France Telecom sent PTO shares into freefall in January when it announced disappointing financials. Now it has threatened to do it again. How have other telcos coped? Plus, a doomsday balance sheet for PTOs. 

Notes and doodles in the margins of France Telecom’s financial statements have of late provided a heavily smudged picture of telco futures. It’s particularly galling for the patrician industrialists and bureaucrats at the helm of FT to be forced into a series of profit warnings and downbeat quarterly results.

It’s not much fun for the French carrier’s PTO peers, either. FT’s January 2006 announcement acted as a blow to the solar plexus for most European telcos (click here), which at the time were just beginning to show signs of a sustainable recovery after months if not years in the doldrums.

Most of FT’s rivals managed some sort of recovery over the next two months, although the principal culprit itself still languishes, trading some 20% down on its 2006 opening numbers. For this reason alone, last week’s half-year statement was awaited with a mixture of fascination and trepidation.

Year half empty
Well, our French friends did not let us down. Once again the figures were garlanded with positives: a rise in organic cashflow and growth in revenues. Didier Lombard, ceo, averred that “in an environment that remains highly volatile, we are deploying the strategy that will allow us to become Europe’s operator of reference for new telecom services.”

Yet the headlines were grabbed by FT’s 30% decline in first half profit and, as in the January announcement, it is suggesting that growth targets, even at a modest and revised level of 2% for 2006, will be missed. FT is laying the blame on declining fixed-line revenues (its earlier refrain) and a slowing off of broadband growth which in part compensated for this last year.

The irony here, not new to regular TelecomRedux readers, is that all this malaise has occurred since the proclamation of the ‘NExT’ business transformation programme announced just over a year ago. NExT, the bastard offspring of a management consultants’ think-tank possibly operating under the influence of hallucinogens, looks somewhat sad.

Not in the eyes of FT and Lombard, however: “the adoption of Orange as the single brand for all our offers is a clear milestone and is already paying off. It paves the way for new services for consumers and businesses, enabled by the convergence of networks and usages.”

And NExT gives Lombard confidence that customer revenues can be increased even while users are fleeing into the arms of alternatives: “new services will create value and allow us to strengthen our positions in Western Europe. In these markets, in a context of slower growth, the Group focuses on balancing profitability and market share.”

Love ‘em and leave ‘em
In that odd form of tunnel vision that only ex-monopoly utilities can carry off with anything approaching  aplomb, the underlying message here would seem to be “they love us – and then they leave us.”

France Telecom’s shares have fluctuated in a +/-1.5% range since last week’s announcement. This suggests that the market had already factored the news into its valuation of the company. It scarcely suggests confidence, however.

Thankfully, FT’s rivals appear to have escaped any herd/lemming instinct among their shareholders, too. Peers such as Deutsche Telekom and Telecom Italia recorded rises as FT revealed its woes, although these were probably not related to the news from Paris.

Yet these companies and other European integrated carriers will be doing the sums for themselves. Here are five key entries on this theoretical balance sheet:
• broadband has compensated for declining fixed-line revenues but is slowing and under price pressure;
• the rate of fixed-line revenue falls are, if anything, gathering pace;
• mobile growth has helped to mask this trend in overall revenues but is itself being squeezed by competition and regulatory pressure;
• attempts to grow through international expansion and acquisition are restricted by remaining levels of debt and a lack of opportunities;
• content provision and new service creation are risky and expensive propositions.

France Telecom’s response to all this, we now know, is a combination of management-speak and re-branding. Better stick that on the balance sheet as well and hope that it works. Oh, that and lots of job cuts – although not at board level (click here).
Jim Chalmers