France Telecom Benefits From Roaming Fees as Profit Drops

France Telecom Quarterly Profit Falls 8.1%
Andre Goldenbarg looks at mobile phones on display at a France Telecom SA Orange mobile phone shop in Paris. Photographer: Antoine Antoniol/Bloomberg

France Telecom SA, the country’s largest phone company, said it will bring in revenue faster than forecast from Iliad SA after roaming fees from the wireless rival helped first-quarter sales beat analyst estimates.

Earnings before interest, taxes, depreciation and amortization fell 8.1 percent from a year earlier to 3.43 billion euros ($4.5 billion), Paris-based France Telecom said today. Revenue slipped 2.7 percent to 10.9 billion euros, exceeding the 10.8 billion-euro average estimate of 12 analysts compiled by Bloomberg.

“This is proof France Telecom was better prepared than Bouygues Telecom or SFR,” said Will Draper, an analyst at Espirito Santo Investment Bank, citing units of Bouygues SA and Vivendi SA.

Iliad, operating under the Free brand, became France’s fourth mobile-phone operator in January, prompting price cuts and stealing subscribers from SFR and France Telecom, which sells wireless packages under the Orange brand. France Telecom lost 615,000 wireless customers last quarter in its home market, where the operator generates about half of its revenue.

“We lost a lot of clients until mid-March, after Free came in,” Chief Financial Officer Gervais Pellissier said during a conference call. “We made up for most of the negative effect of the fourth entrant on our mobile revenue with the proceeds from our roaming contract with Free.”

‘Worst is Over’

The roaming agreement will bring in 1 billion euros in revenue for France Telecom over three years, Pellissier said today, accelerating from an earlier prediction for the same amount over six years.

France Telecom rose 2.3 percent to 10.47 euros at 11:15 a.m. in Paris. The stock fell 16 percent this year through yesterday, compared with declines of 3.9 percent for Vodafone Group Plc and 4.7 percent for Deutsche Telekom AG.

“Revenue in France was better than we expected, and France Telecom’s getting more revenue than planned from its roaming agreement with Free,” said Espirito’s Draper, who recommends buying France Telecom shares with a target of 17.25 euros. “We think the worst is over in terms of competition from Free mobile.”

The French operator’s first-quarter Ebitda compared with the 3.44 billion-euro average estimate of 12 analysts compiled by Bloomberg. The profit margin slipped almost 1.9 percentage points to 31.4 percent, the company said.

Revenue from France declined 4 percent to 5.4 billion euros during the quarter. France Telecom’s wireless market share fell 1.5 percentage points. Its mobile customer base shrank 0.7 percent to 26.5 million users at the end of March.

France Telecom confirmed its forecast to have “close to” 8 billion euros in operating cash flow this year.

‘Pricing Impact’

While rivals have turned to cost cuts to make up for profit lost to Iliad, France Telecom’s Pellissier said no “brutal” cost reductions are planned in 2012. The company reduced marketing spending in the quarter. It announced a longer-term plan for costs in February, with projected savings of 2.5 billion euros by 2015 through network sharing, changes in logistics and reducing client service costs.

“Maybe it won’t be enough to fully compensate the pricing impact of the fourth entrant, but it’s something,” said Pellissier. “Either way we’ve said we will not cut jobs in France in the short term.”

SFR is reviewing its strategy and cost structure to offset a projected slump in earnings and yesterday appointed Michel Combes of Vodafone Group Plc as chief executive officer to develop a new strategy. Bouygues SA has announced 300 million euros in cost cuts.

France Telecom is refocusing its business on faster-growing emerging markets as mobile revenue in Europe stalls. The operator last month won approval from Egyptian regulators to buy out the remaining publicly traded shares in its wireless venture with billionaire Naguib Sawiris, part of a $2 billion transaction.


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