FranceTelecom (FTE), the world’s largest telecommunications carrier in Paris, reported fiscal 2011 earnings of $2.04 per ADS (EUR1.46 per share), surpassing the Zacks Consensus Estimate of $1.93. Earnings grew 2.1% year over year. Net income from continuing operations nudged up 0.5% year over year to EUR3.828 billion ($5.34 billion).

Fiscal 2011 consolidated revenue was EUR45.277 billion ($63.14 billion), down 1.6% year over year. Excluding regulatory measure, revenues were flat year over year despite higher VAT rates and challenging economic conditions in Egypt and C?te d’Ivoire.

Adjusted EBITDA dropped 4.8% year over year to EUR15.083 billion ($21.03 billion), resulting in EBITDA margin of 33.3%, down 110 basis points from the prior year. Higher commercial expenses in the first half led to the decline. Excluding regulatory measure, EBITDA declined 3.4% from 2010.

Revenues by Key Markets

Revenues in France, the operator’s largest market, dipped 3.3% year over year to EUR22.534 billion ($31.42 billion) in 2011, largely due to the increase in VAT, partly offset by the success of segmented offers (Open, Origami and Sosh) and popularity of smartphones. Excluding regulatory measure, revenue was down 1.5%.

Revenues in Spain rose 4.5% year over year to EUR3.993 million ($5.57 billion) mainly attributable to the growth in mobile and ADSL broadband services. Excluding regulatory measures, revenue increased 7%.

Revenues in Poland were EUR3.625 million ($5.05 billion), down 4.1% year over year and 2.6% excluding regulatory measure. Continued migration from fixed-line phones to mobile is suppressing revenues from the country.

Revenues from rest of the world slid 0.9% and upped 0.9% (excluding regulatory measures) year over year to EUR8.795 billion ($12.26 billion). Africa and the Middle East revenues grew 6.8% (excluding regulatory measures), led by growth in Cameroon, Mali, Senegal and new operations (Kenya, Guinea, Guinea-Bissau, Niger, the Central African Republic and Uganda) in Africa, which more than compensated for the political unrest in Egypt and C?te d’Ivoire.

In Europe, revenues upped 0.8% (excluding regulatory measures) on improved mobile data services and a gradual turnaround in Romania. Further, higher data sales and an increased customer base led to a 2.3% (excluding regulatory measures) increase in revenues from the Dominican Republic territory.

Revenues from the Enterprise segment dipped 1.6% year over year to EUR7.101 billion ($9.9 billion), primarily due to a sharp decline in legacy networks services. Revenues from International Carriers and Shared Services slid 1% to EUR1.610 billion ($2.24 billion).

Subscriber Trends

As of December 31, France Telecom had 226.3 million total subscribers across its operating territories, reflecting an 8% year-over-year increase. Mobile customer base (excluding MVNOs) climbed 11.3% year over year to 167.4 million, primarily attributable to a 26.4% growth in Africa and the Middle East to 74.6 million customers. The mobile customer base rose 0.6% to 27.1 million in France, 4.5% to 12.5 million in Spain, 2.3% to 14.7 million in Poland and 19.3% to 99.7 million in rest of the world.

Subscribers from fixed broadband services continued to grow, with a 5% increase in 2011 to reach 14.4 million. Digital TV (IPTV and satellite) subscriber base grew 24.8% to 5.14 million in Europe, mainly in France and Poland.

Liquidity

France Telecom reduced its net debt to EUR30.890 billion at the end of 2011 from EUR31.840 billion at the end of 2010. Net debt-to-EBITDA ratio was 2.09 compared with 1.95 last year.

Capital expenditure (CAPEX) increased 3.3% year over year to EUR5.77 billion (12.7% of 2011 revenue). The company generated organic or operating cash flow (EBITDA – CAPEX) of EUR9.313 billion, exceeding its target of EUR9 billion and was up from EUR5.584 billion in the prior year.

Guidance

The company projects operating cash flow target of EUR8 billion for 2012. Given the economic uncertainty and competitive pressures, France Telecom intends to distribute dividends based on operating cash flow generation. The company would return 40-45% of operating cash flow to shareholders in the form of dividends in fiscal 2012 and 2013.

Additionally, France Telecom maintained its net debt-to-EBITDA ratio target of 2 over the medium term.

Our Take

We believe the company’s five-year growth strategy coupled with the Conquest 2015 plan, divestiture of minority holdings, expansion of networks, partnerships, deleveraging of the balance sheet and a healthy dividend payout bode well for future growth.

However, these positives would be offset by sustained fixed access line erosion, increased VAT, reduced mobile termination rates, unfavorable regulatory measures in Europe and intensifying competition in the wireless market from Bouygues, Telecom Italia spA (TI) and Vodafone Group Plc (VOD).

We are currently maintaining our long-term Underperform rating on the stock. For the short term (1-3 months), France Telecom holds a Zacks #4 (Sell) Rank.

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