Iliad Profits From Triple Play

Anyone who invested in alternative French operator Iliad (Euronext: ILD) when it floated on the Paris exchange at €16.30 in January 2004 has the right to feel pretty smug today. (See Investors Go Mad for Free Shares.)

The company, which derives 80 percent of its revenues from triple-play service provider Free , saw its share price rise €4.20, more than 7 percent, to €61.90 this morning after it published its 2005 financial results. (See Iliad Reports 2005.)

For a company taking on Orange (NYSE: FTE) in the incumbent's own back yard, a 280 percent rise in the value of the stock is more than impressive.

Here's the reason for the healthy share price. Year-on-year revenues are up 47 percent to €724.2 million ($871 million), while net income is up 69 percent to €68.9 million ($82.8 million), higher than the €61.3 million analysts polled by Reuters were, on average, expecting.

Iliad's 2005 EPS (earnings per share) is €1.26 ($1.51), above the analyst consensus figure of €1.12 ($1.35). The company is paying a dividend of €0.20 ($0.24).

For the record, the other 20 percent of Iliad's revenues also comes from telecom services -- hosting, traditional voice resale, calling cards, and public wireless LAN access.

Iliad's numbers make for good reading, but it's the strategy behind the balance sheet that tells the real story, as, in many cases, Iliad has developed its own broadband access equipment -- DSLAMs and home routers/gateways -- rather than wait for the right equipment from a vendor supplier.

It has also been at the forefront of local loop unbundling in France, installing its own DSLAMs in France Telecom's central office. To date, it has its equipment installed in 675 of the incumbent's facilities, and has the key to the door of another 1,000 exchanges. That strategy costs money, though: In 2005 Iliad spent €207.7 million ($249 million), nearly 29 percent of its revenues, on capital expenditure.

But that decision to take control of its technology developments, as well as its marketing and business strategies, has resulted in massive leaps in subscriber additions, revenues, and profits.

Triple-play attraction
Iliad ended 2005 with 1,595,000 ADSL customers, an increase of 531,000, or 50 percent, from the 1,064,000 broadband subscribers it had on December 31, 2004.

At the end of 2005, Iliad had a 17.9 percent market share of the French DSL market, second only to France Telecom's ISP, Wanadoo SA , which had 49.5 percent of France's 8.9 million DSL users. And it's not as if Wanadoo were Iliad's only rival. At the end of 2005, Neuf Cegetel Group (Euronext: NEUF) had a 13.2 percent market share, with nearly 1.2 million broadband customers, while Telecom Italia (TIM) had 546,000 DSL users for a 6.1 percent market share, and T-Online International AG 's Club Internet service had a 4.4 percent share with 392,000 broadband customers. (See French Carriers Announce Merger, Italians Prep Big French DSL Rollout, and T-Online France Uses Cirpack for VOIP.) Of its near 1.6 million broadband connections, 1.12 million are unbundled lines, giving it total control over the services it can deliver, and the management of those services.

That's important, because Iliad believes its service innovation, along with an attractive price, is key to its growth and customer retention. The company claims an independent study shows that fewer than 8 percent of Free customers intend to change their broadband provider, while its rivals fare much worse, with nearly half of Wanadoo's broadband customers planning to defect.

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