FTE Hurt by Economy & FX

French telecom giant France Telecom (FTE - Analyst Report) has reported operating results for third-quarter 2009 with revenue falling 6.4% year over year to €12.69 billion (US$18.1 billion), primarily due to unfavorable exchange rate fluctuations (British pound versus Polish zloty) and reduced mobile termination rates (inter-operator fees). Revenue was also hurt by the recession-driven discontinuation of landline phone use by customers.      

EBITDA & Margin

France Telecom, which operates two of the leading telecom brands in Europe (Orange and Wanadoo), reported EBITDA of €4.6 billion (US$6.6 billion) which declined 8% from the year-ago quarter, resulting in a fall in EBITDA margin to 35.9% from 36.6%. This decline is a result of stringent price regulation and adverse currency exchange swings.

Revenue by Key Markets

Reported revenue in France (46% of group sales), the company’s largest market, declined 1.6% year over year to €5.9 billion (US$8.4 billion) largely due to a decline in legacy fixed-line business, partly offset by growth in wireless and data services.

The company’s second largest market, UK posted 15% year over year decline in revenue to €1.3 billion (US$1.9 billion) as a result of beleaguered economic conditions and regulatory pressure. The company’s UK operation (Orange UK) remains challenged by the cutthroat price competition as bigger rivals such as Telefonica’s (TEF - Analyst Report) O2 UK and Vodafone (VOD - Analyst Report) continue to boost their respective market share. Revenue in Spain and Poland fell by 4.7% and 29.3%, respectively.

Subscriber Trends

At the end of the quarter the company had 189.1 million subscribers across its vast operating territories, a 6.6% year over year increase, equating to 11.7 million net additions. Total cellular customer base grew 9.5% year over year to 128.8 million. Wireless subscriber accretion in the third quarter was healthy with 3.3 million net additions.

The company’s European subscriber base increased 35.5% year over year to 3.8 million (including 2.1 million in France). Momentum for ADSL broadband Internet also remains strong with 6% year over year growth in total customer base to reach 13.4 million at the end of the quarter.

Broadband usage was healthy as the Digital TV subscriber base increased 67% year over year to 2.9 million, while the VoIP customer base increased 22% to 7.3 million.  

Outlook & Action Plans

France Telecom has reaffirmed its expectation of generating stable cash flow at the 2008 level of €8 billion (US$11.4 billion). Capital expenditure as a proportion of revenues is forecasted to be less than 12% in 2009 and the company is expected to spend more in the fourth-quarter. Revenue is expected to remain pressured due to economic and regulatory factors.

The company remains firm in its aggressive cost cutting initiatives as it aims to prevent EBITDA margin from further declines and to cope with the tighter regulatory environment. 

France Telecom plans to retain its dividend policy with a distribution rate of 45% or more of organic cash flow while maintaining a healthy liquidity position. The company will continue its debt reduction policy as it targets to achieve a net debt to EBITDA ratio of less than 2. Moreover, France Telecom will continue to pursue acquisitions in high-growth markets.

To strengthen its foothold in the UK’s wireless market, France Telecom is merging its Orange UK operation with Deutsche Telekom’s (DT) subsidiary T-Mobile UK (fourth-largest mobile carrier in the UK) under a 50-50 joint venture. The combined entity would dethrone O2 UK as the largest wireless operator in the UK with roughly 37% market share. Orange UK is currently the third-largest operator in the British mobile market with roughly 21% share.

Orange UK also has won the rights to market Apple Inc’s (AAPL - Analyst Report) iPhone (3G and 3GS) in the UK. iPhone represents a significant opportunity for the company to further bolster its presence in the UK’s mobile market by attracting new high-end subscribers.

France Telecom recently postponed all corporate restructuring initiatives until at least the end of 2009. The company is increasingly under pressure following a series of suicides by its employees, believed to be the result of continuous workforce restructuring. France Telecom recently revealed its plan to earmark €1 billion (US$1.5 billion) on account of a part-time job scheme to mitigate stress among its French workforce.

Note: France Telecom does not disclose net profit figure at the first-quarter and third-quarter stages.

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