Global Insight Perspective | |
Significance | France Telecom's first-half 2006 profit has declined by 30% |
Implications | The decline will add to the growing unease about the entire industry, reinforcing the widespread belief of a telecoms-sector slowdown. |
Outlook | Continued revenue growth at France Telecom’s mobile and broadband divisions, and the anticipated synergies from the combination of both under the Orange brand, will be of immense help to the group. |
France Telecom has posted a 30% year-on-year (y/y) profit fall for the first half of 2006, as competition eats away at its fixed-line revenue and the effects of a forced cut in call interconnection rates takes its toll. Net income fell to 2.35 billion euro (US$3 billion) from 3.36 billion euro a year earlier, although the first-half 2005 figure included a 200 million-euro gain from the group's Lebanese unit. France Telecom has admitted that it may not meet its year-end targets. The group's gross operating margin (GOM) also fell on a comparable basis, declining 4.9% to 9.47 billion euro in 2006 from 9.95 billion in 2005. France Telecom said that it had reduced its debt by 612 million euro so far in 2006, leaving it with a debt stock of 47.234 billion euro at the end of the half year.
In its statement, France Telecom reported that its total revenue for the half year ending on 30 June 2006 rose to 25.86 billion euro, a 9.3% y/y rise on a historical basis and 1.4% y/y rise on a comparable basis. Again, its mobile division Orange helped prop up other units. A 6.1% rise in revenue to 13.43 billion euro at its mobile division - Personal Communication Services (PCS) - helped offset a 2.3% revenue fall at its fixed division and a 6.7% revenue decline at Enterprise Communication Services (ECS). Revenue at its Consumer Fixed Services (HCS) division fell to 11.13 billion euro, while that at ECS was down to 3.82 billion euro (see World: 27 April 2006: France Telecom Q1 Revenue Up 2.2%, Thanks to Orange).
Outlook and Implications
- Fixed-Line Unit Continues to Decline: Despite efforts to stem the decline at the fixed-line unit, there is still no reprieve in sight for the beleaguered division. HCS suffered its worst results at home in France as well as in Poland,where rising competition continues to thwart the group's efforts to reverse the decline. In France, the toughest competition comes from Iliad — which launched a GSM/Wi-Fi fixed mobile convergence (FMC) product in May, threatening to further churn customers away from France Telecom. The group has countered the threat with plans to launch its own FMC package before the year-end. In the interim, it is relying on rising VoIP usage to offset the decline at its fixed-line division (see France: 17 May 2006: Mobile/Wi-Fi Roll-Out Rages On as France Telecom Sets Date for Launch, 26 April 2006: Neuf Cegetel Launches Mobile/Wi-Fi Service; Posts US$160 mil. Loss, and 21 April 2006: FMC Debuts with Iliad Wi-Fi/Mobile Service).
- Seeking Growth Abroad: Given that its home market is nearing maturity, France Telecom has rekindled its desire to seek further acquisitions abroad. Last month, chief executive Didier Lombard indicated that the company would pursue acquisitions in Asia and Africa. Indeed, in the last 10 months, it has bid for Tunisia Telecom and Telsim in Turkey, and upped its stake in Jordan Telecom by 10% to gain majority control. The company has also been linked with a total takeover of Belgian operator Mobistar and Austrian mobile player ONE, in order to counter the rising threat of Deutsche Telekom (see Jordan: 30 June 2006: France Telecom Pays US$182 mil. for Jordan Telecom Stake, World: 15 June 2006: France Telecom's New Push in Africa, Asia and Austria: 7 June 2006: France Telecom Set to Buy ONE).
- Restructuring for NExT: In line with its New Experience in Telecom (NExT) strategy, the group has rebranded its broadband unit Wanadoo, and also its business services operation Equant, as Orange. While announcing the rebranding, France Telecom hailed Orange as its most recognisable brand, indicating that all its international operations would be rebranded as such. This strategy of fusing its mobile and broadband units is an attempt to ensure that its divisions involved in the next phase in the evolution of telecoms services operate under one banner and name. The company views technologies such as VoIP and GSM/Wi-Fi as integral to the eventual convergence of fixed and mobile communications services. In the interim, France Telecom hopes to offer bundled services under the same banner, kicking this off in the United Kingdom where it offers free broadband services for customers who sign up to a high-end post-paid mobile contract. Similarly, the company is set to offload its 54% stake in directory services subsidiary PagesJaunes to private-equity investor KKR for about 3.3 billion euro (see France: 24 July 2006: Private-Equity Firm Set to Pay US$4.16 bil. for PagesJaunesand World: 1 June 2006: France Telecom Adopts Orange Brand for Internet, TV and Mobile Services).