Orange, the pan-European network operator controlled by France Telecom, has reported strong first half results, with revenues up 13.8 percent at EUR 8.1b and EBITDA advancing 41.0 percent to EUR 2.3b. For the first time there was a net profit, before exceptional items, of EUR 218m. Orange raised its EBITDA target for the full year 2002 to EUR 4.7b from EUR 4.3b.

Jean-Francois Pontal, Group Chief Executive Officer, stated: “The Orange strategy is working. These results are a long way ahead of expectations at the time of our flotation. We’ve passed another financial milestone with our first net profit before exceptional items, and we’re now able to lift our financial targets for the second time this year. We are confident we can maintain our momentum not just this year, but also for the years ahead.”

Margins from its GSM networks business rose 5 percent to 31 percent and Orange provided a positive outlook for further improvements, saying: “We believe that Orange is very well positioned to benefit from the exceptional potential we see in mobile, both from the enormous growth of voice services, which are far from mature, and from the exciting potential of non-voice services which we are now beginning to see evolve.”

The announcement of Orange’s results follows news that France Telecom would abandon its stake in MobilCom and its commitment to fund the loss-making German operator until 2010. France Telecom also announced that Chief Executive Michael Bon, who has presided over the accumulation of an EUR 70b debt mountain, has resigned. Orange had previously written down the value of its MobilCom stake to zero.

Orange also said that it had decided to retain its stake in Italian operator Wind, but would record an EUR 1.1b impairement charge against its value. Jean-Francois Pontal commented: “Shareholder value is key to Orange’s investment decisions. In March, we wrote down the carrying value of our holding in MobilCom to zero. Since then, we have acquired an improved understanding of MobilCom’s business position. Even when these are considered alongside prospects for market consolidation, we see no business case for investing further in MobilCom and therefore will not do so.”

He added: “In light of recent developments, we have reconsidered our intention to dispose of our shareholding in Wind and decided to retain it as a long-term investment. Further to that decision, we have conducted an interim review of its carrying value and as a consequence have decided to reduce its value in our books by EUR 1.1b to EUR 3.2b. We will conduct a further review later in the year once Wind’s management has updated its business plan.”

Insight

France Telecom’s reluctance to sell its stake in Orange now looks justified. Orange was one of the few areas of its business which performed ahead of expectations. The strength of its brand and a good overall customer mix has enabled it to record enviable EBITDA growth. It also appears on target for reaching a positive cash flow position in 2002.

Its comments on the growth potential for both voice and data will provide reassurance to investors who have grown accustomed to a diet of downbeat statements. Its exposure to MobilCom also appears to have been capped, although there is the potential for litigation risk in the future. News that capex requirements for 3G will not exceed EUR 8b (down from a previous estimate of EUR 10b) will please investors too.

Long-term, Orange appears to be well positioned to achieve its goal of becoming a provider of ‘wirefree lifestyle services’. Of all the top tier European operators, it’s users have responded most favourably to its investments in brand affinity and this will become increasingly important when it comes to promoting new data services.