middle East over the next five years.
France Telecom remains under pressure following a series of suicides by its employees, believed to be the result of continuous workforce restructuring. The carrier plans to earmark €1 billion (US$1.5 billion) on account of a part-time job scheme to mitigate stress among its French workforce.
While France Telecom’s wireless business remains on the growth track, we believe sustained fixed access line erosion coupled with increased domestic competition (given the entry of new wireless operator Iliad SA) and unfavorable regulatory measures may continue to affect top-line in the upcoming reporting periods.
Read the full analyst report on “FTE”
Read the full analyst report on “TEF”
Read the full analyst report on “DT”
Zacks Investment Research
