We issued an updated research report on Orange ORAN on Mar 31, 2015.
The company reported a year-over-year decline in revenues and EBITDA in the fourth quarter of 2014. While management’s efforts toward driving 4G expansion supports wireless growth in France and other key regions, low recovery in domestic economic conditions, sustained fixed access line erosion, stiff competition, labor concerns, lower mobile termination rates and unfavorable regulatory measures across the company’s key European markets pose considerable headwinds.
Recently, the European Union’s telecom regulatory authority delayed its antitrust probe into Orange’s proposed acquisition of Spanish broadband and wireless operator Jazztel for the second time, owing to concerns over the telecom retail price inflation effect the deal will have in Spain.
Going forward, Orange is likely to face stiff regulatory pressure in France, Belgium and other European markets. Gradual reduction in mobile termination rates (the fee that operators charge each other to connect calls) in key markets such as the U.K. and Spain remains one of the key reasons for revenue decline across these markets. Spanish regulator, Comisióndel Mercado de lasTelecomunicaciones (CMT), slashed MTRs from €0.04 to €0.0109 on Jan 1, 2014.
As such, Orange’s Average Revenue per User (ARPU) levels are expected to remain under pressure owing to termination rate cuts. The company continues to witness ARPU erosion in its wireless segment and it is expected to deteriorate further owing to stiff competition in the French telecom market. We believe that the rollout of attractive 3G plans by Paris-based broadband service provider, Iliad SA, has resulted in continued revenue erosion for the company. Iliad SA made its debut in the beginning of 2012 with service plans priced at as low as $2.6 a month.
Orange is investing heavily to expand its 3G network coverage in emerging markets to sustain future growth. This might strain the company’s balance sheet, as the investments might not reap the desired profits. Further, the returns generated from the emerging markets could be less than expected owing to sluggish growth. This could in turn hurt the company’s expected return on investment, minimizing shareholder rewards.
For the current year, the company has witnessed two downward revisions over the last two months with the Zacks Consensus Estimate for earnings moving down by 3.3% to $1.16.
Reflecting these factors, Orange currently has a Zacks Rank #5 (Strong sell).