France Telecom's Q2 EBITDA Down 2.6%, Hit by Increased Regulation

France Telecom has announced its second-quarter earnings before interest, tax, depreciation, and amortisation (EBITDA) dropped 2.6% year-on-year (y/y) to 3.98 billion euro (US$5.17 billion), as the operator continues to struggle against the global economic downturn and rises in European regulation. France Telecom, Europe's third-largest telecoms operator, also revealed second-quarter revenues had remained relatively flat, dropping by 0.4% y/y to 11.18 billion euro. The operator also announced net profit for the first half of the year rose to 3.73 billion euro, from 2.56 billion euro in the first half of last year, chiefly as a result of discontinued operations and the disposal of assets related to the creation of Everything Everywhere, the joint venture with T-Mobile in the United Kingdom. Capex in the quarter rose to 1.24 billion euro, or 11.1% of revenue, up from 1.16 billion euro, or 10.3% of revenue in the second quarter of 2009.

France Telecom also saw a total increase in its customer base in the first half of the year of 3.8% y/y, to reach some 182 million customers at the end of June. The operator saw 6.6% y/y growth in the mobile sector to reach 123.1 million customers, driven by Africa and the Middle East where mobile growth was 18.4% y/y. Elsewhere, France Telecom also saw 2.2% y/y growth in ADSL broadband subscribers in the first half to reach 13.2 million customers, and rapid growth in its digital TV subscribers, which rose 34% y/y to reach 3.6 million at the end of June.

The France-based operator also announced a 1.40 euro per share dividend for the 2010–12 period, calming fears about increased competition in its home market, the group's limited ability to cut costs given its promises to French employees and its acquisition ambitions, and has once again confirmed its full-year forecasts.

Outlook and Implications

• A New Five-Year Plan: Chief Financial Officer Gervais Pellissier said France Telecom still expected revenue to be stable this year excluding the impact of regulatory changes, estimated at 1 billion euro annually, chiefly as a result of cuts in mobile termination rates at home and the European Union (EU) cap on roaming charges. However, he added that while the economic environment remains fragile, with a recovery that is a little less strong than was expected at the end of last year, the operator was seeing positive trends for the second half of the year. New France Telecom CEO Stephane Richard revealed his new five-year plan earlier this month, which aims to grow its client base by 50% to 300 million by 2015, largely via acquisitions in emerging markets (see France: 6 July 2010: France Telecom Aims for 50% Customer Growth by 2015 with New Five-Year Plan), and the former incumbent has already pledged to invest 2 billion euro (US$2.5 billion) in its fibre networks by 2015, and this should provide a steady return for the operator in years to come.
• Fibre Roll-Out in France Gains Momentum: France Telecom was able to report slightly higher-than-expected earnings, despite intense competition at home. However, following years of delays caused by regulatory uncertainty and wrangling between the operators, fibre-optic roll-out in France is finally gathering serious momentum (see France: 16 June 2010: French Government Launches US$2.5-Bil. Fibre Programme), while France Telecom has recently been cleared to begin bundling fixed-line and mobile services (see France: 15 June 2010: French Competition Watchdog Approves France Telecom's Quad-Play Ambitions). Meanwhile, in the mobile sector, a recent survey has found that one in four French residents, more than 18 million people, will be accessing mobile broadband services within four years, placing huge demands on the operators network capacity. The French telecoms regulator has recently awarded mobile licences in the 2.1-GHz band—ideal for next-generation mobile broadband services such as LTE-to Orange, SFR and new entrant Free, with Bouygues notably declining to bid (see France: 19 May 2010: Orange and SFR Grab 2.1-GHz Mobile Broadband Licences).
• Strong Growth in Emerging Markets Driven by Acquisitions: France Telecom has reported strong revenue growth of 8% y/y in its Africa and the Middle East region, driven mainly by the 29% increase from new operations. The operator continues to invest heavily in Africa and other emerging markets, and should continue to see key growth in these regions, offsetting a flat performance in Europe (see Armenia: 22 June 2010: Orange Armenia Pledges US$62-Mil. Investment in 2010, Doubles 3G Speeds; Liberia: 21 June 2010: Liberian Government Signs Broadband Connectivity Deal with France Telecom). Elsewhere, its Belgian unit Mobistar has recently announced its first half EBITDA rose 1.1% y/y, boosted by smartphone sales and increased mobile broadband and data use, as numbers of smartphone customers rose 36% (see Belgium: 22 July 2010: Mobistar Q2 EBITDA Up 1.1% on Smartphone Growth). Elsewhere, following the failure of its planned merger with Sunrise in Switzerland, Orange has pledged to invest some US$600 million in order to launch a fresh assault on incumbent Swisscom in the country (see Switzerland: 23 June 2010: Orange Switzerland Announces US$600-Mil. Network Investment Plans).