When France's Orange began to expand rapidly in west and central Africa in mid-2015, the region must have seemed like fertile ground to an operator facing a drought in its domestic market. Hoping to flog a range of telecom services to African businesses and consumers, Orange boldly announced that it would aim to grow sales on the continent by 20% in the four years from 2015 to 2018. Earnings, it said, would grow even more impressively thanks to cost-saving efforts. (See Orange Aims for 20% Sales Growth in Africa.)

But the recent publication of financial results for the 2016 fiscal year has made those targets look challenging, to say the least. While Orange (NYSE: FTE) does not break out figures for Africa alone, revenues from its various operations in Africa and the Middle East grew just 2.6%, to about €5.25 billion ($5.6 billion, at today's exchange rate), and earnings (before interest, tax, depreciation and amortization) fell 1%, to €1.66 billion ($1.78 billion). (See Orange Hints at 2017 Capex Rise as Spain Buoys 2016 Sales.)

The situation had looked much better this time last year, when both sales and earnings across those markets were shown to have risen about 5% in 2015. Such annual growth rates in Africa would ensure Orange remained on course to hit its 2018 target. Falling below that level would leave the operator with a sales Kilimanjaro to climb in subsequent years of the forecast period.

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What detail the French operator does provide is not encouraging. For a start, Orange's only Middle Eastern markets are Jordan and Iraq, and in the latter it holds only a 20% stake in a mobile operator called Korek Telecom. In Africa, by contrast, it has a presence in as many as 19 markets. The Middle East, therefore, seems likely to account for only a sliver of regional sales and profits.

Then there are the movements in customer numbers. In the last three months of 2016, Orange picked up another 7.2 million mobile customers across the region, giving it 120.7 million altogether. Yet this increase looks entirely due to the consolidation of businesses it had previously acquired in Burkina Faso and Sierra Leone. In fact, it seems that Orange would have reported a net loss of about 200,000 customers in the quarter were it not for this takeover activity. In its financial report, the French telco blames a year-on-year decline of 0.3% in customer numbers on "an unprecedented level of disconnections linked to the strengthened requirements regarding verification of customer identities in most countries." (See Orange Buys Airtel Ops in Burkina Faso, Sierra Leone.)

Moreover, Orange was last year hit by what a spokesperson calls a "significant devaluation of the Egyptian pound" and a deterioration of the local economy in the troubled Democratic Republic of Congo. It also attributed the fourth-quarter slowdown in revenue growth to a "decrease in services to operators" across Africa and the Middle East.

Even so, Orange claims it has almost finished addressing regulatory requirements regarding the identification of customers, and that its customer base is now "growing again." On another bright note, it also flagged an increase in revenues from both mobile money and data services in 2016. Indeed, mobile money revenues are currently growing by 50-60% annually, says Orange's spokesperson. But they are not expected to contribute massively to sales in the short term, accounting for just 2.6% of regional revenues last year. And data growth may bring challenges of its own.

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Most obviously, there is industry-wide concern that take-up of mobile Internet services deals a blow to African operators' bigger voice and text-messaging businesses. Most African mobile customers are still on prepaid deals, and only pay for services when they actually make calls or send texts. That makes the use of low-cost Internet telephony and messaging services a much bigger threat than in more developed markets, where smartphone customers typically pay a flat rate for a bundle of voice minutes, text messages and data megabytes. Research shows that consumers in a number of African markets have been able to save money by purchasing a low-cost data package and using services like WhatsApp or Viber instead of traditional telco offerings. (See Africa's Data Dilemma.)

Asked about such pressure in 2015, Orange downplayed any suggestion that usage of web services was cannibalizing mainstream sales to a significant degree. But Marc Rennard, a deputy CEO who was then responsible for the Africa business, did acknowledge there was some "pricing pressure" and even argued that telcos should be able to charge web companies for bandwidth usage -- a controversial practice that is opposed by regulatory authorities in some other parts of the world.

Quite possibly, the rising adoption of so-called "over-the-top" (OTT) services is starting to put more pressure on older revenue streams. But Orange would not comment when asked what impact OTT services are having. "There is no story to tell in this area," said the operator's spokesperson in comments emailed to Light Reading.

In some ways, Orange's African push seems anachronistic. Rapid expansion into emerging markets was all the rage during the mobile telecom boom, when few people owned phones and everybody wanted one. Most of those markets now look saturated. Growth depends largely on selling new services to existing customers, and the continent's idiosyncrasies could make that harder in Africa than elsewhere.

If Orange seems warier of discussing short-term growth targets than it was in 2015, it still insists that Africa is the place to be. "With a fast-growing demography and rapidly growing economies, Africa is without any doubt a certain bet for future growth," said the operator's spokesperson. "We remain confident that over the next 20 or 30 years Africa will see the highest level of growth in both population and the economy."

That Africa remains a "strategic priority" was made very clear in an announcement from Orange earlier today. Flagging its launch of the Orange brand in Burkina Faso, where it took over a business from India's Bharti Airtel in January last year, Orange said it would continue to focus on developing its mobile money and data businesses in west African markets, and expand an optical fiber network to meet growing connectivity demands from enterprise customers. All of that should lay the groundwork for the business transformation that lies ahead. Making it pay will be the next challenge. (See Eurobites: Deutsche Telekom Hosts NB-IoT Olympics.)

— Iain Morris, , News Editor, Light Reading