Orange Sees 'Peak' Capex in 2018/19, Ups 2017 Guidance

Orange expects capital expenditure to peak in 2018 or 2019, as prepares for the introduction of 5G technology, and has raised its spending guidance for the current fiscal year.

The French telecom incumbent plans to invest about €7.2 billion ($8.1 billion) in capex this year, up from a previous forecast of €7.1 billion ($7.9 billion), with additional funds earmarked for the rollout of fiber networks in Spain.

Orange (NYSE: FTE) spent about €7 billion ($7.8 billion) across its various markets in Europe, Africa and the Middle East last year (about 17% of sales) but wants to "accelerate" investments in areas where it sees an opportunity for "quick returns," said Ramon Fernandez, the operator's chief financial officer, during a meeting in Paris with reporters earlier today.

Fernandez said Orange could "reap the benefits" of investing another €100 million ($112 million) in Spanish fiber networks.

Spain was Orange's fastest-growing market in the first three months of the year thanks to keen interest in "converged" offerings that bundle fixed and mobile services in a single bill. (See Orange Doffs Beret to Spanish Biz for Q1 Growth.)

About 80% of Spanish customers are now signed up to such converged offerings, said Fernandez, compared with 57% in France.

Orange is also under growing pressure in Spain from infrastructure rivals including Telefónica and Vodafone España S.A. that are similarly making investments in higher-speed fiber networks.

Asked about longer-term capex expectations, with next-generation 5G mobile technology on the horizon, Fernandez said that spending was likely to reach its zenith either next year or in 2019 before dropping thereafter.

But he also indicated there is still considerable uncertainty about the impact that 5G will have on spending plans.

"The standards for that [5G] are not finalized yet but what we are anticipating is that we will reach a [capex] peak in 2018 or 2019 and that our capex should then go down in relative terms," said Fernandez. "Some expenditure is related to 5G but we need to have the full picture to assess what is required."

Despite the lack of detail, the update will encourage equipment vendors such as Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK), which have blamed recent earnings setbacks on a cyclical downturn following heavy spending on 4G and with 5G technology yet to hit the market. (See Ericsson's Q1 Even Worse Than Feared and Nokia Turnaround Gathers Pace, Shares Rise.)

While European operators such as Germany's Deutsche Telekom AG (NYSE: DT) have warned investors that spending on 5G rollout across Europe could amount to hundreds of billions of dollars, not all analysts are convinced the arrival of 5G will trigger a surge in operator spending. (See DT Plots 5G Across Entire Footprint.)

The use of lower spectrum bands -- providing better wide-area and indoor coverage than the millimeter wave frequencies that operators are eyeing in other parts of the world -- could help to reduce the bill significantly, as could the relatively newfound ability to upgrade networks through software modifications rather than new hardware investments.

"If I were a vendor I would base my business plan on the equipment market being smaller in the next five to seven years," says Bengt Nordström, the CEO of the Northstream market-research and consulting group.

For all the latest news from the wireless networking and services sector, check out our dedicated Mobile content channel here on Light Reading.

With plans to increase capex this year, Orange looks at odds with some other big European operators that plan either to cut spending or to invest the same as in 2016. (See Russia's MTS: There Is No 5G Business Case, Altice to Slash 2017 Capex Despite US FTTH Plan, French Rivalry.)

That could reflect conditions in France, which still accounts for about 46% of group revenues and where Orange faces a number of fixed and mobile network rivals, including aggressive challenger Iliad.

Earlier this year, Iliad said it would spend between €1.4 billion ($1.6 billion) and €1.5 billion ($1.7 billion) in the French market in 2017 -- an increase of between 7.7% and 15.4% on what it spent last year. (See Iliad to Ramp Up Spending in France This Year.)

In its earnings report for the first quarter, Iliad (Euronext: ILD) claimed to have signed up more mobile customers than any other French network operator during the first three months of the year.

Orange continues to feel that "consolidation would be good for the market as a whole," said Fernandez, even though its strategy assumes France will continue to have four mobile operators for the foreseeable future.

Along with rivals Numericable-SFR and Bouygues Telecom, which it tried and failed to acquire last year, Orange was badly hurt by Iliad's arrival in the mobile market in early 2012 and has only recently showed signs of recovery. (See End of the Bouygues Affair for Orange.)

"It is the first time since 2008 that Orange is back on growth with revenues and EBITDA and that shows how tough the situation has been in Europe and France," said Fernandez in discussing the operator's recent performance.

Orange has been diversifying into financial services and the much-vaunted Internet of Things in an attempt to offset declines in traditional activities. Fernandez said he remained confident that Orange could generate as much as €1 billion ($1.1 billion) in revenues from those growth areas next year.

The company is due to launch a range of banking services in July, having acquired a majority stake in France's Groupama Banque last year. (See Orange Plans Bank Raid With AI, Digital Weapons.)

Nevertheless, it does not expect its banking business to break even for another five to six years and says its aim is to capture just 2 million banking customers in France in the next six to seven years -- a figure that represents only about 8% of its mobile customer base in France at the end of last year.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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