FranceTelecom (FTE), the world’s largest telecommunications carrier in Paris, reported fiscal 2010 earnings per ADS of $2.47, surpassing the Zacks Consensus Estimate of $2.26. Earnings climbed 59.6% year over year. Net income shot up 61.7% year over year to €4.88 billion ($6.48 billion), courtesy cost savings at its U.K. operations.

Fiscal 2010 consolidated revenue was €45.503 billion ($60.39 billion), down 1.4% year over year. Excluding regulatory measure, revenues nudged up 0.6% year over year. The second half was strong, particularly driven by growth in mobile services that stabilized during the first half of the year.

Adjusted EBITDA dipped 3.9% to €15.642 billion ($20.761 billion), resulting in EBITDA margin of 34.4%, down 90 basis points from the prior year. Higher commercial expenses led to the decline in the year. Excluding regulatory measure, EBITDA declined 2.3% from 2009.

Revenues by Key Markets

Revenues in France, the operator’s largest market, dipped 1.4% year over year to €23.308 billion ($30.93 billion) in the reported year, largely due to erosion in traditional telephone services and regulatory pricing measures, partly offset by strong growth in data services and handset sales. Excluding regulatory measure, revenue inched up 0.8%.

Revenues in Spain declined 1.1% year over year to €3.821 million ($5.07 billion) mainly due to regulatory pricing measures, partially offset by growth in mobile services and improved fixed services sales. Excluding regulatory measures, revenue rose 2.8%.

Revenues in Poland were €3.934 million ($5.22 billion), down 5.1% year over year and 2.7% excluding regulatory measure. Migration from fixed-line phones to mobile suppressed revenues from the country.

Revenues from rest of the world increased 1.4% and 3.2% (excluding regulatory measure) year over year to €8.248 billion ($10.95 billion). Africa and the Middle East revenues rose 8.8% (excluding regulatory measures), led by new operations in Africa.

In Europe, revenues upped 0.9% (excluding regulatory measures), with strong growth in Belgium, Luxembourg and Moldavia, partially offset by a decline in Romania and price competition in Slovakia. Further, higher smartphone sales and an increased customer base led to a 4.8% increase in revenues from the Dominican Republic territory.

Revenues from the Enterprise segment declined 4.8% year over to €7.216 billion ($9.58 billion), primarily owing to lower traditional data and fixed line services. Revenues from International Carriers and Shared Services rose 4.6% to €1.6 billion ($2.12 billion).

Subscriber Trends

At the end of December 31, 2010, France Telecom had 209.6 million total subscribers across its operating territories, reflecting a 6% year-over-year increase. Mobile customer base climbed 9.1% year over year to 150.4 million, primarily driven by a 23.1% growth in Africa and the Middle East to 59 million customers.

Mobile customer base rose 2.3% to 26.9 million in France, 0.5% to 11.9 million in Spain, 4.5% to 14.3 million in Poland and 15.6% to 83.6 million in rest of the world.

Subscribers from fixed broadband services continued to grow with a 3.4% increase recorded in 2010, reaching a 13.7 million subscriber base. Digital TV subscriber base grew 28% to 4.1 million.


France Telecom reduced its net debt to €31.840 billion at the end of 2010 from €32.534 billion at the end of 2009.

The company generated organic cash flow of €8.110 billion, up from €8.218 billion in the prior year and met its 2010 target of €8 billion. Capital expenditure increased 9.5% year over year to €5.522 billion (12.1% of revenue).


For 2011, France Telecom expects revenue (excluding the regulatory measures) to grow slightly year over year. Capital expenditure as a proportion of revenues is estimated at roughly 13%.

The company continues to expect €8 billion in organic cash flow in 2011. Further, France Telecom reiterated its commitment to pay a dividend of €1.40 per share for 2011 and 2012.

Our Analysis

Despite strong 2010 results and steady progress by France Telecom’s wireless business, we believe sustained fixed access line erosion coupled with increased domestic competition from Bouygues, Telecom Italia spA (TI) and Vodafone Group Plc. (VOD), as well as unfavorable regulatory measures may continue to weigh on the top line. Hence, we are currently maintaining our long-term Underperform rating on the stock.

For the short term (3–6 months), France Telecom holds a Zacks #3 Rank (Hold rating) as it continues to invest in the deployment of mobile broadband and fibre optic network in France, enhanced 2G and 3G mobile network in Africa and the Middle East, sub-marine cable programs as well as cloud computing. Further, “Conquests 2015,” is expected to enhance its business growth prospects both domestically and internationally.

FRANCE TELE-ADR (FTE): Free Stock Analysis Report
TELECOM ITA-ADR (TI): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
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