Orange SA (ORAN) 2003 Q1 法說會逐字稿

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Good day, everyone, and welcome to the Equant First Quarter 2003 Revenues Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the director of investor relations, Mr. Ashley Rayfield. Please go ahead, sir.

Thank you very much. Good morning and good afternoon, ladies and gentlemen. Thank you for joining us today for our investor conference call to review the revenues for the first quarter of 2003, which we announced last evening. The news release is available over most of the wire services and on the Equant website.

Let me review the agenda for today's call. First, Didier Delepine, President and Chief Executive Officer, will discuss some of the highlights for the quarter, as well as trends in the business. We will then entertain your questions at which stage John Allkins, our Chief Financial Officer, will join us.

I would like to remind you that our speaker's comments today may contain remarks that constitute projections, beliefs or similar forward looking statements. You are cautioned that the statements are only predictions and that, in fact, actual results could differ materially from the results anticipated or projected in any such forward looking statements. Additional detail information concerning the important risk factors that could cause actual results to differ materially from the information the speaker will give you today is readily available in Equant's filings with the Securities and Exchange Commission in the U.S. and the Commission of the Boars, France.

All forward looking statements are based on information available to Equant Asset today and Equant assumes no obligation to update such statements. Now I'll turn over the call to our president and chief executive officer, Didier Delepine.

Thank you very much, Ashley. Good morning and good afternoon, ladies and gentlemen. We are in some ways rewarded for our prudence and I'm happy that we are able to headline our release (ph) from Q1 2003 with revenues in line with expectations. Over the last two quarters we keep seeing some flash pickups either in products or geography (ph), but no underlying long lasting foundation for strong and sustained growth. The global economy remains an issue for us and for the rest of our industry. We need to record sequential stability if not goals, for example, in the integration service part of our business. We have detected further weakness with revenue for fulfillment running below expected levels, even in a quarter that is traditionally a weak quarter. Like investors of international corporations at a reluctance to invest for the future when facing instability, confusion and complexity in the world. The airline industry is suffering particularly torrid conditions at the moment and it wrestles with over capacity, increased fuel bills, tougher competition and declining passenger numbers and literally, of course, the situation with the sars fears (ph). The industry is probably facing the toughest trading conditions in living memory, so all in all there was a difficult for our first quarter of 2003.

We look forward to a period of constant strong growth, but in the current environment we are reluctant to plan for that growth any time soon. So, as we have said before, we are running our business on the basis that sustained growth is still some way off. Consecutively we continue to aggressively manage our costs as well as controlling our capital by providing a sound financial basis we should be able to explore what independent industry analyst increasingly see as our reducing (ph) position.

The Yankee Group announced that Equant scored highest among nine global carriers in the survey released in March. Among the reasons stated by the Yankee Group for Equant's leading position, our focused and consistent strategy on the large enterprise market, our cohesive and long standing senior management team that strengthens our overall credibility, extensive European and global network with significant in-country rates and our front line position in IPVPNs. We received strong scores from the Yankee Group in all six service configuring, financial viability, corporate viability, product and service set, technical competence, service and superb and net (ph) growth (ph). And we are not standing still. During the quarter we strengthened our management sitting services by introducing a remote onsite option and we also expended our VPN feature set with a new option for CQ and corporate access to the public in turn.

Excuse me, it is precisely this attention to customer requirements that should help us maintain our leadership position in the industry and in customer minds. As you know, I'm always happy to talk about our customers and so a reminder of some of the wins that we announced in the quarter. The German Center for Rinophase (ph) will be using our network to connect more than 100 sites worldwide in a contract that runs until 2008. Rocky Gold Star (ph) will use Acorn (ph) to link 84 key centers in Asia, Europe and the Americas. One of the tasks we said ourselves this year is to win new customers or new logos and in the first quarter on delighted to tell you that we had 33 new logos. Our target was overachieved here.

There were others, but the contract was total fina F (ph), one in conjunction with FT toss back demonstrates such -- just our efitary (ph) we can work to go get across the group. The contract itself has the potential to deliver revenue of up to 60 million Euros as we link 15 hundred sites in 75 countries with an NPLS base IPVPN. We have little doubt that IPVPNs will be the network solution of choice. The concerting group, IDC, believe that the IPVPN market in 2002 totaled a massive 9.1 billion and will rise to 13.4 billion of US dollars in 2007. For us, of course, the challenge is to ensure that we get our share of that market as competition consolidates into a small group of global player as well as those who will remain regional.

As I have said on a number of occasions, there is one company chair the is often overlooked, the CIO or the CTO who believes in the do-it-yourself approach of buying in bandwidth and boxes and providing an in-house solution. We have to persuade the DIY market that this is an inferior solution, no matter how popular. It does currently account for all over 60 percent of total IPVPN expenditure. With the fortiment (ph) actions seen in our industry last year and the collapse of lab suppliers, the argument in favor of do-it-yourself is stronger than ever. The battle between in sourcing and outsourcing continues.

Network services revenue grew by nearly four percent in the quarter, compared with a year earlier. In a difficult environment we were broadly satisfied by this performance. Our win rate is holding up well and the pricing awarded on renewals remain at about 20 percent at the end of a three year contract. Network services indirect revenues in the quarter continued to show reductions primarily from Sprint and Deutsche Telecom when compared with the first quarter 2002, but these revenue strings were a little changed from quarter four 2002, so we are moving towards a more stable position.

For integration services, we saw fulfillment revenues fall away in the quarter, although the other revenue lines were essentially flat. Fulfillment revenues are highly discretionary and appear to have been particularly impacted by events in the Middle East. There was also some weakness as a result of the U.S. economy. In our revenues from small enterprise and contract computer (inaudible).

The other line of business were broadly in line with our expectations. Since our revenue are moving lower as a result of the change in prices and a minimum revenue commitment introduced of July last year with a slight upset from additional circuit revenue. The decline in circuit switch voice is a plan part of our strategy to move customers onto an IP based solution over time.

In summary, we are managing the business solidly against a difficult economy background, but insuring that we are well positioned to take advantage of the upturn when it comes. Against today difficult background, we are confident of achieving our guidance. Ashley will now explain the Q and A portion.

Thank you, Didier. Now we will answer any questions that you might have. Operator, could you please explain the process for investors to ask a question?

Thank you, ladies and gentlemen. The question and answer session will be conducted electronically. If you would like to ask a question you may do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one on your touch-tone telephone to ask a question. And we'll pause for just a moment to assemble our roster.

While the operator gets the cue in, let me remind you that this call will be replayed by Saturday, May 3. The call in number for the replay is 1-719-457-0820. The access code is 550849. If you did not receive an e-mail of the news release and you want to be included on our distribution list, send anyone at Equant Investor Relations an e-mail with your contact information or call me in London on 44-20-8321-4581 or Isabelle Guiber (ph) in Paris on 331-46-46-99-53. Operator, we're ready for the first question, please.

We'll take our first question from Pierre Meshlon with Abtron (ph).

Hi. Good afternoon. Pierre Meshlon. Two questions, please, even three, if I may. First of all, on Didier's impact sheet, tell us where the proportion of coxners (ph), which are billed in dollar where you don't bare your risk or filter a currency change and where are the proportion of coxners (ph) which are built in other currencies. My second question is on your intake. Obviously you didn't want to give us the fear that as a percent of your sales is made of -- as ordered (ph) it may still be necessary or useful for us to know your order intake. So if you could give us some qualitative (ph) remarks on the trend this order takes with the Mesh welcome (ph). And finally, on your costs, as part of the FT group, I guess you've got a reporting of your cost evolution and you give out a new press release the circuit cost and sub cities (ph) cost. Could you tell us more broadly about the evolution of your cost on top of what you've already mentioned? Thank you.

I'll attempt here, hi. Pierre (ph), Didier. I will take the second question and John will answer your question one and three. You are questioning on the order intake. During 2002 there was an, as you know, an (inaudible) disconnect between order and take in revenue and revenue growth. The reason I'm not very straightforward, the levels of contract renewal is just one of the reason and we've talked about it. You will recall that in Q4 of 2002 we indicated that the older intake was a less credited (ph) indicator than it had been previously, and so we feel that for the moment it would be suddenly counterproductive to keep publishing these numbers. While we can say what I said already in the script, we saw a good level of new business in Q1 2003 under new customers and it's very important to us. We had certainly three new logos. What we call new logos is our old jargon. That means customers which have never been customers of Equant and are joining us during the quarter. So that's a very good sign. Non-renewal business was 60 percent of the dollar (ph) of the order intake in general and typically our data in IP compress, as you know, have a length of about three years, so price variation (ph) close are becoming a little more of the standard with the mid-term review, which is roughly 18 to 24 month thing. So that is the situation with the order intake. John is going to cover your first questions regarding the portion of dollar in the cost and other currency. John.

OK. I think you actually asked how much of our revenue was billed in dollars with offsetting currencies. Basically, again, this will be a dynamic picture depending where we bill and who we bill, but more than 50 percent, 60 percent -- probably a little over 60 percent of our revenue is actually billed in U.S. dollars. The next highest level would be the Euro at 25 percent. We bill a few percent, five percent, maybe in sterling and then you're into a whole range of non-standard currencies. In terms of the basic exposure, what matches and what doesn't match, we do have an exposure to non-dollar costs and non-dollar costs are higher than our non-dollar revenues and that gives us a relatively small exposure in terms of our profit, our EBIDTA line, something like if our revenues are moving up then we'll probably see -- by one percent, then we'll probably see our costs moving up by 1.25 percent because of exchange. So that's the basic picture. In the course, though, we did have a slight gain on exchange, but it wouldn't have flowed through to a positive EBIDTA bearance. It would have actually been a slight negative EBIDTA bearance.

Do you want me to move on to look at the total cost of the evolution? I think we've picked out two of the key costs, which are going down. Our total cost picture continues in the same direction, generally. We've picked out the two headlines, but overall costs are down by this sort of number, at least the 35 million plus that we've mentioned here and on the basis of flat revenue. We think that's a very good indicator of our ability to manage the business towards profitability.

Pierre (ph), you will also read -- I may have to remind you, Didier here, that it is a revenue call. OK?

Yes. Thank you. Well, we were (inaudible) good set off indicators in the past.

Alright. Could we have the next question, please, operator?

Yes. Our next question comes from Matthew Bloxson (ph) with Goldman Sachs.

Hi. A couple of question. I just want to alert you haven't actually reiterated the full year revenue guidance. I was just wondering what the position on that is now. Second question was just off the indirect revenue network services. I'm just wondering what you see as kind of the absolute level where that kind of plateaus. Are you having much more down side (inaudible). And then finally just wondering whether there's any kind of update on the performance at the Radiance (ph) joint venture.

Alright, let me talk about your -- on your first question, Matthew. We showed guidance in the general 2003, total revenues for 2003 would be essentially flat and we have said that we would have a significant increase in EBITA. That remains the position. We do not expect to say anything else on guidance unless there is a matter or change in our circumstances and at this point there isn't. John, are you ready to take the second question?

Yes. OK. I'll take -- I'll take the second question, which is, you know, what is happening to indirect revenues, is there an absolute level? I think we have seen, as Didier said, whilst the quarter on quarter variance for our indirect revenues was pretty significant -- a pretty significant reduction, sequentially the reduction has certainly tailed off. I'm not saying that that is the absolute low level, but if you work out the sequential courses you will see that we were down by a couple of million dollars on 30 million, so we were down five or six percent on a sequential basis. In terms of the Radiance (ph) JV, looking there we can say that Radiance (ph) is continuing to perform well. It's achieving better than its expectation or better than the targets for the first quarter in terms of revenue and we're very happy with the way that that business is panning out. Thanks.

OK.

I'm sorry, Matthew, to cut you off. Could we just have the next question, operator? Perhaps you could come back for us.

Yes. Our next question from Nicholas Kotz, Paulson HSCC (ph).

Yes. Good afternoon. Can you have a (inaudible) competition in particular regarding MCI? Can we feel for the pressure in prices from them. And I still have another question regarding the breaking revenue by geography. Could you give us some figures regarding network services that offer integration, please?

OK. Thank you very much. Obviously the vast majority of the WorldCom reorganization plan addresses market, which our net sales (inaudible). So clearly we believe and we hear that WorldCom is foreclosing its resources not on global customers, but on the U.S. customers and from the U.S. customers tends to go back to one of the most favorable position of MCI in the order of theirs which was the small business market and also the world size market. WorldCom's revenue systems platter (ph) made the two key ports about the enterprise market. First, I think it said that it is trying to manage its straight ride down, which we take to mean an end to these irrational pricing strategies. So, to answer your questions straightforward, there is very little thing I can say about their pricing behavior because we have not really seen MCI WorldCom into our markets here in this last -- in this last quarter.

Second, WorldCom has said it is going to focus more on product differentiation and they mentioned particularly the VPN and the voice over IP market. So it is a position of leadership for us in terms of customers or product in global reach, but although they have announced that, we have not yet seen these in a true large effect. So that would be my answer to the first question. Second question, John?

OK. I think he wanted to understand what's happening to revenue by geography. I didn't quite catch the end of your question, but...

Yes. It's -- I was seeking to know a bit more about the break down for network for revenue by integration to see what comes from America as you used to publish before.

OK. I don't think we've ever published that level of detail. What I can tell you is that if we look at the overall revenue picture, excluding obviously Sita (ph), we're still seeing something like 25 to 30 percent of our revenues coming from the Americas. Western Europe is obviously pretty strong for us. Western Europe is 20/25 percent excluding France, but if we look -- if we take Europe as a whole, then we're running at something like 60 percent of our revenues coming out of that region.

In terms of the particular issues in the various geographies, I think we have noted, Didier mentioned that we do have some issues in integration services revenue, certainly in the USA they've tailed off a bit with the -- with the economic situation in the U.S. and we've also seen -- this is quite the patchy regional thing, Middle East and Far East with the Middle East conflict and the SARS virus also affecting our integration services business reasonably significantly in each of those regions. Thank you.

Best reasons -- the best reasons for us in southern Europe and western Iraq and this -- we see some moves, but sheer weaknesses in a number of places and (inaudible) in North America.

And could I -- just for something about what you said, Didier, you are all talking about DYI solutions, is that 60 percent of the 9.1 bin market you mentioned earlier?

That's not me who said that...

Yes.

... I'm quoting data. I'm quoting data, but we have to say that in the looking at what happened in this quarter, and I have mentioned that to you already before that we were concerned about this do-it-yourself revival, which was not the case in the beginning of the year 2002, but I believe that the difficulties that we are in the U.S. is giving good argument to CIOs and CTOs by saying to the CIO, you know, "We can do it ourselves, control our destiny instead of putting our order mission critical services in the hands of suppliers." So we see that trend. We see a number of trends. One is saying, "Don't give everything to the same guy," and two, "Let's do it ourselves, what we can." This is the results of some of the weaknesses that our industry have seen in the year 2001 and 2002.

Next question, please, operator.

Our next question comes from Steve Randall with Bear Stearns.

Hi. Good afternoon. Actually most of my questions have been addressed, but perhaps you...

Hi, there.

Hi. How are you? Perhaps you could give us a little more color on what's driving network services growth. Obviously you're making gains in IPVPN. Maybe you could talk a little bit more on a granual or a level about the market share gains there and also are you experiencing growth in your other product lines, frame, et cetera. And then, could you talk about any -- or address any margin differences you're seeing between IPVPN and how that's helping you going forward? Thanks.

OK. Thank you. We definitely, in the data NIP have been going forward with IPVPN quite aggressively and I continue to say that IPVPN may be just (inaudible), which is going to last for quite a long while and the time arising is even pushing away with the evolutions of different IPVPN, e-breed (ph) IPVPN, a different type of access in IPVPN, GPRS access to IPVPN. So a number of things which definitely we have taken our camp. We have done our choice and we confirmed that IPVPN is the gross. So our IPVPN is obviously short and strong quarterly gross. Frame relay in this quarter's revenue I've seen a little bit of decline as the migration to IPVPN is accelerating. So definitely positioning around IP. It's not over because IP is going to be an evolution and a novelty (ph) type product, particularly with the flexibility that it offers and the additional bells and whistles which needs to be around that we need to provide and including the different type of IPVPN. As you know we have different battle around IPVPN between the MPLS and the IP seg. We continue to believe that for mission critical services and for convergence solutions, MPLS solution and that's what we should book. John, do you want to go out on the second one?

Yes. OK. Just to reiterate what Didier said, we're seeing very significant growth in our IPVPN, but it's still less mature as a product frame and therefore we would expect to see a little squeeze on margins in those circumstances. However, I think the important thing is when we're talking about IPVPN is our ability and our success in selling a lot of wrap around services, a lot of professional services around that IPVPN area. And, of course, once you have an IPVPN, the ability of your customer to grow his network in terms of bandwidth to utilize better services is very significant, so we see it as having a little squeeze in the beginning, but in long term it's a very good move for us to see a greater move to IPVPN. Thank you.

Great. Thank you.

Matthew Bloxson with Goldman Sachs.

Yes. Good afternoon, guys. In fact, I will ask two little questions. My first question is related to integration services. How do you see the competition evolve on your integration services business. And my question is do you feel other competition from integrate services and do you explain the revenue performance of integration services, how comfortable are you for the future. And my second question is just a follow-up question regarding the Family (ph) NIP, just for the working fact. How do you see the runoff (ph) of protocols (ph) between Family (ph) lay to IP and what type of gross do you see for seven and three? Can you just give a little update, please? Thank you.

OK. Thank you, Matthew. With regard to the integrators, we are not really moving. The integrators are not moving in our space and we are not really moving in their space, so let's be clear. We are seeing a quite good differentiation and when, if you look and combine the Equant's trance with the integrator, we tend to complement each other, so we are in the process of double upping that relationship with several integrators. You never have to try to feed that compliment with regard to the outsourcing business, the integrator more on the outsourcing side and if we look at the market today, the do-it-yourself that I have mentioned earlier in the Q and A was more on the U.S. side and what we see is more on the European side, more of an outsourcing type movement. That means that we need to be closer to the integrators at that level, so we have spent that dist (ph) to strengthen our steady (ph) position as we try to look at barn door solution between large IP outsourcing and net worth. During Q1 we significantly increased the five plan with the integrator (inaudible). I could tell you that the five plan, with regard to operations are solid, because a number of outsourcing in Europe is increasing and I think our success in that field will depend on our ability to bridge that relations. John, on the second question?

The second question was the rollover protocols, frame relate to IP.

Which I think we have already answered that question. With regard to the movement, we believe and we see a decline in frame (ph) relects (ph) and an increase -- large increase -- in IPVPN, so we are quite confident that there is an acceleration of movement from the legacy to the new one. And you see, you can say why have you chosen to go in so strongly IPVPN with a good base of primary edit you already have a number on my competition, that obviously was reluctant to jump on the IPVPN bandwagon. We believe that it is good to have a first position in this market with this new technology and we will continue to accelerate that.

Operator, next question, please.

Our next question comes from Victoria Pease (ph) with Merrill Lynch.

Hi. Good afternoon. I had a couple quick questions. The first one, I was quite interested to see that your cap ex numbers are going down and we are seeing across the board a lot of your peer group moving their cap ex to well below 10 percent of sales and I was wondering if you think there is goat (ph) to bring your numbers down even further to maybe even the five, six, seven percent range and just follow up also on MCI, are there any numbers you can give us in terms of customer wins? And I know you gave those numbers in the past, I wondered if you had an update.

Alright, Victoria. Hi. With regard to MCI, we have stopped to track down this exercise. We have, I think, set off to something which was set with regard to the number of customers that we had factored into numbers of millions of dollars that we had in (inaudible), I think if I remember well. We were on $164 million of gain, something like this. So as I said, we may have taken a few more in this quarter, but without a precise merger at that point, but I also repeat that as I have not seen MCI as of yet in the large bid that we have played with and fought on in the first quarter. With regard to cap ex, obviously John will comment you are pushing forward a number five or six percent. I think this is a little bit below the line. John?

Yes. Just to reinforce, we do operate more of a just in time capital situation. The majority of our cap ex, as I think we explained on the full year call, is now driven by customer demand and in general when we look at that, you know, we can see paybacks within a little over 18 month period, so we are quite happy at being able to operate below the 10 percent level, but frankly, if it takes a little bit more capital to win more customers, then again, that's something we're very happy to do because our financial position and our cash position is very strong. We still have significant cash, no debt. Thank you.

Operator, next question, please.

Once again, ladies and gentlemen, that's star one on your touch-tone telephone to ask a question. We'll go back to Matthew Bloxson (ph) with Goldman Sachs.

Yes. Got my chance. Just a quick one on the relationship with FT. I think they're relative to (inaudible) issues being relatively untouched in terms of changes to management and strategy. I'm just wondering whether you expect any greater focus on the going forward from the parent?

This is a question which is outside of this call for revenue obviously and it may not be addressed to the best person to answer. But I'd like to say that as shown from the different report that you may have (inaudible) and you know, we need to measure our success by wins. I reported to you the total final for customers and we have orders. I believe that if we measure our ability to win thanks to a better associations with better products with better position with better channel, I think it will add. So on that side, and on that front, we still have progress to make. You know that we have a good focus right now on to back copies and costs which is very good. Maybe we can improve even further our synergies on revenue. With regard to the rest, I think that we are part of this group and working good on that front. So I will not keep the board off side, but I am trying to tell you that everything is working quite well for the time being.

Operator, perhaps one last question, please.

We'll take our final question from Adam Worthington with Morgan Stanley.

Sorry, just three quick questions. The first one, out of the 33 logos signed, were any of these included in your prior order book that you had previously disclosed to us. Secondly, with respect to pricing, can you see any catalyst trusting safe and stabilization in the pressing environment. And thirdly, now you've mentioned, and I guess you're reversing the count (ph), your low tackle intensity distance battle, and in recent quarters this is being just to maintain your reducing revenue base. When do you expect to actually have or see an incremental return on the capital investment?

OK. First question is no. The 33 logos have never been included, that is why they are called new logos. The second question is the categories on pricing, pricing of serrations (ph) remain unchanged compared to what we have said before on the 2002. We continue to be, as I said, around the 20 percent over three years. You know, something which could be a little bit under that in some cases and a little bit over in others. So all in all that's where we stand for this reup (ph) area, which means a seven to nine percent, 10, on a yearly basis. John, you want to cover up the policy?

Yes. Again, we're not talking in particular about this course as position because this is a revenue race, but if you look back over last year we can certainly see depreciation being in excess of capital expenditure and that's the model that we will certainly see this year in 2003. We'll get to a different position in 2004 and that's when you'll start to see incremental returns. I think we still have this bubble, if you like, of previous high levels of capital expenditures from the two different businesses working its way through the system, when it works its way through the system we'll be getting better returns on capital employed because, of course, by then we'll be operating as a far higher return base anyway. Thanks very much.

Thank you.

Operator, I think that concludes the conference call for today. I'd like to thank everyone for joining us. The events relations team will be available after the call to answer any additional questions that you might have. You can call either me or Isabelle (ph). Thanks very much indeed.

Thank you very much.

This does conclude today's conference. We thank you for your participation. You may now disconnect.