Orange Belgium Q4: high underlying growth and challenger strategy

Friday 9 February 2018 | 09:49 CET | Background

Orange Belgium announced what appeared to be weak results for the fourth quarter, with sales down 1.3 percent, over 20 percent lower EBITDA and a net loss. However, on an underlying basis, the quarter was not nearly so bad. While investors focused on the bottom line and sent the share price down 10 percent, the company is showing growth at its core. The latest announcements from Orange suggest the company is embracing a challenger strategy similar to T-Mobile Netherlands. 

In Q4, Orange's revenues reached EUR 318 million, down 1.3 percent, and adjusted EBITDA fell 21 percent to EUR 61.9 million. The net result was a loss of EUR 9.3 million versus a profit of EUR 28.6 million a year earlier. Capex rose 3.5 percent to EUR 83.8 million, and free cash flow was a negative EUR 11.9 million versus a positive EUR 7.2 million in Q4 2016. 

Underlying growth 6.7% in mobile service revenue, 11% in EBITDA

In general one needs to be careful with terms such as organic or underlying growth. Management often wants to exclude low-return business lines or one-off costs from the headline results. An investor, interested in the company in the whole, does not have much use for this. However, if one wants to see the true quality of results at specific activities, it is worth looking at the adjusted figures. 

Orange Belgium is a good case for this in its latest results. Its share price fell 10 percent this week, compared to drops of 3 percent for its main rivals Proximus and Telenet. However, the company's underlying results show signs of growth. We need to exclude a number of factors, even if some may question the logic of this:

  • A write-down on Orange Luxembourg of EUR 17.9 million.
  • The deal in Wallonia over taxes on pylons. 
  • The roam like at home regulation in the EU, which reduced Q4 revenues by EUR 8.4 million (FY 2017: - EUR 36.4 million) and took EUR 7.3 million off EBITDA. In 2018, Orange estimates the impact at a negative EUR 26 million on revenue and EUR 17 million on EBITDA.
  • The loss of large MVNO customers - first Lycamobile, now Telenet and soon VOOmobile. The impact in Q4 2017 was EUR 15.3 million less in revenue and EUR 7.5 million less EBITDA. This will increase to a EUR 30 million reduction in EBITDA in 2018. 
  • Not to be excluded are the operating costs for offering cable broadband and TV. These doubled in the quarter to EUR 13.4 million and reduced EBITDA by EUR 18.5 million. 

Orange's mobile service revenue fell 3.3 percent in the quarter. Excluding RLAH, revenues grew 2.9 percent, and without the pylons impact, growth was 6.7 percent. 

Orange reports EBITDA and adjusted EBITDA; restructuring costs are excluded from the latter, which fell by 21 percent. Excluding the pylons tax, the drop was only 1.8 percent. If RLAH is also excluded, the result actually grew by 11 percent. 

Orange's new targets are as follows:

  • Adjusted EBITDA, taking account of the lost MVNOs and RLAH regulation, of EUR 280-300 million in 2018, down from EUR 302 million in 2017. The two negative factors have a combined impact of -47 million. If we include these amounts, EBITDA would reach EUR 337 million, or growth of 12 percent on an adjusted basis.
  • Unchanged capex in 2018, versus EUR 188 million last year. This would lead to free cash flow of EUR 112 million this year, almost the same as in 2017. 
  • A contineud focus on operational efficiency to reduce costs. 
  • In the medium to long term, Orange targets a 10 percent share of the broadband market. 

Challenger strategy

Orange also announced a number of commercial initiatives, along with the completion of its national IoT networks (NB-IoT and LTE-M). In a first in Belgium, the operator launched an unlimited mobile data plan, a concept used mainly be challengers to win market share. The company also wants to expand on the business market, offering a 'one-stop shop' for both fixed and mobile services, and is working with sister company Orange Business Services. These are all efforts similar to the strategy of T-Mobile Netherlands. 

Interesting also is Orange's use of big data. The company is using network data such as dropped calls to target directly customers with poor coverage. They are offered a femtocell. The network data is also used for targeted investments in the network. 

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