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Orange (ORAN - Analyst Report) reported first half 2013 earnings per share of 40 euro cents (52 cents), which decreased from 65 euro cents (85 cents) earned in the first half of 2012. Net income of €1.209 billion ($1.59 billion) was also down 37% year over year.  

The company reported revenues of €20.603 billion ($27.1 billion), which decreased 4.5% year over year. Excluding regulatory measures, revenues dropped 2.2% year over year due to the decline in mobile services revenues in France along with lower Enterprise segment revenues.

Adjusted EBITDA dropped 7.6% year over year to €6.417 billion ($8.43 billion), resulting in EBITDA margin of 31.1%, down 100 basis points from the year-ago period. Excluding regulatory measures, EBITDA declined 5% year over year and margins plunged 90 basis points.

Revenues by Key Markets

In the first half of 2013, Revenues in France, the operator’s largest market, fell 6.8% year over year to €10.084 billion ($13.24 billion), largely due to lower traditional telephone services, partly offset by the success of segmented offers (Open, Origami and Sosh) and the popularity of smartphones. Excluding regulatory measures, revenues decreased 4.0%.

Revenues in Spain grew 1.6% year over year to €2,021 million ($2,654 million) in first half of the year. Excluding regulatory measures, revenues increased 3.9% driven by growth in fixed broadband and mobile revenues.

Revenues in Poland were €1,572 million ($2,064 million), down 8.6% year over year while exclusive of regulatory measures it fell 4.5% year over year.

Revenues from rest of the world rose 0.3% and 2.5% excluding regulatory measures year over year to €3,877 million ($5,091 million). Africa and the Middle East revenues grew 4% (excluding regulatory measures), led by growth in Côte d’Ivoire, Senegal, Guinea and Niger.

In Europe, revenues increased 0.6% (excluding regulatory measures) in the reported period given improved revenues in Luxembourg, Romania, Moldova and Armenia.

Revenues from the Enterprise segment slid 4.9% year over year to €3,297 million ($4,330 million). Revenues from International Carriers and Shared Services grew 2% year over year to €830 million ($1.1 billion)

Subscriber Trends

As of Jun 30, Orange had 231.5 million total subscribers across its operating territories, reflecting a 3.1% year-over-year increase. The mobile customer base (excluding MVNOs) climbed 4.6% year over year to 173.629 million. The growth was primarily led by Africa and the Middle East, where 7.5 million customers were added, bringing the total to 84 million customers. The mobile customer base grew 1.5% to 26.710 million in France, 4.4% to 12.238 million in Spain, 1.3% to 14.947 million in Poland and 7.1% to 107.090 million in rest of the world.

Subscribers from fixed broadband services continued to grow, with a 2.9% increase at the end of the first half to reach 15.107 million. The Digital TV (IPTV and satellite) subscriber base grew 12.0% to 6.164 million in Europe, mainly in France, Poland Slovakia and Spain.

Liquidity

At the end of first half, capital expenditures (CAPEX) rose 0.9% year over year to €2.455 billion ($3.22 billion). The company generated organic or operating cash flow (EBITDA–CAPEX) of €3.962 billion ($5.20 billion), representing 57% of the full-year target of €7 billion.

Guidance

Orange maintained its projection for 2013. The company projects operating cash flow of over €7 billion for fiscal 2013. In addition, it expects net debt/EBITDA ratio of approximately 2.2 and 2 by the end of 2013 and 2014, respectively. This year, the company expects to pay a minimum dividend of 80 euro cents per share. In addition, the company also announced an interim dividend payment of 30 euro cents per share in Dec 11, to shareholders of the record on Dec 10.

Our Take

We believe Orange is progressing well on its Conquests 2015 plan that will reinvigorate growth and restore profitability into the business. Strengthening the 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, lingering weakness in domestic economic conditions, sustained fixed access line erosion, labor concerns, lower mobile termination rates and unfavorable regulatory measures across the company’s key European markets are risks to its performance. Intense competition from Bouygues, Telef (TEF - Analyst Report), Telecom Italia S.p.A (TI - Snapshot Report) and Vodafone Group Plc (VOD - Analyst Report) might also restrict the upside potential of the stock.

Orange holds a Zacks Rank #3 (Hold).
 

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