France Telecom hit by writedowns and iPhone loss

by Caroline Gabriel, ReThink Wireless

In a week when European carriers’ results were looking resilient, France Telecom announced a more mixed bag, with full year profit down 35% because of writedowns, but with its mobile base up 11% on 2007 – a feat that will be harder to repeat in France this year, because of the loss of the iPhone exclusive.

Europe’s third largest telco said net income fell to €4.07 billion ($5.1 billion) from €6.3 billion a year earlier, as it wrote down the value of goodwill and paid higher taxes – 2007 results were skewed by a one-off tax gain. Sales were up 1% to €53.49 billion. Analysts were disappointed, having expected profit of €5.31 billion, though revenues were only marginally below expectations.

But gross operating profit was ahead of consensus forecasts, up 2.8% to €19.4 billion (analysts had predicted €19.1 billion), and net income excluding extraordinary items would have risen by 14% to €5.2 billion, said the operator. It added that its goal is to maintain free cashflow at 2008 levels of €8 billion until 2012. It plans cost savings of €1.5 billion a year by the end of 2011, though is not looking for significant job reductions.

The company, which uses the Orange brand, saw slowdown in France and the UK, in particular, and in other mature markets. It is addressing this mainly by trying to attract more revenue from existing subscribers by offering pay-TV services and quad play. But much of its growth will come from new markets, and it has an aggressive African expansion strategy built on 2G, 3G and WiMAX.

The markets were reassured by an increase in the annual dividend from €1.30 to €1.40. “The group provides one of the most generous returns to the shareholder in the sector,” Benjamin Rousseau of CM- CIC Securities said in a research note. “The outlook on 2009 and the medium term are likely to reassure investors about the group’s capacity to maintain cash generation at high levels.”

CFO Gervais Pellissier said 2008 was a “year of very good operational performance” and that growth was ahead of GDP growth in the Orange markets. France Telecom’s charges included €140 million to lower the value of the Spanish internet unit; the writedown of the value of the 20% stake in Portugal’s Sonaecom SGPS; and the write-off of ecommerce businesses that are being closed or sold.

The company’s mobile customer base rose by 11% to 121.8 million, a higher jump than its overall increase in subscriber numbers, up 7% year-on-year to 182.3 million as of December 31. ADSL was also a strong area, with a rise in customer numbers of 9% to 12.7 million. However, in its home country, the mobile arm has been hit by the banning of its exclusive deal with Apple for the iPhone. The major driver of increased mobile revenue in France was increased web usage by iPhone owners, and the handset’s ability to lure customers from other networks, said Orange.

The company will maintain its capex rate of 12% to 13% for 2009, unlike Telefonica, which cut its capex plans by 10% earlier this week. However, FT warned that if the economic climate deteriorates further, it could reduce investments.

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