Orange Hints at 2017 Capex Rise as Spain Buoys 2016 Sales

France's Orange hinted at a capital expenditure increase in 2017 as it reported modest growth in sales and earnings for its 2016 fiscal year, thanks largely to the performance of its Spanish business and despite further sales erosion in its domestic market.

The operator, which maintains networks across a number of markets in Europe, Africa and the Middle East, has long faced tough competitive conditions in France, which still accounts for about 46% of total revenues, and has recently been diversifying into areas such as the Internet of Things and mobile banking to offset pressure in its mainstream telecom business.

Overall company revenues were up 0.6%, on a comparable basis, to around €40.9 billion ($43.1 billion), while adjusted earnings (before interest, taxation, depreciation and amortization) rose 1.3%, to €12.7 billion ($13.4 billion).

Shares in Orange (NYSE: FTE) were trading up 0.86% in Paris at lunchtime on Thursday, at €14.66 ($15.46), but were about 7.9% lower than at this time last year.

While there were sales improvements in smaller European markets, as well as Africa and the Middle East, Spain provided the real impetus, with revenues up 6%, to about €5 billion ($5.3 billion).

Orange attributed the growth mainly to a sharp increase in the 4G customer base following its investments in the network technology, but also flagged major improvements at its fixed broadband business.

Responding to questions about the likelihood of a response from rival Vodafone España S.A. to its promotional efforts, a spokesperson for Orange Spain said the operator was flourishing thanks to its growing base of "convergent" customers who take the full range of fixed and mobile services from Orange.

"When we look at convergent markets, the one who is suffering the most is the one with the fewest convergent customers -- it is a fragile position," he said.

Revenues in France fell by 1%, to €18.97 billion ($20 billion), having shrunk by 0.8% in 2015. Orange blamed the 2016 decline on the impact of roaming price reductions and stuck by expectations that revenues will stabilize this year and grow in 2018.

"When you look at the results achieved in 2016 we can be encouraged in this direction despite strong competition," said Ramon Fernandez, Orange's chief financial officer, during an earnings call with analysts.

The company is also guiding for a further increase in adjusted EBITDA this year and has hinted that capital expenditure might also rise once again.

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Under its Essentials2020 strategy, announced in March 2015, Orange has been plowing funds into the rollout of fiber and 4G (or even 4G+) networks to meet growing demand for high-speed broadband services: Capital expenditure was up 3% in 2016, to €6.97 billion ($7.35 billion), accounting for as much as 17% of revenues before license payments.

"We'll continue this trend of around 17% and maybe a bit more," said Fernandez. "The return on investment is great."

The strategy contrasts with the approach taken by some other operators, which have been cutting expenditure amid tough economic conditions, but Orange claims that its willingness to invest has allowed it to profit at the expense of rivals, especially in the fiercely competitive fiber broadband market.

"Originally there was a [regulatory] call for [fiber] investment and everyone said whether they would invest in areas or not, but some had no intention to invest and they are now lagging behind," said Pierre Louette, Orange's delegate chief executive officer in charge of the General Secretariat and Orange Wholesale France. "So with SFR-Numericable [France's second-biggest operator] we have taken over what they haven't delivered."

Next page: Spend and they will come

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