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Orange (ORAN - Analyst Report) reported third quarter 2013 revenues of €10.162 billion ($13.4 billion), which decreased 4.0% year over year. Excluding regulatory measures, revenues dropped 2.4% year over year due to the decline in mobile services revenues in France and lower Enterprise segment revenues.

Adjusted EBITDA dropped 7.0% year over year to €3.366 billion ($4.44 billion), resulting in EBITDA margin of 33.1%, down 100 basis points from the year-ago quarter. Excluding regulatory measures, EBITDA declined 5.7% year over year and margins plunged 110 basis points.

Revenues by Key Markets

In the third quarter, revenues in France, the operator’s largest market, fell 5.6% year over year to €4.980 billion ($6.57 billion). Excluding regulatory measures, revenues decreased 4.9%.

Revenues in Spain grew 1.2% year over year to €1,040 million ($1,372 million) in the third quarter. Excluding regulatory measures, revenues increased 6.9% driven by growth in fixed broadband and mobile revenues.

Revenues in Poland were €752 million ($992 million), down 7.9% year over year, while exclusive of regulatory measures it fell 2.6% year over year.

In the rest of Europe, revenues were down 2.7%, due to 10.1% revenue declines in Belgium.

Revenues from rest of the world dropped 0.5% year over year to €1,944 million ($2,565 million). Excluding regulatory measures, revenues increased 1.3% year over year. In Africa and the Middle East, revenues grew 4.1% driven by Côte d’Ivoire, Mali, Guinea and Senegal.

In the Enterprise segment, revenues fell 7.2% year over year to €1,558 million ($2,056 million), reflecting the impact of price reductions during contract renewals and a sluggish European economy. Excluding regulatory measures, revenues rose 13.2%.

Revenues from International Carriers and Shared Services grew 13.4% year over year to €443 million ($584.7 million).

Subscriber Trends

As of Sep 30, Orange had 232.5 million total subscribers across its operating territories, reflecting a 2.1% year-over-year increase. The mobile customer base (excluding MVNOs) climbed 3.2% year over year to 174.677 million. Subscribers from fixed broadband services continued to grow, with a 3.4% increase at the end of third quarter to reach 15.297 million.

Liquidity                                                                 

Capital expenditures (CAPEX) at the end of the third quarter rose 2.6% year over year to €3.748 billion ($4.95 billion). The company generated operating cash flow of €6.034 billion ($7.96 billion), representing 86% of the full-year target of €7 billion.           

Guidance

Orangemaintained its projection for 2013. The company projects operating cash flow of over €7 billion for fiscal 2013. In addition, it continues to expect 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 will pay an interim dividend payment of 30 euro cents per share on Dec 11, 2013.

Our Take

We believe Orange is progressing well on its Conquests 2015 plan that will reinvigorate growth and restore profitability into the business. Strengthening of the domestic footprint and expansion into emerging markets are fueling the company’s growth story. Further, a strong balance sheet and 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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