A slimmed-down Orange has warned investors that earnings are likely to fall this year amid price-based competition in its domestic market and tough conditions abroad.
Witnessing sales declines in all of its chief European markets, France's biggest operator has been slashing costs and disposing of non-core assets to restore profitability, but restructuring costs weighed heavily on its bottom line.
Compared with 2013, overall revenues shrank by 2.5% in 2014, to €39.4 billion ($45 billion), while "restated" EBITDA also fell by 2.5%, to €12.2 billion ($13.9 billion). That, at least, allowed Orange to hold its EBITDA margin steady at 30.9%.
But other costs lopped more off the final measure of profitability, with net income in 2014 plummeting by 43%, to €1.2 billion ($1.4 billion). Orange (NYSE: FTE) partly blamed employee and property restructuring costs for the slump, noting that it also made payments to settle "certain disputes in France and at the Group level."
Table 1: Orange Squash
|−Rest of world||7,374||7,368||0.1%|
|−International Carriers and Shared Services||1,814||1,770||2.5%|
|Restated EBITDA (€M)||12,190||12,507||-2.5%|
|−As % of revenues||30.9%||30.9%||N/A|
|−Rest of world||2,326||2,312||0.6%|
|−International Carriers and Shared Services||4||31||-87.1%|
|Operating income (€M)||4,571||5,214||-12.3%|
|Net income (€M)||1,225||2,133||-42.6%|
|−as % of revenues||14.3%||13.7%||N/A|
Orange does not appear to be expecting much let-up in the competitive conditions, predicting it will make between €11.9 billion ($13.6 billion) and €12.1 billion ($13.8 billion) in EBITDA this year. That implies that either revenues or margins will take a hit.
A major pain point for the operator remains the French market, which still accounts for nearly half of group revenues. Due to fierce competition from mobile upstart Iliad (Euronext: ILD), Orange has been forced to cut prices or risk losing customers, and mobile revenues fell by 4.5% in the fourth (October-to-December) quarter.
Even so, this marks a big improvement on the decline of 6.1% Orange suffered in the third quarter, and the drop of 8.9% in the first half of the year. Encouragingly, Orange reckons the impact of price reductions is lessening.
While cutting operational costs, Orange has also maintained a high capital-expenditure-to-revenues ratio of 14.5% in France in 2014, up from 14.2% in 2013, as it continues to extend the coverage of high-speed services. Its 4G network was available to 74% of the population at the end of 2014, up from 50% in December 2013, while more than 3.6 million households could obtain a fiber broadband connection, 42% more than a year earlier.
That looks prudent given the likelihood of growing competition in the market for converged services. Last year's merger between cable player Numericable-SFR and mobile operator SFR has created a strong rival to Orange in this space, and reports this week suggest that Altice, Numericable's majority owner, is now examining a possible takeover of Bouygues Telecom , another mobile network operator. (See Eurobites: Numericable Funds SFR Buy With €4.7B Rights Issue and Eurobites: Orange Mulls French M&A Action.)
Such consolidation would leave France with just three mobile operators and could relieve some of the pricing pressure on Orange. Shares in French mobile operators rose yesterday amid speculation about takeover activity, but Orange's share price had fallen by more than 2% in early-hours trading on the Euronext exchange following the publication of results.
Like Spanish rival Telefónica , Orange has been quitting countries deemed peripheral to its core business while increasing investments in key markets.
Earlier this month, Orange and Germany's Deutsche Telekom AG (NYSE: DT) agreed to sell their EE joint venture in the UK to fixed-line incumbent BT Group plc (NYSE: BT; London: BTA) for a fee of €12.5 billion ($14.3 billion). Proceeds from that deal could support other transactions and help to reduce net debt, which represented just 2.1 times annualized EBITDA in December, down from 2.4 times a year earlier. (See BT Locks Down £12.5B EE Takeover Deal.)
In the meantime, Orange is also hoping to conclude a €3.4 billion ($3.9 billion) offer for Spanish broadband operator Jazztel plc . "In Spain, a market which is moving massively towards fixed and mobile convergence, the acquisition of Jazztel will allow us to create the second fixed broadband operator and one of the most dynamic players in mobile," said Stéphane Richard, Orange's chairman and CEO, in a company statement. (See Fiber Sizzles in Spain as Orange Targets Jazztel.)
Revenues from Spain -- Orange's second-biggest geographical market by sales and one that has been affected badly by recent economic problems -- fell by 4.4% in 2014, to €3.9 billion ($4.5 billion), while EBITDA was down 7.8%, to €958 million ($1.1 billion).
Conditions were also tough in Poland, Orange's third-biggest geographical market, with both revenues and EBITDA dropping by 4.5%, to €2.9 billion ($3.3 billion) and €921 million ($1.1 billion) respectively. Orange has been cutting prices to lure customers from rival operators and sales dropped despite a 6.3% increase in the contract customer base. It also reported a 2.6% decline in the number of broadband customers it serves.
— Iain Morris, , News Editor, Light Reading