Orange's (ORAN) CEO Stephane Richard on H1 2016 Results - Earnings Call Transcript

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Orange (NYSE:ORAN)

H1 2016 Earnings Conference Call

July 26, 2016 2:30 AM ET


Stéphane Richard - Chairman & CEO

Ramon Fernandez - Deputy CEO, Chief Financial and Strategy Officer

Fabienne Dulac - Senior Executive Vice President

Gervais Pellissier - Deputy Chief Executive Officer

Pierre Louette - Chief Executive Officer Delegate

Thierry Bonhomme - Senior Executive Vice President, Orange Business Services


Dimitri Kallianiotis - Redburn

Nawar Cristini - JP Morgan

San Dhillon - Exane BNP Paribas

Stéphane Beyazian - Raymond James

Nicolas Cote-Colisson - HSBC Bank


Good morning, ladies and gentlemen, and welcome to the Orange’s First Half 2016 Results Conference call. The call will be hosted by Stéphane Richard, CEO; and Ramon Fernandez, Deputy CEO and Chief Financial and Strategy, with members of Orange executive committee for the Q&A session that will start after the presentation. Thank you. And let me hand over to Mr. Stéphane Richard. Please go ahead.

Stéphane Richard

Good morning everyone. Welcome to this meeting. We're going to present you our results for the first half of this year. I will start with the main figures and a few comments on our commercial performance in all our countries. Maybe first the main figures.

In this first half of 2016, the first point to highlight is the top line of the Group. The revenue exceeded slightly €20 billion. It's still some slight growth 0.3% year-on-year. It means that we are confirming the positive trends in our revenues that we have seen for the last three quarters.

In terms of EBITDA, we are flattish, slightly still positive in terms of restated EBITDA. And this figure is perfectly consistent with our guidance of restated EBITDA in ‘16 which will be above 2015. In terms of CapEx, we are still at relatively high level of CapEx. It's major points which explains also our strategy and which is the key of our commercial performance. So CapEx this semester will be - has been €3.2 billion, which is 7.8% growth compared to the same period of last year.

And in terms of balance sheet, and thanks especially to the proceedings of the EE sale, we have net debt to EBITDA ratio under 2x at 1.95x.

Let's see now a few, once again, key figures regarding our commercial performance. You can see that we have been very efficient in all our markets, especially regarding very high broadband both in fixed and mobile. First regarding 4G, we have nearly doubled our customer bases in one year with 22.7 million 4G customers all around the world, and I want to highlight specifically the performance of Spain and of Poland with 2.5 more customers in 4G than last year but still very good trend in France with growth of 68%.

We have also accelerated strongly in FTTH and I just want to remind that Orange today the operator in Europe which is the most advanced and the most also efficient in terms of FTTH both rollout and now commercial impact, so we have doubled once again our customer bases at 2.5 million customers, especially driven by France of course and Spain. Resulting from this is also a strong growth in IPTV customer bases. We have today over 8.1 million TV customers in Europe and this is also due to the success of fiber-to-the-home and convergence which is still also a very - still powerful driver in our performance. We have over 9.5 million convergent customers in Europe with still good trends in France and Poland.

A few highlights on our investments. As I mentioned earlier, we are still in a cycle with high intensity of CapEx. It's a key point in our business and in commercial also model. We want to differentiate by the quality of our offers, truly speaking, especially based on the quality of networks, quality of customer experience, and this requires of course a high level of investment. So this can be seen here with especially the acceleration of FTTH rollout. You can see that we have over eight million connectable homes in Spain, nearly six million in France and it's the really now starting of FTTH rollout in Poland.

In 4G, we have - as you can see, we have now over 82% of coverage in France and we are well ahead of the competition in France. I just want to remind that Orange has been ranked number one network in this country for the sixth consecutive year, and so high level of CapEx and capacity to differentiate by the quality of our networks.

And at last a few quick comments on the footprint evolution. This first half of 2016 has been relatively active with especially two rebranding operations in Belgium and in Egypt. So this is also a major step in so far as the brands, Orange, which is one of our major assets is going to be - has been introduced now in those two countries, Belgium and Egypt. And in Egypt, it’s 33 million customers that are today Orange customers. We have also acquired a cable operator in Moldova and now we - thanks to this operation, we are fully convergent in this country. This acquisition will be totally completed in the next month.

We have closed the acquisition of a few Airtel’s operations in Africa, Burkina Faso, Sierra Leone and also Liberia. We have acquired and we are in the process of integrating Tigo in DRC playing the consolidation in this large country where we are today number two, and we have closed the EE disposal I think in a very good timing and also the disposal of our operation in Kenya.

I now ask Ramon to enter into more details about those very good figures.

Ramon Fernandez

Thank you. Thank you, Stéphane. Good morning to all. So turning to Slide #9, you can see that in the first half, Group revenues increased by €61 million, thanks to an improving underlying trend in France and growth in Spain, Africa, Middle East, and in Enterprise.

In Q2, Group revenue was slightly positive, mainly driven by the strong performance of fixed services with very high broadband at plus 4.7%. France of course was notably impacted by the decrease of national roaming but it's interesting to note that the underlying trend continues to improve despite very strong competition on the mobile market and we will come back on this point later.

Europe performed well, especially Spain with plus 6.2% growth. Africa and the Middle East area reported a more moderate growth of 2.3%, driven by Ivory Coast, Mali and Egypt. And finally, Enterprise grew for the second quarter in the row with plus 0.1%.

Turning to the EBITDA. In Q2, restated EBITDA was up 0.1% despite the costs linked to the Euro 2016 sponsorship and the rebranding of Mobistar and Mobinil. Excluding these effects, underlying growth was plus 1.5%. We successfully reduced our cost by €49 million, many thanks to a decrease in labor, distribution and equipment costs. We also continued to improve our operational efficiency through the implementation of our Explore 2020 program.

This performance supports our 2016 restated EBITDA guidance. As already announced, H2 will show a better trend as it should not be impacted by exceptional elements. This performance combined with the gain on the disposal of EE for €2.2 billion led to a consolidated net income multiplied by close to three at €3.3 billion as you can see on Slide 11.

Net income Group share, excluding EE, increased by €262 million. This is mainly the result of a better reported EBITDA, reflecting the improving underlying trend and also lower taxes compared to 2015. The increase in depreciation and amortization level mainly reflects the change of perimeter following the consolidation of Jazztel and Meditel, and the impairment of Egypt is linked to the impact expected from the ongoing award of a new 4G license.

Turning to Slide 12. In H1, we reduced our net debt by €2.1 billion to €24.5 billion. We received €4.5 billion in cash in January for the EE disposal. We also have 4% of the BT shares, and we pursued our selective M&A policy extending our footprint in Burkina Faso, Liberia in DRC. Sierra Leone was closed in early July. We also continued to enforce our leadership with new spectrum, notably in France and Poland that impacted our net debt in H1 for €1 billion and we increased our CapEx to support the very highly broadband strategy as previously mentioned.

As of June 2016, our net debt to restated EBITDA ratio was at 1.95x compared to 2.01x at the end of 2015, and this leverage is fully consistent with our guidance. Our liquidity position remains strong with €13.2 billion at the end of June, including €7.1 billion in net cash.

Turning now to the business review starting with France on Slide 14. You see that the second quarter confirms the improvement in operational trends. First on fixed. Fixed broadband revenues, growth accelerated at 4.4% in Q2, driven by fiber growth with 1.2 million customers. The convergent offers discount was compensated by an improvement in the retail customer mix and the ARPU on broadband decreased slowly at 0.2% year-on-year. It even increased in fact on a sequential basis. It was €33.1 in Q2. It was €33 in Q1 2016.

Fixed wholesale revenue increased by 4.1% with growth in ADSL, bitstream and fiber co-financing among other issues. In fixed and other band [ph] revenue decreased, as expected, by 12% due also to the end of the positive impact of the tariff increase we had in March 2015, while the trend in the customer base erosion continues to improve.

Looking at mobile. Mobile services revenue decreased by 5.2%. It was impacted by two factors: first, the decrease in national roaming; and second, regulatory changes with the decrease in European roaming rates and also the end of a surcharge on special service numbers that began in late 2015.

Despite these adverse factors, the mobile ARPU trend was in line with the first quarter decreasing by 0.8%. It was 4.5% in Q2 2015, and this is driven by our capacity to maintain prices at a premium even on the low-end segment despite as a result of competitive environment. In H1 in France, restated EBITDA was down 2.6% negatively impacted by the first significant step down as I said in national roaming revenue. Other negative impacts essentially the exceptional employee profit-sharing and the employee share planning Q1. The increase in the so-called [indiscernible] and adverse weather conditions leading to higher network maintenance costs also weighed on the restated EBITDA.

If you exclude these effects, restated EBITDA was up supported by ongoing efforts on costs. We further reduced distribution costs as well as labor costs.

Turning now to the commercial performance, let's have a look at mobile on Slide 15. Despite a very competitive environment, our mobile customer base showed significant growth in Q2 with plus 153,000 net adds, supported by our market segmentation strategy, and confirming the attractiveness of Orange offers while we managed to maintain a price premium versus our competitors. We successfully posted positive net adds both on the orange co-brand and on Sosh with respectively plus 39,000 on the Orange co-brand and plus 114,000 on Sosh, which is with no doubt are very good performance in this environment on the French markets.

Convergence continued to drive the customer base growth with 50% of the consumer voice contracts on open offers at the end of Q2, which is an increase of 5 points year-on-year. The quarter also showed further improvement in the contract churn rate, which is now at 12.7%, its lowest level since 2010. I recall that it was over 16% in 2014, so it's very important improvement. And SIM-only offers continued to be predominant in our acquisitions. Today we have 58% of our customer base on the SIM-only offers.

Last, you also see on this slide that 46% of our contract customer base now benefits from the quality of our 4G network at the end of the second quarter. This is 18 points more compared to the previous year.

Turning to fixed. On fixed broadband, once again we had a record quarter with 93,000 broadband net adds. It is the best second quarter since 2009 fully supported by our fiber strategy with 106,000 of FTTH net adds, of which more than half are new Orange customers. All in all, the broadband customer base increased by more than 4% year-on-year with the FTTH adoption rate at 20%. This is up 3 points year-on-year. Thanks to the superiority of our fiber network we were not only able to regain broadband market share but also to improve our customer mix increasing by 2 points the share of premium customers, and you can see that as a result fiber combined with the convergence continues to be a strong tool to conquer and upsell customers.

Let's now move to Spain where overall revenues grew by 6.2% in Q2, confirming the return to growth achieved in the first quarter. This came as the result of better trends in both mobile and fixed broadband. First, mobile revenues increased by close to 9% in Q2, 8.9%, driven by the 5.5% year-on-year growth in the contract base and also supported by several service upgrades initiated at the end of 2015 and in the first half of 2016. Our 4G user base increased by 81%. It reaches now 6.4 million customers.

Orange leaded the 4G Spanish market in the first quarter and we expect to maintain our leadership in the second quarter.

On fixed broadband, revenues increased by 9.4% in the second quarter, driven by 5.1% growth in subscribers and 12% growth in broadband ARPU, which is fuelled by both fiber and TV offers, leveraging on our extensive fiber rollout, FTTH customers multiplied by close to three over 12 months, now reaching 1.2 million customers, the same figure as in France, and TV subscribers multiplied by 2.8x over 12 months, thanks to our comprehensive and competitive offers.

With regards to convergence, Orange is the most dynamic operator in Spain having the highest penetration of convergence in its fixed broadband base. Now it's 83% and still growing. As a result, in the first half restated EBITDA grew by 15.4% that is plus €84 million reaching almost an EBITDA margin rate of 26%, thanks to revenue evolution and to the accelerated integration synergy so really a very good performance in Spain.

Turning to Poland on Slide 18. The overall revenue trend slightly improved. It is still at minus 3.5% year-on-year with a better trend in mobile and obviously ongoing pressure on fixed services. Mobile service revenues improved. They were down 1.7%. It was 2.1% in the previous quarter driven by, in the second quarter, very strong contract net adds at plus 222,000. This is an increase of more than 30% compared to Q2 last year and we also see that mobile equipment sales also grew strongly due to the transition from subsidies to installments.

Competition on fixed from cable kept pressure on revenues which were down by 8.9% year-on-year. And in order to address this, we pushed ahead first with our convergence as strategy with 40% of our broadband base which is now on convergent offers, and second with our very high broadband strategy with 20% of our base now on VDSL or FTTH. This quarter the company posted 43,000 net adds in very high broadband. It was only 25,000 a year ago and we are deploying also our strategy on fixed LTE mobile technology, which replaces fixed access in the areas where our fixed broadband is not the best.

Let's now turn to Belgium and Luxembourg on Slide 19, where we see that Q2 consolidated revenue decreased by 1.6%, but excluding regulation they were positive 0.4% driven by mobile service revenues increasing 0.9% year-on-year. Orange Belgium boosted solid contract net adds of plus 18,000 excluding machine-to-machine. Another key factor in Belgium is the good performance in terms of annual contract ARPU which is improving by 3.4% this quarter. And last but not least, Orange Belgium contract churn kept improving versus Q1 inbothB2B and B2C segments.

Together with the successful rebranding in May, Orange Belgium pursued its positive commercial momentum in fixed very high broadband in Q2 by reaching plus 10,500 customer base with the launch of its convergent offer. Restated EBITDA in Belgium in H1 increased by 2% as a result of both the positive trend on the top line and the sustained focus on cost optimization.

In Central European countries, we had the fifth consecutive quarter of revenue growth. It's solid 1.5%, mainly driven by Romania, which represents close to 60% of the sub-segment and 2.3% of Group revenues. The contract-based momentum in Central European countries is good. The base is increasing by close to 4% year-on-year, close to eight million customers. 4G also is going up, standing at 2.4 million with an increase of 0.8 million customers over the first half. And following the signing in Romania of a fixed wholesale access contract with Telekom Romania and the acquisition of Sun Communications in Moldova, we are proud to be able to provide full convergent offers soon in all countries in this sub-segment. So we are now in Europe, convergent everywhere.

Turning to Africa & Middle East on Slide 21. You can see that growth slowed down in the Q2 at plus 2.3% impacted by a lower international wholesale revenue growth and by the customer identification process which had been toughened in several countries and these affected volume growth. However mobile customer base was back to positive in June with mobile services revenue up 3.4% in Q2.

On the other side our strategy based on mobile data increase supported by the smartphones penetration, development of services such as Orange Money or e-commerce and also the diversification of our revenue mix with the rise of the B2B segment continued to be successful in this region. Data revenue increased 43% while Orange Money revenue grew 51% in Q2 with 19 million customers, and monthly transaction value of €1 billion on Orange Money. B2B were also on the rise with 8% growth year-on-year.

H1 restated EBITDA was stable year-on-year with lower contribution from the growth in revenues. The cost base supported 3G and 4G deployment and also international traffic increase. It was also negatively impacted by new taxes in the region. Last, in order to prepare for the future, we recently acquired new 4G license in Senegal and Ivory Coast and by now we are commercially launching 4G or having 4G in nine African countries.

Last segment before turning back to Stéphane for our 2016 guidance, Enterprise. On Slide 22 where we have revenues growing for the second quarter in the row with plus 0.3% year-on-year after plus 2.1% in the first quarter. This is supported by a better trend in voice services, data services growth and still a good performance on IT services. Voice revenues improved, not only thanks to the improving trend of legacy revenue but also thanks to the strong growth of voice-over-IP services.

Data services trend continued on their good momentum in France and we had also a strong international performance. And IT and integration services grew 1.2%, and this was driven by security services and cloud, strong growth. As a result, the H1 restated EBITDA increased by 10.4% driven by revenue growth and ongoing efforts on costs. Stéphane?

Stéphane Richard

Thank you, Ramon. So with this set of results that we see as a very solid in all our markets and in all our different activities, we can confirm fully the guidance for this year that we gave at the beginning of this year. The first point of this guidance is about EBITDA. We want to deliver in 2016 the restated EBITDA above what we did in 2015 and we clearly reiterate and confirm this target for this year.

In terms of balance sheet, we are under 2x and so easily confirming the level of net debt to EBITDA ratio in the medium term around 2x. In terms of dividends, we clearly confirmed the €0.60 dividend for this year and we have decided to pay level - interim dividends on December 7 of €0.20. And no change in the M&A policy, that would remain very selective within a very disciplined management of our balance sheet with a strong focus on existing footprint.

So this is what we wanted to tell you. Now, I am here with the full team around me and we are available to answer your questions.

Question-and-Answer Session


Thank you. [Operator Instructions] We will now take our first question from Dimitri Kallianiotis from Redburn. Please go ahead. Your line is open.

Dimitri Kallianiotis

Good morning. I've just got three questions. The first one is regarding French mobile service revenue growth, which deteriorated in Q2. I just wanted to ask you, what's your view for H2? Do you expect that deterioration to continue? Do you expect any improvement, I guess, based on your expectations in terms of regulation and revenues from Iliad? Second question is regarding Spain which was very good, very strong performance. Again there I wanted to ask you how much is driven by Orange outperforming the market and how much is driven by the market itself, and if you expect any changes there, any more competition you expect, I don't know, from MásMóvil or anybody else? And my last question is regarding regulation in France. ARCEP is launching a new consultation on fiber and is talking about introducing new regulation on your fiber in dense areas in particular, I guess, to help the weaker Iliad who have underinvested in fiber. I just wanted to ask you, are you prepared to open your network to some commercial agreements, or will you fight against any regulation to make sure you make a decent return on fiber? Thank you.

Stéphane Richard

Thank you. So regarding the first question, French mobile services revenues, I will ask Fabienne Dulac, the Executive Director for France to give you an answer. But I just want to start by telling you that I don't see any deterioration. I see quite amazing performance in a very competitive market regarding French mobile as surely speaking. But now Fabienne will provide you with more extended explanation.

Fabienne Dulac

Yes, this first semester and quarter two was very specific because it's the first time we saw so much promotion and private sales. It's a very turbulent and competitive market. In this context, the mobile ARPU is down by 1.6 Q-on-Q and in Q2 basis, but I would like to say this growth is exclusively due to decrease in European roaming and new regulatory on special numbers. If you remember we talk about it last quarter fixed. And except this effect, ARPU is increasing, thanks to our capacity to maintain our price premium and thanks to the customer value mix. It’s a good performance in the market extremely turbulent and with a lot of promotion. I remember you some promotion about zero euro in this market. I never saw that before.

Stéphane Richard

Okay. But probably we will come back to the mobile service and mobile business trends later in this conference. I will ask maybe Gervais to commence the Spanish performance.

Gervais Pellissier

Yes, good morning. Regarding the comparison with competitors, we don't have yet the Q2 from competitors because they will publish afterwards but if you refer to the performance on Q1, we are clearly ahead in terms of our revenues even if we have observed that everybody including our two main competitors in terms of service upgrade on one hand but also in terms of net adds are also catching up, so this is also market which is slightly better than it was. This is what you asked but we see that in Q2 we would be also slightly ahead of competition in terms of revenues which should help us to win few other basis points of market share in this market.

Regarding MásMóvil, we are just now in the expectation of the final approval of the purchase of Yoigo [ph]. There are still financial requests we will see. We think that MásMóvil will be an active competitor but limited to certain areas in Spain regarding fixed markets and this is clearly in line with our expectations when we decided to acquire Jazztel and when we are being discussing the Jazztel acquisition with the competition. So it is at European level. We use that as we have sold some of the remedies to MásMóvil, I just mentioned that we sold 700,000 fiber access and this is in line with our expectations. We should have first competitor but not fully acting on the whole territory in Spain but this is in line with our expectations.

Stéphane Richard

Okay, now I’ll ask Pierre to maybe make a full point on regulation of fiber in France, where we are, what can we expect, and what is our view and strategy over the next debate on regulation.

Pierre Louette

Thank you, Stéphane. So we have, as you know, a very detailed regulation in France when it comes to FTTH and which is segmented by area, the very dense area, the less dense areas and the really not dense areas. We are also looking at a situation in which, the ARCEP, the regulator is putting consultation a document on in the perspectives and the situation of the broadband market in France. So they are launching full and detailed market analysis. It goes into the retail market but also the enterprise market. So we are going to be giving elements to ARCEP with regard to those market analysis. As you know those analysis are imposed every third year actually by the European frame regulation and so we will contribute to those regulations but we will contribute with a few simple and clear ideas.

The first idea we have is that the existing regulation allows completely for everyone to invest, co-invest and show their dedication to producing FTTH networks in France. It is very open. It has been organized that way. So in the very dense areas it’s an infrastructure-based area, so you can invest if you want to. If you don't want to invest, you don't invest. And if you have less market share may be because you've invested less so things are rather simple and you get what you deserve or you do not get what you do not deserve. So that's a very simple principle. Has nothing to do with models but it has to do with financials and putting your money where your mouth is actually.

The second area is the less dense area and this is based on co-funding, co-financing. Last year one of the most vocal players of the market, Iliad was short on co-funding. They did not co-fund as they had said they would, so - and this year they’re doing - probably they are doing what they had announced, so this year they're trying to catch up a little bit but last year they were just not doing what they had announced.

And with regard to SFR, as you know they basically stuff doing anything for the last two years and now they say, yes, we are getting back to the market, we are going to invest again. So we are going to be expecting to see signs of their new dedication to FTTH which has not been very evident in the last years. So we are looking at that situation with a very simple approach. We have decided to invest actually in the very dense areas after Iliad but we have chosen a technique which has proven to be the good technique. They chose wrong approach. They put also their NROs [ph] in the wrong place and they are lagging behind now. And as ARCEP knows all of that and knows that the company really doing the job in FTTH is Orange and it's also the reason why since we're producing networks, we’re gaining the market shares. So this is the basic principle for us.

And the second principle is, yes, we are open to answering any questions from ARCEP, probably there will be some movements at one point or another in the Enterprise market which is really the strong sign of the dedication of ARCEP. It's the market on which they really want to focus, but I think you read as we have read statements by ARCEP’s president saying that there will be no revolution in FTTH regulation in France. There will be no revolution and I think no one really wants to go back to an asymmetrical regulation. It's not the topic of the day. And we would obviously very, very strongly oppose that with all the means we have.

Stéphane Richard

I just want to get back briefly on the mobile segment in France which was really your first question and just explain to you why I don't see any deterioration in this performance. In fact if you take the French mobile ARPU and if you consider the two main external effects, one being the European roaming and the other one being the new regulatory frame regarding special numbers, you have slightly growing ARPU. So clearly the apparent decrease is 100% due to external effects.

And the second point is that if you look at the commercial performance and the level of net adds, you would see that in a very, very tough and competitive markets with a lot of promotions, we have been able not only to protect our bases but even to grow with especially in the second quarter over 150,000 net adds in mobile with a good mix between Sosh also and Orange. So that is the reason why I personally consider in this market in France with no consolidation as everyone knows, that's particularly good for Orange. Next question?


Our next question comes from Nawar Cristini from JP Morgan. Please go ahead. Your line is open.

Nawar Cristini

Thank you very much. So my first question is on fixed service revenues in France. So the important trends have continued and now we have firmly entered into positive territories. Could you clearly talk a bit about the growth strategy between here in particular, how should we expect this to develop in H2? And then my other questions are on Africa and Middle East, and in particular on the identification process. So we've seen that impact from a number of countries in Q2 so a few questions here. Firstly, should we expect new countries to move to the same process and see impacting there? And secondly, how advance is the process in the country that are already impacted in particular this year Cameroon and Madagascar? And lastly, how well is Orange positioned to seize this as an commercial opportunity because I guess that the churn level and volatility increase in the market so we could see some winners and some losers from that process? Thank you very much.

Stéphane Richard

All right, so if I understood well, your first question is about the trends of our revenues in fixed services in France.

Nawar Cristini


Stéphane Richard

For H2 after a good H1. So I think I can say that we are relatively very confident in the trends of our business in France, especially thanks to the acceleration in FTTH and the good sales that we have in FTTH. We have growing ARPU as you have certainly noticed in the first half and we expect this momentum to keep in the next quarters, thanks to fiber, thanks also to the new box that we launched in May with slight increase in our price offers and the box itself, so we are confident once again in still growing ARPU in the second half of this year in the fixed service area.

Now regarding the identification topic in Africa and the Middle East, I maybe ask Ramon to comment.

Ramon Fernandez

The identification process is an issue by agreement [ph] we have in all our geographies that it's also coming in Europe and it is really looking at essentially prepaid customers. So what has happened is that following some security concerns and this is a global issue, some governments have engaged into imposing tougher requirements in some African countries. The most visible one obviously is DRC. In DRC, we have - at the end of June we have close to four million customers. And this process led to clean the bases if I may say so, with around 1.4 million customers which had - which could not be identified sufficiently safely so we take - took a safe decision which is to be absolutely crystal clear and this has been done. It is now behind us. And as a matter of fact in June, we engaged in positive net adds in DRC, so it is behind us, and this is really the brunt of what had to be done. Then in Cameroon, in Morocco, in Madagascar, the figures are not so important. And here also it is essentially something which is now behind us.

As I said also, we will have this in some European countries also, in Poland for instance there is a new law which has been passed which is implemented in this month of July and it will be fully implemented in early 2017, and in fact in all these cases in these African countries as well as in Europe, in Belgium also, there is a new regulation in Romania also. So it's a global issue and I think you’re very right to say that it can also be an opportunity for us because this rule obviously applies to all operators. It is a general factor. And in these countries, once the customer base has been cleaned, we expect of course the customer base to go back to growth. We expect to have higher ARPU from existing customers and we can also hope to get a bigger share of this customer base which is going to be rebuilt focusing on our competitive position in all of these countries.

So the first aspect is less revenues and less customers. The second part of the story can be much better.

Nawar Cristini

Very clear. Thank you very much.


Our next question comes from San Dhillon from Exane BNP Paribas. Please go ahead. Your line is open.

San Dhillon

Hey guys. Couple of questions, if I may. Firstly on Spain. Now that the three main players have access to broadly the same football content and are fully convergent with access to high-speed fixed networks, what do you think this means for the pricing environment in Spain going forward? Do you think operators will tend to monetize investments or go for market share? And secondly, at your Essentials2020 Capital Markets Day you guided to €1 billion of additional revenues by 2018 from mobile banking, Internet of Things and whatnot. It's been a year since the CMD. I'm curious to see if you’re still bullish on these new revenue streams, and what type of margins are these new revenue streams could offer to the Group? Thanks.

Stéphane Richard

Okay, so first on Spain. Gervais?

Gervais Pellissier

On Spain, you're right, this is a mix between, I would say, SIM [ph] comparable strength from the three main players on the market but we still have something which creates dynamic today. This is the migration from DSL to fiber and the migration from DTH to IPTV on fiber. These are the two main drivers and there is competition. There is competition and there is competition not only based on the content but based also on the deployment strategy, based on the installation strategy, based on the selling strategy of each player and on some I would say small pricing differences or let's say practical pricing differences. For me, so this is the way we’re expecting the competition to be for those who remind what I said in the past, we are now playing against players who plays the same game. This is a big difference by the way between the Spanish market today and maybe the French market to just a make a comparison.

Stéphane Richard

Okay, thanks. Regarding the Essentials2020 targets in generating new businesses, as you certainly remember, there are two domains that we are working on within this plan. The first is IOT. Regarding IOT, it's clearly one of the priorities of our B2B business in OBS. I can say that maybe Thierry is here, would provide you more comments on IOT. I just mentioned the second one which is the mobile financial services. Well, first regarding what exists today, Orange Money, we have still a very strong and positive trends in the development of Orange Money, over 19 million users in Africa and Middle East and growth of 51% of our revenues in Q2.

We expect revenues - direct revenues coming from Orange Money in Africa and the Middle East over €100 million this year. And then as you certainly know, we are actively preparing the launch of the mobile bank offer in France, and thanks to the partnership with Groupama Banque. We have now recruited an extensive team led by the former CEO of BforBank coming from BforBank and who was André Coisne who was also the man who started ING in France a few years ago, so I think it's one - certainly of the best experienced professional regarding online bank in our country and we are actively preparing this for, let's say, the first semester of first half of 2017, so perfectly on track also regarding our targets.

We will also introduce Orange money in Romania in the next week and we are also preparing the launch of the bank in Spain. Maybe, Thierry, a few additional words on IOT?

Thierry Bonhomme

Few words on IOT for sharing with you all that we are not starting from nothing. We already are managing more than 10 million objects around the globe which is a very strong and powerful position for growing. How will we grow? Through connectivity services and we announced - Stéphane announced a few months ago that we are bringing LPWA technologies within the wide range of technologies already available within infrastructure with LoRa technology that's for infrastructure and its working quite well.

And so the new service platform, by service platform I mean the infrastructure which is collecting the data which is allowing the data to speak a universal language and which is translating those data into outcomes for the customers, we have our own agnostic platform accessories [ph] which is allowing us to grow particularly in four segments; healthcare, transport, marketing and manufacturing business. And last but not least in IOT, you know what, we are a strong player within France. We are going outside of France and we were awarded in India a big - the first big smart region project in one of the states of east region of the world. So quite on track when it comes to the digital enablers for growing this business as Stéphane stated. We are on track.

San Dhillon

Okay, great. Thank you, guys.


Our next question comes from Stéphane Beyazian from Raymond James. Please go ahead. Your line is open.

Stéphane Beyazian

Yes, thank you. I have three questions, if I may. The first one is just from your comments coming back on mobile service revenue both in France, it seems like EU roaming was one of the two key factors to expand to €100 million, let's say revenue loss year-on-year. So was just curious to know what sort of impact you are expecting for the third quarter from EU roaming and to what extent therefore this could sort of delay the return to EBITDA growth therefore to the fourth quarter? And my second question is regarding Italy. This is a market where we are seeing one of your competitor are showing some interests, one electricity company looking to go cyber and I remember that in the past you made some positive comments on this market. So I was wondering whether your analysis of the Italian market has changed following the sectors [ph]. And my third question is regarding network speeds in France on 4G. Clearly the latest data from ARCEP show that your quite strong leadership in 4G, not so much in population coverage actually but also in speeds, and I was wondering to - for how much longer do you think you should be able to maintain some this gaps versus your competition? Thank you.

Stéphane Richard

Okay, Stéphane, I'll start with Italy and let Fabienne provide you some answer regarding the European roaming impact expected on the rest of the year and also the leadership in network quality in the future. So regarding Italy, I want first to make absolutely clear that we today are not working on anything regarding Italy, neither regarding Telecom Italia where we think that today there is strictly no reason, no option and no interest for Orange to imagine any kind of role in Telecom Italia. It is clearly a topic and issue and we are not concerned.

And on the rest of the Italian market, we have decided not to candidate to buy the potential assets that could be released if the demerge in the mobile market is completed and authorized by the European Commission. So we have seen, as you said that Iliad seems to be interested in buying those assets, but we are not. And then, yes, there are other players that once again seem to be interested in rolling out new networks. We think that the Italian situation is clearly rather complicated with a big incumbent, Telecom Italia that seems to be difficult let's say position to really implement an ambitious plan of investment in FTTH that is wished very much by the authorities and may be needed by the markets.

So no surprise to see maybe other players be interested in this, but this being said, what for instance an electricity company is going really to do in FTTH business, this is not very clear to us. So what I can just say once again very clearly is that we have no project, no agenda regarding this country. And now, Fabienne, if you can…

Fabienne Dulac

Yes, thank you. So for the first question about the roaming, we will be impacted by roaming in the future as in the past. But I would like to just highlight, we guess, this impact will be compensated by the volume of roaming during the tourist period this summer, and if you remember last year we have a good result, so we can get the same this year.

For the H2, and if I take more time, I would like to say we are - and I am very confident in our ability and on our capacity to pursue in this good performance because I would like to say it's a really good performance in a very turbulent market. Just two points maybe. In H2, Q3 and Q4, I just would like to remember you that this is more favorable high-end market because you have two periods, Christmas, and maybe not sure, the launch of iPhone and these two events are very favorable for high-end market and especially for Orange. So we are confident and we have capacity to pick up the value in Q3, and another point because I don't know if you agree that but we pursue the growth of convergent customer base. It's a very good point for us, plus 12 points, 50% of our customer base mobile and broadband are in convergent offer, so it's very important for us.

For the second point, the question was about the premium results - the premium network, sorry. It's an evidence, yes, we will pursue our invest because we want to maintain our leadership and I would like to say as Stéphane, the last half result illustrative whole our strategy and the quality of our network and hold the events [ph] we made since the long time now, so we will pursue in this direction because we need to maintain this leadership to acquire new customer and to enhance the loyalty customer base.

Gervais Pellissier

Stéphane, I want to add something to avoid any misunderstanding about the mobile because I think it’s really - you need some highlight. When you look at commercial performance, it was extremely strong except 153,000 net adds in Q2, of which 91 in retail. I just want to highlight that it's 3x as much as Q1. And when we break up these 91,000 customers in Q2, it's 114,000 coming from Sosh which is playing the role of buffer as far as the volume is concerned. And the Origami acquisition, there are some migration, but Origami acquisition and most of brand were up 28,000. It’s up 27% versus Q1. So to make the long story short, you must take on top of your mind that Origami and Sosh has been defending the volume and the value and when you look at ARPU which is a big debate, it was just down €0.10 on a sequential basis. So this is very important to keep on your mind and re-brought up once again what Stéphane and Fabienne have said. Q2 ARPU was down 1.6 [ph] but it was due to the European roaming and the regulatory effect.

If you take out that, the underlying ARPU was up. This is very important. And the volume was there more than before.

Stéphane Beyazian

Okay, thank you.


We will now take our final question from Nicolas Cote-Colisson from HSBC. Please go ahead. Your line is open.

Nicolas Cote-Colisson

Thank you. Good morning. Just to come back on France and regulation. I was wondering what you were thinking about the proposal to set up the structure that would in a way coordinate to build up in the low dense area, so called [indiscernible]. And I was wondering if you were seeing that as a risk attracting more competitors or actually an opportunity to get a better system and to address more effectively these areas. Another one if we could have some certifications from the launch of your new box in France. Has it been a growth driver in the last few weeks? And a very short one on Spain, if I may. You have different strategies in Spain in terms of branding between Jazztel and Orange. Some competitors have commented that the Jazztel brand is still quite disruptive and may also to launch second brand, so I was wondering what was your view on this? Thank you.

Stéphane Richard

Thank you for the questions. We have heard about this maybe idea, I don't know, if we can say project but just idea of creating sort of vehicle, national vehicle around what the, we call in France [indiscernible] meaning those little local network that will be created in finance to over PPPs. To be honest, we think that this idea is very difficult to implement, maybe unpredictable in my view because you have in fact - you will have over 100 different networks in the country with different local authorities.

You will have regions, you will have departments, you will have in some cases cities, and then you will have different also legal formulas. I don't want to enter into details, but in my view, it would be from a legal point of view and the governance point of view incredibly difficult and complex to try to put this profusion of networks in a single frame. And in top of that, I don't think that the local authorities in France will accept - that are financing those networks will accept to be in fact included in larger structure or national structure that no one knows exactly whom and how this would be managed. So I don’t see this idea as really serious. And that is the reason why we have no specific opinion on that.

Regarding the box, maybe Fabienne?

Fabienne Dulac

Yes, thank you. So the new Orange box we launched past May is a well set up for us and for our customer. It allows more connectivity, higher internet speed and better quality of TV and it's important. We already observed two points, one is the impact of our new box with more modulation and more modulation to high-end offers plus three points, and we see another point in the box is a very good contribution to the mix in high-end but especially for the fiber entry so it’s very important for us. Another point very important it’s the quality of this box because this new box is consumed by the call center activity very low more than before, so the product we launched and we put in the hand of the customer is a good quality.

So another point maybe to conclude, this is a key asset, this new box for fiber but also for the premium strategy we have. I would like to remember and to recall one data, 57% of our fiber customer made the choice of high-end offer. So we are in this trend and we pursue in this direction premium strategy.

Stéphane Richard

Okay, Spain. Gervais?

Gervais Pellissier

Just to remind you that today we have five brands in Spain which are the results of the history [ph] and we managed the business with those five brands. Our strategy is to evolve to our two brands because we seek to manage five brands is probably too much. It will take some time because those brands are attributes of our customers [indiscernible]. Regarding the disruptive aspect of Jazztel, we are happy that Jazztel still is perceived as a strategy which is part of the strength of the Jazztel we have acquired and we think that it is a part of the positioning of the bundle as it has been jeopardizing the market and you will see - you have seen and you will see that the price positioning of Jazztel is in line with the overall strategy of generating value within Orange and basically keeping also the Orange brand to the premium part of the market where we will target some of the premium brands of the market. But we think that on the French market, there is for us enough space for keeping two brands for the future.

Nicolas Cote-Colisson

Okay. Thank you.

Stéphane Richard

To all of you and once again we want to emphasize the - we think the quality of this results in France, in Spain, in the Enterprise segment also and reconfirm very clearly our full guidance for this year. Thank you.


That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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