Orange's (ORAN) CEO Ramon Fernandez on Q1 2018 Results - Earnings Call Transcript

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Orange SA (NYSE:ORAN) Q1 2018 Earnings Conference Call April 26, 2018 2:30 AM ET


Ramon Fernandez - CEO Delegate, Chief Financial & Strategy Officer and Director, Middle East & Africa

Eric Debroeck - Head, Regulation

Laurent Paillassot - CEO, Orange Espagne

Mari-Noëlle Jégo-Laveissière - Senior Executive Vice-President, Innovation, Marketing & Technology

Fabienne Dulac - Senior EVP, Orange France

Jerome Barre - Senior EVP, HR

Xavier Pichon - Delegate Director, Finance, Strategic Planning and Development of Orange France

Thierry Bonhomme - Deputy CEO, Orange Business Services


Daniel Morris - Barclays Bank

Nicolas Cote-Colisson - HSBC

Sanvir Dhillon - Exane BNP Paribas

Andrew Lee - Goldman Sachs Group

Jakob Bluestone - Crédit Suisse AG

Dimitri Kallianiotis - Redburn

Stephane Beyazian - Raymond James

Jonathan Dann - RBC Capital Markets

Giovanni Montalti - UBS Investment Bank

Nicolas Didio - Berenberg

Emmet Kelly - Morgan Stanley

Frederic Boulan - Bank of America Merrill Lynch


Good morning, ladies and gentlemen, and welcome to Orange's First Quarter 2018 Results Conference Call. For your information, this conference is being recorded. The call will be hosted by Mr. Ramon Fernandez, Deputy CEO and Chief Financial and Strategy, with members of Orange's Executive Committee for the Q&A session that will start after the presentation. Thank you, and let me hand over to Mr. Ramon Fernandez.

Ramon Fernandez

Good morning, and welcome to the presentation of our Q1 2018 results. I'm here in a big room with my colleagues. And we also have online, Thierry Bonhomme for OBS, Laurent Paillassot in Madrid and Jean-François Fallacher in Warsaw.

So before we get to the performance review, I would like to highlight three methodological evolutions in order for you to better understand our performance. First, starting from Q1, we are reporting under IFRS15. Orange has opted for the full retrospective transition approach, meaning that starting from the 1st of January, we will no longer release IAS18 figures, but just IFRS15 figures. And we will provide IFRS15 [indiscernible] figures for full year 2016 and 2017. As a reminder, we have summarized in this slide, Slide #3, the main impacts that are minus €237 million on full year 2017 revenues and minus €139 million on full year 2017 EBITDA. There is no impact on cash.

Second, we took the opportunity of IFRS15 to change the way we split our revenues in order to better reflect the structural evolution of our markets. Therefore, the revenue is now split per offers with retail, B2B and B2C. Retail services revenues detailing convergent, fixed only, mobile only and IT and integration services. This includes equipment sales related to the above products and services. Second, wholesale, including fixed and mobile revenues with incoming and visitor roaming, and lastly, equipment sales.

Third, this new presentation triggers changes to our ARPU indicators. Going forward, we will use average revenue per offer, ARPO indicators, with three components; convergent ARPO, mobile only ARPO and fixed only broadband ARPO. ARPO is aligned with billed revenue per user.

Let's now start our financial review, starting with Slide 5, which presents the main results. Q1 confirms of the positive trend of 2017 with solid growth in revenues and adjusted EBITDA, confirming the relevance of our strategy. Group revenues increased by 2% in Q1 after 1.2% in full year 2017 under the same IFRS15 standard. This performance was driven by all our segments and in particular, by France that posted a fourth quarter of growth in a row at plus 2.1%, thanks to fiber and to our convergence strategy. Also due to Spain growing by 4.3% driven by convergent services and growing contribution of whole sale activities. African Middle East who accelerated revenue growth at 6.2% in Q1 after 5.7% in Q4 2017. And also other European countries performing well thanks to the success of our convergent LOVE offer. Adjusted EBITDA was up by 3.8% in Q1 after plus 2.1% in full year 2017. On telecom activities, adjusted EBITDA grew by 4.4%.

The telecom adjusted EBITDA margin improved by plus 0.6 points to 26.1%, thanks to strong momentum in France, Spain and Africa, Middle East, and also ongoing efforts on cost efficiency. While we continue to sustain our top line growth, we have an increase in equipment and content costs. We maintained our efforts on indirect costs such as advertising and promotion and general expenses.

Group full-time equivalent employees also continue to decrease by 2.7% in Q1. Finally, we posted a plus 4% growth in operating cash flow, confirming the positive upturn of 2017. This comes as a result of a better EBITDA trend as well as a controlled growth of our CapEx, up plus 3.7%, fully in line with our full year guidance.

Turning to Slide 6, we continued our investment efforts to keep our competitive advantage in connectivity. This quarter, CapEx amounted to €1.5 billion with a remaining focus on networks, especially very high fixed broadband and 4G, which are mostly concentrated in France, Spain, Poland and Africa/Middle East. As a result, we reached a total of 27.7 million fiber connectable homes, we accelerated our fiber deployment plan in Spain, up 22%, reaching 12.2 million connectable homes, in France, up 31% at 9.6 million connectable homes, and also in Poland with 2.7 million connectable homes, this is an increase of 60% over the year.

The group strengthened its leadership position in mobile, particularly in 4G coverage. Orange now covers close to 100% of the population in Belgium and Poland, in France 97%. This is an increase of 8 points year-on-year. And in Spain, 96%, up by 5 points.

Let's now have a look at our commercial performance. Thanks to ongoing investments in very high broadband and content, our 4G and very high broadband customer base posted a strong growth of around 45% and 39%, respectively. We now serve 48 million 4G customers with 1.6 million net adds in Q1, thanks to the positive commercial momentum in Central Europe and Africa/Middle East. And 5.1 million very high broadband customers. This is an addition of 378,000 net adds, thanks to France, which posted the highest ever first quarter for net adds and Spain, which remains number one in FTTH net adds.

Consistent with our [indiscernible] service strategy in Europe, we continue to enrich our content portfolio in France. OCS now accounts for nearly 3 million subscribers. This is a growth of 9.6%. And in Spain thanks to football packages, the TV customer base grew at plus 20%. Also, Orange Bank enhanced its product portfolio by launching a consumer loan offer end of March.

Let's now give a look to the results of our convergence strategy on page 8. This is an additional slide since last year. The European market is quickly transitioning to convergence. And Orange remains the best positioned operator in Europe, providing convergence services across our full European footprint, with now a total base of 10.5 million B2C convergent contracts, growing at 10.4%. Convergence is a strong acquisition tool for both initial and follow-on services. In Q1 convergence helped boost service perfusion into the household and allowed an increase in the number of mobile lines per offer in our entire footprint. Convergence is also a powerful retention tool, offering [indiscernible] protection to Orange from the promotional intensity across our footprint. We've a lower churn for both fixed and mobile components. You have here figures that we provide on a regular basis with the churn differential in France, Spain and Poland.

In Q1, the convergence services revenues grew at more than 14%, representing now more than 17% of total group revenues and this demonstrates, once again, the relevance of this convergence strategy as a key driver for our revenue growth.

Let's now turn to our business review starting with France on Slide 10. Total revenues grew for the fourth consecutive quarter at 2.1% in Q1 despite markets that remains very competitive. This is the impact of our strategy focusing on convergence and fiber together with the second quarter of favorable impact from our ePresse initiative contributing €58 million to the overall €92 million revenue growth in Q1. In terms of volume, you see that convergence is driving our solid performance with our commercial efforts focusing on promoting convergent packages to both existing and new customers. Our convergent B2C broadband customer base is increasing by 7.6%, and convergent customers represent 59.7% of our total B2C customer base. Furthermore, we also increased the number of mobile lines per convergent contract, further helping the migration of Orange and non-Orange mobile-only lines to Orange convergent contracts. And as a result, our convergent mobile base increased by more than 11%.

In addition, convergence proved to be a strong acquisition tool, both in fixed and mobile, as evidenced by the fact that in Q1. 80% of new convergence customers were either new fix and/or new mobile customers to Orange.

Turning now to value, we managed to combine this volume effect with the value effect as 95% of our convergent broadband net adds subscribed to premium offers, therefore, improving our overall customer mix. The increase in the number of mobile lines per convergent contracts, together with the improvement in the customer mix, brought an increase in convergent ARPO to €64.8 per month. This is an increase of 5.3% year-on-year with convergent service revenues growing by close to 15%. Our mobile-only base decreased by 107,000 customers, 72,000 of which becoming part of convergent contracts. Combined with mobile only ARPO growth of 2.8%, this led mobile-only service revenues to erode by 1%. Also partly due to the migration of customers to convergence, the B2C broadband-only customer base decreased by 7,000 in Q1, combined with broadband only ARPO growth of 4.4%, broadband only services revenues grew by 2%.

Let's have a closer look at our commercial performance on Slide 11. We booked 56,000 mobile contract net adds compared to plus 73,000 in Q1 2017. As our competitors engaged in heavy promotional activity in the low end. In spite of this, we managed to improve the value of our mobile contract base as on a net basis we added more high-end customers than we lost low-end customers in the B2C market. In fixed broadband, we added 130,000 FTTH customers in Q1. This is our highest ever first quarter for fiber net adds, leading to a total base of 2.1 million fiber customers. 43% of those fiber net adds were done with fixed customers new to Orange. We now have a base of 9.6 million FTTH connectable homes. This is a 31% increase over the year.

Growth in FTTH co-investment fueled our fixed wholesale service revenues, but not enough to offset and unfavorable base effect linked to an exceptional fiscal incentive, which has been stimulating FTTH co-financing in Q1 2017. And also a decrease in the full unbundling fee beginning this January.

Going forward, we expect fixed wholesale services to turn positive again, supported by a growing level of FTTH pro financing. Mobile wholesale service revenues continue to decrease this quarter, mainly impacted by a continuing decrease in national roaming.

Let's now turn to Orange Spain. In Spain, revenues grew by 4.3%, driven by convergent services, wholesale and equipment revenue growth. Convergent revenues grew at 7%, thanks to service upgrades, FTTH and TV penetration. Convergence revenue now accounts for 56% of retail revenue in Q1. 85% of the broadband B2C base is convergent in Spain. This is the largest convergence penetration in our footprint. But despite its mature state, the convergent base kept increasing at 2.1%, thanks to the acquisition of new customers and to migration effect.

As you will see on the next slide, the convergent mobile contracts grew by 51,000 while the B2C convergent broadband contract grew by 56,000. Convergent ARPO grew by 3.8% to over €57. Convergence is a clear catalyst to the monetization of our 4G and FTTH networks and to the penetration of high value-added services such as IP-TV.

Wholesale services grew by 5.7%. This is a strong performance, driven by the mass mobile contract despite new mobile call termination rates, which have been implemented. Equipment sales increased by 11.3%, thanks to the growth of the contract mobile customer base and to launch of new high-end models.

Turning to the commercial performance, Orange Spain continued to follow a value-driven strategy with limited recourse to promotions, which we believe helped to restore a more disciplined environment as reflected in service upgrades by most of the players in Q1. Despite that, competition at the low end of the market is quite aggressive. In this context, Orange Spain registered resilient commercial performance in mobile contract net adds with plus 42,000, and in fix, we posted solid fiber net adds with plus 169,000, reaching a total of 2.4 million customers, or almost 34% year-on-year growth. FTTH penetration was at 59% of our broadband customer base, plus 15 points year-on-year.

The first quarter was also strong in pay-TV net adds. The TV base increased by 20% to 641,000 thanks to the attractiveness of our TV offer.

Turning to Slide 14, Poland. The implementation of convergence in value strategy is bearing fruits, contributing to a continuous improvement in revenue trend. You can see that in Poland, thanks to the success of Orange LOVE offer, convergence now represents 52% of our B2C broadband customer base at the end of Q1. This is a 14 points increase. Convergence, combined with our investments in very high broadband covering now 2.7 million FTTH connectable homes, contributed to a 9.2% increase in our broadband customer base. Regarding revenues, the improving growth rate of convergence revenues increasingly offsets the decline of non-convergent offers. And wholesale services grew at more than 13%. This is a strong performance driven by national roaming and international interconnection. As a result, the decrease of total revenue slowed down in Q1 at minus 0.6% compared to minus 2.3% in full year 2017.

In addition, it should be noted that the cost base continued to be optimized thanks to a low handset subsidy policy, a lower negative impact of Roam Like at Home, and also the implementation of new employment plan, the number of full-time equivalent employees decreased by 6.8% in Q1.

Let's turn to Belgium and Luxembourg where the last quarter was marked by another improvement of our commercial performance compared to last year. 17,000 new LOVE cable customers joined our convergent customer base in Q1, bringing the total B2C convergent customer base at 114,000. This performance was achieved thanks to solid growth adds and improving churn. In mobile, the positive momentum was further boosted by the successful launch of our unlimited offer, the first unlimited data offer in Belgium, and by the success of convergence. We booked 16,000 mobile contract customers net adds and this results in a plus 3.8% growth of the customer base. Consequently, retail service revenues were up by 6.2%, while wholesale revenues were impacted by the EU roaming regulation and by minus €10.5 million decline in MVNO revenues. In Belgium and Luxembourg, total revenue grew by 0.9% in Q1.

In central European countries, we once again reported, Slide 16, strong growth in Q1 at 7.3% with, in particular, Romania maintaining double-digit growth at plus 11.1%. This growth was driven by good commercial performance sales sustained by an increase in smartphone penetration, a good performance of wholesale and the growing success of convergent offers. The data usage is increasing, boosted by 4G deployment in this area. The total 4G customer base grew at 36% to 4.8 million customers. We pursued our convergent strategy in those three countries, with plus 30,000 net adds for the area in Q1, supported by the very high broadband customer base growth at plus 37%, counting now 179,000 customers.

Lastly, the impact of European roaming regulation was lower this quarter, thanks to the successful limitation of abuses and tariffs renegotiation.

Now let's turn to Africa and Middle East, which continued on the good dynamic started in H2 2017 with plus 6.2% revenue growth in Q1. The customer base increased by 7.8 million, passing the 120 million client milestone, especially thanks to the excellent commercial performance of Morocco, Burkina Faso and also the recovery in DRC. We have different market situations within the Africa and Middle East zone. But almost all the geographies, including incumbents, are benefiting from this growth dynamic. We had 7 operations with double-digit growth among which are Morocco more than 30%, Burkina Faso, 20%; DRC, more than 14%, Cameroon, close to 10%, that are back - DRC and Cameroon to solid growth like Egypt, which reported 7.6% growth driven by the development of hybrid offers and data monetization.

Business wise in this region, retail services grew by 8.5%, supported by data monetization, which is contributing to approximately 2/3 of the growth. Data is growing by more than 30%. Orange Money growing by close to 50%. And also helped by the stabilization of Voice, thanks to the abundance offers. And also thanks to all of these drivers, we are performing well on B2B market with 9.8% growth year-on-year.

Turning to Enterprise. In Q1, we reported a good resilience of revenues, declining by only 1.3% in a very competitive environment. This was linked to good resistance of Voice, especially in France, while the data revenue trend remains under pressure in line with previous quarters. Our IT growth levels, security and cloud, continue to report a double-digit growth, 20% and 17%, respectively. And we had a good commercial dynamic of mobile revenues in Q1 at plus 1.8%, thanks to equipment sales and the contract customer base, which continues to grow by 22,000 net adds after 24,000 in Q4 2017.

Over this first quarter, it's also worth noting that we have signed two major contracts. One is a new seven-year contract worth €400 million with a large European multinational company for connectivity and collaboration solutions. And we also extended our global contract with CMS. In Germany we have a new six-year contract worth €240 million to build a worldwide SDWAN infrastructure network, which will connect cloud applications and IoT devices.

So with these solid results, Page 20, we can fully confirm our guidance for 2018 of a high-growth rate compared to 2017 for adjusted EBITDA and operating cash flow with a peak in CapEx at €7.4 billion. Our net debt to adjusted EBITDA for telecom activities will remain at about two - we're slightly below today in the medium term. And we will propose to increase the dividend at €0.70 for the fiscal year 2018 as already said in February.

Now we are all here to answer to your questions. Thank you.

Question-and-Answer Session


[Operator Instructions]. Our first question comes from the line of Daniel Morris of Barclays.

Daniel Morris

I have got a couple of related questions on the outlook for churn actually. I mean you have obviously highlighted the 2 percentage point benefit you're seeing in France, 6 percentage point in Spain, and we've obviously got plenty of scope to increase the convergence level in France in particular. So I wonder, can we expect churn to keep falling despite what's very heightened low-end competition in the market at the moment? And then I guess meanwhile in Spain you are already at 85% convergence, so is the main benefit behind is there. Or is there still more to go? And then just a little separate one also on churn, but in terms of DSL, can you update us on what you're seeing in terms of legacy DSL churn in the rural PIN areas please?

Ramon Fernandez

So we will start with France with Fabienne. We will turn to Laurent Paillassot in Spain. May be Xavier also for the other European countries. Fabienne?

Fabienne Dulac

Good morning. The promotional activity in France has been more intense than expected, as you can see, and I want to say [indiscernible] that our commercial deferments in this context is very satisfactory, the churn on mobile and on the broadband is still the lowest in the French market. We have a slight increase, but very slight on the mobile and only on the low-end market. So we are very proud of the result when you see the aggressiveness of this market and the churn is well oriented for the future.

Ramon Fernandez

Thank you, Fabienne. Laurent in Madrid.

Laurent Paillassot

Yes. Hi, to all of you. Well, basically in Spain, it is true that the recent quarters have shown significant increase in churn in the whole market, which is driven basically by the price aggressiveness of MasMovil and reactions of Vodafone. However, going back to the questions of the old convergences driving ARPO growth and EBITDA growth? This remains a strong driver for us because convergence is fiber for us, and we only have 59% of our portfolio of fixed customers, which are on fiber. So we can expect to have benefits from switching ADSL to fiber in customers, which impacts positively the churn. So again value driven strategy that has been explained remains active for sure.

Xavier Pichon

So maybe, Xavier Pichon, just one comment on the other European countries. So if you observed the situation in Poland, we're just at the start of convergence. But you observed that most of the acquisitions are now made under convergent contract including for postpaid mobile. So that's - this proves that this is quite helpful. But again, maybe just a big difference between Spain, France and the other markets is that in the other markets, not everybody is convergent, whereas in Spain and France today, everybody is convergent on the market. In Spain, I just remind you that not everybody is convergent. I would say even today, just Orange is really fully convergent. Some other players are adding several players like TV, but nobody is fully convergent. So in Spain, is clearly the trend with one positive effect, which is clearly the recovery of Orange Poland in terms of broadband market share. Thanks to convergence and fiber deployment, we are recovering our broadband market share that was under pressure, that has been under pressure for the last few years. Second, immediate effect in Poland, since we are still at the beginning of convergence, there is not the ARPO uplift that we've in France and Spain today, because at the beginning, when you launch convergence, you have a discount on the price to convince the customers. But when we look at the curve, we're more or less at the end of this ARPO decrease in terms of impact. And the last country, I would like to mention, this is Belgium where, when you observe our acquisition figures in terms of mobile, a huge part of our mobile acquisitions are done through convergence, either migration in a convergent contract on the postpaid contracts or thanks to acquisition of new customers.


Thank you, we will now move to our next question from Nicolas Cote-Colisson of HSBC.

Nicolas Cote-Colisson

[Indiscernible] Spain, to what extent you feel that more intense competition in the low end of the market is helped by the roaming contract you offered to MasMovil? I understand you received high wholesale revenue, but is there a risk of a price disruption affecting the broader market? And I've got a broader question on regulation, if you can share your views about where we are with the European Code? What is key for you to get? And whether you think this could be adopted before summer?

Xavier Pichon

If you allow me just to - before leaving the floor to Laurent, Nicolas, I would just remind you, you had exactly the same question in 2012, when we had the roaming agreement with Iliad. Now amongst the investors community, who is blaming Orange for having been able to offset part of the market situation, thanks to this roaming agreement in France. This was just a few years before. Leaving the floor to Laurent. Just to remind that when we look at the situation one day after few years we might see that the strategic decision was the right one. That's all.

Laurent Paillassot

Well, again, because I know it's been questioned on a regular basis, keep in mind that the agreement that we made with MasMovil would have been done by another player in any cases. So I think the question is not if anyone would be working with MasMovil today, it would the one, we are better off being the one, gives us a big edge. And as you know, we have confirmed agreements with MasMovil, which allows us to be [indiscernible] more efficient, both in terms co-investment, in terms of sharing infrastructure and mobile. We're getting more revenues. We have extended the duration of the contracts. So we are very well positioned there. So their strategy would have been the same, again, starting from the remedies of the acquisition of Jazztel. And we do not believe that there is - we believe there is a space for growth for MasMovil. Our main concern is more the reactions of Vodafone, which is more of a concern in the Spanish market then really the MasMovil's aggressiveness by itself. And again, as you can see in the results from the last year as well as in Q1, we remain very strong in terms of growth of revenues and I can also confirm that we are very strong in growth of EBITDA as well. So I think we're in a good position in the Spanish market.

Ramon Fernandez

Thank you very much, Laurent. I'll ask Eric Debroeck, who is head of regulation in Orange, to take the question on the European Code.

Eric Debroeck

Thank you. Under code, as you know, the commission [indiscernible] and the parliament have reached a political agreement on most of the provisions regarding regulatory objectives, spectrum and uses, and regulatory services obligation. Now that the political debate is concentrating on the most, let's say, [indiscernible] regarding regulation and access to fixed international tariffs. So far, we understand that [indiscernible] parliament with the commission agreed with the commission proposal to concerned NRA powers to impose symmetrical obligation to non-replicable assets that is to say that it is a confirmation of the stability of the French regulation regarding FTTH and it is very positive to access to - in areas, in geographies where we need an access to new or to very high connectivity and it works deployed by incumbents, we are able - we will be able to access in the future to those networks. And so far, the most controversial issue is the asymmetrical regulation on very high connectivity network. And as you may already know, there was a trilogue yesterday and this trilogue failed to the conclusion. So it remains to be seen to - at what date it could be - it could arrive to an agreement on such issue. Thank you.


Our next question comes from the line of San Dhillon of Exane.

Sanvir Dhillon

Two questions if I may. Just very quickly on the current competitive environment in France, you said that it's going to focus on the low-end market, what's the risk that it moves into the more premium segments? And if you can give some color on whether you think it's sustainable, some of the promotions that the competitors are putting into the market? And secondly, a follow up on churn, are you seeing convergent churn in both France and Spain increase year-on-year, or is it stable?

Fabienne Dulac

So as I said, and as you can observe, the promotional activity has been very intense in France, more than we expect in this Q1. It's may be a reaction from the result recorded by Orange France last year, and maybe more aggressiveness from competitors, someone renounced maybe to be - to win money or to have a profitability. In this context, we don't observe risk on premium segment. It's in the other way. In this context, very aggressive. Its specifically aggressive on the low-end market. It's very successful for Orange the high-end segment both in fixed and mobile. We improved the broadband high-end customer mix at 3-point - 3.44 points year-on-year and in the same way, we improved the mobile high-end customer mix to 3.2, yes, 3.2 point year-on-year. So this market is specifically very aggressive and competitive on the low-end market, less on the premium segment. So I think that proves the strategy we have to preserve the value - to preserve the value with a very good network and based on the leadership we want to have on the network, on the customer relationship, on the fiber and the convergence is the right strategy, and we will pursue it. I don't know if the promotion strategy from the competitors is sustainable, but we are ready in this context. And we can make some tactical promotion only if we need with such. We didn't do that during this first quarter, but we can do it if necessary, and we will see.

Ramon Fernandez

Okay. And we can add that we had more high-end net adds in France in Q1 than in Q1 2017. So I mean, this is a very strong characteristic of what is being achieved in France and events have been just described, which is that thanks to this, the 4G fiber, the quality of customer experience, the quality of the network, we have been ranked, once again, by regulator #1 and we're #1 in all ranks. We now have more 4G sites than any other player. So all this concurs to the same result, which is that we are doing extremely well on the high-end market and convergence is really supporting this strategy. And so in terms of churn, I think we gave - I think we gave figures. You know that our methodology, in fact, is not maximizing the figures. For instance, in France, we say there is a 2-point differential between convergent customers and all customers. But if you would compare the churn for convergent broadband customers to non-convergent broadband customers, the difference would be 6 points. And this is very stable. So we are maintaining as it has been described by Fabienne and Laurent so far for Spain. In a context where there is a kind of entry part of a market, which is a kind of washing machine with people changing a bit more often. This is a very small part of a market. And in terms of the higher end where we are really making the difference, there is really little difference and convergence is really helping to not only attract new customers, but also to retain these customers.


Our next question comes from the line of Andrew Lee of Goldman Sachs.

Andrew Lee

I have two, one on your cost cutting and secondly on Enterprise. On the cost cutting, I know you gave us quite a lot of detail in December, but could you just give us an update what are the KPIs that you're looking at to guide on how well the digitalization process is going? Is it app penetration, closing the call center, digital sales? And do you think you have an opportunity to further accelerate headcount reduction like we've seen at Telecom Italia, for example? And then on the Enterprise outlook side, your growth has definitely held up better than most incumbents over the last couple of years, but you haven't quite managed to get it back to flat despite easier comps. So wondering if you could give us your views on where Enterprise growth goes through the next 12 months.

Ramon Fernandez

Okay, so maybe we could first turn to Thierry on Enterprise and then we'll come back to cost cutting. Thierry, you are with us?

Thierry Bonhomme

Yes. And so on the B2B market, two sides for the same coin. When you compare, we are absolutely over plus one in the market. As you saw Q4 2017, Q1 2018, its revenue growth, revenue evolution minus 1% - close to minus 1%. When I see the results really by our, let's say, comparable competitors across the world, and I will not share the names, it's minus 9%, minus 6%, minus 5%, minus 9.5%. And I - globally, I was speaking about Verizon, BT Global system and French competitors. So we are overperforming in the market. And globally, it's linked to our global footprint to over vision and execution of the strategy, which is moving forward into what we call the data journey, so focusing more on the services integration and IT services, not only focusing on the connectivity services. When it comes to the other side of the coin, it's minus 1% meaning that there is, on average, when you observe the global trend of the B2B market, voice and data services are presenting - they have been presenting for years on average minus 3%, minus 4% and that more or less what's impacting our competitors. And that's true, that's being able to provide something close to the old minus one. It's a better performance, but it's relatively flattish. The only way we think things will evolve the world's positive growth is through acceleration of our strategy, the world IT and integration services. Where there is growth, we posted - we have been posting every quarter plus 20% on Orange [indiscernible], plus 17% or 20% on cloud services and we need to accelerate on the application development since related to big data analysis and this dimension is under stronger focus from our team including, by the way, playing with merger and acquisition.

Ramon Fernandez

Okay. Merci. Thank you, Thierry. Maybe on - so on costs, we have two ways of looking at it. First point is that when you look at our different sources of costs, we have two items, which are increasing and all the others are stable or declining. What is increasing is equipment and content. So these are direct costs supporting the acceleration of growth and revenues. And the rest is on what - on the trajectory that I just said. The results, you can see, is that EBITDA is growing and EBITDA margin rate is growing. It has been growing by 0.6 point at group level. If you look at France, it would be 1.2, for instance, increase. So there is a very tight control of these costs in a context where we are back to growth. This is the first point. Second, you know that we have our cost efficiency program Explore2020. We have been reporting extensively on this at the Investor Day in full year. We are today, at the end of Q1 at €2.8 billion of gross savings on the target of €3 billion we had. So we are very well on track in reaching this €3 billion target at the end of the year. We'll do, in fact, more than initially expected as we have already said and France is a very strong contribution to this so I will give the floor to Fabienne. But in terms of big items, you have, in different geographies, intervention volumes, which are going down. The customer relation, of course, is also supporting savings. In Spain also, Laurent could talk about what's going on in terms of mutualization of network deployment, also in Africa and Middle East. So there is, in terms of digitalization, mutualization, simplification, a number of initiatives, which are supporting these general results. Fabienne?

Fabienne Dulac

Yes, especially on digitalization, we pursue our transformation plan focused on digitalization acceleration, and maybe two figures to share. We reached 55% of nonconventional transaction in France through digital channel. It's more - it's plus six points year-on-year. So we accelerate this transfer of activity from channel - physical channel to digital. And it's the same for commercial activity, 24% of the commercial transaction is now online and the digital is currently the second distribution channel. So it's very important for us because, maybe in another sense, as you said, the digital is in France an opportunity regarding the headcount decrease. And it's - the [indiscernible] we have between digitalization and headcount decrease and we're working this way for the future.


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

Jakob Bluestone

I've got two questions, please. Firstly, could you maybe provide a bit of an update on how Orange Bank is progressing? And maybe if you could also just remind us what we should be expecting in terms of EBITDA drag this year? And I guess also when you think you might start to see sort of meaningful revenues coming through? And then just secondly, you've obviously changed the way that you sort of disclose your sort of the detail within France. Could you possibly just to sort of help us get used to the new reporting, give us a little bit of a sense of the growth rates that we've seen in French convergent services, Mobile Only, Fixed Only. Is that sort of roughly what we should be expecting going forward? So should we be expecting kind of teens growth in convergent and low single-digit declines in Mobile Only and Fixed Only? Is that sort of a reasonable way to model these businesses?

Ramon Fernandez

So in terms of Orange Bank, you've seen that we have been launching a new consumer loan product in March, which is a very nice product. In terms of number of customers, we are now over 100,000 customers. So it's working well. In terms of the EBITDA impact, as we said, there will be a negative impact in the first years, building the customer base of Orange Bank. This negative impact is slightly above €100 million for the, let's say, the two first years of the buildup of the bank and our objective is to reach an equilibrium in terms of EBITDA after 5 to 6 years. So this is what we have been saying in the previous quarters. There is no change on this account. And in terms of the general EBITDA trajectory for the group, so no, there is smaller impact, and of course, it's fully embarked in our guidance. So really nothing new to say on this account. In terms of France and reporting, Fabienne?

Fabienne Dulac

Yes. So the performance, maybe - first of all, the performance on the convergence is consistent with our expectation. So we are in the trend and we are consistent with the strategy we have to push customers toward the convergence and towards the fiber. Currently, 60% of the customer broadband base is on the convergence offer and we pursue this strategy that help us to have a customer base less sensitive to promotions. So it's very important. On the Mobile Only, the performance we record this Q1 is linked to the aggressiveness and it's not a surprise when we saw 270 days of promotion less than €5. So it was very tough market in this first quarter. So it's consistent with the market. And as I said just before, the most important for us is we improve the high-end mix on the Mobile and on the Fixed. On the ADSL, as I said just before and on the fixed, it's consistent with the strategy to push customers to migrate toward fiber and the aggressiveness on the ADSL. So it's exactly we expect and we expect retail revenue to continue to grow in 2018 just on the time by the strategy I explained just before convergence development, high-end mix improvement and FTTH penetration.

Jakob Bluestone

So when you expect retail revenues to grow, is that for total retail services? Or was that for Fixed Only? Sorry, just to clarify.

Fabienne Dulac

No, for total revenue.


Our next question comes from Dimitri Kallianiotis of Redburn.

Dimitri Kallianiotis

I've got two questions, the first one is just going back to Spain. Just wanted to get a bit more explanation in terms of the divergence in commercial performance between Mobile and Fixed. We've got to see negative net adds in broadband, but positive in Mobile. Just wanted to get a bit more color if you should see that trend continue or if we should expect the broadband to get better? And last question, coming back to the point mentioned by Ramon in terms of higher content costs. First, I wanted to ask you how close you are to securing Champions League football in France? And we heard yesterday that they will be - the auction for domestic French football will happen on the 29th of May and I just wanted to know if you would consider participating in that auction?

Ramon Fernandez

Laurent, for Spain?

Laurent Paillassot

Yes. Again on the Spanish market, we should look at the overall performance of Orange. We are doing very well with the Orange brand with Amena, with Simyo. We are doing very well in term of B2B. The part, which is - so growing strong and growing with value. So all the value part is growing fast. The issue we have is in term of fixed broadband is concentrating on Jazztel, which is normal because that's where the low-cost war is happening and keeping in mind that Jazztel is Franco brand for sales in the Spanish market to preserve the Orange portfolio. So yes, we're not fighting for volume, we are fighting for value. So the tradeoff that we've always claimed we would do, which is to maintain EBITDA growth, has been the key target for ourselves remains. So we are not fighting to react on volume, we are fighting to react on value and we are preserving growing faster than competition on value. That's our strategy and we will remain with that.

Ramon Fernandez

And so it's exactly the same in France, very consistent strategy at group level. In terms of football, so we are not going to participate to the auction in France. I mean, we have said so repeatedly. So we are consistent. This is not our job. Our job is to distribute content to our customers as we are doing so in France today with our partners, Canal+ and BeIN Sports. And so we will continue to be a distributor and aggregator of content. In order to provide what our customers want to have, we are spending more over the years, you've seen so. We've been spending €750 million last year. It will be slightly more this year, let's say, around [indiscernible] €100 million. And this is what is part of the increase in costing in the first quarter. But this is it. We will continue to work with those who are going to bid, but we're not going to bid ourselves.


Our next question comes from Frederic Boulan of Bank of America Merrill Lynch.

Frederic Boulan

So a question has been asked around the consolidation. So if I remember the message from February was that Orange will not drive something, but will be happy to facilitate any potential transaction. Can you update us on how you're thinking from that point? And then, secondly, just to follow up on the previous question, so I understand you don't want to get involved directly into the League One process, but I think the other question I think is also around - progress around the Champions League. So any color on that would be welcome.

Ramon Fernandez

So I mean, on consolidation, I think there is nothing to change with what we said in February. We are not driving anything. We are always in a position to facilitate and we don't need to see this happening when you watch the performance of Orange France. So nothing else really to add. We will see time and again rumors about potential consolidation. Probably this means that many people think that at some point something will happen. But nothing more. In terms of football, so I think we took the question on the French league. I guess your question is the Champions League at the European level. We know was the rights in France and we are talking, as always, with the owner of these rights and we will see if there is a way to find an agreement at an acceptable price. If not, we will do otherwise.


The next question comes from Stephane Beyazian of Raymond James.

Stephane Beyazian

Can you come back on subsidies and the decision from [indiscernible], meaning are you confident that you can keep all your plan as they are today? And I just would like to make 1 or 2 follow-ups actually. Can you fully quantify in France what is today the proportion of the high-end market that you believe is not affected and why you feel quite confident and the proportion of the sort of more competitive parts of the market to get a better vision of the weight of these two markets? And one additional on B2B, we've seen many telcos signing contracts with AWS, Cisco Jaspers, et cetera. Are you confident you can establish a leadership with all these partnerships that are being signed in the market?

Ramon Fernandez

Okay, maybe let's start with the last one in order to feel Thierry must be still with us. Thierry?

Thierry Bonhomme

To be very transparent on this one, we are part of this global move, which is about joining our strengths between the different partners of the B2B customers for better providing our services to the customers. As you know, we have huge partners, solid partnership with the usual suspects of this world and we will release - we started announcing the renewal of our long-lasting partnership with Microsoft in France, all along that whole value chain and the workspace, as you know, voice, unified cloud services. So it's a wide area of cooperation. I will not mention, of course, Amazon. We are a distributor of other big partners such as Cisco or Avaya. What's interesting with us, with the Orange Business services, is coming from our R&D strength and our policy in favor of the startups through the Orange Digital Venture program and we are increasing our capacity to bring to the portfolio of partners small companies with very disruptive competitive-edge technologies. Let me mention, for instance, what's done within the cyberdefense area with SecBI. So we are adding our technical partnership. We are adding to our technical partnership's capacity in terms of capital investments. So it's a very, very strong move. We are part of it and we are still increasing.

Ramon Fernandez

Thank you, Thierry. Fabienne?

Fabienne Dulac

Yes, so [indiscernible] decisions concern the dispute between Bouygues and SFR regarding specific and old offers in SFR portfolio, Orange is not concerned by this decision currently. We have a second stake because there is an appeal and there is a reexamination of this case that could take some few months. So it's very soon to - for us to draw any conclusion from it. We currently have different payment solution in Orange France. And if situation change, we could consider to launch specific consumer credit with Orange Bank and to have an answer at the move on the market. Just to answer your question, the share of SIM-only offers amongst Orange customer base reached 74%. But I want to just remind you that SIM-only is not equal low-end market. You can have some people on the high-end market and that change the move potentially expected by some competitors. The second question on the high-end market, so as I said before we pursue strategy to preserve the value and to drive customers toward high-end offers. As I said, it's plus three points for mobile and broadband and we reached 31% of high-end on mobile and we reached 43.5 on the fixed broadband driven by fiber. We are on fiber at 56% of customers on the high-end offer. So the strategy is really successful and we pursue it in the future.


We will now take our next question from Jonathan Dann of Royal Bank of Canada.

Jonathan Dann

I've got two. On the fiber customers, you report the number of customers new to Orange. Can you give us some sense of how that is mixed from, say, mature areas and some of the recently opened fiber areas? And then my second question is, your expectations for 5G spectrum auctions in France, Spain for the rest of the year?

Fabienne Dulac

So the estimate customer mix had in France, globally to beginning come from win back all the time because 86% of new customers on fiber come from - is an acquisition. So it's a good news. It's the same in the two area we have today, very dense area and middle dense area. The dynamic is the same. And we don't give more figures. The only point I can give you is the deployment and the commercialization of the fiber on the very dense area was a very success tool to win back and to gain market share, you know. And it's the same in middle dense area where we are very - we improve our strategy and where we gain new customers, too.

Ramon Fernandez

Mari-Noëlle Jégo-Laveissière will take your question on 5G spectrum.

Mari-Noëlle Jégo-Laveissière

On the 5G spectrum, the situations are different when it comes to one country and another. We already have in France key spec frequency, which is the 700, which will be a very good beginning for the 5G. We do test in Romania where you have less 5G using the high frequencies. So nothing should be on the table for 2018 and we will see step-by-step what is going to happen. So we have enough anyway to start the pilots that we will be doing in France and Romania and progressively in all our countries and it would come after the period country-by-country.


Our next question comes from Giovanni Montalti of UBS.

Giovanni Montalti

If I can go back to the football rights. Can you share with us your thoughts about the ongoing negotiations in Spain for the Champions League and also your view about the upcoming auction for LaLiga? And finally, if I may, you were discussing about being keen on, let's say, dealing with a potential winner of the auction in France. What type of deal are you looking for?

Ramon Fernandez

So for football rights in Spain, as you know, MEDIAPRO has acquired the rights for these champions. There's been a first round of bidding, which occurred last month. Only Telefónica and ourselves have done a proposal. Vodafone has not done a proposal. Apparently, MEDIAPRO is not satisfied with the proposal because obviously we're not participating in price increase that we don't see as reasonable in the Spanish market. So now we're starting, I would say, lateral negotiation. So from our perspective, we would like to have the football, but we have to - we think it could be done at a reasonable price. I think there is space for MEDIAPRO to take some of the risk outside of the, I would say, the pay-TV segment that we are looking for. So we don't have any more info at the moment because really the negotiation has to start in the coming weeks. Regarding LaLiga, the time frame is probably not until July. Again, LaLiga, as stated prices claims of - or ambition of prices, which we do not see as reasonable at all. And again, I think that's a view that is shared from all the operators, the high cost of the football is not sustainable and not reasonable. We need it and we want it as a content because our customers love football in Spain, but we don't want it at this price.

Thierry Bonhomme

And for France, I think I answered already. We are a distributor. We are an aggregator. We are not going to bid, but we are a fantastic and very central partner. So partnership is the key. Nobody can do, in fact, without us. I just recall that with more than 11 million broadband customers, we represent more than 40% of the market, so there is no chance that anybody could do any profits without us being somewhere in the game. So don't worry, football is a good game. We will be on the game, but at our place, which is a good place.

Giovanni Montalti

Sorry, if I may follow up quickly. Any reason why you would maintain, let's say, the different approach you have on football between Spain and France? It is true that, on paper, the deal you have in Spain can be represented as, let's say, a distribution deal at variable cost, but the reality is that the threshold, the guaranteed fixed volumes is so high that in reality is a big fixed cost that you take on your P&L. Would it be irrational to move, let's say, the Spanish approach more in line with the French one?

Thierry Bonhomme

Let me see if I can make your comparison and make at least Fabienne and Laurent will describe the situation, but [indiscernible]. In Spain, there is a player where the situation in Spain is that the main TV provider is owned by the incumbent. This is not the situation in France where the main TV provider is an independent operator. in Spain, the incumbent or the TV operator of the incumbent has legal and regulatory obligations to resell that do not exist for French operator. The French TV operator, has no obligation to resell to anybody. So we are in a completely different regulatory scheme between the two countries and we are also in a completely different game between the telecom players. So that doesn't mean that we don't try to apply in the long term the same strategy, but the way to go with the strategy is different between Spain and France. In Spain, and Laurent, you can correct me, Telefónica has an obligation to resell where there is a regulatory calculation of price organized by the regulatory system in the case in France. So we are in a completely different context. I don't know if Fabienne and Laurent want to add something. But this explains why we have different approaches between the two countries.

Giovanni Montalti

No, I appreciate that. My question was just aimed at understanding the way, again, you may change your approach to Spain because I appreciate that in Spain Telefónica has a, let's say, a strong position in content and this makes things different. At the same time, after 3, 4 years, it seems to me that the entire industry is not making money out of football. So I was a bit surprised to see both you and Telefónica bidding even for the Champions League that in the end is not such content able to move market share in the football market.

Ramon Fernandez

Giovanni, if you want, we will make a conference call after the - because it's one-on-one now so we need to move to others. Thank you. Bye-bye.


We will take now take our next question from Nicolas Didio of Berenberg.

Nicolas Didio

I've got two, three questions. The first one is on M&A in Africa. I mean, the Africa - the trends in Africa are clearly getting better. Is it changing in any way your motivation or your ambitions to do 1 or 2 other deals in Africa? The second question is about digitalization, to come back on that. Can you give us a bit of the current status on the decommission of copper in France, some data points maybe? And the last question was on, you know the recent news flow regarding for ZTE and potentially Huawei. Can you give us your thoughts about potential changes in your approach with vendors linked to this situation?

Ramon Fernandez

Okay. So now there is absolutely nothing changing in our M&A policy, which we have described in details in December. Our focus - our absolute focus in Africa has been to go back to growth in revenues and EBITDA in line with our expectations. And Jean-Marc Vignolles is also with us and this has been achieved in the second half of 2017 and confirmed in this first quarter of 2018. So we are back to the levels of growth we expect to see - we want to see in Africa with around, let's say, 5% on an average basis. So this is very good news and we are - and by the way, this is translating very nicely into EBITDA also. So this is really the critical focus we had and we have in our 21 countries in Africa and Middle East. And the fact that we are growing at a more rapid pace has no impact on M&A policy. We will continue to focus on our footprint. And of course, if at some point there is fantastic opportunity somewhere, we would look, but it's not, as you know, our priority. Maybe on the second question on digitalization in copper in France, Fabienne?

Fabienne Dulac

Yes, the approach to decommissioning the copper purely is value based and we will start this decommissioning at the right time, it's not now. This year, I just want to recall, we will stop selling PSTN, but it's not the same subject. And I don't see the link with the digitalization from these two different subjects.

Nicolas Didio

And on the vendor financing relationship, I mean, is there any changes to your - you are probably not exposed really to the deal Huawei, but just that will change your way to think your approach with vendors generally speaking?

Fabienne Dulac

Okay. So you're right, the ZTE-Huawei case are quite different anyway. The strategy - the vendor strategy that we have is really a multisource strategy. So we need to make sure, and we do have a [indiscernible] supplier for each single type of equipment and we have footprint that allows us to have a fairly balanced portfolio. So of course, any move is assessed carefully with all the different geographies. But we need to have - and we do have in our countries an open configuration and we are avoiding any fully vertical situation where we might be in a difficulty position. So this is really fully open and multisourced strategy, which is delivered all over the globe.


We will now take our final question today from Emmet Kelly of Morgan Stanley.

Emmet Kelly

Just two questions, please. First question, I guess, just for Ramon. If I look at the French labor numbers, there appears to be a pretty big acceleration in the decline of French full-time employees during the first three months of 2018, that might just be a timing issue. But with that in mind, can you maybe just give us a few big-picture thoughts on where you see French labor costs in 2018 referring to the employee numbers and also the cost per employee, please? And second question, I guess it's for Mari-Noëlle, some of the wireless-only operators around the world seem very excited about the prospects for FWA or fixed wireless access. Can you maybe just give us a few early thoughts on how you think FWA might play out in France given some operators are investing heavily in fiber and others are investing much less so in fiber?

Ramon Fernandez

Okay, thanks for the first question. You were addressing to me, but I think we have an even better person in the room to take the question who's Jérôme Barré, the Head of HR, and with Fabienne also. So I think they will take the question.

Jerome Barre

So back to your question about the headcount. The headcount as a group had been reduced on the first quarter by 1% and so just about 1,500 people, most of them in France. So it's big, but there's no acceleration. This decrease is due to [indiscernible] those plans outside France and especially in Poland. Ramon mentioned the decrease by 6.8% in Poland. And in France, we are still a big number of people who get retired, but there is no acceleration. We expect for the rest of the year just about the same number of departures as a group, so just about 4% at the group level.

Mari-Noëlle Jégo-Laveissière

As far as the fixed wireless access is concerned, I guess, this is one of the key opportunity for the 4G. But the opportunity - the size of the opportunity is very different when it comes to one country or another. It will come anyway starting in 2020, 2021 and should stay quite small in France. It might be of use for very specific areas where it's very difficult to go with the FTTH. So this can be an opportunity. But it will be really a very small, a niche opportunity for complementing the FTTH. Where in some of the countries, it might be much bigger. We are experimenting in Cluj in Romania starting in June, July and we will take some LOVE existing triple-play customers and adding some of them in the ADSL and some of them on the 4G and we follow carefully the customer experience. So we are definitively working on that opportunity. It shouldn't be significant in France, but it may be good opportunity for us in some other countries.

Ramon Fernandez

We are over this call. This is Ramon. I would just like to wrap up in stating once more that this is a very good quarter, a very good dynamic. We are sticking to our value strategy, which is delivering good results in all our geographies. So this is very good. There is a very nice momentum. Obviously, in an environment where in some of our markets, especially in France and in Spain, there is a very intense promotional environment, but our strategy with convergence, with fiber is delivering a result, especially on the high end of the market, we gave some figures to illustrate this. And so the engine is working quite well and we will be happy to follow up in road shows in the next days to go into more details with any of you who would be interested. So thank you for attending the call. And à bientôt.


Thank you. That will conclude today's Orange's First Quarter 2018 Results Conference Call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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