Iliad revenue surges but device sales dampen the party

Disruptive French telco Iliad has reported 6.9% growth in consolidated revenues for the three months to March 31, but depressed device sales took some of the shine off.

While sales of fixed and mobile devices only brought in €45 million across the quarter, a 38.6% decrease in year-on-year sales would have bruised some egos. Reporting a 6.9% increase in consolidated revenues would certainly keep investors happy, but without the dent to device sales, Iliad executives would have been boasting about a 9.1% increase.

Still, few will complain with the performance of the business over the last three months, as share price increased 5.3% (12.30pm, May 12).

“All crises are revealing,” said CEO Thomas Reynaud. “And for our Group, this one has brought out the best in us, clearly showing the agility of our organization and the strength of our fundamentals.

“I have been particularly impressed by the commitment and drive of our employees who are working so hard to keep people connected. The crisis has strengthened the incredible spirit of solidarity which has always characterized Free.”

Iliad Group financial performance for three months to March 31 (Euro (€), millions)
Total Year-on-year
Consolidated revenues 1,382 6.9%
Service revenues 1,339 9.6%
Mobile ARPU 10.6 12.8%
Fixed ARPU 32 1.3%

Source: Iliad Investor Relations

As with many other telcos in Europe, Iliad is now searching for value outside its core competencies. This can be broken down to two main ventures, both of which are looking quite healthy.

Firstly, in pushing into the convergence business model in France with a FTTH proposition, Iliad is evolving to much more than a disruptive nuisance. The broadband network has now passed 15 million homes across France, adding 215,000 subscribers this quarter. The subscriber base now stands at 1.97 million, with the objective to have 4.5 million by the end of 2024.

The second venture is the launch of its own mobile network in Italy. This has proven to be a very successful bet, with Iliad providing plenty of disruption to the status quo. Revenues are growing in tough circumstances, while the team now has 5.8 million subscribers and market share of roughly 7.3%. The network currently has 2,936 active mobile sites, though this should be 5,000 by the end of the year and more than 10,000 by the end of 2024.

Although the COVID-19 pandemic is currently having a limited impact on the financial performance of Iliad, the team has warned of the operational consequence and the knock-on effect this would have. Like most of the telecoms industry, COVID-19 is not having a material impact, but the longer the lockdown persists, the more difficult it becomes to realise new revenues promised by vast expenditure.

A weak France overshadowed Orange’s Q1

The telecom operator Orange reported a flat Q1, with a weak performance in its home market partially compensated by the strength in Africa and the Middle East.

Orange reported a set of stable top line numbers in its first quarter results. On Group level, the total revenue of €10.185 billion was largely flat from a year ago (-0.1%), and the EBITDAaL (earnings before interest, tax, depreciation and amortisation after lease) improved by 0.7% to reach €2.583. Due to the 8% increase in eCAPEX (“economic” CAPEX), the total operating cash flow decline by 10.2% to €951 million.

Orange 2019Q1 Group level numbers.pdf

Commenting on the results, Stéphane Richard, Chairman and CEO of the Orange Group, said that “the Group succeeded in maintaining its high quality commercial performance in spite of a particularly challenging competitive context notably in our two principal countries of France and Spain. Our strategy is paying off since EBITDAal is continuing to grow while revenues remain stable, allo wing us to reaffirm our 2019 objectives”

On geography level, France, its home and biggest market is going through a weak period. Despite registering net gain in the number of customers, the total income dropped by 1.8% to €4.408 billion, the first quarterly decline in two years. The company blamed competition, a one-off promotion of digital reading offer towards the end of the quarter, and “a weaker performance on high-end equipment sales in the 1st quarter of this year”. The move to “Convergence” was positive, but not fast enough to offset the lose in narrowband customers. The competition pressure is still visible. The Sosh package (home broadband + mobile) Orange rolled out to combat Free is gaining weight among its broadband customers, which resulted in a decline of revenues despite the growth in customer base.

Orange’s European markets, including Spain and the rest of Europe, reported modest growth, with strength in Poland (+2.6%) and Belgium & Luxembourg (+3.8%) offset by a weaker Central Europe (-1.9%). The bright spot was Africa and Middle East, which registered a 5.3% growth to reach €1.349 billion revenue, taking the market’s total revenue above Spain and just marginally behind the rest of Europe. The company’s drive to extend its 4G coverage in Africa is paying off, with mobile data service contributing to 2/3 of its mobile growth. Orange Money also saw strong enthusiasm, with the revenue up by 29% and total number of monthly active users totalling 15.5 million.

Both the Q1 results and outlook to the rest of the year spelled mixed messages for the wider telecom market and Orange’s suppliers, but negatives look to outweigh positives. On the consumer market side, the slowdown of high-end smartphone sales and prolonged replacement cycle has once again been demonstrated in the weak numbers in France. On the network market side, Orange predicts more efficiency. This includes both the network sharing deal signed with Vodafone Spain, which is expected to deliver €800 million savings over ten years, and an overall reduction in CAPEX this year.

As the CEO said, “while the level of eCapex for this quarter is higher, it should reduce slightly for 2019 as a whole, as predicted, excluding the effect of the network sharing agreement with Vodafone in Spain announced on 25 April.” This means, to achieve the annual target of reduced CAPEX, the spending will drop much faster in the rest of year. There is no timetable to start 5G auction in France yet, but it will be safe to say that any expectations of 5G spending extravaganza will be misplaced.

On the positive side, Orange has seen its efforts to diversify its business gaining traction, especially in IoT and smart homes. But these areas, fast as the growth may be, only make a small portion of Orange’s total business.