FranceTelecom (FTE), the world’s largest telecommunications carrier in Paris, reported third quarter 2010 results with consolidated revenue of €11.628 billion ($15 billion), down 0.6% year over year. Excluding regulatory measures, revenues inched up 1.1% year over year.
The quarter’s EBITDA dipped 3.5% to €4.26 billion ($5.5 billion) in the third quarter, resulting in an EBITDA margin of 36.6%, down 110 basis points from the year-ago quarter. Excluding regulatory measures, EBITDA declined only 2.3% from the year-ago level.
Revenues by Key Markets
Revenues in France, the operator’s largest market, fell 0.7% year over year to €5.84 billion ($7.53 billion), largely due to the erosion in traditional telephone services and regulatory pricing measures, partly offset by a growth in wireless and data services.
Revenues in Spain declined 0.8% year over year to €991 million ($1.3 billion) mainly due to regulatory pricing measures, partly offset by growth in internet data services and new offers and smartphones (especially iPhone 4).
Revenues in Poland dropped 4% year over year to €972 million ($1.25 billion). Migration from fixed line phones to mobile as well as regulatory pricing measures affected revenues from the country.
Revenues from Rest of the World inched up 1.7% year over year to €2.29 billion ($2.95 billion). Africa and the Middle East revenues rose 9.8% (excluding regulatory measures), driven by strong growth in West African countries and new operations. In Europe, revenues upped 1.5% (excluding regulatory measures), with strong growth in Belgium and Switzerland partially offset by the downturn in Romania. Further, higher mobile sales led to a 4% increase in revenues from the Dominican Republic territory.
Revenues from the Enterprise segment declined 3.6% year over to €1.78 billion ($2.3 billion), primarily owing to lower traditional data and fixed line services. Revenues from International Carriers and Shared Services upped 3.4% to €1.035 billion ($1.33 billion).
Subscriber Trends
At the end of the third quarter, France Telecom had 203.4 million total subscribers across its vast operating territories, representing a 5.1% increase from the year-ago quarter. Mobile customer base climbed 8% year over year to 144.5 million primarily driven by a growth of 18.7% in Africa and the Middle East to 54.8 million customers. Mobile customer base rose 3.6% to 26.26 million in France, 2.9% to 14.14 million in Poland, and 12.9% to 78.95 million in rest of world during the reported quarter. Subscribers in Spain remained flat year over year during the third quarter.
ADSL broadband Internet continues to grow with a 2.3% increase recorded in the reported quarter reaching a 13.3 million subscriber base. Digital TV subscriber base grew 30% to 3.8 million.
Liquidity
Capital expenditure expanded 9.4% year over year to €1.26 billion (10.8% of revenues) in the third quarter.
Outlook
For 2010, France Telecom expects revenue (excluding the impact of regulatory measures) to grow slightly year over year. Capital expenditure as a proportion of revenues is estimated at roughly 12%, taking into account the investment of €100 million in fiber optics in France.
The company continues to expect generating €8 billion in organic cash flow in 2010. Further, France Telecom reiterated its commitment to pay a dividend of €1.40 per share for 2010, 2011 and 2012.
Our Analysis
France Telecom continues to invest strongly for the deployment of a new fibre optic network in France as well as the deployment of “green” networks such as the Oryx program of solar-powered mobile telephone in Africa. In early July, France Telecom unveiled a new project entitled “Conquests 2015”, which is expected to enhance its business growth prospects both domestically and internationally. Further, the company is expanding its mobile data traffic in emerging markets and continues to have a strong balance sheet. France Telecom’s efforts to offer healthy returns to shareholders appear encouraging.
However, we believe the company remains significantly challenged by weak economic conditions and unfavorable regulatory measures across its key European markets, which continue to weigh on the top line. France Telecom’s wireline voice business is shrinking at a greater pace than its major European peers as recession-hit customers discontinue landline phones.
We are currently maintaining our long-term Neutral recommendation with a Zacks #3 Rank (Hold).
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