France Telecom Beats, Rev Falls - Analyst Blog


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France Telecom ( FTE ), the world's largest telecommunications carrier in Paris, reported fiscal 2011 earnings of $2.04 per ADS (€1.46 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 €3.828 billion ($5.34 billion).

Fiscal 2011 consolidated revenue was €45.277 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 Côte d'Ivoire.

Adjusted EBITDA dropped 4.8% year over year to €15.083 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 €22.534 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 €3.993 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 €3.625 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 €8.795 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 Côte 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 €7.101 billion ($9.9 billion), primarily due to a sharp decline in legacy networks services. Revenues from International Carriers and Shared Services slid 1% to €1.610 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.


France Telecom reduced its net debt to €30.890 billion at the end of 2011 from €31.840 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 €5.77 billion (12.7% of 2011 revenue). The company generated organic or operating cash flow (EBITDA - CAPEX) of €9.313 billion, exceeding its target of €9 billion and was up from €5.584 billion in the prior year.


The company projects operating cash flow target of €8 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.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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