Orange S.A. (ORA) Earnings Call Transcript

So hello, hello to all of you. Welcome to Orange Q3 results presentation. So for your information, this conference is being recorded. The call today will be hosted by Christel Heydemann, our CEO; and Laurent Martinez, our CFO, with other members of Orange Executive Committee for the Q&A session that will start just after the presentation. Thank you. And now let me over to the floor to Christel Heydemann. Christel, the floor is yours.

Good morning, and thank you for joining our Q3 results presentation. Q3 confirms the group's strong momentum with revenue growth at 3.6%. EBITDA increasing by 4.6% and a double-digit growth of operating cash flow at 10.3%. Revenue grew across all geographies with Africa Middle East continuing its double-digit trend. Solid commercial performance underpin retail services increase at 3.3%. Based on these solid results, we are upgrading our EBITDA full year guidance with a growth now expected above 4.5%. A last word on our joint bid to acquire SFR alongside Bouygues and Iliad, Orange remains committed to constructive social dialogue, which is ongoing, expected closing date in the second half of 2027 remain unchanged, subject to regulatory approvals. Driving into our financials. Revenues are up 3.6% this quarter, reaching EUR 12.2 billion and growing across all geographies. This strong performance was driven by retail services and an outstanding mid-teen growth in Middle East and Africa. EBITDA increased by 4.6%, driven by top line growth and continued focus on efficiencies. We also maintained disciplined investment with CapEx to sales decreasing in the quarter and were in line with our full year guidance of around 15%, driving operating cash flow up double-digit at 10%. Let's now look at key actions illustrating execution of our trust the Future plan in Q3. First, last week, we signed together with Deutsche Telekom, Telefonica and Vodafone, letter of intent to prepare a potential joint bid for the future allocation of for mobile satellite services in Europe. The initiative supports the European Commission's ambition to strengthen Europe's sovereignty, security and resilience in critical connectivity infrastructure. Overall, we see satellite connectivity as a core complement to our networks to provide coverage, completeness and resilience. Also in terms of innovative growth. Orange Business obtained a new Seniam cloud calification, extending its portfolio of trusted cloud offers. Orange Business was also selected to provide the European Union's backbone network for trusted data exchange. Our Supramax heat in Middle East Africa keeps gaining traction with 38.5 million active users the 1.8x year-on-year increase. We also conducted a 50 gig on test in Belgium, achieving a near 0 latency. Moving to customer intimacy. In France, we keep enriching customer experience, launching new offers with a new home cinema set-top box for our high-end customers and a 5G plus FastPass, providing dedicated connectivity at major events. We also introduced the Orange Marketplace featuring over 8,000 high-tech products. Also, Poland launched its B2C Cyber app to protect users from cyber threats. About excellence at scale the integration of MASORANGE is completed, and we renamed it as Orange Espana to leverage our strong brand. In France, we continue to simplify our network architecture and have successfully completed the closure of the 2G network, a new milestone in the country's nationwide transition to very high-speed network solutions. Also, we tested an AI scanner for fixed network to detect anomalies and prevent disruption. Finally, early September, we issued a EUR 4.1 billion bond at attractive conditions and 4x oversubscribed, EUR 4.1 billion bond, 4x oversubscribed. It reflects investors' strong confidence and allows us to anticipate future financing needs. In the current interest rate environment, you can note that around 90% of our existing debt is at fixed rates. I now leave the floor to Laurent for the financial overview.

Thank you, Christel. Let's start with France with the third quarter confirming the strong trends seen in previous quarters. we delivered record net adds across the board in mobile, fixed and particularly in convergence with the record since 2018. Our retention programs are delivering results. Mobile churn is down by more than 1 point year-on-year, while fixed broadband churn decreased by more than 2 points year-on-year. . On value, broadband ARPU increased year-on-year, fueled by multi-services growth and upsell cross-sell actions. Convergent ARPO is up sequentially, while the year-on-year trends reflects mobile ARPU decrease. Globally, we actively push our more-for-more approach enriching our offering and using the quality of our network and services to support pricing power while protecting churn and customer satisfaction. Turning to financial results. Revenue is up by 0.5% in the third quarter. Retail excluding PSTN is up 1.1%, reflecting our robust commercial performance and compensating the decline of PSTN. Customer satisfaction remains a key differentiators. Orange maintained its leadership position with an NPS of points ahead of our closest competitors and best-in-class churn across all segments while continuing to offer our clients innovative offers. Equipment revenues were driven by strong demand for high-end device, uplifting our market share. And finally, wholesale legacy activity decreased at expected pace. Overall, the resilience of retail services and our commercial momentum supported revenue growth in the quarters. We are, therefore, fully confident in reaching outlook for stable plus EBITDA costs. Moving to Spain, with revenues increased by 3.5% in the third quarter, supported by solid growth in wholesale and equipment sales. Continuing the trend seen in the first half, services revenues improved sequentially by 0.5 points, led by ongoing B2B expansion across all market segments, improving retail trends including positive fixed and mobile net adds and growth in convergence ARPU. And finally, a strong development in new services with 169,000 customers subscribing to financial services home securities, energy or insurance. Action is in place to continue services trend improvement over the fourth quarters, supporting our outlook for low single-digit EBITDA growth in H2. Turning to Africa and Middle East, which continues to deliver exceptional performance. Revenues increased by more than 14% and was broadly distributed with 10 countries growing double digit. Fixed broadband, data, Orange Money and B2B are all growing above 14%, driven by strong increase in ARPU and customer base supported by demographic growth and expanded coverage. This 14th consecutive quarter of double-digit revenue growth, reinforced our confidence in achieving double-digit EBITDA growth for the full year. Turning to Europe VI, which we pursued a very dynamic of 5.3% in the third quarter in terms of revenue uplift. This reflects an acceleration on both convergence and exceptional IT and integration services. Net adds remains very robust in both mobile and fixed broadband and 1 is growing by 5% in Poland. Orange Poland, in particular, delivered very strong results, overperforming the market with revenues up close to 8%. The acquisition of Nexera expands our fiber footprint by 30% and strengthen growth prospects of our fiber co joint venture. Looking ahead, we confirm our outlook for Europe with a mid-single-digit EBITDA growth for the full year. Looking at Orange business. Revenues declined by 2.5% in the third quarter, reflecting a still affected by macro environment. Against that backdrop, we are executing our transformation plan. first, focusing on our go-to-market on trusted AI, notably with our live intelligence AI offer, trusted cloud with our flagship [indiscernible] Avenue solution. and in trust verticals such as defense and security. Orange Cyberdefense accelerated it grows to 12% and reached EUR 1 billion revenues over 9 months. Second, accelerating on cost efficiencies, in particular with the use of AI and resources mutualization. We are also starting to leverage our international go-to-market partnership with Tech Minda. That being said, the complex market environment is weighing on EBITDA improvement trend. With this, back to you, Christel.

Thank you, Laurent. Our strong Q3 and 9 months performance gives us confidence in achieving our full year objectives. It also enables us to raise our EBITDA growth guidance once again. to above 4.5%, supported by solid performance across Africa, Middle East and Europe. Thank you for your attention. We are now happy to take your questions.

[Operator Instructions] So the first one is Akhil Dattani from JPMorgan.

Can you hear me?

Akhil, can you try again? So next is Joshua Mills from BNP Paribas.

A couple from my side. Just on French consolidation, can you give us an update on the near-term time line here? I think in the last conference call, you were talking about a signing in the second half of this year. And I believe the longest update is for December 6. So how significant is that date? And should we get more updates before then with the works council discussions, as to any actual formal process by which they could block the deal or is this just normal negotiations. And then the second question is just around agentic AI, which has obviously been discussed a lot more at risk for the sector by investors. I'd like to know how you're thinking about that at Orange. Are you taking any steps to block the apps? How are you thinking about evolving your brand strategy in a world where customers are probably going to use AI more and more to compare price points.

Thank you, Joshua. So on the French consolidation timing, you're right, the time line is unchanged. We plan signing of the transaction by the end of this year, 20 and the closing by the end of 2027, we have 2 process in parallel, both were initiated when we signed the MOU. The first one is getting the approvals of employee representatives. We have done so at Orange. Bouygues has done so for Bouygues employees. Iliad has done so with Iliad employees. And Altice has initiated the dialogue with Altice employees. In this context, there are some legal actions that Altice employees have initiated, which will continue to proceed, but we continue to have an open dialogue with the Altice employees and as I said it, we are strong believers of social dialogue. So at this stage, there is no reason to believe that these actions and especially the legal action, would postpone the signature of the transaction by the end of this year. In parallel to that, second very important item is the antitrust process, which we started when we signed the MOU. And this process is moving forward in parallel. And this is, of course, the process that will take most time and that will lead to a closing end of next year. On agentic AI. So of course, Agent is something we are actively engaged on. We have many initiatives in the company. This is true in customer experience, but this is also true in all our IT and software development internally. This is true for cybersecurity and Orange Cyberdefense is highly exposed to the booming evolution of threats, cyber threats in the environment. When it comes to agentic AI and especially agentic -- personal agentic AI apps, this is something that we follow carefully. But when it comes to the fear of price decrease by customers. First of all, this is something that we don't think comes as a news because we already have very inspired pricing ecosystem in Europe. And as you can see, we have a low end of the market that is active with actually very visible and transparent price points that are very different from our premium price points. And despite that, we continue to drive differentiation and to reduce churn on our customer base. So this is something that, of course, we follow carefully, more importantly, to make sure that all our tools and apps are well integrated into this new world of agent AI and essentially January as well, but we are not worried about massive downgrade in the price point environment, which, by the way, is something we got used to facing with the very competitive markets we work in.

Thank you. So Akhil, can you try again?

Can you hear me now?

Yes.

Great. Thank you. I've got 2 as well, please. Maybe first, if we start on the French competitive environment. You've mentioned a very strong KPI performance that we've seen during the quarter. I'd love to understand a bit better exactly what we're seeing I'm mindful that SFR suffered pretty high churn in June. Could you sort of talk us through the dynamics at the moment you're seeing in the market? And I guess specifically, what I'd love to understand is that we haven't seen these improving KPI trends benefiting your retail PSDN trends this quarter. I just wondered if there's anything to call out or whether there might be a bit of a lag there. So anything around that would be super helpful. And then the second question was on the comment, Christel, you made around the MSS spectrum. Obviously, there's been a huge amount of debate in industry around the threat from satellite I'd love to better understand what you're thinking around the role that you play in that environment. Obviously, you don't have satellites as a company or as a JV. So can you help us understand how you leverage that spectrum and how you think about the routes to defending ourselves from satellite threat?

Thanks, Akhil. On the French competitive environment and Jerome will complement. But we see -- and I guess your question is related to the dynamic around SFR. So First, when we look at our commercial performance, SFR is not the only operator from which we are benefiting from. So we can track, of course, portability. . And we've seen Q3 market environment, very similar to Q2 with an overall stable competition on the high end, fixed broadband and mobile, and the low end, that's in the continuity of Q2, slightly more rational than what we saw 12, 18 months ago. And this has been the case already for a few quarters. The back-to-school period was as planned with no change, I would say, from any brand in the market. And on mobile, we have seen some improvement since the beginning of the year, especially on Brent with entry price points that are now more around EUR 10 for 20 gig versus EUR 8 in Q3 '25, so last year. So overall, a stable environment. When it comes to our commercial performance, I don't know if Jerome, you want to comment, but we continue to be driven by, of course, the convergent growth and especially, you see the pressure on the mobile ARPU. On convergent. Of course, we continue to grow customers and the new customers that are entering the cohort have typically on mobile only when we have a customer base in convergent where the average is more 1.8%, that's weighting on the average revenue per user, but this is nothing to worry about, and this is exactly as per plan. I don't know if Jerome, you want to comment more on the competitive dynamics.

Thank you, Christel. Thank you, Akhil, for your question. I think you underline the strong commercial performance, which is reflected again this quarter with the record net adds on convergence since 2018, plus 57,000. And as you said, on mobile, very strong as well. 146,000 and this is not only the result of gaining market share towards SFR, but towards its net positive net adds towards all competitors in France. Pushing for value, of course, despite the pressure on the mobile ARPU and particularly by managing on cross-sell, upsell including some tactical back book price increase to protect our value.

On the satellite and MSS spectrum. So as we commented, we signed a letter of intent with Dutch Telekom, Telefonica, Vodafone, to potentially bid for 1 part of the MSS spectrum that's being auctioned end of '27 for implementation. And of course, the bid for the spectrum would then be open and wholesale to all telecom operators in Europe. And we see MSS spectrum really as a complement to our terrestrial network. And as we've always said, for us, the key element will be the customer experience and the handover from terrestrial to satellite and back and forth between our networks which really requires mastering both side of the experience, working also on the handsets. And so this is really the way we see it. So when it comes to the bid and the consortium to bid for spectrum, it's still early stage. So we can't provide you more details. But again, the process is second half of 2027. So we will provide more detail as soon as we have.

Okay. So now we are moving to Andrea Devita from UBS.

I hope you can hear me.

Yes.

I've got 2 questions as well. One is the follow-up on the French committed dynamics. I guess can you rule out that there is any kind of increased competitive pressures, for example, already gained some of the higher-value SFR customers that are already seeing higher churn at this point. you've raised prices as far as price has raised prices. So I guess, are you confident in this environment despite the potential consumer pressure from what's going on in France that's still going into 2027, we can continue to see positive trends on both the retail PSC and EBITDA growth in France. That's question number one, please. And question number two, I think there's been a bit of a -- in Spain specifically, there's been a bit of a reversal in the trends following the stabilization that you flagged happened in June. I believe you have also raised prices in the market and the bigger players, Telefónica yourself and Vodafone are all seeing better trends. So can we expect a return to stability or any time soon? Or is this kind of 1-ish percent decline on the service revenue is something that we should get used to for the time being.

Thank you, Andrea. On the French market dynamic and the SFR customer base, first and foremost, it's not as if we have seen flow of SFR customers leaving SFR and willing to join. So there is absolutely no massive trend in the market. So we see portability yes, but we also see portability going to SFR. So there is some massive leakage. And of course, we see a trend that we had anticipated as part of our bid for SFR, but not more than that. As you said, we have implemented some price increases very targeted. So no massive and somewhere, of course, in back book some on front book very targeted, as we had said. So this is nothing new. As you commented, some of our competitors also did. And it's a mix of more for more and same for more. Of course, in our case, we are also targeting copper customers to make sure that we align the price of copper up so that there's an incentive to move to fiber. And when it comes to the dynamic on the premium part of the market, I would rather comment on all the actions and especially the additional services we provide to make sure we create an incentive for customers to be willing to take our premium package. So the home cinema set-top box, for instance, that's attached to our premium package for broadband and for which we have seen a very good start and similar across the board. So that's really our play, and we continue to execute on it. And we have no fear that this would change. But of course, we operate in a market that's competitive. So we continue to follow what the competition is doing. When it comes to Spain, so in Spain, as you can see and as we had said, we see a Q3 trend that's improving compared to Q2. We have we have some dynamic where, of course, our focus is on churn reduction because we have we have a market where given we have the largest customer base, of course, churn is the top priority to avoid, I would say, feeding the market. But -- so our action plan is absolutely to continue to improve. We see -- we plan to continue to improve the convergent B2C ARPU trend. And as we've always said, we expect also growth to come from [indiscernible] and B2B given our already very large B2C customer base. I think, Meinrad, you're connected. So if you want to add something, please jump in.

Thank you so much. Thank you, Christel. Yes. Overall, if you look at our results, we have been growing 3.5% in total revenues. And if you look at the service revenues, we see a positive trend. We come down from minus 1.9% in Q2 to minus 1.4% in Q3. And that is a component by a positive mobile and FBA net add strength. And also important, we grow also in ARPU. And in our analysis, we see that we are probably the only major operator in the market that grows ARPU also an acquisition and we have been able to increase our value share in the acquisition as well. So this is a very good base together with the growth in B2B and in new services that we can say that we are optimistic that we will have a continuation of the improvement trend also in Q4 this year.

Christel, can you just confirm, please, or to follow up, but can you please confirm that the outlook, therefore, based on everything that you were seeing in France is still positive growth for both Retail XPS and EBITDA in France for 2027.

Yes. For -- I mean, our '26-'28 guidance is unchanged to the Capital Market Day. And when it comes to the lending for this year, it's still, as we said, stable plus EBITDA trend. So that's also what we see for -- and that's the trend for the full period. So we anticipate the same for '27.

And just to be precise on that, we are expecting as well H2 stable as well stable plus definitively, we don't want to go negative on the H2 on the EBITDA of France, obviously.

So now we are moving to Nicholas Lyall from Berenberg.