EUR 850.00 For Business Accounts Only

Morningstar | Orange Reports Generally In-Line 1Q Results; Shares Undervalued

Orange reported first-quarter results that were roughly in line with our expectations, and we don’t anticipate any significant changes to our EUR 19 per local share fair value estimate. Our narrow moat rating remains intact, and we believe the shares are undervalued. On a comparable basis, the firm reported that revenue declined 0.1% year over year versus our full-year projection of a 0.1% gain. On a historical basis, revenue grew 1%.

However, in France, the firm’s main market, revenue dropped 1.8%. While this was a disappointment, it isn’t as bad as it first appears. Almost all of the decline can be explained by the end of the promotions for Orange’s successful digital reading offer and lower handset sales. Importantly, the firm continues to grow its subscriber bases, with particular success in its converged fixed-line and wireless telephony services, and fiber-based broadband. Orange grew its convergent subscriber base 3.2% from the year-ago period to 5.7 million. It also added 168,000 fiber-based customers in the quarter, taking its total to 2.8 million. While competition has increased in France, we believe the firm’s success in convergence and fiber-based broadband will allow it to return to revenue growth in the country.

Convergence is also driving revenue growth in Spain and the rest of Europe. In Spain, Orange’s revenue increased 0.4% as convergent revenue grew 1.2% and its average revenue per offer grew 1.8%. In the rest of Europe segment, revenue improved 1.4% because of a 3.6% gain in retail services, driven by a 42.8% jump in convergent revenue. In Africa and the Middle East, Orange grew its revenue by 5.3% due to higher data usage and the success of Orange Money, where revenue gained 29%. We continue to expect this region to contribute the fastest revenue growth.

While the firm’s EBITDA margin, excluding leases, of 25.4% looks weak versus our full-year projection of 31.8%, it is a slight improvement from the year ago period. Historically, Orange’s EBITDA margins show seasonality, with the first quarter lower than the rest of the year.