Juicy Results From Orange

Petit déjeuner tasted pretty damned fine chez France Telecom SA this morning, as its mobile business, Orange SA, served up some tasty first-half financials (see Orange Has Strong H1).

Turnover, at €8.1 billion, was up nearly 14 percent on the same period last year (for euros read US$, as €1=$1 at present, or near enough).

The wireless giant even expressed confidence that it can continue to grow both data and voice revenues, significantly aiding the digestive process. The stock was up nearly 8 percent in midday trading in London, granting the company's executives even more opportunity to chant the now well overused company mantra “The future’s bright, the future’s Orange.” Give it a rest, please.

Ignoring the continued use of hackneyed phrases, the market was cheered by the rise in subscriber numbers and strong average revenue per user (ARPU) figures, with 2.1 million subscriptions added overall in the first half of the year.

The most interesting development was probably in France, where Orange managed to increase market share to 49.3 percent and stem ARPU decline (down just 1.5 percent to €382 for the twelve months ending June 2002), due to the aggressive marketing of a cheap and cheerful data services offering.

Orange has been nurturing data usage -- and ARPU -- with its "Orange sans limite" offering in France since May, promising an "all you can manger" mobile data (basically, WAP) service for €6 a month. Only value-added services, such as ring-tone downloads and messaging, cost extra. Didier Quillot, the executive VP of Orange France, said this has attracted 45,000 subscribers to date, half of which churned from rival operators.

A similar service is set to start in the U.K. in September, with the whole of Orange's European operations due to have the service by the end of October.

Overall, the company expects to meet its year-on-year revenue increase target of 15 percent for 2002, though it is not promising any more than this. EBITDA growth, however, should top the projected 30 percent.

Orange did not, however, talk about its Achilles heel -- churn rates. Analysts will have to wait until September to digest those figures.

On the international playing field, the operator looks to be punching above its weight in revenue terms. Compared with its main international rivals, Orange has a relatively small worldwide customer base of 41.4 million as of the end of June 2002. Vodafone Group PLC (NYSE: VOD) had 101 million at the end of March 2002, while T-Mobile had 70 million at the end of 2001. Yet, while Vodafone had annual revenues of £22.84 billion (around €36 billion) from this customer base in year ending March 2002, Orange looks set to post up to €20 billion this year if its prediction that it derives only 40 percent of its annual revenue in the first half are accurate.

One of the reasons for this optimism is the operator's belief that it can "extract value" from its international brand and its broad footprint, unlike Telefónica Móviles SA, which has now decided that footprint size doesn't matter. Orange is being picky about both customers and services, though it is by no means spurning prepaid subs, preferring instead to wean them onto a hybrid tariff.

On the question of 3G, Graham Howe, Orange's COO and deputy CEO, told analysts that Orange UK will have "the best [3G] network out there." But when will it go live? Only when Orange believes it can offer the "right" quality of service, Howe adds, which could take a while, particularly as Orange is not splashing around the capex.

Handsets could also be a delaying factor, though. Howe says Orange is being targeted by a number of lower profile manufacturers of high specification, but cheaper, products. He expects Orange to make a decision in 2003 on the devices it will push.

The only reservations analysts had around today's announcement concern Orange's parent. In a research note, Mark James at Nomura Holdings Inc. said he believes France Telecom's funding difficulties will hamper Orange's share performance during the next six months, making it unlikely that the stock will outperform the sector as a whole, however juicy Orange may make its segment look.

— Ouida Taaffe, special to Unstrung
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