Orange SA (ORAN) 2004 Q3 法說會逐字稿

Good day and welcome everyone to the Equant Revenue Results Conference Call. This call is being recorded. At this time for opening remarks and introduction I would like to turn the call over to Ms. Isabelle Guibert. Please go ahead madam.

Thank you. Good morning and good afternoon ladies and gentlemen. This is Isabelle Guibert, Director of Investor Relations for Equant. Thank you for joining us today for investor conference call for the third quarter revenues of 2004. We announced revenues for the third quarter, the news release is available over most of the wire services and on the Equant web site. Let me review the agenda for today's call. Daniel Caclin, President and the Chief Executive Officer, will discuss our third quarter revenues and will give you an update on our key initiatives and priorities and then I will entertain your questions.

I would like to remind you that our speaker remarks today may contain remarks that constitute projections, beliefs, or similar forward-looking statements. You are cautioned that the statements are only predictions, and that actual results would differ materially from the results anticipated or projected in any such forward-looking statements. Additional information concerning the importance of factors that could cause actual results to differ materially from the information the speaker can give your today. It is readily available in Equant's filing with the US Securities and Exchange Commission and the French Commission of the Bourse.

All forward-looking statements are based on information available to Equant as of today, and Equant assumes no obligations to update such statements. Now I will return the call to our Chief Executive Officer, Daniel Caclin. Daniel?

Thank you Isabelle and good afternoon, good morning, ladies and gentlemen, welcome to the Equant's third quarter revenues call. As explained by Isabelle I will first walk you through the results we have posted yesterday and which are available on our website, and then as usual I will update you on our key initiatives and priorities. For those of you I think, those will be the slides, which are available on our website www.equant.com in the investors' part. I will now use the slide number three.

So the highlights for the third quarter are as following. We are facing, we are still facing challenging market conditions, which have continuously impacted our revenue especially the data on IP part. This increasing pricing pressure, which is at work since now one year plus the continuous move to IP based connections is negatively impacting our legacy data revenue. IP revenues are still growing and for the first time IP generated revenues are higher than revenues coming from legacy data.

Finally we have seen a lower decline of SITA on all the indirect channels as compared to previous quarter from prior year. Indeed the most satisfactory part of the revenue evolution is a growth in Services activity. We are considering as services what's integration services on project management or service management. So one part of this revenue is reported with our data on IP revenue, but the total of each of them, as compared like for like at constant currency rate with last year is growing 20%.

To give you one more reference figure, one year ago the services activities represented 13% of our activity and now it is in the range of 16%. And finally very consistent with our strategic move towards more service, more integration, our outsourcing activity is growing steadily.

Revenues more than doubled as compared to last year and the contracts signed and of 2003 mostly ZFS, AXA, for France Telecom and JTI and these explain the revenue growth for that part of the business. We have signed through the quarter for France Telecom a new outsourcing contract with a significant large concerting(ph) company.

For the existing contract, try to come back to them. I am happy and proud to report that the implementation is on time and on budget, which is no small achievement in an industry where these contracts always were very challenging. Interestingly enough as expected these outsourcing contracts are driving a significant growth on our (inaudible) and other integration services revenue and you as the impact on the reported figure there.

Turning to the next slide, slide number four, revenue Q3 by product line. You have there the usual breakdown of our revenue figure. Network services have declined by 10.5% on a pro forma basis. Just to stop on this for half a minute, pro forma means that we have adjusted last year to this year's currency exchange conditions in order to provide meaningful comparison. The weak dollar makes several contracts which are denominated in Euro or British pounds on a reported basis for a bigger figure than they would had been one year ago. We are facing on network services a continuing pricing pressure in particular in North America not only but very strongly in North America.

The fulfillment, that's our equipment resale business is growing, growing strongly, especially in North America and Russia, because there especially in Russia we are seeing significant investment from customers on those calls because it benefits for Equant business to drive all the integration services revenue as you can see them two lines below.

Our messaging hosting on security activity is reporting a lower figure than last year, but it has to do with services we are providing in France for the France Telecom and if we excluded France MHS messaging hosting on security revenue would have shown a 6% increase over Q3. So here we are seeing a steady pattern of growth.

Other integration services as compared to last year grew by 20% and this was driven, as I said already, by outsourcing contracts on fulfillment activity. That's what is the most significant into these results with, of course, within the otehr services line we report higher voice revenue, which is there again a consequency of our outsourcing contract. The SITA revenue decline is mainly due to price book evolution, the level of price for SITA which has been adjusting according to our contract on what we are seeing there as a matter fact is not completely different from what we see from the direct sales business.

I will now turn to the next slide, slide number five which is giving you the top deals we have signed on the quarter. The first contract is not reported as such because of confidentiality as agreed with our customer, but we have signed for France Telecom, a very large agreement, which is worth more than 100 millions of revenue by quarter for eight years.

In the consulting environment this time we have signed another significantly large contract that was at 35 million, which interestingly enough includes not only network services, but quite a lot of project management, network architecture consulting, posting and managed firewalls. That is one of the contracts we have signed in North America, which represents very well what the move this company is being towards more of the services that is placing the customer solution within the frame of an integrated set of services, answering completely to the customer needs and not only providing telecommunication files.

In the shipping sector another big contract has been signed here again with a significant services component, such as the one which is smaller we signed with Akzo Nobel in Netherlands which is valued 16 millions over a period of 3 years. We had finally expanded our existing relationship with Allianz in Germany to include more firewalls protection and remote access for nomadic users. That's a smaller size contract, which is valued at 9 million. That will finish my overall view of the Q3 revenue.

Now turning to slide number seven. What are the key initiatives we have been running out over Q3. The structure what I am presenting here is exactly what I had shown you with our (inaudible). The first dimension is that we are accelerating our services on solutions growth. I have been consistently telling you that the market conditions for traditional data and IP services were challenging. And Equant is moving readily and we are accelerating the transformation to position what we are doing for the customers within the frame of integrated solutions.

So, to operationalize this move we have completely defined six mentoring solution sets, which are the basic tools for our salesman to deal with the customer. The customer solution on internally to Equant, to have it implemented, rolled out and consistently supported. That, of course, we are more than ever in the business of customized contracts but in order to make good customization in cost-effective conditions it has to be very well prepared, very well organized and this is what we have done for these solution sets.

The second dimension to support these services on solutions acceleration is of course to upscale our sales force. This company has tremendous pool of talent and it is really worth to invest into people and it is what we have done by giving to our sales team, to our professional services team, a reinforced training program, which has been delivered on-site in very cost-effective conditions in order to make them really extremely effective at presenting to the customer, and building the customer the solution sets I have been talking about.

And finally we are continuously enhancing our professional services people capabilities by replacing some of them by principal consultants also -- in a lot of places by replacing some of them by strong security messaging, IP telephony, and application architects expert.

On the more classic side of our business we have continued to transform our portfolio of the products. The most significant enhancement of our portfolio is the launch of what we call LAN VPN beyond this complicated word is the very simple idea, which is to remove the border between the long distance communication network and the local area network, which is used to connect the user. That's the simplest integration of the land dimension and the long distance data network.

Very interestingly, we have signed our sales contract for Business Everywhere. Business Everywhere is the mobility offering, which has been developed by the France Telecom Group, and we are here really taking benefit of the very large scope of key competencies that we find within France Telecom - France Telecom research and development for example. And finally on the portfolio transformation set of actions as per Nortel, we have developed partnerships with Avaya and CISCO around IP telephony and is yielding very good results to this partner in particular for our large outsourcing contracts again.

On the business effectiveness side, to put it perhaps less complicated word what we are doing to improve our revenue and our profitability. We have brought out our new sales engagement model, which is based on the most stringent customer segmentation and approach, which is based on what we call the extended field that using all of the people working to sell to a customer or to serve the customer as an integrated team and as the account management team. And introducing an idea which is a bit new into our world, which is a full life cycle management of the contract. And that is to put even more pro-activeness where we managed ongoing relationship, which as you know is lasting for quite a large number of years with our last customers.

On the cost side the most significant action is around telco and access management both quite a lot of the procurement actions on the local telco's which are providing us our access and of course better management, a better process to manage the where we buy in order to buy at the right time and these have a positive impact on our profitability.

Turning to slide number eight, moving forward in to Q4. We have announced last week our sale of our 49% holding in Radianz. The logic of this transaction for us, is very simple. We are disposing of a non-core asset. To put it maybe in a too simple manner, Radianz owns a network- and Equant is amply, vastly provided for in terms of network. So, we believe that we can develop ourselves quite well without Radianz and we are taking back our full strategic mobility into this area. As you see the transaction has positive impact in terms of cash and proceeds. We will release in due time the precise figure of the book gain is in the range of 90 million. The transaction, which is subject to some regulatory approval in the UK, is expected to close over the coming weeks.

On our business, we are accelerating the transformation I had launched in the beginning of this year. Just to mention a few key actions. Around services expansion that is more than ever developing skills, announcing the offering and being much more precise in the targeting or more effectively marketing of solutions. On the more internal side of profitability optimization we are working around the content of our network business. Because although they are (inaudible) there are field growth opportunities into this business. Always around mobility, as an example, always related to IP telephony is good business for Equant..

And finally to contribute both to the services extension and to the profitability of the network business we continue to enhance our customer support on delivery process. The full scope of action is within the frame of our Energy 2006 Program. We have given at other time some (inaudible) information about it and it is more than ever our priority. We believe that the strategy we have put in place is the right one and we want to deliver faster.

Analysts last year has raised concerns in terms of cash evolution, we had provided information in due time. It is still a priority and as announced we have stabilized our cash position as compared to the end of June and we expect, as announced last night to maintain this.

So the conclusion that is on, I am on slide number ten. We know and we consider that the market conditions are and will remain changing for the traditional connectivity business. What's interesting in Equant's position is that the transformation of our business is under way. That we are making rapid progress in terms of services, solutions, outsourcing and this is delivering growth. We can argue that and I can certainly consider that this transformation has to go faster and I have been taking action middle of the year to put in place a reinforced transformation program to make it happen more rapidly.

As I said earlier, the cash situation as compared to end of June has been stabilized and concerning the full year targets, the guidance we have given in July it is still our objective to deliver on it. This is not today a call about the full results but only revenue, but I think that is interesting for you to get the confirmation from us.

So with this we conclude this introduction and to answer your questions with me in London is Herve Kauffmann, our Chief Operating Officer, on inter is Benoit Merel, who is the acting Chief Finance Control Officer and Stephen Rougeot, Head of Business Development, Marketing & Communication. We are ready for your questions.

Thank you Sir. [OPERATOR INSTRUCTIONS] Thank you. We would take our first question from Stephen Belavian (ph) of SG Securities.

Can you hear me, Yes.

Fine.

Could you just come back on the impact of the loss to Radianz contract on the revenues and on your cost structure and how long is that going to take, i.e., what is the timetable of losing revenues from that joint venture and I have also a second question. You talked about stabilized net cash position. If you just elaborate a bit on that and where most of the improvement is coming? Is that on the CapEx reduction, improvement in margin or working capital changes?

OK, thank you Stephen. First, according to the Radianz business. We have some commercial revenue with Radianz and, of course, we expect that relationship will continue. It will decrease over time, we can expect that it will go over the next year or 18 months equally divided, it is not yet precisely assessed and I don't think that we release the figure of the detail although maybe with full year results we will see. I want to add that, of course, we are ready to sign a new contract with Radianz, in order to continue to provide the services moving forward.

In terms of profit, it will have very limited impact and certainly not visible on Equant's total figures because Radianz was treated as a very close customer and they had price conditions which were not generating a lot of margin for Equant. So, to summarize limited impact on revenue with an insignificant impact on profitability.

According to cash, we are not giving the details on our cash position. The stabilization is, of course, (inaudible) are managing tightly our standing and the remaining is coming from working capital improvements. We will release of course the detailed results end of the year. Don't expect anything spectacular in this area.

Thank you.

Isabelle Guibert Operator next question please.

Thank you. We will take our next question from Pierre Machalon (ph) of Exane BNP Paribas. Please go ahead.

Good afternoon, Pierre Machalon. One question on your (inaudible) service revenue, no, I should say service growth at 20% growth that you quote. How much is that driven from infrastructure services, how much is that from how can we tell this, personnel related or I mean consulting or programming. What I mean is that we have seen a very strong increase from segments sale, so basically including resale of equipment and I wonder what is the share of this in the service sales growth.?

Yes thank you for your question. Stephen in Paris will give you more detail, but first the fulfillment activity is not included in the what we consider as services. Fulfillment is an important activity for us because it drives maintenance contracts, and contracts which are with the services, but we don't consider that fulfillment is part of it. It is a growth is completely related to IT services and skilll-based services and now Stephen will give you more detail.

Yes, we have see as we indicated in the slide and in the press release a 20% growth on a constant currency basis versus the third quarter of 2003. As we indicated also, it is essentially in integration services and again as Daniel said, it's not the hardware part, but the installation as well as the maintenance part, which is growing to the service part of the business. And we have seen also good growth in project management and service management. And finally one last item, our IT skill practice which relates essentially to our messaging and security business has been growing outside France as we have said, it is about 6% growth. So, yes a continued growth in mainly all service lines businesses.

All I can add to make it a bit more precise that project management is growing quite rapidly and is really a very interesting development for us because it really show that our large customer trust in Equant to put in place very large IT infrastructure projects.

Thank you.

Operator, next question please.

Thank you. We will now take a question from Adam Worthington of Morgan Stanley. Please go ahead.

This is Adam Worthington from Morgan Stanley. Three questions if I may. Firstly, I just wanted to clarify the classification of your IP revenues versus your legacy revenue tie. Are you just talking about network services or are you actually including also SITA and the other area? The second question was can you please talk about the growth trends or declines that you are seeing in these IP revenues and legacy streams? Now, and give us an example of the last couple of quarters? The third question was just in terms of the business model longer term here, do you think that this will be a business model with high double digits EBITDA margins and say 10% CapEx to sales or is this more likely given this outsourcing model towards all of the Internet business route model with say 10 to 15% EBIDTA margins and 5% CapEx to sales?

For your last question Adams, we are not, it's not my intention today to enter into projections around profitability moving forward, we are in a revenue release. We will report our full year revenue on profitability moving forward. We are in a revenue release. We would report our full year revenue on profitability in February as usual and it will be the time to give you indications moving forward.

Concerning IP versus data. What we consider as IP is the revenue coming from what we call in our nice jargon IP, ZPN, NPLS and Internet services. All the remaining of the data connectivity is considered as legacy data. So the trends, I don't know, the Paris team will give more details if we give them usually. I will just answer on the SITA part of the revenue. SITA is pure mostly, mostly pure data on IP, but we will post it directly. All in all, the trends for SITA are the same.

The legacy part because of the very, very long history of the alliance, (inaudible) is proportionally bigger than to our direct sales, but what does work is clearly the same for the same for the SITA , which is reported as SITA end. The data on IP direct sales and indirect sales which is reported as such. That double-digit growth for IP and double-digit decrease for the legacy that's our revenue with an interesting point for direct sales at least, which is at from now on IP bigger than legacy. Are we giving usually more detailed figures, if there is?

No, we don't disclose the split between our data revenues and our IP revenues. We can probably give you just a little bit flavor of the trends there, but we don't go into details. Just in terms of price pressure, obviously we are seeing price pressure on both type of revenues both data and IP. Data is declining at a quicker pace obviously than IP is growing even though IP is growing at double digits, and I think that's essentially it in terms of what we can disclose to you.

Certainly sorry, I just wanted to clarify that when you are talking about that IP is greater than data, are you actually including the network services and the SITA area or are you just talking about network services?

Yes, it is in that case when we mentioned that the IP revenues are higher than data, it includes the SITA revenues.

I understand. OK. Now, just going back to my second question. Sorry I have worded that probably not most accurately, instead of, I am not asking the financial forecast here, I am just trying to work out what type of customers you are actually targeting. Whether you are actually going for products and services with high margins and low capital intensity or vice versa? Are you are able to give some color there please?

Yes. In terms of customers, clearly we are targeting customers with the following characteristics. First, they have to be large multinational corporations. We are not optimized, at least for the time being, for any kind of small or medium size enterprises business. Second, after being large on operating on C world countries, they have to be already engaged or considering to out task, particularly if we can part of their communication infrastructure means. The customers, which are pretty much on the side of do it myself are not very clearly at the core of what we want to do.

Now what is for us the core of our new strategy is that we believe that any time, we sell within the frame of complex integrated customized solution, we are making better business. We are making, we are closer from what are the real customer needs. So we are building a relationship, which is lasting longer, which is giving us better level of price and which is giving us much more opportunities in terms of up-selling. I have told you earlier that there were a lot of interesting contracts were delivered on budget and are delivered on budget in terms of profitability and they are being developed as a matter of fact above budget in terms of revenue and usually this additional revenue is the good quality revenue.

Certainly. One final follow-up question, are there benchmarking clauses, I understand that some of these contracts are 5 to 7-year contracts. Are there benchmarking clauses where if there is significant pricing pressure in this area that you are targeting that, customers can negotiate down those prices during the contract?

There are no contracts without price actualization or benchmarking conditions. The outsourcing contracts are on a different commission point, we are not disclosing any details about these contracts and I can just add that they are absolutely consistent with what we have always been doing, for let's say our classic out-tasking movement.

Sure. OK, thank you very much.

Thanks.

Operator, our next question please.

Thank you. We will take our next question from John Walter of Messrs Asset Management (ph). Please go ahead.

Hi, I have a couple of questions. I was wondering if you could please elaborate more on what the competitive situation is like and what is particularly driving it in the States and whether you see that type of overflowing over here into Europe in particular in data because I understand already on voice in the UK, MCI is driving down pressures. Is that kind of priority in Data as well?

Pressure is maximum in the US. You know, all of you know that AT&T has focused itself exclusively in terms of sales on the corporate customer segments and so has MCI, and the bottom line of it is that nobody is losing any customer right now. The market shares are frozen and the competition is on price. In this context, which is unfavorable to the business globally, what we are doing at Equant is to play upon what we are good at. That's clearly in some cases we are better than anybody else in terms of reach and that's what's important for the customer. In other cases, once the contract, the second one is released, the customer, which is a consulting firm was really looking for a partner, able to address much more than pure data (inaudible) customer for us, and we are able to have a discussion on something else than price.

OK.

Do we expect that Europe will be protected forever from that suppression, certainly not, and for these reasons, we are very aggressive to transform our business model as quick as possible and, of course, continuously improve our current sales.

OK. My second question is that I heard recently that Cable & Wireless have just laid a 2-terabit cable across the Atlantic. What impact do you think that could have to your business?

Zero. The extra capacity is especially on the North Atlantic Ocean, has absolutely no impact whatsoever.

OK. Thank you very much.

The overall capacity everywhere, you can get it for not free, but very cheap prices, it's zero compared to what the customers are paying globally.

Operator our next question please.

Thank you. [Operator Instructions]. We will take our next question from Brian Rusling of Cazenove. Please go ahead.

Yeah, I just want to follow-up on the question about the competitive environment because your release talks about a high level of disconnections and to an extend that does suggest market share erosion somewhere. So why are people disconnecting from you. Is it because you decided not to provide the IP VPN services in certain parts of the US because it doesn't make you enough profits or what's the high level of disconnections related to? Are they going to someone else?

The customer, the very large customers are clearly connecting their varous sites for two kind of solutions. One is to buy from companies such as British Telecom, IT&T, managed networks and that was their critical size, one which are key for their operations and for the remaining for small sales branches, they are buying consumer Internet connections and so they are buying a variety of local provider. That's basically what is going on.

Of course, it is a negative trend for this part of industry but at the same time, it is an opportunity for us. For some of these very large, customers we are providing the integrated solution. That is we provide them the core network with a critical size and not only the core network, but the latest security and project management if not (inaudible) of messaging, but we also buy for them the Internet connection of the small size and we integrate them and we monitor them to ensure an acceptable level of our own credit.

Maybe even another part of the background of the question is how did this trend actually changed over the last, let us say, three months. Is it getting worse and you know from the perspective as a way you have outlined the change in your revenue mix, the old model used to be you get into a customer and then you up-sale different products to actually increase your ARPU per customer, what you're just trying to describe here, if you actually lose that initial connection, how do you that?

The model remains the same. We are still up-selling, we are not up-selling the same things and for the non-critical size, we are or the customer is using cheaper technology connections. So the model remains the same, the structure of the revenue is different and of course what is at work here and it is a normal trend and we have largely anticipated it is a technology change that the consumer products are giving you opportunities.

We change the way, you core size served, absolutely not. Does it change the way a sales branch in Slovakia is connected, yes it does. Is there any significant change in terms of trends here or this over the last year? Not at all, what is at work in terms of figures, in terms of volumes, in terms of number of connections remain virtually the same some quarters. A bit up some, a bit down, but not that significant. What's the main effect on the overall revenue is the price level.

Thank you. We will take a follow-up question from Adam Worthington of Morgan Stanley. Please go ahead.

Thanks, I just had a quick follow-up question. Would you just be able to quantify the pricing pressure that you have been seeing. I think previously you have mentioned 20 to 25% over a three-year period, but I was wondering whether you could give me some indication on that across legacy new wave products and also voice as well?

Yeah. I had given the indication you mentioned and our current assessment is roughly that what was 20% to 25% of (inaudible), is now in the range of 30%. So there is clear an acceleration of the negative trend and so prices moving forward.

Do you think that there is a chance of that could actually increase even further?

I have no indication to give you here. I am carefully listening to what my colleague and competitors are saying, which seems to me really in line with indications I am giving you.

Thank you.

OK. Somebody is waving at me to tell me that we have no more questions. So thank you and ...

We still have one question.

OK, so let's go with the question.

Thank you. We will that question from Stephen Belavian of SG Securities, please go ahead.

Yes thank you. Could you just update us on your program to reduce your dependancy to the US currency at the revenue level. What's the feedback from, I mean, clients and that have you managed recently to have more contracting in Euro Gem for instance? Also another question, is it possible, I know don't give report your order book, but could you compare your Q3 order book with what you achieved in Q1 and in Q2? And also a final question, if I may, regarding SITA , we have seen there some improvement on a quarter-on-quarter basis. Could you just elaborate a little bit on that, and is that just a degree of more traffic there and shall we expect that, which may be an inflation function, we would see jump?

What's your second question?

Yes, order book, Q3 order book versus previous quarters.

OK, I am back. OK, on the first point, maybe it is better for me first to explain what its about, although having forgotten our previous discussions about it. We have an imbalance in terms of revenue structure as compared to costs. Of course, we are delivering everywhere, so we have cost in any kind of currency, but most of our revenue is denominated in US dollars. In short, when the US dollar is strong, it is good for Equant's profitability and when the US dollar is weak, it's bad for Equant's profitability and the idea we have operationalized to grow our revenue in other usually strong currencies, that British pound or Euro.

I have given some explanations three months ago about it and as you see, the progress are very slow because over three months we have only renewed one tenth, one twelfth to be precise of our contracts, which have an average duration of 4 years -- 3 years. So in one quarter, we renew only one twelfth of the revenue. So yet we have been making some progress, but we are far from having very significant impact on the natural hedging we are aiming at and it will become significant after we have three quarters on (inaudible).

In terms of order book, yes, we don't report anymore order book, it has proved as a very little significance in terms of the revenue evolution. But what I can tell you, which is interesting is that half of the order values, we have booked since the beginning of the year out coming from contracts with a significant services component. To be a bit more precise, we have given ourselves the threshold of 15%, the average for the company now 16%, when they are 15% of the contract value or the order value, which are related to services we consider that this is a contract with significant services component.

For this category it is now half of the orders of we are booking. In simply put, more than half of the new revenue is within the frame of our new strategy with the long-term benefit we expect in terms of how long the relationship with the customer will last and all in all, better pricing as compared to contracts without services.

And finally for SITA , of course, figures from SITA are impacted by the evolution of the business, evolution of the relationship from some quarters higher than other. But if you have a look on the figures, not taking into account a minimum revenue commitment, which has stopped now one year ago. Then you can see that the evolution is quite comparable to the remaining of the business. That's the revenue is decreasing.

It's interesting to note that SITA hasn't lost over the last year any large airline, that is migration IP solution has been doing well and we are securing on the long term the revenue for SITA on four quarters. The revenue structure is made of less legacy and much more IP. It doesn't impact in the price level, but the good news is that we are already maintaining these market positions with a very, very high market share.

OK thank you.

Operator, we will take the last question.

Thank you. We will take the next question from Francois Travail(ph) of Saxon(ph). Please go ahead.

In fact, my question has been already answered, it was relating to SITA .

OK thank you nevertheless. OK so if there are no more questions, I believe we will close this call here and I want to thank you for your participation and your very interesting set of questions and our next meeting together will be at the latest, although we meet in the meantime for our full year release, which is scheduled for late February next year.

Thank you very much.

Ladies and Gentleman that will conclude today's conference call. Thank you for your participation. You may now disconnect.