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Morningstar | Orange Reported 3Q Results In Line with Our Expectations; Shares Undervalued

Orange reported third-quarter revenue and EBITDA in line with our expectations and we are maintaining our EUR 19 per local share fair value estimate and narrow-moat rating. We believe the shares are undervalued. The firm reported revenue growth of 0.6% year over year versus our full year projection of 0.7%. While competition has increased in France and Spain, its two biggest markets, we believe the company is well positioned long term.

The firm grew revenue in France for the sixth quarter in a row with a strong showing in fiber, where it added 157,000 fiber based broadband customers, taking its total to 2.2 million. Importantly, revenue from convergence increased 10.7% with average revenue per offer, or ARPO, increasing 4.6%. We believe Orange’s increasing focus on fiber and convergence positions it well versus its competitors as it has the best networks, which in turn should allow it to continue to generate revenue growth.

Orange’s revenue growth in Spain slowed to 0.5% as competition increased. Spain has been a major revenue growth driver for several years, but Vodafone is fighting back and MasMovil has improved its competitive position and become more aggressive at the low end, while Telefonica retains the high end position. However, Orange was still able to widen its mobile contract base 7% versus the year-ago period to 11.5 million, and broadband base slightly, thanks to adding 158,000 fiber-based customers. Fiber now accounts for 65.8% of its broadband base and converged subscribers represent 85.1% of its consumer broadband base. Our biggest concern is that ARPO declined slightly, an area we will watch closely.

The firm continues to control its costs and as we stated after the second-quarter results, we expected the second-half EBITDA margin to improve to offset the low first half. We now see this playing out. The third quarter’s adjusted EBITDA margin was 35.8%, which brings the nine-month EBITDA margin to 31.6% versus our full-year projection of 31.4%.

Convergence is also starting to benefit the rest of Europe, which allowed revenue to increase 1.6%. We are particularly pleased that through the success of convergence its Polish operation has returned to revenue growth. Additionally, Orange finally had a quarter in its Africa and Middle East section without any significant currency moves, allowing its revenue to improve 3.7%, which shows the potential of this segment.