French telecom market Q4: Orange stable market leader, small recovery at SFR and Bouygues, Iliad still going strong

Thursday 30 March 2017 | 14:58 CET | Background

France's top four telecom operators generated revenues of EUR 10.2 billion in revenues in the last quarter of 2016, up 2.8 percent from a year earlier. EBITDA rose a stronger 8.7 percent to EUR 3.55 billion, and the sector's margin appears to be turning higher. Capital expenditure increased by 3.3 percent to EUR 2.10 billion, and free cash flow increased slightly to 14.2 percent of revenues.

Orange is the clear market leader, while SFR and Bouygues Telecom are feeling the pressure from Iliad, which is progressing well with its brand Free. Iliad is showing the strongest revenue growth still, has passed SFR to become number two on the fixed market and is closing in on Bouygues on the mobile market. In terms of revenue, Iliad is hardly smaller than Bouygues Telecom, and the company's strategy, organisation and commercial approach have led to a notably strong profitability.

Growth and margins

At the moment, it's the smaller players growing the strongest on the French market. Orange reported lower revenues in Q4 (-0.8% to EUR 4.83 bln), while SFR (+5.4% to 2.89 bln), Bouygues Telecom (+6.1% to 1.26 bln) and Iliad (+8.6% to 1.24 bln) were all growing. These figures show that at the current rate, Iliad will soon pass Bouygues to become number three on the French market.

Orange achieved the highest EBITDA margin (40.4%), above 40 percent for a second quarter in a row. SFR is stuck at around 33 percent, and Bouygues Telecom is much lower, at 17.4 percent in the latest quarter, well below its target for 2017 of 25 percent. Iliad shows a remarkably strong margin, despite being the smallest player, at 34.9 percent.  

Investments (capex) as a percentage of revenue are fairly similar for all four, and combined they reached a ratio of 20.6 percent in Q4 2016. All four operators are working on modernising their networks, and Iliad also is still building out its 4G network. It's clear Iliad has made progress, as its capex ratio fell back to a more normal 17.2 percent in Q4, from 37 percent in Q1 and Q2 2016. 

Free cash flow, as a percentage of revenue, is also largely stable, at 14.2 percent for the four operators combined. However, the differences between the four are large. Orange (21.3%) and Iliad (17.6%) are doing well, while SFR (6.2%) is still digesting its merger integration costs, and Bouygues Telecom (-1.7%) is in need of scale and costs savings in order to continue as a standalone operation. 

Customer growth

On the fixed line market, Orange, Bouygues and Iliad are growing their customer numbers, while SFR is losing ground still. SFR is also the weakest on the mobile market, although did show some growth. In Q2 2016 Iliad passed SFR to become the second-largest fixed operator, while on the mobile market Free is still the smallest, although narrowing the gap with Bouygues. 

  • Orange lost prepaid users but won in postpaid, leading to a net gain of 525,000 customers during the quarter for a total 30.033 million. The incumbent lost 110,000 fixed lines, to reach 32.896 million at the end of 2016. It also had 11.151 million broadband connections (+95,000) and 25,000 narrowband customers (-14,000).
  • SFR lost 47,000 customers on the fixed market for a total 6.113 million. The transition from ADSL to FTTH/cable continues, with around a third now using 'superfast' broadband. On the mobile market SFR grew in postpaid and reached a total 20.067 million customers.
  • Bouygues Telecom added 98,000 customers in the fixed market for a total 3.101 million. A growing number, 482,000, use superfast broadband, and a quarter of these are on fibre. Bouygues also gained 336,000 mobile customers, for a total 12.996 million at end-2016. Prepaid numbers were stable, with growth coming in postpaid.
  • Iliad gained 58,000 fixed customers for a total 6.385 million. In mobile, it added 315,000 users to reach 12.700 million at year-end.

Recovery in 2017

All four operators are working together on the expansion of fibre networks in France. Market leader Orange shows a stable performance and could increase its margin even further. Bouygues Telecom and SFR are still working on a turnaround, while facing off the challenge from Iliad. Iliad shows great financial stability and profitability. Only in the first half of 2016 did it show a dip, due to the costs of expanding its 4G network. Now that the work is largely completed it can open up the attack on Bouygues for the number-three spot.

  • Orange did not give a revenue outlook for 2017, but will continue with its cost savings programme (Explore2020) in order to push its EBITDA higher. It will soon launch Orange Bank, which is expected to lead to a new source of revenue.
  • Bouygues Telecom targets an EBITDA margin of 25 percent in 2017. It's hiked the capex budget by 50 percent to EUR 1.2 billion in order to take its LTE network to coverage of 92 percent by the end of 2017 and 99 percent by end-2018. It's also expanding its 'very high speed' internet coverage (FTTH, cable), targeting 19 million homes passed by the end of 2019, of which 12 million FTTH. The latter should reach 20 million by 2022. While this will put pressure on free cash flow in the near term, the company aims to bring this back up to EUR 300 million in 2020, from EUR 114 million last year.
  • SFR, the biggest subsidiary of Altice, showed its first growth in 24 quarters in Q4. The company is also working on expanding its 4G and FTTH coverage. The target is 22 million addresses passed by the end of 2022, compared to 9.3 million at the end of 2016.
  • Iliad targets over the long term 25 percent of the 'very high speed' broadband market. In 2017 it aims to add 200,00 FTTH customers, and this should rise to 300,000 to 500,000 per year in the following years. The same as the other operators, it aims to reach 20 million homes passed by 2022, and 9 million already in 2018. Iliad also targets a 25 percent share of the mobile market. This will be supported by the expansion of the 4G network coverage to 85 percent by the end of 2017. The capex budget will increase to EUR 1.4-1.5 billion in 2017 and 2018 from EUR 1.3 billion last year, and the EBITDA margin should pass 40 percent by 2020. Free cash flow is forecast to increase from EUR 388 million in 2016 to over EUR 1 billion in 2020. 

Iliad's outlook excludes it's planned launch in Italy, where it will enter the market as the fourth mobile operator, following the merger of 3 Italia (CK Hutchison) and Wind (VimpelCom). Iliad targets a market share of 10-15 percent in Italy and said it expects to be able to breakeven at the EBITDA level already with a 10 percent share. 

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