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France Telecom 1H Profit Slips

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France Telecom (FTE), the world’s largest telecommunications carrier in Paris, reported first half 2012 earnings of €0.65 per share ($0.84 per share), down from €0.73 per share earned in the year-ago period. Net income slipped 8.9% year over year to €1.91 billion ($2.48 billion).

Revenue decreased 1.9% year over year to €21.84 billion ($28.34 billion). Excluding regulatory measures, revenues inched down 0.1% year over year due to weak revenues in other European countries, in particular France that were offset by steady growth in Africa and the Middle East as well as Spain.

Adjusted EBITDA dropped 6.7% year over year to €7.0 billion ($9.1 billion), resulting in EBITDA margin of 32.1%, down 160 basis points from the year-ago period. Excluding regulatory measures, EBITDA declined 5.3% year over year.

Revenues by Key Markets

Revenues in France, the operator’s largest market, fell 4.5% year over year to €10.83 billion ($14.0 billion), largely due to lower traditional telephone services, partly offset by the success of segmented offers (Open, Origami and Sosh) and popularity of smartphones. Excluding regulatory measures, revenue was down 2.0%.

Revenues in Spain rose 2.4% year over year to €1.9 billion ($2.6 billion) mainly attributable to continued growth in fixed broadband services and the rapid development of Internet browsing on mobiles. Excluding regulatory measures, revenue increased 4.8%.

Revenues in Poland were €1.69 billion ($2.2 billion), down 2.3% year over year and 1.1% excluding regulatory measure. Continued migration from fixed-line phones to mobile is suppressing revenues from the country.

Revenues from rest of the world grew 1.6% and 2.8% excluding regulatory measures year over year to €4.14 billion ($5.4 billion). Africa and the Middle East revenues grew 6.2% (excluding regulatory measures), led by growth in Côte d’Ivoire, Cameroon, Senegal and new African operations.

In Europe, revenues remained flat (excluding regulatory measures) in the first half of the year, as mobile sales improved in Belgium and contract customers increased in Romania. Further, higher data sales and an expanded customer base led to a 2.1% (excluding regulatory measures) increase in revenues from the Dominican Republic territory.

Revenues from the Enterprise segment slid 2.6% year over year to €3.49 billion ($4.5 billion), primarily due to a sharp decline in legacy networks services, which was partially offset by growth in the other businesses. Revenues from International Carriers and Shared Services increased 6.9% to €817 million ($1.1 billion).

Subscriber Trends

As of June 30, France Telecom had 224.2 million total subscribers across its operating territories, reflecting a 3.5% year-over-year increase. Mobile customer base (excluding MVNOs) climbed 6.2% year over year to 165.7 million, primarily attributable to a 13.9% growth in Africa and the Middle East to 76.3 million customers. The mobile customer base rose 2.8% to 11.7 million in Spain, 1.5% to 14.8 million in Poland and 8.9% to 99.7 million in rest of the world. These increases were partly offset by a 1.2% decline to 26.3 million in France.

Subscribers from fixed broadband services continued to grow, with a 4.7% increase in the first half to reach 14.7 million. The Digital TV (IPTV and satellite) subscriber base grew 19.7% to 5.5 million in Europe, mainly in France, Poland, Belgium and Slovakia.


France Telecom reduced its net debt to €31.18 billion at the end of June 2012 from €32.33 billion at the end of June 2011. Net debt-to-EBITDA ratio was 2.11 compared with 2.09 in the year-ago period.

Capital expenditure (CAPEX) nudged up 1.0% year over year to €2.46 billion (11.3% of first half 2012 revenue). The company generated organic or operating cash flow (EBITDA–CAPEX) of €4.54 billion, down from €5.07 billion in the year-ago period.


Based on first half results, France Telecom will pay an interim dividend of €0.58 per share on September 12.

Given the economic uncertainty and competitive pressures, France Telecom continues to expect dividend distributions 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.


The company projects operating cash flow of €8 billion for fiscal 2012. Additionally, France Telecom maintained its net debt-to-EBITDA ratio target of 2 over the medium term.

Our Take

We believe France Telecom is progressing well on its Conquests 2015 plan that will reinvigorate growth and restore profitability in the business. Strengthening domestic footprint and expansion into emerging markets are fueling the company’s growth story. Further, a strong balance sheet and a healthy dividend payout bode well for future growth.

Nevertheless, persistently weak domestic economic conditions, sustained fixed access line erosion, labor concerns, lower mobile termination rates and unfavorable regulatory measures across its key European markets and intensifying competition from Bouygues, Telecom Italia spA (TI) and Vodafone Group Plc (VOD)  might restrict the upside potential of the stock.

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

Read the Full Research Report on FTE

Read the Full Research Report on VOD

Read the Full Research Report on TI

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