France Telecom Q1 Analysis
Board: IIS: France Telecom
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Here is my take on France Telecom's (NYSE: FTE) first quarter 2012 results, which were released May 3, 2012:
-Consolidated Revenue: EUR 10.922 billion, -1.8% on a comparable basis year-over-year (basically stable, -0.1%, ex-regulatory measures) or -2.7% on an historical basis factoring in lost revenue from the divested Orange Switzerland operations
-Restated EBITDA: EUR 3.432 billion, -7% on a comparable basis or -5.6% excluding regulatory measures
-Restated EBITDA margin: 31.4%, 170 bps lower compared with Q1 2011
-Restated operating cash flow (restated EBITDA-capex): EUR 2.335 billion, in line with the confirmed target of EUR 8 billion in FY2012, -10.74% on a comparable basis
-"Final" FY2011 Dividend: EUR 0.80/share will be paid in cash to ADR holders on July 5, 2012 (ex-dividend date: June 5, 2012)
-"Interim" FY2012 Dividend: recommended September 2012 payment of EUR 0.60/share.
The last 12 months’ net additions of 10.7 million customers boosted the Group’s overall base to 225 million at quarter end (excluding MVNOs), a 5.0% increase year-on-year, again primarily related to the robust growth of mobile services in Africa and the Middle East. This figure, however, is down 1.3 million from last quarter. Mobile services customers stood at 166.2 million (excluding MVNOs) at March 31, 2012, a year-on-year increase of 7.1%, or 11.0 million net additions, with a 0.7% customer base decline in France being more than offset by market share gains in Rest of Europe and Africa and the Middle East. The Broadband services customer base increased 4.8% to 14.6 million. And, despite all the news about subscriber losses due to the launch of Iliad’s Free brand, by my calculation total customers across all business segments in France were marginally up at 62.04 million versus 61.943 million a year ago.
Results by Geography
Revenues in France were EUR 5.4 billion in the quarter, a 4.2% decline on a comparable basis. A marked slowdown in the traditional fixed-line business (down 14.8%) overpowered 5.6% Y/Y broadband customer base growth and 23% Y/Y television subscriber growth. In the wireless segment, Orange lost over 600,000 customers to Free at one point in the quarter, but transfer requests have slowed markedly from March through the present and gross contract additions were actually up 31% in the last half of the quarter. Moreover, FT’s Sosh brand, a newly created competitor to Iliad's Free service, gained 183,000 customers at quarter end, and FT's quad play product boosted its customer base to 1.7 million, a 66% Y/Y increase. Lastly, while in March 201l the firm estimated its roaming agreement would to add up to EUR 1 billion in revenue over six years, Group management announced it could now exceed that amount in perhaps half the time. While Illiad’s launch has certainly had a negative impact, the firm has taken measures to mitigate the damage. Big picture: despite the net loss of 387,000 contract customers in the quarter, the Group’s mobile customer count rose 0.9% year-on-year to 19.066 million at the end of March. All this bears watching closely.
Revenues in Spain came in at EUR 981 million, up 2.3% on a comparable basis. In a deteriorating Spanish economy, subscribers seem to be “moving downscale” to benefit from Orange’s low-end offers. The firm’s mobile subscriber base, number of contracts, and data service revenue all grew solidly, and its broadband customer base and ADLS average revenue per user (ARPU) rose 12.4% and 2.4%, respectively
First quarter 2012 revenues in Poland fell to EUR 832 million, -3.4% on a comparable basis, mainly due to the decrease in the landline business. Nonetheless, Orange Poland maintained its estimated 30% market share as the mobile services, data services, broadband, and digital TV all showed strength.
The Rest of the World segment also saw revenue gains of 2% Y/Y, coming in at EUR 2.134 billion, driven by a 12% increase in the customer base to 99.4 million. A post-Arab Spring uprisings rebound in Egypt (3.5% revenue gain) and the Ivory Coast (18% revenue gain) particularly benefited the segment. Yet even excluding those two countries, revenues rose 6.2% (compared w/ 5.9% in the 2H2011) on the back of broad strength in such diverse locations as Cameroon, Uganda, Niger, Belgium, Romania, Mali, Moldovia, Armenia, and the Dominican Republic.
What to take away
In FY2012, shareholders should anticipate moderately declining revenue and ongoing margin compression as competition in France with Free continues and the fixed-line business across Europe slows. Operating cash flow should resume tepid growth after bottoming this year just below EUR 8.0 billion due to stronger than expected revenues from the Group’s roaming agreement and broadband and Satellite TV subscriber growth.
France Telecom’s ~50% share price decline since mid-2009 is disproportionate relative to the firm's actual deterioration over that period. Nonetheless, I suspect the market could remain overly pessimistic about FTE’s prospects and continue to pay a punishingly low multiple for as long as the slow-motion political/economic train wreck in Europe plays out. From an operational perspective, I view the dividend as secure (and estimate a full-year 2012 payout of EUR 1.15-1.20/share), but only time will tell the extent of the pressure Hollande & Co. will put on corporations in France. In short, I see compelling value in the shares, but am very skeptical it will be realized by the market in the form of a sustained rise anytime soon.
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Disclosure: Long FTE