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France Telecom (FTE)
Q2 2007 Earnings Call
August 2, 2007 8:00 am ET
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Gervais Pellissier - CFO
Bernard Ghillebeart - EVP of Orange U.K.
Louis-Pierre Wenes - SEVP of NexT Transformation
Sanjiv Ahuja - SEVP of Orange
Barbara Dalibard - SEVP of Enterprise Communication Services
Damien Maltarp - Cazenove
Nick Lyle - UBS
Matthew Bloxton - Deutsche Bank
Laurent Gerald - Broadband London
James Britton - Lehman Brothers
Nicolas Cote-Colisson - HSBC Securities
Jonathan - Bear Stearns
Terry Sinclair - Citigroup
James Ratzer - New Street Research
Remi Thomas - Cheuvreux
Mark Cardwell - Stanford C. Bernstein & Co
Fred Boulan - Morgan Stanley
Frederic Doussard - Oddo Securities
Antoine Pradayrol - Exane BNP Paribas
Jerry Gutter - Sedual Inc.
Good afternoon ladies and gentlemen, Vincent Benoit speaking, and welcome to France Telecom's first half 2007 results conference call. The call will be hosted by Gervais Pellissier Chief Financial Officer also members of FT senior management, who are also with us, for the Q&A session. We will start by a 40 minutes presentation followed by a Q&A session (Operator Instructions).
The presentation contains forward-looking statements and information on France Telecom's objectives, in particular for 2007. More detailed information on the potential risks that could affect France Telecom's financial results can be found in the document de reference filed with the Autorite des Marches Financiers and in the Form 20 F filed with the U.S. Securities and Exchange Commission.
Market share figures at June 30, 2007 included in the presentation are France Telecom estimates, pending the release of official figures for the period from national regulatory authorities.
Thank you, and let me handover to Gervais Pellissier.
Thank you Vincent. Good morning to some of you, and good afternoon to the others, and good evening to a few participants. And thank you for attending this conference call where I am going to present, briefly, the results I guess you already know. So, I would like to shorten the presentation, which will leave more time for the questions.
Let me first try to summarize in a few words the main achievements, and I will start with slide number nine, where there are a few highlights. I think the first good news of this first half is that we have been able to achieve what we wanted to achieve this is stabilization of our profitability and gross operating margin. On top of it a better revenue situation than what we had last year, especially in second quarter with a 2% revenue growth compared to the situation we had a year ago.
This puts us in a situation where we are clearly on-track to reach our 2007 guidance, regarding profitability CapEx etc. But on top of that to confirm also that we are able to commit on a stable organic cash flow for the period 2007/2008 as it was slightly up early in 2006.
Last point is that when we look at the situation of our different businesses, and what has been done the course of this first half. We think that we have developed enough action, never enough, but we continue to use for some areas. But we have developed enough action to sustain the performance in 2007, and also to lay already some foundation for 2008.
A clear roadmap of the products challenge of second half. We are continuing to arranging our processes within the Group in order to enhance the level of service, and to reduce our cost structure. And we continue to be on track to deeply transform the Group the line, with the strong and deep business transformation we had of technology transformation we had.
You remember we were speaking, two years ago, of the move within the enterprise business. The IT move is now completely in the consumer business of the fixed line, and we start shortly on the mobile with the first conversion of that product and announcing with some success like this.
So that's some of the main figures of the first half on the next page, it's the performance in revenue, with 1.9% revenue growth with €25.9 billion. And this comes on a compact booking in domestic fixed and mobile operations for France at the start of this achievement, some recovery in other European markets, a much better performance for enterprise than a year ago. And we have the sustained performance of the five growing markets, which continues to contribute to growth.
Regarding gross operating margin stabilization comes from, mainly from again, urban side in France, where there is a recovery in the profitability. And the continued contribution of fast growing markets, where gross operating margin continue to increase inline with the increase in revenue.
Regarding the level of spending in CapEx it is slightly below 2006 at the end of H1. However, on the basis of the products, which are underway, in terms of large investments within the Group, we confirm the full year objective up 13% to revenue. Down at the cash flow level we have an organic cash flow which is slightly increased over first half 2006, and thinking as able to confirm the full year objective of €6.8 bullion.
Regarding the situation of the debt, or that the organic cash flow has started, is mainly dedicated to the payment of the 2006 dividend, which explains that the level of debt remains rather stable compared to the beginning of the year, so in terms of the second half where the cash flow is for the debt (inaudible).
To comment on some key operational achievements in terms of number of clients, on the next page, the total customer base is 163 million customers, out of which 102.5 billion mobile customers, which is an increase of 10%. And what is also included that within the mobile customer base now 9 million mobile customers are broadband mobile customers, which is a multiplication by 3 for the course of the last 12 months.
As regards the fixed broadband business DSL, we have now 10.5 million subscribers. We remain the leader on the European market. And probably our base is probably one of the more, I would say, dynamic and technically benefited in terms of triple play, with 50%of the customer base equipped with Livebox, 35% of our customers using Voice-over-IP and 8% using IPTV we see that’s mainly in France, we are now 12% of the customer base, of our DSL customer bases in V-over-IP.
As regards to the enterprise business, on top of the global revenue performance, there is a continued development of the convergence of services especially Business Everywhere in France, with 525,000 customers about 20% compared to a year ago. The IP/VPN accesses with 273,000 also 20% on top of last year, and also the strong performance in services revenue, which is increasing by 16%.
Before I am turning to some of the financial figures, again, a few reminders regarding the strategy of the company. Remember that one year and half ago, actually two years ago in June 2005, when we announced the NexT strategy that's a huge part of the future growth would come on value added services on top of the access and from convergence services.
When you look at that slide you see that the path, which is coming from value added services including Internet access plus content, all the value added services invoice on top of the expense is now representing 23% of the revenue in the major countries, whereas it was representing only 18% of the revenues in major markets, in the western market two years ago.
At the same time traditional PSTN and voice access, which was representing 38% of the revenue in 2005, is now representing 29%. So there is a drop by about 10 points of the contribution of our legacy voice and access business to the revenue, whereas mobile has increased and are stable a little below 50% of the total.
Explain two things, first of all the fact that we were right to push of this technology move and technology revolution of our customer base, because this is one way to compete successfully in the future, and to maintain our market share with new businesses.
The second point is that this is also the explanation of this point pressure we have had on the margin, and the need to adjust our tools with this cost structure with this new technology. Same move but at lower pace is also observed in the fast growing markets. It is also an increase of, at that time, new services whereas mobile remains the main figure for revenue and for growth in those markets.
Regarding these fast growing markets, I am on slide 19; the situation is also a strong evolution in the global revenue picture of France Telecom. They are now accounting for 13% of our global revenue. We are representing 10% two years ago. Well this is slide 10; I have mistaken the numbers regarding the slides.