EUR 850.00 For Business Accounts Only

Morningstar | Orange Reports Generally In-Line First-Half Results; Maintaining FVE; Shares Undervalued

Orange reported first-half results that were roughly in line with our expectations, and we plan to maintain 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 0.9% year over year versus our full-year projection of 0.7%. We were pleased to see revenue increase across all of its telecom regions.

As we have been discussing for several years now, Orange is doing particularly well with its converged strategy. The firm’s converged offers increased 9% to 10.7 million customers and SIM cards connected to those converged offers grew 12% to 18 million. Those convergent subscribers were spread 6.1 million in France, 3.1 million in Spain, 1.1 million in Poland, and with small amounts in other European countries. These customers continue to generate higher average revenue per offer, or ARPO, and have lower churn, which increases their lifetime value.

In France, its largest market, revenue grew 0.6% in the second quarter, led by an 11.4% improvement in convergent revenue. Convergent ARPO improved 3.2%. Orange also increased its France wireless contract base 4% to 19 million and its broadband subscriber base 2.6% to 11.3 million. Our other focus has been on fiber-based broadband where Orange’s base jumped 33% to 2.25 million. These factors are also driving its success in Spain, where it is outperforming both Telefonica and especially Vodafone. Here its revenue grew 1.8% in the quarter with its fiber broadband base gaining 31.6% to 2.6 million. Fiber now accounts for 62.2% of its total broadband base in Spain.

Orange continued to make progress with its cost-cutting programs and generated EBITDA margin of 29.5% for the half year. While this is below our full-year projection of 31.5%, the second half is historically much stronger. Thus, we anticipate the full year will be similar.

The rest of Europe also generated revenue growth of 0.7% in the second quarter and the Africa and Middle East region increased 2.1%. While wireless subscriber growth in Africa and the Middle East only improved 0.8% to 117.4 million, it saw 28% growth in the more valuable contract customers to 12.4 million. We continue to expect this region to help sustain revenue growth as it is further behind in the development of wireless services.