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Orange (ORAN - Analyst Report) reported 2013 earnings per share of 71 euro cents (approximately 94 cents), missing the Zacks Consensus Estimate of $1.27. The company’s earnings grew from 31 euro cents (approximately 39 cents) earned a year ago driven by the growing numbers of mobile customers and  4G mobile broadband customers in France.

The company reported 2013 revenues of €40.981 billion (approximately $54.4 billion), which decreased 4.5% year over year. Excluding regulatory measures, revenues dropped 2.6% year over year due to the decline in mobile services revenues in France, Poland and lower Enterprise segment revenues.

Adjusted EBITDA dropped 7.5% year over year to €12.649 billion (approximately $16.8 billion), resulting in EBITDA margin of 30.9%, down 100 basis points from the prior year. Excluding regulatory measures, EBITDA declined 5.5% year over year and margins fell 90 basis points.

Revenues by Key Markets

In 2013, revenues in France, the operator’s largest market, fell 6.6% year over year to €20.018 billion (approximately $26.5 billion). Excluding regulatory measures, revenues decreased 4.8%.

Revenues in Spain grew 0.6% year over year to €4,052 million (approximately $5,381 million). Excluding regulatory measures, revenues grew 4.4% driven by growth in fixed broadband and sale of mobile handsets under plans with payment by instalment.

Revenues in Poland were €3,079 million (approximately $4,089 million), down 8.6% year over year, while exclusive of regulatory measures, it fell 3.9% year over year due to competitive pressure.

Revenues from rest of the world dropped 0.5% year over year to €7,792 million (approximately $10,348 million). Excluding regulatory measures, revenues increased 1.3% year over year. In Africa and the Middle East, revenues grew 4.7% driven by Côte d’Ivoire, Mali, Guinea and Senegal, while in Europe revenues fell 2.8% given the drop in revenues from Belgium and Slovakia.

In the Enterprise segment, revenues fell 5.3% year over year on a comparable basis and excluding regulatory measures to €6,513 million (approximately $8,650 million). The decline was due to the impact of pricing competition and a sluggish European economy.

Revenues from International Carriers and Shared Services grew 5.2% year over year to €1,702 million ($2,260.4 million).

Subscriber Trends

As of Dec 31, Orange had 236.3 million total subscribers across its operating territories, reflecting a 2.4% year-over-year increase. The mobile customer base (excluding MVNOs) climbed 3.5% year over year to 178.5 million. Subscribers from fixed broadband services continued to grow, with a 3.7% increase at the end of the year to 15.5 million.

Liquidity                                                                

Capital expenditures (CAPEX) at the end of the was €5.631 billion, representing 13.7% of revenues and year-over-year growth of 0.4%. The company generated operating cash flow (restated EBITDA less CAPEX) of €7.019 billion in 2013, in line with its target.          

Guidance

For 2014, the company projects net debt/EBITDA ratio of approximately 2x. This year, the company expects to pay a minimum dividend of 80 euro cents per share. In addition, the company will pay 60 cents per share in dividends in 2014. It will pay an interim dividend of 20 euro cents per share in Dec 2014. Further, the remainder of cash dividend of 50 cents for 2013 will be paid on Jun 5, 2014.

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 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 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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