FT: Beaucoup Losses

If you think you’ve got money problems, a quick glance at France Telecom SA’s (NYSE: FTE) annual results may be reassuring. The former French telecom monopoly announced today that it lost a whopping €20.7 billion (US$22.7 billion) in 2002 -- the largest annual loss in French corporate history (see France Telecom Posts Huge Loss).

While the carrier’s press release today attempts to shroud the results in a positive light, emphasizing increased operating income and improved EBITDA, France Telecom CEO Thierry Breton admitted the company is struggling. “France Telecom is announcing results that are the worst in its history,” he said on a conference call this morning.

Despite the enormity of the loss -- more than double the €8.3 billion France Telecom lost in 2001 -- it should come as no surprise. The carrier recently warned that it expected to report a net loss of between €18 billion and €21 billion.

“The loses, or really write downs, are on track from my perspective as the EU telecom players continue to 'play catch-up' to what has, for the most part, taken place in the U.S.,” Craig Johnson, an independent analyst based in Portland, Ore., writes in an email.

In a separate release today, mobile-phone operator Orange SA (London/Paris: OGE), which is 84.2 percent owned by the French carrier, announced its own €4.54 billion loss for 2002 (see Orange Posts Annual Figures). Both companies were hit hard by massive write-downs of their stakes in a number of different telecom companies.

To be fair, €18.2 billion of France Telecom’s losses last year were due to asset write-downs, including €7.3 billion for German wireless operator MobilCom AG, €1.7 billion for NTL Inc. (Nasdaq Europe: NTLI), €4.4 billion for Equant (NYSE: ENT; Paris: EQU), €900 million for Orange Switzerland, and €1.6 billion in Italian telecom operator Wind Telecomunicazioni SpA. The carrier said today that it’s negotiating to sell its stake in the Italian company, which is controlled by Italian electricity company Enel.

All was not grim, however. France Telecom pulled in €6.8 billion in operating income in 2002, a 30.9 percent improvement from the year before. The company also improved its revenues by 8.4 percent to €46.6 billion, and EBITDA by 21.1 percent to €14.9 billion. The company also reiterated a forecast 3 to 5 percent revenue hike this year and said that it’s aiming for double-digit growth both in operating profits and EBITDA this year.

"We're rolling up our sleeves to support our growth," Breton said on today's call.

In addition, France Telecom said it has reduced its debt, which was teetering dangerously close to the €70 billion mark last June, bringing it down to a mere €68 billion by the end of the year. The carrier said that it expects to generate an additional €3 billion towards debt reduction in 2003 and that it’s aiming to reduce its debt by €6 billion per year in 2004 and 2005.

“What you really see is that they have a huge debt burden that will continue to weigh on them as it weighs on their U.S. counterparts,” Johnson writes. “Managing the Street during the next couple of years will be their main focus.”

Over the next three years, France Telecom said, it expects to generate €15 billion in free cash flow. To achieve this goal, it will cut costs by €3.5 billion by 2005 and reduce capital expenditures for 2003 to €7 billion from €7.4 billion last year.

Orange also confirmed its plans to squeeze hard on its capex (excluding license payments) in the coming years, stating that it expects to spend between €7 billion and €8 billion during the next three years (2003-5), about €3 billion less than previously forecast. This would give Orange, on average, €2.5 billion a year.

That's quite a dramatic reduction compared with the past two years. In 2002, Orange shelled out just less than €3.3 billion on its networks, a decrease on 2001's expenditure of nearly €3.5 billion.

Given that the coming three years will see Orange rolling out its first phase of next-generation 3G networks in prime territories such as France and the U.K., the management team will have its work cut out making that money stretch while keeping pace with 3G rivals such as Vodafone Group plc (NYSE: VOD).

Following today’s announcement, France Telecom saw its share price dip 1.38 percent in afternoon trading on the New York Stock Exchange, falling to $20.75 a share.

— Ray Le Maistre, European Editor, Unstrung

and Eugénie Larson, Reporter, Light Reading

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