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Orange Q1 Revenues Disappoint

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Orange (ORAN - Free Report) reported first quarter 2014 revenues of €9.804 billion ($13.4 billion), which decreased 3.8% year over year. Excluding regulatory measures, revenues dropped 3.0% year over year due to revenue declines in most of the markets.

Adjusted EBITDA dropped 3.8% year over year to €3.017 billion ($4.13 billion), resulting in EBITDA margin of 30%, flat with the year-ago quarter. Excluding regulatory measures, EBITDA declined 3.3% year over year and margins fell 10 basis points.

Revenues by Key Markets

In the first quarter, revenues in France, the operator’s largest market, fell 5.0% year over year to €4.810 billion ($6.59 billion). Excluding regulatory measures, revenues decreased 4.9%.

Revenues in Spain slid 1.2% year over year to €977 million ($1,338 million). Excluding regulatory measures, revenues increased 3.2% driven by growth in fixed broadband and mobile contracts.

Revenues in Poland were €716 million ($981 million), down 7.9% year over year, while exclusive of regulatory measures it fell 5.1% year over year.

In rest of Europe, revenues declined 8.4%, due to price reduction in Belgium and Slovakia, offsetting revenue growth in Romania.

Revenues from rest of the world dropped 1.2% year over year to €1,865 million ($2,555 million). Excluding regulatory measures, revenues increased 0.2% year over year. In Africa and the Middle East, revenues grew 6.0% driven by Côte d’Ivoire, Mali and Guinea.

In the Enterprise segment, revenue fall was limited to 2.3% year over year to €1,565 million ($2,144 million), reflecting the positive impact from IT and services integration products. Excluding regulatory measures the revenue decline remained the same.

Revenues from International Carriers and Shared Services declined 4.3% year over year to €407 million ($557.7 million).

Subscriber Trends

As of Mar 31, Orange had 239.4 million total subscribers across its operating territories, reflecting a 4.2% year-over-year increase. The mobile services customer base climbed 5.8% year over year to 181.7 million. Subscribers from fixed broadband services continued to grow, with a 4.1% increase at the end of the first quarter to reach 15.6 million. The French incumbent added 608,000 broadband subscribers, including 341,000 in Spain, 205,000 in France and 30,000 in Slovakia.

Capital Expenditure    

Capital expenditures (CAPEX) at the end of the first quarter increased 1.6% year over year to €1.161 billion ($1.591 billion).

Orange projects adjusted EBITDA of €12.0 to €12.5 billion ($16.44-$17.13). In addition, it continues to expect year-end net debt/EBITDA ratio of close to 2 and mid-term ratio of around 2 to maintain financial strength and investment capacity. The telecom behemoth also plans to make selective acquisitions in markets, where they already have a presence.

This year, the company expects to pay a minimum dividend of 60 euro cents per share. In addition, the company will make an interim dividend payment of 20 euro cents per share on Dec 2014. Additionally, the company will pay the balance 50 cents per share dividend for 2013 on Jun 5, 2014.

Our Take

We believe that the efforts made by Orange toward driving up 4G expansion to support wireless growth in France and other key regions has uplifted its market position among European wireless operators. However, slow recovery 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, Telefonica (TEF - Free Report) , Telecom Italia S.p.A (TI - Free Report) and Vodafone Group Plc (VOD - Free Report) might also restrict the upside potential of the stock.

Orange holds a Zacks Rank #4 (Sell).

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