France Telecom's Q1 squeezed by domestic price war

Profits margins at France's largest telecoms operator France Telecom (FT) got knocked in the first quarter following the success of Iliad's Free Mobile and its low-cost offers. FT reported that its first-quarter operating profits fell by 8 per cent to €3.43 billion, compared with €3.73 billion in the same period last year.

FT said revenue dropped 2.7 per cent to €10.9 billion, just ahead of the €10.8 billion average estimate of 12 analysts compiled by Bloomberg. The company also admitted to losing over 615,000 net customers in its home market--around 2 per cent of its user base--since the launch of Free Mobile in early January.

The impact of this sudden change in market conditions prompted FT CFO Gervais Pellissier to say that the group would not meet its goals for 2013-15 detailed in a strategic plan last year, according to Reuters. However, Pellissier defended the company's reaction to Free Mobile, pointing to FT's more aggressive pricing, the promotion of its low-cost brand Sosh and the launch of triple-play services.

"Our commercial reaction has paid off," Pellissier said on an earnings conference call, adding that number portability requests had returned to normal levels by last month having peaked in March.

Pellissier also emphasised the benefit of its much criticised roaming agreement with Free Mobile, saying to the Financial Times: "The negative effect of the fourth entrant on our mobile revenue was almost fully compensated by the revenue from our roaming contract with Free Mobile."

Guy Peddy, a telecom analyst at UK-based Macquarie Securities, said while the results gave him hope the company could weather the storm in France, much remained to be done. "It is a bit like they have built a new foundation and we still need to see what the new house will look like," he told Reuters.

The French stock market seemed reassured by FT's performance and marked the shares up 2.7 per cent. The results were "slightly above expectations," one Paris-based trader told the Wall Street Journal, but added that the "bad news is the company's commentary regarding 2012."

The trader said the pressure on margins and the number of customers lost in the first quarter indicated that the outlook for the company "isn't great" for the time being.

Of particular note, the entry of Free Mobile appears to have turned France from being one of Europe's least competitive wireless markets, which has had margins in the mid-to-high 30s, to something closer to the mid-20s seen in the combative UK market, according to Reuters.

For more:
- see this France Telecom release
- see this Reuters article
- see this Financial Times article (reg. req.)
- see this Wall Street Journal article (sub. req.)
- see this Bloomberg article

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