France Télécom SA Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: Orange (ORAN)

France Télécom SA (FTE) Q1 2013 Earnings Call April 24, 2013 ET

Executives

Gervais Gilles Pellissier - Chief Financial Officer, Executive Director of Group Finance & Information Systems, Chairman of Treasury & Financing Committee, Chairman of Risks Committee, Chairman of Tax Committee and Chairman of Investments Committee

Claire Roblet - Acting Head of Investor Relations

Stephane Richard - Chairman, Chief Executive Officer and Chairman of Strategy Committee

Delphine Ernotte Cunci - Deputy Chief Executive Officer

Jean-Marc Vignolles - Former Chief Executive Officer of PTK Centertel

Vivek Badrinath - Senior Executive Vice-President of Enterprise Communications Services

Analysts

Nick Delfas - Morgan Stanley, Research Division

Jakob Bluestone - Crédit Suisse AG, Research Division

Dimitri Y. Kallianiotis - Citigroup Inc, Research Division

Antoine Pradayrol - Exane BNP Paribas, Research Division

Jonathan Dann - Barclays Capital, Research Division

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

Nick Lyall - UBS Investment Bank, Research Division

Stephane Beyazian - Raymond James Euro Equities

Andrew Lee - Goldman Sachs Group Inc., Research Division

Nicolas Cote-Colisson - HSBC, Research Division

Vincent Maulay - Oddo Securities, Research Division

Gervais Gilles Pellissier

So good morning, to everybody. Thank you very much for joining us this morning. So we just wanted to have our usual conference call on Q1 results. Let me just have an introductory remarks. To say that execution, probably, I would say, it's a little more comfortable than it was a year ago, maybe not as comfortable as we would like it to be forever but probably less uncertainties, better mastering of the situation, especially in terms of commercial activity and in terms of their open [ph], especially on the French market. But also and I think this is for us very important, the first proof that we are serious when we speak about cost reduction.

So to start with Slide 4, the key financials, which has been released this morning. So revenue trend remains difficult, minus 4%. Regulatory issues, mainly termination rate cuts in roaming in Europe represent 60% of the revenue decline, which means that excluding regulatory impact, our revenue declined has been limited to 1.8%.

We have continued pressure on revenues in France and Poland, while Spain and other countries posted strong revenue growth, including Spain.

In spite of this deteriorating revenue trends we have recorded in Q1, an improved EBITDA margin erosion in a sense that now our margin is limited to 0.8 point of margin, with a margin at 34% -- 30.4%, EBITDA down by 6.6%. Just to remind that a year ago it was a 7% decline and the margin rate erosion was much higher with 1.2 -- or 1.8 even margin rate erosion.

CapEx has been kept completely in line with our investment plan, even with an increase of very high broadband in France and the pickup of 4G investment also on the French territory. With all those figures, we feel really comfortable to confirm the year-end guidance of an operating cash flow above EUR 7 billion, and this is what we can confirm today, with all what is attached, including dividend policy and debt policy.

Regarding the cost structure, which of course is -- we -- one of the achievements of the first quarter on Page 5. So first, revenues, repricing effect is spreading into the mobile customer base in France and Poland, but ARPU evolution is kept under control, minus 12% ARPU decrease in France for full year 2013 in contract [ph].

Enterprise is impacted by contractual negotiations in an adverse macroeconomic environment. The result recently disclosed by some of our peers, especially in the IT service industry, shows that this trend is unfortunately shared across the industry. If you'd like further commentaries there are [indiscernible] with the results this morning.

The continued pressure on revenues was addressed by the positive impact of our efficiency plan, with the stabilization of indirect costs, which is one of the key levels to mitigate pressure on revenues. Margin erosion, as I've said, has been limited to 0.8% of revenues compared to 1.6 points decline in first half and second half 2012.

Total OpEx were down by EUR 220 million, minus 3% year-over-year, with, for the first time, indirect costs slightly down. This is the first time for the last couple of years over the last 5 years that our indirect costs are down.

Commercial and content costs were down by 3.3% and labor cost has been stabilized. Our commercial agility allowed us to report the best Q1 mobile contract net adds in France for the last 3 years, with a clear rebound this March, and we are happy with the take-off of 4G in the U.K., as announced yesterday, with 318,000 customers, which is in line with the objective to be above 1 million 4G customers by the end of the year.

On Page 6, what's happening on the cost structure, and you see that on the curve, on the -- which is presented on Page 6. Whereas revenues have been down by EUR 441 million, we had been able to decrease the cost base by EUR 219 million in the same period and to stabilize indirect cost with a slight decrease of the direct cost. 7% decrease of direct cost, as we got indirect cost, labor OpEx have been stabilized, thanks to several labor volume effect, both in France and across our international footprint.

On a year-on-year basis, across the group, the number of employees on a full-time equivalent base has been decreased by 2,250 people, including 1,500 decrease in France, partly explained by the success of the senior part-time plans, which has been reinforced at the end of the year, with an improved key.

The pricing effects negatively affect the favorable volume effect for labor cost but this is explained by the average 2% salary increase in France and 2.7% international. Our commercial activities, I think, this quarter has demonstrated that we continue to take and in some countries to lead the initiative in terms of marketing, and that we are hopefully seeing results, especially are quite noticeable at the end of the quarter.

In Q1, we are implementing many commercial initiatives. In France, the launch of our Livebox Play, resulting in a positive effect on churn, which has been decreased by 1 point and on customer mix, with an increase of premium offers penetration by 7 points plus Livebox Play launch. We have more than 3,000 Livebox Play also subscribed.

Open and Sosh continued to be very successful, with more than 1 million Sosh customers, nearly 300,000 additional customers net adds in the quarter; and 3.4 million Open customers, 400,000 additional customers.

In Spain, we adopted our convergent offers, and we now have 49% of convergent customers versus 20% a year ago. We achieved the best ever DSL net adds, with an increase of 40,000 of the net adds. Both these results had been achieved with the reduction in commercial and content costs by EUR 70 million, in spite of an increase of handset sales by EUR 25 million. This is thanks to an increase in penetration of the SIM-only offer on the French and Spanish market, so the natural dynamics of the market but we are ready to that through [ph] and tight management of retention and acquisition cost on the subsidized base.

With those results, we can confirm the main operational visions we had presented in front of you 2 months ago. At group level, we announced the stabilization of indirect cost over the year. We have already achieved the slight decrease in Q1. Mobile data revenue were up by 22% in Q1, in line with the target to grow more than 10% for the full year. In France, we had maintained our mobile market share at 37%, in line with our target to be above 35% and we have doubled the fiber customer base this Q1 2012. The penetration of our premium offers in broadband gross adds amounted to 38% share since the launch.

In Europe, we now have convergent offers in 4 countries, Spain, Poland, Slovakia and Belgium. We launched new offers soon in other European geographies.

In Africa and Middle East, Orange Money continues to be a success. We now have more than 6,600,000 customers, in line with our target to have 8 million customers by year end.

On the Enterprise segment, given the overall revenue has been disappointing, cloud revenues were up by 20 basis points in Q1 and emerging markets grew by 11% on the same period.

The 2 indications by geographies. To start with France on Slide 10. In France, as expected, the top line continued to decrease, excluding regulations, in spite of a positive contribution from wholesale, as well as from the roaming agreement. Regulation continued to weigh on revenues, accounting for EUR 150 million out of the EUR 330 million revenue decline. The impact mainly comes from termination rate cuts, reaching now a bottom level in France. Just keep in mind that -- we are now at the last cuts at EUR 0.08, and that will be no longer at 1st October.

Excluding the regulations, mobile service revenues declined by nearly 3%, in line with our expectations, while the roaming agreement partly offsets the decrease in retail revenue but not to the same proportion than what we had last year because we already add some roaming revenue in first quarter 2012.

For the France rolling ARPU was down by 10.7%. We see a small 5.5% decrease, excluding regulation, and this is in line with our full year estimates. We'll have a decline of around 12% of the French mobile ARPU. As expected, pressure on those revenues got stronger quarter-after-quarter, affecting the spreading of repriced customer.

The trend in fixed service revenues is similar to Q4 2012 at minus 4.3%. But what's more interesting is that PSTN line loss continued to slowdown during the quarter, minus 15% year-over-year. Broadband revenues were flat but we think that, thanks to the introduction of Livebox Play and of the take-off of fibre, we should be able to show an increase of broadband revenues in the next quarter.

Let me also mention 2 significant upswings since March. On mobile contract net adds, which is a positive figure for March, as well as its fixed broadband share of conquest. This can be higher in March than what it was in February and January.

There's few elements for -- updating you on the French regulatory environment. On mobile, we think that we got a clear competition authority statement on the roaming agreement, which includes provisions on network sharing, on consolidation, on the way 4G roaming should be organized and -- but also even more and more important for us, the confirmation of the roaming agreements we have, which has not been put into question by the competition authority. So for us, all these brings -- has a more positive and, let's say, stable regulatory environment to operate on the mobile business over the next couple of years.

Second decision was refarming of 1,800 megahertz starting on October 1 especially for Bouygues. And then the termination rate cuts, which I said, will terminate in July 2013, the last decrease. But at the same time, we have in July, the end of asymmetry for the 4 [ph] contracts.

On the fixed and broadband business, we have been authorized to increase PSTN access fee by EUR 0.90 from June 4. On very high broadband, the current government plans will, in our view, probably be rather favorable for investors, especially for the biggest investor who is Cons Telecanor [ph].

On unbundling prices, for the first time and I would say following the recommendations of the European Commission, especially the European Commission of Mrs. Cruz [ph], ULL price has been increased as from May 1, 2013 by EUR 0.10.

We have kept in this period our investment capacity, as I mentioned. It's on Page 12 and we have spent EUR 1.1 billion -- nearly EUR 1.2 billion in CapEx, which is nearly 7% increase compared to what we did a year ago and 9% increase in France. Because we already consider that on the very high speed as a broadband or mobile to keep its essentials, to keep a competitive edge against competition, as it is demonstrated for fibre in France today or for 4G in the U.K.

In France, we accelerated our 4G network rollout. We had 50 municipalities covered in April, and which represents 15 broadband RALs [ph] and we intend to cover more than 30% of the population by the end of the year. Our intention is to make our customers aware that we are the best network, including the best backhaul and the best possible speed with a strong speed essential against competition on 4G.

We have also accelerated the rollout of fibre. We have more than 200,000 customers and we are aiming to nearly double that by the year end. And today, our conquest share remains clearly above 50% on fibre.

In Spain, Page 13. Spain, in spite of a difficult environment, in spite of increased competition has been able to continue to post revenue growth plus 0.8% in total, plus 3.3%, excluding regulation, and even a positive mobile revenue growth, excluding regulation, by 0.8%. Profitability balance was again positive, and we are the only one amongst the big guys to be positive, with nearly 10% contract customer base growth compared to March 2012. And this growth has been also fueled by an increase in better ARPU, 32% that ARPU increased between 2012 and 2013.

However, we should notice that the same dynamics start on the Spanish market, with an increased penetration of a similarly [ph] and low-end offers, which is probably different compared to what we had a year ago.

Regarding fixed revenues, they're increased by 16%. Double-digit growth in broadband customer base, with the highest DSL quarterly net adds of 40,000 customers since 2011. And convergent customers now represents 49% of the fixed broadband base. Convergent customers is our customers who are using the 2 of those. That doesn't mean that they have a bundle yet, but different compared to the French situation where we have 20%, now a little more than -- about 22%, 23% of the French customers who have an open contract. So a bundle that is -- more to use the 2 offers from Orange.

Fixed broadband 12 months [ph] ARPU increased by 2%. And in terms of commercial initiative, Orange Spain has launched early April, Canguro offers, which will be a very competitive offer against other convergent offer in the market, especially the one of the incumbent.

In Poland, during the first quarter, Orange Poland extended its leadership position. And I guess, you have followed the release of our Polish colleagues yesterday. We are clearly in a much better situation. We have recovered and reconquested positions on the B2B market, which was a [indiscernible] and we have now a positive mobile portability against Plus and T-Mobile. The more or less it's institutionalized, we are not excluding us to face the new entrants in terms of profitability but we are clearly better than the traditional competitors.

Quadruple-play offer reached 72,000 customers, which means that now convergent offers is a standout within Continental Europe. May be not the case in U.K., also by the nature of the different players who are not convergent per se. But within Continental Europe, we see now that convergence is a standout for huge parts of the market.

Fixed client losses have slowed down from 209,000 line loss in Q1 2012 down to 100,000 line loss in Q1 2013. And Q1 revenues around by EUR 61 million, out of which more than half linked with regulation.

Orange has also launched several initiatives to optimize its future performance, especially in terms of cost savings, with a voluntary departure plan of 1,700 employees for Orange Poland, which have been already chosen by 1,300 employees who have chosen the voluntary departure plan at end of March.

For other geographies, so rest of the world, which is Africa, Middle East and other European countries, we have growth more or less coming from most of the geographies. In Europe, before impact of regulation, but a slight growth except regulation -- excluding regulation, 2.6%. When I say, they are not so bad. But as for regulatory impacts, that's 4.6 points of revenues, which I think is regulatory [ph].

In Africa, Middle East grows up -- also goes up 3.5%, which is unfortunately slowed down by Egypt, even if Egypt reports a 1.5% revenue growth in this very difficult political and economic environment.

Enterprise division, revenues down by 5.3%, which is, let's say, not a good figure, mainly coming from IT services, where in terms of differential compared to a year ago, negative, decreasing with maybe some additional quite pressure because of the macroeconomic environment. And IT service are really linked to the economic cycles, as usual, and seeing where we are, 15 [ph] right now.

Page 18 to close this presentation. As we said, that we have continued with new commercial initiatives. New Origami tariffs in France, launched early April but also 4G start -- with the EUR 10 premium for 4G to start in January 2014. So why do we just price 4G at this real price, the price we see for this real value starts in January. It's mainly because we are opening this service who are trying customers and tell them to take the service this year. This year is the year of adoptions, the year of test because of institution coverage. We are opening the service on the French market, with I think 13% coverage -- with a 10% coverage, sorry. Now we should be at 30% coverage at the end of December, and we think that only -- that's only with 30% coverage that you can really deliver a real perceived service differential for customers, and that it justifies some additional pricing. This is way we see it.

But results that it was very important also throughout the kind of forward pricing strategy, where we tell to people what is the pricing strategy for the future and what should we pay next year when 4G will be implemented, and this is very important for us.

In Spain, we have also revamped our convergent offers with the launch of Canguro, and we have a target to reach 50% of the broadband customer base with this offer. We have also refreshed Amena.com offers and are also taking into account SIMO, which has been the -- purchased from KPN as another low-end brand dedicated to some specific market segment.

In Poland, we launched yesterday a new look at France, new -- to snap up share of the growing low-cost market.

And in Romania, we launched our cloud services for our consumers.

In terms of investment, we keep accelerating on very high broadband investment in France and Spain. We have simplified, and as I see it's very important in our organization around innovation. We've now won a strong view [ph] for group, covering all the value-added shares from R&D up to product definitions but also network management.

In parallel, to improve our efficiency, we have signed towerco agreements with IHS in Ivory Coast and Cameroon, and we continue to invest to get further opportunities on other geographies, to increase our balance sheet in terms of network investment when it's feasible.

On Page 19, I will not comment further, just to say that this is exactly the page that was presented to you last February. So we didn't change any comment on the page for the same guidance in terms of yearly guidance for cash flow and dividends with medium-term guidance for M&A, and that's our commitment.

Maybe just regarding that -- an additional comment, you have all probably got the news of the recent downgrade by Standard & Poor's from a A- to BBB+. But what's important for us is that now we have a stable outlook, and this means that Standard & Poor's has been convinced by our arguments, by our ability to decrease cost and by our ability to continue to maintain this strong liquidity. We have been able to raise just a few weeks ago, EUR 750 million on a 6.5 years maturity at 1.875%, which is the lowest rate ever achieved by the company and just lower that's gone up for our peak years, with better rating for the countries and us or even by our own state test.

And now with my colleagues, Delphine Ernotte, Vivek Badrinath, Benoit Scheen, Jean-Marc Vignolles for Spain to answer to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Nick Delfas from Morgan Stanley.

Nick Delfas - Morgan Stanley, Research Division

Really a question about France and the Iliad roaming contract. Is the use of FTE's network affecting quality at all for your own customers in any areas? And the second question, is Iliad now caring enough traffic in some areas that you could maybe move towards switching off the roaming agreements in those areas as envisaged in the Competition Authority document?

Claire Roblet

So on the quality of the network, the Iliad agreement has no impacts on the quality of the network. And the truth is the test campaign, the asset is running each year and last year, end of 2012, we are the first mobile network with a very huge difference compared to our competitors. For instance, at Orange, you can download twice, 2x faster than the second competitor. So no impact on the quality of our network. So we are the first mobile network in France, definitely the first. On the second point, I'd rather -- you should rather ask Iliad. In fact, it's not a question for us, I guess.

Operator

We will take our next question from Jakob Bluestone from Credit Suisse.

Jakob Bluestone - Crédit Suisse AG, Research Division

I've got 2 questions please. Firstly, looking at the cost cutting, the EUR 219 million reduction in your OpEx, could you talk about if there was any impact from the recent government measures in that OpEx reduction. So perhaps, if you could quantify the impact from the CICE's crédit d'impô. Secondly, on your broadband subscribers in France. You had a fairly low market share this quarter. I guess some of that is seasonality. But it still looks a little low given that -- given your new box. Could you maybe talk a little bit about what you're expecting for broadband net adds going forward?

Stephane Richard

Regarding crédit d'impôt pour la compétitivité et l'emploi, CIC, nothing has been taken in this first quarter, and we'll be very careful in the way to account for it. But if we had to account for it on a full year basis, it would be EUR 75 million positive impact in 2013 and about EUR 100 million in 2014. But also, for you to know, as we mentioned and underlined the negative impact last year, we will underline this positive impact when it will be taken into account. I'll let Delphine answer on broadband.

Delphine Ernotte Cunci

Yes, on broadband markets, it's true to say that the first quarter is always very difficult quarter for us in terms of market share because market is usually quite slow in the first quarter. So as long as we have the biggest competitor on broadband, it has quite an impact on the market share. But nevertheless, we've launched the new box beginning of February and we could -- we've seen very strong impact on the churn minus 1 point just after the launch of the Livebox Play. And we have a real switch within the first quarter. March is quite a good month and we expect it to go on with our Conquest market -- March Conquest market share. It was a good month compared to January and February. And besides, in this quarter, the market was very, very, very weak, so the number of new customers was really, really, really very low. And second point, of course, one of our goal is to regain market share price to fiber. And we can already observe that our new fiber customers are increasing in line with our targets to double our fiber customer intelligence area where we know our market share is weaker than in other areas.

Operator

We will take our next question from Dimitri Kallianiotis from Citi.

Dimitri Y. Kallianiotis - Citigroup Inc, Research Division

My first question was to -- if you are still confident about stabilizing EBITDA in France next year. In particular, in terms -- are you still losing market share? And with respect to 4G, if you think you will still have a network advantage, clearly you've got the best network now. If we will be able to launch on 1,800 megahertz, do you think that will put you at a disadvantage or you still think you would be able to have the best 4G network. By next question was on cost cutting. I mean, clearly, there's a lot of focus there. I just want to ask you if you see any opportunities to increase the cost cutting and where are the main opportunities to cut cost. And my last question is on mobile. Clearly, the 2 years offer from Free is being very successful. We saw -- we got EUR 4. And how do you intend on re-competing hard in the lower end of the market of the very low-end postpaid but also for prepaid.

Stephane Richard

Before leaving the floor to Delphine on the market dynamics in France and what we do, just regarding EBITDA. We have never said we would stabilize France EBITDA. We have said we would stabilize Group operating cash flow, which is, more or less, stabilizing Group EBITDA because we have said, we would not decrease investment. So this is the message. And we still think that there will be still some pressure on EBITDA in France in the course of next year. Now the question is that when next year will we be able to stabilize that, first half, second half or fourth quarter, that's still a question and we are very early today to answer precisely to that. We see some of the dynamics and I think we have, today, a little more capacity than we have next year to plan what should happen. We see some of the positives, especially one point we already mentioned is that we expect next year to stabilize the fixed line revenue in France, which means that then, we will stabilize the EBITDA for the fixed line business, which is the first element. Then, there are still a few uncertainties on the rate of adoption of 4G with that -- how strong will be the ARPU uplift with 4G, still an unknown question, we don't know yet. What will be -- again, if Iliad introduce a subsidized offer, what will be view the behavior of customers. And we are also depending, and you see the point of uncertainty not only for us, but for everybody, on what should be the innovation on terminals. You know that the market dynamics will also depend whether a new iPhone is very innovative, whether a new Samsung is very innovative, whether there are new tablets that can, especially on 4G, further develop the usage more than if there is very little innovation on the handset front.

Delphine Ernotte Cunci

On the quality of the 4G network, I just want to say that there are 3 main assets to have the best network. The first one is the spectrum. And considering we have the largest bandwidth of spectrum both on 2.6 and 800. I'm convinced that we have the ability to have the best speed on 4G. The second thing, of course, is the coverage, the number of antennas and we are accelerating the coverage of 4G. I think we'll be up to more than 30% coverage at the end of the year, considering that Bouygues is going to have quite a good coverage in October. So we know that, of course, and we are competing on the coverage and now, I'm convinced that we're going to be successful. And besides, a very key element of the network. We do not speak very often of this element, but it's key. It is the backhaul, because if you don't have a very high-speed backhauls, you can put all the antennas you want, you'll never have this network. And considering the backhauls, we have the very good one, which is mainly fiber backhaul, so we have the ability to see that in terms of coverage and to guarantee the best piece for our customer. So I think we are on the road to have the really best class network, 4G network in France. And last, we are also deploying H+. H+ is 3x faster than 3G and our coverage is now up to 65% of the population. So there's a real -- combining H+ plus 4G, there's a real competitive edge with the Orange network. On the mobile and the low end, you mentioned the EUR 2 and EUR 4.9 and the EUR 3.99 from Bouygues. We reacted yesterday by launching a Sosh offer, 2 hours SMS unlimited at EUR 4.5 to be able to compete on this low-end market, which is price driven, so we know we need to have the good price point to be competitive. But nevertheless, we do want to be down to EUR 2 because we don't want to be -- we want to be competitive but not aggressive on this low-end market.

Stephane Richard

On your comment on cost cutting. So we had already said that it should decrease our cost by EUR 600 million for Group, out of which, more than EUR 500 million for France, both direct and indirect. We think that the damage is coming both from on direct cost reduction of SAC/SRC reduction of interconnection, so these are the 2 elements, which is the link -- which is the natural link of the industry -- direction of the industry amplifies our own efforts. Let's say, for EUR 1 of savings generated naturally by the move to SIM-only and by the decrease of termination rate cuts, we have probably EUR 0.50 by our own effort. This is what we do. But then on indirect costs, we see a growing impact through the course of the year of manpower decreases, definitely thanks to the senior part-time plans. All the reductions on reducing cost of network, cost of call centers, cost of distribution, so this is -- all this, which is amplifying, and I think we should be above the figures we have been giving at the beginning of the, year but also to face the pressure on revenues that we see still going on, at least for this year and maybe the beginning of next year.

Operator

We will take our next question from Antoine Pradayrol from Exane.

Antoine Pradayrol - Exane BNP Paribas, Research Division

A few questions, please. The first one, to come back on fixed broadband net additions, which were quite low in the first quarter despite the slight acceleration in fiber and despite the launch of the new box. Do you plan to launch new offers or to cut prices or to do something to accelerate, or is it just kind of a natural acceleration that we'll expect in the coming quarters without any changes with your offers? That's the first question. The second question, on mobile in France, I exclude Sosh customers, you still lost 380,000 contract customers in -- if I'm not mistaken, in Q1. So do you think that this can improve in the coming quarters and even may be stabilize or not at all, excluding Sosh? And third, if I look at Spain, the margin in Spain and the impact of the Kangaroo offer, do you think that you can despite Kangaroo, do you think you can still increase your EBITDA margin in Spain in 2013?

Stephane Richard

Jean-Marc, if you can answer the question on Spain, if you're online.

Jean-Marc Vignolles

Sorry. I didn't hear the question, sorry.

Stephane Richard

The question is, can you keep your objective to improve EBITDA in Spain in spite -- after the launch of Kangaroo offer?

Jean-Marc Vignolles

Yes, I think we are quite confident that we can deliver EBITDA improvement because we -- if I need to understand that, although the Kangaroo package, the conversion packages are putting pressure on top line, they go along also with the increase of SIM-only offers in the mobile environment. And by the way, the mobile proposition in Kangaroo is SIM-only, and so the growth of those SIM-only offers has also the development of low-cost offers in the mobile environment like CAMENA and Simyo, with lower commercial and customer-facing cost, should enable us to maintain the trend of our EBITDA improvement.

Delphine Ernotte Cunci

On the fixed broadband, I just want to remind that we have a very -- a switch within the first quarter, with a very good March. So we think the launch of the Livebox Play has a real impact on our ability to regain market share. It's the first point. The second point is we do not intend to reprice the fixed broadband and we intend to keep our price point. Our main ability to regain market share is, of course, our new Livebox Play, but also Open, which is very, very performing with very, very good trend on Open, so we expect it to continue in the year. And besides, we're also working on our mix within our offers, and the Livebox Play enables us to regain premium offers and to improve our mix between low-end offers on the broadband market and premium offers. We have gained 7 points in this mix in 2 months and we expect it to be up to 15 points in the coming months. On the mobile market, we expect the low-end market to continue to grow. Our percentage of premium offers in this quarter is 27%. But I just want to mention that yes, we've lost contracts in this quarter, but it's the best quarter in 3 years even if -- of course, last year was quite unusual, but in 2011, we've lost 145 contracts, and this year, only 86 contracts. And when I speak of contracts, it's, of course, without the end-to-end, so it's real -- well, not real, but, common contract. So I think it's not a big reducing of our base and besides, like for broadband, March was a very good month in terms of mobile because we had positive net adds in March on the mobile also.

Antoine Pradayrol - Exane BNP Paribas, Research Division

Okay. So we should not think of Sosh versus non-Sosh. We should think about the total contract system as dedicated is what you think?

Delphine Ernotte Cunci

Yes.

Stephane Richard

Yes, Antoine, because I think it's the move you will see everywhere in all countries where you have low-end. The SIM-only would be now part of the market. Maybe the slight difference in our comment we made with others is that we see, however, that the 2-year offer is so low, but then, we ensure that at the end of the game, we give you a real-value market share. That's one of the issues. Well, we have decided to cut our offers at EUR 5. We see that EUR 5, there could be some additional update with the incoming calls, et cetera, which remain -- leave a decent -- I would say a decent low-end ARPU, but that's one of the issues in this industry.

Delphine Ernotte Cunci

Within the contract net growth adds, we have 43% of premium offers, so that's the actual figure. And besides, we expect 4G to help us to regain efficiency on the premium offers that's why we didn't launch 4G on Sosh for instance.

Operator

We will take our next question from Jonathan Dann from Barclays.

Jonathan Dann - Barclays Capital, Research Division

It's a couple of not related questions. The first on -- could you just give us a sort of some color on what's happening to the contract ARPU in each quarter. And I guess, if I'm right, you're basically adding 27% of net adds or gross adds on Sosh, but Sosh is about 10% to the base. So if you could put that how many more euros of contract ARPU pressure do you think there is. And then if Jean-Marc could, perhaps, sort of update us on the sort of, I guess the latest in Spanish fiber rollouts. And then finally, you mentioned having a strong mobile backhaul network. Could you just sort of quantify that. How many mobile -- what percentage of mobile base stations have say a fiber backhaul?

Delphine Ernotte Cunci

On the French mobile, considering that, of course, low-end market is going to grow, considering that we -- the reprice of our base and we expect and we are monitoring that. And the average ARPU of our new customers, we think we are completely in line with our guidance at minus 12% ARPU on the French mobile.

Stephane Richard

Jean-Marc, for Spain, can you update people what we do on fiber.

Jean-Marc Vignolles

First, we can say that we have started commercializing our fiber offer in Madrid within the framework of the first rollout of close to 40,000 households, and this is within the framework of the rollouts, which we announced in June last year. And then, of course, you have, at the moment, certain regulatory pressure related to the agreement we reached with Vodafone in March to jointly roll out in 50 main cities, and with the target to reach 80 -- 800,000 households by the end of the year. And we are negotiating an agreement with the incumbent on the conditions and to access vertical cabling, which has led us to announce the slow progress of negotiations to the regulators and the -- on the agreement, as you know, between ourselves and Vodafone to follow the failure to reach our common agreement with Telefonica and [indiscernible] on the shared rollout due to conditions put in this agreement, in particular, the obligation to symmetric rollout in order to access the vertical gaming. So I'd say that operationally, we haven't started. Commercially, we have a the corporation framework to roll out with Vodafone and definitely, we are in a phase where we are trying to obtain from the regulator, the clearing up of the last remaining issues we have.

Delphine Ernotte Cunci

Yes, on the backhaul for the French mobile network, we have a fiber in more than 90% in very dense areas, and I think, all over France, it's more than 80%.

Operator

We will take our next question from Frederic Boulan from Nomura.

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

So couple of questions, please, on French mobile and one question on cost control. So first, on mobile, if you could come back on the drivers of the net addition deterioration, you had positive contracts in Q4, which I think is probably the right quarter to look at, what was driving this because we have price cuts from SFR are in late January, but you reacted very promptly with your promotions in early Feb. And also, I find it surprising, you compared Q1 with Q1 last year, which was when Iliad entered the market, so I think everybody hoped that Q1 this year will definitely be better. So do you consider the SFR cuts and the follow-up cuts from Bouygues and yourself to be as significant step changes in this pricing in the market and, at which we saw from the entry of Iliad earlier in 2012. And secondly, on the phasing in the year, so you have a new range of offers, can you comment on the expectations on the adoption of your those new offers, the impact it will have on ARPU and if we should expect service revenues to deteriorate going forward after a reasonably stable Q1. And lastly, on cost control, so the improvement in margins over Q4, when I look at numbers, seems to be driven by better control in IT and networks and SG&A. If you could give us a bit more color on what you're doing here and if this trend is similar across the business, in particular, if you're seeing a similar trend in the French business.

Delphine Ernotte Cunci

So on the mobile market it's true that considering the 2012 figures, where Orange regained contracts and market share, SFR, even if there were a lot of promotions, didn't. So they reacted, in fact, in January, considering that to be able to regain some market share. So it had an impact on our net adds, that's why we revamped our Origami offers in June -- April in order to be competitive in these premium offers. But the also very big impact of the EUR 2 from Free, launched in December with a lot of commercials beginning at the end of December, and which had a very strong impact in January. In fact, January was rather like January last year, but of course, we reacted better and the impact on the base was much, much lower than it was last year.

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

Okay. And question on the pacing.

Delphine Ernotte Cunci

On phasing, in fact, in our budget, of course, we include our base with price and we included also possible new move from our competitors, so that's why we can confirm that we have -- we are in line with our guidance minus 12% end of 2013.

Stephane Richard

[indiscernible] we see the transition with that cuts. I think with the uncertainties we have living with for the last 3 years, we have now a kind of central scenario, and we have some second or third scenarios in mind when preparing the budget. We have a central scenario and this is why I think we have been able also last year to stick to our operating cash flow commitment in spite of a much stronger impact of Iliad on the market share and on the ARPU than what we could have initially anticipated at the very beginning of the year or even before the Iliad launch, which means that on the cost structure, we are also keeping in mind some additional reports, especially because we don't want to sacrifice the investment. We think that, especially investment in fiber and 4G or H+ in countries where we need to invest, to continue to invest in H+. I don't say we will do nothing on other investment lines. In the traditional 2G, we'd see whether we can increase in some geographies, some DSL in some countries, and in some areas, we might probably slow down some, obviously, investment, but really want to keep the focus on investment because we see this will be the way to differentiate. It's true on fiber to date. I think we will show that at the end of the year more than 1/2 of the net share of conquest, we are regaining ease coming from fiber, okay? That's the additional reconquest from the 15% or the 16% that we have today, to the figures we want to be, will come from -- about 1/2 of that will come from fiber probably, that's very important. And on 4G, we will reconsider looking at what's happening in the U.K. but also looking at what's happening in Switzerland or in the U.S., especially with Verizon. We think that this is a tool for our reconquest. The second point, but I think you know that better than us, is that we think that with the new tariffs, which have been launched by our competitors, they have more or less used the huge part of their weapon. We don't see that much marginal flexibility result impacting the existing customer base even more. And today, everybody has a customer base, including Iliad. I think this is the big difference. The EUR 2 offer of Iliad has been very attractive, but not very attractive for their EUR 19.9 offer. I'm not sure they will show beautiful figures on this part of the business. And I think everybody in the business is behaving as businessmen, but I think nobody wants to have just customers paying EUR 2 a month. Even if you get 50% market share with EUR 2, I don't think you'll make a living with it.

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

I know you don't disclose EBITDA numbers per country, but is it fair to say that some of the good results we're seeing in terms of IT and SG&A are driven by efforts in France or there are some kind of contrasting reality there?

Stephane Richard

The growth of France is now attributing a lot.

Operator

We will take our next question from Nick Lyall from UBS.

Nick Lyall - UBS Investment Bank, Research Division

A couple of questions, please. Could you give us the percentage of the base that you've repriced so far, so the end of Q1 please? And then secondly, you mentioned some scenarios there about your various guidance in France. But what do you assume, from the impact of Iliad moving into the subsidized market, because the one operator who doesn't have any legacy issues potentially is Iliad and they've got 80% of the market still to address, so that would sound like a huge potential difference in scenarios. Could you tell us which one you're taking your central case? And the final thing is this morning, just on the wires on Bloomberg, it was mentioned you were looking at an ARPU decline of minus 12% to minus 13%. It's not much of a difference, but it sounded like a bit of a slip. Could you just say if that was the right number? And any reasons behind that if it has changed?

Stephane Richard

Two comments. One, on the Illiad decision, when you said, not gets issue, I'm not so sure. Because 2 issues, I think, and again, let's see our view of the situation. Why would people enter into the subsidized market? Probably to take some share of the subsidized market, but also to find a way to get familiarity of the customer base in the future, especially with the reliable [ph] of 4G and where I think Iliad might have difficulties to be a first on the departure line. Maybe they will be very good afterwards, but I don't see they will be first on the departure line at least today, and secondly, because they have a huge 2G handset days that they need to move up because they want to make some ARPU with their customers because their customers are just take 2G handsets, they will never consume better, never. And this is, I think, the new, let's say, holy grail for everybody, including Iliad. So again, I don't say that they don't want to fix their market share on the subsidized base as this is, but my feeling is that if they move to subsidies, this is also to enhance their old existing customer base. At least this is my view from outside. I don't discuss that with them and I just give you my analysis like you would give your own analysis on this, too. I'm not too worried, and the second part, we have always said that when you enter subsidy, you enter into no longer lean business approach. You are obliged to get [indiscernible] synergies, you are obliged to get some logistics, unless you just give a discount to customers if they do something, but then it's not really subsidy. And it's quite costly on the P&L and on the cash situation. While I think it is to be managed with care, if I just take the speech of Telefonica and subsidies, I would be very astonished that Iliad goes massively to subsidies, massively. It might do it, but I don't see it can be massive. That's one point. Regarding the ARPU, you are -- sorry to say that, you are a little too much precise. This is because you work with the [indiscernible] company that between 12% and 13%, if you are able to project that, I hire you tomorrow.

Nick Lyall - UBS Investment Bank, Research Division

I’ll take you up on that. Just to be clear, it's not that guidance is slipping on ARPUs, minus 12% to minus 13% is not...

Stephane Richard

No, honestly, we are -- when we said the minus 12%, we were between, let's say, minus 11%, minus 13%. And it's true that -- it is true, but to be very honest with you, it is true that the pressure on price especially introduced by SFR at the beginning of the year is more -- is in a more, let's say, downward scenario as pushed out to the more downward part scenario for our revenues than the upward part. That's very clear. I think everybody understands that and if I tell you the contrary, you would not believe me.

Delphine Ernotte Cunci

On the percentage of the base repriced, we were at 50% at the end of 2012, and we are around 60% nowadays, but what I want to highlight is the fact not only are we are monitoring our reprice base considering the very specific market and the move of SFR. So we are repositioning what we call our fragile customers, so we intend to increase quite a lot this percentage of our base repriced.

Operator

We will take our next question from Stephane Beyazian from Raymond James.

Stephane Beyazian - Raymond James Euro Equities

A tricky question, if I may. Just to come back on what you said about Spain, if you were to be cleared or to have a regulatory in your favor regarding fibre in Spain, would that change your covenant agreement that you've signed with Vodafone then and potentially walk away from this agreement? Or whatever happens, you intend to be building with the Vodafone, the number of homes that you've announced? Second question, if I may, just to come back on subsidies. Is it possible just to give us a sense of what happened recently regarding the level of subsidies? Just trying to think of what potentially could be happening going forward and whether there is some flexibility in stepping up the level of subsidies in the French market. And my third question is regarding their immersion. There's been a couple of comments in the press about that. Could you just come back on what's the stages of the options there and what's the contribution of this business and its margin directly?

Stephane Richard

I will answer first on the immersion and then leave Delphine on the French subsidies and Jean-Marc on the fibre situation. So regarding their immersion, you remember that we took initially, a minority of stakes, which was only last year, of 49%. And I would say then with the willingness of our shareholders to exit probably earlier than initially anticipated, we have taken 100% of the company because we see it is an interesting company. We have said, however, that when we look at their immersion situation and to their competitiveness against other players especially YouTube, who is the #1, that their immersion would need probably U.S.-based partners and probably within the industry other than just investors providing money, because we think that today, the ecosystem of the Internet landscape is probably to be in big alliances with other players, then being able to multiply the audience than just being an isolated like video player. And it's what we have been starting with, to look at potential partners, and it's true that amongst the names which have been mentioned, Jaru [ph] is probably one of the potential partners so we are currently discussing with those potential partners, but we are not yet to a conclusion. Just to mention that last year, I think the immersion made about EUR 45 million of revenues and has a positive EBITDA contribution, was EBITDA positive. So a very slight contribution. So let's be clear, 100% of their immersion in our figures doesn't represent in the aggregated KPIs of the group very much. But we think it's a good opportunity and it's a very interesting French-based business. Regarding fibre, Jean-Marc?

Jean-Marc Vignolles

So the answer to your question is no. I mean the outcome of the regulatory action we have undertaken has no direct impact on the project that has been signed with Vodafone, or the project with Vodafone is in line with our announcement that it makes sense to share the fibre rollout efforts with other players in the market in order to maximize commercial return and also savings. What we are asking to regulation is simply the application of what is already -- has already been stated by CMT, and which is access to the vertical cabling without any restriction of equivalent resources or realm, meaning that we are asking for pricing conditions and technical conditions, sharing of dummies [ph] from household or building owners to access to the company -- the vertical cabling that has already been done by Telefonica or to allow access to our own vertical cabling. So at the end of the day, really, the pace of the rollout and of the project will depend as it should be on, obviously, commercial success and market conditions. But definitely, the project is not under condition of the outcome of the regulatory actions we are undertaking.

Delphine Ernotte Cunci

On the subsidies, there's 2 effects, the volume effect and the price effect. The volume effect is just the number of subsidized gross adds within our gross adds contract [indiscernible]. In Q1, it's 60% of our contract gross adds that are subsidized compared to 73% last year. And the second 1 is the unitary effect. We -- that the unitary subsidy is down by 14% this year. Besides, we are really focusing on high-value customers and always balancing in the middle range offers between more subsidies or low-end offers, because we are -- our guidance is in terms of EBITDA, not only revenues. So we are sometimes, we prefer to propose low-end offers to some customers because it's better in terms of EBITDA. So we are really managing the value effect of our base rather than purely the revenue.

Operator

We will take our next question from Andrew Lee from Goldman Sachs.

Andrew Lee - Goldman Sachs Group Inc., Research Division

I think this might have been answered actually, but just one follow-up question on the handset subsidies in France. I wondered if you could give us a sense as to the incremental proportion of the French market that you think offering handset subsidies would open up to Iliad.

Delphine Ernotte Cunci

I have the answer for Orange, but not for the French market.

Andrew Lee - Goldman Sachs Group Inc., Research Division

That will be great.

Delphine Ernotte Cunci

So it's 60% for gross ads and I guess it's-- I don't know that -- I don't know. You should ask our competitors, but their -- I don't know the percentage.

Stephane Richard

We are also thinking on how it could be. It is not that we don't want to answer, but nobody knows how maybe -- and again, maybe, probably, Iliad themselves, they might have -- they might not have completely decided how they will launch there. And depending on that, it might affect one segment, although the segment, as I've mentioned before, we don't know in what they want to do, what will be your kind of, let's say, enhancement of the consumer base. So how to move the customer, which what they have been very -- they have been doing quite well on the broadband base, don't forget that, with the Free box revolution. And so I mean mainly, first, to enhance and to increase the spending of their own customer base, how to move their 2G base and what part they want to attack for [indiscernible]. You know that probably, your mix of that, depending on how they will produce that is slightly different.

Delphine Ernotte Cunci

There's also a question around 4G. By the end of this year, 1/2 of our mobile range will be 4G. So what is going to be the reaction of Iliad is considering that new equipment will be 4G pocket.

Operator

We will take our next question from Nicolas Cote-Colisson from HSBC.

Nicolas Cote-Colisson - HSBC, Research Division

Just to follow up on your comment on end market consolidation, just wonder what's your take on the European Commission worker and cure regarding the single market. I also have a couple of questions regarding the French market. If you can share with us the indication of churn levels for the Sosh offers, and if you can share some indications of revenue trends for the enterprise market.

Stephane Richard

Regarding consolidation, no, we don't expect this soon, any potential improvement of the conditions for in country or in market consolidation. That is the statement of the Competition Authority in France is very clear, they want to continue to see 4 [ph] players. And I think within the Jergo [ph] case, we should not underestimate in the user cost of this in the pricing put by ourselves and maybe by Vodafone on the value of Jergo with how I see [indiscernible]. But you price the risk that by getting rid of 1 player, even if we are getting rid of 1 player, the regulator and Competition Authority try to keep most of the conditions to give or to allocate spectrum to a new entrant, so to recreate a new player. I think that's part of the game so we don't see a very short-term improvement on that. Regarding the single market, we think that it's a favorable speech. We see it's a good industrial speech. We think that some of the measures might be attractive. Now, how will that play really in the industry dynamic, still a little early to comment on that.

Delphine Ernotte Cunci

On the Sosh question, we do not disclose the Sosh churn, but what I can tell you is that the overall contract churn is improving in Q1.

Nicolas Cote-Colisson - HSBC, Research Division

And on the enterprise market?

Vivek Badrinath

Yes, on the enterprise market, the first quarter has been -- yes, Vivek Badrinath speaking, Nicolas. The enterprise market has been challenging in the first quarter, sluggish in essentially 2 areas in the European geographies, and 1 of them has been network, not on [indiscernible], as you can see on the slide where activity and customer base is increasing, so we've held the footprint. However, we've had a handful of shop price revisions against contract renewals. So we have contracts that tend to have same revenues over a long period, and then when you do the renewal, in particular for 2 customers who had very significant cost-cutting requirements, we exchanged, in a way, our renewal on a longer period against a price reduction going forward. So that's been the main impact for the challenging numbers in the first quarter on the core business. You will find overall and you'll find the same read across from our network equipment vendors and our competitors, Europe has been a disappointing region for all of them in this quarter overall. On the services side, we're facing a pretty sluggish signing environment, contracts take longer to get signed, fewer opportunities in the beginning of this year. It's been a slow start in the IT-based services area after, let's say, a reasonably strong fourth quarter last year in this domain. So what we're doing going forward, first of all, we focus on our growth areas that we mentioned and there, the numbers are holding reasonably well. If you look at cloud revenues, they are 28% with a mid-market penetration of our cloud offering that is quite resilient as of now. Our cloud offerings are reading good success and we launched yesterday, new Unified Communications as a Service offering at a global level. So this helps us to tap into broader geographies than just Europe, and our emerging markets numbers are at plus 7%, which means that our ability to generate revenue outside the European macroeconomic context is a favorable trend for our overall revenue line. And then at a more, let's say, transactional and technical level, we've activated all of the tools of a recovery plan on the quarter 1 numbers, both in terms of commercial drive, upselling activities on the existing customer base. That, as I said, is holding well. So we're holding the customers and we are pushing for upsell both commercially with the commercial team and also with the new products. So we -- and at the same time, as you saw, the renewal cycles and the winning cycles of the contracts has been longer in this first quarter. We've put a lot of pressure to close the contracts faster. We've got some new logos in the very final or just kind of post the first quarter but in the signed phase as of now, which generate good value either on services or on emerging as well. So they're pretty sturdy and in line with our strategy.

Operator

We will take our last question from Vincent Maulay from Oddo.

Vincent Maulay - Oddo Securities, Research Division

Two quick questions. The first question on the net add in mobile in France. And could you use more color on the dynamics within Q1? What has driven the improvement in March versus January, and what could be extrapolated in Q2? And the second question on the Livebox Play. When the new box could positively impact the net adds or, I mean, be more conquest tool instead of migration tool so far? And if you could update on your guidance of at least 6-year ARPU increase on this new book.

Delphine Ernotte Cunci

So yes, we have positive net adds both in mobile and broadband in March, thanks, I guess, to our ability to monitor our base and reduce our churn. Those are mobile and broadband. It has a real strong impact on broadband, minus 1 point of churn in each 1 month, so it's very efficient. And I agree, I think it's going to be also a very strong weapon on acquisition. But I think it was difficult in Q1 because the market was very, very weak, weaker than expected. And so it's going -- I expect it to be more efficient with the acquired position in the coming months. The guidance, yes, is maintained, yes, 6 years ARPU premium with [indiscernible].

Stephane Richard

So thank you very much for having been with us this morning. We'll probably see most of you in the next days or weeks to maybe have additional discussion. Thank you. Have a good day.

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